<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-5759 51-0255124
------------------------------- ---------------------- -------------------
(State or other jurisdiction of Commission File Number (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
BGLS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 33-93576 13-3593483
------------------------------- ---------------------- -------------------
(State or other jurisdiction of Commission File Number (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
----------
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the preceding 12 months (or
for such shorter period that the Registrants were required to file such
reports), and (2) have been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Explanatory Note: BGLS Inc. is required to file all reports required by
Section 13 or 15(d) of the Exchange Act in connection with its 15.75% Series B
Senior Secured Notes due 2001.
At August 11, 1997, Brooke Group Ltd. had 18,097,096 shares of common
stock outstanding, and BGLS Inc. had 100 shares of common stock outstanding, all
of which are held by Brooke Group Ltd.
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<PAGE> 2
BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. BROOKE GROUP LTD./BGLS INC. CONSOLIDATED FINANCIAL STATEMENTS:
Brooke Group Ltd. Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996............................................................................. 2
BGLS Inc. Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996..................... 3
Brooke Group Ltd. Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and June 30, 1996......................................................... 4
BGLS Inc. Consolidated Statements of Operations for the three and six months ended
June 30, 1997 and June 30, 1996............................................................... 5
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the six
months ended June 30, 1997.................................................................... 6
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the six months
ended June 30, 1997........................................................................... 7
Brooke Group Ltd. Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and June 30, 1996............................................................... 8
BGLS Inc. Consolidated Statements of Cash Flows for the six months ended
June 30, 1997 and June 30, 1996............................................................... 9
Notes to Consolidated Financial Statements.......................................................... 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................................. 28
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................................................. 38
Item 3. DEFAULTS UPON SENIOR SECURITIES................................................................ 38
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS............................................ 38
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 39
SIGNATURES.............................................................................................. 40
</TABLE>
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<PAGE> 3
Item 1. CONSOLIDATED FINANCIAL STATEMENTS
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ........................................................ $ 19,549 $ 1,941
Accounts receivable - trade ...................................................... 12,106 19,475
Other receivables ................................................................ 731 1,217
Receivables from affiliates ...................................................... 11,965 47
Inventories ...................................................................... 47,447 53,691
Other current assets ............................................................. 3,749 4,181
--------- ---------
Total current assets ........................................................... 95,547 80,552
Property, plant and equipment, at cost, less accumulated
depreciation of $32,204 and $31,047 .............................................. 31,605 80,282
Intangible assets, at cost, less accumulated amortization
of $18,375 and $17,457 ........................................................... 3,524 4,421
Investment in affiliate ............................................................ 3,051
Other assets ....................................................................... 4,641 9,371
--------- ---------
Total assets ................................................................... $ 135,317 $ 177,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt .............................. $ 70,695 $ 55,242
Accounts payable ................................................................. 16,224 32,461
Due to affiliates ................................................................ 990
Dividends payable ................................................................ 1,387
Cash overdraft ................................................................... 6
Accrued promotional expenses ..................................................... 30,390 30,257
Accrued taxes payable ............................................................ 21,350 26,379
Accrued interest ................................................................. 23,383 24,354
Other accrued liabilities ........................................................ 24,350 33,387
--------- ---------
Total current liabilities ...................................................... 186,392 204,463
Notes payable, long-term debt and other obligations, less current portion .......... 342,253 378,243
Noncurrent employee benefits ....................................................... 29,662 31,256
Other liabilities .................................................................. 30,329 18,704
Commitments and contingencies ......................................................
Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized 10,000,000 shares .........
Series G Preferred Stock, 2,184,834 shares, convertible, participating,
cumulative, each share convertible to 1,000 shares of common stock and cash
or stock distribution, liquidation preference of $1.00 per share ...............
Common stock, par value $0.10 per share, authorized 40,000,000 shares, issued
24,998,043 shares, outstanding 18,097,096 and 18,497,096 shares ................ 1,850 1,850
Additional paid-in capital ....................................................... 91,454 94,169
Deficit .......................................................................... (496,642) (490,706)
Other ............................................................................ (15,842) (27,963)
Less: 6,900,947 and 6,500,947 shares of common stock in treasury, at cost ........ (34,139) (32,339)
--------- ---------
Total stockholders' equity (deficit) ......................................... (453,319) (454,989)
--------- ---------
Total liabilities and stockholders' equity (deficit) ......................... $ 135,317 $ 177,677
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
<PAGE> 4
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents .................................................. $ 19,273 $ 1,940
Accounts receivable - trade ................................................ 12,106 19,475
Other receivables .......................................................... 700 1,166
Receivables from affiliates ................................................ 11,965 47
Inventories ................................................................ 47,447 53,691
Other current assets ....................................................... 3,293 3,878
--------- ---------
Total current assets ................................................... 94,784 80,197
Property, plant and equipment, at cost, less accumulated depreciation of
$31,848 and $30,762 ........................................................ 31,366 79,972
Intangible assets, at cost, less accumulated amortization of $18,375
and $17,457 ................................................................ 3,524 4,421
Investment in affiliate ...................................................... 3,051
Other assets ................................................................. 7,884 10,467
--------- ---------
Total assets ........................................................... $ 137,558 $ 178,108
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt ........................ $ 70,220 $ 53,945
Accounts payable ........................................................... 16,099 32,336
Cash overdraft ............................................................. 6
Due to parent .............................................................. 22,217 29,598
Accrued promotional expenses ............................................... 30,390 30,257
Accrued taxes payable ...................................................... 21,350 26,379
Accrued interest ........................................................... 23,383 24,354
Other accrued liabilities .................................................. 24,187 32,861
--------- ---------
Total current liabilities .............................................. 207,846 229,736
Notes payable, long-term debt and other obligations, less current portion .... 342,253 378,243
Noncurrent employee benefits ................................................. 29,662 31,256
Other liabilities ............................................................ 36,529 21,958
Commitments and contingencies ................................................
Stockholder's equity (deficit):
Common stock, par value $0.01 per share; 100 shares authorized,
issued and outstanding ...................................................
Additional paid-in capital ................................................. 39,081 39,081
Deficit .................................................................... (506,211) (499,264)
Other ...................................................................... (11,602) (22,902)
--------- ---------
Total stockholder's deficit ............................................ (478,732) (483,085)
--------- ---------
Total liabilities and stockholder's equity (deficit) ................... $ 137,558 $ 178,108
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE> 5
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues* ............................................. $ 96,593 $ 125,213 $ 176,598 $ 215,729
Cost of goods sold* ................................... 50,951 63,522 92,796 110,570
------------ ------------ ------------ ------------
Gross profit .......................................... 45,642 61,691 83,802 105,159
Operating, selling, administrative and general expenses 39,715 58,264 77,037 103,156
------------ ------------ ------------ ------------
Operating income ...................................... 5,927 3,427 6,765 2,003
Other income (expenses):
Interest income ................................... 692 110 1,251 128
Interest expense .................................. (15,499) (15,457) (30,966) (30,234)
Equity in loss of affiliate ....................... (5,841) (1,306) (14,398) (2,883)
Sale of assets .................................... 1,065 23,086
Retirement of debt ................................ 2,963
Proceeds from legal settlement .................... 4,125
Other, net ........................................ 61 2,219 180 2,334
------------ ------------ ------------ ------------
Loss from continuing operations before income taxes ... (13,595) (11,007) (6,994) (28,652)
Provision (benefit) for income taxes .................. 45 (289) 789 146
------------ ------------ ------------ ------------
Loss from continuing operations ....................... (13,640) (10,718) (7,783) (28,798)
------------ ------------ ------------ ------------
Discontinued operations:
(Loss) income from discontinued operations ........ (321) 46 42 349
Gain on disposal .................................. 5 5
------------ ------------ ------------ ------------
(Loss) income from discontinued operations ............ (316) 46 47 349
------------ ------------ ------------ ------------
Net loss .............................................. (13,956) (10,672) (7,736) (28,449)
Proportionate share of New Valley capital transaction,
retirement of Class A Preferred Shares ............ 1,782
------------ ------------ ------------ ------------
Net loss applicable to common shares .................. $ (13,956) $ (10,672) $ (7,736) $ (26,667)
============ ============ ============ ============
Per common share:
Loss from continuing operations ................... $ (0.75) $ (0.58) $ (0.42) $ (1.46)
============ ============ ============ ============
(Loss) income from discontinued operations ........ $ (0.02) $ $ 0.02
============ ============ ============ ============
Net loss applicable to common shares .............. $ (0.77) $ (0.58) $ (0.42) $ (1.44)
============ ============ ============ ============
Weighted average common shares outstanding ............ 18,097,096 18,497,096 18,240,743 18,497,096
============ ============ ============ ============
</TABLE>
- ----------
* Revenues and Cost of goods sold include federal excise taxes of $19,153,
$29,487, $36,013 and $50,684, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
<PAGE> 6
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------- -------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues* ............................................. $ 96,593 $ 125,213 $ 176,598 $ 215,729
Cost of goods sold* ................................... 50,951 63,522 92,796 110,570
--------- --------- --------- ---------
Gross profit .......................................... 45,642 61,691 83,802 105,159
Operating, selling, administrative
and general expenses................................. 39,581 58,073 76,657 102,660
--------- --------- --------- ---------
Operating income ...................................... 6,061 3,618 7,145 2,499
Other income (expenses):
Interest income .................................... 680 60 1,239 78
Interest expense ................................... (16,411) (16,395) (32,792) (32,063)
Equity in loss of affiliate ........................ (5,841) (1,306) (14,398) (2,883)
Sale of assets ..................................... 1,279 27,663
Retirement of debt ................................. 2,963
Other, net ......................................... 61 1,703 173 1,668
--------- --------- --------- ---------
Loss from continuing operations before income taxes ... (14,171) (12,320) (8,007) (30,701)
Provision (benefit) for income taxes .................. 45 (253) 787 198
--------- --------- --------- ---------
Loss from continuing operations ....................... (14,216) (12,067) (8,794) (30,899)
Discontinued operations:
(Loss) income from discontinued operations ......... (321) 46 42 349
Gain on disposal ................................... 5 5
--------- --------- --------- ---------
(Loss) income from discontinued operations ............ (316) 46 47 349
--------- --------- --------- ---------
Net loss .............................................. $ (14,532) $ (12,021) $ (8,747) $ (30,550)
========= ========= ========= =========
</TABLE>
* Revenues and Cost of goods sold include federal excise taxes of $19,153,
$29,487, $36,013 and $50,684, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 7
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-In Treasury
Shares Amount Capital Deficit Other Stock Total
---------- -------- ---------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .......... 18,497,096 $ 1,850 $ 94,169 $(490,706) $(27,963) $(32,339) $(454,989)
Net loss ............................ (7,736) (7,736)
Distributions on common stock
($0.15 per share) ................. (2,715) (2,715)
Amortization of deferred
compensation ...................... 821 821
Unrealized holding gain on investment
in New Valley ..................... 11,965 11,965
Effect of New Valley
capital transactions .............. (665) (665)
Settlement of loan .................. (400,000) 1,800 (1,800)
---------- -------- -------- --------- -------- -------- ---------
Balance, June 30, 1997 .............. 18,097,096 $ 1,850 $ 91,454 $(496,642) $(15,842) $(34,139) $(453,319)
=========== ======== ======== ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-6-
<PAGE> 8
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------- Paid-In
Shares Amount Capital Deficit Other Total
------- ------ ---------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ........ 100 $ $39,081 $(499,264) $(22,902) $(483,085)
Net loss .......................... (8,747) (8,747)
Unrealized holding gain on
investment in New Valley ........ 11,965 11,965
Effect of New Valley capital
transactions .................... (665) (665)
Settlement of loan ................ 1,800 1,800
------- ----- ------- --------- -------- ---------
Balance, June 30, 1997 ............ 100 $ $39,081 $(506,211) $(11,602) $(478,732)
======= ===== ======= ========= ======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-7-
<PAGE> 9
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
--------- ---------
<S> <C> <C>
Net cash used in operating activities .............................. $ (20,003) $ (735)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ................. 43,245 4,415
Capital expenditures ............................................. (3,653) (14,680)
Dividends from New Valley ........................................ 6,183
Other, net ....................................................... (491)
--------- ---------
Net cash provided by (used in) investing activities ................ 39,592 (4,573)
--------- ---------
Cash flows from financing activities:
Proceeds from debt ............................................... 4,225 15,161
Repayments of debt ............................................... (6,852) (7,769)
Borrowings under revolver ........................................ 137,062 172,043
Repayments on revolver ........................................... (132,308) (166,050)
Decrease in cash overdraft ....................................... (6) (4,266)
Distributions on common stock .................................... (4,102) (2,775)
--------- ---------
Net cash (used in) provided by financing activities ................ (1,981) 6,344
--------- ---------
Net increase in cash and cash equivalents .......................... 17,608 1,036
Cash and cash equivalents, beginning of period ..................... 1,941 3,370
--------- ---------
Cash and cash equivalents, end of period ........................... $ 19,549 $ 4,406
========= =========
Supplemental non-cash financing activities:
Exchange of Series 2 Senior Secured Notes for Series A Notes ..... $ 99,154
Exchange of 14.50% Subordinated Debentures for Series B Notes .... 125,495
Issuance of Series A Notes for options ........................... 822
Exchange of Series A Notes for Series B Notes .................... 99,976
Issuance of promissory notes for shares of Liggett-Ducat ......... 1,643
Promissory note from New Valley .................................. $ 33,500
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-8-
<PAGE> 10
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------
June 30, June 30,
1997 1996
--------- ---------
<S> <C> <C>
Net cash used in operating activities .............................. $ (25,202) $ (73)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ................. 43,245 4,415
Capital expenditures ............................................. (3,653) (14,680)
Dividends from New Valley ........................................ 6,183
Other, net ....................................................... (491)
--------- ---------
Net cash provided by (used in) investing activities ................ 39,592 (4,573)
--------- ---------
Cash flows from financing activities:
Proceeds from debt ............................................... 3,750 14,519
Repayments of debt ............................................... (5,555) (7,514)
Borrowings under revolver ........................................ 137,062 172,043
Repayments on revolver ........................................... (132,308) (166,050)
Decrease in cash overdraft ....................................... (6) (3,761)
Distributions paid to parent ..................................... (3,621)
--------- ---------
Net cash provided by financing activities .......................... 2,943 5,616
--------- ---------
Net increase in cash and cash equivalents .......................... 17,333 970
Cash and cash equivalents, beginning of period ..................... 1,940 3,370
--------- ---------
Cash and cash equivalents, end of period ........................... $ 19,273 $ 4,340
========= =========
Supplemental non-cash financing activities:
Exchange of Series 2 Senior Secured Notes for Series A Notes ..... $ 99,154
Exchange of 14.50% Subordinated Debentures for Series B Notes .... 125,495
Issuance of Series A Notes for options ........................... 822
Exchange of Series A Notes for Series B Notes .................... 99,976
Forgiveness of debt by parent .................................... 13,705
Issuance of promissory notes for shares of Liggett-Ducat ......... 1,643
Promissory note from New Valley .................................. $ 33,500
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-9-
<PAGE> 11
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements of Brooke Group Ltd. (the "Company")
include the consolidated statements of its wholly owned subsidiary, BGLS
Inc. ("BGLS"). The consolidated statements of BGLS include the accounts of
Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley
Holdings, Inc. ("NV Holdings"), Liggett-Ducat Ltd. ("Liggett-Ducat") and
other less significant subsidiaries. Liggett is engaged primarily in the
manufacture and sale of cigarettes, principally in the United States.
Liggett-Ducat is engaged in the manufacture and sale of cigarettes in
Russia. All significant intercompany balances and transactions have been
eliminated.
The interim consolidated financial statements of the Company and BGLS are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the Company's
and BGLS' consolidated financial position, results of operations and cash
flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's and BGLS' Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the
Securities and Exchange Commission. The consolidated results of operations
for interim periods should not be regarded as necessarily indicative of
the results that may be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those
estimates.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
LIQUIDITY:
The Company's principal sources of liquidity for 1997 include, among other
things, proceeds from the sale of BrookeMil Ltd. ("BML"), a subsidiary of
BOL, to an affiliate, New Valley Corporation ("New Valley"), on January
31, 1997, and certain funds available from New Valley subject to
limitations imposed by BGLS' indenture agreements. New Valley may acquire
or seek to acquire additional operating businesses through merger,
purchase of assets, stock acquisition or other means, or to make other
investments, which may limit its ability to make such distributions.
Liggett had net capital and working capital deficiencies of $178,660 and
$78,481, respectively, at June 30, 1997, is highly leveraged and has
substantial near-term debt service requirements. Further, Liggett's Senior
Secured Notes (the "Liggett Notes") require a mandatory principal
redemption of $37,500 on February 1, 1998 and a payment at maturity on
February 1, 1999 of $107,400, and Liggett's revolving credit facility (the
"Facility") expires on March 8, 1998 unless extended by its lenders. Based
on Liggett's net loss for 1996 and anticipated 1997 operating results,
Liggett does not anticipate it will be able to generate sufficient cash
from operations to make such payments. While Liggett is currently in
negotiations with its note holders to restructure the terms of the Liggett
Notes and, with its lenders, to extend the Facility, there are no
commitments to restructure the Liggett Notes or to extend the Facility at
this time, and no assurances can be given in this regard. In conjunction
with these discussions, the Company is also engaged in negotiations with
the principal holders of the BGLS 15.75% Series B Senior Secured Notes
(the "BGLS Notes") with respect to certain related modifications to the
terms of such debt.
-10-
<PAGE> 12
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Pending completion of the negotiations, BGLS and Liggett have postponed
making the interest payments of approximately $18,338 for the BGLS Notes
due on July 31, 1997 and approximately $9,700 for the Liggett Notes due on
August 1, 1997. The indentures governing the BGLS Notes and the Liggett
Notes provide for a 30-day grace period before the failure to pay interest
will be an event of default.
The failure to pay interest on the Liggett Notes would permit Liggett's
lenders under the Facility to cease making further advances. While the
lenders have continued to make such advances, and Liggett's management
currently anticipates that they will continue to do so, no assurances can
be given in this regard. If Liggett is unable to restructure the terms of
the Liggett Notes, extend the Facility, or otherwise make all payments
thereon within the applicable grace periods, substantially all of
Liggett's long-term debt and the Facility would be in default and holders
of such debt could accelerate the maturity of such debt. In such event,
Liggett may be forced to seek protection from creditors under applicable
laws. These matters raise substantial doubt about Liggett meeting its
liquidity needs and its ability to continue as a going concern.
BOL is in the process of constructing a new tobacco factory and is
actively pursuing various potential financial alternatives related
thereto. (Refer to Note 5.)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS 130 establishes standards for reporting and
display of comprehensive income. The purpose of reporting comprehensive
income is to present a measure of all changes in equity that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. SFAS 130 requires
that an enterprise classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet.
SFAS 130 is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. The Company has not yet determined the
impact of the implementation of SFAS 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. Once operating segments
have been determined, SFAS 131 provides for a two-tier test for
determining those operating segments that would need to be disclosed for
external reporting purposes. In addition to providing the required
disclosures for reportable segments, SFAS 131 also requires disclosure of
certain "second level" information by geographic area and for
products/services. SFAS 131 also makes a number of changes to existing
disclosure requirements. SFAS 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. The Company
has not yet determined the impact of the implementation of SFAS 131.
-11-
<PAGE> 13
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. INVESTMENT IN NEW VALLEY CORPORATION
The Company's and BGLS' investment in New Valley at June 30, 1997 is
summarized below:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF FAIR CARRYING HOLDING
SHARES VALUE AMOUNT LOSS
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Class A Preferred Shares ..... 618,326 $ 57,504 $ 57,504 $(12,412)
Class B Preferred Shares ..... 250,885 1,254 1,254 (600)
Common Shares ................ 3,989,710(A) 3,990 (58,758)
-------- -------- --------
$ 62,748 $ $(13,012)
======== ======== ========
</TABLE>
(A) Gives effect to July 1996 one-for-twenty stock split.
The $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares ($100
Liquidation Value), $.01 par value (the "Class A Preferred Shares"), and the
$3.00 Class B Cumulative Convertible Preferred Shares ($25 Liquidation
Value), $.10 par value (the "Class B Preferred Shares"), are accounted for as
debt and equity securities, respectively, pursuant to the requirements of
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", and are classified as available-for-sale. Through September
1996, earnings on the Class A Preferred Shares were comprised of dividends
accrued during the period and the accretion of the difference between the
Company's basis and their mandatory redemption price. New Valley's Common
Shares, $.01 par value (the "Common Shares"), were accounted for pursuant to
APB No. 18, "The Equity Method of Accounting for Investments in Common
Stock".
During the quarter ended September 30, 1996, the decline in the market value
of the Class A Preferred Shares, the dividend received on the Class A
Preferred Shares and the Company's equity in losses incurred by New Valley
caused the carrying value of the Company's investment in New Valley to be
reduced to zero. Beginning in the fourth quarter of 1996, the Company
suspended the recording of its earnings on the dividends accrued and the
accretion of the difference between the Company's basis in the Class A
Preferred Shares and their mandatory redemption price.
At June 30, 1997, the Company's investment in New Valley consisted of an
approximate 42% voting interest. The Company's investment is represented by
618,326 Class A Preferred Shares (57.7%), 3,989,710 Common Shares (41.7%)
(giving effect to a one-for-twenty reverse stock split by New Valley in July
1996) and 250,885 Class B Preferred Shares (9.0%).
During the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for a total amount of $10,530. The Company has recorded its
proportionate interest in the excess of the carrying value of the shares over
the cost of the shares repurchased as a credit to additional paid-in capital
in the amount of $1,782, along with other New Valley capital transactions of
$1,563, for the six months ended June 30, 1996. No such repurchases have been
made during the six months ended June 30, 1997. Other New Valley capital
transactions charged to equity were $665 for the six months ended June 30,
1997.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at
-12-
<PAGE> 14
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
any time prior to that date, at the option of New Valley, at $100.00 per
share plus accrued dividends. The holders of Class A Preferred Shares are
entitled to receive a quarterly dividend, as declared by the Board of
Directors, payable at the rate of $19.00 per annum. On March 13, 1996, New
Valley declared a cash dividend of $10.00 per share on its Class A Preferred
Shares payable on March 27, 1996. NV Holdings received $6,183 in the
distribution. At June 30, 1997, the accrued and unpaid dividends arrearage on
the Class A Preferred Shares was $139,017 or $129.75 per share.
Holders of the Class B Preferred Shares are entitled to receive a quarterly
dividend, as declared by the Board, at a rate of $3.00 per annum. At June 30,
1997, the accrued and unpaid dividends arrearage on Class B Preferred Shares
was $127,266 or $45.60 per share. No dividends on the Class B Preferred
Shares have been declared since the fourth quarter of 1988.
Summarized financial information for New Valley as of June 30, 1997 and
December 31, 1996 and for the three and six months ended June 30, 1997 and
1996 follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Current assets, primarily cash and marketable
securities .................................... $ 114,175 $ 183,720
Non-current assets ............................... 311,005 222,820
Current liabilities .............................. 127,130 98,110
Non-current liabilities .......................... 175,258 170,223
Redeemable preferred stock ....................... 233,531 210,571
Shareholders' equity (deficit) ................... (110,739) (72,364)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues .............................................. $ 24,404 $ 30,449 $ 44,157 $ 62,434
Costs and expenses .................................... 29,594 35,138 61,519 73,316
Loss from continuing operations ....................... (4,270) (4,872) (15,483) (10,484)
(Loss) income from discontinued operations ............ (759) 110 113 838
Net loss applicable to common shares(A) ............... (21,779) (20,408) (48,100) (36,475)
</TABLE>
(A) Considers all preferred accrued dividends, whether or not declared, and
the excess of carrying value of redeemable preferred shares over cost of
shares purchased.
ACQUISITION OF COMMON SHARES OF BML:
On January 31, 1997, New Valley acquired substantially all the common shares
of BML from BOL for $55,000. (Refer to Note 3.)
RJR NABISCO HOLDINGS CORP.:
At June 30, 1997, New Valley held 1,062,650 shares of RJR Nabisco Holdings
Corp. ("RJR Nabisco") common stock with a market value of $34,270 (cost of
$32,574). The unrealized gain on New Valley's investment in RJR Nabisco
common stock was $1,696 at June 30, 1997. Based on the
-13-
<PAGE> 15
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
market price of RJR Nabisco common stock at August 8, 1997 ($30.625 per
share), no amounts are payable by the Company or New Valley under any of
its net profit-sharing arrangements with respect to the RJR Nabisco common
stock.
3. INVESTMENT IN BROOKE (OVERSEAS) LTD.
On January 31, 1997, BOL sold all its shares of BML to New Valley for
$21,500 in cash and a promissory note of $33,500 payable $21,500 on June
30, 1997 and $12,000 on December 31, 1997 with interest at 9%. The
consideration received exceeded the carrying value of the Company's
investment in BML by $43,700. The Company recognized a gain on the sale in
the amount of $21,300. The remaining $22,400 was deferred in recognition
of the fact that the Company retains an interest in BML through its 42%
equity ownership in New Valley and that a portion of the property sold is
subject to a put option held by New Valley. The option allows New Valley,
under certain circumstances, to put a portion of the property sold back to
the Company at the greater of the appraised fair value of the property at
the date of exercise or $13,600. On April 18, 1997, BML sold one of its
office buildings, Ducat Place I, to a third party. Accordingly, the
Company recognized approximately $1,240 of its deferred gain on the BML
sale in the second quarter, 1997.
On April 28, 1997 and June 30, 1997, New Valley paid BOL $3,500 and
$18,000, respectively, representing a portion of the promissory note
together with accrued interest thereon. As of June 30, 1997, the balance
remaining on the note was $12,000 and is due on December 31, 1997.
In connection with the sale of its BML shares to New Valley, certain
specified liabilities aggregating $40,800, including the Vneshtorgbank
loan with a balance of $13,927 at June 30, 1997, remained with BML, and
New Valley indemnified the Company and its subsidiaries with respect to
any obligation arising from such liabilities.
4. INVENTORIES
Inventories consist of:
June 30, December 31,
1997 1996
-------- ------------
Finished goods .................... $ 13,874 $ 15,304
Work-in-process ................... 4,445 4,435
Raw materials ..................... 30,377 34,002
Replacement parts and supplies .... 5,208 4,406
-------- --------
Inventories at current cost ....... 53,904 58,147
LIFO adjustments .................. (6,457) (4,456)
-------- --------
$ 47,447 $ 53,691
======== ========
At June 30, 1997, Liggett and Liggett-Ducat had leaf tobacco purchase
commitments of approximately $13,828 and $3,935, respectively.
-14-
<PAGE> 16
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
June 30, December 31,
1997 1996
-------- ------------
Land and improvements ............. $ 455 $ 455
Buildings ......................... 6,443 14,205
Machinery and equipment ........... 50,663 49,401
Leasehold improvements ............ 302 302
Construction-in-progress .......... 5,946 46,966
-------- --------
63,809 111,329
Less accumulated depreciation ..... 32,204 31,047
-------- --------
$ 31,605 $ 80,282
======== ========
On May 6, 1997, Liggett-Ducat Tobacco Ltd., a subsidiary of Liggett-Ducat,
entered into two contracts for construction of a new tobacco factory on
the outskirts of Moscow which provide for payments of $1,700 over a
three-month period ending July 1997 and of $18,760 payable over a
twelve-month period ending July 1998. In addition, a pre-construction
payment of $520 was paid in April 1997.
6. INCOME TAXES
The provision for taxes for the six months ended June 30, 1997 and 1996
does not bear the customary relationship to the pretax loss/income for the
Company and BGLS due principally to the effects of taxes provided for
foreign operations and an increase in the valuation allowance related to
deferred tax assets.
7. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- -----------
<S> <C> <C>
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $1,326 and $1,511 ...... $231,538 $231,353
14.500% Subordinated Debentures due 1998 .................. 800 800
Notes payable - Foreign ................................... 5,755 22,668
Other ..................................................... 1,240 2,425
Liggett:
11.500% Senior Secured Series B Notes due 1999, net of
unamortized discount of $302 and $424 ................. 112,310 119,688
Variable Rate Series C Senior Secured Notes due 1999 ...... 32,279 32,279
Revolving credit facility ................................. 29,026 24,272
-------- --------
Total notes payable and long-term debt .................... 412,948 433,485
Less current maturities ................................... 70,695 55,242
-------- --------
Amount due after one year ................................. $342,253 $378,243
======== ========
</TABLE>
REVOLVING CREDIT FACILITY - LIGGETT:
On March 8, 1994, Liggett entered into the Facility for $40,000 with a
syndicate of commercial lenders. The Facility is collateralized by all
inventories and receivables of Liggett. At June 30, 1997,
-15-
<PAGE> 17
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
$209 was available under the Facility based on eligible collateral.
Borrowings under the Facility, whose interest is calculated at a rate
equal to 1.5% above the Philadelphia National Bank's prime rate (8.25%),
bore a rate of 9.75% at March 31, 1997. On April 1, 1997, Philadelphia
National Bank raised its prime rate to 8.5%, thereby increasing Liggett's
interest rate to 10.0%. The Facility requires Liggett's compliance with
certain financial and other covenants. The Facility also limits the amount
of cash dividends and distributions by Liggett and imposes requirements
with respect to Liggett's adjusted net and working capital. In January
1997, the Facility was extended for one year. The Facility is classified
as short-term at June 30, 1997, since it is due on March 8, 1998, unless
extended by the lender. No assurances can be given that the Facility will
be further extended.
During the first quarter of 1997, Liggett violated the working capital
covenant contained in the Facility. This violation occurred during
February 1997 when $37,500 of the Liggett Notes were reclassified from
long-term to current as a result of the February 1, 1998 mandatory
redemption requirement of such Notes. On March 19, 1997, the lead lender
agreed to waive this covenant default, and the Facility was amended as
follows: (i) the working capital definition was changed to exclude the
current portion of the Liggett Notes; (ii) the maximum permitted working
capital deficit was reduced to $12,000 (as computed in accordance with the
agreement); (iii) the maximum permitted adjusted net worth deficit was
increased to $180,000 (as computed in accordance with the agreement); and
(iv) the permitted advance rates under the Facility for eligible inventory
were reduced by five percent.
LIGGETT 11.500% SENIOR SECURED SERIES B NOTES DUE 1999:
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Liggett Series B Notes"). Interest on the Liggett Series B Notes is
payable semiannually on February 1 and August 1 at an annual rate of
11.5%. The Liggett Notes referred to below require mandatory principal
redemptions of $7,500 on February 1 in each of the years 1993 through 1997
and $37,500 on February 1, 1998 with the balance of the Liggett Notes due
on February 1, 1999. In February 1997, $7,500 of Liggett Series B Notes
were purchased using the Facility and credited against the mandatory
redemption requirements. The transaction resulted in a net gain of $2,963.
The Liggett Notes are collateralized by substantially all of the assets of
Liggett, excluding inventories and receivables. Eve Holdings Inc. is a
guarantor for the Liggett Notes. The Liggett Notes may be redeemed, in
whole or in part, at a price equal to 102% and 100% of the principal
amount in the years 1997 and 1998, respectively, at the option of Liggett.
The Liggett Notes contain restrictions on Liggett's ability to declare or
pay cash dividends, incur additional debt, grant liens and enter into any
new agreements with affiliates, among others.
ISSUANCE OF LIGGETT SERIES C VARIABLE RATE NOTES:
On January 31, 1994, Liggett issued $22,500 of Variable Rate Series C
Senior Secured Notes Due 1999 (the "Liggett Series C Notes"). The Liggett
Series C Notes bore a 16.5% interest rate, which was reset on February 1,
1995 to 19.75%, the maximum reset rate. The Series C Notes have the same
terms (other than interest rate) and stated maturity as the Liggett Series
B Notes.
FOREIGN LOANS:
On January 31, 1997, in connection with the sale of BML shares to New
Valley, the Russian bank loan in the amount of $20,419 remained with BML
(refer to Note 3). The Company is a guarantor on lines of credit opened by
BOL during the first quarter 1997 with two Russian banks in total amount
of $4,000. These lines of credit are collateralized by accounts
receivable, inventory and equipment.
-16-
<PAGE> 18
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
At June 30, 1997, the balance outstanding was $3,250. Interest on such
lines of credit is currently 23%. The lines of credit expire in August
and September 1997.
SUBSEQUENT EVENT:
As discussed above, the Liggett Notes require a mandatory principal
redemption of $37,500 on February 1, 1998 and a payment at maturity on
February 1, 1999 of $107,400, and the Facility expires on March 8, 1998
unless extended by Liggett's lenders. Liggett is currently in negotiations
with its note holders to restructure the Liggett Notes and, with its
lenders, to extend the Facility. In conjunction with these discussions,
the Company is also engaged in negotiations with the principal holders of
the BGLS Notes with respect to certain related modifications to the terms
of such debt.
