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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
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DELAWARE 1-5759 51-0255124
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(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation
incorporation or organization)
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BGLS INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 33-93576 13-3593483
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(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation
incorporation or organization)
</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)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange on
Title of each class which registered
------------------- ----------------
Brooke Group Ltd.
Common Stock, par value $.10 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None
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. BGLS Inc. meets the conditions set forth in
General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this
form with the reduced disclosure format.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of Brooke Group Ltd. as of April 6, 1998 was approximately $171,000,000.
Directors and officers and ten percent or greater stockholders of Brooke Group
Ltd. are considered affiliates for purposes of this calculation but should not
necessarily be deemed affiliates for any other purpose.
At April 6, 1998, Brooke Group Ltd. had 20,348,498 shares of common
stock outstanding, and BGLS Inc. had 100 shares of common stock outstanding, all
of which are held by Brooke Group Ltd.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III (items 10, 11, 12 and 13) from the definitive Proxy Statement
of Brooke Group Ltd. for the 1998 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission no later than 120 days after the end
of the Registrant's fiscal year covered by this report.
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BROOKE GROUP LTD.
BGLS INC.
FORM 10-K
TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 16
Item 3. Legal Proceedings............................................................................ 17
Item 4. Submission of Matters to a Vote of Security Holders;
Executive Officers of the Registrant......................................................... 17
PART II
Item 5. Market for Registrants' Common Equity and Related Stockholder Matters........................ 20
Item 6. Selected Financial Data...................................................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 37
Item 8. Financial Statements and Supplementary Data.................................................. 37
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................... 37
PART III
Item 10. Directors and Executive Officers of the Registrants.......................................... 38
Item 11. Executive Compensation....................................................................... 38
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 38
Item 13. Certain Relationships and Related Transactions............................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 39
SIGNATURES............................................................................................. 52
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PART I
ITEM 1. BUSINESS
GENERAL
Brooke Group Ltd. (the "Company"), a Delaware corporation founded in
1980, is a holding company for a number of businesses. The Company is
principally engaged, through its subsidiary Liggett Group Inc. ("Liggett"), in
the manufacture and sale of cigarettes in the United States; through its
subsidiary Brooke (Overseas) Ltd. ("BOL"), in the manufacture and sale of
cigarettes in Russia; and through its investment in New Valley Corporation ("New
Valley"), in the investment banking and brokerage business, in real estate
development in Russia and the Ukraine, in the ownership and management of
commercial real estate in the United States and in the acquisition of operating
companies. The Company holds such businesses through its wholly-owned
subsidiary, BGLS Inc. ("BGLS"), a Delaware corporation organized in 1990.
The Company is controlled by Bennett S. LeBow, the Chairman and Chief
Executive Officer of the Company, BGLS and New Valley, who beneficially owns
approximately 46% of the Company's common stock. The principal executive offices
of the Company and BGLS are located at 100 S.E. Second Street, Miami, Florida
33131, and the telephone number is (305) 579-8000.
LIGGETT GROUP INC.
General. The Company's tobacco business in the United States is
conducted through its indirect wholly-owned subsidiary Liggett, which is the
operating successor to the Liggett & Myers Tobacco Company. Substantially all of
Liggett's manufacturing facilities are located in or near Durham, North
Carolina. Liggett is registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and files periodic reports and other information
with the Securities and Exchange Commission (the "SEC").
Liggett is engaged in the manufacture and sale of cigarettes, primarily
in the United States. Liggett's management believes, based on published industry
sources, that Liggett's domestic shipments of approximately 6.45 billion
cigarettes during 1997 accounted for 1.3% of the total cigarettes shipped in the
United States during such year. This represents a market share decline of 0.5%
from 1996 and 0.9% from 1995. Liggett produces both premium cigarettes as well
as discount cigarettes (which include among others, control label, branded
discount and generic cigarettes). Premium cigarettes are generally marketed
under well-recognized brand names at full retail prices to adult smokers with
strong preference for branded products, whereas discount cigarettes are marketed
at lower retail prices to adult smokers who are more cost conscious. Liggett's
cigarettes are produced in approximately 300 combinations of length, style and
packaging.
Liggett produces four premium cigarette brands: L&M, Chesterfield, Lark
and Eve. Liggett's premium cigarettes represented approximately 33%, 31% and 30%
of net sales (excluding federal excise taxes) in 1997, 1996 and 1995,
respectively. Liggett's management believes, based on published industry
sources, that Liggett's share of the premium market segment was approximately
0.5% for 1997, compared to 0.7% and 0.8% for 1996 and 1995, respectively.
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In 1980, Liggett was the first major domestic cigarette manufacturer to
successfully introduce discount cigarettes as an alternative to premium
cigarettes. In 1989, Liggett established a new price point within the discount
market segment by introducing Pyramid, a branded discount product which, at that
time, sold for less than most other discount cigarettes. Liggett's management
believes, based on published industry sources, that Liggett held a share of
approximately 3.5% of the discount market segment for 1997, compared to 4.9% and
5.5% for 1996 and 1995, respectively. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations" for additional information concerning Liggett's premium and discount
product sales.
At the present time, Liggett has no foreign operations. Liggett does
not own the international rights to its premium cigarette brands, which are
actively marketed by other companies in foreign markets, thereby adversely
affecting Liggett's ability to penetrate such markets. Liggett does, however,
export other cigarette brands primarily to Eastern Europe and the Middle East.
Export sales of approximately 85 million units accounted for approximately 1% of
Liggett's 1997 total unit sales volume. Revenues from export sales were $0.8
million for 1997, compared to $3.3 million and $5.4 million for 1996 and 1995,
respectively. Operating loss attributable to export sales in 1997 amounted to
approximately $0.1 million compared to operating losses of $1.8 million and $2.1
million in 1996 and 1995, respectively.
Business Strategy. Liggett's near-term business strategy is to reduce
further certain operating and selling costs in order to increase the
profitability of both its premium and discount products, and to reduce its
investment in working capital. As part of this strategy, Liggett reorganized its
sales force in early 1994, reducing its field sales force by 150 permanent
positions and adding approximately 300 part-time positions. Liggett has also
reduced costs in both administrative and manufacturing functions by making
additional modifications to its manufacturing operations and significantly
curtailing employee benefit programs. In 1995, Liggett continued its efforts
towards reducing costs by, among other things, offering voluntary retirement
programs to eligible employees and reducing headcount by an additional 120
positions.
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 further reduced its salaried, hourly and part-time
headcount by a total of 108 positions (18%) over the succeeding twelve months.
Liggett's long-term business strategy in the premium segment of the
market is to maintain or improve its profit margins in the face of declining
unit sales and market share by improving operating efficiencies and implementing
further cost reduction programs. Liggett's long-term business strategy in the
discount segment of the market is to maintain its market share or improve its
profit margins by consistently providing high-quality products and services at
prices and on terms comparable to those available elsewhere in the market.
Sales, Marketing and Distribution. Liggett's products are distributed
from a central distribution center in Durham, North Carolina to 26 public
warehouses located throughout the United States. These warehouses serve as local
distribution centers for Liggett's customers. Liggett's products are transported
from the central distribution center to the warehouses via third-party trucking
companies to meet pre-existing contractual obligations to its customers.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett offers
its customers discount payment terms, traditional rebates and promotional
incentives. Customers typically pay for purchased goods
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within two weeks following delivery from Liggett. Liggett's largest single
customer, Speedway SuperAmerica LLC, accounted for approximately 19.4% of net
sales in 1997, approximately 13.9% of net sales in 1996, and approximately 11.6%
of net sales in 1995. Sales to this customer were primarily in the private label
discount segment and constituted approximately 29.1%, 20.3% and 16.8% of
Liggett's discount segment sales in 1997, 1996 and 1995, respectively. Liggett
is currently negotiating the renewal of its contract with this customer, which
contract is due to expire on June 30, 1998.
Following the January 1997 restructuring, Liggett's marketing and sales
functions were performed by approximately 110 direct sales representatives
calling on national and regional customer accounts, together with approximately
90 part-time retail sales consultants who service retail outlets. In addition,
Liggett employs food broker groups in certain geographic locations to perform
these marketing and sales functions.
Trademarks. All of the major trademarks used by Liggett are federally
registered or are in the process of being registered in the United States and
other markets where Liggett's products are sold. Trademarks registrations
typically have a duration of ten years and can be renewed at Liggett's option
prior to their expiration date. In view of the significance of cigarette brand
awareness among consumers, management believes that the protection afforded by
these trademarks is material to the conduct of its business. All of Liggett's
trademarks are owned by its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve")
and Cigarette Exporting Company of America, Ltd. ("CECOA"). Liggett does not own
the international rights to its premium cigarette brands.
Manufacturing. Liggett purchases and maintains leaf tobacco inventory
to support its cigarette manufacturing requirements. Liggett believes that there
is a sufficient supply of tobacco within the worldwide tobacco market to satisfy
its current production requirements. Liggett stores its leaf tobacco inventory
in warehouses in North Carolina and Virginia. There are several different types
of tobacco, including flue-cured leaf, burley leaf, Maryland leaf, oriental
leaf, cut stems and reconstituted sheet. Leaf components of cigarettes are
generally the flue-cured and burley tobaccos. While premium and discount brands
use many of the same tobacco products, input ratios of tobacco products account
for the differences between premium and discount products. Domestically grown
tobacco is an agricultural commodity subject to United States government
production controls and price supports which can substantially affect its market
price. Foreign flue-cured and burley tobaccos, some of which are used in the
manufacture of Liggett's cigarettes, are generally 10% to 15% less expensive
than comparable domestic tobaccos. Liggett normally purchases all of its tobacco
requirements from domestic and foreign leaf tobacco dealers, much of it under
long-term purchase commitments. As of December 31, 1997, approximately 64% of
Liggett's commitments were for the purchase of foreign tobacco. Increasing
tobacco costs due to reduced worldwide supply of tobacco and a reduction in the
average discount available to Liggett from leaf tobacco dealers on tobacco
purchased under prior years' purchase commitments will have an unfavorable
impact on Liggett's operations during 1998.
Liggett's cigarette manufacturing facilities are designed for the
execution of short production runs in a cost-effective manner, which enables
Liggett to manufacture and market a wide variety of cigarette brand styles.
Liggett's cigarettes are produced in approximately 300 different brand styles
under Eve's and CECOA's trademarks and brand names as well as private labels for
other companies, typically retail or wholesale distributors who supply
supermarkets and convenience stores. Liggett believes that its existing
facilities are sufficient to accommodate a substantial increase in production.
While Liggett pursues product development, its total expenditures for
research and development on new products have not been financially material over
the past three years.
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Competition. Liggett is the smallest of the five major manufacturers of
cigarettes in the United States. The four largest manufacturers of cigarettes
are Philip Morris, Inc. ("Philip Morris"), R.J. Reynolds Tobacco Company
("RJR"), Brown & Williamson Tobacco Corporation, and Lorillard Tobacco Company,
Inc.
There are substantial barriers to entry into the cigarette business,
including extensive distribution organizations, large capital outlays for
sophisticated production equipment, substantial inventory investment, costly
promotional spending, regulated advertising and strong brand loyalty. In this
industry, the major cigarette manufacturers compete among themselves for market
share on the basis of brand loyalty, advertising and promotional activities and
trade rebates and incentives. Liggett's four major competitors all have
substantially greater financial resources than Liggett, and most of these
competitors' brands have greater sales and consumer recognition than Liggett's
brands.
Liggett's management believes, based on published industry sources,
that Philip Morris' and RJR's sales together accounted for approximately 72.9%
of the domestic cigarette market in 1997. Liggett's domestic shipments of
approximately 6.45 billion cigarettes during 1997 accounted for 1.3% of the
approximately 485 billion cigarettes shipped in the United States during such
year, compared to 8.95 billion cigarettes (1.9%) and 10.52 billion cigarettes
(2.2%) during 1996 and 1995, respectively.
Industry-wide shipments of cigarettes in the United States have been
declining for a number of years although this trend reversed itself in 1996.
Consistent with published industry sources that domestic industry-wide shipments
declined by approximately 0.5% in 1997, Liggett's management believes that
industry-wide shipments of cigarettes in the United States will continue to
decline as a result of numerous factors, including health considerations,
diminishing social acceptance of smoking, legislative limitations on smoking in
public places and federal and state excise tax increases which have augmented
cigarette price increases.
Historically, because of their dominant market share, Philip Morris and
RJR have been able to determine cigarette prices for the various pricing tiers
within the industry, and the other cigarette manufacturers have brought their
prices into line with the levels established by the two industry leaders.
Off-list price discounting by manufacturers, however, has substantially affected
the average price differential at retail, which can be significantly greater
than the manufacturers' list price gap.
Legislation, Regulation and Litigation. Reports with respect to the
alleged harmful physical effects of cigarette smoking have been publicized for
many years and, in the opinion of Liggett's management, have had and may
continue to have an adverse effect on cigarette sales. Since 1964, the Surgeon
General of the United States and the Secretary of Health and Human Services have
released a number of reports which claim that cigarette smoking is a causative
factor with respect to a variety of health hazards, including cancer, heart
disease and lung disease, and have recommended various government actions to
reduce the incidence of smoking. In 1997, Liggett publicly acknowledged that, as
the Surgeon General and respected medical researchers have found, smoking causes
health problems, including lung cancer, heart vascular disease and emphysema.
Since 1966, federal law has required that cigarettes manufactured,
packaged or imported for sale or distribution in the United States include
specific health warnings on their packaging. Since 1972, Liggett and the other
cigarette manufacturers have included the federally required warning statements
in print advertising, on billboards and on certain categories of point-of-sale
display materials relating to cigarettes.
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The Comprehensive Smoking Education Act ("CSEA"), which became
effective in October 1985, requires that packages of cigarettes distributed in
the United States and cigarette advertisements (other than billboard
advertisements) in the United States bear one of the following four warning
statements on a quarterly rotating basis: "SURGEON GENERAL'S WARNING: Smoking
Causes Lung Cancer, Heart Disease, Emphysema, and May Complicate Pregnancy";
"SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks
to Your Health"; "SURGEON GENERAL'S WARNING: Smoking by Pregnant Women May
Result in Fetal Injury, Premature Birth, and Low Birth Weight"; and "SURGEON
GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide". Shortened versions
of these statements are also required, on a rotating basis, on billboard
advertisements. By a limited eligibility amendment to the CSEA, for which
Liggett qualifies, Liggett is allowed to display all four required package
warnings for the majority of its brand packages on a simultaneous basis (such
that the packages at any time may carry any one of the four required warnings),
although it rotates the required warnings for advertising on a quarterly basis
in the same manner as do the other major cigarette manufacturers. The law also
requires that each person who manufactures, packages or imports cigarettes
annually provide to the Secretary of Health and Human Services a list of
ingredients added to tobacco in the manufacture of cigarettes. Annual reports to
the United States Congress are also required from the Secretary of Health and
Human Services as to current information on the health consequences of smoking
and from the Federal Trade Commission on the effectiveness of cigarette labeling
and current practices and methods of cigarette advertising and promotion. Both
federal agencies are also required annually to make such recommendations as they
deem appropriate with regard to further legislation. In addition, since 1997,
Liggett has included the warning: "SMOKING IS ADDICTIVE" on its packages.
In August 1996, the Food and Drug Administration ("FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of tobacco
products and imposing restrictions on the sale, advertising and promotion of
tobacco products. Litigation has been 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 other 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 tobacco
litigation settlements in Note 16 to the Consolidated Financial Statements of
the Company and BGLS (the "Company's Consolidated Financial Statements")
included elsewhere in this report.
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. In December 1997, the
United States District Court for the District of Massachusetts enjoined this
legislation from going into effect on the grounds that it is preempted by
federal law, however, on December 15, 1997, Liggett began complying with this
legislation by providing ingredient information to the Massachusetts Department
of Public Health. The enactment of this legislation has encouraged efforts to
enact similar legislation in other states.
In 1993, the United States Congress amended the Agricultural Adjustment
Act of 1938 to require each United States cigarette manufacturer to use at least
75% domestic tobacco in the aggregate of the cigarettes manufactured by it in
the United States, effective January 1, 1994, on an annualized basis or pay a
domestic marketing assessment ("DMA") based upon price differentials between
foreign and domestic tobacco and, under certain circumstances, make purchases of
domestic tobacco from the tobacco stabilization cooperatives organized by the
United States
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government. After an audit, the United States Department of Agriculture ("USDA")
informed Liggett that it did not satisfy the 75% domestic tobacco usage
requirement in 1994 and was subject to a DMA of approximately $5.5 million.
Liggett agreed to pay this assessment in quarterly installments, with interest,
over a five-year period. Since the levels of domestic tobacco inventories on
hand at the tobacco stabilization organizations are below reserve stock levels,
Liggett was not obligated to make purchases of domestic tobacco from the tobacco
stabilization cooperatives.
In February 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("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
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 and the period for
post-hearing submissions ended in February 1996. 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 environmental tobacco
smoke ("ETS") which concluded 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 domestic cigarette manufacturers, together with other segments
of the tobacco and distribution industries, commenced a lawsuit against the EPA
seeking a determination that the EPA did not have the statutory authority to
regulate ETS and that given the current body of scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's classification of ETS was arbitrary and capricious. Whatever the outcome
of this litigation, issuance of the report may encourage efforts to limit
smoking in public areas.
The Company understands that a grand jury investigation is being
conducted by the office of the United States Attorney for the Eastern District
of New York (the "Eastern District Investigation") regarding possible violations
of criminal law relating to the activities of The Council for Tobacco Research -
USA, Inc. (the "CTR"). Liggett was a sponsor of the CTR at one time. In May
1996, Liggett received a subpoena from a Federal grand jury sitting in the
Eastern District of New York, to which Liggett has responded.
In March 1996, and in each of March, July, October and December 1997,
the Company and/or Liggett received subpoenas from a Federal grand jury in
connection with an investigation by the United States Department of Justice (the
"DOJ Investigation") involving the industry's knowledge of the health
consequences of smoking cigarettes; the targeting of children by the industry;
and the addictive nature of nicotine and the manipulation of nicotine by the
industry. Liggett has responded to the March 1996, March 1997 and July 1997
subpoenas and is in the process of responding to the October and December 1997
subpoenas. The Company understands that the Eastern District Investigation and
the DOJ Investigation have, for all intents and purposes, been consolidated into
one investigation being conducted by the Department of Justice. The Company and
Liggett are unable, at this time, to predict the outcome of this investigation.
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There are various other legislative efforts pending on the federal and
state level which seek, among other things, to restrict or prohibit smoking in
public buildings and other areas, increase excise taxes, require additional
warnings on cigarette packaging and advertising, ban vending machine sales,
curtail affirmative defenses of tobacco companies in product liability
litigation, place cigarettes under the regulatory jurisdiction of the FDA and
require that cigarettes meet certain fire safety standards. If adopted, at least
certain of the foregoing legislative proposals could have a material adverse
impact on Liggett's operations. In addition, the industry is facing increased
pressure from anti-smoking groups and an extraordinary increase in smoking and
health litigation, including private class action litigation, and health care
cost recovery actions brought by states, local governments and other third
parties.
While attitudes toward cigarette smoking vary around the world, a
number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Such restrictions are, in some cases, more onerous
than restrictions imposed in the United States. Due to Liggett's lack of foreign
operations, and minimal export sales to foreign countries, the risks of foreign
limitations or restrictions on the sale of cigarettes are limited to entry
barriers into additional foreign markets and the inability to grow the existing
markets.
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. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. Since then,
several bills have been introduced in the Senate that purport to propose
legislation along these lines. Management is 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.
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of December 31, 1997, there were approximately 250 individual
suits, 40 purported class actions or actions where class certification has been
sought and 75 state, municipality and other third-party payor health care
reimbursement actions pending in the United States in which Liggett is a named
defendant. 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 practice laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. 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 health care cost recovery actions vary. In
most of these cases, 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.
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In March 1996, Liggett and the Company entered into an agreement to
settle the Castano class action tobacco litigation and 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. In March 1997, Liggett and 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, during 1997, settlements were
reached with four more states through their respective Attorneys General. On
March 12, 1998, the Company and Liggett reached a settlement agreement resolving
the tobacco-related Medicaid reimbursement claims of 14 additional states, the
District of Columbia and U.S. Virgin Islands. On March 27, 1998, a settlement
with Georgia's Attorney General was reached. The Company and Liggett now have
settlement agreements with the Attorneys General of 43 states and territories
accounting for more than 85% of the nation's potential Medicaid claims. The
settlements cover all smoking-related claims, including both addiction-based and
tobacco injury claims against Liggett and the Company brought by the states and,
upon court approval, the nationwide class.
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.
Management believes that Liggett is in compliance in all material
respects with the laws regulating cigarette manufacturers.
See Item 3. "Legal Proceedings", Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Developments
in the Cigarette Industry - Legislation and Litigation" and Note 16 to the
Company's Consolidated Financial Statements for a description of legislation,
regulation and litigation and of the Company's and Liggett's settlements.
BROOKE (OVERSEAS) LTD.
Liggett-Ducat Ltd. BOL, a wholly-owned subsidiary of BGLS, is engaged
in the manufacture and sale of cigarettes in Russia through Liggett-Ducat, a
Russian joint stock company. BOL owns a 95.9% equity interest in Liggett-Ducat.
On February 2, 1998, BOL acquired the 19.97% interest in, and options to acquire
additional shares of, Liggett-Ducat previously owned by Liggett. See Note 4 to
the Company's Consolidated Financial Statements.
Liggett-Ducat, one of Russia's leading cigarette producers since 1892,
manufactured and marketed 14.5 billion cigarettes in 1997. Liggett-Ducat
produces or has rights to produce 19 different brands of cigarettes, including
Russian brands such as Pegas, Prima, Novosti and Balomorkanal.
Liggett-Ducat manufactures three types of cigarettes: filter,
non-filter and papirossi. Papirossi is a traditional type of Russian cigarette
featuring a long paper filter comprising two-thirds of the cigarette with
tobacco filling up the balance. In 1997, Liggett-Ducat sold 4.4 billion filter
cigarettes (30%), 7.6 billion non-filter cigarettes (52%) and 2.6 billion
papirossi (18%).
The long-term strategy of Liggett-Ducat is to upgrade the quality of
its traditional Russian cigarette brands to international standards and to
expand the range of cigarettes it offers to
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include the higher-margin American blend and international blend cigarettes. The
new types of cigarettes should appeal to the growing segment of the market that
prefers American blend cigarettes over traditional Russian blended cigarettes.
Russian blend cigarettes have a very strong flavored oriental tobacco blend with
a heavy pungent odor, while the American blend is a lighter flavored Virginia
tobacco blend. The international blend will be a mix between Russian and
American blends. As markets have developed in Eastern Europe, consumer
preferences have typically shifted toward international and American blend
cigarettes.
Liggett-Ducat produces its cigarettes in a 150,000 square foot factory
complex located on Gasheka Street in downtown Moscow and operates a 150,000
square foot warehouse outside of the city. Liggett-Ducat is currently building a
new cigarette factory on the outskirts of Moscow on land it has leased for a
term of 49 years. The new factory, which will utilize Western cigarette making
technology and have a capacity of approximately 30 billion units per year, will
produce American and international blend cigarettes, as well as traditional
Russian cigarettes. Construction of the new factory is currently scheduled for
completion by the end of 1998, although no assurances thereof can be given.
Liggett-Ducat currently manufactures its cigarettes on four production
lines, comprised of both Russian-made and imported machinery. Liggett-Ducat has
recently upgraded the equipment at the existing factory to improve its
operations, and all upgraded equipment will be utilized at the new factory.
During 1996 and 1997, Liggett-Ducat installed an upgraded primary processing
complex manufactured by GBE Tobacco which will enable the factory to produce
international standard cigarettes. In addition, Liggett-Ducat acquired a new
filter-making complex from Hoechst Celanese which allows Liggett-Ducat to
produce Western quality filters, previously purchased from outside vendors, and
installed a new rejected cigarette tobacco reclamation machine to reduce waste.
The Russian cigarette market is one of the largest and fastest growing
cigarette markets in the world. Annual consumption of cigarettes is estimated at
300 billion units in Russia (1997 estimate), making the market the third largest
in the world after the United States and China. The potential size of the market
is estimated by management at up to 450 billion units per year. Approximately
61% of Russian men and 17% of Russian women are estimated to smoke cigarettes.
The market has been growing rapidly over the past several years (particularly
the female market) as imported cigarettes have become available to satisfy
increasing demand.
While growth in consumption had been restrained historically by static
domestic cigarette making capacity, recent increases in domestic production
capacity resulted in an estimated 20% increase in domestic production to
approximately 170 billion cigarettes (57% of the market) in 1997. Excess demand
and demand for Western style cigarettes were satisfied by approximately 130
billion units of imported cigarettes (43% of the market).
Russian customs legislation continues to support local producers.
During 1996 and 1997, the Russian Government raised the duties on imported
cigarettes several times to a current effective rate of 115% of cost. In the
past, many imported cigarettes were sold illegally without payment of required
duties. Recent efforts to improve enforcement of import duties has maintained
the differential between the price of imported and domestic cigarettes. Imported
cigarettes currently range in price at retail from approximately 2 to 18 rubles
($.50 to $3.00) per pack, as compared to domestically produced cigarettes which
sell for approximately 1 to 3 rubles ($.16 to $.50) per pack.
Liggett-Ducat's brands currently compete primarily against those of
other Russian cigarette makers. Liggett-Ducat as well as other Russian producers
sell their cigarettes at the lowest price points in the market. Competition in
this sector of the market is generally based on price and name recognition of
the producing factory. There is very limited advertising of these
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<PAGE> 12
products, typically only in trade publications and wholesale catalogs.
Liggett-Ducat's brands also compete to a lesser extent against lower priced
imported cigarettes from Eastern Europe and Asia.
In order to increase their presence in the Russian market and avoid
import duties, several of the major international cigarette manufacturers have
begun to produce American and international blend cigarettes domestically. Such
activities by companies with well established, international brands will provide
significant additional competition to Liggett-Ducat as its seeks to increase its
sales of such higher margin products upon completion of the new factory.
Sale of BrookeMil Ltd. Until January 31, 1997, BOL was also engaged in
the real estate development business in Moscow through its subsidiary BrookeMil
Ltd. ("BML"). On January 31, 1997, BOL entered into a stock purchase agreement
(the "Purchase Agreement") with New Valley, pursuant to which BOL sold 10,483
shares of the common stock of BML to New Valley, comprising 99.1% of the
outstanding shares of BML (the "BML Shares"). New Valley paid to BOL, for the
BML Shares, a purchase price of $55 million, consisting of $21.5 million in cash
and a $33.5 million 9% promissory note of New Valley (the "Note"). The Note,
which was collateralized by the BML Shares, was paid during 1997. The
transaction was approved by the independent members of the Board of Directors of
the Company. The Company retained independent legal counsel in connection with
the evaluation and negotiation of the transaction. See Notes 4 and 16 to the
Company's Consolidated Financial Statements for a discussion of the transaction
and information regarding a pending lawsuit relating to New Valley's purchase of
the BML Shares.