Pending completion of the negotiations, BGLS and Liggett have postponed
making the interest payments due on July 31, 1997 on the BGLS Notes and on
August 1, 1997 on the Liggett Notes, respectively. The indentures
governing the BGLS Notes and the Liggett Notes provide for a 30-day grace
period before the failure to pay interest will be an event of default. The
failure to pay interest on the Liggett Notes would permit the lenders
under the Facility to cease making further advances. While the lenders
have continued to make such advances, and Liggett's management currently
anticipates that they will continue to do so, no assurances can be given
in this regard. For information concerning Liggett's substantial near-term
debt service requirements and other related matters, refer to Note 1.
8. STOCK COMPENSATION
As of January 1, 1997, the Company granted to employees of the Company
non-qualified stock options to purchase 422,000 shares of the Company's
common stock at an exercise price of $5.00 per share. The options, which
will become exercisable over the ten-year term, vest in six equal annual
installments. No compensation expense was recorded in this transaction,
since the options had no intrinsic value.
9. RELATED PARTY TRANSACTIONS
Effective July 1, 1990, a former executive transferred all of his equity
in the Company to the Chairman and resigned from substantially all of his
positions with the Company and its affiliates. In consideration for this
transfer, a partnership (the "Partnership") controlled by the Chairman
agreed, among other things, to make certain payments to the Company on
account of the former executive's outstanding indebtedness of $8,677
(deducted from equity). In connection with this transaction, the
Partnership pledged 1,681,715 of the shares it held of the Company's
common stock to secure this non-recourse obligation, except as to the
pledged shares. In May 1994, the Partnership paid $3,200 in partial
satisfaction of the obligation. In consideration thereof, the Company
released 1,281,715 of the pledged shares. On March 7, 1997, the
Partnership transferred to the Company the remaining 400,000 pledged
shares in final satisfaction of the obligation. As a result, the Company
credited retained earnings $1,800, the fair market value of the pledged
shares which were returned to treasury.
-17-
<PAGE> 19
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
10. RESTRUCTURING CHARGES
During the first six months of 1997, Liggett reduced its headcount by 114
full-time positions and recorded a $1,831 restructuring charge to
operations for severance programs, primarily salary continuation and
related benefits for terminated employees. Approximately $285 in
restructuring charges will be funded in subsequent years. Liggett expects
to continue its cost reduction programs.
11. CONTINGENCIES
TOBACCO-RELATED LITIGATION:
OVERVIEW. Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions predicated on the theory that they should be liable
for damages from cancer and other adverse health effects alleged to have
been caused by cigarette smoking or by exposure to secondary smoke
(environmental tobacco smoke, "ETS") from cigarettes. These cases are
reported hereinafter as though having been commenced against Liggett
(without regard to whether such cases were actually commenced against the
Company or Liggett). There has been a noteworthy increase in the number of
cases pending against both Liggett and the other tobacco companies. The
cases generally fall into three categories: Individual Actions, Class
Actions and Attorneys General Actions, although recently several actions
have been commenced on behalf of other interest groups. As new cases are
commenced, the costs associated with defending such cases and the risks
attendant to the inherent unpredictability of litigation continue to
increase. Liggett had been receiving certain financial and other
assistance from others in the industry in defraying the costs and other
burdens incurred in the defense of smoking and health litigation and
related proceedings, but these benefits have ended. Certain joint defense
arrangements, and the financial benefits incident thereto, have also
ended. The future financial impact on the Company of the termination of
this assistance and the effects of the tobacco litigation settlements
discussed below is not quantifiable at this time.
INDIVIDUAL ACTIONS. As of June 30, 1997, there were 145 cases pending
against Liggett where individual plaintiffs allege injury resulting from
cigarette smoking, addiction to cigarette smoking or exposure to ETS and
seek compensatory and, in some cases, punitive damages. Of these, 57 are
pending in the State of Florida, 43 are pending in the State of New York
and 17 are pending in the State of Texas. The balance of individual cases
are pending in 14 states.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by
cigarette smoking are based on various theories of recovery, including
negligence, gross negligence, special duty, voluntary undertaking, strict
liability, fraud, misrepresentation, design defect, failure to warn,
breach of express and implied warranties, conspiracy, aiding and abetting,
concert of action, unjust enrichment, common law public nuisance,
indemnity, market share liability, and violations of deceptive trade
practices laws, the Federal Racketeer Influenced and Corrupt Organization
Act ("RICO") and antitrust statutes. Plaintiffs also seek punitive damages
in many of these cases. Defenses raised by defendants in these cases
include lack of proximate cause, assumption of the risk, comparative fault
and/or contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption. Several
representative cases are described below.
-18-
<PAGE> 20
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
On June 24, 1992, in an action entitled CIPOLLONE V. LIGGETT GROUP INC.,
ET AL., the United States Supreme Court issued an opinion concluding that
the Federal Cigarette Labeling and Advertising Act did not preempt state
common law damage claims but that The Public Health Cigarette Smoking Act
of 1969 (the "1969 Act") did preempt certain, but not all, state common
law damage claims. The decision bars plaintiffs from asserting claims
that, after the effective date of the 1969 Act, the tobacco companies
either failed to warn adequately of the claimed health risks of cigarette
smoking or sought to neutralize those claimed risks in their advertising
or promotion of cigarettes. Bills have been introduced in Congress on
occasion to eliminate the federal preemption defense. Enactment of any
federal legislation with such an effect could result in a significant
increase in claims, liabilities and litigation costs.
On March 27, 1987, an action entitled ROGERS V. LIGGETT GROUP INC. ET AL.,
Superior Court, Marion County, Indiana, was filed against Liggett and
others. The plaintiff sought compensatory and punitive damages for cancer
alleged to have been caused by cigarette smoking. Trial commenced on
January 31, 1995. The trial ended on February 22, 1995 when the trial
court declared a mistrial due to the jury's inability to reach a verdict.
The court directed a verdict in favor of the defendants as to the issue of
punitive damages during the trial of this action. A second trial commenced
on August 5, 1996 and, on August 23, 1996, the jury returned a verdict in
favor of the defendants. This verdict is currently on appeal.
On May 12, 1992, an action entitled CORDOVA V. LIGGETT GROUP INC., ET AL.,
Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on
behalf of the general public, alleges that defendants have been engaged in
unlawful, unfair and fraudulent business practices by allegedly
misrepresenting and concealing from the public scientific studies
pertaining to smoking and health funded by, and misrepresenting the
independence of, the Council on Tobacco Research ("CTR") and its
predecessor. The complaint seeks equitable relief against the defendants,
including the imposition of a corrective advertising campaign, restitution
of funds, disgorgement of revenues and profits and the imposition of a
constructive trust. On June 5, 1997, Liggett settled this matter.
On September 10, 1993, an action entitled SACKMAN V. LIGGETT GROUP INC.,
United States District Court, Eastern District of New York, was filed
against Liggett alleging as injury lung cancer. On May 25, 1996, the
District Court granted Liggett summary judgment on plaintiff's fraud and
breach of warranty claims, but, on June 9, 1997 denied Liggett's Motion
for Summary Judgment on plaintiffs' conspiracy claim. On June 27, 1997,
the magistrate issued an order compelling Liggett to produce certain CTR
documents with respect to which Liggett had asserted various privilege
claims. The other cigarette manufacturers and the CTR are appealing the
order.
In February 1995, an action entitled CARTER, ET AL. V. THE AMERICAN
TOBACCO COMPANY, ET AL., Superior Court for the State of Florida, Duval
County, was filed against Liggett and others. Plaintiff sought
compensatory damages, including, but not limited to, reimbursement for
medical costs. Both American Tobacco and Liggett were subsequently
dismissed from this action. On August 9, 1996, a jury returned a verdict
against the remaining defendant, Brown & Williamson Tobacco Corporation
("B&W"), in the amount of $750. The court also awarded plaintiff's
attorney's fees in the amount of $1,785. B&W has appealed this verdict.
-19-
<PAGE> 21
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CLASS ACTIONS. As of June 30, 1997, there were 29 actions pending, which
have either been certified as a class or are seeking class certification,
where Liggett, among others, was a named defendant. Two of these cases,
FLETCHER, ET AL. V. BROOKE GROUP LTD., ET AL. and WALKER, ET AL. V.
LIGGETT GROUP INC., ET AL. have been settled, subject to court approval.
These two settlements are more fully discussed below under the "Attorneys
General Actions" section.
On October 31, 1991, an action entitled BROIN, ET AL. V. PHILIP MORRIS
INCORPORATED, ET AL., Circuit Court of the Eleventh Judicial District in
and for Dade County, Florida, was filed against Liggett and others. This
case was the first class action commenced against the industry and has
been brought by plaintiffs on behalf of all flight attendants that have
worked or are presently working for airlines based in the United States
and who have never regularly smoked cigarettes but allege that they have
been damaged by involuntary exposure to ETS. The trial in this action
commenced on June 2, 1997 and is currently in progress.
On March 25, 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN
TOBACCO COMPANY INC., ET AL., United States District Court, Eastern
District of Louisiana, was filed against Liggett and others. The class
action complaint sought relief for a nationwide class of smokers based on
their alleged addiction to nicotine. The District Court granted
plaintiffs' motion for class certification.
On March 12, 1996, the Company and Liggett entered into an agreement,
subject to court approval, to settle the CASTANO class action tobacco
litigation. Under the CASTANO settlement agreement, upon final court
approval of the settlement, the CASTANO class would be entitled to receive
up to five percent of Liggett's pretax income (income before income taxes)
each year (up to a maximum of $50,000 per year) for the next 25 years,
subject to certain reductions provided for in the agreement, and a $5,000
payment from Liggett if the Company or Liggett fail to consummate a merger
or similar transaction with another non-settling tobacco company defendant
within three years of the date of the settlement. The Company and Liggett
have the right to terminate the CASTANO settlement under certain
circumstances. On May 11, 1996, the CASTANO Plaintiffs Legal Committee
filed a motion with the United States District Court for the Eastern
District of Louisiana seeking preliminary approval of the CASTANO
settlement. On May 23, 1996, the Court of Appeals for the Fifth Circuit
reversed the February 17, 1995 order of the District Court certifying the
CASTANO suit as a nationwide class action and instructed the District
Court to dismiss the class complaint. On September 6, 1996, the CASTANO
plaintiffs withdrew the motion for approval of the CASTANO settlement.
On March 14, 1996, the Company, the CASTANO Plaintiffs Legal Committee and
the CASTANO plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending nine months from the
date of Final Approval (as defined in the letter), if granted, of the
CASTANO settlement or, if earlier, the completion by the Company or
Liggett of a combination with any defendant in CASTANO, except Philip
Morris, the CASTANO plaintiffs and their counsel agree not to enter into
any more favorable settlement agreement with any CASTANO defendant which
would reduce the terms of the CASTANO settlement agreement. If the CASTANO
plaintiffs or their counsel enter into any such settlement during this
period, they shall pay the Company $250,000 within 30 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
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<PAGE> 22
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
CASTANO settlement agreement. If the Company or its affiliates enter into
any such transaction, then the CASTANO plaintiffs will be entitled to
receive $250,000 within 30 days from the transacting party.
ATTORNEYS GENERAL ACTIONS. As of June 30, 1997, 32 Attorneys General
actions were filed and served on Liggett and the Company. As more fully
discussed below, Liggett has reached settlements in 25 of these actions.
In certain of the pending proceedings, state and local government entities
and others seek reimbursement for Medicaid and other health care
expenditures allegedly caused by tobacco products. The claims asserted in
these Medicaid recovery actions vary. All plaintiffs assert the equitable
claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking and seek
reimbursement of those costs. Other claims made by some but not all
plaintiffs include the equitable claim of indemnity, common law claims of
negligence, strict liability, breach of express and implied warranty,
violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under RICO.
On May 23, 1994, an action entitled MOORE, ATTORNEY GENERAL, EX REL STATE
OF MISSISSIPPI V. THE AMERICAN TOBACCO COMPANY, ET AL., Chancery Court of
Jackson County, Mississippi, was commenced against Liggett and others
seeking restitution and indemnity for medical payments and expenses
allegedly made or incurred for tobacco related illnesses. In May 1994, the
State of Florida enacted legislation, effective July 1, 1994, allowing
certain state authorities or entities to commence litigation seeking
recovery of certain Medicaid payments made on behalf of Medicaid
recipients as a result of diseases (including, but not limited to,
diseases allegedly caused by cigarette smoking) allegedly caused by liable
third parties (including, but not limited to, the tobacco industry). On
February 21, 1995, the State of Florida commenced an action pursuant to
this statutory scheme. The Florida Medicaid trial has recently commenced.
See "Settlements", below. Legislation similar to that enacted in Florida
has been introduced in the Massachusetts and New Jersey legislatures.
SETTLEMENTS. On March 15, 1996, in addition to the CASTANO settlement
discussed above, the Company and Liggett entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida,
Louisiana, Mississippi, West Virginia and Massachusetts. The 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 Attorneys General settlement, the five states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March
22, 1996, with the balance payable over nine years and indexed and
adjusted for inflation), provided that any unpaid amount will be due 60
days after either a default by Liggett in its payment obligations under
the settlement or a merger or other similar transaction by the Company or
Liggett with another defendant in the lawsuits. In addition, Liggett will
be required to pay the states a percentage of Liggett's pretax income
(income before income taxes) each year from the second through the
twenty-fifth year. This annual percentage is 2-1/2% of Liggett's pretax
income, subject to increase to 7-1/2% depending on the number of
additional states joining the settlement. No additional states
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<PAGE> 23
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
have joined this settlement to date. All of Liggett's payments are subject
to certain reductions provided for in the agreement. Liggett has also
agreed to pay to the states $5,000 if the Company or Liggett fails to
consummate a merger or other similar transaction with another defendant in
the lawsuits within three years of the date of the settlement.
Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. The Company and
Liggett also have agreed to phase in compliance with certain of the
proposed interim FDA regulations on the same basis as provided in the
CASTANO settlement.
The Company and Liggett have the right to terminate the settlement with
respect to any state participating in the settlement if any of the
remaining defendants in the litigation succeed on the merits in that
state's Attorney General action. The Company and Liggett may also
terminate the settlement if they conclude that too many states have filed
Attorney General actions and have not resolved such cases as to the
settling defendants by joining in the settlement.
At December 31, 1995, the Company had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Attorneys General
settlement, and no additional amounts have been accrued with respect to
the recent settlements discussed below. The Company cannot quantify the
future costs of the settlements at this time as the amount Liggett must
pay is based, in part, on future operating results. Possible future
payments based on a percentage of pretax income, and other contingent
payments based on the occurrence of a business combination, will be
expensed when considered probable.
On March 20, 1997, Liggett, together with the Company, entered into a
comprehensive settlement of tobacco litigation through parallel agreements
with the Attorneys General of 17 additional states and with a nationwide
class of individuals and entities that allege smoking-related claims.
Thereafter, settlements were entered into with several other Attorneys
General. The settlements cover all smoking-related claims, including both
addiction-based and tobacco injury claims against the Company and Liggett,
brought by the Attorneys General and, upon court approval, the nationwide
class.
As of June 30, 1997, settlements with 25 Attorneys General were reached,
including the Attorneys General of Alaska, Arizona, California,
Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington
and Wisconsin. The Company's and Liggett's previous settlements on March
15, 1996 with the Attorneys General of Florida, Louisiana, Massachusetts,
Mississippi and West Virginia remain in full force and effect. Other
states have either recently filed Medicaid recovery actions or indicated
intentions to do so. Both Liggett and the Company will endeavor to resolve
those matters on substantially the same terms and conditions as the prior
settlements; however, there can be no assurance that any such settlements
will be completed.
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, the Company and plaintiffs filed the
mandatory class settlement agreement in an action entitled FLETCHER, ET
AL. V. BROOKE GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama,
where the court granted preliminary approval and preliminary certification
of the class, and on May 15, 1997, a similar mandatory class settlement
agreement was filed in an action entitled WALKER, ET AL. V. LIGGETT GROUP
INC., ET AL., United States District Court, Southern District of West
Virginia. The WALKER court
-22-
<PAGE> 24
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
also granted preliminary approval and preliminary certification of the
nationwide class; however, on August 5, 1997, the court vacated its
preliminary certification of the settlement class.
In the FLETCHER action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a
later court hearing. Effectiveness of the mandatory settlement is
conditioned on final court approval of the settlement after a fairness
hearing. There can be no assurance as to whether, or when, such court
approval will be obtained. There are no opt out provisions in this
settlement, except for Medicaid claims by states that are not party to the
Attorneys General settlements.
Pursuant to the settlements, the Company and Liggett agreed to cooperate
fully with the Attorneys General and the nationwide class in their
respective lawsuits against the tobacco industry. The Company and Liggett
agreed to provide to these parties all relevant tobacco documents in their
possession, other than those subject to claims of joint defense privilege,
and to waive, subject to court order, certain attorney-client privileges
and work product protections regarding Liggett's smoking-related documents
to the extent Liggett and the Company can so waive these privileges and
protections. The Attorneys General and the nationwide class agreed to keep
Liggett's documents under protective order and, subject to final court
approval, to limit their use to those actions brought by parties to the
settlement agreements. Those documents that may be subject to a joint
defense privilege with other tobacco companies will not be produced to the
Attorneys General or the nationwide class, but will be, pursuant to court
order, submitted to the appropriate court and placed under seal for
possible IN CAMERA review. Additionally, under similar protective
conditions, the Company and Liggett agreed to offer their employees for
witness interviews and testimony at deposition and trial. Pursuant to both
settlement agreements, Liggett also agreed to place an additional warning
on its cigarette packaging stating that "smoking is addictive" and to
issue a public statement, as requested by the Attorneys General. Liggett
has commenced distribution of cigarette packaging which displays the new
warning label.
Under the terms of the new settlement agreements, Liggett will pay, on an
annual basis, 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after
the date of the agreements. Monies collected in the settlement fund will
be overseen by a court-appointed committee and utilized to compensate
state health care programs and settlement class members and to provide
counter-market advertising. Liggett agreed to phase-in compliance with
certain proposed FDA regulations regarding smoking by children and
adolescents, including a prohibition on the use of cartoon characters in
tobacco advertising and limitations on the use of promotional materials
and distribution of sample packages where minors are present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or the Company,
prior to the fourth anniversary of the settlement agreements, would
receive certain settlement benefits, including limitations on potential
liability and not having to post a bond to appeal any future adverse
judgment. In addition, within 120 days following such a combination,
Liggett would be required to pay the settlement fund $25,000. Both the
Attorneys General and the nationwide class have agreed not to seek an
injunction preventing a defendant tobacco company combining with Liggett
or the Company from spinning off any of its affiliates which are not
engaged in the domestic tobacco business.
The Company and Liggett are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies. In
addition, in the event of a "global" tobacco settlement
-23-
<PAGE> 25
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
enacted through Federal legislation or otherwise, the Attorneys General
and tobacco plaintiffs agreed to use their "best efforts" to ensure that
the Company and Liggett's liability under such a plan should be no more
onerous than under these new settlements. See "Other Matters", below.
IMMINENT TRIALS. Although trial schedules are subject to change, the next
individual cases scheduled for trial, where Liggett is a defendant, are
WESTMORELAND V. LIGGETT GROUP INC., ET AL., United States District Court,
Middle District of Florida, Tampa Division, and SACKMAN, both of which are
scheduled for trial in October, 1997. There are two other individual cases
scheduled for trial in 1997. In addition to the BROIN trial currently in
progress, there is one other class action scheduled for trial in 1997,
ENGLE, ET AL. V. R. J. REYNOLDS TOBACCO COMPANY, ET AL.
OTHER MATTERS. On June 20, 1997, Philip Morris Incorporated ("Philip
Morris"), R. J. Reynolds Tobacco Company ("RJR"), B&W, Lorillard Tobacco
Company ("Lorillard") and the United States Tobacco Company, along with
the Attorneys General for the States of Arizona, Connecticut, Florida,
Mississippi, New York and Washington and the CASTANO Plaintiffs'
Litigation Committee executed a Memorandum of Understanding to support the
adoption of federal legislation and necessary ancillary undertakings,
incorporating the features described in a proposed resolution. The
proposed resolution mandates a total reformation and restructuring of how
tobacco products are manufactured, marketed and distributed in the United
States. The proposals are currently being reviewed by the White House,
Congress and various public interest groups. Management is unable to
predict the ultimate effect, if any, of the enactment of legislation
adopting the proposed resolution. Management is also unable to predict the
ultimate content of any such legislation; however, adoption of any such
legislation could have a material adverse effect on the business of the
Company and Liggett.
On March 20, 1997, RJR, Philip Morris, B&W and Lorillard obtained a
temporary restraining order from a North Carolina state court preventing
the Company and Liggett and their agents, employees, directors, officers
and lawyers from turning over documents allegedly subject to the joint
defense privilege in connection with the settlements, which restraining
order was converted to a preliminary injunction by the court on April 9,
1997. This ruling is currently on appeal by the Company and Liggett. On
June 5, 1997, the North Carolina Supreme Court denied Liggett's Motion to
Stay the case pending appeal. On March 24, 1997, the United States
District Court for the Eastern District of Texas and state courts in
Mississippi and Illinois each issued orders enjoining the other tobacco
companies from interfering with Liggett's filing with the courts, under
seal, those documents.
The Company understands that a grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District of
New York regarding possible violations of criminal law relating to the
activities of The Council for Tobacco Research - USA, Inc. Liggett was a
sponsor of The Council for Tobacco Research - USA, Inc. at one time. The
Company is unable, at this time, to predict the outcome of this
investigation.
In March 1996, Liggett received a subpoena from a Federal grand jury
sitting in the Southern District of New York. Documents have been produced
in response to the subpoena. The Company understands that this
investigation has been transferred to the main office of the United States
Department of Justice. In addition, in May 1996, Liggett was served with a
subpoena by a grand jury sitting in the District of Columbia, to which
Liggett has responded by producing documents. Liggett was also served with
a subpoena from the District of Columbia grand jury in July, 1997. Liggett
is in the process of responding to that subpoena. The Company and Liggett
are unable, at this time, to predict the outcome of these investigations.
-24-
<PAGE> 26
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Antitrust Division of the United States Department of Justice
investigation into the United States tobacco industry activities in
connection with product development efforts regarding "fire-safe" or
self-extinguishing cigarettes has been concluded. No action by the
Department of Justice was taken.
Litigation is subject to many uncertainties, and it is possible that some
of the aforementioned actions could be decided unfavorably against the
Company or Liggett. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation.
The Company is unable to evaluate the effect of these developing matters
on pending litigation or the possible commencement of additional
litigation.
There are several other proceedings, lawsuits and claims pending against
the Company unrelated to product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such other
proceedings, lawsuits and claims should not materially affect the
Company's financial position, results of operations or cash flows.
The Company is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against the Company and Liggett. It is possible that the Company's
consolidated financial position, results of operations and cash flows
could be materially adversely affected by an ultimate unfavorable outcome
in any of such pending litigation.
LEGISLATION AND REGULATION:
On August 28, 1996, the FDA filed in the Federal Register a Final Rule
(the "FDA Rule") classifying tobacco as a drug, asserting jurisdiction by
the FDA over the manufacture and marketing of tobacco products and
imposing restrictions on the sale, advertising and promotion of tobacco
products. The FDA's stated objective and focus for its initiative is to
limit access to cigarettes by minors by measures beyond the restrictions
either mandated by existing federal, state and local laws or voluntarily
implemented by major manufacturers in the industry. Litigation was
commenced in the United States District Court for the Middle District of
North Carolina challenging the legal authority of the FDA to assert such
jurisdiction, as well as challenging the constitutionality of the rules.
The court, after argument, granted plaintiffs' motion for summary judgment
prohibiting the FDA from regulating or restricting the promotion and
advertising of tobacco products and denied plaintiffs' motion for summary
judgment on the issue of whether the FDA has the authority to regulate
access to, and labeling of, tobacco products. The four major cigarette
manufacturers and the FDA have filed notices of appeal. The Company and
Liggett support the FDA Rule and have begun to phase in compliance with
certain of the proposed interim FDA regulations. See discussions of the
CASTANO and Attorneys General settlements above.
In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the
ingredients in cigarettes and other tobacco products sold in that state.
On February 7, 1997, the United States District Court for the District of
Massachusetts denied an attempt to block the new legislation on the ground
that it is preempted by federal law. The Company and Liggett support this
proposed legislation.
-25-
<PAGE> 27
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota
("TRQ") on certain imported tobacco, imposing extremely high tariffs on
imports of flue-cured and burley tobacco in excess of certain levels which
vary from country to country. Oriental tobacco is exempt from the quota as
well as all tobacco originating from Canada, Mexico or Israel. Management
believes that the TRQ levels are sufficiently high to allow Liggett to
operate without material disruption to its business.
On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under the
TRQ should be allocated. Currently, tobacco imported under the TRQ is
allocated on a "first-come, first-served" basis, meaning that entry is
allowed on an open basis to those first requesting entry in the quota
year. Others in the cigarette industry have suggested an "end-user
licensing" system under which the right to import tobacco under the quota
would be initially assigned on the basis of domestic market share. Such an
approach, if adopted, could have a material adverse effect on the Company
and Liggett.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings were completed during 1995. OSHA has
not yet issued a final rule or a proposed revised rule. While the Company
cannot predict the outcome, some form of federal regulation of smoking in
workplaces may result.
In January 1993, the United States Environmental Protection Agency ("EPA")
released a report on the respiratory effect of ETS which concludes that
ETS is a known human lung carcinogen in adults, and in children causes
increased respiratory tract disease and middle ear disorders and increases
the severity and frequency of asthma. In June 1993, the two largest of the
major domestic cigarette manufacturers, together with other segments of
the tobacco and distribution industries, commenced a lawsuit against the
EPA seeking a determination that the EPA did not have the statutory
authority to 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.
As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would
rise 10 cents in the year 2000 and 5 cents more in the year 2002.
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.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco
industry, the effects of which, at this time, the Company is not able to
evaluate.
-26-
<PAGE> 28
Item 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
12. SALES OF ASSETS
On January 31, 1997, BOL sold BML to New Valley for $21,500 in cash and a
promissory note of $33,500 payable $21,500 on June 30, 1997 and $12,000 on
December 31, 1997. (Refer to Note 3.)
On March 11, 1997, Liggett sold to Blue Devil Ventures, a North Carolina
limited liability partnership, certain surplus realty for $2,200 and
recognized a gain of $1,531.
-27-
<PAGE> 29
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion provides an assessment of the consolidated
results of operations, capital resources and liquidity of Brooke Group Ltd. (the
"Company") and its subsidiaries and should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company and BGLS Inc.
("BGLS") included elsewhere in this report. BGLS is a wholly owned subsidiary of
the Company. The consolidated financial statements include the accounts of BGLS,
Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley
Holdings, Inc. ("NV Holdings"), Liggett-Ducat Ltd. ("Liggett-Ducat") and other
less significant subsidiaries. The Company holds an equity interest in New
Valley Corporation ("New Valley") through NV Holdings.
On January 31, 1997, BOL sold its interest in BrookeMil Ltd. ("BML"), a
real estate investment company doing business in Russia, to New Valley. See Note
3 to the Company's Consolidated Financial Statements.
For purposes of this discussion and other consolidated financial
reporting, the Company's significant business segments are tobacco for the six
months ended June 30, 1997 and tobacco and real estate for the six months ended
June 30, 1996.
RECENT DEVELOPMENTS
NEW VALLEY. As of June 30, 1997, New Valley held 1,062,650 shares of
RJR Nabisco Holdings Corp. ("RJR Nabisco") common stock with a market value of
$34,270 (cost of $32,574). New Valley's unrealized gain on its investment in RJR
Nabisco common stock was $1,696 at June 30, 1997. For information concerning the
acquisition of BML by New Valley, see "BOL" below.
BOL. On January 31, 1997, New Valley acquired from BOL 10,483 shares
(99.1%) of common stock of BML for a purchase price of $55,000, consisting of
$21,500 in cash and a $33,500 9% promissory note of New Valley (the "Note"). The
Note is collateralized by the BML Shares. During the second quarter 1997, New
Valley paid $21,500 to BOL. The remaining balance on the note is $12,000 and is
due on December 31, 1997. The Company recognized a gain of $21,300 on the sale
in the first quarter, 1997. On April 18, 1997, BML sold one of its office
buildings to a third party. Accordingly, the Company recognized approximately
$1,240 of the deferred gain. See Note 3 to the Company's Consolidated Financial
Statements.
LIGGETT. In January 1997, Liggett underwent a major restructuring from
a centralized organization to a decentralized enterprise with four Strategic
Business Units, each a profit center, and a corporate headquarters. This
restructuring is intended to more closely align sales and marketing strategies
with the unique requirements of regional markets as well as reduce working
capital by improved production planning and inventory control. As a result of
this reorganization, Liggett is further reducing its salaried, hourly and
part-time headcount by a total of 273 positions (35%) over an eight-month
transition period.
On March 11, 1997, Liggett sold to Blue Devil Ventures, a North
Carolina limited liability partnership, certain surplus realty for $2,200. The
Company recognized a gain of $1,531.
NEGOTIATIONS WITH NOTE HOLDERS. Liggett is engaged in negotiations with
a committee composed of a majority of its note holders with respect to a
restructuring of the terms of Liggett's Senior Secured Notes (the "Liggett
Notes") and, with its lenders, to extend its revolving credit facility (the
"Facility"). In conjunction with these discussions, the Company is also engaged
in negotiations with the principal holders of the BGLS 15.75% Series B Senior
Secured Notes (the "BGLS Notes") with respect to certain related modifications
to the terms
-28-
<PAGE> 30
of such debt. Pending completion of the negotiations, BGLS and Liggett have
postponed making the interest payments due on July 31, 1997 on the BGLS Notes
and on August 1, 1997 on the Liggett Notes.
With respect to Liggett's near-term debt service requirements and
related matters, refer to "Capital Resources and Liquidity" below.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS 130 establishes
standards for reporting and display of comprehensive income. The purpose of
reporting comprehensive income is to present a measure of all changes in equity
that result from recognized transactions and other economic events of the period
other than transactions with owners in their capacity as owners. SFAS 130
requires that an enterprise classify items of other comprehensive income by
their nature in a financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the balance sheet. SFAS 130 is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. The Company has not yet determined the impact of the
implementation of SFAS 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information". SFAS 131 specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be disclosed. Once operating segments have been
determined, SFAS 131 provides for a two-tier test for determining those
operating segments that would need to be disclosed for external reporting
purposes. In addition to providing the required disclosures for reportable
segments, SFAS 131 also requires disclosure of certain "second level"
information by geographic area and for products/services. SFAS 131 also makes a
number of changes to existing disclosure requirements. SFAS 131 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. The Company has not yet determined the impact of the implementation
of SFAS 131.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
PRICING ACTIVITY. On March 7, 1997, R. J. Reynolds Tobacco Company
("RJR") initiated another list price increase on all brands of $.40 per carton
(approximately 4%). Brown & Williamson Tobacco Corporation ("B&W"), Lorillard
Tobacco Company ("Lorillard") and Liggett have matched this increase, and,
on March 21, 1997, Philip Morris Incorporated ("Philip Morris") announced a
price increase of $.50 per carton. Subsequently, Liggett and the other
manufacturers matched Philip Morris' price increase.
LEGISLATION, REGULATION AND LITIGATION. The cigarette industry
continues to be challenged on numerous fronts. New cases continue to be
commenced against Liggett and the Company and other cigarette manufacturers. As
of June 30, 1997, there were 145 individual suits, 29 class actions or actions
where class certification has been sought and 32 state (and several
municipality) Medicaid reimbursement actions pending in the United States in
which Liggett is a named defendant and has been served. As new cases are
commenced, the costs associated with defending such cases and the risks
attendant to the inherent unpredictability of litigation continue to increase.
Recently, there have been a number of restrictive regulatory actions from
various Federal administrative bodies, including the United States Environmental
Protection Agency ("EPA") and the Food and Drug Administration ("FDA"), adverse
political and legal decisions and other unfavorable developments concerning
cigarette smoking and the tobacco industry, including the commencement and
certification of class actions and the commencement of Medicaid reimbursement
suits by various states' Attorneys General. These developments generally receive
widespread media attention. The Company is not able to evaluate the effect of
these developing matters on pending litigation or the possible commencement of
additional litigation, but it is possible that the Company's financial position,
results of operations and cash flows could be materially adversely affected by
an ultimate unfavorable outcome in any of such pending litigation. See Note 11
to the Company's Consolidated Financial Statements for a description of
legislation, regulation and litigation.
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The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. Plaintiffs also
seek punitive damages in many of these cases. Defenses raised by defendants in
these cases include lack of proximate cause, assumption of the risk, comparative
fault and/or contributory negligence, lack of design defect, statutes of
limitations, equitable defenses such as "unclean hands" and lack of benefit,
failure to state a claim and federal preemption.
The claims asserted in the Medicaid recovery actions vary. All
plaintiffs assert the equitable claim that the tobacco industry was "unjustly
enriched" by plaintiffs' payment of health care costs allegedly attributable to
smoking and seek reimbursement of those costs. Other claims made by some but not
all plaintiffs include the equitable claim of indemnity, common law claims of
negligence, strict liability, breach of express and implied warranty, violation
of a voluntary undertaking or special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false advertising, and
claims under RICO.
SETTLEMENTS. On March 12, 1996, Liggett, together with the Company,
entered into an agreement to settle the CASTANO class action tobacco litigation,
and on March 15, 1996, Liggett, together with the Company, entered into an
agreement with the Attorneys General of West Virginia, Florida, Mississippi,
Massachusetts and Louisiana to settle certain actions brought against Liggett
and the Company by such states. Liggett and the Company, while neither
consenting to FDA jurisdiction nor waiving their objections thereto, agreed to
withdraw their objections and opposition to the proposed FDA regulations and to
phase in compliance with certain of the proposed interim FDA regulations.
Under the CASTANO settlement agreement, upon final court approval of
the settlement, the CASTANO class would be entitled to receive up to five
percent of Liggett's pretax income (income before income taxes) each year (up to
a maximum of $50,000 per year) for the next 25 years, subject to certain
reductions provided for in the agreement, and a $5,000 payment from Liggett if
the Company or Liggett fail to consummate a merger or similar transaction with
another non-settling tobacco company defendant within three years of the date of
the settlement. The Company and Liggett have the right to terminate the CASTANO
settlement under certain circumstances. On May 11, 1996, the CASTANO Plaintiffs
Legal Committee filed a motion with the United States District Court for the
Eastern District of Louisiana seeking preliminary approval of the CASTANO
settlement. On May 23, 1996, the Court of Appeals for the Fifth Circuit reversed
the February 17, 1995 order of the District Court certifying the CASTANO suit as
a nationwide class action and instructed the District Court to dismiss the class
complaint. On September 6, 1996, the CASTANO plaintiffs withdrew the motion for
approval of the CASTANO settlement.
On March 14, 1996, the Company, the CASTANO Plaintiffs Legal Committee
and the CASTANO plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending nine months from the date
of Final Approval (if granted) of the CASTANO settlement or, if earlier, the
completion by the Company or Liggett of a combination with any defendant in
CASTANO, except Philip Morris, the CASTANO plaintiffs and their counsel agree
not to enter into any more favorable settlement agreement with any CASTANO
defendant which would reduce the terms of the CASTANO settlement agreement. If
the CASTANO plaintiffs or their counsel enter into any such settlement during
this period, they shall pay the Company $250,000 within 30 days of the more
favorable agreement and offer the Company and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the CASTANO settlement agreement has not been earlier terminated
by the Company in accordance with its terms, the Company and its affiliates will
not enter into any business transaction with any third party which would cause
the termination of the CASTANO settlement agreement. If the Company or its
affiliates enter into any such transaction, then the CASTANO plaintiffs will be
entitled to receive $250,000 within 30 days from the transacting party.
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Under the Attorneys General settlement, the five states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March 22,
1996, with the balance payable over nine years and indexed and adjusted for
inflation), provided that any unpaid amount will be due 60 days after either a
default by Liggett in its payment obligations under the settlement or a merger
or other similar transaction by the Company or Liggett with another defendant in
the lawsuits. In addition, Liggett will be required to pay the states a
percentage of Liggett's pretax income (income before income taxes) each year
from the second through the twenty-fifth year. This annual percentage is 2-1/2%
of Liggett's pretax income, subject to increase to 7-1/2% depending on the
number of additional states joining the settlement. No additional states have
joined this settlement to date. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to the
states $5,000 if the Company or Liggett fails to consummate a merger or other
similar transaction with another defendant in the lawsuits within three years of
the date of the settlement.
On March 20, 1997, Liggett, together with the Company, entered into a
comprehensive settlement of tobacco litigation through parallel agreements with
the Attorneys General of 17 states and with a nationwide class of individuals
and entities that allege smoking-related claims. Thereafter, settlements were
entered into with several other Attorneys General. The settlements cover all
smoking-related claims, including both addiction-based and tobacco injury claims
against Liggett and the Company, and upon court approval, the nationwide class.
As of June 30, 1997, settlements with 25 Attorneys General were
reached, including the Attorneys General of Alaska, Arizona, California,
Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington and
Wisconsin. The Company's and Liggett's previous settlements on March 15, 1996
with the Attorneys General of Florida, Louisiana, Massachusetts, Mississippi and
West Virginia remain in full force and effect. Other states have either recently
filed Medicaid recovery actions or indicated intentions to do so. Both Liggett
and the Company will endeavor to resolve those matters on substantially the same
terms and conditions as the prior settlements; however, there can be no
assurance that any such settlements will be completed.
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, the Company and plaintiffs filed the
mandatory class settlement agreement in an action entitled FLETCHER, ET AL. V
BROOKE GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the class,
and on May 15, 1997, a similar mandatory class settlement agreement was filed in
an action entitled WALKER, ET AL. V. LIGGETT GROUP INC., ET AL., United States
District Court, Southern District of West Virginia. The WALKER court also
granted preliminary approval and preliminary certification of the nationwide
class; however, on August 5, 1997, the court vacated its preliminary
certification of the settlement class.
In the FLETCHER action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a later
court hearing. Effectiveness of the mandatory settlement is conditioned on final
court approval of the settlement after a fairness hearing. There can be no
assurance as to whether, or when, court approval will be obtained. There are no
opt out provisions in this settlement, except for Medicaid claims by states that
are not party to the Attorneys General settlements.
Pursuant to the settlements, the Company and Liggett agreed to
cooperate fully with the Attorneys General and the nationwide class in their
respective lawsuits against the tobacco industry. The Company and Liggett agreed
to provide to these parties all relevant tobacco documents in their possession,
other than those subject to claims of joint defense privilege, and to waive,
subject to court order, certain attorney-client privileges and work product
protections regarding Liggett's smoking-related documents to the extent Liggett
and the Company can so waive these privileges and protections. The Attorneys
General and the nationwide class agreed to keep Liggett's documents under
protective order and, subject to final court approval, to limit their use to
those actions brought by parties to the settlement agreements. Those documents
that may be subject to a joint defense privilege with other tobacco companies
will not be produced to the Attorneys General or the nationwide class, but will
be, pursuant to court order, submitted to the appropriate court and placed under
seal for possible IN CAMERA review. Additionally, under similar protective
conditions, the Company and Liggett agreed to offer their employees for witness
interviews and
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testimony at deposition and trial. Pursuant to both settlement agreements,
Liggett also agreed to place an additional warning on its cigarette packaging
stating that "smoking is addictive" and to issue a public statement, as
requested by the Attorneys General. Liggett has commenced distribution of
cigarette packaging which displays the new warning label.
Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a settlement
fund, commencing with the first full fiscal year starting after the date of the
agreements. Monies collected in the settlement fund will be overseen by a
court-appointed committee and utilized to compensate state health care programs
and settlement class members and to provide counter-market advertising. Liggett
agreed to phase in compliance with certain proposed FDA regulations regarding
smoking by children and adolescents, including a prohibition on the use of
cartoon characters in tobacco advertising and limitations on the use of
promotional materials and distribution of sample packages where minors are
present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or the Company, prior to
the fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not having
to post a bond to appeal any future adverse judgment. In addition, within 120
days following such a combination, Liggett would be required to pay the
settlement fund $25,000. Both the Attorneys General and the nationwide class
agreed not to seek an injunction preventing a defendant tobacco company
combining with Liggett or the Company from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.
The Company and Liggett are also entitled to certain "most favored
nation" benefits not available to the other defendant tobacco companies. In
addition, in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs agreed to
use their "best efforts" to ensure that the Company and Liggett's liability
under such a plan should be no more onerous than under these new settlements.
See "Other Matters" below.
At December 31, 1995, the Company had accrued approximately $4,000 for
the present value of the fixed payments under the initial Attorneys General
settlement and no additional amounts have been accrued with respect to the
recent settlements discussed above. The Company cannot quantify the future costs
of the settlements at this time as the amount Liggett must pay is based, in
part, on future operating results. Possible future payments based on a
percentage of pretax income, and other contingent payments based on the
occurrence of a business combination, will be expensed when considered probable.
See the discussions of the tobacco litigation settlements appearing in Note 11
to the Company's Consolidated Financial Statements.
OTHER MATTERS. On June 20, 1997, Philip Morris, RJR, B&W, Lorillard and
the United States Tobacco Company, along with the Attorneys General for the
States of Arizona, Connecticut, Florida, Mississippi, New York and Washington
and the CASTANO Plaintiffs' Litigation Committee executed a Memorandum of
Understanding to support the adoption of federal legislation and necessary
ancillary undertakings, incorporating the features described in a proposed
resolution. The proposed resolution mandates a total reformation and
restructuring of how tobacco products are manufactured, marketed and distributed
in the United States. The proposals are currently being reviewed by the White
House, congress and various public interest groups. Management is unable to
predict the ultimate effect, if any, of the enactment of legislation adopting
the proposed resolution. Management is also unable to predict the ultimate
content of any such legislation. However, adoption of any such legislation could
have a material adverse effect on the business of the Company and Liggett.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996.
REVENUES. Total revenues were $96,593 for the three months ended June
30, 1997 compared to $125,213 for the three months ended June 30, 1996. This
22.9% decrease in revenues was primarily due to
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a $35,144 or 31.0% decrease in revenues at Liggett reflecting a 38.3% decrease
in Liggett's overall unit sales volume, partially offset by an increase of
$8,463 or 84.7% over the same period in 1996 in tobacco revenues and an increase
of 39.5% in overall unit sales volume at Liggett-Ducat. (See also "Recent
Developments in the Cigarette Industry-Pricing Activity" for a discussion of the
March 1997 price increase). The decline in overall units sales volume of 38.3%
at Liggett was comprised of declines within the premium segment of 32.9% and
discount segment (which includes generic, control label and branded discount
products) of 36.2%. The decline in premium and discount unit sales volume was
due to certain competitors continuing leveraging rebate programs tied to their
products and increased promotional activity by certain other manufacturers. The
increase in tobacco revenues at Liggett-Ducat is attributable to increased unit
sales volume of 39.5% and significant net price increases. The increase in
tobacco revenues at Liggett-Ducat is offset by a decline in real estate revenues
of $668 due to the sale of the BML Shares.
GROSS PROFIT. Gross profit was $45,642 for the three months ended June
30, 1997 compared to $61,691 for the three months ended June 30, 1996, a
decrease of $16,049 when compared to the same period last year, due primarily to
the decline in unit sales volume at Liggett discussed above. Overall, the
Company's gross profit as a percentage of revenues decreased 2.0% when compared
to the same period in the prior year. Liggett's gross profit as a percentage of
revenues (excluding federal excise taxes) for the period decreased to 71.1%
compared to 72.5% in the same period in the prior year. This decrease is the
result of increased tobacco costs due to a reduction in the average discount
available to Liggett from leaf tobacco dealers on tobacco purchased under prior
years' purchase commitments, partially offset by the March 1997 list price
increase discussed above. See "Recent Developments in the Cigarette Industry".
EXPENSES. Selling, general and administrative expenses were $39,715 for
the three months ended June 30, 1997 compared to $58,264 for the same period
last year. The decrease of $18,549 is due primarily to lower promotion,
marketing and administrative expenses at Liggett partially offset by
restructuring charges of $70 and higher legal expenses at Liggett.
OTHER INCOME (EXPENSE). Interest expense was $15,499 for the three
months ended June 30, 1997 compared to $15,457 for the same period last year.
Equity in earnings of affiliate was a loss of $5,841 for the three
months ended June 30, 1997 compared to a loss of $1,306 for the three months
ended June 30, 1996 and relates primarily to the decline in market value of the
New Valley Class A Preferred Shares and to New Valley's net loss of $5,029
compared to its net loss of $4,762 in 1996.
Interest expense and loss in equity of affiliate were partially offset
by the sale of assets of $1,065, primarily recognition of the deferred gain on
Ducat Place I which was sold to a third party by BML on April 18, 1997.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996.
REVENUES. Total revenues were $176,598 for the six months ended June
30, 1997 compared to $215,729 for the six months ended June 30, 1996. This 18.1%
decrease in revenues was primarily due to a $47,331 or 24.7% decrease in
revenues at Liggett reflecting a 31.5% decrease in Liggett's unit sales volume,
partially offset by an increase of $11,774 or 58.0% over the same period in 1996
in tobacco revenues and an increase of 24.8% in overall unit sales volume at
Liggett-Ducat. The decline in overall units sales volume of 31.5% at Liggett was
comprised of declines within the premium segment of 24.8% and discount segment
(which includes generic, control label and branded discount products) of 30.6%.
The decline in premium and discount unit sales volume was due to certain
competitors continuing leveraging rebate programs tied to their products and
increased promotional activity by certain other manufacturers. The increase in
tobacco revenues at Liggett-Ducat is attributable to increased unit sales volume
of 24.8% and significant net price increases. The increase in tobacco revenues
at Liggett-Ducat is offset by a decline in real estate rental revenues of $1,116
due to the sale of the BML Shares.
GROSS PROFIT. Gross profit was $83,802 for the six months ended June
30, 1997 compared to $105,159 for the six months ended June 30, 1996, a decrease
of $21,357 when compared to the same period last year, due primarily to the
decline in unit sales volume at Liggett discussed above. Overall, the Company's
gross profit as a percentage of revenues decreased 1.3% when compared to the
same period in the prior year. Liggett's gross profit as a percentage of
revenues (excluding federal excise taxes) for the period decreased to 71.9%
compared to 73.0% in the same period in the prior year. This decrease is the
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result of increased tobacco costs due to a reduction in the average discount
available to Liggett from leaf tobacco dealers on tobacco purchased under prior
years' purchase commitments, partially offset by the March 1997 list price
increase. See "Recent Developments in the Cigarette Industry".
EXPENSES. Selling, general and administrative expenses were $77,037 for
the six months ended June 30, 1997 compared to $103,156 for the same period last
year. The decrease of $26,119 is due primarily to lower promotion, marketing and
administrative expenses at Liggett due primarily to the decline in unit sales
volume discussed above partially offset by restructuring charges of $1,831 and
higher legal expenses at Liggett.
OTHER INCOME (EXPENSE). Interest expense was $30,966 for the six months
ended June 30, 1997 compared to $30,234 for the same period last year.
Equity in earnings of affiliate was a loss of $14,398 for the six months
ended June 30, 1997 compared to a loss of $2,883 for the six months ended June
30, 1996 and relates to the decline in market value of the Class A Preferred
Shares and to New Valley's net loss of $15,370 in 1997 compared to its net loss
of $9,646 in 1996.
Interest expense and loss in equity of affiliate were offset by the gain
on sale of assets, which includes the sale of the BML shares and surplus realty
at Liggett, and proceeds from a legal settlement. See Notes 3, 11 and 12 to the
Company's Consolidated Financial Statements.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents increased $17,608 and $1,036 for the six
months ended June 30, 1997 and 1996, respectively. Net cash used in operations
for the six months ended June 30, 1997 was $20,003 compared to net cash used in
operations of $735 for the comparable period of 1996, due to a net loss of
$7,736, an increase in receivables of $32,498 resulting from the sale of the BML
shares to New Valley, a decrease in accounts payable and accrued expenses of
$21,564. These items were offset by a decrease in trade receivables at Liggett
due to declining sales volume, equity in loss of affiliate of $14,398 and the
impact of the deferred gain on the sale of the BML shares of approximately
$22,000.
Cash provided by investing activities of $39,592 for the period ended
June 30, 1997 includes principally cash of $43,000 received in the sale of the
BML shares to New Valley and net cash received in the sale of certain of
Liggett's surplus realty to Blue Devil Ventures. Cash received was offset by
capital expenditures of $3,653 at Liggett and BOL. Capital expenditures include
$1,086 and $2,567 for real estate development at BOL and for equipment
modernization at Liggett, respectively. Cash used in investing activities of
$4,573 for the six months ended June 30, 1996 includes capital expenditures of
approximately $12,200 for real estate development at BOL and $2,500 for
equipment modernization at Liggett. Capital expenditures were offset by
dividends received on the New Valley Class A Preferred Shares of $6,183 or
$10.00 per share and proceeds from the sale of certain surplus realty at
Liggett.
Cash used in financing activities was $1,981 for the six months ended
June 30, 1997 compared to cash provided of $6,344 for the same period in 1996.
Proceeds from financing activities primarily include proceeds at BOL from credit
lines of $3,250 and net borrowings under Liggett's Facility of $4,754. These
proceeds were offset by repayments on debt including principally the required
repurchase of $7,500 face amount of the Liggett Notes on February 1, 1997 at a
net gain of $2,963. Distributions on common stock include distributions declared
in the fourth quarter 1996 which were paid in January 1997 and distributions
declared and paid in March and June 1997. Proceeds from debt in the same period
in 1996 include the private placement of BGLS' Series A Notes (later exchanged
for Series B Notes) for net cash proceeds of $6,065, borrowings by BOL for real
estate development of $8,454 and borrowings of $6,000 by Liggett and BOL under
their revolving credit facilities. These transactions were primarily offset by
the
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redemption for approximately $6,237 of BGLS' 16.125% Senior Subordinated Reset
Notes including premium and accrued interest thereon, and distributions to the
Company's shareholders of $2,775.
LIGGETT. Liggett had a net capital deficiency of $178,660 as of June 30,
1997, is highly leveraged and has substantial near-term service requirements.
Due to the many risks and uncertainties associated with the cigarette industry
and the impact of recent tobacco litigation settlements, there can be no
assurance that Liggett will be able to meet its future earnings or cash flow
goals. Consequently, Liggett could be in violation of certain debt covenants,
and if its lenders were to exercise acceleration rights under the Facility or
the Liggett Notes indenture, or refuse to lend under the Facility, Liggett would
not be able to satisfy such demands or its working capital requirements.
Further, the Liggett Notes require a mandatory principal redemption of
$37,500 on February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400, and the Facility expires on March 8, 1998 unless extended by its
lenders. Based on Liggett's net loss for 1996 and anticipated 1997 operating
results, Liggett does not anticipate it will be able to generate sufficient cash
from operations to make such payments. While Liggett is currently in
negotiations with its note holders to restructure the terms of the Liggett Notes
and, with its lenders, to extend the Facility, there are no commitments to
restructure the Liggett Notes or to extend the Facility at this time, and no
assurances can be given in this regard. In conjunction with these discussions,
the Company is also engaged in negotiations with the principal holders of the
BGLS Notes with respect to certain related modifications to the terms of such
debt. Pending completion of the negotiations, both BGLS and Liggett have
postponed making the interest payments of approximately $18,338 for the BGLS
Notes due on July 31, 1997 and approximately $9,700 for the Liggett Notes due on
August 1, 1997. The indentures governing the BGLS Notes and the Liggett Notes
provide for a 30-day grace period before the failure to pay interest will be an
event of default.
The failure to pay interest on the Liggett Notes would permit Liggett's
lenders under the Facility to cease making further advances. While the lenders
have continued to make such advances, and Liggett's management currently
anticipates that they will continue to do so, no assurances can be given in this
regard. If Liggett is unable to restructure the terms of the Liggett Notes,
extend the Facility, or otherwise make all payments thereon within the
applicable grace periods, substantially all of Liggett's long-term debt and the
Facility would be in default and holders of such debt could accelerate the
maturity of such debt. In such event, Liggett may be forced to seek protection
from creditors under applicable laws. These matters raise substantial doubt
about Liggett meeting its liquidity needs and its ability to continue as a going
concern.
On March 8, 1994, Liggett entered into the Facility under which it can
borrow up to $40,000 (depending on the amount of eligible inventory and
receivables as determined by the lenders) from a syndicate of commercial
lenders. At June 30, 1997, $28,767 was outstanding and $209 was available under
the Facility based on eligible collateral. The Facility is collateralized by all
inventories and receivables of Liggett. Borrowings under the Facility, whose
interest is calculated at a rate equal to 1.5% above Philadelphia National
Bank's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate, bore a rate of 9.75% at March 31, 1997. On April 1, 1997,
Philadelphia National Bank raised its prime rate to 8.5%, thereby increasing
Liggett's interest rate to 10.0% for the quarter ended June 30, 1997. The
Facility contains certain financial covenants similar to those contained in the
Liggett Notes Indenture, including restrictions on Liggett's ability to declare
or pay cash dividends, incur additional debt, grant liens and enter into any new
agreements with affiliates, among others. In addition, the Facility currently
imposes requirements with respect to Liggett's adjusted net worth (not to fall
below a deficit of $180,000 as computed in accordance with the agreement) and
working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement). The Facility is classified as short-term at June
30, 1997, since it is due on March 8, 1998, unless extended by the lender. As
discussed above, Liggett is currently in negotiations to extend the Facility.
During the first quarter of 1997, Liggett violated the working capital
covenant contained in the Facility as a result of the 1998 mandatory redemption
payment on the Liggett Notes becoming due within one year. On March 19, 1997,
the lead lender agreed to waive this covenant default, and the Facility was
amended as follows: (i) the working capital definition was changed to exclude
the Liggett Notes; (ii) the maximum permitted working capital deficit, as
defined, was reduced to $12,000 (as computed in
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accordance with the agreement); (iii) the maximum permitted adjusted net worth
deficit, as defined, was increased to $180,000 (as computed in accordance with
the agreement); and (iv) the permitted advance rates under the Facility for
eligible inventory were reduced by five percent.
In February 1997, Liggett purchased $7,500 of Series B Notes using
revolver availability and credited such Notes against the 1997 mandatory
redemption requirement. Liggett recorded a net gain of $2,963 for this
transaction in the first quarter, 1997. Current maturities of both the Liggett
Notes and the Facility of approximately $74,000 contribute substantially to the
working capital deficit of $78,481 at June 30, 1997.
Liggett (and, in certain cases, the Company) and other United States
cigarette manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke (environmental tobacco smoke) from cigarettes. As new cases are
commenced, the costs associated with defending such cases and the risk attendant
to the inherent unpredictability of litigation continue. Liggett had been
receiving certain financial and other assistance from others in the industry in
defraying the costs and other burdens incurred in the defense of smoking and
health litigation and related proceedings, but these benefits have recently
ended. Certain joint defense arrangements, and the financial benefits incident
thereto, have also ended. The future financial impact on the Company of the
termination of this assistance and the effects of the tobacco litigation
settlements discussed above is not quantifiable at this time.
The Company believes, and has been so advised by counsel handling the
respective cases, that the Company and Liggett have a number of valid defenses
to the claim or claims asserted against them. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Recently, there
have been a number of adverse regulatory, political and other developments
concerning cigarette smoking and the tobacco industry, including the
commencement of the purported class actions referred to above. These
developments generally receive widespread media attention. Neither the Company
nor Liggett is able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation.
The Company is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against the Company and Liggett. It is possible that the Company's consolidated
financial position, results of operations or cash flows could be materially
affected by an ultimate unfavorable outcome in any such pending litigation.
BGLS. At June 30, 1997, BGLS' long-term debt was approximately
$233,000. See "Liggett" above for a discussion of certain recent developments
with respect to the BGLS Notes. BGLS or its affiliates may, from time to time,
based on current market conditions, purchase Liggett Notes in the open market
or in privately negotiated transactions.
BOL. As discussed in "Recent Developments," on January 31, 1997, BOL
sold its 99.1% interest in BML to New Valley for $55,000. The purchase price
paid was $21,500 in cash and a 9% promissory note of $33,500, of which $21,500
was paid during the second quarter 1997. The remaining balance of $12,000 is due
on December 31, 1997.
In October 1995, Liggett-Ducat entered into a loan agreement with
Vneshtorgbank, Moscow, Russia, to borrow up to $20,400 to fund real estate
development. Interest on the note is based on the London Interbank Offered Rate
plus 10%. The Company has guaranteed the payment of the note. In December 1996,
the loan was assigned by Liggett-Ducat to BML. On January 31, 1997, New Valley
purchased BOL's 99.1% interest in BML and indemnified the Company and its
subsidiaries with respect to the loan.
Liggett-Ducat plans to build a new cigarette factory on the outskirts
of Moscow. The new factory, which will utilize Western cigarette making
technology and have a capacity of 24 billion units per year, will produce
American and international blend cigarettes, as well as traditional Russian
cigarettes. Preliminary construction has begun, and management is actively
pursuing various potential financing alternatives that
-36-
<PAGE> 38
would permit the new factory to be operational by the end of 1998, although no
assurance can be given that such financing can be obtained on satisfactory
terms.
THE COMPANY. As a result of the 1995 debt exchange offer, the
redemption of the Reset Notes in 1996, the sale of the BML shares to New Valley
in January 1997 and the redemption of $7,500 of the Liggett Notes on February 1,
1997, the Company decreased its scheduled near-term debt maturities to
approximately $74,000 due in the year 1998; at June 30, 1997, substantially all
of this debt relates to Liggett. In addition, Liggett has a payment due at
maturity of the Liggett Notes on February 1, 1999 of $107,400. The BGLS Notes
Indenture limits the amount of restricted payments BGLS is permitted to make to
the Company during the calendar year. At June 30, 1997, the remaining amount
available through December 31, 1997 in the Restricted Payment Basket related to
BGLS' payment of dividends to the Company (as defined by the BGLS Notes
Indenture) is $7,801. In March 1997, the Company provided for its quarterly
dividend of $1,395 with proceeds from the legal settlement received in January
1997. Company expenditures (exclusive of Liggett and Liggett-Ducat) in 1997 for
current operations include debt service estimated at $36,800, dividends on the
Company's shares (currently at an annual rate of approximately $5,500) and
corporate expense. The Company anticipates funding 1997 current operations with
the proceeds from the sale of BML, management fees and other payments from
subsidiaries of approximately $5,000 and the proceeds from the legal settlement
of $4,100. The Company expects to finance its long-term growth, working capital
requirements, capital expenditures and debt service requirements through a
combination of cash provided from operations, proceeds from the sale of certain
assets, additional public or private debt and/or equity financing and
distributions from New Valley. New Valley may acquire or seek to acquire
additional operating businesses through merger, purchase of assets, stock
acquisition or other means, or to make other investments, which may limit its
ability to make such distributions.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in this report and
in other filings with the Securities and Exchange Commission and in its reports
to shareholders, which reflect management's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of the Company.
Liggett continues to be subject to risk factors endemic to the domestic tobacco
industry including, without limitation, health concerns relating to the use of
tobacco products and exposure to ETS, legislation, including tax increases,
governmental regulation, privately imposed smoking restrictions, governmental
and grand jury investigations and litigation. Each of the Company's operating
subsidiaries, namely Liggett and Liggett-Ducat, are subject to intense
competition, changes in consumer preferences, the effects of changing prices for
its raw materials and local economic conditions. Furthermore, the performance of
Liggett-Ducat's cigarette operations in Russia are affected by uncertainties in
Russia which include, among others, political or diplomatic developments,
regional tensions, currency repatriation restrictions, foreign exchange
fluctuations, inflation, and an undeveloped system of commercial laws and
legislative reform relating to foreign ownership in Russia. In addition, the
Company has a high degree of leverage and substantial near-term debt service
requirements, as well as a net worth deficiency and recent losses from
continuing operations. See "Capital Resources and Liquidity" for a discussion of
certain matters which raise substantial doubt about Liggett meeting its
liquidity needs and its ability to continue as a going concern. The Indenture
for the BGLS Notes provides for, among other things, the restriction of certain
affiliated transactions between the Company and its affiliates, as well as for
certain restrictions on the use of future distributions received from New
Valley. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. The Company does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.
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<PAGE> 39
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to information entitled "Contingencies" in Note 11 to
the Consolidated Financial Statements of Brooke Group Ltd. and BGLS
Inc. (collectively, the "Companies") included elsewhere in this report
on Form 10-Q.
Item 3. DEFAULTS UPON SENIOR SECURITIES
As of June 30, 1997, New Valley Corporation, the Companies' affiliate,
had the following respective accrued and unpaid dividend arrearages on
its 1,072,462 outstanding shares of $15.00 Class A Increasing Rate
Cumulative Senior Preferred Shares ($100 Liquidation Value), $.01 par
value per share (the "Class A Shares"), and 2,790,776 outstanding
shares of $3.00 Class B Cumulative Convertible Preferred Shares ($25
Liquidation Value), $.10 par value per share (the "Class B Shares"):
(1) $139.0 million or $129.75 per Class A Share; and (2) $127.3 million
or $45.60 per Class B Share.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
During the second quarter of 1997, the Company submitted the following
matter to a vote of security-holders at its Annual Meeting of
Stockholders held on June 2, 1997 (the "Annual Meeting"). Proxies for
the Annual Meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended.
The sole matter voted upon at the Annual Meeting was the election of
three (3) directors and the following is a tabulation of the results:
Total shares of Common Stock outstanding as of April 28, 1997 (the
record date) - 18,097,096
Total shares of Common Stock voted in person or by proxy - 17,415,378
Election of Directors:
FOR WITHHOLD
Bennett S. LeBow 17,727,829 86,884
Robert J. Eide 17,727,829 88,890
Jeffrey S. Podell 17,727,829 86,884
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<PAGE> 40
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Class Settlement Agreement, dated May 15, 1997, by
and between the named and representative plaintiff in
EARL WILLIAM WALKER, ET AL. V. LIGGETT GROUP INC. ET
AL., for himself and on behalf of the plaintiff
settlement class, and Brooke Group Ltd. and Liggett
Group Inc.
27.1 Brooke Group Ltd.'s Financial Data Schedule (for SEC
use only)
27.2 BGLS Inc.'s Financial Data Schedule (for SEC use
only)
99.1 Liggett Group Inc.'s Interim Consolidated Financial
Statements for the quarterly period ended June 30,
1997.
99.2 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly period ended
June 30, 1997.
99.3 Brooke (Overseas) Ltd.'s Interim Consolidated
Financial Statements for the quarterly period ended
June 30, 1997.
99.4 New Valley Holdings, Inc.'s Interim Consolidated
Financial Statements for the quarterly period ended
June 30, 1997.
(b) REPORTS ON FORM 8-K
During the second quarter of 1997, the following current
reports on Form 8-K were filed:
<TABLE>
<CAPTION>
REGISTRANT(S) DATE OF REPORT ITEM(S) FINANCIAL STATEMENTS
------------- -------------- ------- --------------------
<S> <C> <C> <C>
1. Brooke Group Ltd. June 11, 1997 5, 7 None
BGLS Inc.
2. Brooke Group Ltd. April 14, 1997 7 None
</TABLE>
-39-
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
BROOKE GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
------------------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: August 19, 1997
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
------------------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: August 19, 1997
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<PAGE> 1
Exhibit 10.1
CLASS SETTLEMENT AGREEMENT
--------------------------
This CLASS SETTLEMENT AGREEMENT is entered into this 15th day of May
1997 by and between the named and representative plaintiff ("Plaintiff") in EARL
WILLIAM WALKER, ET AL. V. LIGGETT GROUP INC., ET AL., Civil Action No.
2:97-0102, United States District Court, Southern District of West Virginia (the
"WALKER Action"), for himself and on behalf of the plaintiff settlement class as
hereinafter defined ("Settlement Class"), and Brooke Group Ltd., a Delaware
corporation ("Brooke Group"), Liggett & Myers Inc., a Delaware corporation
("Myers"), and Liggett Group Inc., a Delaware corporation (which, with Myers, is
hereinafter referred to as "Liggett").
RECITALS
--------
WHEREAS,
1 On February 7, 1997, Plaintiff filed a complaint to commence the
WALKER Action against Liggett, asserting claims on behalf of a putative
nationwide class of all persons who have incurred or are alleged to have
incurred costs or other damages arising from cigarette smoking and seeking,
among other things, equitable/injunctive relief, a declaratory judgment, and
compensatory and/or punitive damages, according to proof, as set forth in the
complaint.