The site of the proposed third phase of the Ducat Place project being
developed by BML is currently used by Liggett-Ducat as the site for its existing
cigarette factory. In connection with the sale of the BML Shares, Liggett-Ducat
entered into a Use Agreement with BML whereby Liggett-Ducat is permitted to
continue to utilize the site on the same basis as in the past. The Use Agreement
is terminable by BML on 270 days' prior notice. In addition, New Valley has the
right under the Purchase Agreement to require BOL and BGLS to repurchase this
site for the then appraised fair market value, but in no event less than $13.6
million, during the period Liggett-Ducat operates the factory on such site.
NEW VALLEY CORPORATION
General. New Valley is engaged, through its ownership of Ladenburg
Thalmann & Co. Inc. ("Ladenburg"), in the investment banking and brokerage
business, through its ownership of BML, in the real estate development business
in Russia and the Ukraine, through its New Valley Realty division, in the
ownership and management of commercial real estate in the United States, and in
the acquisition of operating companies. New Valley is registered under the
Exchange Act and files periodic reports and other information with the SEC.
The Company indirectly holds, through BGLS and BGLS' wholly-owned
subsidiary, New Valley Holdings, Inc. ("NV Holdings"), approximately 42% of the
voting interest in New Valley. This approximate 42% interest consists, as of
March 31, 1998, of (i) 19,748 shares of common stock (the "New Valley Common
Shares") (approximately 0.2% of the class) and 250,885 shares of $3.00 Class B
Cumulative Convertible Shares (the "Class B Preferred Shares") (approximately
9.0% of the class) held directly by BGLS and (ii) 3,969,962 New Valley Common
Shares (approximately 41.4% of the class) and 618,326 $15.00 Class A Increasing
Rate Cumulative Senior Preferred Shares (the "Class A Preferred Shares")
(approximately 57.7% of the class) held by NV Holdings. See Note 2 to the
Company's Consolidated Financial Statements.
Bennett S. LeBow, Chairman of the Board, President and Chief Executive
Officer of the Company and of BGLS and the controlling stockholder of the
Company, serves as Chairman of
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<PAGE> 13
the Board and Chief Executive Officer of New Valley. Howard M. Lorber, a
consultant to the Company and its subsidiaries and a stockholder of the Company,
serves as President and Chief Operating Officer, and is a director, of New
Valley. Richard J. Lampen, Executive Vice President of the Company and of BGLS,
serves as Executive Vice President, and is a director, of New Valley. Marc N.
Bell, Vice President, General Counsel and Secretary of the Company and of BGLS,
serves as Vice President, Associate General Counsel and Secretary of New Valley.
On January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors under its
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the "Joint
Plan"). The Joint Plan was confirmed by the United States Bankruptcy Court for
the District of New Jersey, Newark Division on November 1, 1994, and pursuant
thereto, New Valley effected certain related asset dispositions.
Joint Plan Provisions; Dispositions Pursuant to the Joint Plan. The
Joint Plan of New Valley places restrictions on and requires approvals for
certain transactions with the Company and its affiliates to which New Valley or
a subsidiary of, or entity controlled by, New Valley may be party, including the
requirements, subject to certain exceptions for transactions involving less than
$1 million in a year or pro rata distributions on New Valley's capital stock, of
approval by not less than two-thirds of the entire Board, including at least one
of the directors elected by the holders of New Valley's preferred shares, and
receipt of a fairness opinion from an investment banking firm. In addition, the
Joint Plan requires that, whenever New Valley's Certificate of Incorporation
provides for the vote of the holders of the Class A Senior Preferred Shares
acting as a single class, such vote must, in addition to satisfying all other
applicable requirements, reflect the affirmative vote of either (x) 80% of the
outstanding shares of that class or (y) a simple majority of all shares of that
class voting on the issue exclusive of shares beneficially owned by the Company.
Pursuant to the Joint Plan, on November 15, 1994, New Valley sold the
assets and operations with which it provided domestic and international money
transfer services, bill payment services, telephone cards, money orders and bank
card services (collectively, the "Money Transfer Business") which included the
capital stock of its subsidiary, Western Union Financial Services, Inc. ("FSI")
and certain related assets, to First Financial Management Corporation ("FFMC"),
and, on January 13, 1995, it sold to FFMC all of the trademarks and trade names
used in the Money Transfer Business and constituting the Western Union name and
trademark. The aggregate purchase price was approximately $1.193 billion,
including $893 million in cash and $300 million representing the assumption by
FFMC of substantially all of New Valley's obligations under its pension plan.
Pursuant to the Joint Plan, all of New Valley's debt and allowed claims were
satisfied in full and all classes of equity and other equity interests were
reinstated and retained all of their legal, equitable and contractual rights.
Through October 1, 1995, New Valley was engaged in the messaging
services business through its wholly-owned subsidiary, Western Union Data
Services Company, Inc. ("DSI"). On October 31, 1995, New Valley completed the
sale of substantially all of the assets (exclusive of certain contracts) and
conveyance of substantially all of the liabilities of DSI to FFMC for $20
million, subject to certain adjustments. This transaction was effective as of
October 1, 1995.
Ladenburg Thalmann & Co. Inc. On May 31, 1995, New Valley acquired all
of the outstanding shares of common stock and other equity interests of
Ladenburg for $25.8 million, net of cash acquired, subject to adjustment.
Ladenburg is a full service broker-dealer which has been a member of the New
York Stock Exchange since 1876. Its specialties include investment banking,
trading, research, market making, private client services, institutional sales
and asset management.
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<PAGE> 14
Ladenburg's investment banking area maintains relationships with
businesses and provides them with research, advisory and investor relations
support. Services include merger and acquisition consulting, management of and
participation in underwriting of equity and debt financing, private debt and
equity financing, and rendering appraisals, financial evaluations and fairness
opinions. Ladenburg's listed securities, fixed income and over-the-counter
trading areas include trading a variety of financial instruments. Ladenburg's
client services and institutional sales departments serve over 20,000 accounts
worldwide and its asset management area provides investment management and
financial planning services to numerous individuals and institutions.
Ladenburg is a wholly-owned subsidiary of Ladenburg Thalmann Group Inc.
("Ladenburg Group"), which has other subsidiaries specializing in merchant
banking, venture capital and investment banking activities on an international
level. Ladenburg Thalmann International ("LTI"), a wholly-owned subsidiary of
Ladenburg Group, is engaged in corporate finance and capital markets activities
in Russia and Ukraine, seeking, among other things, mandates to raise capital
for local corporate issuers in the international capital markets. LTI,
headquartered in New York City, has an office in Kiev, Ukraine.
In July 1997, LTI, together with Societe Generale, formed a fund with
an initial capitalization of U.S.$90.5 million for investment in public and
private equity securities in Ukraine. LTI's Kiev office serves as investment
advisor to the fund.
BrookeMil Ltd. On January 31, 1997, New Valley acquired the BML Shares,
representing 99.1% of the outstanding shares of BML, from BOL. New Valley paid
to BOL a purchase price of $55 million, consisting of $21.5 million in cash and
the $33.5 million 9% Note of New Valley. The Note, which was collateralized by
the BML Shares, was paid during 1997. The source of funds used by New Valley for
the acquisition, including the payment of the Note, was general working capital
including cash and cash equivalents and proceeds from the sale of investment
securities available for sale. The amount of consideration paid by New Valley
was determined based on a number of factors including current valuations of the
assets, future development plans, local real estate market conditions and
prevailing economic and political conditions in Russia.
New Valley retained independent legal counsel and financial advisors in
connection with the evaluation and negotiation of the transaction, which was
approved by a special committee of the independent directors of New Valley. In
accordance with the terms of the Joint Plan, the transaction was approved by not
less than two-thirds of the entire Board of Directors, including the approval of
at least one of the directors elected by the holders of New Valley's preferred
shares, and a fairness opinion from an investment banking firm was obtained. The
shareholders of New Valley did not vote on the BML transaction (nor the
acquisition of Ladenburg or the Office Buildings and Shopping Centers described
below) as their approval was not required by applicable corporate law or New
Valley's constituent documents.
BML is developing the three-phase Ducat Place complex on 2.2 acres of
land in downtown Moscow, for which it has a 49-year lease. The first phase of
the project, Ducat Place I, a 46,500 square foot Class-A office building, was
successfully built and leased in 1993, and sold by BML to a tenant in April
1997. In 1997, BML completed construction of Ducat Place II, a premier 150,000
square foot office building. Ducat Place II has been leased to a number of
leading international companies including Motorola, Conoco, Lukoil-Arco and
Morgan Stanley. The third phase, Ducat Place III, is planned as a 350,000 square
foot mixed-use complex, with construction anticipated to commence in 1999. For
further information with respect to this transaction, see "Brooke (Overseas)
Ltd. - Sale of BrookeMil Ltd.".
Western Realty. In February 1998, New Valley and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, New
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<PAGE> 15
Valley agreed, among other things, to contribute to Western Realty the real
estate assets of BML, including Ducat Place II and the site for Ducat Place III,
and Apollo agreed to contribute up to $58 million.
Under the terms of the agreement governing Western Realty (the "LLC
Agreement"), the ownership and voting interests in Western Realty will be held
equally by Apollo and New Valley. Apollo will be entitled to a preference on
distributions of cash from Western Realty to the extent of its investment,
together with a 15% annual rate of return, and New Valley will then be entitled
to a return of $10 million of BML-related expenses incurred by New Valley since
March 1, 1997, together with a 15% annual rate of return; subsequent
distributions will be made 70% to New Valley and 30% to Apollo. Western Realty
will be managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and New Valley. All material corporate
transactions by Western Realty will generally require the unanimous consent of
the Board of Managers. Accordingly, New Valley will account for its
non-controlling interest in Western Realty on the equity method. See Note 3 to
the New Valley's Consolidated Financial Statements accompaying this report.
The Company, New Valley and their affiliates have other business
relationships with affiliates of Apollo. On January 11, 1996, the Company
acquired from an affiliate of Apollo the Shopping Centers for $72.5 million. New
Valley and pension plans sponsored by BGLS have invested in investment
partnerships managed by an affiliate of Apollo. Affiliates of Apollo own a
substantial amount of debt securities of BGLS and warrants to purchase common
stock of the Company. See Note 9 to the Company's Consolidated Financial
Statements.
On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made a $11 million loan (the "Loan") to Western Realty. The Loan, which
bears interest at the rate of 15% per annum and is due September 30, 1998, is
secured by a pledge of New Valley's shares of BML. Upon completion of the
transfer of Ducat Place II and the satisfaction of other conditions under the
LLC Agreement, the Loan and the accrued interest thereon will be converted into
a capital contribution by Apollo to Western Realty and the BML pledge released.
Western Realty will seek to make additional real estate and other
investments in Russia. New Valley and Apollo have agreed to invest, through
Western Realty or another entity, up to $25 million in the aggregate for the
potential development of a real estate project in Moscow. In addition, Western
Realty has agreed to invest $20 million for a 30% profits interest in a company
organized by BOL which will, among other things, acquire an interest in an
industrial site and manufacturing facility being constructed on the outskirts of
Moscow by a subsidiary of BOL.
The foregoing summary reflects all material terms of, and is qualified
in its entirety by, reference to the text of the LLC Agreement, a copy of which
is incorporated by reference as an exhibit to New Valley's Annual Report on Form
10-K for the year ended December 31, 1997 and is incorporated by reference
herein.
New Valley Realty Division. On January 10 and January 11, 1996, New
Valley acquired four commercial office buildings (the "Office Buildings") and
eight shopping centers (the "Shopping Centers"), respectively, for an aggregate
purchase price of $183.9 million, consisting of $23.9 million in cash and $160
million in non-recourse mortgage financing provided by the sellers. The Office
Buildings and Shopping Centers are being operated through New Valley's New
Valley Realty division.
The Office Buildings consist of two adjacent commercial office
buildings in Troy, Michigan and two adjacent commercial office buildings in
Bernards Township, New Jersey. New Valley acquired the Office Buildings in
Michigan from Bellemead of Michigan, Inc. ("Bellemead Michigan") and the Office
Buildings in New Jersey from Jared Associates, L.P. (each, a "Seller"), for an
aggregate purchase price of $111.4 million. Each Seller was an affiliate of
Bellemead
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Development Corporation, which was indirectly wholly-owned by The Chubb
Corporation. The purchase price was paid for the Office Buildings as follows:
(i) $23.5 million for the 700 Tower Drive property, located in Troy, Michigan;
(ii) $28.1 million for the 800 Tower Drive property, located in Troy, Michigan;
(iii) $48.3 million for the Westgate I property, located in Bernards Township,
New Jersey; and (iv) $11.4 million for the Westgate II property, located in
Bernards Township, New Jersey. The two Michigan buildings were constructed in
1987 and the two New Jersey buildings were constructed in 1991. The gross square
footage of the Office Buildings ranges from approximately 50,300 square feet to
approximately 244,000 square feet.
New Valley acquired a fee simple interest in each Office Building
(subject to certain rights of existing tenants), together with a fee simple
interest in the land underlying three of the Office Buildings and a 98-year
ground lease (the "Ground Lease") underlying one of the Office Buildings. Under
the Ground Lease, Bellemead Michigan, as lessor, is entitled to receive rental
payments of a fixed monthly amount and a specified portion of the income
received from the 700 Tower Drive property. Space in the Office Buildings is
leased to commercial tenants and, as of March 20, 1998, the Office Buildings
were fully occupied.
Concurrently with the acquisition of the Office Buildings, New Valley
engaged a property-management affiliate of Sellers that had previously managed
the Office Buildings to act as the managing agent and leasing agent for the
Office Buildings. The agreement for the New Jersey Office Buildings has a
fifteen-year term and the agreement for the Michigan Office Buildings expires
June 30, 1998, but the agreements may be terminated by either party on 60 days'
notice without cause or economic penalty. Effective November 1997, the
agreements were assigned to Gale & Wentworth, a national real estate company.
On January 11, 1996, New Valley acquired the Shopping Centers from
various limited partnerships (AP Century I., L.P., AP Century II, L.P., AP
Century III, L.P., AP Century IV, L.P., AP Century V, L.P., AP Century VI, L.P.,
AP Century VIII, L.P., and AP Century IX, L.P.) (each, a "Partnership") for an
aggregate purchase price of $72.5 million. Each Partnership is an affiliate of
Apollo. The Shopping Centers are located in Marathon and Royal Palm Beach,
Florida; Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukee, Oregon; Richland
and Marysville, Washington; and Charleston, West Virginia. New Valley acquired a
fee simple interest in each Shopping Center and the underlying land for each
property. Space in the Shopping Center is leased to a variety of commercial
tenants and, as of March 20, 1998, the aggregate occupancy of the Shopping
Centers was approximately 92%. The Shopping Centers were constructed at various
times during the period 1963-1988. The gross square footage of the Shopping
Centers ranges from approximately 108,500 square feet to approximately 222,500
square feet.
The purchase price paid for the Shopping Centers was as follows: (i)
$3.9 million for the Marathon Shopping Center property, located in Marathon,
Florida; (ii) $9.8 million for the Village Royale Plaza Shopping Center
property, located in Royal Palm Beach, Florida; (iii) $6.0 million for the
University Place property, located in Lincoln, Nebraska; (iv) $9.6 million for
the Coronado Shopping Center property, located in Santa Fe, New Mexico; (v) $7.3
million for the Holly Farm Shopping Center property, located in Milwaukee,
Oregon; (vi) $10.6 million for the Washington Plaza property, located in
Richland, Washington; (vii) $12.4 million for the Marysville Towne Center
property, located in Marysville, Washington; and (viii) $12.9 million for the
Kanawha Mall property, located in Charleston, West Virginia (the properties
described in clauses (i), (ii), (v), (vii) and (viii) are subject to an
underlying mortgage in favor of a single lender and are referred to collectively
as the "Properties"). See Notes 3 and 7 to New Valley's Consolidated Financial
Statements accompanying this report.
Concurrently with the acquisition of the Shopping Centers, New Valley
engaged a property-management firm, whose principals were the former minority
partners in the Partnerships, that had previously operated the Shopping Centers
to act as the managing agent
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and leasing agent for the Shopping Centers. Effective December 31, 1996, such
firm's engagement was terminated, and Kravco Company was engaged as managing
agent and leasing agent for the Kanawha Mall and Insignia Commercial Group, Inc.
as managing agent and leasing agent for the remaining Shopping Centers.
The acquisition of the Office Buildings was effected pursuant to a
purchase agreement dated January 10, 1996. The acquisition of the Shopping
Centers was effected pursuant to a purchase agreement dated January 11, 1996.
For information concerning other business relationships with affiliates of
Apollo, see "Western Realty". The foregoing summary reflects all material terms
of and is qualified in its entirety by reference to the purchase agreements,
copies of which are incorporated by reference as exhibits to New Valley's Annual
Report on Form 10-K for the year ended December 31, 1996, and are incorporated
by reference herein.
On November 10, 1997, New Valley sold its Marathon, Florida Shopping
Center for $5.4 million and recognized a gain of $1.3 million on the sale.
Thinking Machines Corporation. On January 11, 1996, Ladenburg Thalmann
Capital Corp., the merchant banking subsidiary of Ladenburg Group, in connection
with the First Amended Joint Plan of Reorganization (the "TMC Plan") of Thinking
Machines Corporation ("Thinking Machines") made a $10.6 million convertible
bridge loan (the "Loan") to TMCA Acquisition Corp. ("TMCA"). TMCA is an entity
formed to invest the Loan proceeds (net of certain expenses) in Thinking
Machines, currently a developer and marketer of data mining and knowledge
discovery software and, through 1996, of parallel software for high-end and
networked computer systems (discontinued in 1996).
On February 8, 1996, the date of confirmation of the TMC Plan, Thinking
Machines emerged from bankruptcy and merged with TMCA pursuant to the TMC Plan.
As a result of the merger, the Loan was converted into a controlling interest in
a partnership which held approximately 61% of the outstanding common stock of
Thinking Machines. Thinking Machines used the Loan proceeds to help fund its
advanced product development and marketing. In December 1997, New Valley
acquired for $3.15 million additional shares in Thinking Machines pursuant to a
rights offering by Thinking Machines to its existing shareholders which
increased its ownership to approximately 73% of the outstanding Thinking
Machines shares.
Thinking Machines designs, develops, markets and supports software
offering prediction-based management solutions under the name LoyaltyStream(TM)
for businesses such as financial services and telecommunications providers to
help reduce customer attrition, control costs, more effectively cross-sell or
bundle products or services and manage risks. Incorporated in LoyaltyStream is
Darwin(R), a data mining software tool set with which a customer can analyze
vast amounts of its pre-existing data as well as external demographics data to
predict behavior or outcomes, and then send this information through systems
integration to those divisions of the customer which can use it to more
effectively anticipate and solve business problems. To date, no material
revenues have been recognized by Thinking Machines with respect to the sale or
licensing of such software and services.
During the fourth quarter of 1996, Thinking Machines adopted a plan to
terminate its parallel processing computer sales and service business. As a
result, Thinking Machines wrote-down certain assets, principally inventory,
related to these operations to their net realizable value by $6.1 million.
Thinking Machines sold its parallel processing software business on November 19,
1996 for $4.3 million and sold its remaining parallel processing service
business in April 1997 for $2.4 million in cash and a percentage of certain
future operating profits.
Miscellaneous Investments. At December 31, 1997, New Valley owned 50.1%
of the outstanding shares of PC411, Inc. ("PC411"), a development stage company
which completed an
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initial public offering in May 1997 with net proceeds of $5.9 million. PC411,
which provides on-line electronic directory assistance to personal computer
users, is currently offering a limited version of the PC411 service over the
Internet. PC411's long-term strategy is to position itself as an
Internet/intranet (private server based networks) information publishing and
distribution company.
In addition, as of December 31, 1997, New Valley's long-term
investments consisted primarily of investments in limited partnerships of $27.2
million. See Note 8 to New Valley's Consolidated Financial Statements
accompanying this report.
New Valley may acquire additional operating businesses through merger,
purchase of assets, stock acquisition or other means, or seek to acquire control
of operating companies through one of such means. There can be no assurance that
New Valley will be successful in targeting or consummating any such
acquisitions.
EMPLOYEES
At December 31, 1997, the Company and its subsidiaries had
approximately 1,556 full-time employees, of whom approximately 476 were employed
by Liggett and approximately 1,063 were employed by Liggett-Ducat. Approximately
16% of the Company's (including its subsidiaries) employees are hourly employees
and are represented by unions. The Company and its subsidiaries have not
experienced any significant work stoppages since 1977, and the Company believes
that relations with its employees and their unions are satisfactory.
ITEM 2. PROPERTIES
The Company's and BGLS' principal executive offices are located in
Miami, Florida. The Company subleases 12,356 square feet of office space from an
unaffiliated company in an office building in Miami, which it shares with BGLS
and New Valley and various of their subsidiaries. New Valley has entered into an
expense-sharing arrangement for use of such office space. The sublease expires
on February 28, 1999.
Substantially all of Liggett's tobacco manufacturing facilities,
consisting principally of factories, distribution and storage facilities, are
located in or near Durham, North Carolina. Such facilities are both owned and
leased. As of December 31, 1997, the principal properties owned or leased by
Liggett are as follows:
<TABLE>
<CAPTION>
OWNED APPROXIMATE
OR TOTAL SQUARE
TYPE LOCATION LEASED FOOTAGE
---- -------- ------ -------
<S> <C> <C> <C>
Office and
Manufacturing Complex Durham, NC Owned 932,000
Warehouse Durham, NC Owned 203,000
Storage Facilities Danville, VA Owned 578,000
Distribution Center Durham, NC Leased 260,000
</TABLE>
Liggett's Durham, North Carolina complex consists of 10 major
structures over approximately 17 acres. Included are Liggett's manufacturing
plant, research facility and corporate offices. Liggett's management believes
its property, plant and equipment are well maintained and in good condition and
that its existing facilities are sufficient to accommodate a substantial
increase in production.
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Liggett leases the Durham, North Carolina distribution center pursuant
to a lease which expires in May 1999. Liggett has an option to purchase the
leased property at any time during the term of the lease. Liggett utilizes
approximately 40% of the distribution center. Liggett also leases excess space
in its research facility to third parties.
On March 11, 1997, Liggett sold to Blue Devil Ventures, a North
Carolina limited liability partnership, certain surplus realty in Durham, North
Carolina, for a sale price of $2.2 million. The Company recognized a gain of
approximately $1.1 million on the sale.
Liggett-Ducat has a 49-year land lease on a site on the outskirts of
Moscow, Russia where Liggett-Ducat plans to build a new cigarette factory.
Liggett-Ducat utilizes the site for its existing cigarette factory in Moscow
pursuant to a Use Agreement with BML. See Item 1. "Business - Brooke (Overseas)
Ltd. - Sale of BrookeMil Ltd."
ITEM 3. LEGAL PROCEEDINGS
Reference is made to Note 16, incorporated herein by reference, to the
Company's Consolidated Financial Statements, which contain a general description
of certain legal proceedings to which the Company and/or BGLS or their
subsidiaries are a party and certain related matters. Reference is also made to
Exhibit 99.1, incorporated herein by reference, for additional information
regarding the pending material legal proceedings to which the Company, BGLS
and/or Liggett are party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 1997 no matter was submitted to the
Company's stockholders for their vote or approval, through the solicitation of
proxies or otherwise. Such information with respect to BGLS is omitted due to
the fact that BGLS meets the conditions set forth in General Instruction
(I)(1)(a) and (b) of Form 10-K and is therefore filing this report with the
reduced disclosure format.
EXECUTIVE OFFICERS OF THE REGISTRANTS
The table below, together with the accompanying text, present certain
information regarding all current executive officers of the Company and of BGLS
as of March 27, 1998. Each of the executive officers of the Company and of BGLS
serves until the election and qualification of such individual's successor or
until such individual's death, resignation or removal by the Board of Directors
of the respective company.
<TABLE>
<CAPTION>
YEAR INDIVIDUAL
BECAME AN
NAME AGE POSITION EXECUTIVE OFFICER
---- --- -------- -----------------
<S> <C> <C> <C>
Bennett S. LeBow 60 Chairman of the Board, 1990
President and Chief
Executive Officer of the
Company and of BGLS
Richard J. Lampen 44 Executive Vice President 1996
of the Company and
of BGLS
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
YEAR INDIVIDUAL
BECAME AN
NAME AGE POSITION EXECUTIVE OFFICER
---- --- -------- -----------------
<S> <C> <C> <C>
Joselynn D. Van Siclen 57 Vice President, Chief 1996
Financial Officer and
Treasurer of the
Company and of BGLS
Marc N. Bell 37 Vice President, General 1998
Counsel and Secretary
of the Company and of
BGLS
Ronald S. Fulford 64 Chairman of the Board, 1996
President and Chief
Executive Officer of
Liggett
</TABLE>
BENNETT S. LEBOW has been the Chairman of the Board, President and
Chief Executive Officer of the Company, a New York Stock Exchange-listed holding
company, since June 1990, and has been a director of the Company since October
1986. Since November 1990, he has been Chairman of the Board, President and
Chief Executive Officer of BGLS, which directly or indirectly holds the
Company's equity interests in several private and public companies.
Mr. LeBow has been a director of Liggett since June 1990 and Chairman
of the Board of Liggett from July 1990 to May 1993. He served as one of three
interim Co-Chief Executive Officers from March 1993 to May 1993.
He has been Chairman of the Board of New Valley, in which the Company
holds an indirect voting interest of approximately 42%, since January 1988, and
Chief Executive Officer since November 1994. In November 1991, an involuntary
petition seeking an order for relief under Chapter 11 of Title 11 of the United
States Code was commenced against New Valley by certain of its bondholders. New
Valley emerged from bankruptcy reorganization proceedings in January 1995. He
has been Chairman of the Board, President and Chief Executive Officer of NV
Holdings since September 1994.
He was a director of MAI Systems Corporation ("MAI"), the Company's
former indirect majority-owned subsidiary, from September 1984 to October 1995,
Chairman of the Board from November 1990 to May 1995 and the Chief Executive
Officer from November 1990 to April 1993. In April 1993, MAI filed for
protection under Chapter 11 of Title 11 of the United States Code. In November
1993, MAI emerged from bankruptcy reorganization proceedings. MAI is engaged in
the development, sale and service of a variety of computer and software
products.
RICHARD J. LAMPEN has served as the Executive Vice President of the
Company and of BGLS since July 1996. Since October 1995, Mr. Lampen has been the
Executive Vice President of New Valley. From May 1992 to September 1995, Mr.
Lampen was a partner at Steel Hector & Davis, a law firm located in Miami,
Florida. From January 1991 to April 1992, Mr. Lampen was a Managing Director at
Salomon Brothers Inc, an investment bank, and was an employee at Salomon
Brothers Inc from 1986 to April 1992. Mr. Lampen is a director of New Valley,
Thinking Machines, PC411 and Spec's Music, Inc. Mr. Lampen has served as a
director of a number of other companies, including U.S. Can Corporation and The
International Bank of Miami, N.A., as well as a court-appointed independent
director of Trump Plaza Funding, Inc.
JOSELYNN D. VAN SICLEN has been Vice President, Chief Financial Officer
and Treasurer of the Company and of BGLS since May 1996, and currently holds
various positions with certain
18
<PAGE> 21
of BGLS' subsidiaries, including Vice President and Treasurer of Eve Holdings,
Inc., a wholly-owned subsidiary of Liggett, since April 1994 and May 1996,
respectively. Prior to May 1996, Ms. Van Siclen served as Director of Finance of
the Company and was employed in various accounting capacities for various
subsidiaries of the Company since 1992. Since before 1990 to November 1992, Ms.
Van Siclen was an audit manager for the accounting firm of Coopers & Lybrand
L.L.P.
MARC N. BELL has been the Vice President of the Company and of BGLS
since January 1998 and has served as General Counsel and Secretary of the
Company and of BGLS since May 1994. Since November 1994, Mr. Bell has served as
Associate General Counsel and Secretary of New Valley and since February 1998,
as Vice President. Prior to May 1994, Mr. Bell was with the law firm of
Zuckerman, Spaeder, Taylor & Evans, in Miami, Florida and from June 1991 to May
1993, with the law firm of Fischbein - Badillo - Wagner - Harding in New York,
New York.
RONALD S. FULFORD has served as Chairman of the Board, President and
Chief Executive Officer of Liggett since September 1996. Mr. Fulford has also
served as a consultant to the Company from March 1996 to March 1997. From June,
1986 until February 1996, Mr. Fulford served as Executive Chairman of Imperial
Tobacco ("Imperial"), the British tobacco unit of the British conglomerate
Hanson PLC ("Hanson"). Before Imperial, Mr. Fulford was chief executive of three
other Hanson companies: London Brick, British EverReady UK & South Africa and
United Gas Industries UK & Europe.
19
<PAGE> 22
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock, $.10 par value per share, is listed and
traded on the New York Stock Exchange ("NYSE") under the symbol "BGL". The high
and low sale prices for a share of the Company's common stock on the NYSE, as
reported by the NYSE, for each fiscal quarter of 1997 and 1996 were as follows
(in dollars):
<TABLE>
<CAPTION>
Year High Low
---- ---- ---
<S> <C> <C>
1997:
-----
Fourth Quarter $ 11 1/8 $ 5 5/8
Third Quarter 6 3/4 3 1/16
Second Quarter 5 1/4 3 1/2
First Quarter 5 3/8 4
1996:
-----
Fourth Quarter 5 3/4 4 1/4
Third Quarter 6 1/4 4 5/8
Second Quarter 8 7/8 5 5/8
First Quarter 10 1/8 7 3/4
</TABLE>
There is no public market for BGLS' common stock, $.01 par value per
share, as all of such common stock is held by the Company.
HOLDERS
At April 6, 1998, there were 280 holders of record of the Company's
common stock.
DIVIDENDS
During 1997 and 1996, the Company declared and paid regular quarterly
cash dividends of $.075 per share on its common stock. The declaration of future
cash dividends is within the discretion of the Board of Directors of the Company
and is subject to a variety of contingencies such as market conditions, earnings
and the financial condition of the Company as well as the availability of cash.
The payment of dividends and other distributions to the Company by BGLS are
subject to the Indenture for BGLS' Senior Secured Notes. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Capital Resources and Liquidity".
20
<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1) .................................... $ 389,615 $ 460,356 $ 461,459 $ 479,343 $ 493,041
Loss from continuing operations ................ (51,810) (64,918) (45,344) (17,991) (69,228)
Income from discontinued operations(2) ......... 1,925 2,385 21,229 174,683 --
(Loss) income from extraordinary items(4) ...... -- -- (9,810) (46,597) 153,741
Net (loss) income .............................. (49,885) (62,533) (33,925) 110,095 106,780
Basic/diluted loss from continuing
operations per share(3) ..................... (2.85) (3.41) (1.56) (1.02) (4.19)
Basic/diluted income from discontinued
operations per share ........................ 0.11 0.13 1.16 9.92 3.45
Basic/diluted (loss) income from
extraordinary items per share ............... -- -- (0.54) (2.65) 8.55
Basic/diluted net (loss) income
per share(3) ................................ (2.74) (3.28) (0.94) 6.25 5.60
Cash distributions declared per common
share ....................................... 0.30 0.30 0.30 -- --
BALANCE SHEET DATA:
Current assets ................................. $ 67,985 $ 80,552 $ 96,615 $ 87,504 $ 114,411
Total assets ................................... 126,460 177,677 225,620 229,425 164,819
Current liabilities ............................ 140,504 204,463 119,177 144,351 220,207
Notes payable, long-term debt and
other obligations, less current portion ..... 399,835 378,243 406,744 405,798 389,671
Noncurrent employee benefits, deferred
credits and other long-term liabilities ..... 74,518 49,960 55,803 54,128 69,623
Stockholders' equity (deficit) ................. (488,397) (454,989) (356,104) (374,852) (514,682)
</TABLE>
- ------------------------
(1) Revenues include federal excise taxes of $87,683, $112,218, $123,420,
$131,877 and $127,341, respectively.
(2) See Note 5 to the Company's Consolidated Financial Statements.
(3) Per share computations include the impact of New Valley's repurchase of
Class A Preferred Shares in 1996 and 1995.
(4) In 1995 and 1994, extraordinary items represent loss resulting from the
early extinguishment of debt. In 1993, such items represent gain
resulting from the early extinguishment of debt as well as gain on
foreclosure and gain on reorganization of MAI Systems, Inc.
21
<PAGE> 24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
INTRODUCTION
The following discussion provides an assessment of the results of
operations, capital resources and liquidity of the Company and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this report. The operating results of the periods
presented were not significantly affected by inflation. The consolidated
financial statements include the accounts of BGLS, Liggett, BOL, NV Holdings,
other less significant subsidiaries and, as of December 29, 1995, Liggett-Ducat.
The Company holds an equity interest in New Valley. At December 31,
1997, the Company accounts for its share of earnings based on its ownership of
New Valley Common Shares (42%), Class B Preferred Shares (9%) and Class A
Preferred Shares (58%). The Common Shares are accounted for pursuant to the
equity method; the Class A Preferred Shares and the Class B Preferred Shares are
accounted for under Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity Securities".
On January 31, 1997, BOL sold its interest in BML, a real estate
development company doing business in Russia, to New Valley. See Item 1.
"Business - Brooke (Overseas) Ltd. - Sale of BrookeMil Ltd." and Note 4 to the
Company's Consolidated Financial Statements.
For purposes of this discussion and other consolidated financial
reporting, the Company's significant business segment is tobacco for the year
ended December 31, 1997 and tobacco and real estate for the years ended December
31, 1996 and 1995.
RECENT DEVELOPMENTS
THE COMPANY
Standstill Agreement. On March 5, 1998, BGLS entered into an agreement
(the "Standstill Agreement") with AIF II, L.P. and an affiliated investment
manager on behalf of a managed account (the "Apollo Holders"), who together hold
approximately 41.8% of the $232,864 principal amount of BGLS' 15.75% Senior
Secured Notes due 2001 (the "BGLS Notes")
Pursuant to the terms of the Standstill Agreement, the Apollo Holders
agreed to defer the payment of interest on the BGLS Notes held by them,
commencing with the interest payment that was due July 31, 1997, which they had
previously agreed to defer, through the interest payment due on July 31, 2000.
The deferred interest payments will be payable at final maturity of the BGLS
Notes on January 31, 2001 or upon an Event of Default under the Indenture for
the BGLS Notes. In connection with the Standstill Agreement, the Company issued
to the Apollo Holders a five-year warrant to purchase 2,000,000 shares of the
Company's common stock at a price of $5.00 per share. The Apollo Holders were
also issued a second warrant expiring October 31, 2004 to purchase an additional
2,150,000 shares of the Company's common stock at a price of $0.10 per share.
The second warrant will become exercisable on October 31, 1999 and the Company
will have the right under certain conditions prior to that date to substitute
for that warrant a new warrant for 9.9% of the common stock of Liggett.
22
<PAGE> 25
On February 6, 1998, the holder of 41.9% of the BGLS Notes, who had
previously been a party to the Standstill Agreement, was paid its pro-rata share
of the July 31, 1997 interest payment on the BGLS Notes. On March 2, 1998, BGLS
made the interest payment due on January 31, 1998 to all holders of the BGLS
Notes other than the Apollo Holders.
Sale of Stock. On January 16, 1998, the Company entered into a Stock
Purchase Agreement with High River Limited Partnership ("High River") in which
High River purchased 1,500,000 shares of the Company's common stock for $9,000.
LIGGETT
Notes Restructuring. On January 30, 1998, with the consent of the
required majority of the holders of the Liggett 11.50% Series B and 19.75%
Series C Senior Secured Notes due 1999 (the "Liggett Notes"), Liggett entered
into various amendments to the Indenture governing the Liggett Notes which
provided, among other things, for a deferral of the February 1, 1998 mandatory
redemption payment of $37,500 to the date of final maturity of the Liggett Notes
on February 1, 1999. In connection with the deferral, the Company agreed to
issue 482,970 shares of the Company's common stock to the holders of record on
January 15, 1998 of the Liggett Notes. The Indenture under which the Liggett
Notes are outstanding was also amended to prohibit, with limited exceptions,
payments of dividends and incurrence of new debt by Liggett and to tighten
restrictions on the disposition of proceeds of asset sales. The Company and BGLS
also agreed to guarantee the payment by Liggett of the August 1, 1998 interest
payment on the Liggett Notes.
NEW VALLEY
Western Realty. In February 1998, New Valley and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty to make real
estate and other investments in Russia. In connection with the formation of
Western Realty, New Valley agreed, among other things, to contribute the real
estate assets of BrookeMil Ltd. ("BML") to Western Realty and Apollo agreed to
contribute up to $58,000. Western Realty will seek to make additional real
estate and other investments in Russia. New Valley and Apollo have agreed to
invest, through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In addition,
Western Realty has agreed to acquire for $20,000 a 30% profits interest in a
company organized by BOL which will, among other things, acquire an interest in
an industrial site and manufacturing facility being constructed on the outskirts
of Moscow by a subsidiary of BOL.
Investment in RJR Nabisco. At December 31, 1997, New Valley held
612,650 shares of common stock of RJR Nabisco Holdings corp. ("RJR Nabisco")
with a market value of $22,898 (cost of $18,780). New Valley expensed $100 in
1997, $11,724 in 1996 and $3,879 in 1995 relating to the RJR Nabisco investment.
In June 1996, various agreements between High River, the Company and
New Valley were terminated by mutual consent. Pursuant to these agreements the
parties had agreed to take certain actions during late 1995 and throughout 1996
designed to cause RJR Nabisco to effectuate a spinoff of its food business,
Nabisco Holdings Corp. The terminations of the High River agreements left in
effect for one year certain provisions concerning payments to be made to High
River in the event New Valley achieved a profit (after deducting certain
expenses) on the sale of the shares of RJR Nabisco common stock which were held
by it or they were valued at the end of such year at higher than their purchase
price or in the event the Company or its affiliates engaged in certain
transactions with RJR Nabisco. Based on the market price of RJR Nabisco common
stock, no amounts were payable by New Valley under these agreements.
23
<PAGE> 26
Pursuant to a December 27, 1995 agreement between the Company and New
Valley whereby New Valley agreed to reimburse the Company and its subsidiaries
for certain reasonable out-of-pocket expenses in connection with RJR Nabisco,
New Valley paid the Company and its subsidiaries a total of $17 and $2,370 in
1997 and 1996.
On February 29, 1996, New Valley entered into a total return equity
swap transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to 750,000
shares of RJR Nabisco common stock as of August 13, 1996). New Valley entered
into the Swap in order to be able to participate in any increase or decrease in
the value of the RJR Nabisco common stock during the term of the Swap. The
transaction was for a period of up to six months, unless extended by the
parties, subject to earlier termination at the election of New Valley, and
provided for New Valley to make a payment to the Counterparty of $1,537 upon
commencement of the Swap. At the termination of the transaction, if the price of
the RJR Nabisco common stock during a specified period prior to such date (the
"Final Price") exceeded $34.42, the price of the RJR Nabisco common stock during
a specified period following the commencement of the Swap (the "Initial Price"),
the Counterparty was required to pay New Valley an amount in cash equal to the
amount of such appreciation with respect to the shares of RJR Nabisco common
stock subject to the Swap plus the value of any dividends with a record date
occurring during the Swap period. If the Final Price was less than the Initial
Price, then New Valley was required to pay the Counterparty at the termination
of the transaction an amount in cash equal to the amount of such decline with
respect to the shares of RJR Nabisco common stock subject to the Swap, offset by
the value of any dividends, provided that, with respect to approximately 225,000
shares of RJR Nabisco common stock, New Valley was not required to pay any
amount in excess of an approximate 25% decline in the value of the shares. The
potential obligations of the Counterparty under the Swap were guaranteed by the
Counterparty's parent, a large foreign bank, and New Valley pledged certain
collateral in respect of its potential obligations under the Swap and agreed to
pledge additional collateral under certain conditions. New Valley marked its
obligation with respect to the Swap to fair value with unrealized gains or
losses included in income. During the third quarter of 1997, the Swap was
terminated in connection with New Valley's reduction of its holdings of RJR
Nabisco common stock, and New Valley recognized a loss on the Swap of $7,305 for
the year ended December 31, 1996.
BOL
Sale of BML. 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 was paid during 1997. The Company recognized a gain of
approximately $21,300 on the sale in 1997. See Note 4 to the Company's
Consolidated Financial Statements.
YEAR 2000 COSTS
The Company has evaluated the costs to implement century date change
compliant systems conversions and is in the process of executing a planned
conversion of its systems prior to the year 2000. Although such costs may be a
factor in describing changes in operating profit for one or more of the
Company's business segments in any given reporting period, the Company currently
does not believe that the anticipated costs of year 2000 systems conversions
will have a material impact on its future consolidated results of operations or
cash flows. However, due to the interdependent nature of computer systems, the
Company may be adversely impacted in the year 2000 depending on whether it or
entities not affiliated with the Company have addressed this issue successfully.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130
24
<PAGE> 27
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
No. 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. For the Company,
other components of stockholders' equity include such items as minimum pension
liability adjustments, unearned compensation expense related to stock options
and the Company's proportionate interest in New Valley's capital transactions.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. The Company does not anticipate that
implementation of SFAS No. 130 will have a material impact on the consolidated
financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. SFAS No. 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 No. 131 also requires disclosure of
certain "second level" information by geographic area and for products/services.
SFAS No. 131 also makes a number of changes to existing disclosure requirements.
Management believes that the adoption of this pronouncement will not have a
material effect on the Company's financial statement disclosures. SFAS No. 131
is effective for fiscal years beginning after December 15, 1997, with earlier
application encouraged.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," was issued which revises required
disclosures about pensions and postretirement benefit plans. SFAS No. 132 is
effective for the Company for the year ended 1998. The Company has not yet
determined the impact of its implementation.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Pricing Activity. On March 7, 1997, R. J. Reynolds Tobacco Company
("RJR") initiated a list price increase on all brands of $.40 per carton
(approximately 4%). Brown & Williamson Tobacco Corporation ("B&W"), Lorillard
Tobacco Company ("Lorillard") and Liggett 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. On August 29, 1997, Philip Morris
announced a second price increase of $.70 per carton. During the first week of
September, all other major United States cigarette makers, including Liggett,
matched this increase.
On January 23, 1998, Philip Morris and RJR announced a list price
increase of $.25 per carton (approximately 2 1/2%). This action was matched by
Liggett and the other manufacturers during the following week. On April 3, 1998,
Philip Morris announced a second list price increase of $.50 per carton
(approximately 4.5%). This action, the fourth in 13 months, was matched by
Liggett and the other manufacturers.
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 December 31, 1997, there were approximately 250 individual suits, 40
purported class actions and 75 state, municipality and other third-party payor
health care reimbursement actions pending in the United States in which Liggett
is a named defendant. As new cases are commenced, the costs associated with
defending such cases and the risks attendant to the inherent unpredictability of
litigation continue to increase. Recently, there have been a number of
25
<PAGE> 28
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 decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
including the commencement and certification of class actions and the
commencement of Medicaid reimbursement suits by various states' Attorneys
General. These developments generally receive widespread media attention. The
Company is not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation, but it
is possible that Company's financial position, results of operations and cash
flows could be materially adversely affected by an ultimate unfavorable outcome
in any of such pending litigation. (See Item 3. "Legal Proceedings" and Note 16
to the Company's Consolidated Financial Statements for a description of
legislation, regulation and litigation.)
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, 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, RICO and antitrust statutes. In
many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including disgorgement of profits and punitive damages.
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 or repose, equitable defenses such as
"unclean hands" and lack of benefit, failure to state a claim and federal
preemption.
The claims asserted in the health care cost recovery actions vary. In
most of these cases, plaintiffs assert the equitable claim that the tobacco
industry was "unjustly enriched" by plaintiffs' payment of health care costs
allegedly attributable to smoking and seek reimbursement of those costs. Other
claims made by some but not all plaintiffs include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of express
and implied warranty, violation of a voluntary undertaking or special duty,
fraud, negligent misrepresentation, conspiracy, public nuisance, claims under
state and federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under the RICO.
Settlements. In March 1996, Liggett and the Company entered into an
agreement to settle the Castano class action tobacco litigation and 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 (the "March 1996 Settlements"). Liggett and the Company, while
neither consenting to FDA jurisdiction nor waiving their objections thereto,
agreed to withdraw their objections and opposition to the proposed FDA
regulations and to phase in compliance with certain of the proposed interim FDA
regulations.
Under the Castano settlement agreement, upon final court approval of
the settlement, the Castano class would be entitled to receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, and a $5,000 payment from Liggett if
the Company or Liggett fails 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. (For additional information
26
<PAGE> 29
concerning the Fifth Circuit's decision, see Note 16 to the Company's
Consolidated Financial Statements.) On September 6, 1996, the Castano plaintiffs
withdrew the motion for approval of the Castano settlement.
On March 14, 1996, the Company, the Castano Plaintiffs Legal Committee
and the Castano plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending nine months from the date
of Final Approval (if granted) of the Castano settlement or, if earlier, the
completion by the Company or Liggett of a combination with any defendant in
Castano, except Philip Morris, the Castano plaintiffs and their counsel agree
not to enter into any more favorable settlement agreement with any Castano
defendant which would reduce the terms of the Castano settlement agreement. If
the Castano plaintiffs or their counsel enter into any such settlement during
this period, they shall pay the Company $250,000 within thirty days of the more
favorable agreement and offer the Company and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the Castano settlement agreement has not been earlier terminated
by the Company in accordance with its terms, the Company and its affiliates will
not enter into any business transaction with any third party which would cause
the termination of the Castano settlement agreement. If the Company or its
affiliates enter into any such transaction, then the Castano plaintiffs will be
entitled to receive $250,000 within thirty days from the transacting party.
Under the Attorneys General settlement, the five states would share an
initial payment by Liggett of $5,000 ($1,000 of which was paid on March 22,
1996, with the balance payable over nine years and indexed and adjusted for
inflation), 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.
In March 1997, Liggett and 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, during 1997, settlements were
reached with four more states through their respective Attorneys General
(collectively, the "March 1997 Settlements"). The settlements cover all
smoking-related claims, including both addiction-based and tobacco injury claims
against the Company and Liggett brought by the states and, upon court approval,
the nationwide class. On March 12, 1998, the Company and Liggett entered into
additional settlements with the Attorneys General of 14 states, the District of
Columbia and the U. S. Virgin Islands (the "March 1998 Settlements") and, on
March 26, 1998, the Company and Liggett settled with the Attorney General of
Georgia.
As mentioned above, in March 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
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<PAGE> 30
court vacated its preliminary certification of the settlement class, which
decision is currently on appeal.
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. (For additional
information concerning the Fletcher action, see Note 16 to the Company's
Consolidated Financial Statements.)
Under the March 1998 Settlements, Liggett is required to pay each of
the 14 settling states and territories their relative share (based on the
Medicaid population of each state over the total Medicaid population of the
United States) of between 27.5% and 30% of Liggett's pre-tax income each year
for 25 years, with a minimum payment guarantee of $1,000 per state over the
first nine years of the agreement. The annual percentage is subject to increase,
pro rata from 27.5% up to 30%, depending on the number of additional states
joining the settlement. Pursuant to the "most favored nation" provisions under
the March 1996 Settlements and the March 1997 Settlements, each of the states
settling under those settlements could benefit from the economic terms of the
March 1998 Settlements.
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. At December 31, 1997, in connection with the March 1998 Settlements,
the Company accrued $16,421 for the present value of the fixed payments under
the March 1998 Settlements. No additional amounts have been accrued with respect
to the 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 16
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. (For additional information concerning the proposed
resolution, see Note 16 of the Company's Consolidated Financial Statements.) The
proposals are currently being reviewed by the White House, Congress and various
public interest groups. Separately, the other tobacco companies negotiated
settlements of the Attorneys General health care cost recovery actions in
Mississippi, Florida and Texas. 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.
In a speech on September 17, 1997, President Clinton called for federal
legislation that, among other things, would raise cigarette prices by up to
$1.50 per pack. Since then, several bills have been introduced in the Senate
that purport to propose legislation along these lines. Management is 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.
28
<PAGE> 31
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Revenues Operating Income
-------- ----------------
Year Ended December 31, Year Ended December 31,
----------------------- -----------------------
1997 1996 1995 1997 1996 1995
-------- -------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Liggett $312,268 $401,062 $455,666 $ 3,688 $ 6,753 $ 24,619
Liggett-Ducat 77,115 54,160 8,642 (6,825)
Other 232 5,134 5,793 (4,301) (3,855) (16,559)
-------- -------- -------- ------- ------- --------
Total $389,615 $460,356 $461,459 $ 8,029 $(3,927) $ 8,060
======== ======== ======== ======= ======= ========
</TABLE>
1997 compared to 1996
Revenues. Consolidated revenues were $389,615 for the year ended
December 31, 1997 compared to $460,356 for the year ended December 31, 1996, a
decrease of $70,741 primarily due to a decline in sales of $88,794 at Liggett
offset by an increase in tobacco revenues at Liggett-Ducat of $22,955. Revenues
in 1996 also included real estate rental income of $2,675 and sales of
microfiche products of $2,459.
Net sales at Liggett decreased in total by 22.1% ($88,794) due
primarily to a decline in unit sales volume of 30.9% ($124,029) partially offset
by price increases of $23,237 and improved product mix of $11,998 (see "Recent
Developments in the Cigarette Industry - Pricing Activity"). The decline in
Liggett's sales volume was due to certain competitors' continuing leveraged
rebate programs tied to their products and increased promotional activity by
certain other manufacturers. In the premium segment, revenues declined in 1997
by 16.4% ($20,158) to $102,440 as a result of a 21.4% decline in unit sales
volume of $26,184 which was partially offset by price increases of $6,026. In
the discount segment, revenues declined in 1997 by 24.6% ($68,636) to $209,828
due to a 33.8% decline in unit sales volume of $85,846 which was partially
offset by price increases of $17,210. In 1997, fixed manufacturing costs on a
basis comparable to 1996 were $1,428 lower although costs per thousand units
increased $0.56 per thousand due to higher fixed costs per unit.
Net sales at Liggett-Ducat increased 42.8% ($22,955) to $77,115 over
1996 due primarily to higher unit sales volume ($13,211), price increases
($5,087) and the effect of excise tax increases ($4,667).
Gross Profit. Consolidated gross profit of $187,494 for the year ended
December 31, 1997 decreased $29,529 from gross profit of $217,023 for the same
period in 1996, reflecting a decrease in gross profit at Liggett of $40,305
offset by an increase at Liggett-Ducat of $11,720 for the year ended December
31, 1997 compared to the same period in the prior year. The 1997 decline in
consolidated gross profit was due primarily to the decline in unit sales volume
discussed above. In 1997, Liggett's premium and discount brands contributed
33.8% and 58.5%, respectively, to the Company's gross profit while Liggett-Ducat
contributed 7.22%. The improved performance at Liggett-Ducat during 1997 is due
to lower tobacco and material prices resulting from purchases in higher volume
($6,600) and the effect of price increases ($5,500). In 1996, Liggett's premium
and discount brands contributed 34.4% and 63.9%, respectively, to the Company's
gross margin and Liggett-Ducat and BML contributed .7%. As a percent of revenues
(excluding federal excise taxes), gross profit at Liggett increased to 73.0% for
1997 compared to 72.0% for 1996 with gross profit for the premium segment at
77.1% both in 1997 and 1996 and gross profit for the discount segment at 70.8%
and 69.4% in 1997 and 1996, respectively. This
29
<PAGE> 32
increase is the result of the March and September 1997 list price increases and
improved production variances. These increases were partially offset by
increased tobacco costs at Liggett due to a reduction in the average discount
available to Liggett from leaf tobacco dealers on tobacco purchased under prior
years' purchase commitments. Gross profit margin was further reduced by
restructuring charges of $407 in cost of sales in 1997. As a percent of revenues
(excluding Russian excise taxes), gross profit at Liggett-Ducat increased to
17.0% for 1997 compared to 3.0% in 1996.
Expenses. Consolidated operating, selling, general and administrative
expenses were $179,465 for the year ended December 31, 1997 compared to $220,950
for the same period for the prior year, a decrease of $41,485. The decrease was
due primarily to Liggett's decrease in unit sales volume with corresponding
reductions in spending on promotional programs and marketing programs of $43,657
as well as reductions in administrative costs of approximately $7,000 over the
prior year. Such reductions were somewhat offset by increases in legal expenses
of $19,368, which includes the legal settlement discussed above of $16,421 and
also reflects, in part, the end of joint defense arrangements. (Refer to Note 16
of Company's Consolidated Financial Statements.) Expenses at BOL also declined
approximately $4,700 primarily due to workforce reductions at Liggett-Ducat in
late 1996 and the sale of BML in January of 1997.
Other Income (Expense). Consolidated interest expense was $61,778 for
the year ended December 31, 1997 compared to $60,556 for the same period for the
prior year. The increase of $1,222 relates to additional interest expense
incurred as a result of deferred payments during negotiations with BGLS
Noteholders (see "Capital Resources and Liquidity"). Equity in loss of affiliate
in 1997 and 1996 of $27,035 and $7,211, respectively, represents the Company's
proportionate share of losses from continuing operations at New Valley and the
decline in value of the New Valley Class A Preferred Shares. This is partially
offset by discontinued operations in which the Company reflected its portion of
New Valley's income from discontinued operations which was $1,925 in 1997 and
$2,385 in 1996 reflecting the Company's proportionate interest in the
discontinued operations of Thinking Machines, a subsidiary of New Valley. Other
income also includes the sale of assets, primarily the sale of the BML shares by
BOL to New Valley in 1997 and the sale of surplus realty at Liggett and the
assets of COM Products Inc. ("COM") in 1996.