2 On March 19, 1997, a complaint was filed to commence the action
CAROL FLETCHER, ET AL. V. BROOKE GROUP, LTD., ET AL., Civil No. 97-13, in the
Circuit Court of Mobile, Alabama ("FLETCHER") against Liggett and Brooke Group
asserting claims on behalf of a putative nationwide class of all persons and
entities which have incurred or are alleged to have incurred costs or other
damages arising from cigarette smoking and seeking, among other things,
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<PAGE> 2
equitable/injunctive relief, a declaratory judgment, and compensatory and/or
punitive damages, according to proof, as set forth in the complaint.
3 On March 20, 1997, the plaintiffs in FLETCHER and Liggett and
Brooke Group entered into a settlement (the "FLETCHER Settlement") of the
nationwide class action brought by the plaintiffs in FLETCHER, pursuant to which
Liggett agreed to, among other things, make certain payments into a settlement
fund to be equitably distributed to the settlement class, comply with certain
proposed regulations restricting the marketing and sale of cigarettes to minors,
and offer cooperation in connection with the prosecution of lawsuits against
other tobacco companies; all in accordance with the terms of the FLETCHER
Settlement, a copy of which is annexed hereto as Appendix A.
4 Subsequent to the execution of the FLETCHER Settlement, the
parties to the WALKER Action engaged in settlement discussions and succeeded in
renegotiating that settlement for the purpose of resolving the WALKER Action.
5 The primary purpose of this Class Settlement Agreement (and the
FLETCHER Settlement) is to provide certain compensatory, equitable and
injunctive relief sought by Plaintiff and other settlement class members,
including, among other things, payments by Liggett to a settlement fund, the
cooperation of Liggett and Brooke Group with respect to class members' claims
against other tobacco manufacturers, the preclusion of certain advertisement and
marketing practices, and the addition of a further warning to Liggett
cigarettes. The mechanism for accomplishing the compensatory relief set forth in
this Agreement is the creation of a settlement fund board, to which the claims
of all settlement class members against Liggett and
-2-
<PAGE> 3
Brooke Group shall be directed. The compensatory, equitable and injunctive
relief are components of an integrated settlement set forth in this Class
Settlement Agreement.
6 Apart from this action and the FLETCHER action, scores of
individual and putative class actions, as well as several actions brought on
behalf of states and other governmental bodies and other entities, have been
filed against Liggett and Brooke Group and other tobacco defendants seeking,
among other things, equitable relief and damages allegedly arising from
cigarette smoking. Moreover, actions are still being filed and many more are
expected to be filed in the future. Smoking-related litigation has resulted in
extensive discovery concerning the potential liability of Liggett and Brooke
Group as well as extensive consideration of the legal and factual bases of
smoking-related litigation.
7 The plaintiffs and the defendant tobacco companies have spent,
and continue to spend, enormous resources litigating these smoking-related
claims. Such litigation is depleting and will continue to deplete the defendant
tobacco companies' resources otherwise available to compensate claimants. Absent
an alternative method of resolution, Liggett, a financially troubled company,
would not be able to satisfy the smoking-related claims pending against it, let
alone the claims which may be asserted in the future.
8 Counsel for the Plaintiff have substantial experience in the
litigation of smoking-related cases and class actions, including the litigation
of individual smokers' cases.
9 Liggett and Brooke Group have denied, and continue to deny any
wrongdoing or any legal liability of any kind in all smoking-related litigation.
-3-
<PAGE> 4
10 In light of the uncertainties associated with the pending
litigation and Liggett's financial condition, there are substantial risks that
adjudications with respect to smoking-related claims by certain settlement class
members will, as a practical matter, be dispositive of the claims and interests
of certain other settlement class members not yet adjudicated or will
substantially impair or impede the ability of such other settlement class
members to protect their interests.
11 Liggett and Brooke Group recognize and acknowledge that defending
the continued prosecution of the WALKER Action (and other similar putative class
actions and individual suits) against them, through trial and appeals, would
require considerable resources and expense, would entail uncertainty and risk,
and constitutes circumstances under which the available assets of Liggett may be
properly characterized as a "limited fund" in comparison to the aggregate
potential claims of all settlement class members. Liggett and Brooke Group have
determined that the settlement, in accordance with this Class Settlement
Agreement, of the claims asserted in the WALKER Action against them will be
beneficial by enabling Liggett to continue the legal business of selling
cigarettes, under terms of candor and full disclosure to the public, while
avoiding bankruptcy or other insolvency that could otherwise result from the
transaction costs and potential exposure of ongoing litigation.
12 Plaintiffs allege that Liggett and Brooke Group have acted or
refused to act on grounds generally applicable to the settlement class, thereby
making final injunctive relief appropriate with respect to the class as a whole
in accordance with Rule 23(b)(2) of the Federal Rules of Civil Procedure in the
context of this settlement.
-4-
<PAGE> 5
13 Liggett has made available relevant information, and Plaintiff,
through counsel, have investigated such information and other relevant
information, as to the nature, extent and availability of Liggett's financial
resources, and have concluded preliminarily that the criteria of Federal Rule of
Civil Procedure 23(b)(1)(B) apply to Liggett and its affiliates in the context
of this settlement.
14 Plaintiff and Liggett and Brooke Group recognize and support the
public interest in preventing smoking by, or the promotion of smoking to,
children and adolescents and further recognize that it is of extreme importance
to halt any marketing efforts directed to children and adolescents and to
provide for full disclosure of material facts relating to tobacco products.
15 Plaintiff recognizes and acknowledges that the continued
prosecution of the WALKER Action and other smoking-related litigation against
Liggett and Brooke Group through trial and appeals would require considerable
time and expense and would entail uncertainty, risk and delay, including the
risk of bankruptcy or other insolvency of Liggett. Plaintiffs have determined
that the settlement, in accordance with this Class Settlement Agreement, of the
claims asserted in the WALKER Action will be beneficial to the settlement class
by providing the class with compensatory relief, as well as substantial and
critical non-monetary equitable and injunctive relief.
NOW, THEREFORE, in consideration of the foregoing and of the
promises and covenants set forth in this Class Settlement Agreement, Plaintiff,
on his own behalf and on behalf of the Settlement Class (as defined below), and
Liggett and Brooke Group hereby stipulate and agree that, conditional upon the
approval of the Court as required by Rule 23 of the Federal
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<PAGE> 6
Rules of Civil Procedure and as provided herein, the WALKER Action shall be
settled as against Liggett and Brooke Group and that all claims asserted by or
on behalf of the Walker putative class members against the Settling Defendants
shall be dismissed with prejudice, all on the terms and conditions contained
herein, as follows:
1 DEFINITIONS.
------------
As used in and solely for the purposes of this Agreement, the following
terms shall have the following respective meanings:
"Actively Assist" means to engage in all reasonable efforts to provide
full and timely cooperation and assistance.
"Affiliate" means a Present Affiliate or a Future Affiliate.
"Agreement" means this Settlement Agreement.
"Arbitrator" means the person or persons agreed to by the Settling
States and the Settlement Class (and/or the FLETCHER Settlement Class), and/or
their counsel, or appointed by the Court, the FLETCHER Court or the
Multidistrict Litigation Panel, as the case may be, to make decisions regarding
allocations of the Settlement Fund between the Settling States and the
Settlement Class (and/or the FLETCHER Settlement Class), and to resolve disputes
of the Oversight Committee.
"Attorneys General" means those State Attorneys General or other
parties who have brought Attorney General Actions.
-6-
<PAGE> 7
"Attorney General Actions" means actions by or on behalf of States
seeking injunctive relief and/or damages in connection with smoking and/or
Medicaid or other expenses allegedly resulting therefrom.
"Attorneys General Settlement Agreement" means that agreement entered
into on or about March 20, 1997 between Brooke Group and Liggett and the
Attorneys General of certain states, a copy of which is annexed hereto as
Exhibit B.
"Brooke Group" means Brooke Group Ltd. and its Present Affiliates other
than Liggett.
"Cigarette" means any product including components, accessories, or
parts which is intended to be burned under ordinary conditions of use and
consists of: (1) any roll of tobacco wrapped in paper or in any substance not
containing tobacco; or (2) any roll of tobacco wrapped in any substances
containing tobacco which, because of its appearance, the type of tobacco used in
the filler, or its packaging and labeling, is likely to be offered to, or
purchased by, consumers as a cigarette described in subparagraph (1).
"Cigarette Pack" means a unit of twenty Cigarettes or one ounce of
Tobacco Snuff.
"Cost Per Cigarette Pack" means, with respect to a Tobacco Company, the
aggregate costs incurred by such Tobacco Company under a Global Settlement
during a specified year, divided by the number of Cigarette Packs manufactured
by such Tobacco Company during such year, as determined by The Maxwell Consumer
Report published by Wheat First Butcher Singer or a similar or successor report.
-7-
<PAGE> 8
"Court" means the United States District Court for the Southern
District of West Virginia.
"Domestic Tobacco Operations" means the manufacture and/or sale of
Cigarettes and any other tobacco products in the United States, its territories,
its possessions and the Commonwealth of Puerto Rico.
"FDA Rule" means the regulations promulgated by the FDA concerning the
sale and distribution of cigarettes and other products on August 28, 1996 at 60
Fed. Reg. 44396, to be codified at 21 C.F.R. Parts 801, 803, 804, 807, 820 and
897.
"FLETCHER Class Counsel" means the settlement class counsel listed in
Section 25.8 of the FLETCHER Settlement Agreement.
"FLETCHER Court" means the Circuit Court of Mobile County, Alabama.
"FLETCHER Settlement Agreement" means the mandatory class action
settlement entered into by plaintiffs and Liggett and Brooke Group in CAROL
FLETCHER, ET AL. V. BROOKE GROUP, LTD., ET AL., Civil No. 97-13, in the Circuit
Court of Mobile, Alabama on March 20, 1997, a copy of which is annexed hereto as
Appendix A.
"FLETCHER Settlement Class" means the settlement class as defined in
the FLETCHER Settlement Agreement.
"Future Affiliate" means any one entity, other than an entity with a
Market Share greater than 30% as of the date of this Agreement, which is a
Non-settling Tobacco Company (including any successor to or assignee of its
assets) if such entity or an Affiliate of such entity with the prior written
approval of Brooke Group, subsequent to the date, and during the term, of
-8-
<PAGE> 9
this Agreement but prior to the fourth anniversary of the date of execution of
this Settlement Agreement: (i) directly or indirectly acquires or is acquired by
Liggett or Brooke Group; (ii) directly or indirectly acquires all or
substantially all of the stock or assets of Liggett or Brooke Group; (iii) all
or substantially all of whose stock or assets are directly or indirectly
acquired by Liggett or Brooke Group; or (iv) directly or indirectly merges with
Liggett or Brooke Group or otherwise combines on any basis with Liggett or
Brooke Group.
"Future Affiliate Transaction" means a transaction, or series of
transactions, by which an entity becomes a Future Affiliate.
"Global Settlement" means any National disposition, settlement,
agreement or other arrangement, such as "Tobacco Claims Legislation", by way of
legislation, executive order, regulation, taxation, levy, fine, class action
settlement, court order or otherwise, of smoking-related litigation, in direct
or indirect connection with which one or more Tobacco Companies receives the
benefit of a limitation of, or total or partial immunity from, liability to the
members of the Settlement Class for the types of claims released under this
Agreement.
"Initial Notice" means the written notice document to be provided by
Liggett and its Present Affiliates to Settlement Class members as defined in
Section 8.1 of this Agreement.
"Initial Notice Date" means the first date upon which Initial Notice is
given by Liggett and its Present Affiliates to the Settlement Class pursuant to
Section 8.1 of this Agreement.
"Injury" means any physical, mental or emotional injury, including, by
way of example and not limitation, cancer, heart disease, emphysema, addiction
and phobia.
-9-
<PAGE> 10
"Liggett" means Liggett Group Inc. and Liggett & Myers, Inc.
"Mandatory Class Fairness Hearing" means the hearing to be conducted by
the Court in connection with the determination of the fairness, adequacy and
reasonableness of this Agreement under Rule 23 of the Federal Rules of Civil
Procedure, insofar as the Agreement applies to Liggett and its Present
Affiliates.
"Mandatory Class Final Order and Judgment" or "Mandatory Class Final
Approval" means the order to be entered by the Court, with respect to Liggett
and its Present Affiliates, approving this Agreement without material
alterations, as fair, adequate and reasonable under Rule 23 of the Federal Rules
of Civil Procedure, confirming the Settlement Class certification under Rule 23
thereof, and making such other findings and determinations as the Court deems
necessary and appropriate to effectuate the terms of this Agreement and to
exercise its continuing and exclusive jurisdiction over the enforcement and
administration of all terms of this Settlement Agreement.
"Mandatory Class Settlement Date" or "Settlement Date" means the date
on which all of the following shall have occurred: (a) the entry of the
Mandatory Class Final Order and Judgment without material modification, and (b)
the achievement of finality for the Mandatory Class Final Order and Judgment by
virtue of that order having become final and non-appealable through (i) the
expiration of all appropriate appeal periods without an appeal having been
filed; (ii) final affirmance of the Mandatory Class Final Order and Judgment on
appeal or final dismissal or denial of all such appeals, including petitions for
review, rehearing or certiorari; or
-10-
<PAGE> 11
(iii) final disposition of any proceedings, including any appeals, resulting
from any appeal from the entry of the Mandatory Class Final Order and Judgment.
"Market Share" means, with respect to a specified Tobacco Company and a
specified year, the Domestic Tobacco Operations market share in that year of all
of such company's cigarettes and other tobacco products (as the case may be), as
determined by The Maxwell Consumer Report published by Wheat First Butcher
Singer or a similar or successor report.
"National" means actually covering or potentially covering
(whether by block grants to states, localities or other governmental entities or
otherwise) the United States or the United States and one or more of its
territories, possessions and the Commonwealth of Puerto Rico.
"Non-Settling Tobacco Companies" means each of The American Tobacco
Co., Lorillard Tobacco Co., Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown
& Williamson Tobacco Corp., and United States Tobacco Co., unless and until it
becomes a Future Affiliate, as herein defined.
"Other Settlement" means a settlement of a Tobacco Action which is not
a Global Settlement.
"Oversight Committee" means a committee, made up of no less than nine
(9) individuals, to oversee the cooperation provided by Settling Defendants
under Sections 5.3.1 and 5.3.2 hereof. The committee shall have not less than
75% of its composition from representation of the Attorneys General.
-11-
<PAGE> 12
"Parent", with respect to Liggett means Brooke Group, and with respect
to any other specified corporation or entity, means another corporation,
partnership or other entity which directly or indirectly controls such specified
corporation or entity.
"Parties" means the Plaintiffs and Brooke Group and Liggett.
"Population" means, with respect to a geographic area, the population
of that area as reported in the most recent census conducted by the United
States Bureau of the Census.
"Population Quotient" means, with respect to an Other Settlement or
judgment, a quotient whose numerator is the Population of the United States and
whose denominator is the total Population of the state(s), jurisdictions, or
other grouping of persons covered by such Other Settlement or judgment.
"Preliminary Approval" means the Court's provisional certification of
the Settlement Class, preliminary approval of this Agreement, approval of the
form of Initial Notice to the Settlement Class pursuant to Rule 23 of the
Federal Rules of Civil Procedure, or the setting of a date for the approval or
submission for approval of the form of such notice.
"Present Affiliate" means with respect to a specified corporation,
another corporation, partnership or other entity which as of the date of this
Agreement, directly or indirectly, controls, is controlled by, or is under
common control with, such specified corporation or entity including any and all
Parents, subsidiaries, and/or sister corporations or entities of such specified
corporation or entity.
"Present Value" means, with respect to a specified amount or amounts,
the present value of such amount or amounts as calculated using a discount rate
equal to the yield on 10-year
-12-
<PAGE> 13
Treasury Notes as reported in the WALL STREET JOURNAL at the time of such
calculation; provided that where such amount or amounts are not otherwise
determinable, the amount or amounts to be present-valued shall be deemed to be
the average for the most recent three years. "Pretax Income", with respect to
Liggett, means for a specified year, the "Income before Income Taxes" as
determined in accordance with generally accepted accounting principles ("GAAP")
of Liggett for its most recent fiscal year, as report in filings to the United
States Securities and Exchange Commission or, if there is no such filing, as
reported by Liggett's independent outside auditors. If GAAP changes in any
material respect during the term of this Agreement so that the benefits
anticipated by the parties (in light of GAAP applicable on the date of this
Agreement), an appropriate adjustment shall be made to the formulas and
calculations hereunder to achieve the parties' expectations as of the date
hereof.
"Protective Order" or "Stipulation Regarding Liggett
Documents" means, with respect to privileged documents produced by a Settling
Defendant pursuant to Paragraph 5.3.2 an order of the Court: (a) protecting the
confidentiality of such documents; (b) providing that such documents may be used
only in actions against Non-Settling Tobacco Companies and, to the extent
permitted by law, only under seal; (c) providing that, to the extent such
documents are or may be subject to the attorney/client privilege or attorney
work product doctrine, such production or use of the documents does not
constitute a waiver of such privilege, doctrine or protection with respect to
any party other than the parties to whom the documents are produced subject to
the order. The provisions of the Protective Order shall not apply to documents
claimed to be privileged but which are determined by the Court or by any other
court not to be privileged for reasons other than waiver due to production
pursuant to this Agreement.
-13-
<PAGE> 14
"Settlement Class" means a settlement class composed of:
(a) all Smokers who reside in the United States, its territories,
possessions and the Commonwealth of Puerto Rico; and
(b) the estates, representatives, and administrators of these
Smokers; and
(c) the spouses, children, relatives and "significant others" of
these Smokers as their heirs or survivors; and
(d) all persons who reside in the United States, its territories,
possessions and the Commonwealth of Puerto Rico who, prior to or during the term
of this Agreement, have been exposed to or claim to have been exposed to
(including, through market share theory) environmental or second-hand tobacco
smoke from tobacco products manufactured by Liggett or its predecessors and have
suffered or claim to have suffered Injury as a consequence thereof; and
(e) all persons or entities (including, without limitation, any
territory, city, county, state, parish, possession or any other political
subdivision thereof, or any agency or instrumentality of any of the foregoing,
or any insurance company) in the United States, its territories, possessions,
and the Commonwealth of Puerto Rico, which, prior to or during the term of this
Agreement, have incurred or claim to have incurred losses as a result of, based
on, or by reason of paying for or providing treatment for diseases, illnesses,
or medical conditions allegedly caused by Cigarettes (or exposure thereto,
including by way of environmental or second hand smoke) to the persons defined
in subparagraphs (a) through (d) above; and
-14-
<PAGE> 15
(f) all persons who reside in the United States, its territories,
possessions and the Commonwealth of Puerto Rico, who, prior to or during the
term of this Agreement, have either smoked Cigarettes or used tobacco products
(or been exposed thereto, including by way of environmental or second hand
smoke) and claim (i) to have suffered Injury as a consequence thereof, and (ii)
in connection with such claim, allege that Liggett and/or Brooke Group or their
predecessors engaged in a fraud, conspiracy or any concerted activity with one
or more other tobacco product manufacturers in the manufacturing, sale or
marketing of tobacco products;
provided that excluded from such settlement class are (i) officers and
directors of any of the Settling Defendants, (ii) any person or entity which has
entered into any prior or contemporaneous settlement with Liggett of a Tobacco
Action, and (iii) any State that opts out of this Settlement pursuant to Section
9 of this Agreement.
"Settlement Class Counsel" means the firms listed in Section 24.8 of
this Agreement.
"Settlement Class Representatives" means the Plaintiff or Plaintiffs
approved by the Court to serve as Settlement Class representatives.
"Settlement Fund" means the fund established in accordance with the
terms of Section 7 of this Agreement, which shall be established in a reputable
bank or other financial institution subject to the jurisdiction of the Court, to
provide a secure and interest-bearing fund, which shall be jointly controlled by
the Settling States and the Settlement Class (and/or the FLETCHER Settlement
Class).
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"Settlement Fund Board" or "Board" means the board which shall be
established pursuant to this Agreement (and/or the FLETCHER Settlement
Agreement) to administer that portion of the Settlement Fund allocated to the
Settlement Class and/or the FLETCHER Settlement Class pursuant to such
Agreements. Board representatives shall be appointed by the Court pursuant to
procedures for selection of the representatives established by the Court. At
least one-third of the Board shall be comprised of representatives of the public
health community who shall be designated by majority vote of the other members
of the Board.
"Settling Defendants" means Brooke Group and/or Liggett.
"Settling Defendants' Counsel" means the law firm of Kasowitz, Benson,
Torres & Friedman L.L.P.
"Settling States" means those States that entered into the Attorneys
General Settlement Agreement.
"Smokers" means all persons who, prior to or during the term of this
Agreement, have smoked Cigarettes or have used other tobacco products
manufactured by Liggett or its predecessors and have suffered or claim to have
suffered Injury as a consequence thereof.
"Subsequent Notice" means the written notice to be provided by Liggett
and its Present Affiliates to Settlement Class members as defined and provided
by Section 8.4 of this Agreement.
"Subsequent Notice Dates" means the dates defined in Section 8.4
hereof.
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"Tobacco Action" means any individual lawsuit or putative or certified
class action lawsuit brought against one or more Tobacco Companies in connection
with smoking-related claims such as (without limitation) those asserted in the
WALKER Action.
"Tobacco Companies" means The American Tobacco Co., Lorillard Tobacco
Co., Philip Morris Inc., R.J. Reynolds Tobacco Co., Brown & Williamson Tobacco
Corp., Liggett and United States Tobacco Co. and/or their respective Affiliates.
"Tobacco Snuff" means any cut, ground, powdered, or leaf tobacco that
is intended to be placed in the oral cavity.
2. SETTLEMENT PURPOSES ONLY.
-------------------------
This Agreement is for settlement purposes only, and neither the fact
of, nor any provision contained in, this Agreement nor any action taken
hereunder shall constitute, be construed as, or be admissible in evidence
against the Settling Defendants as, any admission of the validity of any claim,
any argument or any fact alleged or which could have been alleged by Plaintiffs
in the Action or alleged or which could have been alleged in any other action or
proceeding of any kind or of any wrongdoing, fault, violation of law, or
liability of any kind on the part of the Settling Defendants or any admission by
them of any claim or allegation made or which could have been made in the Action
or in any other action or proceeding of any kind, or as an admission by any of
the Plaintiffs or members of the Settlement Class of the validity of any fact or
defense asserted or which could have been asserted against them in the Action or
in any other action or proceeding of any kind.
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3. SUBMISSION FOR PRELIMINARY APPROVAL.
------------------------------------
Promptly after execution of this Agreement, the Parties shall, through
their respective attorneys, jointly submit this Agreement to the Court and move
the Court for Preliminary Approval.
4. PARTIES.
--------
4.1. This Agreement shall be binding, in accordance with the terms
hereof, upon Plaintiffs, the Settlement Class, Brooke Group and Liggett;
provided that, notwithstanding anything else contained in this Agreement, the
payment obligations of this Agreement shall be binding only upon Liggett and its
successors.
4.2. No Settling Defendant shall sell, dispose or transfer
substantially all of its cigarette brands or businesses without first causing
the acquiror, on behalf of itself and its successors, to be bound by all of the
obligations of a Settling Defendant pursuant to Sections 5.2 and 5.4 through 5.8
hereunder as to such transferred brands or businesses; provided that this
Section 4.2 shall not apply to the extent such sale, disposition or transfer is
required by the Federal Trade Commission, Department of Justice, State Attorney
General or court order.
4.3. The Parties acknowledge and agree that the willingness of Brooke
Group and Liggett to enter into this Agreement, and in particular their
willingness to agree to the equitable and other relief relating to cigarette
marketing and to cooperation provided for in Section 5 hereof, are important to
the interests of the Settlement Class.
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5. CONSENT DECREES; WARNINGS; COOPERATION.
---------------------------------------
5.1. Upon execution of this Settlement Agreement, Liggett shall, by and
through its Director, Bennett S. LeBow, issue a public statement substantially
in the following form and substance:
The tobacco industry has for many years acted in concert to seek to
deny, refute or dilute warnings concerning smoking issued by the United States
Surgeon General, the Environmental Protection Agency and other respected health
authorities. We at Liggett have determined, in entering into agreements settling
smoking-related litigation, that we will not be a party to this industry
activity. Our settlement agreements with a national settlement class, including
our agreement submitted today in federal court in West Virginia for preliminary
approval, have reaffirmed our commitment to aid the settlement class members and
their counsel in revealing the true nature and extent of this industry conduct.
5.2. As promptly as reasonably practicable, but no later than six
months after execution of the Attorneys General Settlement Agreement, Settling
Defendants shall cause to be printed boldly, on all of their Cigarette packages
and in all of their Cigarette advertising, in addition to the warnings mandated
under the Federal Cigarette Labeling and Advertising Act, as amended, 15 U.S.C.
Section 1331 ET SEQ., the statement that cigarette smoking is addictive. To the
extent any Settling Defendant manufactures and sells other tobacco products, a
similar warning shall be placed on such product.
5.3.1. Upon execution of this Agreement, each Settling Defendant shall:
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(1) cooperate with the Settlement Class, its members and counsel,
in that such Settling Defendant will take no steps to impede or
frustrate their investigations into, or prosecutions of, any of the
non-settling defendants in Tobacco Actions, so as to secure the just,
speedy and inexpensive determination of all such smoking-related claims
against said non-settling persons and entities;
(2) cooperate in and facilitate reasonable non-party discovery
from Settling Defendants in connection with Tobacco Actions;
(3) actively assist the Settlement Class, its members and counsel
in identifying and locating any and all persons known to such Settling
Defendant to have documents or information that is discoverable in such
proceedings, and to actively assist in interviewing and obtaining
documents and information from all such persons, and to encourage such
person to cooperate with the Settlement Class; and shall actively
assist in interpreting documents relating to litigation against
Non-settling Tobacco Companies; and
(4) actively assist the Settlement Class, its members and counsel,
by requesting, and if necessary, moving the Court to compel, the
Non-settling Tobacco Companies to produce to Liggett all documents (1)
that are relevant to the subject matter of Tobacco Actions or which are
likely to lead to admissible evidence in connection with the claims
asserted in a Tobacco Action, and (2) that the Non-settling Tobacco
Companies claim are subject to a joint defense or common interest
privilege. Settling Defendants will review such documents, and
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shall deposit those documents with respect to which Settling Defendants
have concerns regarding whether such documents should be protected from
discovery under seal for IN CAMERA inspection by the Court, together
with a statement to the Court of Settling Defendants' concerns
regarding whether they should be protected from discovery. The Parties
agree to request that the Court shall retain jurisdiction to resolve
that issue; and
(5) insofar as such Settling Defendant has or obtains any material
information concerning any fraudulent or illegal conduct on the part of
any parties, including Non-settling Tobacco Companies, their agents,
attorneys, or their co-defendants designed to frustrate or defeat the
claims of the plaintiffs against such parties, companies, agents,
attorneys, or co-defendants, or which have the effect of unlawfully
suppressing evidence relevant to smoking claims, disclose such
information to the appropriate judicial and regulatory agencies, and to
Settlement Class Counsel.
5.3.2. With respect to each Settlement Class member and her counsel,
subject to, and promptly after (i) the entry of a Protective Order by
the Court, and (ii) an agreement by such Settlement Class member and
her counsel to abide by, and not object to this Settlement Agreement,
each Settling Defendant shall:
(1) promptly provide all documents and information that are
relevant to the subject matter of the Actions or which are likely to
lead to admissible
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evidence in connection with the claims asserted in a Tobacco Action,
subject to the provisions of Section 5.3.2(2) hereof;
(2) waive any and all applicable attorney-client privileges and
work product protections with respect to such documents and
information. Such waiver shall not extend to (a) documents and
information not relevant to the subject matter of Tobacco Actions or
not reasonably likely to lead to admissible evidence in connection with
claims asserted in any Tobacco Action (b) documents subject to a joint
defense or other privilege or protection which Settling Defendants
cannot legally waive unilaterally, except that the waiver by the
Settling Defendant shall apply, to the extent permitted by law, to its
own joint defenses or other privileges. To the extent that a Settling
Defendant has a good faith belief, or one or more Non-settling Tobacco
Companies claims, that documents to be provided pursuant to Section
5.3.2(1) hereof may be subject to a joint defense or other privilege
(or a claim of such privilege) of one or more of the Non-settling
Tobacco Companies, such documents shall be deposited under seal for in
camera inspection by the Court, or a court in which a Tobacco Action is
pending, together with a statement to the Court that such Settling
Defendant has concerns as to whether some or all of such documents
should be protected from discovery, and the Parties agree to request
that the Court shall retain jurisdiction to resolve that issue. Liggett
will participate in proceedings, including by way of court
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appearances or declarations, concerning issues of whether such
documents are discoverable;
(3) offer their employees, and any and all other individuals over
whom they have control, to provide witness interviews of such employees
and to testify, in depositions and at trial; it being understood and
agreed that Liggett will waive and hereby does waive any and all
applicable confidentiality agreements to the extent such
confidentiality agreements would restrict testimony under this
Agreement, if any, to which such witnesses may be subject;
(4) demand from its past or current national legal counsel all
documents and information obtained in the course of representation of
any Settling Defendant which in any way relates to the cooperation
required in paragraphs 5.3.1(1) - 5.3.2(3) above, which shall be
provided to the Settlement Class, its members and counsel as provided
under this paragraph.
5.3.3. With respect to the cooperation set forth in paragraphs
5.3.1 and 5.3.2 above, the Attorneys General and Settlement Class
Counsel (and/or FLETCHER Class Counsel) shall appoint, on a yearly
basis, an Oversight Committee, to oversee such cooperation so that it
fairly assists them and minimizes the burden on a Settling Defendant.
All requests for cooperation will be first made to the Oversight
Committee. The Oversight Committee shall coordinate such requests
giving due regard to the legitimate needs of the litigants requesting
cooperation and the burden on the Settling Defendant. Nothing in this
Agreement shall waive or alter the rights of Settlement Class
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<PAGE> 24
members to obtain discovery of Liggett as required by a court order or
case management order in any Tobacco Action, provided that no order is
sought that is inconsistent with this Agreement.
5.3.4. In the event the Oversight Committee cannot agree on the
sharing of cooperation by litigants, any member of the Committee may
seek resolution by an Arbitrator. In the event that the Oversight
Committee cannot agree on the selection of an Arbitrator, the Oversight
Committee will petition the Multidistrict Litigation Panel for
appointment of an Arbitrator. In the event any Settling Defendant,
absent good cause, does not provide requested cooperation as promptly
as reasonably practicable, after receiving written notice from the
Committee of such request, (1) the Committee may seek relief from an
Arbitrator, and (2) the Committee, upon notice to the Settling
Defendant, may petition an Arbitrator for specific performance of such
requested cooperation.
5.4. Each Settling Defendant, promptly after becoming bound by
this Agreement, shall consent to jurisdiction by the FDA, for the sole
purpose of promulgating the FDA Rule with respect to all Tobacco
Companies. Further, each Settling Defendant, promptly after execution
of this Agreement, shall endorse, support and assist in attempts by the
FDA to have the FDA Rule become enforceable. Such efforts shall
include, if and as reasonably requested by the Attorneys General,
filing appropriate amicus briefs and other court papers in litigation
relating to the FDA Rule.
5.5. Each Settling Defendant shall follow and abide by the
provisions of the FDA Rule, insofar as they pertain solely to such
Settling Defendant's Domestic Tobacco
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<PAGE> 25
Operations, as set forth in, and modified by, paragraphs 5.5.1 - 5.5.4
hereof until a final determination is reached respecting the FDA Rule
at which time the Settling Defendants will be bound by the FDA Rule
only insofar as, and to the extent that, the FDA Rule becomes an
enforceable obligation binding upon all of the Tobacco Companies:
1 FDA Rule Section 897.16(b), as proposed.
2 FDA Rule Section 897.16(d), as proposed.
3 FDA Rule Section 897.30(a), as proposed.
4 FDA Rule Section 897.30(b), but only to the extent that such
section applies to billboards within 1,000 feet of a clearly
marked public or private elementary or secondary school or a
clearly marked, outdoor, municipal or other
government-operated public playground for children.
5.6. Notwithstanding anything to the contrary in the Proposed Rule
or in this Agreement, Liggett will commence compliance with Section 5.5
of this Agreement as soon as reasonably practicable, according priority
as to compliance to the States listed in Appendix A to the Attorneys
General Settlement Agreement and then to Subsequent Settling States;
provided that Liggett may limit its compliance to the extent, if any,
necessary to ensure that the net annual out-of-pocket cost to Liggett
of such compliance not exceed $1 million; and provided further that
Liggett shall not be obligated pursuant hereto to breach pre-existing
legal obligations, if any, it may have with respect to the matters
covered by Section 5.5 (and shall use its reasonable best efforts to
minimize the degree to which any such obligations would impede its full
compliance therewith). For purposes of this paragraph, the phrase "net
annual out-of-pocket costs" means
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<PAGE> 26
the excess of (a) the additional out-of-pocket expenditures incurred
during a particular year by Liggett in complying with the matters
specified in Section 5.5, over (b) savings, if any, in out-of-pocket
expenditures realized during such year by Liggett directly from the
implementation of the matters covered by Section 5.5.
5.7. If, when and to the extent that the FDA Rule, in whole or in
part, becomes an enforceable legal obligation binding upon all of the
Defendants, each Settling Defendant will comply therewith, without
consideration of any limits or exceptions herein. If the FDA Rule does
not so become such a legal obligation, Liggett shall, during the
duration of this Agreement, continue to comply with Section 5.5.
5.8. Each Settling Defendant shall not use cartoon characters,
such as "Joe Camel" in any of its advertising and promotional materials
and activities with respect to tobacco products. No Settling Defendant
shall enter into any new contract for advertising and promotion with
respect to tobacco products using any such cartoon characters after the
date the Settling Defendants become bound by this Agreement.
6. GLOBAL SETTLEMENT.
------------------
2 Effective upon the execution hereof, Settlement Class
Counsel each agree (a) to exercise best efforts to ensure that the financial
terms, financial obligations or financial conditions of any Global Settlement
are no more onerous on, or less favorable to, Brooke Group and Liggett than the
financial terms, financial obligations or financial conditions of this
Settlement Agreement, and (b) to issue a public statement substantially in the
following form and substance:
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The historic settlements entered into by Liggett, whereby
Liggett has agreed, among other things, to provide full cooperation to
twenty-two Attorneys General and a nationwide settlement class and to
consent to FDA regulation of tobacco marketing, are a major advance in
our efforts to prevent smoking by children and adolescents and to
ensure that the tobacco industry markets its products lawfully.
Accordingly, the undersigned counsel will use their best efforts in
Congress and elsewhere to ensure that any such industry-wide resolution
provide for financial terms for Liggett that reflect appropriate
recognition of Liggett's cooperative efforts, and which are no more
onerous on, or less favorable to Liggett than those provided for in our
Settlement Agreement.
3 In the event there is a Global Settlement at any time which
contains financial terms, financial obligations or financial conditions as to
Brooke Group and Liggett which are more onerous on, or less favorable to, Brooke
Group and Liggett than those of this Settlement Agreement, then, in addition to
and not in derogation of any other rights or remedies Brooke Group and Liggett
may have, Brooke Group and Liggett shall have the right, at their option, to
withdraw from future performance of this Agreement.
7. SETTLEMENT FUND.
----------------
7.1. Except as may otherwise be provided herein, all amounts due and
owing by each Settling Defendant under this Agreement shall be paid when due
into the Settlement Fund to be allocated and distributed to Settlement Class
members (and/or FLETCHER Settlement Class members) and Settling States in
accordance with this Agreement (and/or the FLETCHER
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Settlement Agreement) and the Attorneys General Settlement Agreement. In the
event that the Settling States and Settlement Class Counsel (and/or FLETCHER
Class Counsel) cannot agree to an equitable allocation of the Settlement Fund
between the Settling States and the Settlement Class (and/or the FLETCHER
Settlement Class), the Settling States and Settlement Class Counsel (and/or
FLETCHER Class Counsel) shall seek to agree on the selection of an Arbitrator to
determine such allocation. In the event that the Settling States and Settlement
Class Counsel (and/or FLETCHER Class Counsel) cannot agree on the selection of
an Arbitrator, the Settling States and Settlement Class Counsel (and/or FLETCHER
Class Counsel) will petition the Court to determine such allocation; it being
understood that some portion of the Settlement Fund will be allocated to
counter-market advertising.
7.2. Settling Defendants shall have no interest in or responsibility
for allocations or distributions from the Settlement Fund and do not guarantee
any earnings or insure against any losses from any portion of the Settlement
Fund assets that may be maintained or administered as provided in Section 7.1
above.
7.3. Subject to the terms of this Agreement, Liggett shall make the
following payments:
7.3.1. An initial payment of $25 million due 120 days from the date of
a Future Affiliate Transaction; and
7.3.2. Subject to the provisions of Sections 7.7 - 7.9, payments, each
equivalent to 25% of Liggett's Pretax Income, due 120 days after the end of each
fiscal year of
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Liggett. The first payment shall be made with respect to the first full fiscal
year commencing after the date of this Settlement Agreement.
7.4. Liggett shall pay the reasonable and necessary expenses of the
administration, allocation, and distribution of the Settlement Fund; provided
that Liggett shall not be obligated to pay more than $1 million in any year for
such expenses or the costs of Initial and each Subsequent Notice.
7.5. The amounts payable hereunder to the Settlement Fund shall
represent the maximum amounts payable to the Settlement Fund under this
Agreement (and/or the FLETCHER Settlement Agreement) and the Attorneys General
Settlement Agreements. Subject to the approval of the Court (and/or the FLETCHER
Court) the Settlement Fund Board shall institute a process for the allocation of
the Settlement Fund to the Settlement Class, as set forth in this Agreement.
7.6. The Court shall retain exclusive and continuing jurisdiction over
the Settlement Fund, and any and all claims thereto. All allocations of, and
distributions from, the Settlement Fund to the Settlement Class shall be subject
to Court approval.
7.7. In the event of a Global Settlement, the Settling Defendants shall
have the right to reduce the aggregate payments due from Liggett in each year
pursuant to this Agreement so that such aggregate payments shall be no more than
the lesser of (A) on a Cost Per Cigarette Pack basis, one-third of the lowest
Cost Per Cigarette Pack due in such year from the Non-Settling Tobacco Companies
under such Global Settlement and (B) on a percentage of Pretax Income basis,
one-third of the lowest percentage of Pretax Income due in such year from the
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Non-Settling Tobacco Companies under such Global Settlement (such percentage to
be computed as if the payments due from such companies were included in revenues
and earnings).
7.8. Liggett shall receive as a credit against any and all amounts due
hereunder, any and all amounts it is required to pay under a Global Settlement.
7.9. In the event that one or more States elect to opt out of the
Settlement Class (and/or the FLETCHER Settlement Class) and action(s) are
brought against any Settling Defendant on behalf of such State(s), the annual
payment amount due under Sections 7.3.2 of this Agreement from a Settling
Defendant shall be reduced by an amount equal to the product of (i) the ratio
that the Medicaid Population of the States that elect to opt out of the FLETCHER
Settlement Class then bears to the total Medicaid Population and (ii) 20% of
Liggett's Pretax Income.
7.10. The Settlement Fund shall constitute the sole source of recovery
on any and all claims against Liggett and its Present Affiliates which have
been, will be, or could be asserted, directly or indirectly, by, on behalf, or
for the benefit of any and all Settlement Class members, such that, subject to
the Court's final determination that this Settlement Agreement is fair pursuant
to Mandatory Class Final Approval, Liggett and its Present Affiliates shall
enjoy a universal release from all claims associated with or resulting from the
smoking of their cigarettes in consideration of their agreeing to the entry of
the Consent Decree and of Liggett's payments into the Settlement Fund and of the
reasonable expenses of the administration, allocation, and distribution of the
Settlement Fund, for the benefit of Settlement Class members, in accordance with
this Agreement.
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7.11. The Board shall institute a process for the equitable
adjudication of smoking-related claims against Liggett for compensatory damages
by Settlement Class members in view of, among other things, the history of the
outcome of such claims; it being understood that all claims for punitive,
exemplary or other such damages are hereby waived. The Board shall also consider
any and all comments, recommendations, requests and suggestions from Settlement
Class members and their counsel, as to the appropriate and equitable allocation
and distribution of the Settlement Fund, for evaluation and recommendation by
the Board to the Court for its approval. The Court shall not be requested by the
Parties or the Board to make any specific orders regarding the ultimate
allocation and distribution of the Settlement Fund at the time of Preliminary or
Mandatory Class Final Approval. The notice forms to be submitted to the Court
for its approval shall inform Settlement Class members that issues of allocation
and distribution are reserved for future rulings, conditioned upon and
subsequent to Mandatory Class Final Approval, and that any and all Settlement
Class members who wish to do so may submit their comments, recommendations,
requests and suggestions for the allocation and distribution of the Settlement
Fund, under a procedure to be established by the Court. The Court will be
requested to grant Preliminary and Mandatory Class Final Approval without regard
to the ultimate equitable allocation and distribution of the Settlement Fund, in
order to provide Settlement Class members with a full opportunity to participate
in the allocation decision-making process after the Settlement Fund is in place;
and to avoid distracting the parties and the Court, during the settlement
approval process, with comments or objections more properly directed at the
specifics of allocation and distribution with respect to particular claimants
rather than the
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common class interest in the overall fairness, adequacy, and reasonableness of
the Settlement itself, in the context of the "limited fund" available from
Liggett to pay claims, the provision of valuable equitable relief, and the
compromise of disputed and risky claims.
7.12. Settling Defendants agree not to take any action the primary
purpose of which is to reduce Liggett's payment obligations under this
Agreement.
7.13. Settling Defendants represent that prior to entering into this
Settlement Agreement, Settling Defendants took no action the primary purpose of
which was to reduce Liggett's anticipated payment obligations under this
Agreement.
8. NOTICE TO THE SETTLEMENT CLASS.
-------------------------------
8.1. Upon Preliminary Approval, and as the Court may direct, each
Settling Defendant shall cause notice of the settlement embodied herein (the
"Initial Notice") to be given to the members of the Settlement Class.
8.2. The Initial Notice to Settlement Class members shall inform them
as follows:
The allocation of the Settlement Fund to specific uses or among
particular claimants has not been determined. Future allocation and
distribution of the Settlement Fund will be administered by the
Settlement Fund Board. The Board shall be comprised of representatives
appointed by the Attorneys General of certain settling states and by
Settlement Class Counsel with the approval of the Court, and it shall
include representatives of the public health community. The Board shall
be responsible for recommending and implementing guidelines and
procedures for the administration of
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claims. The Settlement Agreement does not specify any particular
allocation of Settlement proceeds. Settlement Class members will be
given notice and an opportunity to be heard and make suggestions
regarding allocation before any final allocation or distribution
decisions are made.
8.3. The Initial Notice, in a form to be approved by the Court, shall
be disseminated as provided in this Section 8 over the course of a period not to
exceed ninety (90) days from the Initial Notice Date, subject to approval by the
Court.
8.4. At the end of each successive three-year interval during the term
of this Agreement ("Subsequent Notice Dates"), each Settling Defendant shall
cause notice of the settlement embodied herein (the "Subsequent Notice") to be
given to the members of the Settlement Class.
8.5. Each Subsequent Notice, in a form to be approved by the Court,
shall be disseminated over the course of four periods each not to exceed sixty
(60) days from each applicable Subsequent Notice Date.
9. MANDATORY CLASS CERTIFICATION AS TO LIGGETT.
--------------------------------------------
The mandatory certification of the Settlement Class under Rule
23(b)(1)(B) and/or 23(b)(2) of the Federal Rules of Civil Procedure is essential
to the ability of the Parties to perform the terms and conditions set forth in
this Settlement Agreement. It is the intent and understanding of the Parties
that the undertakings of Liggett and Brooke Group as described in Section 5 of
this Settlement Agreement, with respect to Liggett's promotional, advertising,
marketing and sales practices in order to inform the Settlement Class and the
American public of
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the dangers of smoking and the addictive nature of nicotine, to prevent sales of
cigarettes to children and adolescents, and to provide active and meaningful
cooperation in the prosecution of smokers' claims against Non-Settling Tobacco
Companies constitute injunctive, equitable, and declaratory relief of real,
immediate, and ongoing benefit to the Settlement Class and the public,
sufficient to satisfy the criteria of mandatory class certification under Rule
23. The Parties shall cooperate in establishing, to the satisfaction of the
Court, the evidentiary predicates for the Court's determination of a "limited
fund" under Rule 23. In the event the Settlement Class is not certified under
one or more of these mandatory provisions, or is later decertified by the Court
or on appeal, Liggett and Brooke Group shall have the right and option to
withdraw from this Settlement Agreement.
10. FUTURE AFFILIATE.
-----------------
10.1. The terms of this Agreement shall not be binding upon or
applicable to a Future Affiliate of the Settling Defendants, except as provided
for in this Section 10.
10.2. (a) In the event of a Future Affiliate Transaction, the
Settlement Class shall not seek to enjoin or otherwise challenge a spinoff or
like disposition of the stock or assets of any Affiliate of the Future Affiliate
which is not engaged in Domestic Tobacco Operations. The Settlement Class
reserves the right to seek to enjoin such a spinoff in the event that such
spinoff or like disposition is sought by someone other than Brooke Group or a
Future Affiliate or an Affiliate of a Future Affiliate.
(b) In the event of and after a Future Affiliate Transaction:
(i) the Settlement Class members each release (pursuant to, MUTATIS MUTANDIS,
Section 11.1 hereof) and
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covenant not to bring suit for any claim so released against any Affiliate of
the Future Affiliate, other than the Affiliate engaged in Domestic Tobacco
Operations; and (ii) if prior to the Future Affiliate Transaction, a Settlement
Class member shall have obtained a verdict or judgment in an action, against an
Affiliate (including the Parent) of the Future Affiliate, other than against the
Affiliate engaged in Domestic Tobacco Operations, such Settlement Class member
shall not seek to enforce such verdict or judgment against any such Affiliate
other than the Affiliate engaged in Domestic Tobacco Operations.
10.3. In the event a Settlement Class member obtains a verdict or
judgment against a Non-settling Tobacco Company in a Tobacco Action, and a
Settling Defendant commences a proxy contest or similar action seeking control
of such Non-settling Tobacco Company or an Affiliate thereof, then such
Non-settling Tobacco Company or an Affiliate thereof will not be required to
post a bond in order to stay enforcement of such verdict or judgment, and such
Settlement Class member will not seek to enforce such verdict or judgment
against such Non-settling Tobacco Company or such Affiliate, for a period of the
earlier of (i) one year from the commencement of such proxy contest or action,
and (ii) completion or resolution of the proxy or merger vote.
10.4. In the event that subsequent to a Future Affiliate Transaction,
and in conformity with Section 10.2(b) hereof, a Settlement Class member
obtains a verdict or judgment against a Future Affiliate in an action, such
Future Affiliate will not be required to post a bond in order to stay
enforcement of such verdict or judgment, and such Settlement Class member will
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<PAGE> 36
not seek to enforce such judgment against such Future Affiliate or an Affiliate
of such Future Affiliate until the verdict or judgment becomes final and
non-appealable.
10.5. Prior to a Future Affiliate Transaction, Settling Defendants
shall not enter into any agreement with any prospective Future Affiliate which
diminishes or impairs the prospective Future Affiliate's assets, other than in
the established and/or ordinary course of business of such prospective Future
Affiliate, and shall use best efforts to prevent such prospective Future
Affiliate from diminishing or impairing such assets. In the event of a Future
Affiliate Transaction, the Settlement Class reserves all of their rights to
prevent the Future Affiliate from diminishing or impairing the Future
Affiliate's assets, other than in the established and/or ordinary course of
business of such Future Affiliate.
10.6. With respect to subsections 10.1 - 10.5 above, nothing in these
provisions, or elsewhere in this Agreement, limits the authority of the
Settlement Class to challenge any transaction which they reasonably believe is
in violation of federal or state antitrust law.
10.7. In the event of a Future Affiliate Transaction, after which
Liggett remains as a separate entity such that Liggett's Pretax Income is
readily calculable, Section 7.3.2 hereof shall remain in effect with respect to
Pretax Income solely attributable to such separate entity. In the event of a
Future Affiliate Transaction, Settling Defendants and the Attorneys General and
their respective counsel, each agree to exercise best efforts to negotiate in
good faith a payment schedule to replace that set forth in Section 7.3.2.
Nothing in this Section 10.7 affects in any way Liggett's payment obligations
under Section 7.3.1 hereof.
-36-
<PAGE> 37
10.8. Promptly after a Future Affiliate Transaction, a Future Affiliate
shall abide by Sections 5.4 - 5.7 hereof.
10.9. Promptly after a Future Affiliate Transaction, Settling
Defendants and the Settlement Class Counsel, each agree to exercise best efforts
to negotiate in good faith a settlement of all claims against a Future
Affiliate.
10.10. As promptly as reasonably practicable after a Future Affiliate
Transaction, a Future Affiliate shall agree to eliminate cartoon characters such
as "Joe Camel," from all of its advertising and promotional materials and
activities with respect to tobacco products.
11. RELEASE.
--------
11.1. Upon the Mandatory Class Settlement Date, with respect to each
Settling Defendant, for good and sufficient consideration as described herein,
all members of the Settlement Class, collectively and individually, on behalf of
themselves, the persons they represent, their heirs, executors, administrators,
trustees, beneficiaries, agents, attorneys, successors, assigns, affiliates,
officers, directors, employees and shareholders shall be deemed to and do hereby
release, dismiss and discharge each and every claim, right, and cause of action
(including, without limitation, all claims for damages, medical expenses,
restitution, medical monitoring, or any similar legal or equitable relief, under
federal, state or common law), known or unknown, asserted or unasserted, direct
or indirect, which they had, now have, or may hereafter have against each
Settling Defendant (including its past, present and future parents,
subsidiaries, affiliates and their past, present and future agents, servants,
attorneys, employees, officers, directors, shareholders, and beneficial owners)
(and downstream distribution entities of
-37-
<PAGE> 38
Liggett, but only to the extent that such downstream distribution entities would
have cross-claims against Liggett) which is based on any and all harm, injury or
damages claimed by members of the Settlement Class to be caused by smoking,
addiction to, or dependence upon, cigarettes or which is asserted in the Action
in connection with, or arising out of the conduct, acts, facts, transactions,
occurrences, representations or omissions set forth, alleged, referred to or
otherwise embraced in the Action complaint or any and all other Tobacco Actions.
Provided, however, as follows:
1) If this Agreement expires upon completion of its full term, this
release shall continue and apply in full force and effect with respect to all
released claims which accrued or shall accrue prior to, through and including
the date of such expiration, such that such claims shall be forever released,
but only as to such claims through and including such date; if this Agreement
terminates for any reason prior to its full term, this release shall be of no
further force and effect and Settling Defendants shall be entitled to a credit
to the extent otherwise provided in this Agreement against all claims covered by
the release for the full amount paid by such Settling Defendants hereunder.
2) Except as specifically provided herein, this release does not
pertain or apply to any other existing or potential defendant in any present or
future action.
3) This release does not release Settling Defendants from claims which
may be asserted by the Settlement Class against a Settling Defendant involving
conduct unrelated to the manufacture and/or sale of tobacco products.
-38-
<PAGE> 39
11.2. Except as specifically provided herein, nothing in this Agreement
shall prejudice or in any way interfere with the rights of the Plaintiffs,
Settlement Class members, and the Settling Defendants to pursue all of their
rights and remedies against Non-settling Tobacco Companies or other defendants.
12. EXCLUSIVE REMEDY; DISMISSAL OF ACTION; JURISDICTION OF COURT.
-------------------------------------------------------------
12.1. Except as otherwise provided in this Agreement, this Agreement
shall be the sole and exclusive remedy for any and all released claims of
Settlement Class members against the Settling Defendants, and upon the entry of
the Mandatory Class Final Order and Judgment by the Court, each Settlement Class
member shall be barred from initiating, asserting, or prosecuting any released
claims against Brooke Group or Liggett.
12.2. On the Mandatory Class Settlement Date, the Action shall be
dismissed as against each Settling Defendant, subject to the continuing and
exclusive jurisdiction of the Court over the enforcement and administration of
the Settlement Agreement, and the allocation and distribution of the Settlement
Fund. Settlement Class members may not commence or prosecute actions against
Brooke Group or Liggett on claims released pursuant to this Agreement once the
Mandatory Class Final Order and Judgment is entered. The Settlement Class
Counsel agree to provide reasonable cooperation to stay or dismiss, as
appropriate, any action of any Settlement Class member for such released claims
pending in state or federal court against the Settling Defendants.
12.3. The Court shall retain exclusive and continuing jurisdiction over
the Action, all Parties, all Settlement Class members and the Settlement Fund to
interpret and enforce the terms, conditions, and obligations of this Agreement.
Nothing in this Agreement shall be construed to divest or limit the jurisdiction
of the Court with respect to claims which may be alleged by the Settlement Class
against Non-settling Tobacco Companies or other defendants.
-39-
<PAGE> 40
13. TERM.
-----
13.1. Unless earlier terminated in accordance with the provisions of
this Agreement, the duration of this Agreement shall be twenty-five (25) years
from the Liggett Settlement Date; provided that in the event of a Global
Settlement, the duration of this Agreement shall be equal to the duration of the
Global Settlement.
13.2. The performance of this Agreement by Liggett and Brooke Group is
expressly contingent upon the Court's issuance of the Mandatory Class Final
Order and Judgment. If the Court fails to hold the Mandatory Class Fairness
Hearing within six (6) months of the date hereof or to issue a Mandatory Class
Final Order and Judgment within sixty (60) days following conclusion of the
Mandatory Class Fairness Hearing, Liggett and Brooke Group may elect to
terminate this Agreement by written notice to the Court and the Settlement Class
Counsel within twenty (20) business days following the end of either such
period.
13.3. Except as may be otherwise specifically provided in this
Agreement, a termination by a Settling Defendant hereunder shall have the effect
of rendering this Agreement as having no force or effect whatsoever, null and
void AB INITIO, and not admissible as evidence for any purpose in any pending or
future litigation in any jurisdiction. However, a termination
-40-
<PAGE> 41
shall not affect any prior cooperation or require the return of any documents
produced to a Settlement Class member pursuant to this Agreement.
14. CONTINUING ENFORCEABILITY.
--------------------------
14.1. The parties acknowledge and agree that the purpose of this
Agreement and the mandatory certification of the Settlement Class with respect
to Liggett and its Present Affiliates is to provide the Settlement Class with
certain equitable and other relief, and a secure and ongoing source of recovery,
subject to equitable allocation and distribution, while ensuring that Liggett
may make its payments hereunder without risking bankruptcy or other insolvency;
this Agreement is intended to be a mutually beneficial and equitable alternative
to the prospect of bankruptcy.
14.2. Unless earlier terminated, as to the Settlement Class, this
Agreement and each provision of or obligation arising from this Agreement shall
continue and remain fully executory and enforceable if a Settling Defendant
institutes or is subject to the institution against it of any proceeding or
voluntary case under title 11 of the UnIted States Code, or other proceeding
seeking to adjudicate it insolvent or seeking liquidation, winding up,
reorganization, arrangement, adjustment, protection, relief or composition of it
or its debts under any law relating to bankruptcy, insolvency or reorganization
or relief or protection of debtors or other proceeding seeking the entry of an
order for relief or the appointment of a receiver, trustee, custodian or other
similar official for it or for any part of its property (each, a "Bankruptcy
Proceeding"). Brooke Group has the right but not the obligation to cure and to
perform any and all obligations of Liggett under this Agreement notwithstanding
the occurrence and continuation
-41-
<PAGE> 42
of any Bankruptcy Proceeding with respect to Liggett; provided, however, that
until such time as Liggett decides whether to reject or assume this Agreement,
Brooke Group shall have the obligation to pay the annual installments as
provided by Section 7 hereof and any and all rights the Settlement Class may
have not to accept such cure or performance in any Bankruptcy Proceeding are
waived.
15. ENTRY OF GOOD FAITH BAR ORDER ON CONTRIBUTION AND
INDEMNITY CLAIMS; INDEMNIFICATION.
-------------------------------------------------
15.1. The Parties shall request that the Court enter an order barring
and prohibiting the commencement and prosecution of any claim or action by any
Non-settling Tobacco Company in any smoking-related litigation against Settling
Defendants, including but not limited to any contribution, indemnity and/or
subrogation claim seeking reimbursement for payments made or to be made to any
Settlement Class member for claims settled under this Agreement. Settling
Defendants shall be entitled to dismissal with prejudice of any such
Non-settling Tobacco Company's claims against them which violate or are
inconsistent with this bar.
15.2. Any Settlement Class member making a claim against a non-settling
person for what would be a claim settled under this Agreement if asserted
against a Settling Defendant shall indemnify and hold harmless each Settling
Defendant from any claim ever asserted against such Settling Defendant arising
from such claim.
15.3. Claims by or on behalf of any Settlement Class members against
any non-settling parties are not released and shall not be barred, precluded,
limited, or reduced as a
-42-
<PAGE> 43
consequence of this Agreement or the subsequent award and distribution of funds
to such Settlement Class members from the Settlement Fund, except if and to the
extent required under federal or state law applicable under choice-of-law
doctrines in the forum in which any such claims may be instituted or pursued.
16. EXPENSES AND FEES.
------------------
16.1. Subject to Section 7.4 hereof, all reasonable and necessary
expenses incurred by the Board in administering, allocating and distributing the
Settlement Fund, and the costs of Initial and Subsequent Notices, shall be paid
by the Settling Defendants in addition to, and without reducing, their payments
into the Settlement Fund.
16.2. In addition to the above described expenses of administration and
notice, the reasonable fees and expenses of the Settlement Class Counsel, if and
as approved by the Court, shall be paid by the Settling Defendants after the
Settlement Date separate and apart from, and in addition to, their initial
payments into the Settlement Fund.
16.3. In the event of a failure by the Court to issue the Final Order
and Judgment or a decision by any Settling Defendant to exercise its right to
withdraw pursuant to Section 13 of this Agreement, the Settling Defendants will
bear, in accordance with the terms of this Agreement, the costs of the Initial
Notice incurred to such point (in the case of Brooke Group and Liggett not to
exceed a total of $1 million; provided that Brooke Group, Liggett and Plaintiffs
shall each have the right to terminate this Agreement in the event that the
Court orders Initial Notice costing in excess of $1 million, unless Brooke Group
and/or Liggett and/or Plaintiffs and/or Settlement Class Counsel agree to pay
such excess.)
-43-
<PAGE> 44
17. TAX STATUS OF SETTLEMENT FUND.
------------------------------
17.1. The Settlement Fund created under this Agreement will be
established and maintained as a Qualified Settlement Fund ("QSF") in accordance
with Section 468B of the Internal Revenue Code of 1986, as amended (the "IRC"),
and the regulations promulgated thereunder. Any Settling Defendant shall be
permitted, in its discretion, and at its own cost, to seek a private letter
ruling from the Internal Revenue Service ("IRS") regarding the tax status of the
Settlement Fund. The parties agree to negotiate in good faith, subject to Court
approval, any changes to the Agreement which may be necessary to obtain IRS
approval of the Settlement Fund as a QSF.
17.2. Representatives of the Settling States and the Settlement Class
will be appointed to act as administrator of the Settlement Fund. As
administrator, such representatives will undertake the following actions in
accordance with the regulations under IRC section 468B: (a) apply for the tax
identification number required for the Settlement Fund; (b) file, or cause to be
filed, all tax returns the Settlement Fund is required to file under federal or
state laws; (c) pay from the Settlement Fund all taxes that are imposed upon the
Settlement Fund by federal or state laws; and (d) file, or cause to be filed,
tax elections available to the Settlement Fund, including a request for a prompt
assessment under IRC sec. 6501(d), if and when the administrator deems it
appropriate to do so.
17.3. The Settling Defendants, as transferors of the Settlement Fund,
shall prepare and file the information statements concerning their settlement
payments to
-44-
<PAGE> 45
the Settlement Fund as required to be provided to the IRS pursuant to the
regulations under IRC Section 468B.
18. COURT'S SETTLEMENT APPROVAL ORDER.
----------------------------------
Except as specifically provided herein, this Agreement is subject to
and conditioned upon the issuance by the Court, following the fairness hearing,
of a Mandatory Class Final Order and Judgment.
19. EFFECT OF DEFAULT OF ANY SETTLING DEFENDANT.
--------------------------------------------
In the event any Settling Defendant fails to make a payment due and
owing under the terms of this Agreement, or is in default of this Agreement in
any other respect, the Settlement Class Counsel shall so notify the Court. The
defaulting Settling Defendant shall then be given up to sixty (60) calendar days
to "cure" the default. If the defaulting Settling Defendant does not "cure" the
default in the time provided in this Section 19, the Settlement Class Counsel
may apply to the Court for relief, including withdrawal from the agreement.
20. REPRESENTATIONS AND WARRANTIES; COVENANTS.
------------------------------------------
20.1. Each Settling Defendant represents and warrants that (i) it has
all requisite corporate power and authority to execute, deliver and perform this
Agreement and to consummate the transactions contemplated hereby; (ii) the
execution, delivery and performance by such Settling Defendant of this Agreement
and the consummation by it of the actions contemplated herein have been duly
authorized by all necessary corporate action on the part of such Settling
Defendant; and (iii) this Agreement has been duly and validly executed and
delivered by such Settling Defendant and constitutes its legal, valid and
binding obligation.
-45-
<PAGE> 46
20.2. Each Settling Defendant covenants and agrees for the benefit of
the Settlement Class that it will not enter into any transaction involving the
borrowing of funds in excess of $100 million unless such transaction is fair
from a financial perspective to the Settling Defendant and represents the
reasonable exercise of such Settling Defendant's business judgment.
21. ARBITRATION.
------------
21.1. In the event that the Parties are unable to agree, after good
faith efforts, as to the determination or calculation of Pretax Income or Market
Share for any year hereunder, such determination or calculation shall be
submitted to binding arbitration under the supervision of the Court.
21.2. The Settlement Class Counsel shall during the term of this
Agreement have the right, at its sole cost, to have an independent auditor
review the Settling Defendants' compliance with their payment obligations under
this Agreement; provided that any such review will not be binding upon such
Settling Defendants.
22. MOST FAVORED NATION.
--------------------
22.1. In the event of any Other Settlement with any Non-Settling
Tobacco Company, the payments due from each Settling Defendant in each year
under this Agreement shall be reduced to the extent, if any, necessary to ensure
that such payments are the lesser of (a) on a percentage of Pretax Income basis,
payments such that the percentage in each year of such Settling Defendant's
Pretax Income represented by such payments is no more than one-third of the
percentage in such year of such Non-Settling Tobacco Company's Pretax Income
-46-
<PAGE> 47
represented by the product of (i) the average annual payments due from such
Non-Settling Tobacco Company under such Other Settlement and (ii) the Population
Quotient with respect to such Other Settlement and (b) on a Cost Per Cigarette
Pack basis, no more than the product of (i) one-third of the lowest Cost Per
Cigarette Pack due in such year from the Non-Settling Tobacco Companies under
such Other Settlement and (ii) the Population Quotient with respect to such
Other Settlement. The Benchmark Figure set forth in this Section 22.1 does not
reflect in any fashion the Settlement Class's or Settlement Class Counsels'
views as to an appropriate settlement or resolution with any Non-Settling
Tobacco Company.
22.2. In the event of the entry of any final monetary judgment (other
than by way of settlement) in a Tobacco Action, against any one or more of the
Non-Settling Tobacco Companies, then each Settling Defendant shall have the
right to reduce the payments it is obligated to make pursuant to this Agreement
to the extent, if any, necessary to make the sum of all amounts theretofore paid
and the then Present Value of all amounts thereafter payable pursuant to this
Agreement (assuming for purposes of such Present Value calculation that the
annual amounts due hereunder remain unchanged from the then most recent fiscal
year) by any Settling Defendant per percentage point of the then Market Share of
such Settling Defendant no more than the lesser of (a) fifty (50%) of (i) the
dollar amount of the product of (A) such judgment and (B) the Population
Quotient with respect to such judgment per (ii) percentage point of the then
Market Share of each such Non-Settling Tobacco Company and (b) on a Cost Per
Cigarette Pack basis, no more than the product of (i) one-third of the lowest
Cost Per Cigarette Pack due in each year from such Non-Settling Tobacco Company
under such judgment and
-47-
<PAGE> 48
(ii) the Population Quotient with respect to such judgment; provided that such
Settling Defendant shall give written notice of such reduction and the method of
calculating such reduction to the Court and Settlement Class Counsel as soon as
practicable after the entry of such judgment.
22.3. In each year beginning with the second year a Settling Defendant
becomes bound by this Agreement, the annual payment amount due under Section 7.3
of this Agreement from such Settling Defendant shall be decreased in proportion
to any decrease, and (only if there shall have been a prior such decrease)
increased in proportion to any increase, in such Settling Defendant's Market
Share from the prior year; provided, however, that (a) such annual payment
amount shall not be so decreased to the extent, if any, that such annual payment
amount in such year is decreased as a result of a decrease in such Settling
Defendant's Pretax Income and (b) such annual payment amount shall never be
increased such that the aggregate amount of any such increases exceeds the
aggregate amount of any such decreases. Such Settling Defendant, as soon as
practicable after the end of such year, shall give written notice of any such
decrease or increase and the method of calculating it to the Court and
Settlement Class Counsel.