Loss from Continuing Operations. The loss from continuing operations
for the year ended December 31, 1997 was $51,810 compared with a loss of $64,918
for the same period in the prior year. A tax provision of $1,123 in 1997 and
$1,402 in 1996 relates to foreign income taxes at the subsidiary level.
Other. At December 31, 1997, the Company and its consolidated group had
net operating loss carryforwards for tax purposes of approximately $125,000
which may be subject to certain restrictions and limitations and which will
generally expire in the years 2006 to 2017.
1996 compared to 1995
Revenues. Consolidated revenues were $460,356 for the year ended
December 31, 1996 compared to $461,459 for the year ended December 31, 1995, a
decrease of $1,103 primarily due to a decline in sales of $54,604 at Liggett
offset by an increase in tobacco revenues at Liggett-Ducat of $53,377. Results
of operations for Liggett-Ducat were not included in 1995 since consolidation
occurred as of December 29, 1995.
Net sales at Liggett decreased in 1996 12.0% ($54,604) from the prior
year, due primarily to a 17.9% decline in unit sales volume of $81,644,
partially offset by the effects of the April 1996 list price increase of $16,975
and improved product mix of $10,065. 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. Liggett
30
<PAGE> 33
experienced a significant increase in volume at the end of the fourth quarter of
1996, in part due to ongoing trade programs based on quarterly volume targets
for its customers and to consumer promotional programs consisting of coupons and
variable price reductions. In the premium segment, revenues declined in 1996 by
10.8% ($14,925) to $122,598 as a result of a 13.7% decline in unit sales volume
($18,893) which was partially offset by price increases of $3,968. In the
discount segment, revenues declined in 1996 by 12.5% ($39,679) to $278,464 as a
result of a 19.1% decline in unit sales volume ($52,640) which was partially
offset by price increases of $13,007. In 1996, fixed manufacturing costs on a
basis comparable to 1995 were $203 lower although costs per thousand units
increased $0.29 due to higher fixed costs per unit.
Liggett-Ducat (not included in the prior year's results) increased unit
sales volume over the prior year by 8.7% to approximately 11.4 billion units and
increased revenues by $9,832 driven by the expanding market in Russia.
Gross Profit. Consolidated gross profit of $217,023 for the year ended
December 31, 1996 decreased $28,249 from gross profit of $245,272 for the same
period in 1995, reflecting a decrease in gross profit at Liggett of $30,089 for
the year ended December 31, 1996 compared to the same period in the prior year.
The 1996 decline in consolidated gross profit was due primarily to the decline
in unit sales volume discussed above. In 1996, Liggett's premium and discount
brands contributed 34.4% and 63.9%, respectively, to the Company's gross profit
while Liggett-Ducat contributed 0.7% and BML 1.0%. This was somewhat offset by
gross margin at Liggett-Ducat of $4,036 which margins were not included in the
prior year's results. As a percent of revenues (excluding federal excise taxes),
Liggett's gross profit decreased to 72.0% for 1996 compared to 73.2% for 1995
with gross profit for the premium segment at 77.1% and 79.7% in 1996 and 1995,
respectively, and gross profit for the discount segment at 69.4% and 72.4% in
1996 and 1995, respectively. This decrease in gross profit in 1996 is the result
of increased tobacco costs due to reduced worldwide supply of tobacco, and a
reduction in the average discount available to Liggett from leaf tobacco dealers
on tobacco purchased under prior years' purchase commitments, partially offset
by the April 1996 list price increase. Gross profit for 1995 was also reduced by
an accrual of approximately $4,900 for the United States Department of
Agriculture ("USDA") domestic marketing assessment. See Note 16 to the Company's
Consolidated Financial Statements.
Expenses. Consolidated operating, selling, general and administrative
expenses were $220,950 for the year ended December 31, 1996 compared to $237,212
for the same period for the prior year, a decrease of $16,262. The decrease was
due primarily to Liggett's decrease in sales volume with corresponding
reductions in spending on promotional programs ($4,682) offset by charges for
restructuring of $3,428 for severance programs ($132 of which is included in
cost of sales). The anticipated savings of the restructuring related primarily
to reduced payroll and benefits expenses in future periods. Of the total
restructuring expense recorded during 1996, $1,416 was funded during 1996 and
$2,012 remained to be funded in subsequent years. In addition, corporate
expenses, primarily legal fees, decreased by approximately $4,000. In 1995,
expenses increased due to increased spending on trade and promotional programs
and the accrual of approximately $4,000 for the settlement of certain tobacco
litigations with the Attorneys General of certain states. See Note 16 to the
Company's Consolidated Financial Statements.
Other Income (Expense). Consolidated interest expense was $60,556 for
the year ended December 31, 1996 compared to $57,505 for the same period for the
prior year. The increase of $3,051 relates to interest expense at Liggett-Ducat
not reflected in the prior year's consolidation, increased interest accrued for
the USDA domestic marketing assessment expense at Liggett partially offset by
redemption of $7,000 of the Liggett Senior Secured Notes (the "Liggett Series B
Notes") and an increase in interest expense at corporate due to an increase in
outstanding indebtedness of approximately $9,000. Equity in loss of affiliate of
$7,211 in 1996 represents the Company's proportionate share of losses from
continuing operations at New Valley. This is partially offset by discontinued
operations in which the Company reflected its portion of New Valley's loss
31
<PAGE> 34
from discontinued operations ($1,591) and the gain on disposal ($3,976). In
1995, equity in earnings of affiliate was $678 with income from discontinued
operations of $2,860 and gains in discontinued operations of $18,369
attributable to New Valley. Other income in 1996 includes the sale of assets of
COM and the sale of surplus realty at Liggett as a result of which the Company
realized gains of $3,047 and $3,669, respectively.
Loss from Continuing Operations. The loss from continuing operations
for the year ended December 31, 1996 was $64,918 compared with a loss of $45,344
for the same period in the prior year. A tax provision of $1,402 in 1996 and
$342 in 1995 relates to foreign income taxes at the subsidiary level in 1996 and
state income taxes at the subsidiary level in 1995.
Other. At December 31, 1996, the Company and its consolidated group had
net operating loss carryforwards for tax purposes of approximately $114,000
which may be subject to certain restrictions and limitations and which will
generally expire in the years 2006 to 2009.
Discontinued Operations. Income from discontinued operations of $2,385
for the year ended December 31, 1996 and $21,229 for the prior year reflects the
Company's proportionate interest in the discontinued operations of Thinking
Machines, a subsidiary of New Valley, in 1996 and the redemption/sale of SkyBox
preferred and common stock and the sale of New Valley's message servicing
business in 1995.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents increased $2,813 and decreased $1,429 and
$906 for the twelve months ended December 31, 1997, 1996 and 1995, respectively.
Net cash used in operations in 1997 was $25,063 compared to cash used
in 1996 of $3,705 primarily due to decreases in trade payables, promotional
spending and taxes payable offset by decreasing trade receivables, decreased
inventories and increasing in corporate accruals for interest charges.
Net cash used in operations in 1996 of $3,705 was lower than cash used
in 1995 of $22,986, primarily due to the declining sales volume at Liggett
resulting in lower working capital requirements, decreasing trade receivables
and increases in accrual of promotional expense. This is compared to net cash
used in 1995 of $22,986, primarily the impact of non-cash adjustments relating
to discontinued operations and an increase in inventory levels. Such effects on
the uses of cash were offset by an increase in liabilities for various legal
settlements, debt issuance costs and unearned revenue.
Net cash provided by investing activities in 1997 of $36,327 was
principally due to the sale of BML by BOL for $55,000 on January 30, 1997 and
the sale of used equipment by Liggett offset by capital expenditures of $20,142
principally costs for construction and equipment by Liggett-Ducat for the new
cigarette factory in Russia. This is compared to net cash used in investing
activities in 1996 of $4,279 which was principally due to continuing capital
expenditures for real estate development in Russia of $29,800 by BML and
expenditures at Liggett of $4,300 for equipment modernization partially offset
by dividends received from New Valley on the Class A Preferred Shares held by
the Company and the proceeds from the sale of assets at both Liggett and the
Company.
Net cash provided by investing activities was $66,874 for the year
ended December 31, 1995. In the year ended December 31, 1995, cash was provided
through dividends from New Valley on the Class A Preferred Shares of $61,832,
the redemption of SkyBox preferred stock for $4,000 and the sale of the SkyBox
common stock for $9,282. These amounts were offset by
32
<PAGE> 35
capital expenditures, particularly for building improvements related to real
estate development by BML in Russia.
Net cash used in financing activities of $8,532 in 1997 was comprised
of repurchase of $7,500 principal amount of Liggett Notes, repayment of credit
facilities in Russia, repayments of Liggett's revolving credit facility (the
"Facility") and distributions on the Company's common stock partially offset by
proceeds from credit facilities in Russia and proceeds from the Facility at
Liggett.
Net cash provided by financing activities in 1996 was $6,680, primarily
due to bank loans for Russian real estate development, the sale by BGLS of
additional 15.75% Series A Senior Secured Notes Due 2001 (the "Series A Notes")
later exchanged for the 15.75% Series B Senior Secured Notes Due 2001 (the
"Series B Notes") and an increase in borrowings under Liggett's Facility. Cash
provided was offset by redemption of BGLS' 16.125% Senior Subordinated Reset
Notes Due 1997 (the "Reset Notes"), a decrease in the cash overdraft and
distributions to the Company's stockholders of $4,162.
Cash used in financing activities in 1995 was $44,794 reflecting the
redemption of BGLS' Series 1 Senior Secured Notes on June 12, 1995 in the amount
of $23,594, repayments and redemptions of Liggett's long-term debt of $7,983,
repayments under Liggett's revolver of $3,830, distributions by the Company of
$5,475 to stockholders and a decrease in cash overdraft of $594 partially offset
by proceeds from debt of $2,568.
Liggett. Liggett had a net capital deficiency of $192,857 as of
December 31, 1997, is highly leveraged and has substantial near-term service
requirements. Due to the many risks and uncertainties associated with the
cigarette industry, the impact of recent tobacco litigation settlements (see
"Recent Developments in the Cigarette Industry - Legislation and Litigation")
and increased tobacco costs, there can be no assurance that Liggett will be able
to meet its future earnings goals. Consequently, Liggett could be in violation
its debt covenants, including covenants limiting the maximum permitted adjusted
net worth and net working capital deficiencies, 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.
The Liggett Series B Notes ($150,000) and Liggett C Notes ($32,279)
issued in 1992 and in 1994, respectively, pay interest semiannually at an annual
rate of 11.5% and 19.75%, respectively. The Liggett Notes required mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Liggett Notes due
on February 1, 1999. The Liggett Notes are collateralized by substantially all
of the assets of Liggett, excluding accounts receivable and inventory. Eve is
guarantor for the Liggett Notes. The Liggett Notes may be redeemed, in whole or
in part, at a price equal to 100% of the principal amount, 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. At December 31, 1997, Liggett was in
compliance with all debt covenants under the Liggett Notes' Indenture.
On January 30, 1998, Liggett obtained the consents of the required
majority of the holders of the Liggett Notes to various amendments to the
Indenture governing the Liggett Notes. The amendments provide, among other
things, for a deferral of the February 1, 1998 mandatory redemption of $37,500
principal amount of the Liggett Notes to the date of final maturity, February 1,
1999. In addition, the amendments prohibit, with limited exceptions, payments of
dividends and incurrence of new debt by Liggett and tighten restrictions on the
disposition of proceeds of asset sales. The Company and BGLS also agreed to
guarantee the payment by Liggett of the August 1, 1998 interest payment on the
Liggett Notes. (Refer to Note 9 to the Company's Consolidated
33
<PAGE> 36
Financial Statements.) At maturity, the Liggett Notes will require a principal
payment of $144,891. Based on Liggett's results of operations for 1997, Liggett
does not anticipate it will be able to generate sufficient cash from operations
to make such payments.
Liggett also has a $40,000 revolving credit facility expiring March 8,
1999 (the "Facility"), under which $23,428 was outstanding at December 31, 1997.
On August 29, 1997, the Facility was amended to permit Liggett to borrow an
additional $6,000 which was used on that date in making the interest payment of
$9,700 due on August 1, 1997 to the holders of the Liggett Notes. BGLS
guaranteed the additional $6,000 advance under the Facility and collateralized
the guarantee with $6,000 in cash, deposited with Liggett's lender. At December
31, 1997, this amount is classified in other assets on the balance sheet.
Availability under the Facility was approximately $7,728 based on eligible
collateral at December 31, 1997. The Facility is collateralized by all
inventories and receivables of Liggett. Borrowings under the Facility, whose
interest is calculated at a rate equal to 1.5% above Philadelphia National
Bank's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate, bear a rate of 10% at December 31, 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, as amended on April
8, 1998, imposes requirements with respect to Liggett's adjusted net worth (not
to fall below a deficit of $195,000 as computed in accordance with the
agreement) and working capital (not to fall below a deficit of $17,000 as
computed in accordance with the agreement). At December 31, 1997, Liggett was in
compliance with all covenants under the Facility.
On May 14, 1996, Liggett sold certain surplus realty in Durham, North
Carolina to the County of Durham for a sale price of $4,300. A gain of
approximately $3,600 was recognized on this sale.
On March 11, 1997, Liggett sold certain surplus realty in Durham, North
Carolina to Blue Devil Ventures, a North Carolina limited liability partnership,
for a sale price of $2,200. A gain of approximately $1,600 was recognized on
this sale.
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.
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. (See
"Recent Development in the Cigarette Industry - Legislation, Regulation and
Litigation" and "--Settlements" above and Note 16 to the Company's Consolidated
Financial Statements.)
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.
34
<PAGE> 37
BGLS. At December 31, 1997, BGLS' long-term debt was approximately
$233,664.
On November 27, 1995, BGLS commenced an offer to exchange a total of
$232,864 principal amount of 15.75% Senior Secured Notes due January 31, 2001,
for all its outstanding 13.75% Series 2 Senior Secured Notes Due 1997 ("Series 2
Notes"), Reset Notes and 14.50% Subordinated Debentures Due 1998 ("Subordinated
Debentures"). The exchange ratio was $1,087.47 principal amount of new Series A
Notes for each $1,000 principal amount of Series 2 Notes exchanged, $1,132.28
principal amount of Series B Notes for each $1,000 principal amount of Reset
Notes exchanged and $1,000 principal amount of new Series B Notes for each
$1,000 principal amount of Subordinated Debentures exchanged. The new Series A
Notes and the new Series B Notes were identical except that the Series B Notes
were not subject to restrictions on transfer.
The exchange offer closed on January 30, 1996. All $91,179 of the
Series 2 Notes and $125,495 of the Subordinated Debentures were exchanged. In
addition, BGLS cancelled all of the Subordinated Debentures ($13,705) held by
the Company. Subordinated Debentures in the amount of $800 remained outstanding
and were paid at maturity on April 1, 1998. As part of the exchange offer,
substantially all of the covenants and events of default were eliminated
pertaining to the Subordinated Debentures.
Holders of Reset Notes did not exchange, and the Reset Notes were
redeemed on March 29, 1996 for a total amount of $5,785, including premium,
together with accrued interest of $452. On March 7, 1996, an additional $7,397
face amount of Series A Notes were sold for $6,300 including accrued interest
with the proceeds being used for the redemption of the Reset Notes.
Pursuant to a registered exchange offer, holders of the Series A Notes
exchanged all of the $107,373 outstanding principal amount for an equal
principal amount of Series B Notes. The exchange closed March 21, 1996. BGLS has
cancelled all the Series A Notes.
The new Series B Notes are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and NV
Holdings as well as a pledge of all of the New Valley securities held by BGLS
and NV Holdings. The BGLS Series B Notes Indenture contains certain covenants,
which among other things, limit the ability of BGLS to make distributions to the
Company to $6,000 per year ($12,000 if less than 50% of the Series B Notes
remain outstanding), limit additional indebtedness of BGLS to $10,000, limit
guarantees of subsidiary indebtedness by BGLS to $50,000, and restrict certain
transactions with affiliates that exceed $2,000 in any year subject to certain
exceptions which include payments to the Company not to exceed $6,500 per year
for permitted operating expenses, payment of the Chairman's salary and bonus and
certain other expenses, fees and payments. In addition, the Indenture contains
certain restrictions on the ability of the Chairman and certain of his
affiliates to enter into certain transactions with, and receive payments above
specified levels from, New Valley. Interest is payable at the rate of 15.75% per
annum on January 31 and July 31 of each year, except for the period ended July
31, 1996 when interest was payable at 13.75% from October 1, 1995 to January 30,
1996 and at 15.75% from January 31, 1996 through July 31, 1996.
The Company recorded an extraordinary charge of approximately $9,700
for the year ended December 31, 1995 relating to the exchanged debt securities
discussed above.
On March 5, 1998, BGLS entered into the Standstill Agreement whereby
the Apollo Holders agreed to the deferral of interest payments, commencing with
the interest payment due July 31, 1997 through the interest payment due July 31,
2000. (See "Recent Developments - Standstill Agreement".)
35
<PAGE> 38
BOL. On January 31, 1997, BOL sold its 99.1% interest in BML to New
Valley for $55,000. The purchase price paid was $21,500 in cash and a 9%
promissory note of $33,500, which was paid during 1997. (See Item 1. "Business -
Brooke (Overseas) Ltd. - Sale of BrookeMil Ltd.".)
In October 1995, Liggett-Ducat entered into a loan agreement with a
Russian bank to borrow up to $20,400 to fund real estate development. The
Company guaranteed the payment of the note. In December 1996, the loan was
assigned by Liggett-Ducat to BML which has pledged Ducat Place II, the second
phase of BML's Ducat Place real estate development, as collateral for the loan.
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. BML paid
the balance of the loan in full during the third quarter 1997.
Liggett-Ducat is building a new cigarette factory on the outskirts of
Moscow. The new factory, which will utilize Western cigarette making technology
and have a capacity of 30 billion units per year, will produce American and
international blend cigarettes, as well as traditional Russian cigarettes.
Western Realty has agreed to acquire for $20,000 a 30% profits interest in a
company organized by BOL which will, among other things, acquire an interest in
the manufacturing facility. (See "Recent Developments - New Valley".) In
addition, BOL has entered into equipment purchases of approximately $35,400, of
which $28,800 will be financed over five years beginning in 1998. The Company is
a guarantor of one of the purchases for which the remaining obligation is
approximately $7,000.
The Company. Prior to the 1995 exchange offer, the Company had
substantial near-term consolidated debt service requirements, with aggregate
required principal payments of $318,106 due in the years 1995 through 1998. As a
result of the 1995 exchange offer, the redemption of the Reset Notes in 1996 and
the sale of the BML shares to New Valley in January 1997 and the 1998 Liggett
restructuring, the Company has decreased its scheduled debt maturities to $6,427
due in the year 1998; approximately $5,000 of this debt relates to credit lines
established by Liggett-Ducat. Liggett has a payment at maturity on February 1,
1999 of approximately $145,000. The Company believes that it will continue to
meet its liquidity requirements through 1998, although the BGLS Notes Indenture
limits the amount of restricted payments BGLS is permitted to make to the
Company during the calendar year. At December 31, 1997, the remaining amount
available through December 31, 1998 in the Restricted Payment Basket related to
BGLS' payment of dividends to the Company (as defined by BGLS' Series B Notes
Indenture) is $11,086. Company expenditures (exclusive of Liggett and
Liggett-Ducat) in 1998 for current operations include debt service estimated at
$30,715, dividends on the Company's shares (currently at an annual rate of
approximately $6,100) and corporate expense. The Company anticipates funding
1998 current operations and long-term growth with the proceeds from public
and/or private debt and equity financing, management fees and other payments
from subsidiaries of approximately $3,600 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
36
<PAGE> 39
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
operations in Russia are affected by uncertainties in Russia which include,
among others, political or diplomatic developments, regional tensions, currency
repatriation restrictions, foreign exchange fluctuations, inflation, and an
undeveloped system of commercial laws and legislative reform relating to foreign
ownership in Russia. In addition, the Company has a high degree of leverage and
substantial near-term debt service requirements, as well as a net worth
deficiency and recent losses from continuing operations. The Indenture for BGLS'
Series B Notes provides for, among other things, the restriction of certain
affiliated transactions between the Company and its affiliates, as well as for
certain restrictions on the use of future distributions received from New
Valley. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. The Company does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and Notes thereto,
together with the report thereon of Coopers & Lybrand L.L.P. dated April 3,
1998, and quarterly financial results are set forth beginning on page F-1 of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
37
<PAGE> 40
PART III
ITEMS 10, 11, 12 AND 13.
The information called for by Items 10, 11, 12 and 13 with respect to
the Company will be contained in the Company's definitive Proxy Statement for
its 1998 annual meeting of stockholders, to be filed with the SEC not later than
120 days after the end of the Company's fiscal year covered by this report
pursuant to Regulation 14A under the Exchange Act, and incorporated herein by
reference.
Such information with respect to BGLS is omitted due to the fact that
BGLS meets the conditions set forth in General Instruction (I)(1)(a) and (b) of
Form 10-K and is therefore filing this report with the reduced disclosure
format.
38
<PAGE> 41
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) INDEX TO 1997 CONSOLIDATED FINANCIAL STATEMENTS:
The Company's Consolidated Financial Statements and the Notes thereto,
together with the report thereon of Coopers & Lybrand L.L.P. dated April 3,
1998, appears beginning on page F-1 of this report. Financial statement
schedules not included in this report have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or the Notes thereto.
(A)(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts ................. Page F-53
39
<PAGE> 42
(A)(3) EXHIBITS
(a) The following is a list of exhibits filed herewith as part of the report on
Form 10-K:
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
---------- --------------------------------------------------------------------
<S> <C>
* 2.1 Stock Purchase Agreement dated as of January 31, 1997 among
BrookeMil Ltd. ("BML"), Brooke (Overseas) Ltd. ("BOL"), BGLS Inc.
("BGLS") and New Valley Corporation ("New Valley") (incorporated
by reference to exhibit 2.1 in New Valley's Current Report on
Form 8-K dated January 31, 1997, Commission File No. 1-2493
(the "New Valley Form 8-K")).
* 3.1 Restated Certificate of Incorporation of Liggett Group Inc. (the
predecessor to Brooke Group Ltd. (the "Company"))
(incorporated by reference to the Company's Registration
Statement on Form S-1, Commission File No. 33-16868).
* 3.2 Certificate of Amendment of the Restated Certificate of
Incorporation of the Company (incorporated by reference to
the Company's Form 10-Q for the quarter ended June 30, 1990,
Commission File No. 1-5759).
* 3.3 Amended and Restated By-Laws of the Company,
effective December 5, 1995 (incorporated by
reference to the Company's current Report on Form
8-K dated December 5, 1995, Commission File No.
1-5759).
* 3.4 Certificate of Designations of Series A Junior Convertible
Participating PIK Preferred Stock, Series B Junior Convertible
Participating Reset Preferred Stock, Series C Junior Convertible
Participating Reset Preferred Stock and Series D Junior
Convertible Participating Reset Preferred Stock (incorporated
by reference to the Company's Form 10-Q for the quarter
ended September 30, 1990, Commission File No. 1-5759).
* 3.5 Certificate of Designation of Series E Junior
Convertible Participating Preferred Stock of the
Company (incorporated by reference to the Company's
Report on Form 8-K dated October 29, 1993).
* 3.6 Certificate of Designation of Series F Junior
Convertible Participating Preferred Stock of the
Company (incorporated by reference to the Company's
Report on Form 8-K dated October 29, 1993,
Commission File No. 1-5759).
* 3.7 Certificate of Designation of Series G Junior
Convertible Participating Preferred Stock of the
Company (incorporated by reference to the Company's
Form 10-K for the fiscal year ended 1993,
Commission File No. 1-5759).
</TABLE>
40
<PAGE> 43
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
----------- -------------------------------------------------------
<S> <C>
* 3.8 Certificate of Incorporation of BGLS
(incorporated by reference to exhibit 3.1 in BGLS'
Registration Statement on Form S-4 dated December
19, 1995, Commission File Number 33-80593).
* 3.9 By-Laws of BGLS (incorporated by reference to
exhibit 3.2 in BGLS' Registration Statement on Form
S-4 dated December 19, l995, Commission File Number
33-80593).
* 4.1 Indenture, dated as of January 1, 1996, between BGLS Inc.
("BGLS") and Fleet National Bank of Massachusetts ("Fleet"),
as Trustee, relating to the "Series A Notes" and the 15.75%
Series B Senior Secured Notes due 2001 (the "Series B
Notes"), including the form of Series A Note and the form of
Series B Note (the "Series A and Series B Indenture")
(incorporated by reference to exhibit 4.1 in BGLS'
Registration Statement on Form S-4 dated December 19, 1995,
Commission File No. 33-80593).
* 4.2 Pledge and Security Agreement, dated as of
January 1, 1996, between BGLS and Fleet, as
Trustee, under the Series A and Series B Indenture
(incorporated by reference to exhibit 4.2 in BGLS'
Registration Statement on Form S-4 dated December
19, 1995, Commission File No. 33-80593).
* 4.3 A/B Exchange and Registration Rights Agreement,
dated as of November 21, 1995, among the Company,
BGLS, AIF II L.P., Artemis America Partnership,
Tortoise Corp., and Mainstay High Yield Corporate
Bond Fund (incorporated by reference to exhibit 4.3
in BGLS' Registration Statement on Form S-4 dated
December 19, 1995, Commission File No. 33-80593).
* 4.4 Pledge and Security Agreement, dated as of
January 1, 1996, between New Valley Holdings, Inc.
and Fleet, as Trustee, under the Series A and
Series B Indenture (incorporated by reference to
exhibit 4.4 in BGLS' Registration Statement on Form
S-4 dated December 19, 1995, Commission File No.
33-80593).
* 4.5 Standstill Agreement and Consent, dated as of
August 28, 1997, among BGLS, AIF II, L.P., Artemis
America Partnership and Tortoise Corp.
(incorporated by reference to exhibit 99.2 in the
Company's Form 8-K dated August 29, 1997,
Commission No. 1-5759).
* 4.6 Standstill Agreement, dated as of March 3,
1998, among BGLS and AIF II, L.P. ("AIF II") and
Artemis America Partnership ("AAP" and
collectively, with AIF, the "Apollo Holders")
(incorporated by reference to exhibit 10.1 in the
Company's Form 8-K dated March 2, 1998, Commission
File No. 1-5759).
* 4.7 Limited Recourse Guarantee Agreement, dated as
of March 2, 1998, made by Brooke (Overseas) Ltd.
("BOL") for the benefit of the Apollo Holders
(incorporated by reference to exhibit 10.8 in the
Company's Form 8-K dated March 2, 1998, Commission
File No. 1-5759).
</TABLE>
41
<PAGE> 44
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- ----------------------------------------------------
<S> <C>
* 4.8 Pledge Agreement, dated as of March 2, 1998,
between BOL and AIF (incorporated by reference to
exhibit 10.9 in the Company's Form 8-K dated March
2, 1998, Commission File No. 1-5759).