22.4. The Plaintiffs, on behalf of themselves (upon the execution
hereof) and the Settlement Class (upon Preliminary Approval), Settlement Class
Counsel, and any attorneys or representatives of any of the foregoing, agree
that for the next fifteen (15) years neither the Plaintiffs, the Settlement
Class, nor any attorneys or representatives of the foregoing will, without the
express written consent of Brooke Group (which may be withheld for any reason or
for no reason) discuss, negotiate, support, approve or enter into any agreement
or understanding
-48-
<PAGE> 49
with any creditor, claimant, trustee, receiver or other party-in-interest, of
Liggett, Brooke Group or any of their affiliates, other than Brooke Group itself
(collectively, "Prohibited Parties"), with respect to any restructuring,
liquidation or reorganization of Liggett, Brooke Group or any of their
affiliates, including with respect to any plan under Chapter 11 or Chapter 7 of
title 11, United States Code (the "Bankruptcy Code").
22.5. The rights and remedies of each Settling Defendant under this
Section 22 are cumulative and not exclusive of each other and shall survive the
termination of this Agreement.
23. FURTHER ACTIONS.
----------------
Each of the Parties and their respective counsel shall take such
actions and execute such additional documents as may be reasonably necessary or
appropriate to consummate or implement the settlement contemplated by this
Agreement.
24. MISCELLANEOUS.
--------------
24.1. This Agreement, including all Exhibits attached hereto, shall
constitute the entire agreement among the Parties with regard to the subject
matter of this Agreement and shall supersede any previous agreements and
understandings between the Parties with respect to the subject matter of this
Agreement. This Agreement may not be changed, modified, or amended except in
writing signed by all parties, subject to Court approval.
24.2. This Agreement shall be construed under and governed by the laws
of the State of West Virginia.
-49-
<PAGE> 50
24.3. This Agreement may be executed by the Parties in one or more
counterparts each of which shall be deemed an original but all of which together
shall constitute one and the same instrument.
24.4. This Agreement shall be binding upon and inure to the benefit of
the Settlement Class, the Settling Defendants, and their representatives, heirs,
successors, and assigns.
24.5. Nothing in this Agreement shall be construed to subject any
Settling Defendant's parent or affiliated company to the obligations or
liabilities of that Settling Defendant.
24.6. There shall be no third party beneficiaries of this Agreement
other than non-party releases hereunder. No person other than the Parties
hereto, the Settlement Class members and the releasees hereunder shall have any
right or claim under or in respect of this Agreement.
24.7. The headings of the Sections of this Agreement are included for
convenience only and shall not be deemed to constitute part of this Agreement or
to affect its construction.
-50-
<PAGE> 51
24.8. Any notice, request, instruction, application for Court approval
or application for Court orders sought in connection with this Agreement or
other document to be given by any Party to any other Party shall be in writing
and delivered personally or sent by registered or certified mail, postage
prepaid, if to the Settling Defendants to the attention of each Settling
Defendant's respective representative and to the Settlement Class Counsel on
behalf of Settlement Class members, or to other recipients as the Court may
specify. As of the date of this Agreement, the respective representatives are as
follows:
Settlement Class Counsel
------------------------
Kenneth B. McClain
Gregory Leyh
HUMPHREY, FARRINGTON & McCLAIN, P.C.
221 West Lexington
Suite 400
Independence, Missouri 64051
James F. Humphreys
JAMES F. HUMPHREYS & ASSOCIATES, L.C.
Bank One Center
Suite 1113
707 Virginia Street, East
Charleston, West Virginia 25301
-51-
<PAGE> 52
Brooke Group and Liggett
------------------------
Mr. Bennett S. LeBow
BROOKE GROUP LTD.
100 S.E. Second Street
Miami, Florida 33131
Mr. Marc E. Kasowitz
Mr. Daniel R. Benson
KASOWITZ, BENSON, TORRES & FRIEDMAN LLP
1301 Avenue of the Americas
New York, New York 10019
Mr. Michael L. Hirschfeld
MILBANK, TWEED, HADLEY & MCCLOY
1 Chase Manhattan Plaza
New York, New York 10005-1413
The above designated representatives may be changed from time to time
by any Party upon giving notice to all other Parties in conformance with this
Section 24.8.
24.9. References to or use of a singular noun or pronoun in this
Agreement shall include the plural, unless the context implies otherwise.
-52-
<PAGE> 53
IN WITNESS WHEREOF the Parties have executed this Agreement as of the
day and date first written above.
SETTLEMENT CLASS COUNSEL
By: /s/ Kenneth B. McClain
-------------------------------
Date: May 15, 1997
BROOKE GROUP LTD.
By: /s/ Bennett S. Lebow
-------------------------------
Date: May 15, 1997
LIGGETT GROUP INC.
By: /s/ Bennett S. LeBow
-------------------------------
Date: May 15, 1997
-53-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOKE GROUP LTD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,549
<SECURITIES> 0
<RECEIVABLES> 13,208
<ALLOWANCES> 1,102
<INVENTORY> 47,447
<CURRENT-ASSETS> 95,547
<PP&E> 63,809
<DEPRECIATION> 32,204
<TOTAL-ASSETS> 135,317
<CURRENT-LIABILITIES> 186,392
<BONDS> 342,253
0
0
<COMMON> 1,850
<OTHER-SE> (455,169)
<TOTAL-LIABILITY-AND-EQUITY> 135,317
<SALES> 176,598
<TOTAL-REVENUES> 176,598
<CGS> 92,796
<TOTAL-COSTS> 92,796
<OTHER-EXPENSES> 14,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,966
<INCOME-PRETAX> (6,994)
<INCOME-TAX> 789
<INCOME-CONTINUING> (7,783)
<DISCONTINUED> 47
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,736)
<EPS-PRIMARY> (0.42)
<EPS-DILUTED> (0.42)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
EXHIBIT 27.2
</LEGEND>
<CIK> 0000927388
<NAME> BGLS INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 19,273
<SECURITIES> 0
<RECEIVABLES> 13,208
<ALLOWANCES> 1,102
<INVENTORY> 47,447
<CURRENT-ASSETS> 94,784
<PP&E> 63,214
<DEPRECIATION> 31,848
<TOTAL-ASSETS> 137,558
<CURRENT-LIABILITIES> 207,846
<BONDS> 342,253
0
0
<COMMON> 0
<OTHER-SE> (478,732)
<TOTAL-LIABILITY-AND-EQUITY> 137,558
<SALES> 176,598
<TOTAL-REVENUES> 176,598
<CGS> 92,796
<TOTAL-COSTS> 92,796
<OTHER-EXPENSES> 14,398
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (32,792)
<INCOME-PRETAX> (8,007)
<INCOME-TAX> 787
<INCOME-CONTINUING> (8,794)
<DISCONTINUED> 47
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,747)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
<PAGE> 2
LIGGETT GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Liggett Group Inc.:
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholder's Equity (Deficit) for
the six months ended June 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 7
Eve Holdings Inc.:
Balance Sheets as of June 30, 1997 and December 31, 1996. . . . . . . . . . . . . . . . . . . 20
Statements of Operations for the three and six months ended June 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Statements of Cash Flows for the six months ended June 30,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
</TABLE>
-1-
<PAGE> 3
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506 $ -
Accounts receivable:
Trade, less allowances of $1,102 and $1,280, 11,838 19,316
respectively . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . 792 744
Inventories . . . . . . . . . . . . . . . . . . . . . . . 42,925 50,122
Other current assets . . . . . . . . . . . . . . . . . . . 912 1,205
--------- ----------
Total current assets . . . . . . . . . . . . . . . 56,973 71,387
Property, plant and equipment, at cost, less accumulated
depreciation of $29,058 and $29,511, respectively . . . . 17,943 18,705
Intangible assets, at cost, less accumulated amortization
of $18,247 and $17,388, respectively . . . . . . . . . . . 2,468 3,327
Other assets and deferred charges, at cost, less accumulated
amortization of $8,241 and $7,410, respectively . . . . . 3,402 4,258
--------- ----------
Total assets . . . . . . . . . . . . . . . . . . . $ 80,786 $ 97,677
========= ==========
</TABLE>
(continued)
-2-
<PAGE> 4
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . $ 66,474 $ 31,807
Cash overdraft . . . . . . . . . . . . . . . . . . . . . - 6
Accounts payable:
Trade . . . . . . . . . . . . . . . . . . . . . . . 11,537 14,979
Affiliates . . . . . . . . . . . . . . . . . . . . 1,323 216
Accrued expenses:
Promotional . . . . . . . . . . . . . . . . . . . . 30,390 33,666
Compensation and related items . . . . . . . . . . . 734 682
Taxes, principally excise taxes . . . . . . . . . . 3,319 7,565
Estimated allowance for sales returns . . . . . . . 5,000 5,000
Interest . . . . . . . . . . . . . . . . . . . . . . 8,072 8,435
Other . . . . . . . . . . . . . . . . . . . . . . . 8,605 9,380
--------- ----------
Total current liabilities . . . . . . . . . . . 135,454 111,736
Long-term debt, less current maturities . . . . . . . . . . . 107,280 144,698
Non-current employee benefits and other liabilities . . . . . 16,712 17,721
Commitments and contingencies (Notes 5 and 8)
Stockholder's equity (deficit):
Redeemable preferred stock (par value $1.00 per share;
authorized 1,000 shares; no shares issued and out-
standing)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital . . . . . . . . . . . . . . . 47,640 49,840
Accumulated deficit . . . . . . . . . . . . . . . . . . (226,300) (226,318)
--------- ----------
Total stockholder's deficit . . . . . . . . . . (178,660) (176,478)
--------- ----------
Total liabilities and stockholder's equity
(deficit) . . . . . . . . . . . . . . . . . . $ 80,786 $ 97,677
========= ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-3-
<PAGE> 5
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1997 1996 1997 1996
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales* . . . . . . . . . . . . . . . . . . . . $78,142 $113,286 $144,443 $191,774
Cost of sales* . . . . . . . . . . . . . . . . . . 36,214 52,533 66,473 88,825
------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . 41,928 60,753 77,970 102,949
Selling, general and administrative expenses . . . 37,430 54,552 71,353 96,249
Restructuring . . . . . . . . . . . . . . . . . . . 70 733 1,831 1,154
------- -------- -------- --------
Operating income . . . . . . . . . . . . 4,428 5,468 4,786 5,546
Other income (expense):
Interest income . . . . . . . . . . . . . . . 3 - 60 -
Interest expense . . . . . . . . . . . . . . . (5,930) (5,993) (11,970) (11,849)
Equity in income of affiliate . . . . . . . . 218 - 185 -
Sale of assets . . . . . . . . . . . . . . . . 2,402 3,714 3,994 3,698
Retirement of debt . . . . . . . . . . . . . . - - 2,963 -
Miscellaneous, net . . . . . . . . . . . . . . 1 (4) - -
------- -------- -------- --------
Net income (loss) . . . . . . . . . . . . $ 1,122 $ 3,185 $ 18 $ (2,605)
======= ======== ======== ========
</TABLE>
*Net sales and cost of sales include federal excise taxes of $19,153, $29,487,
$36,013, and $50,684, respectively.
The accompanying notes are an integral part
of these financial statements.
-4-
<PAGE> 6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock and Total
Contributed Accumulated Stockholder's
Capital Deficit Deficit
----------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 . . . . . . . . . $49,840 $(226,318) $(176,478)
Net income . . . . . . . . . . . . . . . . . - 18 18
Consideration for option to acquire affiliate
stock in excess of its net assets
(Note 9) . . . . . . . . . . . . . . . . (2,200) - (2,200)
------- --------- ---------
Balance at June 30, 1997 . . . . . . . . . . . $47,640 $(226,300) $(178,660)
======= ========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-5-
<PAGE> 7
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
---------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 18 $ (2,605)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 3,482 4,013
Deferred income taxes . . . . . . . . . . . . . . . . . . - -
Gain on sale of property, plant and equipment . . . . . . (3,994) (3,698)
Gain on retirement of notes . . . . . . . . . . . . . . . (2,963) -
Deferred finance charges and debt discount written off . . 130 -
Equity in income of affiliate . . . . . . . . . . . . . . (185) -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . 7,430 2,250
Inventories . . . . . . . . . . . . . . . . . . . . . . . 7,197 5,399
Accounts payable . . . . . . . . . . . . . . . . . . . . (2,364) (5,043)
Accrued expenses . . . . . . . . . . . . . . . . . . . . (8,607) 177
Non-current employee benefits . . . . . . . . . . . . . . (205) (371)
Other, net . . . . . . . . . . . . . . . . . . . . . . . (974) (882)
---------- --------
Net cash used in operating activities . . . . . . . (1,035) (760)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment . . . . . 4,743 4,415
Capital expenditures . . . . . . . . . . . . . . . . . . . . (1,086) (2,484)
Purchase of an option in affiliate . . . . . . . . . . . . . (2,200) -
---------- --------
Net cash provided by investing activities . . . . . . 1,457 1,931
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . . . . (4,664) (127)
Borrowings under revolving credit facility . . . . . . . . . 137,062 170,217
Repayments under revolving credit facility . . . . . . . . . (132,308) (165,848)
Decrease in cash overdraft . . . . . . . . . . . . . . . . . (6) (3,761)
---------- --------
Net cash provided by financing activities . . . . . . 84 481
Net increase in cash and cash equivalents . . . . . . . . . . . 506 1,652
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . - -
---------- --------
End of period . . . . . . . . . . . . . . . . . . . . . . . . $ 506 $ 1,652
========== ========
Supplemental cash flow information:
Cash payments during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 11,984 $ 11,584
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ 108 $ 75
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-6-
<PAGE> 8
LIGGETT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. The Company
Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL"). Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States. Certain management and
administrative functions are performed by affiliates (see Note 9).
The consolidated financial statements included herein are unaudited
and, in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1996 balance
sheet has been derived from audited financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission. The results of operations for interim periods should not
be regarded as necessarily indicative of the results that may be expected for
the entire year.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $178,660 as of June 30, 1997, is highly leveraged and has
substantial near-term debt service requirements. Due to the many risks and
uncertainties associated with the cigarette industry and the impact of tobacco
litigation (see Note 8), there can be no assurance that the Company will be
able to meet its future earnings or cash flow goals. Consequently, the Company
could be in violation of certain debt covenants, and if its lenders were to
exercise acceleration rights under its revolving credit facility (the
"Facility") or the indenture for its Senior Secured Notes (the "Liggett
Notes") or refuse to lend under the Facility, the Company would not be able to
satisfy such demands or its working capital requirements.
Further, the Liggett Notes require a mandatory principal redemption of
$37,500 on February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400 and the Facility expires on March 8, 1998 unless extended by its
lenders. Current maturities of both the Liggett Notes and the Facility of
approximately $66,474 contribute substantially to the working capital deficit
of approximately $78,481 as of June 30, 1997.
While the Company is currently in negotiations with its note holders
to restructure the terms of the Liggett Notes and, with its lenders, to extend
the Facility, there are no commitments to restructure the Liggett Notes or to
extend the Facility at this time, and no assurances can be given in this
regard. Based on the Company's net loss for 1996 and anticipated 1997
operating results, the Company does not anticipate it will be able to generate
sufficient cash from operations to make such payments. Pending completion of
the negotiations, the Company postponed making the interest payment of
approximately $9,700 due on August 1, 1997 on the Liggett Notes. The indenture
governing the Liggett Notes provides for a 30-day grace period before the
failure to pay interest will be an event of default.
The failure to pay interest on the Liggett Notes would permit the
lenders under the Facility to cease making further advances. While the lenders
have continued to make such advances, and management currently anticipates that
they will continue to do so, no assurances can be given in this regard. If the
Company is unable to restructure the terms of the Liggett Notes, extend the
Facility, or otherwise make all payments thereon within the applicable grace
periods, substantially all of its long-term debt and the Facility would be in
default and holders of such debt could accelerate the maturity of such debt.
In such event, the Company may be forced to seek protection from creditors
under applicable laws.
-7-
<PAGE> 9
These matters raise substantial doubt about the Company meeting its liquidity
needs and its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
2. Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant estimates subject to material changes in
the near term include deferred tax assets, allowance for doubtful accounts,
sales returns and allowances, actuarial assumptions of pension plans and
litigation and defense costs. Actual results could differ from those
estimates.
3. Per Share Data
All of the Company's common shares (1,000 shares, issued and
outstanding for all periods presented herein) are owned by BGLS. Accordingly,
earnings and dividends per share data are not presented in these consolidated
financial statements.
4. Sale of Assets
On April 29, 1996, Liggett executed a definitive agreement (as
amended) with Blue Devil Ventures, a North Carolina limited liability
partnership, for the sale by Liggett to Blue Devil Ventures of certain surplus
realty in Durham, North Carolina, for a sale price of $2,200. The transaction
closed on March 11, 1997. A gain of $1,531 was recognized, net of costs
required to prepare the properties for sale and selling costs.
On April 28, 1997, Liggett sold excess production equipment to Brooke
(Overseas) Ltd. ("BOL") for $3,000. See Note 9.
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, Deecember 31,
1997 1996
------- -------------
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . . $13,873 $15,304
Work-in-process . . . . . . . . . . . . . . . . . . 4,208 4,382
Raw materials . . . . . . . . . . . . . . . . . . . 27,677 31,338
Replacement parts and supplies . . . . . . . . . . 3,624 3,554
------- -------
Inventories at current cost . . . . . . . . . . . . 49,382 54,578
LIFO adjustment . . . . . . . . . . . . . . . . . . (6,457) (4,456)
------- -------
Inventories at LIFO cost . . . . . . . . . . . . . $42,925 $50,122
======= =======
</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
-8-
<PAGE> 10
not in excess of anticipated requirements and are at prices, including carrying
costs, established at the date of the commitment. Liggett had leaf tobacco
purchase commitments of approximately $13,828 at June 30, 1997.
6. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ----------
<S> <C> <C>
Land and improvements . . . . . . . . . . . . . . . $ 455 $ 455
Buildings . . . . . . . . . . . . . . . . . . . . . 6,150 5,848
Machinery and equipment . . . . . . . . . . . . . . 40,396 41,913
--------- ----------
Property, plant and equipment . . . . . . . . . . . 47,001 48,216
Less accumulated depreciation . . . . . . . . . . . (29,058) (29,511)
--------- ----------
Property, plant and equipment, net. . . . . . . . . $ 17,943 $ 18,705
========= ==========
</TABLE>
7. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ---------
<S> <C> <C>
11.5% Senior Secured Notes due February 1, 1999,
net of unamortized discount of $302 and $424,
respectively . . . . . . . . . . . . . . . . . . $112,310 $119,688
Variable Rate Series C Senior Secured Notes due
February 1, 1999 . . . . . . . . . . . . . . . . 32,279 32,279
Borrowings outstanding under revolving credit
facility . . . . . . . . . . . . . . . . . . . . 29,026 24,272
Other . . . . . . . . . . . . . . . . . . . . . . . 139 266
-------- --------
173,754 176,505
Current portion . . . . . . . . . . . . . . . . . . (66,474) (31,807)
-------- --------
Amount due after one year . . . . . . . . . . . . . $107,280 $144,698
======== ========
</TABLE>
Senior Secured Notes
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes"). Interest on the Series B Notes is payable semiannually
on February 1 and August 1 at an annual rate of 11.5%. The Series B Notes and
Series C Notes referred to below (collectively, the "Liggett Notes") require
mandatory principal redemptions of $7,500 on February 1 in each of the years
1993 through 1997 and $37,500 on February 1, 1998 with the balance of the
Liggett Notes due on February 1, 1999. In February 1997, $7,500 of the Series B
Notes were purchased using revolver availability and credited against the
mandatory redemption requirements. The transaction resulted in a net gain of
$2,963. The Liggett Notes are collateralized by substantially all of the assets
of the Company, excluding inventories
-9-
<PAGE> 11
and receivables. Eve is a guarantor for the Notes. The Liggett Notes may be
redeemed, in whole or in part, at a price equal to 102% and 100% of the
principal amount in the years 1997 and 1998, respectively, at the option of the
Company. 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.
On January 31, 1994, the Company issued $22,500 of Variable Rate
Series C Senior Secured Notes (the "Series C Notes"). The Series C Notes have
the same terms (other than interest rate) and stated maturity as the Series B
Notes. The Series C Notes bore a 16.5% interest rate, which was reset on
February 1, 1995 to 19.75%. The Company had received the necessary consents
from the required percentage of holders of its Series B Notes allowing for an
aggregate principal amount up to but not exceeding $32,850 of Series C Notes to
be issued under the Series C Notes indenture. In connection with the
consents, holders of Series B Notes received Series C Notes totaling two
percent of their current Series B Notes holdings. The total principal amount
of such Series C Notes issued was $2,842. On November 20, 1994, the Company
issued the remaining $7,508 of Series C Notes in exchange for an equal amount
of Series B Notes and cash of $375. The Series B Notes so exchanged were
credited against the mandatory redemption requirements for February 1, 1995.
Revolving Credit Facility
On March 8, 1994, Liggett entered into the Facility under which it can
borrow up to $40,000 (depending on the amount of eligible inventory and
receivables as determined by the lenders) from a syndicate of commercial
lenders. Availability under the Facility was approximately $209 based upon
eligible collateral at June 30, 1997. The Facility is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility,
whose interest is calculated at a rate equal to 1.5% above Philadelphia
National Bank's (the indirect parent of Congress Financial Corporation, the
lead lender) prime rate of 8.25%, bore a rate of 9.75% on March 31, 1997. On
April 1, 1997, Philadelphia National Bank raised its prime rate to 8.5%,
thereby increasing Liggett's interest rate to 10.0%. The Facility contains
certain financial covenants similar to those contained in the Liggett Notes
indenture, including restrictions on Liggett's ability to declare or pay cash
dividends, incur additional debt, grant liens and enter into any new agreements
with affiliates, among others. In addition, the Facility currently imposes
requirements with respect to the Company's adjusted net worth (not to fall
below a deficit of $180,000 as computed in accordance with the agreement) and
working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement). The Facility is classified as short-term debt
as of March 31, 1997, as it becomes due on March 8, 1998, unless extended by
the lenders.
During the first quarter of 1997, the Company violated the working
capital covenant contained in the Facility as a result of the 1998 mandatory
redemption payment on the Liggett Notes becoming due within one year. On March
19, 1997, the lead lender agreed to waive this covenant default, and the
Facility was amended as follows: (i) the working capital definition was
changed to exclude the current portion of the Liggett Notes; (ii) the maximum
permitted working capital deficit, as defined, was reduced to $12,000; (iii)
the maximum permitted adjusted net worth deficit was increased to $180,000; and
(iv) the permitted advance rates under the Facility for eligible inventory were
reduced by five percent.
The Company is currently in negotiations with a committee composed of
a majority of its note holders to restructure the terms of the Liggett Notes
and, with it lenders, to extend the Facility. Pending completion of the
negotiations, the Company postponed making the interest payment of
approximately $9,700 due on August 1, 1997 on the Liggett Notes. The indenture
governing the Liggett Notes provides for a 30-day grace period before the
failure to pay interest will be an event of default. The failure to pay
interest on the Liggett Notes would permit the lenders under the Facility to
cease making further advances. While the lenders have continued to make such
advances, and management currently anticipates that they will continue to do
so, no assurances can be given in this regard. For information concerning
Liggett's substantial near-term debt service requirements and other related
matters, see Note 1.
-10-
<PAGE> 12
8. Contingencies
Tobacco-Related Litigation
OVERVIEW. Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions predicated on the theory that they should be liable for
damages from cancer and other adverse health effects alleged to have been
caused by cigarette smoking or by exposure to secondary smoke (environmental
tobacco smoke, "ETS") from cigarettes. These cases are reported hereinafter as
though having been commenced against Liggett (without regard to whether such
cases were actually commenced against Liggett or BGL). There has been a
noteworthy increase in the number of cases pending against both Liggett and the
other tobacco companies. The cases generally fall into three categories:
Individual Actions, Class Actions and Attorneys General Actions, although
recently several actions have been commenced on behalf of other interest
groups. As new cases are commenced, the costs associated with defending such
cases and the risks attendant to the inherent unpredictability of litigation
continue to increase. Liggett had been receiving certain financial and other
assistance from others in the industry in defraying the costs and other burdens
incurred in the defense of smoking and health litigation and related
proceedings, but these benefits have ended. Certain joint defense
arrangements, and the financial benefits incident thereto, have also ended.
The future financial impact on Liggett of the termination of this assistance
and the effects of the tobacco litigation settlements discussed below is not
quantifiable at this time.
INDIVIDUAL CASES. As of June 30, 1997, there were 145 cases
pending against Liggett where individual plaintiffs allege injury resulting
from cigarette smoking, addiction to cigarette smoking or exposure to ETS and
seek compensatory and, in some cases, punitive damages. Of these, 57 are
pending in the State of Florida, 43 are pending in the State of New York and 17
are pending in the State of Texas. The balance of individual cases are pending
in 14 states.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and
implied warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. Plaintiffs also
seek punitive damages in many of these cases. Defenses raised by defendants in
these cases include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, lack of design defect,
statute of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption. Several
representative cases are described below.
On June 24, 1992, in an action entitled Cipollone v. Liggett Group
Inc., et al., the United States Supreme Court issued an opinion concluding that
The Federal Cigarette Labeling and Advertising Act did not preempt state common
law damage claims but that The Public Health Cigarette Smoking Act of 1969 (the
"1969 Act") did preempt certain, but not all, state common law damage claims.
The decision bars plaintiffs from asserting claims that, after the effective
date of the 1969 Act, the tobacco companies either failed to warn adequately of
the claimed health risks of cigarette smoking or sought to neutralize those
claimed risks in their advertising or promotion of cigarettes. Bills have been
introduced in Congress on occasion to eliminate the federal preemption defense.
Enactment of any federal legislation with such an effect could result in a
significant increase in claims, liabilities and litigation costs.
On March 27, 1987, an action entitled Rogers v. Liggett Group Inc. et
al., Superior Court, Marion County, Indiana, was filed against Liggett and
others. The plaintiff sought compensatory and punitive damages for cancer
alleged to have been caused by cigarette smoking. Trial commenced on January
31, 1995. The trial ended on February 22, 1995 when the trial court declared a
mistrial due to the
-11-
<PAGE> 13
jury's inability to reach a verdict. The court directed a verdict in favor of
the defendants as to the issue of punitive damages during the trial of this
action. A second trial commenced on August 5, 1996 and, on August 23, 1996,
the jury returned a verdict in favor of the defendants. This verdict is
currently on appeal.
On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et
al., Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on behalf
of the general public, alleges that defendants have been engaged in unlawful,
unfair and fraudulent business practices by allegedly misrepresenting and
concealing from the public scientific studies pertaining to smoking and health
funded by, and misrepresenting the independence of, the Council on Tobacco
Research ("CTR") and its predecessor. The complaint seeks equitable relief
against the defendants, including the imposition of a corrective advertising
campaign, restitution of funds, disgorgement of revenues and profits and the
imposition of a constructive trust. On June 5, 1997, Liggett settled this
matter.
On September 10, 1993, an action entitled Sackman v. Liggett Group
Inc., United States District Court, Eastern District of New York, was filed
against Liggett alleging as injury lung cancer. On May 25, 1996, the District
Court granted Liggett summary judgment on plaintiff's fraud and breach of
warranty claims, but, on June 9, 1997 denied Liggett's Motion for Summary
Judgment on plaintiffs' conspiracy claim. On June 27, 1997, the magistrate
issued an order compelling Liggett to produce certain CTR documents with
respect to which Liggett had asserted various privilege claims. The other
cigarette manufacturers and the CTR are appealing the order.
In February 1995, an action entitled Carter, et al. v. The American
Tobacco Company, et al., Superior Court for the State of Florida, Duval County,
was filed against Liggett and others. Plaintiff sought compensatory damages,
including, but not limited to, reimbursement for medical costs. Both American
Tobacco and Liggett were subsequently dismissed from this action. On August 9,
1996, a jury returned a verdict against the remaining defendant, Brown &
Williamson Tobacco Corporation ("B&W"), in the amount of $750. The court also
awarded plaintiff's attorney's fees in the amount of $1,785. B&W has appealed
this verdict.
CLASS ACTIONS. As of June 30, 1997, there were 29 actions pending,
which have either been certified as a class or are seeking class certification,
where Liggett, among others, was a named defendant. Two of these cases,
Fletcher, et al. v. Brooke Group Ltd., et al. and Walker, et al. v. Liggett
Group Inc., et al. have been settled, subject to court approval. These two
settlements are more fully discussed below under the "Attorneys General
Actions" section.
On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Incorporated, et al., Circuit Court of the Eleventh Judicial District in and
for Dade County, Florida, was filed against Liggett and others. This case was
the first class action commenced against the industry and has been brought by
plaintiffs on behalf of all flight attendants that have worked or are presently
working for airlines based in the United States and who have never regularly
smoked cigarettes but allege that they have been damaged by involuntary
exposure to ETS. The trial in this action commenced on June 2, 1997 and is
currently in progress.
On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company Inc., et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged
addiction to nicotine. The District Court granted plaintiffs' motion for class
certification.
On March 12, 1996, Liggett and BGL entered into an agreement,
subject to court approval, to settle the Castano class action tobacco
litigation. Under the Castano settlement agreement, upon final court approval
of the settlement, the Castano class would be entitled to receive up to five
percent of Liggett's pretax income (income before income taxes) each year (up
to a maximum of $50,000 per year)
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<PAGE> 14
for the next 25 years, subject to certain reductions provided for in the
agreement, and a $5,000 payment from Liggett if Liggett or BGL fail to
consummate a merger or similar transaction with another non-settling tobacco
company defendant within three years of the date of the settlement. Liggett
and BGL have the right to terminate the Castano settlement under certain
circumstances. On May 11, 1996, the Castano Plaintiffs Legal Committee filed a
motion with the United States District Court for the Eastern District of
Louisiana seeking preliminary approval of the Castano settlement. On May 23,
1996, the Court of Appeals for the Fifth Circuit reversed the February 17, 1995
order of the District Court certifying the Castano suit as a nationwide class
action and instructed the District Court to dismiss the class complaint. On
September 6, 1996, the Castano plaintiffs withdrew the motion for approval of
the Castano settlement.
On March 14, 1996, BGL, the Castano Plaintiffs Legal Committee and the
Castano plaintiffs entered into a letter agreement. According to the terms of
the letter agreement, for the period ending nine months from the date of Final
Approval (as defined in the letter), if granted, of the Castano settlement or,
if earlier, the completion by Liggett or BGL of a combination with any
defendant in Castano, except Philip Morris, the Castano plaintiffs and their
counsel agree not to enter into any more favorable settlement agreement with
any Castano defendant which would reduce the terms of the Castano settlement
agreement. If the Castano plaintiffs or their counsel enter into any such
settlement during this period, they shall pay BGL $250,000 within 30 days of
the more favorable agreement and offer Liggett and BGL the option to enter into
a settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the Castano settlement agreement has not been earlier terminated
by BGL in accordance with its terms, BGL and its affiliates will not enter into
any business transaction with any third party which would cause the termination
of the Castano settlement agreement. If BGL or its affiliates enter into any
such transaction, then the Castano plaintiffs will be entitled to receive
$250,000 within 30 days from the transacting party.
ATTORNEYS GENERAL ACTIONS. As of June 30, 1997, 32 Attorneys
General actions were filed and served on Liggett and BGL. As more fully
discussed below, Liggett has reached settlements in 25 of these actions. In
certain of the pending proceedings, state and local government entities and
others seek reimbursement for Medicaid and other health care expenditures
allegedly caused by tobacco products. The claims asserted in these Medicaid
recovery actions vary. All plaintiffs assert the equitable claim that the
tobacco industry was "unjustly enriched" by plaintiffs' payment of health care
costs allegedly attributable to smoking and seek reimbursement of those costs.
Other claims made by some but not all plaintiffs include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of express
and implied warranty, violation of a voluntary undertaking or special duty,
fraud, negligent misrepresentation, conspiracy, public nuisance, claims under
state and federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under RICO.