* 4.9 Pledge Agreement, dated as of March 2, 1998,
between BOL and AAP (incorporated by reference to
exhibit 10.10 in the Company's Form 8-K dated March
2, 1998, Commission File No. 1-5759).
* 4.10 Indenture, dated April 1, 1988, between BGLS
and First Trust National Association ("First
Trust"), as Trustee, relating to the Subordinated
Debentures (the "14.5% Debenture Indenture")
(incorporated by reference to exhibit 4(ff) in the
Company's Form 10-Q for the quarter ended September
30, 1990, Commission File No. 1-5759).
* 4.11 First Supplemental Indenture, dated September
4, 1990, to the 14.5% Debenture Indenture, between
BGLS and First Trust, as Trustee (incorporated by
reference to exhibit 4(f) in the Company's Form
10-K for the year ended December 31, 1990,
Commission File No. 1-5759).
* 4.12 Second Supplemental Indenture, dated November 19, 1990,
to the 14.5% Debenture Indenture, between
BGLS and First Trust, as Trustee (incorporated by
reference to exhibit 4(g) in the Company's Form
10-K for the year ended December 31, 1990,
Commission File No. 1-5759).
* 4.13 Third Supplemental Indenture, dated November
19, 1990, to the 14.5% Debenture Indenture, between
BGLS and First Trust, as Trustee (incorporated by
reference to exhibit 4(i) in the Company's Form
10-K for the year ended December 31, 1990,
Commission File No. 1-5759).
* 4.14 Fourth Supplemental Indenture, dated October
22, 1993, to the 14.5% Debenture Indenture, between
BGLS and First Trust, as Trustee (incorporated by
reference to exhibit 4(y) in the Company's Form
10-Q for the quarter ended September 30, 1993,
Commission File No. 1-5759).
* 4.15 Fifth Supplemental Indenture, dated January 18, 1995,
to the 14.5% Debenture Indenture, between
BGLS and First Trust, as Trustee (incorporated by
reference to exhibit 4(e) in the Company's Form
10-K for the year ended December 31, 1994,
Commission File No. 1-5759).
* 4.16 Sixth Supplemental Indenture, dated as of
January 26, 1996, to the 14.5% Debenture Indenture,
between BGLS and First Trust, as Trustee
(incorporated by reference to exhibit 4.13 in BGLS'
Registration Statement on Form S-4 dated December
19, 1995, Commission File No. 33-80593).
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
----------- -----------------------------------------------------------------
<S> <C>
* 4.17 Indenture, dated February 14, 1992, among Liggett Group Inc.
("Liggett"), Eve Holdings Inc. ("Eve") and Bankers Trust
Company, as Trustee ("Bankers Trust"), including the Forms of
Series A Notes and Series B Notes and the Guaranty thereon
(the "Liggett Indenture") (incorporated by reference to exhibit
4(m) in the Company's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).
* 4.18 First Supplemental Indenture, dated January 26, 1994,
including the Form of Series C Variable
Rate Senior Secured Note and the Guaranty thereon
(incorporated by reference to exhibit 4.2 in
Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 4.19 Second Supplemental Indenture and Amendment to
Series B and Series C Senior Secured Notes, dated
as of January 30, 1998, between Liggett, Eve and
Bankers Trust (incorporated by reference to exhibit
99.2 in the Company's Form 8-K dated February 2,
1998, Commission File No. 1-5759).
* 4.20 Security Agreement, dated February 14, 1992,
among Liggett, Eve and Bankers Trust (the "Security
Agreement") (incorporated by reference to exhibit
4(n) in the Company's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).
* 4.21 Amendment No. 1 to the Security Agreement, dated January
26, 1994 (incorporated by reference to exhibit 4.4
in Liggett's Registration Statement on Form S-1,
Commission File
No. 33-75224).
* 4.22 Amendment No. 2 to Security Agreement, dated as of January 30,
1998, among Liggett, Eve and Bankers Trust (incorporated by
reference to exhibit 99.3 in the Company's Form 8-K dated February
2, 1998, Commission File No. 1-5759).
* 4.23 Deed of Trust and Assignment of Rents, Leases
and Leasehold Interests, dated February 14, 1992,
by Liggett to Bankers Trust relating to each of the
Virginia and North Carolina properties (the "Deed
of Trust") (incorporated by reference to exhibit
4(o) in the Company's Form 10-K for the year ended
December 31, 1991, Commission File No. 1-5759).
* 4.24 Amendment No. 1 to the Deed of Trust (North Carolina),
dated January 26, 1994 (incorporated by reference to exhibit
4.6 in Liggett's Registration Statement on Form S-1,
Commission File No. 33-75224).
* 4.25 Amendment No. 1 to the Deed of Trust (Virginia), dated
January 26, 1994 (incorporated by reference to exhibit 4.7 in
Liggett's Registration Statement on Form S-1, Commission File
No. 33-75224).
</TABLE>
43
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------------- -----------------------------------------------------
<S> <C>
* 4.26 Pledge Agreement, dated as of January 30, 1998,
among BOL and Bankers Trust (incorporated by
reference to exhibit 99.6 in the Company's Form 8-K
dated February 2, 1998, Commission
File No. 1-5759).
* 4.27 Loan and Security Agreement, dated as of March 8, 1994,
in the amount of $40,000,000 between
Liggett and Congress Financial Corporation
(incorporated by reference to exhibit 10(xx) in the
Company's Form 10-K for the year ended December 31,
1993, Commission File No. 1-5759).
* 4.28 First Amended Joint Chapter 11 Plan or Reorganization for
New Valley Corporation ("New Valley") dated September 27,
1994, Notice of Modification of the First Amended Joint
Chapter 11 Plan of Reorganization dated October 20, 1994 and
Plan Amendment dated October 28, 1994, as confirmed by
the United States Bankruptcy Court for the District of New
Jersey, Newark Division, on November 1, 1994 (incorporated by
reference to exhibit 2 in New Valley's Form 10-Q for the
quarter ended September 30, 1994, Commission File No. 1-2493).
* 4.29 Order Confirming First Amended Joint Chapter 11
Plan of Reorganization for New Valley entered by
the Bankruptcy Court on November 1, 1994
(incorporated by reference to exhibit 99(b) in New
Valley's Form 10-Q for the quarter ended September
30, 1994, Commission File No. 1-2493).
* 10.1 Corporate Services Agreement, dated as of June 29, 1990,
between the Company and Liggett (incorporated
by reference to exhibit 10.10 in Liggett's Registration
Statement on Form S-1, Commission File No. 33-47482).
* 10.2 Corporate Services Agreement, dated June 29, 1990,
between the Company and Liggett (incorporated
by reference to exhibit 10.11 in Liggett's
Registration Statement on Form S-1, Commission File
No. 33-47482).
* 10.3 Services Agreement, dated as of February 26, 1991, between
Brooke Management Inc. ("BMI") and Liggett (the "Liggett Services
Agreement") (incorporated by reference to exhibit 10.5 in BGLS'
Registration Statement on Form S-1, Commission File No. 33-93576).
* 10.4 First Amendment to Liggett Services Agreement,
dated as of November 30, 1993, between Liggett and
BMI (incorporated by reference to exhibit 10.6 of
BGLS' Registration Statement on Form S-1,
Commission File No. 33-93576).
* 10.5 Second Amendment to Liggett Services Agreement, dated
as of October 1, 1995, between BMI, the Company and
Liggett (incorporated by reference to exhibit 10(c)
in the Company's Form 10-Q for the quarter ended
September 30, 1995, Commission File No. 1-5759).
</TABLE>
44
<PAGE> 47
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------- ----------------------------------------------------
<S> <C>
* 10.6 Corporate Services Agreement, dated January 1,
1992, between BGLS and Liggett (the "Liggett
Services Agreement") (incorporated by reference to
exhibit 10.13 of Liggett's Registration Statement
on Form S-1, Commission File
No. 33-47482).
* 10.7 Employment Agreement, dated February 21, 1992,
between the Company and Bennett S. LeBow
(incorporated by reference to exhibit 10(xx) in the
Company's Form 10-K for the year ended December 31,
1991, Commission File No. 1-5759).
* 10.8 Tax-Sharing Agreement, dated June 29, 1990,
among the Company, Liggett and certain other
entities (incorporated by reference to exhibit
10.12 in Liggett's Registration Statement on Form
S-1, Commission File No. 33-47482).
* 10.9 Lease with respect to Liggett's distribution
center in Durham, North Carolina, including letter
agreement extending term of Lease (incorporated by
reference to exhibit 10.15 in Liggett's
Registration Statement on Form S-1, Commission File
No. 33- 47482).
* 10.10 Tax Indemnity Agreement, dated as of October 6, 1993,
among the Company, Liggett and certain
other entities (incorporated by reference to
exhibit 10.2 in SkyBox International Inc.'s Form
10-Q for the quarter ended September 30, 1993,
Commission File No. 0-22126).
* 10.11 Exchange Agreement, dated as of November 21, 1995,
among the Company, BGLS, AIF, Artemis Partnership,
Tortoise, Starfire Holding Corporation and
Mainstay (incorporated by reference to exhibit
10.13 in BGLS' Registration Statement on Form S-4
dated December 19, 1995, Commission File No.
33-80593).
* 10.12 Registration Rights Agreement, dated as of
January 1, 1996, among the Company, New Valley,
BGLS and Fleet, as Trustee (incorporated by
reference to exhibit 10.14 in BGLS' Registration
Statement on Form S-4 dated December 19, 1995,
Commission File No. 33-80593).
* 10.13 Agreement among BGLS, the Company and High
River Limited Partnership ("High River"), dated
October 17, 1995 (incorporated by reference to
exhibit 10(b) in the Company's Form 10-Q for the
quarter ended September 30, 1995, Commission File
No. 1-5759).
</TABLE>
45
<PAGE> 48
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------------------------------------------------
<S> <C>
* 10.14 Letter Agreement among BGLS, the Company and
High River dated November 5, 1995 (incorporated by
reference to exhibit 10(a) in the Company's Form
10-Q for the quarter ended September 30, 1995,
Commission File No. 1-5759).
* 10.15 Agreement between New Valley and the Company,
dated as of December 27, 1995 (incorporated by
reference to exhibit 10.19 in BGLS' Registration
Statement on Form S-4 dated December 19, 1995,
Commission File No. 33-80593).
* 10.16 Expense Sharing Agreement, dated as of
January 18, 1995, between the Company and New
Valley (incorporated by reference to exhibit 10(d)
in the Company's Form 10-Q for the quarter ended
September 30, 1995, Commission File No. 1-5759).
* 10.17 Stock Option Agreement, dated January 25,
1995, between the Company and Howard M. Lorber
(incorporated by reference to exhibit 10(g) in the
Company's Form 10-K for the year ended December 31,
1994, Commission File No. 1-5759).
* 10.18 Agreement among New Valley, ALKI and High
River, dated October 17, 1995 (the "High River
Agreement") (incorporated by reference to exhibit
10(d) in New Valley's Form 10-Q for the quarter
ended September 30, 1995, Commission File No.
1-2493).
* 10.19 Letter Amendment, dated October 17, 1995, to
the High River Agreement (incorporated by reference
to exhibit 10(e) in the New Valley's Form 10-Q for
the quarter ended September 30, 1995, Commission
No. 1-2493).
* 10.20 Letter Amendment, dated November 5, 1995, to
the High River Agreement (incorporated by reference
to exhibit 10(f) in New Valley's Form 10-Q for the
quarter ended September 30, 1995, Commission File
No. 1-2493).
* 10.21 Agreement of Termination, dated June 5, 1996,
between New Valley, ALKI, High River, the Company
and BGLS (incorporated by reference to exhibit 16
in the Schedule 13D filed by, among others, the
Company with the Commission on March 11,1966, as
amended, with respect to the common stock of RJR
Nabisco Holdings Corp. (the "Schedule 13D")).
* 10.22 Amended and Restated Consulting Agreement,
dated as of March 1, 1996, between the Company and
Howard M. Lorber (the "Lorber Consulting
Agreement") (incorporated by reference to exhibit
10.25 in the Company's Form 10-K for the year ended
December 31, 1995, Commission File No. 1-5759).
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------
<S> <C>
10.23 Amendment dated January 1, 1998 to the Lorber Consulting
Agreement.
* 10.24 Settlement Agreement, dated March 12, 1996, by and
between Dianne Castano and Ernest Perry, the
putative representative plaintiffs in Dianne
Castano, et al. v. The American Tobacco Company,
Inc. et al., Civil No. 94-1044, United States
District Court for the Eastern District of
Louisiana, for themselves and on behalf of the
plaintiff settlement class, and the Company and
Liggett, as supplemented by the letter agreement
dated March 14, 1996 (the "Settlement Agreement")
(incorporated by reference to exhibit 13 in the
Schedule 13D).
* 10.25 Addendum to Settlement Agreement (incorporated by reference to
exhibit 10.30 in the Company's Form 10-K/A No. 1 for the year
ended December 31, 1996, Commission File No. 1-5759).
* 10.26 Settlement Agreement, dated March 15, 1996,
by and among the State of West Virginia, State of
Florida, State of Mississippi, Commonwealth of
Massachusetts, and State of Louisiana, the Company
and Liggett (incorporated by reference to exhibit
15 in the Schedule 13D).
* 10.27 Addendum to Initial States Settlement Agreement (incorporated
by reference to exhibit 10.43 in the Company's Form
10-Q for the quarterly period ended March 31, 1997,
Commission File No. 1-5759).
* 10.28 Settlement Agreement, dated March 20, 1997, by and
among the States listed in Appendix A thereto, the
Company and Liggett (incorporated by reference to
exhibit 10.40 in the Company's Form 10-K for the
year ended December 31, 1996).
* 10.29 Settlement Agreement, dated March 20, 1997,
by and between the named and representative
plaintiffs in Fletcher, et al. v. Brooke Group
Ltd., et al., for themselves and on behalf of the
plaintiff settlement class, and the Company and
Liggett (incorporated by reference to exhibit 10.41
in the Company's Form 10-K for the year ended
December 31, 1996).
* 10.30 Settlement Agreement, dated April 14, 1997,
by and among the State of California, the Company
and Liggett (incorporated by reference to exhibit
10.44 in the Company's Form 10-Q for the quarter
ended March 31, 1997, Commission File No. 1-5759).
* 10.31 Settlement Agreement, dated May 6, 1997, by
and between the State of Alaska, the Company and
Liggett (incorporated by reference to exhibit 10.44
in the Company's Form 10-Q for the quarter ended
March 31, 1997, Commission File No. 1-5759).
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------------------------------------------------------------
<S> <C>
* 10.32 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 the Company and
Liggett (incorporated by reference to exhibit 10.1 in the
Company's Form 10-Q for the quarter ended June 30, 1997,
Commission File No. 1-5759).
* 10.33 Settlement Agreement, dated June 9, 1997, by
and between the State of Oregon and the Company and
Liggett (incorporated by reference to exhibit 10.2
in the Company's Form 10-Q for the quarter ended
September 30, 1997, Commission File No. 1-5759).
* 10.34 Settlement Agreement, dated September 15, 1997,
by and among the State of Nevada and the
Company and Liggett (incorporated by reference to
exhibit 10.1 in the Company's Form 10-Q for the
quarter ended September 30, 1997, Commission File
No.1-5759).
10.35 Settlement Agreement, dated March 12, 1998, by and
among the States listed in Appendix A thereto, the
Company and Liggett.
* 10.36 Stock Purchase Agreement, dated April 3, 1996, among
Liggett-Ducat Ltd. ("Liggett-Ducat"), Belgrave
Limited ("Belgrave"), Eduard Z. Nakhamkin
("Nakhamkin") and BOL (incorporated by reference to
exhibit 10.28 in the Company's Form 10-K for the
year ended December 31, 1995, Commission File No.
1-5759).
* 10.37 Consulting Agreement, dated April 3, 1996,
among BOL, Belgrave and Nakhamkin (incorporated by
reference to exhibit 10.29 in the Company's Form
10-K for the year ended December 31, 1995,
Commission File No. 1-5759).
* 10.38 Pledge Agreement, dated April 3, 1996, between BOL
and Belgrave (incorporated by reference to exhibit
10.30 in the Company's Form 10-K for the year ended
December 31, 1995, Commission File No. 1-5759).
* 10.39 Stock Option Agreement, dated December 16, 1996,
between the Company and Howard M. Lorber
(incorporated by reference to exhibit 10.34 in the
Company's Form 10-K for the year ended December 31,
1996, Commission File No. 1-5759.
* 10.40 Letter Agreement dated September 5, 1996 between
Ronald S. Fulford and Liggett (incorporated
by reference to exhibit 10.23 in Liggett's Form
10-K for the year ended December 31, 1996,
Commission File No. 33-75224).
* 10.41 Stock Option Agreement, dated January 1, 1997, between
the Company and Richard J. Lampen (incorporated by
reference to exhibit 10.35 in the Company's Form
10-K for the year ended December 31, 1996).
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- --------------------------------------------------------------
<S> <C>
* 10.42 Stock Option Agreement, dated January 1, 1997, between the
Company and Marc N. Bell (incorporated by reference to
exhibit 4.3 in the Company's Registration Statement on Form S-8
(No. 333-24217).
10.43 Stock Option Agreement, dated January 1, 1998, between the
Company and Joselynn D. Van Siclen.
* 10.44 Promissory Note of New Valley dated January 31, 1997 in favor
of BOL (incorporated by reference to exhibit 10.1 in the
New Valley Form 8-K).
* 10.45 Pledge Agreement dated as of January 31, 1997
entered into by and between BOL and New Valley
(incorporated by reference to exhibit 10.2 in the
New Valley Form 8-K).
* 10.46 Use Agreement dated as of January 31, 1997,
entered into by and between BML and Liggett-Ducat
Joint Stock Company (incorporated by reference to
exhibit 10.3 in the New Valley Form 8-K).
* 10.47 Stock Purchase Agreement, dated as of January 16, 1998,
by and between the Company and High River Limited
Partnership (incorporated by reference to the
Company's Form 8-K dated January 16, 1998,
Commission File No. 5759).
* 10.48 Commitment, Contribution and Subordination
Agreement, dated as of January 30, 1998, by Liggett,
the Company, BGLS, BOL and Bankers Trust
(incorporated by reference to exhibit 99.4 in the
Company's Form 8-K dated February 2, 1998,
Commission File No. 1-5759).
* 10.49 Registration Rights Agreement, dated as of
January 30, 1998, among the Company and the holders
of record of the shares of the Company's common
stock referred to therein (incorporated by
reference to exhibit 99.5 in the Company's Form 8-K
dated February 2, 1998, Commission File No.
1-5759).
* 10.50 Warrant to purchase common stock of the Company,
dated March 2, 1998, issued to AIF (incorporated by
reference to exhibit 10.2 in the Company's Form 8-K
dated March 2, 1998, Commission File No. 1-5759).
* 10.51 Warrant to purchase common stock of the Company,
dated March 2, 1998, issued to AAP (incorporated by
reference to exhibit 10.3 in the Company's Form 8-K
dated March 2, 1998, Commission File No. 1-5759).
* 10.52 Warrant to purchase common stock of the Company,
dated March 2, 1998, issued to AIF (incorporated by
reference to exhibit 10.4 in the Company's Form 8-K
dated March 2, 1998, Commission File No. 1-5759).
</TABLE>
49
<PAGE> 52
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- ------------------------------------------------------
<S> <C>
* 10.53 Warrant to purchase common stock of the
Company, dated March 2, 1998, issued to AAP
(incorporated by reference to exhibit 10.5 in the
Company's Form 8-K dated March 2, 1998, Commission
File No. 1-5759).
* 10.54 Registration Rights Agreement, dated as of
March 2, 1998, among the Company and the Apollo
Holders (incorporated by reference to exhibit 10.6
in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
* 10.55 Registration Rights Agreement, dated as of
March 2, 1998, among the Company and the Apollo
Holders (incorporated by reference to exhibit 10.7
in the Company's Form 8-K dated March 2, 1998,
Commission File No. 1-5759).
10.56 Stock Option Agreement, dated as of March 12, 1998,
by and between the Company and Kasowitz, Benson,
Torres & Friedman LLP, Marc E. Kasowitz and Daniel
R. Benson.
21 Subsidiaries of the Company.
23.1 Consent of Coopers & Lybrand L.L.P. relating to the Company's
Registration Statements on Form S-3 (No. 33-38869 and
No. 33-63119) and Form S-8 (No. 333-24217).
23.2 Consent of Arthur Anderson LLP relating to the Company's
Registration Statements on Form S-3 (No. 33-38869 and
No. 33-63119) and Form S-8 (No. 333-24217).
27.1 Financial Data Schedule of the Company.
27.2 Financial Data Schedule of BGLS.
99.1 Material Legal Proceedings
99.2 Liggett Group Inc.'s Consolidated Financial
Statements for the fiscal year ended December 31,
1997.
99.3 New Valley Holdings, Inc.'s Financial Statements
for the fiscal year ended December 31, 1997.
99.4 Brooke (Overseas) Ltd.'s Consolidated Financial
Statements for the fiscal year ended December 31,
1997.
</TABLE>
- -------------------
* Incorporated by reference
Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) is listed in
exhibit nos. 10.7, 10.40, 10.41, 10.42 and 10.43.
50
<PAGE> 53
(B) REPORTS ON FORM 8-K:
The Company filed the following reports on Form 8-K during the fourth
quarter of 1997:
<TABLE>
<CAPTION>
FINANCIAL
DATE ITEMS STATEMENTS
---- ----- ----------
<S> <C> <C>
1. November 26, 1997 5, 7 None
2. December 17, 1997 5, 7 None
</TABLE>
51
<PAGE> 54
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: April 8, 1998
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
----------------------------------
Joselynn D. Van Siclen
Vice President and
Chief Financial Officer
Date: April 8, 1998
52
<PAGE> 55
POWER OF ATTORNEY
The undersigned directors and officers of Brooke Group Ltd. and BGLS
Inc. hereby constitute and appoint Richard J. Lampen, Joselynn D. Van Siclen and
Marc N. Bell, and each of them, with full power to act without the other and
with full power of substitution and resubstitutions, our true and lawful
attorneys-in-fact with full power to execute in our name and behalf in the
capacities indicated below, this Annual Report on Form 10-K and any and all
amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 8, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ Bennett S. LeBow
---------------------------------
Bennett S. LeBow Chairman of the Board, President
and Chief Executive Officer
(Principal Executive Officer)
/s/ Joselynn D. Van Siclen
---------------------------------
Joselynn D. Van Siclen Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert J. Eide
---------------------------------
Robert J. Eide Director
/s/ Jeffrey S. Podell
---------------------------------
Jeffrey S. Podell Director
</TABLE>
53
<PAGE> 56
BROOKE GROUP LTD.
BGLS INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997
ITEMS 8, 14(a) (1) AND (2), AND 14(d)
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Financial Statements and Schedule of the Registrant and its
subsidiaries required to be included in Items 8, 14(a) (1) and (2), and 14(d)
are listed below:
<TABLE>
<CAPTION>
Page
FINANCIAL STATEMENTS: ----
- --------------------
<S> <C>
Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements
Reports of Independent Accountants................................................. F-3
Brooke Group Ltd. Consolidated Balance Sheets as of December 31, 1997 and 1996 F-5
BGLS Inc. Consolidated Balance Sheets as of December 31, 1997 and 1996............. F-6
Brooke Group Ltd. Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995............................................... F-7
BGLS Inc. Consolidated Statements of Operations for the years ended December
31, 1997, 1996 and 1995........................................................ F-8
Brooke Group Ltd. Consolidated Statements of Stockholders' Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995................................... F-9
BGLS Inc. Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995......................................... F-10
Brooke Group Ltd. Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995............................................... F-11
BGLS Inc. Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995........................................................ F-13
Notes to Consolidated Financial Statements......................................... F-15
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts................................... F-53
Financial Statement Schedules not listed above have been omitted
because they are not applicable or the required information is
contained in the Company's Consolidated Financial Statements or
accompanying Notes.
New Valley Corporation
Reports of Independent Accountants................................................. F-54
Consolidated Balance Sheets as of December 31, 1997 and 1996....................... F-55
Consolidated Statements of Operations for the years ended December 31, 1997,
1996 and 1995.................................................................. F-56
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995............................................... F-58
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995.................................................................. F-59
Notes to Consolidated Financial Statements......................................... F-61
</TABLE>
F-1
<PAGE> 57
Liggett Group Inc.
The consolidated financial statements of Liggett Group Inc. are
incorporated herein by reference from Liggett Group Inc.'s Form 10-K for the
year ended December 31, 1997, and are filed as exhibit 99.2 to this report.
New Valley Holdings, Inc.
The financial statements of New Valley Holdings, Inc. are filed as
exhibit 99.3 to this report and are incorporated herein by reference.
Brooke (Overseas) Ltd.
The consolidated financial statements of Brooke (Overseas) Ltd. are
filed as exhibit 99.4 to this report and are incorporated herein by reference.
F-2
<PAGE> 58
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Brooke Group Ltd. and BGLS Inc.
We have audited the accompanying consolidated balance sheets of Brooke Group
Ltd. and Subsidiaries (the "Company") and BGLS Inc. and Subsidiaries ("BGLS")
as of December 31, 1997 and 1996 and the related consolidated statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's and BGLS's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Brooke
Group Ltd. and Subsidiaries and BGLS Inc. and Subsidiaries at December 31, 1997
and 1996 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1997 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 8, 1998
F-3
<PAGE> 59
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Brooke Group Ltd. and BGLS Inc.
Our report on the consolidated financial statements of Brooke Group Inc. and
Subsidiaries and BGLS Inc. and Subsidiaries is included on Page F-3 of this
Form 10-K. In connection with our audits of such financial statements, we have
also audited the related financial statement schedule on Page F-53 on this Form
10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 8, 1998
F-4
<PAGE> 60
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ......................................................... $ 4,754 $ 1,941
Accounts receivable - trade ....................................................... 10,462 19,475
Other receivables ................................................................. 1,239 1,217
Receivables from affiliates ....................................................... 1,978 47
Inventories ....................................................................... 39,312 53,691
Other current assets .............................................................. 10,240 4,181
--------- ---------
Total current assets ............................................................ 67,985 80,552
Property, plant and equipment, at cost, less accumulated
depreciation of $33,187 and $31,047 ............................................... 45,943 80,282
Intangible assets, at cost, less accumulated amortization
of $19,302 and $17,457 ............................................................ 2,610 4,421
Investment in affiliate ............................................................. 3,051
Other assets ........................................................................ 9,922 9,371
--------- ---------
Total assets .................................................................... $ 126,460 $ 177,677
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt ............................... $ 6,429 $ 55,242
Accounts payable .................................................................. 10,461 32,017
Due to affiliates ................................................................. 1,226 990
Dividends payable ................................................................. 1,387
Cash overdraft .................................................................... 945 6
Accrued promotional expenses ...................................................... 26,993 30,257
Accrued taxes payable ............................................................. 19,998 26,379
Accrued interest .................................................................. 39,782 24,354
Other accrued liabilities ......................................................... 34,670 33,831
--------- ---------
Total current liabilities........................................................ 140,504 204,463
Notes payable, long-term debt and other obligations, less current portion ........... 399,835 378,243
Noncurrent employee benefits ........................................................ 29,366 25,220
Other liabilities ................................................................... 45,152 24,740
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 ........................ 1,850 1,850
Additional paid-in capital ........................................................ 88,290 94,169
Deficit ........................................................................... (538,791) (490,706)
Other ............................................................................. (5,607) (27,963)
Less: 6,900,947 shares of common stock in treasury, at cost ...................... (34,139) (32,339)
--------- ---------
Total stockholders' equity (deficit) .......................................... (488,397) (454,989)
--------- ---------
Total liabilities and stockholders' equity (deficit) .......................... $ 126,460 $ 177,677
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
<PAGE> 61
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
ASSETS:
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 4,754 $ 1,940
Accounts receivable - trade ....................................................... 10,462 19,475
Other receivables ................................................................. 1,191 1,166
Receivables from affiliates ....................................................... 1,603 47
Inventories ....................................................................... 39,312 53,691
Other current assets .............................................................. 10,044 3,878
--------- ---------
Total current assets .......................................................... 67,366 80,197
Property, plant and equipment, at cost, less accumulated depreciation of
$32,760 and $30,762.................................................................. 45,775 79,972
Intangible assets, at cost, less accumulated amortization of $19,302 and
$17,457.............................................................................. 4,421
Investment in affiliate ............................................................. 2,610 3,051
Other assets ........................................................................ 13,165 10,467
--------- ---------
Total assets .................................................................. $ 128,916 $ 178,108
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt ............................... $ 6,212 $ 53,945
Accounts payable .................................................................. 10,336 31,892
Cash overdraft .................................................................... 891 6
Due to parent ..................................................................... 22,951 29,598
Accrued promotional expenses ...................................................... 26,993 30,257
Accrued taxes payable ............................................................. 19,998 26,379
Accrued interest .................................................................. 39,782 24,354
Other accrued liabilities ......................................................... 34,312 33,305
--------- ---------
Total current liabilities...................................................... 161,475 229,736
Notes payable, long-term debt and other obligations, less current portion ........... 399,835 378,243
Noncurrent employee benefits ........................................................ 29,366 25,220
Other liabilities ................................................................... 51,355 27,994
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 ........................................................................... (550,339) (499,264)
Other ............................................................................. (1,857) (22,902)
--------- ---------
Total stockholder's equity (deficit) .......................................... (513,115) (483,085)
--------- ---------
Total liabilities and stockholder's equity (deficit) .......................... $ 128,916 $ 178,108
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
<PAGE> 62
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
-------------------------------------------
Year Ended December 31,
-------------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Revenues* ................................................... $ 389,615 $ 460,356 $ 461,459
Cost of goods sold* ......................................... 202,121 243,333 216,187
------------ ------------ ------------
Gross profit ................................................ 187,494 217,023 245,272
Operating, selling, administrative and general expenses ..... 162,938 220,950 233,236
Settlement charges .......................................... 16,527 3,976
------------ ------------ ------------
Operating income (loss) ..................................... 8,029 (3,927) 8,060
Other income (expenses):
Interest income ......................................... 553 220 989
Interest expense ........................................ (61,778) (60,556) (57,505)
Equity in (loss) earnings of affiliate .................. (27,035) (7,211) 678
Sale of assets .......................................... 23,086 6,716
Other, net .............................................. 6,458 1,242 2,776
------------ ------------ ------------
Loss from continuing operations before income taxes ......... (50,687) (63,516) (45,002)
Provision for income taxes .................................. 1,123 1,402 342
------------ ------------ ------------
Loss from continuing operations ............................. (51,810) (64,918) (45,344)
------------ ------------ ------------
Discontinued operations:
Income (loss) from discontinued operations .............. 276 (1,591) 2,860
Gain on disposal ........................................ 1,649 3,976 18,369
------------ ------------ ------------
Income from discontinued operations ......................... 1,925 2,385 21,229
------------ ------------ ------------
(Loss) before extraordinary items ........................... (49,885) (62,533) (24,115)
------------ ------------ ------------
Extraordinary items:
Loss from extraordinary items-early extinguishment of debt (9,810)
------------ ------------ ------------
Net loss .................................................... (49,885) (62,533) (33,925)
Proportionate share of New Valley capital transactions,
retirement of Class A Preferred Shares .................. 1,782 16,802
------------ ------------ ------------
Net loss applicable to common shares ........................ $ (49,885) $ (60,751)$ (17,123)
============ ============ ============
Per basic and diluted common share:
Loss from continuing operations ......................... $ (2.85) $ (3.41)$ (1.56)
============ ============ ============
Income from discontinued operations ..................... $ 0.11 $ 0.13 $ 1.16
============ ============ ============
Extraordinary items ..................................... $ $ $ (0.54)
============ ============ ============
Net loss applicable to common shares .................... $ (2.74) $ (3.28)$ (0.94)
============ ============ ============
Weighted average common shares outstanding .................. 18,168,329 18,497,096 18,301,186
============ ============ ============
</TABLE>
- ---------------
*Revenues and Cost of goods sold include excise taxes of $87,683, $112,218 and
$123,420 for ended the years ended December 31, 1997, 1996 and 1995,
respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
<PAGE> 63
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
----------------------------------
Year Ended December 31,
----------------------------------
1997 1996 1995
----------------------------------
<S> <C> <C> <C>
Revenues* .......................................................... $389,615 $460,356 $461,459
Cost of goods sold* ................................................ 202,121 243,333 216,187
-------- -------- --------
Gross profit ....................................................... 187,494 217,023 245,272
Operating, selling and general expenses ............................ 162,548 219,039 232,985
Settlement charges ................................................. 16,527 3,976
-------- -------- --------
Operating income (loss) ............................................ 8,419 (2,016) 8,311
Other income (expenses):
Interest income ................................................ 543 157 989
Interest expense ............................................... (65,581) (64,417) (61,036)
Equity in (loss) earnings of affiliate ......................... (27,035) (7,211) 678
Sale of assets ................................................. 27,663 6,716
Other, net ..................................................... 2,326 (2,579) 2,292
-------- -------- --------
Loss from continuing operations before income taxes ................ (53,665) (69,350) (48,766)
Provision for income taxes ......................................... 1,135 5,254 1,736
-------- -------- --------
Loss from continuing operations .................................... (54,800) (74,604) (50,502)
-------- -------- --------
Discontinued operations:
Income (loss) from discontinued operations ..................... 276 (1,591) 2,860
Gain on disposal ............................................... 1,649 3,976 18,369
-------- -------- --------
Income from discontinued operations ................................ 1,925 2,385 21,229
-------- -------- --------
(Loss) before extraordinary items .................................. (52,875) (72,219) (29,273)
-------- -------- --------
Extraordinary items:
Loss resulting from the early extinguishment of debt ........... (9,810)
-------- -------- --------
Loss from extraordinary items ............................. (9,810)
-------- -------- --------
Net (loss) income .................................................. $(52,875) $(72,219) $(39,083)
======== ======== ========
</TABLE>
- ------------------
*Revenues and Cost of goods sold include excise taxes of $87,683, $112,218 and
$123,420 for the years ended December 31, 1997, 1996 and 1995, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
F-8
<PAGE> 64
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Additional
Common Stock Paid-In Treasury
Shares Amount Capital Deficit Stock Other Total
---------- --------- ---------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ..................... 18,260,844 $ 1,826 $ 66,245 $(420,746) $(33,542) $ 11,365 $(374,852)
Net loss ....................................... (33,925) (33,925)
Consolidation of foreign subsidiary ............ 14,435 14,435
Distributions on common stock
($0.30 per share) ............................ (5,474) (5,474)
Stock grant to directors ....................... 20,000 2 (2) 94 94
Stock grant to consultant ...................... 250,000 25 (800) 1,244 (563) 469
Stock options granted to consultant ............ 938 (201) 375
MAI spin-off ................................... 27,286 (2,332) 27,085
Unrealized holding loss on investment in
New Valley ................................... 1,103 (2,332)
Effect of New Valley capital transactions ...... 17,043 18,146
Treasury stock, at cost ........................ (33,748) (3) 3 (135) (135)
Other, net ..................................... (2) 12 10
----------- -------- -------- --------- -------- -------- ---------
Balance, December 31, 1995 ..................... 18,497,096 1,850 93,186 (428,173) (32,339) 9,372 (356,104)
Net loss ....................................... (62,533) (62,533)
Distributions on common stock
($0.30 per share) ............................ (5,549) (5,549)
Amortization of deferred compensation .......... 252 252
Stock options granted to consultant ............ 4,750 (4,750)
Unrealized holding loss on investment in
New Valley ................................... (33,936) (33,936)
Effect of New Valley capital transactions ...... 1,782 1,099 2,881
----------- -------- -------- --------- -------- -------- ---------
Balance, December 31, 1996 ..................... 18,497,096 1,850 94,169 (490,706) (32,339) (27,963) (454,989)
Net loss ....................................... (49,885) (49,885)
Distributions on common stock
($0.30 per share) ............................ (5,504) (5,504)
Amortization of deferred compensation .......... 1,311 1,311
Stock options granted to consultant ............ (375) (375)
Unrealized holding loss on investment in
New Valley ................................... 16,842 16,842
Effect of New Valley capital transactions ...... 3,190 3,190
Pension-related minimum liability adjustment ... 1,013 1,013
Settlement of loan ............................. (400,000) 1,800 (1,800)
----------- --------- -------- --------- -------- -------- ---------
Balance, December 31, 1997 ..................... 18,097,096 $ 1,850 $ 88,290 $(538,791) $(34,139) $ (5,607) $(488,397)
=========== ======== ======== ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-9
<PAGE> 65
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Additional
Common Stock Paid-In
Shares Amount Capital Deficit Other Total
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 .......................... 100 $(402,643) $ 11,365 $(391,278)
Distributions paid to parent ........................ (5,872) (5,872)
Distribution of MAI to parent ....................... 24,942 (201) 24,741
Net loss ............................................ (39,083) (39,083)
Unrealized loss on investment in New Valley ......... (2,332) (2,332)
Effect of New Valley capital transactions............ $ 17,043 1,103 18,146
Forgiveness of debt by parent ....................... 4,565 4,565
Capital contribution ................................ 1,986 1,986
Other, net .......................................... (768) (768)
-------- --------- --------- --------- --------- ---------
Balance, December 31, 1995 .......................... 100 23,594 (423,424) 9,935 (389,895)
Distributions paid to parent......................... (3,621) (3,621)
Net loss ............................................ (72,219) (72,219)
Unrealized holding loss on investment in New Valley . (33,936) (33,936)
Effect of New Valley capital transactions ........... 1,782 1,099 2,881
Forgiveness of debt by parent........................ 13,705 13,705
-------- --------- --------- --------- --------- ---------
Balance, December 31, 1996 .......................... 100 39,081 (499,264) (22,902) (483,085)
Net loss ............................................ (52,875) (52,875)
Unrealized holding loss on investment in New Valley . 16,842 16,842
Effect of New Valley capital transactions ........... 3,190 3,190
Pension-related minimum liability adjustment ........ 1,013 1,013
Settlement of loan .................................. 1,800 1,800
-------- --------- --------- --------- --------- ---------
Balance, December 31, 1997 .......................... 100 $ $ 39,081 $(550,339) $ (1,857) $(513,115)
======== ========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-10
<PAGE> 66
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
-------------------------------------
Year Ended December 31,
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................ $(49,885) $(62,533) $(33,925)
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
Depreciation and amortization ................................ 8,135 8,819 9,076
Noncash compensation expense ................................. 1,311 252 559
Deferred income taxes ........................................ 1,061
Gain on sale of assets ....................................... (26,247) (6,716) (1,042)
Extraordinary item ........................................... 9,810
Impact of discontinued operations ............................ (1,925) (2,385) (21,229)
Equity in loss (earnings) of affiliates ...................... 27,034 7,211 (678)
Other, net ................................................... 4,845
Changes in assets and liabilities (net of effect of dispositions):
Receivables .................................................. 8,839 6,222 6,561
Inventories .................................................. 14,379 6,830 (7,490)
Accounts payable and accrued liabilities ..................... 7,585 27,716 (5,445)
Deferred Gain ................................................ (6,459)
Other assets and liabilities, net ............................ (7,830) 9,818 15,972
-------- -------- --------
Net cash used in operating activities .............................. (25,063) (3,705) (22,986)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of business and assets ........................ 56,494 8,040 14,152
Investments ...................................................... (25) (2,811) (1,965)
Capital expenditures ............................................. (20,142) (34,241) (8,805)
Dividends from New Valley ........................................ 24,733 61,832
Other, net ....................................................... 1,660
-------- -------- --------
Net cash provided by (used in) investing activities ................ 36,327 (4,279) 66,874
-------- -------- --------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-11
<PAGE> 67
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
------------------------------------
Year Ended December 31,
------------------------------------
1997 1996 1995
------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from debt ............................................... 10,305 20,702 2,568
Repayments of debt ............................................... (11,516) (8,864) (37,196)
Borrowings under revolver ........................................ 278,442 353,365 397,873
Repayments on revolver ........................................... (279,435) (350,105) (401,703)
Increase (decrease) in cash overdraft ............................ 938 (4,256) (594)
Series G preferred dividend ...................................... (75)
Distributions on common stock .................................... (7,266) (4,162) (5,475)
Treasury stock purchases ......................................... (135)
Other, net ....................................................... (57)
-------- -------- --------
Net cash (used in) provided by financing activities ................ (8,532) 6,680 (44,794)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ....... 81 (125)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............... 2,813 (1,429) (906)
Cash and cash equivalents, beginning of period ..................... 1,941 3,370 4,276
-------- -------- --------
Cash and cash equivalents, end of period ........................... $ 4,754 $ 1,941 $ 3,370
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-12
<PAGE> 68
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
-----------------------------------
Year Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income .............................................. $(52,875) $(72,219) $(39,083)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization .............................. 7,993 8,677 8,946
Gain on sale of assets ..................................... (26,247) (6,716)
Deferred income taxes ...................................... 4,861
Extraordinary item ......................................... 9,810
Impact of discontinued operations .......................... (1,925) (2,385) (21,229)
Equity in loss (earnings) of affiliates .................... 27,034 7,211 (678)
Other, net ................................................. 120
Changes in assets and liabilities (net of effect of dispositions):
Receivables ................................................ 8,838 5,863 7,261
Inventories ................................................ 14,379 6,830 (7,489)
Accounts payable and accrued liabilities ................... 1,245 34,461 1,001
Deferred Gain .............................................. (3,511)
Other assets and liabilities, net .......................... (8,287) 9,712 16,970
-------- -------- --------
Net cash used in operating activities .............................. (33,356) (3,705) (24,371)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of business and assets ...................... 8,040 13,852
Impact of discontinued operations .............................. 56,494
Investments .................................................... (25) (2,811) (2,765)
Capital expenditures ........................................... (20,142) (34,241) (8,569)
Dividends from New Valley ...................................... 24,733 61,832
Other, net ..................................................... 1,660
-------- -------- --------
Net cash provided by (used in) investing activities ................ 36,327 (4,279) 66,010
-------- -------- --------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-13
<PAGE> 69
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
(Dollars in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
-----------------------------------
Year Ended December 31,
-----------------------------------
1997 1996 1995
-----------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from debt ............................................... 10,305 19,060 2,568
Repayments of debt ............................................... (10,436) (8,265) (37,166)
Borrowings under revolver ........................................ 278,442 353,365 397,873
Repayments on revolver ........................................... (279,435) (350,105) (401,703)
Increase (decrease) in cash overdraft ............................ 885 (3,755) (215)
Distributions paid to parent ..................................... (3,621) (5,871)
Other, net ....................................................... 1,986
-------- -------- --------
Net cash (used in) provided by financing activities ................ (239) 6,679 (42,528)
-------- -------- --------
Effect of exchange rate changes on cash and cash equivalents ....... 81 (125)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ............... 2,813 (1,430) (889)
Cash and cash equivalents, beginning of period ..................... 1,941 3,370 4,259
-------- -------- --------
Cash and cash equivalents, end of period ........................... $ 4,754 $ 1,940 $ 3,370
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
F-14
<PAGE> 70
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
The consolidated financial statements of Brooke Group Ltd. (the
"Company") include the consolidated statements of its wholly-owned
subsidiary, BGLS Inc. ("BGLS"). The consolidated statements of BGLS
include the accounts of Liggett Group Inc. ("Liggett"), Brooke
(Overseas) Ltd. ("BOL"), New Valley Holdings, Inc. ("NV Holdings")
and other less significant subsidiaries. Based on the Company's
ability to assert sufficient control, the Company consolidated the
accounts of Liggett-Ducat Ltd. ("Liggett-Ducat") at December 31,
1995. (Refer to Note 4.) 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.
(b) Liquidity:
During the years ended December 31, 1996 and 1995, the Company relied
primarily on dividends received from New Valley Corporation ("New
Valley") and in 1997, proceeds received on the sale of its indirect
subsidiary, BrookeMil Ltd. ("BML"), to New Valley to meet its
liquidity needs.
The Company's potential sources of liquidity for 1998 include, among
other things, additional public and/or private debt and equity
financing, management fees 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. New Valley's ability to make such
distributions is subject to risk and uncertainties attendant to its
business. (Refer to Note 2.)
Liggett had net capital and working capital deficiencies of $192,857
and $17,542, respectively, at December 31, 1997, is highly leveraged
and has substantial near-term debt service requirements. On January
30, 1998, Liggett obtained the consents of the required majority of
the holders of Liggett's 11.50% Series B and 19.75% Series C Senior
Secured Notes due 1999 (the "Liggett Notes") to various amendments to
the Indenture governing the Liggett Notes. The amendments provide,
among other things, for a deferral of the February 1, 1998 mandatory
redemption of $37,500 principal amount of the Liggett Notes to the
date of final maturity, February 1, 1999. (Refer to Note 9.) At
maturity, the Liggett Notes will require a principal payment of
$144,891. Liggett does not anticipate it will be able to generate
sufficient cash from operations to make such payments. In addition,
Liggett has a $40,000 revolving credit facility expiring March 8,
1999 (the "Facility"), under which $23,427 was outstanding at
December 31, 1997. If Liggett is unable to refinance or restructure
the terms of the Liggett Notes or otherwise make all payments
thereon, 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. Due
to the many risks and uncertainties associated with the cigarette
industry and the impact of tobacco litigation, there can be no
assurance that Liggett will be able to meet its future earnings
or cash flow goals. These matters raise substantial doubt about
Liggett meeting its liquidity needs and its ability to continue as a
going concern and may negatively impact the Company's liquidity.
F-15
<PAGE> 71
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company has 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 modifications to the terms of such
debt. On March 2, 1998, BGLS entered into an agreement with AIF II,
L.P. and an affiliated investment manager on behalf of a managed
account (together, "the Apollo Holders"), who hold approximately
41.8% of the $232,864 principal amount of the BGLS Notes. Pursuant to
the terms of the agreement, the Apollo Holders have agreed to defer
the payment of interest on the BGLS Notes held by them, commencing
with the interest payment that was due July 31, 1997, which they had
previously agreed to defer, through the interest payment due July 31,
2000. The deferred interest payments will be payable at final
maturity of the BGLS Notes on January 31, 2001 or upon an event of
default under the Indenture for the BGLS Notes. (Refer to Notes 9 and
14.)
BOL is in the process of constructing a new tobacco factory in
Moscow, Russia currently scheduled to be operational in early 1999.
The remaining construction costs are expected to be financed
primarily by equipment lease financing currently in place and bank or
other loans. (Refer to Note 4.)
(c) Estimates and Assumptions:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, 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, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans and
litigation and defense costs. Actual results could differ from those
estimates.
(d) Cash and Cash Equivalents:
For purposes of the statements of cash flows, cash includes cash on
hand, cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or
less. Interest on short-term investments is recognized when earned.
(e) Financial Instruments:
The estimated fair value of the Company's long-term debt is as
follows:
<TABLE>
<CAPTION>
At December 31, 1997 1996
---- ----
<S> <C> <C> <C> <C>
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Long-term debt $406,264 $314,108 $433,485 $294,451
</TABLE>
Short-term debt - The carrying amounts reported in the Consolidated
Balance Sheets are a reasonable estimate of fair value.
Long-term debt - Fair value is estimated based on current market
quotations, where available, or based on an evaluation of the debt in
relation to market prices of the Company's publicly traded debt.
F-16
<PAGE> 72
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The methods and assumptions used by the Company's management in
estimating fair values for financial instruments presented herein are
not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair values.
(f) Significant Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its temporary
cash in money market securities (investment grade or better) with
what management believes are high credit quality financial
institutions.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. One
customer accounted for approximately 19.4% of net sales in 1997,
13.7% of net sales in 1996 and 11.6% of net sales in 1995. Sales to
this customer were primarily in the private label discount segment.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers, located primarily
throughout the United States, comprising Liggett's customer base.
Ongoing credit evaluations of customers' financial condition are
performed and, generally, no collateral is required. Liggett
maintains reserves for potential credit losses and such losses, in
the aggregate, have generally not exceeded management's expectations.
Liggett-Ducat sells its products primarily to companies in the
wholesale distribution and retail industries in the Russian
Federation. Two distributors accounted for 24.9% and 22.0% of sales
in 1997. Prepayment for goods and services is a customary business
practice in Russia and Liggett-Ducat receives payment in advance for
the majority of its sales. Although Liggett-Ducat does not require
collateral and, as a consequence, is exposed to credit risk,
Liggett-Ducat does perform ongoing credit evaluations of its
customers and believes that its trade accounts receivable risk
exposure is limited.
(g) Accounts Receivable:
The allowance for doubtful accounts and cash discounts was $1,383 and
$1,280 at December 31, 1997 and 1996, respectively.
(h) Inventories:
Liggett tobacco inventories, which comprise 92.6% and 95.0% of total
inventory in 1997 and 1996, respectively, are stated at the lower of
cost or market and are determined primarily by the last-in, first-out
(LIFO) method. Although portions of leaf tobacco inventories may not
be used or sold within one year because of the time required for
aging, they are included in current assets, which is common practice
in the industry. It is not practicable to determine the amount that
will not be used or sold within one year.
All other inventories are determined primarily on a first-in,
first-out (FIFO) basis.
F-17
<PAGE> 73
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(i) Property, Plant and Equipment:
Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets,
which are 20 years for buildings and 3 to 10 years for machinery and
equipment.
Interest costs are capitalized in connection with the construction of
major facilities. Capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated
useful life. In 1997, 1996 and 1995, interest costs of $693, $6,387
and $1,004, respectively, were capitalized.
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are
capitalized. The cost and related accumulated depreciation of
property, plant and equipment are removed from the accounts upon
retirement or other disposition and any resulting gain or loss is
reflected in operations.
(j) Intangible Assets:
Intangible assets, consisting principally of trademarks and goodwill,
are amortized using the straight-line method over 10-12 years.
Amortization expense for the years ended December 31, 1997, 1996 and
1995 was $1,845, $1,778 and $1,725, respectively. Management
periodically reviews the carrying value of such assets to determine
whether asset values are impaired.
(k) Impairment of Long-Lived Assets:
Impairment losses on long-lived assets are recognized when expected
future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and estimates of
future cash flows of the underlying business.
(l) Employee Benefits:
Liggett sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such
benefits involves an estimate of unpaid claims as of December 31,
1997 and 1996 which are subject to significant fluctuations in the
near term.
(m) Postretirement Benefits other than Pensions:
The cost of providing retiree health care and life insurance benefits
is actuarially determined and accrued over the service period of the
active employee group.
(n) Stock Options:
The Company measures compensation expense for stock-based employee
compensation plans using the intrinsic value method and provides pro
forma disclosures of net income as if the fair value-based method had
been applied in measuring compensation expense.
F-18
<PAGE> 74
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(o) Income Taxes:
Deferred taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for tax purposes as
well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates.
A valuation allowance reduces deferred tax assets when it is deemed
more likely than not that some portion or all of the deferred tax
assets will not be realized.
(p) Revenue Recognition:
Revenues from sales are recognized upon the shipment of finished
goods to customers. The Company provides an allowance for expected
sales returns, net of related inventory cost recoveries. Since the
Company's primary line of business is tobacco, the Company's
financial position and its results of operations and cash flows have
been and could continue to be materially adversely affected by
significant unit sales volume declines, litigation and defense costs,
increased tobacco costs or reductions in the selling price of
cigarettes in the near term.
(q) Advertising and Promotional Costs:
Advertising and promotional costs are expensed as incurred.
Advertising expenses were $40,534, $74,238 and $75,713 for the years
ended December 31, 1997, 1996 and 1995, respectively.
(r) Legal Costs:
The Company's policy is to accrue legal and other costs related to
contingencies as services are performed.
(s) Earnings Per Share:
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share". SFAS No. 128 specifies new standards designed
to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational
guidelines, revising the disclosure requirements and increasing the
comparability of EPS data on an international basis. Some of the
changes made to simplify the EPS computations include: (a)
eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that common stock
equivalents are not considered in computing basic EPS, (b)
eliminating the modified treasury stock method and the three percent
materiality provision and (c) revising the contingent share
provisions and the supplemental EPS data requirements. SFAS No. 128
also makes a number of changes to existing disclosure requirements.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Prior
period EPS information is restated to conform to the provisions of
SFAS No. 128. For the years ended December 31, 1996 and 1995 per
share calculations include the Company's proportionate share of
excess carrying value of New Valley redeemable preferred shares over
the cost of shares repurchased of $1,782 and $16,802, respectively.
F-19
<PAGE> 75
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(t) Foreign Currency Translation:
The Company's Russian subsidiary operates in a "highly inflationary"
economy and uses the U.S. dollar as the functional currency.
Therefore, certain assets of this entity (principally inventories and
property and equipment) are translated at historical exchange rates
with all other assets and liabilities translated at year end exchange
rates and all translation adjustments are reflected in the
consolidated statements of operations.
(u) Reclassifications:
Certain amounts in prior years' financial statements have been
reclassified to conform to the current year's presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 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 No. 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. For the Company, other components of
stockholders' equity include such items as minimum pension liability
adjustments, unearned compensation expense related to stock options and
the Company's proportionate interest in New Valley's capital
transactions. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. The Company does not anticipate that
implementation of SFAS No. 130 will have a material impact on the
consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 specifies
revised guidelines for determining an entity's operating segments and
the type and level of financial information to be disclosed. SFAS No.
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 No. 131 also requires disclosure of certain
"second level" information by geographic area and for
products/services. SFAS No. 131 also makes a number of changes to
existing disclosure requirements. Management believes that the adoption
of this pronouncement will not have a material effect on the Company's
financial statement disclosures. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits," was issued which revises required
disclosures about pensions and postretirement benefit plans. SFAS No.