On May 23, 1994, an action entitled Moore, Attorney General, ex rel
State of Mississippi v. The American Tobacco Company, et al., Chancery Court of
Jackson County, Mississippi, was commenced against Liggett and others seeking
restitution and indemnity for medical payments and expenses allegedly made or
incurred for tobacco related illnesses. In May 1994, the State of Florida
enacted legislation, effective July 1, 1994, allowing certain state authorities
or entities to commence litigation seeking recovery of certain Medicaid
payments made on behalf of Medicaid recipients as a result of diseases
(including, but not limited to, diseases allegedly caused by cigarette smoking)
allegedly caused by liable third parties (including, but not limited to, the
tobacco industry). On February 21, 1995, the State of Florida commenced an
action pursuant to this statutory scheme. The Florida Medicaid trial has
recently commenced. See "Settlements", below. Legislation similar to that
enacted in Florida has been introduced in the Massachusetts and New Jersey
legislatures.
SETTLEMENTS. On March 15, 1996, in addition to the Castano
settlement discussed above, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of
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<PAGE> 15
Florida, Louisiana, Mississippi, West Virginia and Massachusetts. The
settlement with the Attorneys General releases Liggett and BGL from all
tobacco-related claims by these states including claims for Medicaid
reimbursement and concerning sales of cigarettes to minors. The settlement
provides that additional states which commence similar Attorney General actions
may agree to be bound by the settlement prior to six months from the date
thereof (subject to extension of such period by the settling defendants).
Certain of the terms of the settlement are summarized below.
Under the Attorneys General settlement, the states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March 22,
1996, with the balance payable over nine years and indexed and adjusted for
inflation), provided that any unpaid amount will be due 60 days after either a
default by Liggett in its payment obligations under the settlement or a merger
or other similar transaction by Liggett or BGL with another defendant in the
lawsuits. In addition, Liggett will be required to pay the states a percentage
of Liggett's pretax income (income before income taxes) each year from the
second through the twenty-fifth year. This annual percentage is 2-1/2% of
Liggett's pretax income, subject to increase to 7-1/2% depending on the number
of additional states joining the settlement. No additional states have joined
this settlement to date. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to
the states $5,000 if Liggett or BGL fails to consummate a merger or other
similar transaction with another defendant in the lawsuits within three years
of the date of the settlement.
Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. Liggett and BGL also
have agreed to phase in compliance with certain of the proposed interim FDA
regulations on the same basis as provided in the Castano settlement.
Liggett and BGL have the right to terminate the settlement with
respect to any state participating in the settlement if any of the remaining
defendants in the litigation succeed on the merits in that state's Attorney
General action. Liggett and BGL may also terminate the settlement if they
conclude that too many states have filed Attorney General actions and have not
resolved such cases as to the settling defendants by joining in the settlement.
At December 31, 1995, Liggett had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Attorneys General
settlement, and no additional amounts have been accrued with respect to the
recent settlements discussed below. BGL cannot quantify the future costs of
the settlements at this time as the amount Liggett must pay is based, in part,
on future operating results. Possible future payments based on a percentage of
pretax income, and other contingent payments based on the occurrence of a
business combination, will be expensed when considered probable.
On March 20, 1997, Liggett, together with BGL, entered into a
comprehensive settlement of tobacco litigation through parallel agreements with
the Attorneys General of 17 additional states and with a nationwide class of
individuals and entities that allege smoking-related claims. Thereafter,
settlements were entered into with several other Attorneys General. The
settlements cover all smoking-related claims, including both addiction-based
and tobacco injury claims against Liggett and BGL, brought by the Attorneys
General and, upon court approval, the nationwide class.
As of June 30, 1997, a total of 25 Attorneys General settlements,
were reached, including the Attorneys General of Alaska, Arizona, California,
Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, New Jersey, New York, Oklahoma, Oregon, Texas, Utah, Washington and
Wisconsin. Liggett's and BGL's previous settlements on March 15, 1996 with
the Attorneys General of Florida, Louisiana, Massachusetts, Mississippi and
West Virginia remain in full force and effect. Other states have either
recently filed Medicaid recovery actions or indicated intentions to do so.
Both Liggett and BGL will endeavor to resolve those matters on substantially
the same terms and conditions as the prior settlements; however, there can be
no assurance that any such settlements will be completed.
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<PAGE> 16
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, BGL and plaintiffs filed the mandatory
class settlement agreement in an action entitled Fletcher, et al. v. Brooke
Group Ltd., et al., Circuit Court of Mobile County, Alabama, where the court
granted preliminary approval and preliminary certification of the class, and on
May 15, 1997 a similar mandatory class settlement agreement was filed in an
action entitled Walker, et al. v. Liggett Group Inc., et al., United States
District Court, Southern District of West Virginia. The West Virginia Court
also granted preliminary approval and preliminary certification of the
nationwide class; however, on August 5, 1997, the court vacated its preliminary
certification of the settlement class.
In the Fletcher action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a later
court hearing. Effectiveness of the mandatory settlement is conditioned on
final court approval of the settlement after a fairness hearing. There can be
no assurance as to whether, or when, such court approval will be obtained.
There are no opt out provisions in this settlement, except for Medicaid claims
by states that are not party to the Attorneys General settlements.
Pursuant to the settlements, Liggett and BGL agreed to cooperate fully
with the Attorneys General and the nationwide class in their respective
lawsuits against the tobacco industry. Liggett and BGL agreed to provide to
these parties all relevant tobacco documents in their possession, other than
those subject to claims of joint defense privilege, and to waive, subject to
court order, certain attorney-client privileges and work product protections
regarding Liggett's smoking-related documents to the extent Liggett and BGL can
so waive these privileges and protections. The Attorneys General and the
nationwide class agreed to keep Liggett's documents under protective order and,
subject to final court approval, to limit their use to those actions brought by
parties to the settlement agreements. Those documents that may be subject to a
joint defense privilege with other tobacco companies will not be produced to
the Attorneys General or the nationwide class, but will be, pursuant to court
order, submitted to the appropriate court and placed under seal for possible in
camera review. Additionally, under similar protective conditions, Liggett and
BGL agreed to offer their employees for witness interviews and testimony at
deposition and trial. Pursuant to both settlement agreements, Liggett also
agreed to place an additional warning on its cigarette packaging stating that
"smoking is addictive" and to issue a public statement, as requested by the
Attorneys General. Liggett has commenced distribution of cigarette packaging
which displays the new warning label.
Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after the
date of the agreements. Monies collected in the settlement fund will be
overseen by a court-appointed committee and utilized to compensate state health
care programs and settlement class members and to provide counter-market
advertising. Liggett also agreed to phase-in compliance with certain proposed
FDA regulations regarding smoking by children and adolescents, including a
prohibition on the use of cartoon characters in tobacco advertising and
limitations on the use of promotional materials and distribution of sample
packages where minors are present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or BGL, prior to the
fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not
having to post a bond to appeal any future adverse judgment. In addition,
within 120 days following such a combination, Liggett would be required to pay
the settlement fund $25,000. Both the Attorneys General and the nationwide
class have agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or BGL from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.
Liggett and BGL are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies. In addition,
in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs agreed
to use their
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<PAGE> 17
"best efforts" to ensure that Liggett's and BGL's liability under such a plan
should be no more onerous than under these new settlements. See "Other
Matters", below.
IMMINENT TRIALS. Although trial schedules are subject to change,
the next individual cases scheduled for trial, where Liggett is a defendant,
are Westmoreland v. Liggett Group Inc., et al., United States District Court,
Middle District of Florida, Tampa Division, and Sackman, both of which are
scheduled for trial in October, 1997. There are two other individual cases
scheduled for trial in 1997. In addition to the Broin trial currently in
progress, there is one other class action scheduled for trial in 1997, Engle,
et al. v. R. J. Reynolds Tobacco Company, et al.
OTHER MATTERS. On June 20, 1997, Philip Morris Incorporated ("Philip
Morris"), R. J. Reynolds Tobacco Company ("RJR"), B&W, Lorillard Tobacco
Company ("Lorillard") and the United States Tobacco Company, along with the
Attorneys General for the States of Arizona, Connecticut, Florida, Mississippi,
New York and Washington and the Castano Plaintiffs' Litigation Committee
executed a Memorandum of Understanding to support the adoption of federal
legislation and necessary ancillary undertakings, incorporating the features
described in a proposed resolution. The proposed resolution mandates a total
reformation and restructuring of how tobacco products are manufactured,
marketed and distributed in the United States. The proposals are currently
being reviewed by the White House, Congress and various public interest groups.
Management is unable to predict the ultimate effect, if any, of the enactment
of legislation adopting the proposed resolution. Management is also unable to
predict the ultimate content of any such legislation; however, adoption of any
such legislation could have a material adverse effect on the business of
Liggett.
On March 20, 1997, RJR, Philip Morris, B&W, and Lorillard obtained a
temporary restraining order from a North Carolina state court preventing
Liggett and BGL and their agents, employees, directors, officers and lawyers
from turning over documents allegedly subject to the joint defense privilege in
connection with the settlements, which restraining order was converted to a
preliminary injunction by the court on April 9, 1997. This ruling is currently
on appeal by Liggett and BGL. On June 5, 1997, the North Carolina Supreme
Court denied Liggett's Motion to Stay the case pending appeal. On March 24,
1997, the United States District Court for the Eastern District of Texas and
state courts in Mississippi and Illinois each issued orders enjoining the other
tobacco companies from interfering with Liggett's filing with the courts, under
seal, those documents.
Liggett understands that a grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District of New
York regarding possible violations of criminal law relating to the activities
of The Council for Tobacco Research - USA, Inc. Liggett was a sponsor of The
Council for Tobacco Research - USA, Inc. at one time. Liggett is unable, at
this time, to predict the outcome of this investigation.
In March 1996, Liggett received a subpoena from a Federal grand jury
sitting in the Southern District of New York. Documents have been produced in
response to the subpoena. Liggett understands that this investigation has been
transferred to the main office of the United States Department of Justice. In
addition, in May 1996, Liggett was served with a subpoena by a grand jury
sitting in the District of Columbia, to which Liggett has responded by
producing documents. Liggett was also served with a subpoena from the District
of Columbia grand jury in July, 1997. Liggett is in the process of
responding to that subpoena. Liggett is unable, at this time, to predict the
outcome of these investigations.
The Antitrust Division of the United States Department of Justice
investigation into the United States tobacco industry activities in connection
with product development efforts regarding "fire-safe" or self-extinguishing
cigarettes has been concluded. No action by the Department of Justice was
taken.
On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Group
Inc. was filed in the United States District Court for the Southern District of
New York, Case No. 96-CIV-1921, wherein the
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<PAGE> 18
plaintiff, who was formerly employed as Liggett's President and Chief Executive
Officer, seeks recovery of certain monies allegedly owing by Liggett to him for
long-term incentive compensation. At a September 19, 1996 hearing, the court
dismissed the plaintiff's alternate claim for recovery under a fraud theory and
by order dated March 10, 1997, the court dismissed the balance of plaintiff's
claims. Plaintiff has appealed the verdict.
Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against
Liggett. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Liggett is unable
to evaluate the effect of these developing matters on pending litigation or the
possible commencement of additional litigation.
There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect Liggett's financial position,
results of operations or cash flows.
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 and cash flows could be materially adversely affected by an
ultimate unfavorable outcome in any of such pending litigation.
Legislation and Regulation
On August 28, 1996, the FDA filed in the Federal Register a Final Rule
(the "FDA Rule") classifying tobacco as a drug, asserting jurisdiction by the
FDA over the manufacture and marketing of tobacco products and imposing
restrictions on the sale, advertising and promotion of tobacco products. The
FDA's stated objective and focus for its initiative is to limit access to
cigarettes by minors by measures beyond the restrictions either mandated by
existing federal, state and local laws or voluntarily implemented by major
manufacturers in the industry. Litigation was commenced in the United States
District Court for the Middle District of North Carolina challenging the legal
authority of the FDA to assert such jurisdiction, as well as challenging the
constitutionality of the rules. The court, after argument, granted plaintiffs'
motion for summary judgment prohibiting the FDA from regulating or restricting
the promotion and advertising of tobacco products and denied plaintiffs' motion
for summary judgment on the issue of whether the FDA has the authority to
regulate access to, and labeling of, tobacco products. The four major
cigarette manufacturers and the FDA have filed notices of appeal. Liggett and
BGL support the FDA Rule and have begun to phase in compliance with certain of
the proposed interim FDA regulations. See discussions of the Castano and
Attorneys General settlements above.
In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. On February 7, 1997,
the United States District Court for the District of Massachusetts denied an
attempt to block the new legislation on the ground that it is preempted by
federal law. Liggett and BGL support this proposed legislation.
On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota ("TRQ")
on certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain levels which vary from
country to country. Oriental tobacco is exempt from the quota as well as all
tobacco originating from Canada, Mexico or Israel. Management believes that
the TRQ levels are sufficiently high to allow Liggett to operate without
material disruption to its business.
On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under the TRQ
should be allocated. Currently, tobacco
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<PAGE> 19
imported under the TRQ is allocated on a "first-come, first-served" basis,
meaning that entry is allowed on an open basis to those first requesting entry
in the quota year. Others in the cigarette industry have suggested an
"end-user licensing" system under which the right to import tobacco under the
quota would be initially assigned on the basis of domestic market share. Such
an approach, if adopted, could have a material adverse effect on Liggett.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings were completed during 1995. OSHA has not
yet issued a final rule or a proposed revised rule. While Liggett cannot
predict the outcome, some form of federal regulation of smoking in workplaces
may result.
In January 1993, the United States Environmental Protection Agency
("EPA") released a report on the respiratory effect of ETS which concludes that
ETS is a known human lung carcinogen in adults, and in children causes
increased respiratory tract disease and middle ear disorders and increases the
severity and frequency of asthma. In June 1993, the two largest of the major
domestic cigarette manufacturers, together with other segments of the tobacco
and distribution industries, commenced a lawsuit against the EPA seeking a
determination that the EPA did not have the statutory authority to 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.
As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002.
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.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
the effects of which, at this time, Liggett is not able to evaluate.
9. Related Party Transactions
On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat Ltd.'s ("Liggett-Ducat") tobacco operations from BOL, an indirect
subsidiary of BGL, for $2,100. Liggett-Ducat, which produces cigarettes in
Russia, manufactured and marketed 11.4 billion cigarettes in 1996. Liggett
also acquired on that date for $3,400 a ten-year option, exercisable by Liggett
in whole or in part, to purchase from BOL at the same per share price up to
292,407 additional shares of Liggett-Ducat, thereby entitling Liggett to
increase its interest in Liggett-Ducat to approximately 62%. The option fee is
to be credited against the purchase price. In addition, as part of the same
transaction, Liggett had the right on or before June 30, 1997 to acquire from
BOL for $2,200 another ten-year option on the same terms to purchase the
remaining shares of Liggett-Ducat (an additional 33%). On March 13, 1997,
Liggett acquired this option and paid BOL $2,000, and recorded a payable to BOL
for the remaining $0.2 million. Liggett accounts for its investment in
Liggett-Ducat under the equity method of accounting. Liggett's equity in the
net income of Liggett-Ducat amounted to $185 for the six months ended June 30,
1997. The excess of the cost of the option over carrying amount of net assets
to be acquired under the option has been charged to stockholder's deficit.
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<PAGE> 20
Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with
BGL and certain other entities pursuant to which Liggett has paid taxes to BGL
as if it were filing a separate company tax return, except that the agreement
effectively limits the ability of Liggett to carry back losses for refunds.
Liggett is entitled to recoup overpayments in a given year out of future
payments due under the agreement.
Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments.
Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee paid in monthly installments. Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to $830
in 1997 and $790 in 1996. This fee is in addition to the management fee and
overhead reimbursements described above.
Since April 1994, the Company has leased equipment from BGLS for $50
per month. On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000, for a gain of $2,578.
10. Restructuring Charges
In the first half of 1997, the Company reduced its headcount by 114
full-time positions and recorded a $1,831 restructuring charge to operations
for severance programs, primarily salary continuation and related benefits for
terminated employees. Approximately $285 in restructuring charges will be
funded in subsequent years. The Company expects to continue its cost reduction
programs.
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<PAGE> 21
EVE HOLDINGS INC.
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10 $ -
Office equipment . . . . . . . . . . . . . . . . . . . . . . 1 2
Trademarks, at cost, less accumulated amortization of
$18,144 and $17,294, respectively . . . . . . . . . . . . 2,269 3,119
-------- --------
Total assets . . . . . . . . . . . . . . . . . $ 2,280 $ 3,121
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Federal income taxes currently payable to parent . . . . . . $ 74 $ -
Dividends payable . . . . . . . . . . . . . . . . . . . . . . 1,127 4,623
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . - 92
Other current liabilities . . . . . . . . . . . . . . . . . . 3 19
Deferred income taxes . . . . . . . . . . . . . . . . . . . . 794 1,092
-------- --------
Total liabilities . . . . . . . . . . . . . . . 1,998 5,826
-------- --------
Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital . . . . . . . . . . . . . . . . . . . . . . . 49,148 46,548
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 . . . . . . . . . . . . . . (44,520) (44,520)
Other . . . . . . . . . . . . . . . . . . . . . . . . (4,346) (4,733)
-------- --------
Total stockholder's equity (deficit) . . . . . 282 (2,705)
-------- --------
Total liabilities and stockholder's equity
(deficit) . . . . . . . . . . . . . . . . . . $ 2,280 $ 3,121
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
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<PAGE> 22
EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues:
Royalties - parent . . . . . . . . . . . . $1,761 $2,437 $3,306 $4,150
Interest - parent . . . . . . . . . . . . 1,576 1,577 3,153 3,153
------ ------ ------ ------
3,337 4,014 6,459 7,303
Expenses:
Amortization of trademarks . . . . . . . . 425 425 851 851
Miscellaneous, net . . . . . . . . . . . . 27 35 64 58
------ ------ ------ ------
Income before income taxes . . . . . 2,885 3,554 5,544 6,394
Income tax provision . . . . . . . . . . . . . 458 1,244 837 2,238
------ ------ ------ ------
Net income . . . . . . . . . . . . . $2,427 $2,310 $4,707 $4,156
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-21-
<PAGE> 23
EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,707 $4,156
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 851 851
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . (298) (298)
Changes in assets and liabilities:
Federal income taxes currently payable to parent . . . . . . . 74 (29)
Other current liabilities . . . . . . . . . . . . . . . . . . . (16) -
------ ------
Net cash provided by operating activities .. . . . . . . . . 5,318 4,680
------ ------
Cash flows from financing activities:
Dividends/capital distributions . . . . . . . . . . . . . . . . . . (5,603) (4,658)
Decrease (increase) in due from parent . . . . . . . . . . . . . . 387 (22)
Decrease in cash overdraft . . . . . . . . . . . . . . . . . . . . (92) -
------ ------
Net cash used in financing activities . . . . . . . . . . . (5,308) (4,680)
------ ------
Net increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . 10 -
Cash:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . - 8
------ ------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10 $ 8
====== ======
Supplemental cash flow information:
Payments of income taxes through receivable from parent . . . . . . $1,060 $2,314
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 -
Dividends/capital distributions declared but not paid . . . . . . . 1,127 2,176
</TABLE>
The accompanying notes are an integral part
of these financial statements.
-22-
<PAGE> 24
EVE HOLDINGS INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. The Company
Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett
Group Inc. ("Liggett"). Eve, formed in June 1990, is the proprietor of, and has
all right, title and interest in, certain federal trademark registrations (the
"Trademarks"). Eve has entered into an exclusive licensing agreement with
Liggett (effective until 2010) whereby Eve grants the use of the Trademarks to
Liggett in exchange for royalties, computed based upon Liggett's annual net
sales, excluding excise taxes. The Trademarks are pledged as collateral for
Liggett's borrowings under the notes indentures (see Note 3).
2. Summary of Significant Accounting Policies
a. Going Concern
The accompanying financial statements have been prepared assuming that
Eve will continue as a going concern. Eve's revenues are comprised solely of
royalties and interest income from Liggett. In addition, Eve holds a note
receivable from Liggett for $44,520 due no sooner than February 1, 1999.
Liggett had a working capital deficiency of $78,481 and a net capital
deficiency of $178,660 as of June 30, 1997, is highly leveraged and has
substantial near-term debt service requirements. These matters raise
substantial doubt about Eve and Liggett meeting their liquidity needs and their
ability to continue as going concerns.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
b. Per Share Data
All of Eve's common shares (100 shares authorized, issued and
outstanding for all periods presented herein) are owned by Liggett.
Accordingly, earnings and dividends per share data are not presented in these
financial statements.
3. Guarantee of Liggett Notes
On February 14, 1992, Liggett issued $150,000 of Senior Secured Notes
(the "Series B Notes"). In connection with the issuance of the Series B Notes,
the Trademarks were pledged as collateral. In addition, Eve is a guarantor
for the Series B Notes.
During 1994, Liggett issued $32,850 of Series C Senior Secured Notes
(the "Series C Notes"). Eve is a guarantor for the Series C Notes.
-23-
<PAGE> 25
4. Income Taxes
Eve qualifies as a company conducting operations exempt from income taxation
under Delaware General Statute Section 1903(b). In recent years, some states
have been aggressively pursuing companies exempt under this statute. Eve's
management believes that certain state income tax rulings supporting these
states' arguments will be ultimately reversed and that Eve's status as a
company not conducting business in these states will be respected.
Consequently, management has not provided a reserve for additional state income
taxes. No assurance can be given with regard to future state income tax
rulings and audit activity with respect to Eve.
-24-
<PAGE> 1
Exhibit 99.2
NEW VALLEY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
<PAGE> 2
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
PAGE
----
Consolidated Balance Sheets as of June 30, 1997 and
December 31, 1996......................................... 2
Consolidated Statements of Operations for the three months
and six months ended June 30, 1997 and 1996............... 3
Consolidated Statement of Changes in Shareholders' Equity
(Deficit) for the six months ended June 30, 1997.......... 4
Consolidated Statements of Cash Flows for the six months
ended June 30, 1997 and 1996.............................. 5
Notes to the Quarterly Consolidated Financial Statements...... 6
-1-
<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 21,519 $ 57,282
Investment securities available for sale...................... 48,930 61,454
Trading securities owned...................................... 24,440 29,761
Restricted assets............................................. 708 2,080
Receivable from clearing brokers.............................. 14,163 23,870
Other current assets.......................................... 4,415 9,273
--------- --------
Total current assets..................................... 114,175 183,720
--------- --------
Investment in real estate......................................... 256,570 179,571
Investment securities available for sale.......................... 2,592 2,716
Restricted assets................................................. 5,441 6,766
Long-term investments, net........................................ 16,874 13,270
Other assets...................................................... 29,528 20,497
--------- --------
Total assets............................................. $ 425,180 $406,540
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities...................... $ 44,624 $ 44,888
Prepetition claims and restructuring accruals................. 15,780 15,526
Income taxes.................................................. 18,304 18,243
Securities sold, not yet purchased............................ 20,185 17,143
Note payable to related party................................. 12,000 --
Current portion of notes payable and long-term obligations ... 16,237 2,310
--------- --------
Total current liabilities................................ 127,130 98,110
--------- --------
Notes payable..................................................... 157,733 157,941
Other long-term obligations....................................... 17,525 12,282
Redeemable preferred shares....................................... 233,531 210,571
Shareholders' equity (deficit):
Cumulative preferred shares; liquidation preference of $69,769;
dividends in arrears, $127,266 and $115,944................... 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding...................... 96 96
Additional paid-in capital.................................... 625,858 644,789
Accumulated deficit........................................... (737,224) (721,854)
Unearned compensation on stock options........................ (444) (731)
Unrealized gain on investment securities...................... 696 5,057
--------- --------
Total shareholders' equity (deficit)..................... (110,739) (72,364)
--------- --------
Total liabilities and shareholders' equity (deficit)..... $ 425,180 $406,540
========= ========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
-2-
<PAGE> 4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
1997 1996 1997 1996
----------------------------- --------------------------
<S> <C> <C> <C> <C>
Revenues:
Principal transactions, net................................ $ 3,227 $ 6,172 $ 5,726 $ 14,910
Commissions................................................ 3,431 4,820 6,824 8,683
Real estate leasing........................................ 6,303 5,958 12,585 11,664
Interest and dividends..................................... 2,582 4,642 4,123 9,826
Other income............................................... 8,861 8,857 14,899 17,351
--------- --------- ---------- ----------
Total revenues......................................... 24,404 30,449 44,157 62,434
--------- --------- ---------- ----------
Cost and expenses:
Operating, general and administrative...................... 25,551 30,399 49,818 64,053
Interest................................................... 4,043 4,739 7,905 9,263
Provision for loss on long-term investment................. -- -- 3,796 --
--------- --------- ---------- ----------
Total costs and expenses............................... 29,594 35,138 61,519 73,316
--------- --------- ---------- ----------
Loss from continuing operations before income taxes
and minority interest...................................... (5,190) (4,689) (17,362) (10,882)
Income tax provision............................................ 45 400 95 300
Minority interests in loss from continuing operations
of consolidated subsidiary................................. 965 217 1,974 698
--------- --------- ---------- ----------
Loss from continuing operations................................. (4,270) (4,872) (15,483) (10,484)
Discontinued operations:
Income (loss) from discontinued operations................. (289) 110 583 838
Loss on sale of discontinued operations.................... (470) -- (470) --
--------- --------- ---------- ----------
Income (loss) of discontinued operations................... (759) 110 113 838
--------- --------- ---------- ----------
Net loss........................................................ (5,029) (4,762) (15,370) (9,646)
Dividend requirements on preferred shares....................... (16,750) (15,646) (32,730) (31,108)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased....................... -- -- -- 4,279
--------- --------- ---------- ----------
Net loss applicable to Common Shares............................ $ (21,779) $ (20,408) $ (48,100) $ (36,475)
========= ========= ========== ==========
Loss per common share:
Continuing operations...................................... $ (2.19) $ (2.14) $ (5.03) $ (3.90)
Discontinued operations.................................... (.08) .01 .01 .09
--------- --------- ---------- ----------
Net loss per Common Share.................................. $ (2.27) $ (2.13) $ (5.02) $ (3.81)
========= ========= ========== ==========
Number of shares used in computation............................ 9,578,000 9,578,000 9,578,000 9,578,000
========= ========= ========== ==========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
-3-
<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned
Class B Compensation
Preferred Common Paid-In Accumulated on Stock Unrealized
Shares Shares Capital Deficit Options Gain
--------- ------ ------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996............ $279 $96 $644,789 $(721,854) $ (731) $ 5,057
Net loss........................... (15,370)
Undeclared dividends and accretion
on redeemable preferred shares... (21,409)
Unrealized loss on investment
securities....................... (4,361)
Public sale of subsidiary's
common stock..................... 2,715
Adjustment to unearned
compensation on stock options.... (237) 237
Compensation expense on stock
option grants.................... 50
---- --- -------- --------- -------- ---------
Balance, June 30, 1997................ $279 $96 $625,858 $(737,224) $ (444) $ 696
==== === ======== ========= ======== =========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
-4-
<PAGE> 6
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1997 1996
------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................................ $ (15,370) $ (9,646)
Adjustments to reconcile net loss to net cash
provided from (used for) operating activities:
Income from discontinued operations................................... (113) (838)
Depreciation and amortization......................................... 3,945 2,332
Provision for loss on long-term investment............................ 3,796
Stock based compensation expense...................................... 1,601
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ 15,249 (11,873)
Decrease (increase) in income taxes................................ 61 (3,329)
Increase (decrease) in accounts payable and accrued liabilities.... (11,460) 10,234
--------- --------
Net cash used for continuing operations.................................... (2,291) (13,120)
Net cash provided from discontinued operations............................. 1,523 838
--------- --------
Net cash used for operating activities..................................... (768) (12,282)
--------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 24,138 60,899
Purchase of investment securities..................................... (15,851) (15,843)
Sale or liquidation of long-term investments.......................... 2,807 14,500
Purchase of long-term investments..................................... (8,357) (1,269)
Purchase or improvements of real estate............................... (45) (24,882)
Sale of other assets.................................................. 5,561
Payment of prepetition claims......................................... (1,142) (6,655)
Return of prepetition claims paid..................................... 1,396
Decrease in restricted assets......................................... 2,697 20,191
Payment for acquisitions, net of cash acquired........................ (20,014) 1,915
--------- --------
Net cash provided from (used for) investing activities..................... (8,810) 48,856
--------- --------
Cash flows from financing activities:
Payment of preferred dividends........................................ (10,354)
Purchase of Class A preferred stock................................... (10,530)
Increase in margin loans payable...................................... 7,406
Sale of subsidiary's common stock..................................... 5,417
Repayment of notes payable............................................ (21,708)
Repayment of other obligations........................................ (9,894) (9,217)
--------- --------
Net cash used for financing activities..................................... (26,185) (22,695)
--------- --------
Net decrease in cash and cash equivalents.................................. (35,763) 13,879
Cash and cash equivalents, beginning of period............................. 57,282 51,742
--------- --------
Cash and cash equivalents, end of period................................... $ 21,519 $ 65,621
========= ========
</TABLE>
See accompanying Notes to Quarterly Consolidated Financial Statements
-5-
<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and Subsidiaries (the "Company"). The consolidated financial
statements as of June 30, 1997 presented herein have been prepared by the
Company without an audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present
fairly the financial position as of June 30, 1997 and the results of
operations and cash flows for all periods presented have been made.
Results for the interim periods are not necessarily indicative of the
results for an entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, as filed with the Securities
and Exchange Commission.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income. The purpose of reporting comprehensive income is to
present a measure of all changes in equity that result from recognized
transactions and other economic events of the period other than
transactions with owners in their capacity as owners. SFAS 130 requires
that an enterprise classify items of other comprehensive income by their
nature in the financial statement and display the accumulated balance of
other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet.
SFAS 130 is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. The Company has not yet determined the
impact of the implementation of SFAS 130.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. Once operating segments
have been determined, SFAS 131 provides for a two-tier test for
determining those operating segments that would need to be disclosed for
external reporting purposes. In addition to providing the required
disclosures for reportable segments, SFAS 131 also requires disclosure of
certain "second level" information by geographic area and for
products/services. SFAS 131 also makes a number of changes to existing
disclosure requirements. SFAS 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged. The Company
has not yet determined the impact of the implementation of SFAS 131.
-6-
<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
2. ACQUISITION
On January 31, 1997, the Company entered into a stock purchase agreement
(the "Purchase Agreement") with Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), a wholly-subsidiary of Brooke Group Ltd. ("Brooke"), a
related party through the ownership of an approximate 42% voting interest
in the Company. Pursuant to the Purchase Agreement, the Company acquired
10,483 shares (the "BML Shares") of the common stock of BrookeMil Ltd.
("BML") from Brooke (Overseas) for a purchase price of $55,000, consisting
of $21,500 in cash and a $33,500 9% promissory note of the Company (the
"Note"). The BML Shares comprise 99.1% of the outstanding shares of BML, a
real estate development company in Russia. The Note is collateralized by
the BML Shares and, as of June 30, 1997, had a balance of $12,000 which is
payable on December 31, 1997.
BML is developing a three-phase complex on 2.2 acres of land in downtown
Moscow, for which it has a 49-year lease. In 1993, the first phase of the
project, Ducat Place I, a 46,500 sq. ft. Class-A office building, was
constructed and leased. On April 18, 1997, BML sold Ducat Place I to one
of its tenants for approximately $7,500, which purchase price has been
reduced to reflect prepayments of rent. In 1995, BML began construction of
Ducat Place II, a 150,000 sq. ft. office building. Ducat Place II has been
substantially pre-leased to a number of leading international companies
with occupancy for most tenants expected by September 1997. The third
phase, Ducat Place III, is planned as a 400,000 sq. ft. mixed-use complex,
with construction anticipated to commence in 1998. The Company is
currently evaluating plans for financing the construction of Ducat Place
III.
The acquisition was treated as a purchase for financial reporting purposes
and, accordingly, these consolidated financial statements include the
operations of BML from the date of acquisition.
The purchase price was allocated as follows: current assets of
approximately $9,000, investment in real estate of $79,200, other assets
of $8,800, assumption of current liabilities of $35,146 and long-term
liabilities of $6,854. Current assets consisted primarily of an asset held
for sale of $6,400 related to the estimated proceeds from the sale of
Ducat Place I, net of $1,100 in accrued closing costs. Liabilities
included a $20,400 loan to a Russian bank for the construction of Ducat
Place II ("Construction Loan"). The Construction Loan, which matures
$6,100 in April 1997 (paid with the proceeds from the sale of Ducat Place
I), $4,100 in July 1997 and $10,200 in October 1997, is collateralized by
a mortgage on Ducat Place II. In addition, the liabilities of BML included
approximately $13,800 of rents and related payments prepaid by tenants of
Ducat Place II for periods generally ranging from 15 to 18 months.