132 is effective for the Company for the year ended 1998. The Company
has not yet determined the impact of its implementation.
2. INVESTMENT IN NEW VALLEY CORPORATION
At December 31, 1997 and 1996, the Company's investment in New Valley
consisted of an approximate 42% voting interest. At December 31, 1997 and
1996, the Company owned 57.7% of
F-20
<PAGE> 76
\
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
the outstanding $15.00 Class A Increasing Rate Cumulative Senior Preferred
Shares ($100 Liquidation Value), $.01 par value (the "Class A Preferred
Shares"), 9.0% of the outstanding $3.00 Class B Cumulative Convertible
Preferred Shares ($25 Liquidation Value), $.10 par value (the "Class B
Preferred Shares") and 41.7% of New Valley's common shares, $.01 par value
(the "Common Shares").
The Class A Preferred Shares and the Class B Preferred Shares are
accounted for as debt and equity securities, respectively, pursuant to the
requirements of SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities", and are classified as available-for-sale. The
Common Shares are accounted for pursuant to APB No. 18, "The Equity Method
of Accounting for Investments in Common Stock".
The Company determines the fair value of the Class A Preferred Shares and
Class B Preferred Shares based on the quoted market price. 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. 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.
The Company's and BGLS' investment in New Valley at December 31, 1997 and
1996, respectively, is summarized below:
<TABLE>
<CAPTION>
Unrealized
Number of Fair Carrying Holding
1997 Shares Value Amount Gain (Loss)
- ---- ------ ----- ------ -----------
<S> <C> <C> <C> <C>
Class A Preferred Shares....... 618,326 $59,359 $59,359 $ (5,494)
Class B Preferred Shares....... 250,885 941 941 (913)
Common Shares.................. 3,989,710(A) 1,995 (60,300)
------- ------- --------
$62,295 $ $ (6,407)
======= ======= ========
1996
- ----
Class A Preferred Shares....... 618,326 $72,962 $72,962 $(24,881)
Class B Preferred Shares....... 250,885 1,631 1,631 (223)
Common Shares.................. 3,989,710(A) 5,985 (71,542)
------- ------ --------
$80,578 $ 3,051 $(25,104)
====== ======= ========
</TABLE>
- -------------
(A) Gives effect to July 1996 one-for-twenty stock split.
In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of the
United States Bankruptcy Court for the District of New Jersey and on
January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors
under the Joint Plan. Pursuant to the Joint Plan, among other things, the
Class A Preferred Shares, the Class B Preferred Shares,
F-21
<PAGE> 77
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
the Common Shares and other equity interests were reinstated and retained
all of their legal, equitable and contractual rights.
In February 1995, New Valley repurchased 54,445 Class A Preferred Shares
pursuant to a tender offer made as part of the Joint Plan. During 1995,
New Valley repurchased 339,400 additional Class A Preferred Shares on the
open market at an aggregate cost of $43,405. During 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 and $16,802
for the years ended December 31, 1996 and 1995, respectively, along with
other New Valley capital transactions of $241 for the year ended December
31, 1995.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per
annum. At December 31, 1997 and 1996, respectively, the accrued and unpaid
dividends arrearage was $163,302 ($152.41 per share) and $117,117 ($109.31
per share). The Company received $24,733 ($40.00 per share) and $61,832
($100.00 per share) in dividend distributions in 1996 and 1995,
respectively.
Holders of the Class B Preferred Shares are entitled to receive a
quarterly dividend, as declared by the Board, at a rate of $3.00 per
annum. At December 31, 1997 and 1996, respectively, the accrued and unpaid
dividends arrearage was $139,412 ($49.95 per share) and $115,944 ($41.55
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 follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current assets, primarily cash and marketable securities.. $118,642 $183,720
Noncurrent assets......................................... 322,749 222,820
Current liabilities....................................... 128,128 98,110
Noncurrent liabilities.................................... 185,024 170,223
Redeemable preferred stock................................ 258,638 210,571
Shareholders' equity (deficit)............................ (130,399) (72,364)
Revenues.................................................. 108,441 111,954 $ 67,730
Costs and expenses........................................ 136,685 128,209 66,064
(Loss) income from continuing operations.................. (25,193) (13,216) 1,374
Income from discontinued operations....................... 4,620 5,726 16,873
Net loss applicable to Common Shares(A)................... (89,048) (65,160) (13,714)
Company's share of discontinued operations................ 1,925 2,385 7,031
</TABLE>
- ---------------------
(A) Considers all preferred accrued dividends, whether or not declared
and, in 1995 and 1996, the excess of carrying value of redeemable
preferred shares over cost of shares purchased.
On January 31, 1997, New Valley acquired substantially all the common
shares of BML from BOL for $55,000. (Refer to Note 4.)
F-22
<PAGE> 78
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
On February 20, 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC ("Western
Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, New Valley agreed, among
other things, to contribute to Western Realty the real estate assets of
its subsidiary BML and Apollo agreed to contribute up to $58,000.
Under the terms of the agreement governing Western Realty (the "LLC
Agreement"), the ownership and voting interests in Western Realty will be
held equally by Apollo and New Valley. Apollo will be entitled to a
preference on distributions of cash from Western Realty to the extent of
its investment, together with a 15% annual rate of return, and New Valley
will then be entitled to a return of $10,000 of BML-related expenses
incurred by New Valley since March 1, 1997, together with a 15% annual
rate of return; subsequent distributions will be made 70% to New Valley
and 30% to Apollo. Western Realty will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and New
Valley. All material corporate transactions by Western Realty will
generally require the unanimous consent of the Board of Managers.
Accordingly, New Valley will account for its non-controlling interests in
Western Realty on the equity method.
The organization of Western Realty was effected pursuant to the LLC
Agreement. On January 11, 1996, the Company acquired from an affiliate of
Apollo eight shopping centers for $72,500. New Valley and pension plans
sponsored by BGLS have invested in investment partnerships managed by an
affiliate of Apollo. Apollo's affiliate owns a substantial amount of debt
securities of BGLS and warrants to purchase common stock of the Company.
On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made an $11,000 loan (the "Loan") to Western Realty. The Loan,
which bears interest at the rate of 15% per annum and is due September 30,
1998, is collateralized by a pledge of New Valley's shares of BML. Upon
completion of the transfer of Ducat Place II and the satisfaction of other
conditions under the LLC Agreement, the Loan and the accrued interest
thereon will be converted into a capital contribution by Apollo to Western
Realty and the BML pledge released.
Western Realty will seek to make additional real estate and other
investments in Russia. New Valley and Apollo have agreed to invest,
through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In
addition, Western Realty has agreed to acquire for $20,000, a 30% profits
interest in a company organized by BOL which will, among other things,
acquire an interest in a new factory being constructed on the outskirts of
Moscow by a subsidiary of BOL. (Refer to Note 4.)
3. RJR NABISCO HOLDINGS CORP.
As of December 31, 1997 and 1996, New Valley held approximately 612,650
and 1,700,000 shares of RJR Nabisco Holdings Corp. ("RJR Nabisco") common
stock, respectively, with a market value of $22,898 and $59,200 (cost of
approximately $18,780 and $53,400). During 1997, 1996 and 1995, New Valley
expensed $100, $11,724 and $3,879, respectively, for costs relating to its
RJR Nabisco investment.
In June 1996, various agreements between High River Limited Partnership
("High River"), the Company, BGLS and New Valley were terminated by mutual
consent. Pursuant to these agreements, the parties had agreed to take
certain actions during late 1995 and in 1996 designed to cause RJR Nabisco
to effectuate a spinoff of its food business, Nabisco Holdings Corp.
("Nabisco").
F-23
<PAGE> 79
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The terminations of the High River agreements left in effect for one year
certain provisions concerning payments to be made to High River in the
event New Valley achieved a profit (after deducting certain expenses) on
the sale of the shares of RJR Nabisco common stock which were held by it
or they were valued at the end of such year at higher than their purchase
price or in the event the Company or its affiliates engaged in certain
transactions with RJR Nabisco. Based on the market price of RJR Nabisco
common stock, no amounts were payable by New Valley under these
agreements.
Pursuant to an agreement between the Company and New Valley whereby New
Valley agreed to reimburse the Company and its subsidiaries for reasonable
out-of-pocket expenses in connection with RJR Nabisco, New Valley paid the
Company and its subsidiaries a total of $17 and $2,370 in 1997 and 1996.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to
750,000 shares of RJR Nabisco common stock as of August 13, 1996). New
Valley entered into the Swap in order to be able to participate in any
increase or decrease in the value of the RJR Nabisco common stock during
the term of the Swap. The transaction was for a period of up to six
months, unless extended by the parties, subject to earlier termination at
the election of New Valley, and provided for New Valley to make a payment
to the Counterparty of $1,537 upon commencement of the Swap. At the
termination of the transaction, if the price of the RJR Nabisco common
stock during a specified period prior to such date (the "Final Price")
exceeded $34.42, the price of the RJR Nabisco common stock during a
specified period following the commencement of the Swap (the "Initial
Price"), the Counterparty was required to pay New Valley an amount in cash
equal to the amount of such appreciation with respect to the shares of RJR
Nabisco common stock subject to the Swap plus the value of any dividends
with a record date occurring during the Swap period. If the Final Price
was less than the Initial Price, then New Valley was required to pay the
Counterparty at the termination of the transaction an amount in cash equal
to the amount of such decline with respect to the shares of RJR Nabisco
common stock subject to the Swap, offset by the value of any dividends,
provided that, with respect to approximately 225,000 shares of RJR Nabisco
common stock, New Valley was not required to pay any amount in excess of
an approximate 25% decline in the value of the shares. The potential
obligations of the Counterparty under the Swap were guaranteed by the
Counterparty's parent, a large foreign bank, and New Valley pledged
certain collateral in respect of its potential obligations under the Swap
and agreed to pledge additional collateral under certain conditions. New
Valley marked its obligation with respect to the Swap to fair value with
unrealized gains or losses included in income. During the third quarter of
1997, the Swap was terminated in connection with New Valley's reduction of
its holdings of RJR Nabisco common stock, and New Valley recognized a loss
on the Swap of $7,305 for the year ended December 31, 1996.
4. 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 note
was paid in full as of December 31, 1997. The consideration received
exceeded the carrying value of its investment in BML by $43,700. The
Company recognized a gain on the sale in 1997 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 (the site of the third
phase of the Ducat Place real estate
F-24
<PAGE> 80
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
project being developed by BML, which is currently used by Liggett-Ducat
for its existing cigarette factory), is subject to a put option held by
New Valley. The option allows New Valley to put this site back to the
Company at the greater of the appraised fair value of the property at the
date of exercise or $13,600, during the period Liggett-Ducat operates the
factory on such site. During the second quarter 1997, BML sold one of its
office buildings, Ducat Place I, to a third party. Accordingly, the
Company recognized $1,240 of its deferred gain.
In connection with the sale of its BML shares to New Valley, certain
specified liabilities aggregating $40,800 remained with BML, including a
Russian bank loan with a balance of $20,418, which was paid in full during
the third quarter, 1997.
At December 31, 1997 and 1996, the Company's subsidiaries owned
approximately 96% of the stock of Liggett-Ducat through purchases of stock
in 1997 and 1996 from other shareholders.
Prior to December 29, 1995, the Company did not consolidate Liggett-Ducat
due to certain events continuing through 1995 which impaired the Company's
ability to control the operations of Liggett-Ducat. Such events included
political restrictions on the Company's ability to influence and control
the management and operating policies of Liggett-Ducat and the risks of
loss of ownership.
During the second quarter of 1996, BOL entered into stock purchase
agreements with the former chairman of Liggett-Ducat and the former
Director of Liggett-Ducat's tobacco operations (the "Sellers"). Under the
stock purchase agreements, BOL acquired 142,558 shares held by the Sellers
for $2,143. The purchase price was payable in installments during 1996 and
certain shares of Liggett-Ducat collateralize the Company's obligation
under both the purchase agreements and the consulting agreements
(described below).
Concurrently, the Company entered into consulting and non-compete
agreements with the Sellers. Under the terms of these agreements, the
Company will pay the Sellers a total of approximately $8,357 over five
years. At December 31, 1997, the liability remaining under these
agreements was $4,875.
In 1996, Russian tax authorities assessed Liggett-Ducat $7,600 for
outstanding tax liabilities relating to 1995. The liability is payable in
two parts, 50% within 2-1/2 years, the remaining 50% over the succeeding
five years. The remaining liability at December 31, 1997 was $4,405.
Liggett-Ducat is in the process of constructing a new cigarette factory on
the outskirts of Moscow which is currently scheduled to be operational in
early 1999. A 49-year land lease was renegotiated in 1996 for the site on
which Liggett-Ducat plans to build the new factory. In addition,
Liggett-Ducat has entered into a construction contract for the plant. The
remaining liability under that contract at December 31, 1997 is
approximately $11,500. Equipment purchase agreements in place at December
31, 1997 total $26,955 of which $22,950 will be financed by the
manufacturers. In February 1998, the Company agreed to guarantee payment
for additional equipment purchased by Liggett-Ducat in the amount of
$7,400 of which $5,841 will be financed by the manufacturers.
The performance of Liggett-Ducat's cigarette operations in Russia is
affected by uncertainties in Russia which may 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.
F-25
<PAGE> 81
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Subsequent Event:
In February 1998, Western Realty agreed to acquire for $20,000, a 30%
profits interest in a company organized by BOL, which will, among other
things, acquire an interest in the new factory discussed above.
5. DISCONTINUED OPERATIONS
A summary of discontinued operations follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Income (loss) from discontinued operations:
New Valley........................................ $ 276 $(1,591) $ 1,800
MAI............................................... 698
SkyBox............................................ 362
------ ------- -------
276 (1,591) 2,860
------ ------- -------
Gain from disposal of operations:
New Valley........................................ 1,649 3,976 5,231
SkyBox............................................ 13,138
------ ------- -------
1,649 3,976 18,369
------ ------- -------
Income from discontinued operations................... $1,925 $ 2,385 $21,229
====== ======= =======
</TABLE>
New Valley:
In October 1996, Thinking Machines adopted a plan to terminate its
parallel processing computer sales and service business. Consequently, the
operating results of this segment, including the write-down of certain
assets, principally inventory, to their net realizable value by $6,100,
were classified as discontinued operations. The 1997 financial statements
of the Company reflect its portion of the income from operations and the
gain on disposal in discontinued operations.
On October 31, 1995, New Valley sold substantially all the assets of its
wholly-owned subsidiary, Western Union Data Services Company, Inc. (the
"Messaging Service Business"), and conveyed substantially all of the
liabilities of the Messaging Service Business for $17,540 in cash and
$2,460 in cancellation of intercompany indebtedness. The financial
statements of the Company reflect its portion of the gain ($5,231) in gain
on disposal of discontinued operations in 1995.
MAI:
In February 1995, the Company distributed to its stockholders a special
dividend (the "MAI Distribution") of the 65.2% equity interest it held in
MAI Systems Corporation ("MAI"). The MAI Distribution reduced the
Company's stockholders' equity (deficit) by $27,085 in the first quarter
of 1995.
In addition, in connection with a transaction wherein MAI's United States
and Canadian bank lenders took title to the stock of MAI's European
subsidiaries in satisfaction of a total of approximately $84,000 of
indebtedness owed by MAI to such bank lenders, the Company may be
required, under certain limited circumstances, to purchase an equity
interest of up to $7,500 in a holding company controlled by the bank
lenders. The $7,500 is recorded as a liability.
F-26
<PAGE> 82
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
SkyBox:
During the first quarter of 1995, the Company sold all of its remaining
common stock of its former subsidiary, SkyBox International Inc.
("SkyBox"), for $9,138. In addition, during the same period, SkyBox
redeemed the 40 shares of SkyBox Series A Preferred Stock which the
Company held for $4,000.
6. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Finished goods............................. $13,273 $15,304
Work-in-process............................ 1,976 4,435
Raw materials.............................. 24,495 34,002
Replacement parts and supplies............. 4,466 4,406
------- -------
Inventories at current cost................ 44,210 58,147
LIFO adjustments........................... (4,898) (4,456)
------- -------
$39,312 $53,691
======= =======
</TABLE>
The Company has a leaf inventory management program whereby, among other
things, it is committed to purchase certain quantities of leaf tobacco.
The purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at
the date of the commitment. At December 31, 1997, Liggett and
Liggett-Ducat had leaf tobacco purchase commitments of approximately
$10,200 and $27,800, respectively. In addition, Liggett-Ducat had leaf
tobacco prepayments of $9,290.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
Land and improvements...................... $ 411 $ 455
Buildings.................................. 6,521 14,205
Machinery and equipment.................... 53,717 49,401
Leasehold improvements..................... 302 302
Construction-in-progress................... 18,179 46,966
------- --------
79,130 111,329
Less accumulated depreciation.............. (33,187) (31,047)
------- --------
$45,943 $ 80,282
======= ========
</TABLE>
The amounts provided for depreciation for the years ended December 31,
1997, 1996 and 1995 were $4,513, $4,412 and $4,699, respectively.
F-27
<PAGE> 83
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The amount of capitalized interest included in property, plant and
equipment was $693 and $6,387 in 1997 and 1996, respectively.
8. SALE OF ASSETS
On January 31, 1997, BOL sold BML to New Valley for $21,500 in cash and a
promissory note of $33,500 which was paid in 1997. (Refer to Note 4.)
On March 11, 1997, Liggett sold to Blue Devil Ventures, a North Carolina
limited liability partnership, surplus realty for $2,200. The Company
recognized a gain of approximately $1,100.
On May 14, 1996, Liggett sold to the County of Durham surplus realty for
$4,300. The Company recognized a gain of approximately $3,600.
On July 15, 1996, the Company sold substantially all of the non-cash
assets and certain liabilities of COM Products, Inc., a subsidiary engaged
in the business of selling micrographics equipment and supplies, for
approximately $3,700 cash and a promissory note for $500. The Company
recognized a gain of approximately $3,000 on this transaction.
9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
December 31,
1997 1996
---- ----
<S> <C> <C>
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $1,141 and $1,511...... $231,723 $231,353
14.500% Subordinated Debentures due 1998.................. 800 800
Notes payable - Foreign................................... 5,000 22,668
Other..................................................... 629 2,425
Liggett:
11.500% Senior Secured Series B Notes due 1999, net of
unamortized discount of $206 and $424................. 112,406 119,688
Variable Rate Series C Senior Secured Notes due 1999...... 32,279 32,279
Revolving credit facility................................. 23,427 24,272
-------- --------
Total notes payable and long-term debt.................... 406,264 433,485
Less:
Current maturities.................................... 6,429 55,242
-------- --------
Amount due after one year................................. $399,835 $378,243
======== ========
</TABLE>
Standstill Agreement - BGLS:
During negotiations with the holders of more than 83% of the BGLS Notes
concerning certain modifications to the terms of such debt, BGLS entered
into a standstill agreement with such holders on August 28, 1997. Pursuant
to the standstill agreement, as amended, such holders agreed that they
would be entitled to receive their portion of the July 31, 1997 interest
payment on the BGLS Notes (in total, $15,340) only after giving BGLS 20
days' notice but in any event by February 6, 1998.
F-28
<PAGE> 84
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
On February 6, 1998, BGLS entered into a further amendment to the
standstill agreement with the Apollo Holders who hold approximately 41.8%
of the BGLS Notes which extended the termination date of such agreement
with respect to the Apollo Holders to March 2, 1998. Also on February 6,
1998, the holder of 41.9% of the BGLS Notes, who had previously been a
party to the standstill agreement, was paid its pro rata share of the July
31, 1997 interest payment on the BGLS Notes. The Company also sold stock
on January 16, 1998 to an affiliate of this holder. (Refer to Note 13.)
On March 2, 1998, the Company entered into an agreement with the Apollo
Holders in which the Apollo Holders agreed to defer the payment of
interest on the BGLS Notes held by them, commencing with the interest
payment that was due July 31, 1997, which they had previously agreed to
defer, through the interest payment due July 31, 2000. The deferred
interest payments will be payable at final maturity of the BGLS Notes on
January 31, 2001 or upon an event of default under the Indenture for the
BGLS Notes.
In connection with the March 2, 1998 agreement with the Apollo Holders,
the Company issued to the Apollo Holders a five-year warrant to purchase
2,000,000 shares of the Company's common stock at a price of $5.00 per
share. The Apollo Holders were also issued a second warrant expiring
October 31, 2004 to purchase an additional 2,150,000 shares of the
Company's common stock at a price of $0.10 per share. The second warrant
will become exercisable on October 31, 1999, and the Company will have the
right under certain conditions prior to that date to substitute for that
warrant a new warrant for 9.9% of the common stock of Liggett.
In connection with the consents of the Liggett bondholders to the
restructuring of the Liggett Notes, on February 2, 1998, the Company
issued 482,970 shares of treasury stock to the Liggett bondholders of
record as of January 15, 1998. The Company has agreed to use its best
efforts to file with the Securities and Exchange Commission (the "SEC") a
shelf registration statement on Form S-3 to be declared effective by May
31, 1998. If the registration statement has not been declared effective by
such date, liquidated damages on the shares of common stock will accrue at
the daily rate of $25, provided that the number of days on which damages
shall accrue shall not exceed 300 days. Liquidated damages would be
payable, at the option of the Company, in cash or in shares of common
stock of the Company.
As a result of the foregoing transactions involving the Company's debt,
the Company expects to record a non cash charge of approximately $29,000
during the first quarter of 1998 reflecting the fair value of the
instruments issued.
15.75% Series B Senior Secured Notes Due 2001
An exchange offer wherein BGLS offered to exchange all its outstanding
Series 2 Notes, Reset Notes and Subordinated Debentures for 15.75% Series
A Senior Secured Notes ("Series A Notes") and Series B Notes closed on
January 30, 1996. All $91,179 of the Series 2 Notes and $125,495 of the
Subordinated Debentures were exchanged. In addition, BGLS cancelled all of
the Subordinated Debentures ($13,705) held by the Company. Subordinated
Debentures in the amount of $800 remained outstanding and were paid at
maturity on April 1, 1998. As part of the exchange offer, substantially
all of the covenants and events of default were eliminated pertaining to
the Subordinated Debentures.
Holders of Reset Notes did not exchange, and the Reset Notes were redeemed
on March 29, 1996 for a total amount of $5,785, including premium,
together with accrued interest of $452. On March 7,
F-29
<PAGE> 85
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
1996, an additional $7,397 face amount of Series A Notes were sold for
$6,300 including accrued interest with the proceeds being used for the
redemption of the Reset Notes.
Pursuant to a registered exchange offer, holders of the Series A Notes
exchanged all of the $107,373 outstanding principal amount for an equal
principal amount of Series B Notes. The exchange closed March 21, 1996.
The Company has cancelled all the Series A Notes.
The Series B Notes are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and
NV Holdings as well as a pledge of all of the New Valley securities held
by BGLS and NV Holdings. The BGLS Series B Notes Indenture contains
certain covenants, which among other things, limit the ability of BGLS to
make distributions to the Company to $6,000 per year ($12,000 if less than
50% of the Series B Notes remain outstanding), limit additional
indebtedness of BGLS to $10,000, limit guaranties of subsidiary
indebtedness by BGLS to $50,000, and restrict certain transactions with
affiliates that exceed $2,000 in any year subject to certain exceptions
which include payments to the Company not to exceed $6,500 per year for
permitted operating expenses, payment of the Chairman's salary and bonus
and certain other expenses, fees and payments. In addition, the Indenture
contains certain restrictions on the ability of the Chairman and certain
of his affiliates to enter into certain transactions with, and receive
payments above specified levels from, New Valley. The Series B Notes may
be redeemed, in whole or in part, through December 31, 1999, at a price of
101% of the principal amount and thereafter at 100%. Interest is payable
at the rate of 15.75% per annum on January 31 and July 31 of each year,
except for the period from October 1, 1995 to January 30, 1996 when
interest was payable at 13.75%.
The Company recorded an extraordinary charge of approximately $9,700 for
the year ended December 31, 1995 relating to the exchanged debt securities
discussed above.
Liggett 11.500% Senior Secured Series B Notes due 1999:
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Liggett Series B Notes"). Interest on the Liggett Series B Notes is
payable semiannually on February 1 and August 1 at an annual rate of
11.5%. The Liggett Series B Notes and Series C Notes referred to below
(collectively, the "Liggett Notes") required 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 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 100% of the principal amount 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.
On January 30, 1998, with the consent of the required majority of the
holders of the Liggett Notes, Liggett entered into various amendments to
the Indenture governing the Liggett Notes, which provided, among other
things, for a deferral of the February 1, 1998 mandatory redemption
payment of $37,500 to the date of final maturity of the Liggett Notes on
February 1, 1999. In connection with the deferral, the Company agreed to
issue 482,970 shares of the Company's common stock to the holders of
record on January 15, 1998 of the Liggett Notes. The Indenture under which
the Liggett Notes are outstanding was also amended to prohibit, with
limited exceptions, payments of dividends and incurrence of new debt by
Liggett and to tighten restrictions on the disposition of proceeds of
F-30
<PAGE> 86
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
asset sales. The Company and BGLS also agreed to guarantee the payment by
Liggett of the August 1, 1998 interest payment on the Liggett Notes. In
addition, Liggett Noteholders were granted a security interest in 16% of
the stock of Liggett-Ducat or a successor entity held by BOL.
On February 1, 1999, all of the Liggett Notes, approximately $144,900,
will reach maturity. There are no refinancing or restructuring
arrangements in place at this time for the notes and no assurances can be
given in this regard. (Refer to Note 1(b).)
Issuance of Liggett Series C Variable Rate Notes:
The Series C Notes have the same terms (other than interest rate, which is
19.75%) and stated maturity as the Liggett Series B Notes.
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 December 31, 1997, $7,728 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, bear a rate of 10.0% at
December 31, 1997. 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 permitted maximum adjusted net worth and net working
capital deficiencies. In January 1997, the Facility was extended for one
year and, in November 1997, was extended for an additional year until
March 8, 1999.
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, which redemption has now been
extended to the maturity date, February 1, 1999. 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. On April 8, 1998, the
Facility was further amended to increase the maximum permitted adjusted
net worth and net working capital deficiencies to $195,000 and $17,000,
respectively. The Facility, as amended, also provides that a default by
Liggett or its subsidiaries under the March 96 Settlements, March 97
Settlements and March 98 Settlements (all as defined below in Note 16)
shall constitute an event of default under the Facility.
On August 29, 1997, the Facility was amended to permit Liggett to borrow
an additional $6,000 which was used on that date in making the interest
payment of $9,700 due on August 1, 1997 to the holders of the Liggett
Notes. BGLS guaranteed the additional $6,000 advance under the Facility
and collateralized the guarantee with $6,000 in cash, deposited with
Liggett's lender. At December 31, 1997, this amount is classified in other
assets on the consolidated balance sheet.
Foreign Loans:
In October, 1995, Liggett-Ducat, a subsidiary of BOL, entered into a
construction loan agreement with a Russian Bank for a period of two years
on behalf of BML for $20,400. The loan was paid in full by BML in the
third quarter of 1997. Deferred financing fees of approximately $4,044
were recorded and were amortized over the term of the loan. (Refer to Note
4.)