Proforma operating results for the six months ended June 30, 1997 and 1996
are not presented herein as the historical operating results of BML are
not material to the historical operating results of the Company.
On August 13, 1997, BML executed a new credit agreement with a Russian
bank. Upon closing, all amounts due under the Construction Loan would be
refinanced with borrowings under the new facility, which borrowings would
bear interest at 16% per year, mature no later than August 2002, with
principal payments commencing after the first year, and be collateralized
by a mortgage on Ducat Place II and guaranteed by the Company.
-7-
<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The components of the Company's investment in real estate at June 30, 1997
are as follows:
<TABLE>
<CAPTION>
U.S. BML TOTAL
---- --- -----
<S> <C> <C> <C>
Land .................................. $ 36,162 $ 14,200 $ 50,362
Buildings............................... 147,033 65,000 212,033
Construction-in-progress................ 14 51 65
--------- -------- ---------
Total............................. 183,209 79,251 262,460
Less: accumulated depreciation......... (5,870) (20) (5,890)
--------- -------- ---------
Net investment in real estate..... $ 177,339 $ 79,231 $ 256,570
========= ======== =========
</TABLE>
3. DISCONTINUED OPERATIONS
During the fourth quarter of 1996, Thinking Machines Corporation
("Thinking Machines") adopted a plan to terminate its parallel processing
computer sales and service business. Consequently, the operating results
of this segment have been classified as discontinued operations, and the
quarterly results for 1996 have been reclassified. Accordingly, the
financial statements reflect the financial position and the results of
operations of the discontinued operations of Thinking Machines separately
from continuing operations.
Summarized operating results of the discontinued operations of Thinking
Machines are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................... $ 286 $ 4,098 $ 3,386 $8,797
======== ======= ======= ======
Operating income................. $ (471) $ 179 $ 950 $1,365
======== ======= ======= ======
Income (loss) before income
taxes and minority interests.. $ (471) $ 179 $ 950 $1,365
Minority interests............... 182 (69) (367) (527)
-------- ------- ------- ------
Net income (loss)................ $ (289) $ 110 $ 583 $ 838
======== ======= ======= ======
</TABLE>
In April 1997, Thinking Machines sold the remaining part of its
discontinued operations for $2,405 in cash which resulted in the Company
recording a loss on disposal of discontinued operations of $470, after the
recognition of minority interests of $592 and the write-off of goodwill of
$1,410.
4. INCOME TAXES
At June 30, 1997, the Company had approximately $100,000 of unrecognized
net deferred tax assets, comprised primarily of net operating loss
carryforwards, available to offset future taxable income for federal tax
purposes. A valuation allowance has been provided against the amount as it
is deemed more likely than not that the benefit of the deferred tax assets
will not be utilized. The Company continues to evaluate the realizability
of the deferred tax assets and its estimate is subject to change. The
income tax provision (benefit), which principally represented the effects
of state income taxes, for the six months ended June 30, 1997 and 1996,
does not bear a customary relationship with pre-tax accounting income
principally as a consequence of the change in the valuation allowance
relating to deferred tax assets.
-8-
<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a separate component of
shareholders' equity (deficit). The Company had realized gains on sales of
investment securities available for sale of $3,358 and $7,052 for the
three and six months ended June 30, 1997, respectively.
The components of investment securities available for sale at June 30,
1997 are as follows:
<TABLE>
<CAPTION>
GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
Marketable equity securities:
<S> <C> <C> <C>
RJR Nabisco common stock................ $ 32,574 $ 1,696 $ 34,270
Other marketable equity securities...... 9,720 766 $ 674 9,812
--------- -------- -------- ---------
Total marketable equity securities... 42,294 2,462 674 44,082
Marketable debt securities (short-term)....... 4,848 4,848
Marketable debt securities (long-term)........ 3,685 1,093 2,592
--------- -------- -------- ---------
Total securities available for sale........... 50,827 2,462 1,767 51,522
Less long-term portion of investment
securities.............................. (3,685) (1,093) (2,592)
--------- -------- -------- ---------
Investment securities - current portion....... $ 47,142 $ 2,462 $ 674 $ 48,930
========= ======== ======== =========
</TABLE>
As of June 30, 1997, the long-term portion of investment securities
available for sale consisted of marketable debt securities which mature in
two years.
As of June 30, 1997, the Company, through a wholly-owned subsidiary, held
approximately 1.06 million shares of RJR Nabisco Holdings Corp. ("RJR
Nabisco") common stock with a market value of $34,270 (cost of $32,574).
Based on the market price of the RJR Nabisco common stock at August 8,
1997 ($30.625 per share), no amounts are payable by the Company under any
of its profit sharing arrangements with respect to the RJR Nabisco common
stock.
6. LONG-TERM INVESTMENTS
At June 30, 1997, long-term investments consisted primarily of investments
in limited partnerships of $15,675 and an equity investment in a company
of $1,000. The Company determined that an other than temporary impairment
in the value of its investment in a joint venture had occurred and
wrote-down this investment to zero in March 1997 with a charge to
operations of $3,796. The fair value of the Company's long-term
investments approximates its carrying amount. The Company's estimates of
the fair value of its long-term investments are subject to judgment and
are not necessarily indicative of the amounts that could be realized in
the current market.
In January 1997, the Company converted an investment in preferred stock
made in 1995 into a majority equity interest in a small on-line directory
assistance development stage company and, accordingly, began consolidating
the results of this development stage company. This long-term investment
of $1,001 was written off in 1996 due to continuing losses of this
company. In May 1997, this development stage company completed an initial
public offering and, as a result, the Company recorded $2,715 as
additional paid-in capital which represented its 50.1% ownership in this
company's shareholders' equity after this offering. As of June 30, 1997,
this development stage company had revenues and losses of $160 and $2,023,
respectively, since its inception.
-9-
<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company is required under certain limited partnership agreements to
make additional investments up to an aggregate of $18,000 as of June 30,
1997. The Company's investments in limited partnerships are illiquid and
the ultimate realization of these investments are subject to the
performance of the underlying partnership and its management by the
general partners.
7. REDEEMABLE PREFERRED SHARES
At June 30, 1997, the Company had authorized and outstanding 2,000,000 and
1,071,462, respectively, of its Class A Senior Preferred Shares. At June
30, 1997 and December 31, 1996, respectively, the carrying value of such
shares amounted to $233,531 and $210,571, including undeclared dividends
of $139,017 and $117,117, or $129.75 and $109.31 per share. As of June 30,
1997, the unamortized discount on the Class A Senior Preferred Shares was
$5,188.
For the six months ended June 30, 1997, the Company recorded $1,551 in
compensation expense related to certain Class A Senior Preferred Shares
awarded to an officer of the Company in 1996. At June 30, 1997, the
balance of the deferred compensation and the unamortized discount related
to these award shares was $4,530 and $2,917, respectively.
8. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $127,266 and $115,944
at June 30, 1997 and December 31, 1996, respectively. These undeclared
dividends represent $45.60 and $41.55 per share as of the end of each
period. No accrual was recorded for such undeclared dividends as the Class
B Preferred Shares are not mandatorily redeemable.
9. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
Those liabilities that are expected to be resolved as part of the
Company's First Amended Joint Chapter 11 Plan of Reorganization, as
amended (the "Joint Plan"), are classified in the Consolidated Balance
Sheets as prepetition claims and restructuring accruals. On January 18,
1995, approximately $550 million of prepetition claims were paid pursuant
to the Joint Plan. The prepetition claims remaining as of June 30, 1996 of
$15,780 may be subject to future adjustments depending on pending
discussions with the various parties and the decisions of the Bankruptcy
Court.
10. CONTINGENCIES
LITIGATION
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a shareholder of the Company. The suit
alleges that the Company's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by the Company. The plaintiff seeks (i) a declaration that
the Company's directors breached their fiduciary duties, Brooke aided and
abetted such breaches and such parties are therefore liable to the
Company, and (ii) unspecified damages to be awarded to the Company. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit, and it intends to
defend the suit vigorously.
-10-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company is also a defendant in various other lawsuits and may be
subject to unasserted claims primarily in connection with its activities
as a securities broker-dealer and participation in public underwritings.
These lawsuits involve claims for substantial or indeterminate amounts and
are in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
will not have a material adverse effect on the Company's consolidated
financial position, results of operations, or cash flows.
-11-
<PAGE> 1
Exhibit 99.3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
<PAGE> 2
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996............................... 2
Consolidated Statements of Operations for the three months and six months ended
June 30, 1997 and June 30, 1996................................................................ 3
Consolidated Statement of Stockholder's Equity (Deficit) for the six months
ended June 30, 1997........................................................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30, 1997
and June 30, 1996............................................................................. 5
Notes to Consolidated Financial Statements.......................................................... 6
</TABLE>
-1-
<PAGE> 3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................................... $ 1,272 $ 1,875
Accounts receivable - trade ......................................... 268 166
Receivables from affiliates ......................................... 12,107
Inventories ......................................................... 4,522 3,569
Prepaid expenses and other .......................................... 2,373 2,640
--------- ---------
Total current assets ............................................. 20,542 8,250
Property, plant and equipment, at cost, less
accumulated depreciation of $595 and $676 ....................... 14,433 59,607
Goodwill, net ......................................................... 1,056 1,094
Deferred finance costs ................................................ 2,805
Other ................................................................. 5 540
--------- ---------
Total assets ..................................................... $ 36,036 $ 72,296
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt ................. $ 3,250 $ 21,658
Accounts payable - trade ............................................ 4,438 13,074
Due to affiliates ................................................... 48,045 48,875
Unearned revenue .................................................... 103 7,406
Accrued taxes ....................................................... 8,013 8,474
Taxes due to affiliate .............................................. 11,741
Accrued interest .................................................... 597
Other accrued liabilities ........................................... 1,895 2,692
--------- ---------
Total current liabilities ........................................ 77,485 102,776
Notes payable and long-term debt ...................................... 2,505
Unearned revenue ...................................................... 9,458
Other liabilities ..................................................... 25,498 1,494
Commitments and contingencies..........................................
Stockholder's equity (deficit):
Common stock, par value $1 per share, 701,000 shares
authorized, issued and outstanding ............................... 701 701
Additional paid-in-capital .......................................... 5,600 3,400
Deficit ............................................................. (75,753) (45,533)
--------- ---------
Total stockholder's equity (deficit) ............................. (69,452) (41,432)
--------- ---------
Total liabilities and stockholder's equity (deficit) ............. $ 36,036 $ 72,296
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
<PAGE> 4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales ................................. $ 18,451 $ 10,657 $ 32,155 $ 21,496
Cost of sales ............................. 15,294 10,178 26,623 20,173
-------- -------- -------- --------
Gross profit .............................. 3,157 479 5,532 1,323
Operating, selling, administrative and
general expenses ................... 1,940 2,940 3,918 5,001
-------- -------- -------- --------
Operating income (loss) ................... 1,217 (2,461) 1,614 (3,678)
Other income (expense):
Interest income ........................ 671 1,151
Interest expense ....................... (2,376) (2,123) (4,524) (3,947)
Gain on sale of stock .................. 1,492 27,055
Gain on foreign currency exchange ...... 110 347 310 560
Other, net ............................. (71) (1,846) (100) (2,062)
-------- -------- -------- --------
Income (loss) before income taxes ......... 1,043 (6,083) 25,506 (9,127)
Provision (benefit) for income taxes ...... 45 (253) 12,527 198
-------- -------- -------- --------
Net income (loss) ......................... $ 998 $ (5,830) $ 12,979 $ (9,325)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE> 5
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
----------------------- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------- ------ ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................... 701,000 $701 $3,400 $(45,533) $(41,432)
Net income.................................... 12,979 12,979
Distributions to parent....................... (43,199) (43,199)
Capital contribution.......................... 2,200 2,200
------- ---- ------ -------- --------
Balance, June 30, 1997........................ 701,000 $701 $5,600 $(75,753) $(69,452)
======= ==== ====== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
<PAGE> 6
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 30, June 30,
1997 1996
-------- --------
<S> <C> <C>
Net cash provided by operating activities .............. $ 1,366 $ 3,396
-------- --------
Cash flows from investing activities:
Capital expenditures ............................. (5,567) (12,134)
Proceeds from sale of BML, net ................... 41,502
Proceeds from sale of option to purchase
stock in Liggett-Ducat ......................... 2,200
Investment ....................................... (500)
-------- --------
Net cash provided by (used in) investing activities .... 38,135 (12,634)
-------- --------
Cash flows from financing activities:
Proceeds from debt ............................... 3,750 8,454
Repayments of debt ............................... (655) (930)
Borrowings under revolver ........................ 1,566
Repayments on revolver ........................... (155)
Distributions paid to parent ..................... (43,199)
-------- --------
Net cash (used in) provided by financing activities .... (40,104) 8,935
-------- --------
Net decrease in cash and cash equivalents .............. (603) (303)
Cash and cash equivalents, beginning of period ......... 1,875 1,660
-------- --------
Cash and cash equivalents, end of period ............... $ 1,272 $ 1,357
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 7
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
Brooke (Overseas) Ltd. ("the Company"), a Delaware corporation, is a
wholly-owned subsidiary of BGLS Inc. ("BGLS") and an indirect
subsidiary of Brooke Group Ltd. ("Brooke"). The consolidated financial
statements of the Company include Liggett-Ducat Ltd. ("Liggett-Ducat"),
a Russian closed joint stock company engaged in the manufacture and
sale of cigarettes in Russia, Liggett-Ducat Tobacco Ltd. ("LDT"), a
wholly-owned subsidiary engaged in the construction of a new cigarette
factory, and, prior to January 31, 1997, BrookeMil Ltd. ("BML"), a
wholly-owned subsidiary engaged in construction of office buildings and
property management in Moscow, Russia.
On July 5, 1996, Liggett Group Inc. ("Liggett"), a wholly-owned
subsidiary of BGLS, purchased from the Company 140,000 shares (19.97%)
of the tobacco operations of Liggett-Ducat for $2,100. Ten-year option
agreements currently in place enable Liggett to increase its ownership
in Liggett-Ducat to 95%. (Refer to Note 7.)
In December 1996, the Company cancelled BML intercompany debt in
exchange for 10,483 shares of newly issued BML common stock. These
shares represent 99.1% of the outstanding shares of BML. On January 31,
1997, such shares were sold to New Valley Corporation ("NVC"). (Refer
to Note 3.)
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included as Exhibit 99.4 in Brooke's and BGLS' Annual Report on
Form 10-K, as amended, for the year ended December 31, 1996, as filed
with the Securities and Exchange Commission. The consolidated results
of operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY:
The Company has historically relied on Brooke and BGLS for sources of
financing. At June 30, 1997, the Company had net capital and working
capital deficiencies of $69,452
-6-
<PAGE> 8
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
and $56,943, respectively. The Company has upgraded the cigarette
operations' tobacco processing complex and is continuing to implement
cost-saving measures. Liggett-Ducat plans to begin the manufacture and
marketing of western style cigarettes within the next year. Management
believes that such activities will result in improved operations and
cash flow, but there can be no assurances in this regard. In addition,
the Company is in the process of constructing a new tobacco factory as
discussed in Note 5 and is actively pursuing various potential
financing alternatives related thereto.
3. SALE OF BROOKEMIL
On January 31, 1997, the Company sold its 99.1% of the outstanding
shares of BML to New Valley Corporation ("New Valley") for $21,500 in
cash and a promissory note of $33,500, collateralized by the BML
shares, payable during 1997 with an annual interest rate of 9%. The
consideration received exceeded the carrying value of the Company's
investment in BML by $52,500. The Company recognized an immediate gain
on the sale in the amount of $25,500. The remaining $27,000 was
deferred, reflecting recognition that the Company's parent, BGLS,
retains an interest in BML through its 42% equity ownership in New
Valley, and that further, a portion of the property sold is subject to
a put option held by New Valley. This option allows New Valley, under
certain circumstances, to put a portion of the property sold back to
the Company at the greater of the appraised fair value of the property
at the date of exercise or $13,600. The Company distributed the $21,500
cash proceeds received from the sale of BML to BGLS on January 31,
1997. On April 28, 1997 and June 30, 1997, New Valley paid BOL $3,500
and $18,000, respectively, representing a portion of the promissory
note together with accrued interest thereon. During the second quarter
1997, BOL distributed to BGLS $18,500 in proceeds received from New
Valley together which accrued interest thereon.
On April 18, 1997, BML sold one of its office buildings, Ducat Place I,
to a third party. Accordingly, the Company recognized approximately
$1,490 of the deferred gain. At June 30, 1997, the balance of the
deferred gain was approximately $25,500.
In connection with the sale of the BML shares, certain specified
liabilities aggregating $40,800, including the Vneshtorgbank loan with
a balance of $20,418 ($13,927 at June 30, 1997), remained with BML.
Further, the Company, Brooke and BGLS each contributed to the capital
of BML, through cancellation of all indebtedness of BML to each such
entity, the aggregate amount of which was $19,275 including accrued
interest thereon. In addition, Liggett-Ducat entered into a Use
Agreement with BML whereby Liggett-Ducat is permitted to continue to
utilize the existing factory site on the same basis as in the past. The
Use Agreement is terminable by BML on 270 days' prior notice.
-7-
<PAGE> 9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
4. INVENTORIES
Inventories consist of:
June 30, December 31,
1997 1996
-------- ------------
Finished goods .................... $ $
Work-in-process ................... 238 53
Raw materials ..................... 2,700 2,664
Replacement parts and supplies .... 1,584 852
------ ------
$4,522 $3,569
====== ======
The Company has a leaf inventory management program whereby, among
other things, it is committed to purchase certain quantities of leaf
tobacco. The purchase commitments are for quantities not in excess of
anticipated requirements and are at prices established at the date of
the commitment. At June 30, 1997, the Company had leaf tobacco
purchase commitments of $3,935.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
June 30, December 31,
1997 1996
------- ------------
Buildings .......................... $ $ 8,064
Factory machinery and equipment .... 8,163 4,419
Computers and software ............. 296 289
Office furniture and equipment ..... 205 129
Vehicles ........................... 418 416
Construction-in-progress ........... 5,946 46,966
------- -------
15,028 60,283
Less accumulated depreciation ...... 595 676
------- -------
$14,433 $59,607
======= =======
Purchase commitments of approximately $2,000 have been made for factory
machinery. Of this amount, $1,000 was paid in July 1997; the other
$1,000 is payable over a period of 5 years with interest at 8% per
annum.
On April 28, 1997, the Company purchased excess production equipment
from Liggett for $3,000.
On May 6, 1997, LDT entered into two contracts for construction of a
new tobacco factory on the outskirts of Moscow which provide for
payments of $1,700 over a three-month period ending July 1997 and
$18,760 over a twelve-month period ending July 1998. A pre-construction
payment of $520 was paid in April 1997.
-8-
<PAGE> 10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
June 30, December 31,
1997 1996
------- ------------
Bank loan ................................ $ $20,418
Deferred financing fees .................. 1,240
Notes payable ............................ 5,755
------- -------
Total notes payable and long-term debt ... 5,755 21,658
Less current maturities .................. 3,250 21,658
------- -------
Amount due after one year ................ $ 2,505 $
======= =======
In October 1995, Liggett-Ducat entered into a loan agreement with
Vneshtorgbank to borrow up to $20,418 to fund real estate development.
At December 31, 1996, BML had drawn down $20,418 of the loan. In
connection with the sale of BML to New Valley, the Russian bank loan
remained at BML and the Company and Brooke, as guarantor, were
indemnified by New Valley with respect to this liability. (Refer to
Note 3.)
REVOLVING CREDIT FACILITIES:
In February and March 1997, the Company obtained lines of credit in the
amounts of $1,000 at 28% per annum and $2,000 at 26%, respectively, in
order to secure tobacco commitment purchases. The lines of credit were
extended in May 1997 and interest rates reduced to 23%. Also in April
1997, an additional $1,000 line of credit was obtained. At June 30,
1997, the balance outstanding was $3,250. Brooke is a guarantor on the
lines of credit which are collateralized by accounts receivable,
inventory and equipment. The lines of credit expire in August and
September 1997.
7. RELATED PARTY TRANSACTIONS
The Company has obtained funding through a revolving credit facility
with Brooke and BGLS at an annual interest rate of 20% to cover certain
expenses including the cost of certain administrative services and
personnel, tobacco and material purchases and upgrades of factory
equipment. In addition, prior to January 31, 1997, Brooke and BGLS had
advanced funds to BML for its real estate developments projects. The
amount due to Brooke and BGLS under this facility at June 30, 1997 was
$33,702 together with interest of $14,243, of which $13,997 together
with interest of $6,922 is due from Liggett-Ducat and LDT.
On March 13, 1997, Liggett acquired a second option to purchase all
remaining shares of Liggett-Ducat (an additional 33%) from the Company
for $2,200. Of that amount, $2,050 was paid in cash and the Company
recorded a receivable of $150.
-9-
<PAGE> 11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
8. INCOME TAXES
The entire 1996 and a portion ($786) of the 1997 provision for income
taxes is payable pursuant to Russian statutory requirements. Further,
the Company has recorded a provision for income taxes of $11,741
related to its sale of BML in 1997 in accordance with its tax sharing
agreement with Brooke.
The provision for taxes for the six months ended June 30, 1997 and 1996
does not bear the customary relationship to the pretax loss/income for
the Company due principally to the effects of taxes provided for
foreign operations and an increase in the valuation allowance related
to deferred tax assets.
9. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's Common Stock
as collateral in connection with the issuance of BGLS' 15.75% Senior
Secured Notes ("BGLS Notes") due 2001. Liggett is currently in
negotiations with its note holders to restructure the terms of its
Senior Secured Notes. Pending completion of the negotiations, BGLS has
postponed making its interest payment due on July 31, 1997 of
approximately $18,338 on the BGLS Notes. The indenture governing the
BGLS Notes provides for a 30-day grace period before the failure to pay
interest will be an event of default.
-10-
<PAGE> 1
Exhibit 99.4
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
JUNE 30, 1997
<PAGE> 2
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Balance Sheets as of June 30, 1997 and December 31, 1996........................................... 2
Statements of Operations for the three months and six months ended June 30, 1997 and
June 30, 1996.................................................................................. 3
Statement of Stockholder's Equity (Deficit) for the six months ended June 30, 1997................. 4
Statements of Cash Flows for the six months ended June 30, 1997 and June 30, 1996................. 5
Notes to Financial Statements...................................................................... 6
</TABLE>
-1-
<PAGE> 3
NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents ........................................ $ 8 $ 1
Investment in New Valley:
Redeemable preferred stock ..................................... 57,504 72,962
Common stock ................................................... (57,504) (72,962)
-------- --------
Total investment in New Valley .................................
-------- --------
Total assets ..................................................... $ 8 $ 1
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Payable to parent ................................................ $ 43 $ 4
Accrued expenses ................................................. 7
Current income taxes payable to parent ........................... 6,304 6,312
-------- --------
Total liabilities ................................................ 6,347 6,323
-------- --------
Commitments and contingencies ....................................
Common stock, $0.01 par value, 100 shares authorized, issued
and outstanding ................................................
Additional paid-in capital ....................................... 7,633 7,633
Deficit .......................................................... (15,022) (727)
Other ............................................................ 1,050 (13,228)
-------- --------
Total stockholder's equity (deficit) ............................. (6,339) (6,322)
-------- --------
Total liabilities and stockholder's equity (deficit) ............. $ 8 $ 1
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-2-
<PAGE> 4
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Equity in loss of New Valley ................................ $ (5,811) $ (1,487) $(14,325) $ (2,983)
Interest income ............................................. 41 6 48
General and administrative expenses ......................... (7) (2) (30) (4)
-------- -------- -------- --------
Loss from continuing operations before income taxes ......... (5,818) (1,448) (14,349) (2,939)
-------- -------- -------- --------
(Benefit) provision for income taxes:
Current .................................................. (1) 13 (8) 448
Deferred ................................................. (16) (520) (16) (3,208)
-------- -------- -------- --------
Income tax benefit .......................................... (17) (507) (24) (2,760)
-------- -------- -------- --------
Loss from continuing operations ............................. (5,801) (941) (14,325) (179)
(Loss) income from discontinued operations of New Valley,
net of taxes ........................................... (331) 30
-------- -------- -------- --------
Net loss .................................................... $ (6,132) $ (941) $(14,295) $ (179)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-3-
<PAGE> 5
NEW VALLEY HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- -- PAID-IN
SHARES AMOUNT CAPITAL DEFICIT OTHER TOTAL
-------- -------- ---------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 .......... 100 $ $ 7,633 $ (727) $(13,228) $ (6,322)
Proportionate share of New Valley's
capital transactions .............. (662) (662)
Unrealized holding gain on investment
in New Valley ..................... 14,940 14,940
Net loss ............................ (14,295) (14,295)
-------- -------- -------- -------- -------- --------
Balance, June 30, 1997 .............. 100 $ $ 7,633 $(15,022) $ 1,050 $ (6,339)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-4-
<PAGE> 6
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Six Months Ended
---------------------
June 30, June 30,
1997 1996
------- -------
<S> <C> <C>
Net cash provided by operating activities ........... $ 7 $ (257)
------- -------
Cash flows from investing activities:
Dividends received from New Valley ................ 6,183
------- -------
Net cash provided by investing activities ........... 6,183
------- -------
Cash flows from financing activities:
Distributions paid to parent ...................... (5,801)
------- -------
Net cash used in financing activities ............... (5,801)
------- -------
Net increase in cash and cash equivalents ........... 7 125
Cash and cash equivalents at beginning of period .... 1 738
------- -------
Cash and cash equivalents at end of period .......... $ 8 $ 863
======= =======
</TABLE>
The accompanying notes are an integral part
of the financial statements.
-5-
<PAGE> 7
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
ORGANIZATION. New Valley Holdings, Inc. (the "Company") was formed on
September 9, 1994 by BGLS Inc. ("BGLS") to act as a holding company for
certain stock investments in New Valley Corporation ("New Valley"). BGLS
owns 100% of the authorized, issued and outstanding common stock of the
Company. BGLS is a wholly-owned subsidiary of Brooke Group Ltd.
("Brooke").
The interim financial statements of the Company are unaudited and, in the
opinion of management, reflect all adjustments necessary (which are normal
and recurring) to present fairly the Company's financial position, results
of operations and cash flows. These financial statements should be read in
conjunction with the financial statements and the notes thereto included
as Exhibit 99.3 in Brooke's and BGLS' Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the
Securities and Exchange Commission. The results of operations for interim
periods should not be regarded as necessarily indicative of the results
that may be expected for the entire year.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
USE OF ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts
of revenues and expenses. Actual results could differ from those
estimates.
2. INVESTMENT IN NEW VALLEY CORPORATION
The Company's investment in New Valley at June 30, 1997 is summarized
below:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF FAIR CARRYING HOLDING
SHARES VALUE AMOUNT LOSS
--------- --------- -------- -----------
<S> <C> <C> <C> <C>
Class A Preferred Shares .... 618,326 $ 57,504 $ 57,504 $ (9,941)
Common Shares ............... 3,969,962 3,970 (57,504)
--------- --------- ---------
$ 61,474 $ $ (9,941)
========= ========= =========
</TABLE>
(A) Gives effect to July 1996 one-for-twenty reverse stock split.
The $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares
($100 Liquidation Value), $.01 par value (the "Class A Preferred Shares"),
are accounted for as debt securities pursuant to the requirements of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities", and are classified
as available-for-sale. Through September 1996, earnings on the Class A
Preferred Shares were comprised of dividends accrued during the period and
the accretion of the difference between the Company's basis and their
mandatory redemption price. New Valley's Common Shares, $.01 par value
(the "Common Shares") were accounted for pursuant to APB No. 18, "The
Equity Method of Accounting for Investments in Common Stock".
-6-
<PAGE> 8
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
During the quarter ended September 30, 1996, the decline in the market
value of the Class A Preferred Shares, the dividend received on the Class
A Preferred Shares and the Company's equity in losses incurred by New
Valley caused the carrying value of the Company's investment in New Valley
to be reduced to zero. Beginning in the fourth quarter of 1996, the
Company suspended the recording of its earnings on the dividends accrued
and the accretion of the difference between the Company's basis in the
Class A Preferred Shares and their mandatory redemption price.
At June 30, 1997, the Company's investment in New Valley consisted of an
approximate 42% voting interest. The Company's investment is represented
by 618,326 Class A Preferred Shares (57.7%) and 3,969,962 Common Shares
(41.5%) after giving effect to a one-for-twenty reverse stock split by New
Valley in July 1996.
During the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for a total amount of $10,530. The Company has recorded
its proportionate interest in the excess of the carrying value of the
shares over the cost of the shares repurchased as a credit to additional
paid-in capital in the amount of $1,782, along with other New Valley
capital transactions of $1,563 for the six months ended June 30, 1996. No
such repurchases have been made during the quarter ended June 30, 1997.
Other New Valley capital transactions charged to equity were $662 for the
six months ended June 30, 1997.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per
annum. On March 27, 1996, New Valley paid a cash dividend on the Class A
Preferred Shares of $10.00 per share. The Company received $6,183 in the
distribution. At June 30, 1997, the accrued and unpaid dividends arrearage
was $139,017 ($129.75 per share).
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of June 30, 1997 and
December 31, 1996 and for the six months ended June 30, 1997 and 1996
follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
-------- ------------
<S> <C> <C>
Current assets, primarily cash and marketable
securities .................................... $ 114,175 $ 183,720
Non-current assets ............................... 311,005 222,820
Current liabilities .............................. 127,130 98,110
Non-current liabilities .......................... 175,258 170,223
Redeemable preferred stock ....................... 233,531 210,571
Shareholders' equity (deficit) ................... (110,739) (72,364)
</TABLE>
-7-
<PAGE> 9
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues ...................................... $ 24,404 $ 30,449 $ 44,157 $ 62,434
Costs and expenses ............................ 29,594 35,138 61,519 73,316
Loss from continuing operations ............... (4,270) (4,872) (15,483) (10,484)
(Loss) income from discontinued operations .... (759) 110 113 838
Net loss applicable to common shares(A) ....... (21,779) (20,408) (48,100) (36,475)
</TABLE>
(A) Considers all preferred accrued dividends, whether or not declared,
and the excess of carrying value of redeemable preferred shares over
cost of shares purchased.
ACQUISITION OF COMMON SHARES OF BML:
On January 31, 1997, New Valley acquired substantially all the common
shares of BrookeMil Ltd., a real estate investment company doing business
in Russia, from Brooke Overseas Ltd. ("BOL"), for $55,000, $21,500 payable
in cash and a promissory note of $33,500. On April 28, 1997 and June 30,
1997, New Valley paid BOL $3,500 and $18,000, respectively, representing a
portion of the promissory note together with accrued interest thereon. As
of June 30, 1997, the balance remaining on the note is $12,000 and is due
on December 31, 1997.
RJR NABISCO HOLDINGS CORP.:
At June 30, 1997, New Valley held 1,062,650 shares of RJR Nabisco Holdings
Corp. ("RJR Nabisco") common stock with a market value of $34,270 (cost of
$32,574). The unrealized gain on New Valley's investment in RJR Nabisco
common stock was $1,696 at June 30, 1997. Based on the market price of RJR
Nabisco common stock at June 30, 1997, no amounts are payable by Brooke or
New Valley under any of their net profit-sharing arrangements with respect
to the RJR Nabisco common stock.
4. FEDERAL INCOME TAX
At June 30, 1997, the Company had $8,400 of unrecognized net deferred tax
assets, comprised primarily of future deductible temporary differences. A
valuation allowance has been provided against this deferred tax asset as
it is presently deemed more likely than not that the benefit of the tax
asset will not be utilized. The Company continues to evaluate the
realizability of its deferred tax assets and its estimate is subject to
change.
The provision for taxes for the six month period ended June 30, 1996 does
not bear a customary relationship to the pretax income for the Company due
principally to the effects of the 80% dividends received deduction for
Federal taxes. The benefit for income taxes at June 30, 1997 is based on
the current taxable loss.
-8-
<PAGE> 10
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
5. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's common stock and
the Company's investments in the New Valley securities as collateral in
connection with the issuance of BGLS' 15.75% Senior Secured Notes ("BGLS
Notes") due 2001. Liggett Group Inc., a subsidiary of BGLS, is currently
in negotiations with its note holders to restructure the terms of its
Senior Secured Notes. Pending completion of the negotiations, BGLS has
postponed its interest payment of approximately $18,338 due July 31, 1997,
on the BGLS Notes The indenture governing the BGLS Notes provides for a
30-day grace period before the failure to pay interest will be an event of
default.
-9-