F-31
<PAGE> 87
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
At December 31, 1997, Liggett-Ducat had two 6-month credit facilities open
with a Russian bank. The first, for $2,000, expires on April 30, 1998,
initially bore an interest rate of 21%, subsequently raised to 28% on
December 2, 1997. The second, for $3,000, expires on May 16, 1998,
initially bore an interest rate of 25%, subsequently raised to 28% on
December 2, 1997.
Scheduled Maturities:
Scheduled maturities of long-term debt for each of the next five years are
as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.................................... $ 6,429
1999.................................... 168,112
2000....................................
2001.................................... 231,723
2002....................................
Thereafter..............................
----------
$ 406,264
==========
</TABLE>
10. COMMITMENTS
Certain of the Company's subsidiaries lease certain facilities and
equipment used in its operations under both month-to-month and fixed-term
agreements. The aggregate minimum rentals under operating leases with
noncancelable terms for one year or more are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998...................................... $2,144
1999...................................... 735
2000...................................... 280
2001...................................... 267
2002...................................... 143
Thereafter................................ 2,155
------
$5,724
======
</TABLE>
Lease commitments for 2002 and thereafter relate primarily to the
remaining 45 years of a land lease and 23 years of an equipment lease in
Russia.
The Company's rental expense for the years ended December 31, 1997, 1996
and 1995 was $3,625, $5,471 and $4,449, respectively.
11. EMPLOYEE BENEFIT PLANS
Defined Benefit Retirement Plans:
The Company sponsors several defined benefit pension plans, covering
virtually all of Liggett's full-time employees. These plans provide
pension benefits for eligible employees based primarily on their
compensation and length of service. Contributions are made to the pension
plans in amounts necessary to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974 ("ERISA").
F-32
<PAGE> 88
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
In a continuing effort to reduce operating expenses, all defined benefit
plans were frozen between 1993 and 1995 and several early retirement
windows were offered in 1995 and 1996. As a result of these actions, the
Company recorded a curtailment charge (see table below).
The Company's net pension expense consists of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned during the period.......... $ 350 $ 350 $ 454
Interest cost on projected benefit obligation............. 12,255 12,241 12,850
Actual return on assets................................... (42,511) (21,143) (23,501)
Curtailment related to plan restructuring................. 484 1,463 1,550
Net amortization and deferral............................. 27,430 7,384 9,547
-------- -------- --------
$ (1,992) $ 295 $ 900
======== ======== ========
</TABLE>
In accordance with SFAS No. 87, "Employers' Accounting for Pensions", the
overfunded and underfunded plans with respect to the accumulated benefit
obligation at December 31, 1996 have been segregated for financial
statement presentation. All plans were underfunded with respect to the
accumulated benefit obligation at December 31, 1995. An analysis of the
funded status of the Company's defined benefit pension plans and amounts
recognized in the balance sheets at December 31, 1997 and 1996 for the
pension plans are as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------------------------------------------------------------
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Exceed Accumulated Benefits Exceed
Benefits Assets Benefits Assets
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation ...................... $ 157,193 $ 3,843 $ 155,612 $ 2,900
========= ========= ========= =======
Accumulated benefit obligation ................. $ 161,614 $ 3,860 $ 160,587 $ 2,915
========= ========= ========= =======
Projected benefit obligation ................... $ 161,614 $ 3,860 $ 160,587 $ 2,915
Plan assets at fair value ............................ 194,732 169,845
--------- --------- --------- -------
Projected benefit obligation (less than) in
excess of plan assets .......................... (33,118) 3,860 (9,258) 2,915
Unrecognized net gain (loss) ......................... 51,017 (2,058) 28,221 (976)
Curtailment liability ................................ 1,463
Adjustment required to recognize minimum liability ... 2,058 976
--------- --------- --------- -------
Pension liability before purchase accounting
valuation adjustments .......................... 17,899 3,860 20,426 2,915
Purchase accounting valuation adjustments related
to income taxes ................................ (3,077) (3,425)
--------- --------- --------- -------
Net pension liability included in the balance sheets . $ 14,822 $ 3,860 $ 17,001 $ 2,915
========= ========= ========= =======
</TABLE>
Assumptions used in the determination of net pension expense and the
actuarial present value of benefit obligations for the years ended
December 31, 1997 and 1996 follow:
<TABLE>
<S> <C>
Discount rates.................................. 6.25 - 8.00%
Accrued rates of return on invested assets...... 9.0%
Salary increase assumptions..................... N/A
</TABLE>
F-33
<PAGE> 89
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Plan assets consist of commingled funds, marketable equity securities and
corporate and government debt securities.
Postretirement Medical and Life Insurance Plans:
BGLS and Liggett
Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Effective January 1, 1995, retirees are required to fund 100% of
participant medical premiums.
The components of net periodic postretirement benefit cost for the years
ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost, benefits attributed to employee
service during the year............................ $ 24 $ 68 $ 68
Interest cost on accumulated postretirement
benefit obligation................................. 703 829 970
Charge for special termination benefits................. 47 137 489
Amortization of net (gain) loss......................... (193) (92) (26)
---- ---- ------
Net periodic postretirement benefit expense............. $581 $942 $1,501
==== ==== ======
</TABLE>
The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") at December 31, 1997 and 1996
applicable to each employee group for benefits:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Retired employees................................................. $ 6,870 $ 7,899
Active employees - fully eligible................................. 498 674
Active employees - not fully eligible............................. 810 515
------- -------
APBO......................................................... 8,178 9,088
Unrecognized net gain............................................. 3,992 3,324
Purchase accounting valuation adjustment related to
income taxes................................................. (963) (1,072)
------- -------
Postretirement liability.......................................... $11,207 $11,340
======= =======
</TABLE>
The APBO at December 31, 1997 and 1996 was determined using discount rates
of 7.5% and 8%, respectively, and a health care cost trend rate of 4% in
1997 and 1996. A 1% increase in the trend rate for health care costs would
have increased the APBO and net periodic postretirement benefit cost by
$360 and $26, respectively, for the year ended December 31, 1997. The
Company does not hold any assets reserved for use in the plan.
F-34
<PAGE> 90
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Profit Sharing Plan:
Liggett
The 401(k) plans originally called for Liggett contributions matching up
to a 3% employee contribution, plus additional Liggett contributions of up
to 6% of salary based on the achievement of Liggett's profit objectives.
Effective January 1, 1994, Liggett suspended the 3% match for the salaried
employees' 401(k) Plan, but reinstated it on April 1, 1996. Liggett
contributed and expensed $497, $591 and $900 to the 401(k) plans for the
years ended December 31, 1997, 1996 and 1995, respectively.
12. INCOME TAXES
The Company files a consolidated federal income tax return that includes
its more than 80%-owned United States subsidiaries. At December 31, 1997,
the Company had $99,861 of unrecognized net deferred tax assets, comprised
primarily of net operating loss carryforwards, available to offset future
taxable income for federal tax purposes. The Company established a
valuation allowance 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 amounts provided for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. Federal.....................................
Foreign.......................................... $1,134 $ 1,454
State............................................ (11) (52) $ 342
------ ------- -----
Total provision (benefit) for continuing operations. $1,123 $ 1,402 $ 342
====== ======= =====
</TABLE>
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Sales and product allowances....... $ 3,102 $ 2,504
Inventory.......................... 457 $1,568 1,270 $ 683
Coupon accruals.................... 2,369 4,492
Property, plant and equipment...... 5,760 5,218
Employee benefit plan accruals..... 12,698 13,193
Debt restructuring charges......... 19,105 22,334
Excess of tax basis over book basis-
non-consolidated entities....... 9,467 9,467
Excess of book basis over tax basis-
non-consolidated entities....... 5,166
Legal settlements.................. 9,840 2,910
Net operating loss carryforwards... 50,151 45,543
Valuation allowance................ (99,861) (90,646)
Reclassifications.................. (7,328) (7,328) (11,067) (11,067)
--------- ------ ------- -------
$ $ $ $
========= ====== ======= =======
</TABLE>
F-35
<PAGE> 91
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Loss from continuing operations
before income taxes ......................... $(50,687) $(63,516) $(45,002)
-------- -------- --------
Federal income tax (benefit) at statutory rate (17,740) (22,231) (15,751)
Increases (decreases) resulting from:
State income taxes, net of federal income tax
benefits ................................... (8) (34) 342
Foreign taxes ............................... 1,134 1,454
Changes in valuation allowance .............. 9,215 21,471 11,810
Other ....................................... 8,522 742 3,941
-------- -------- --------
Provision for income tax .................... $ 1,123 $ 1,402 $ 342
======== ======== ========
</TABLE>
The Company's tax years from 1993 to 1995 are presently under audit with
the Internal Revenue Service. The Company believes it has adequately
reserved for any potential adjustments which may occur.
At December 31, 1997, the Company and its consolidated group had net
operating loss carryforwards for tax purposes of approximately $125,000
which may be subject to certain restrictions and limitations and which
will expire in the years 2006 to 2017.
13. EQUITY
Treasury Stock:
On March 7, 1997, a partnership controlled by the Company's Chairman,
President and Chief Executive Office and controlling stockholder (the
"Chairman") transferred 400,000 shares of common stock to the Company in
satisfaction of an obligation. (Refer to Note 17.)
In 1995, pursuant to a Stock Grant Agreement, the Company purchased 33,748
shares of common stock from a former employee at market price. During
1995, the Company issued, in the aggregate, 270,000 shares from treasury.
On January 16, 1998, the Company entered into a Stock Purchase Agreement
in which High River purchased 1,500,000 shares of BGL common stock for
$9,000. The Company has agreed to use its best efforts to file with the
SEC,a shelf registration statement on Form S-3 to be declared effective by
May 15, 1998. If the registration statement has not been declared
effective by such date, liquidated damages on the shares of common stock
will accrue at the rate of $25 per day for the first 60-day period, and
thereafter at the rate of $50 per day, provided that the aggregate
liquidated damages shall not exceed $9,000.
On March 12, 1998, the Company granted an option for 1,250,000 shares of
the Company's common stock to a law firm that represents the Company and
Liggett. On May 1, 1998 and April 1, 1999, options for 250,000 and an
additional 1,000,000 shares of common stock are exercisable at $17.50 per
share, respectively. The option expires on March 31, 2003.
F-36
<PAGE> 92
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
14. STOCK PLANS
On December 16, 1996, the Company entered into a Stock Option Agreement
(the "Agreement") with a consultant who serves as a director and President
of New Valley. The Agreement granted such consultant non-qualified stock
options to purchase 1,000,000 shares of the Company's common stock at an
exercise price of $1.00 per share. The options, which have a ten-year
term, vest and become exercisable in six equal annual installments
beginning on July 1, 1997. Pursuant to the Agreement, common stock
dividend equivalents are paid on each vested and unexercised option. The
Company estimated the fair value of such grant on the date of grant using
the Black-Scholes option-pricing model with the following assumptions: a
risk-free interest rate of 6.4%, expected option life of 10 years,
volatility of 81.4% and no expected dividends or forfeiture. Under this
model, the fair value of stock options granted in 1996 was $4,750. The
Company recognized expense of $1,127 and $64 for the years ended 1997 and
1996, respectively.
As of January 1, 1994, the Company had granted 500,000 shares of
restricted common stock to the same consultant. Of the total number of
shares granted, 250,000 were immediately vested and issued during the
third quarter. The remaining 250,000 shares were issued in 1995 and vested
in 1997. In addition, on January 25, 1995, the Company entered into a
non-qualified stock option agreement with the same consultant. Under the
agreement, options to purchase 500,000 shares were granted at $2.00 per
share. The options are exercisable over a ten-year period, beginning with
20% on the grant date and 20% on each of the four anniversaries of the
grant date. The grant provides for dividend equivalent rights on all the
shares underlying the options. During 1997, 1996 and 1995, the Company
recorded charges to income of $205, $222, and $557, respectively, for
compensation based on estimates of the fair market value for the shares
and options granted. In 1997, 1996 and 1995, the Company also recorded
charges to income of $188, $150 and $150, respectively, for the dividend
equivalent rights.
As of January 1, 1998 and 1997, the Company granted to employees of the
Company non-qualified stock options to purchase 42,500 and 422,000,
respectively, shares of the Company's common stock at an exercise price of
$5.00 per share. The options have a ten-year term and vest in six equal
annual installments. The Company will recognize compensation expense of
$154 over the vesting period.
The fair value of option grants to employees is estimated on the date of
grant using the Black-Scholes option-pricing model for pro forma footnote
disclosure purposes with the following assumptions used for grants in
1997: a risk-free interest rate of 6.44%, expected option life of 10
years, volatility of 81.46% and no expected dividends or forfeitures.
A summary of stock options granted to employees follows:
<TABLE>
<CAPTION>
Weighted
Number of Exercise Average
Shares Price Fair Value
------ ----- ----------
<S> <C> <C> <C>
Outstanding on December 31, 1996 0
Granted ................... 422,000 $5.00 $4.30
Exercised ................. 0
Cancelled ................. 0
Outstanding on December 31, 1997 422,000 $5.00 4.30
Exercisable .................... 89,165
</TABLE>
F-37
<PAGE> 93
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company has chosen to continue accounting for stock options at their
intrinsic value. Had the fair value method of accounting been applied to
the Company's stock options granted to employees, the pro forma effect
would be as follows:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net loss as reported..................................... $(49,885)
Estimated fair value of the year's option grants......... 383
Net loss adjusted........................................ (50,268)
Adjusted net loss per share - Basic and Diluted.......... (2.81)
</TABLE>
15. SUPPLEMENTAL CASH FLOW INFORMATION
In accordance with the requirements of SFAS No. 95, "Statement of Cash
Flows," supplemental cash flow information is disclosed below:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
I. Cash paid during the period for:
Interest .................................... $ 43,028 $ 57,362 $ 60,158
Income taxes, net of refunds ................ 462 582 1,735
II. Non-cash investing and financing activities:
Dividends payable ........................... $ 1,387
Distribution of MAI to stockholders ......... $ 27,085
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>
16. 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: (i) smoking and health cases
alleging personal injury brought on behalf of individual smokers
("Individual Actions"), (ii) smoking and health cases alleging personal
injury and purporting to be brought on behalf of a class of plaintiffs
("Class Actions") and (iii) health care cost recovery actions brought by
state and local
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
governments, although recently numerous health care cost recovery actions
have been commenced on behalf of other third-party payors including
asbestos manufacturers, unions and taxpayers ("Attorneys General
Actions"). 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 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, which, for the most part, consisted of the payment of counsel
fees and costs, but this assistance terminated in 1997. In 1995 and 1996,
approximately $1,500 and $6,500, respectively, in counsel fees and costs
were paid by others. In 1995 and 1996, Liggett incurred additional fees
and costs in connection with tobacco-related litigation in the amount of
approximately $4,500 and $3,500, respectively. In 1997, Liggett incurred
fees and costs in the amount of approximately $5,750. 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.
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.
Individual Actions. As of December 31, 1997, there were approximately 250
cases pending against Liggett, and in most cases the other tobacco
companies, 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, 108 are
pending in the State of Florida, 82 are pending in the State of New York
and 19 are pending in the State of Texas. The balance of individual cases
are pending in 16 states. There are four individual cases pending where
Liggett is the only named defendant.
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. In many of these cases, in addition
to compensatory damages, plaintiffs also seek other forms of relief
including disgorgement of profits and punitive damages. 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.
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 October 6, 1997, the
parties settled this matter.
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Class Actions. As of December 31, 1997, there were approximately 40
actions pending, for which either a class has been certified or plaintiffs
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 "Settlements" 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 has been brought by plaintiffs on behalf of all flight attendants
that have worked or are presently working for airlines based in the United
States and who have never regularly smoked cigarettes but allege that they
have been damaged by involuntary exposure to ETS. On October 10, 1997, the
other major tobacco companies settled this matter which settlement
provides for a release of the Company and Liggett. In February 1998, the
Circuit Court approved the settlement, however, a Notice of Appeal was
filed in the Third District Court of Appeal by an objector to the
settlement.
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. On February 17, 1995, the District
Court granted plaintiffs' motion for class certification (the "Class
Certification Order").
On May 23, 1996, the Court of Appeals for the Fifth Circuit reversed the
Class Certification Order and instructed the District Court to dismiss the
class complaint. The Fifth Circuit ruled that the District Court erred in
its analysis of the class certification issues by failing to consider how
variations in state law affect predominance of common questions and the
superiority of the class action mechanism. The appeals panel also held
that the District Court's predominance inquiry did not include
consideration of how a trial on the merits in Castano would be conducted.
The Fifth Circuit further ruled that the "addiction-as-injury" tort is
immature and, accordingly, the District Court could not know whether
common issues would be a "significant" portion of the individual trials.
According to the Fifth Circuit's decision, any savings in judicial
resources that class certification may bring about is speculative and
would likely be overwhelmed by the procedural problems certification
brings. Finally, the Fifth Circuit held that in order to make the class
action manageable, the District Court would be forced to bifurcate issues
in violation of the Seventh Amendment.
The extent of the impact of the Castano decision on tobacco-related class
action litigation is still uncertain, although the decertification of the
Castano class by the Fifth Circuit may preclude other federal courts from
certifying a nationwide class action for trial purposes with respect to
tobacco-related claims. The Castano decision has had to date, however,
only limited effect with respect to courts' decisions regarding narrower
tobacco-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, courts in
New York, Louisiana and Maryland have certified "addiction-as-injury"
class actions that covered only citizens in those states. Two class
actions pending in state court in Florida have also been certified and one
of the actions, the Broin case, had begun trial before settling in 1997.
The Castano decision has had no measurable impact on litigation brought by
or on behalf of single individual claimants.
Attorneys General Actions. As of December 31, 1997, 39 Attorneys General
actions were filed against Liggett and the Company. In February 1998, one
additional action was commenced. As more fully discussed below, through
March 1998, Liggett and the Company have settled 37 of these actions. In
addition, the Company and Liggett have reached settlements with six
Attorneys General representing states or territories which have not yet
commenced litigation. As of December 31, 1997, there were
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
approximately 35 additional third-party payor actions pending. 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 use of tobacco products. The claims asserted in these
health care cost recovery actions vary. In most of these cases, 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. In March 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 settlement. The Company and
Liggett have the right to terminate the Castano settlement under certain
circumstances. 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 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. 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
September 6, 1996, shortly after the class was decertified, the Castano
plaintiffs withdrew the motion for approval of the Castano settlement.
In March 1996, the Company and Liggett entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida,
Louisiana, Massachusetts, Mississippi and West Virginia (the "March 1996
Settlements"). The March 1996 Settlements release the Company and Liggett
from all tobacco-related claims including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors. Certain
of the terms of the March 1996 Settlements are summarized below.
Under the March 1996 Settlements, the five settling 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
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 settling 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 settling 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 March 1996
Settlement.
Settlement funds received by the Attorneys General will be used to
reimburse the states for smoking-related health care 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 March 1996 Settlements with respect to any settling state if any of
the remaining defendants in the litigation succeed on the merits in that
state's respective Attorney General action. The Company and Liggett may
also terminate the March 1996 Settlements if they conclude that too many
states have filed Attorney General actions and have not settled such cases
with the Company and Liggett.
On March 20, 1997, Liggett, the Company and the five settling states
executed an addendum pursuant to which Liggett and the Company agreed to
provide to the five settling states, among other things, the additional
cooperation and compliance with advertising restrictions that is provided
for in the March 1997 Settlements (discussed below). Also, pursuant to the
addendum, the initial settling states agreed to use best efforts to ensure
that in the event of a global tobacco settlement enacted through federal
legislation or otherwise, Liggett's and the Company's financial
obligations under such a global settlement would be no more onerous than
under this settlement.
At December 31, 1995, the Company had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Settlements. At
December 31, 1997, in connection with the March 1998 Settlements, the
Company accrued $16,421 for the present value of the fixed payments under
the March 1998 Settlements. 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.
In March 1997, Liggett and 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, during 1997,
settlements were reached with four more states through their respective
Attorneys General (settlements with these 21 Attorneys General and with
the nationwide class are hereinafter referred to as the "March 1997
Settlements"). On March 12, 1998, Liggett and the Company, announced
settlements with the Attorneys General of 14 states, the District of
Columbia and the U.S. Virgin Islands (the "March 1998 Settlements"). On
March 26, 1998, the Company and Liggett settled with the Attorney General
of Georgia. The foregoing settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against the
Company and Liggett, brought by the Attorneys General and, upon court
approval, the nationwide class.
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The states and territories where settlements have been reached with
Attorneys General are: Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana,
Nebraska, Nevada, New Hampshire, New Jersey, New Mexico, New York, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Utah,
U.S. Virgin Islands, Washington, West Virginia, Wisconsin and Wyoming.
Other states have either recently filed health care cost recovery actions
or indicated intentions to do so. Both Liggett and the Company will
endeavor to resolve those actions on substantially the same terms and
conditions as the March 1998 Settlements, however, there can be no
assurance that any such settlements will be completed.
As mentioned above, in March 1997, Liggett, the Company and plaintiffs
filed a 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 Company anticipates that
should the court in Fletcher, after dissemination of notice to the class
of the pending limited fund class action settlement and a full fairness
hearing with respect thereto, issue a final order and judgment approving
the settlement, such an order would preclude further prosecution by class
members of tobacco-related claims against both Liggett and the Company.
Under the Full Faith and Credit Act, a final judgment entered in a
nationwide class action pending in a state court has a preclusive effect
against any class member with respect to the claims settled and released.
As the class definition in Fletcher encompasses all individual and
third-party payor claimants, it is anticipated that, upon final order and
judgment, all such class members would be barred from further prosecution
of tobacco-related claims against Liggett and the Company.
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.
The Walker court also granted preliminary approval and preliminary
certification of the nationwide class, however, in August 1997, the court
vacated its preliminary certification of the settlement class, which
decision is currently on appeal. The Walker court relied on the Supreme
Court's decision in Amchem Products Inc. v. Windsor in reaching its
decision to vacate preliminary certification of the class. In Amchem, the
Supreme Court affirmed a decision of the Third Circuit vacating the
certification of a settlement class that involved asbestos-exposure
claims. The Supreme Court held that the proposed settlement class did not
meet the requirements of Rule 23 of the Federal Rules of Civil Procedure
for predominance of common issues and adequacy of representation. The
Third Circuit had held that, although classes could be certified for
settlement purposes, Rule 23's requirements had to be satisfied as if the
case were going to be litigated. The Supreme Court agreed that the
fairness and adequacy of the settlement are not pertinent to the
predominance inquiry under Rule 23(b)(3), and thus, the proposed class
must have sufficient unity so that absent class members can fairly be
bound by decisions of class representatives.
After the Amchem opinion was issued by the Supreme Court in June 1997,
objectors to Liggett's settlement in Walker moved for decertification.
Although Liggett's settlement in the Walker action is a "limited fund"
class action settlement proceeding under Rule 23(b)(1) and Amchem was a
Rule 23 (b)(3) case, the court in the Walker action, nonetheless,
decertified the Walker class. Applying Amchem to the Walker case, the
District Court, in a decision issued in August 1997, determined that
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<PAGE> 99
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
while plaintiffs in Walker have a common interest in "maximizing the
limited fund available from the defendants," there remained "substantial
conflicts among class members relating to distribution of the fund and
other key concerns" that made class certification inappropriate.
The Amchem decision's ultimate affect on the viability of both the Walker
and Fletcher settlements remains uncertain given the Fifth Circuit's
recent ruling reaffirming a limited fund class action settlement in In re
Asbestos Litigation ("Ahearn"). In June 1997, the Supreme Court remanded
Ahearn to the Fifth Circuit for consideration in light of Amchem. On
remand, the Fifth Circuit made two decisive distinctions between Amchem
and Ahearn. First, the Ahearn class action proceeded under Rule 23(b)(1)
while Amchem was a Rule 23(b)(3) case, and second, in Ahearn, there was no
allocation or difference in award, according to nature or severity of
injury, as there was in Amchem. The Fifth Circuit concluded that all
members of the class and all class representatives share common interests
and none of the uncommon questions, abounding in Amchem, exist.
The remaining material terms of the March 1996 Settlements, the March 1997
Settlements and the March 1998 Settlements are described below.
Pursuant to each of the settlements, both 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 the 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.
Pursuant to the March 1996 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or the
Company, prior to the third anniversary of the settlement, would receive
certain settlement benefits, including limitations on potential liability.
Pursuant to the agreement, any such combining tobacco company would be
released from the lawsuits brought by the five initial settling states.
Such combining tobacco company would be obligated to pay into the
settlement fund within sixty days of becoming bound to the agreement
$135,000, and make annual payments of 2.5% of the combining company's
pre-tax income (but not less than $30,000 per year). Such combining
tobacco company would also have to comply with the advertising and access
restrictions provided for in the agreement, and would have to withdraw
their objections to the FDA rule.
Pursuant to the March 1997 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or the
Company, prior to the fourth anniversary of the settlements, would receive
certain settlement benefits, including limitations on potential liability
for affiliates not engaged in domestic tobacco operations and a waiver of
any obligation to post a bond to
F-44
<PAGE> 100
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
appeal any future adverse judgment. In addition, within 120 days following
any such combination, Liggett would be required to pay the settlement fund
$25,000. Under all settlements, the plaintiffs have agreed not to seek an
injunction preventing a defendant tobacco company combining with Liggett
or the Company from spinning off any affiliate which is not engaged in the
domestic tobacco business.
Pursuant to the March 1998 Settlements, Liggett is required to pay each of
the settling states and territories their relative share (based on the
Medicaid population of each state over the total Medicaid population of
the United States) of between 27.5% and 30% of Liggett's pre-tax income
each year for 25 years, with a minimum payment guarantee of $1,000 per
state over the first nine years of the agreement. The aggregate liability
under the March 1996 Settlements, the March 1997 Settlements and the March
1998 Settlements is $39,556, the present value of which, when discounted
at the rate of 18% per annum, is $19,365 at December 31, 1997. Minimum
payments to be made for these settlements over the next five years and
thereafter are: 1998: $4,044; 1999: $4,406; 2000: $4,406; 2001: $4,465;
2002: $4,518; thereafter: $17,717. The annual percentage is subject to
increase, pro rata from 27.5% up to 30%, depending on the number of
additional states joining the settlement. Pursuant to the "most favored
nation" provisions under the March 1996 Settlement and the March 1997
Settlements, each of the states settling under those settlements could
benefit from the economic terms of the March 1998 Settlements. In the case
of the March 1997 Settlements, in the event that the Fletcher class is
approved, 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. In all settlements, 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. The March
1998 Settlements provide for additional restrictions and regulations on
Liggett's advertising, including a prohibition on outdoor advertising and
product advertising on the Internet and on payments for product placement
in movies and television.
Under all settlements, the Company and Liggett are also entitled to most
favored nation treatment in the event any settling Attorney General
reaches a settlement with any other defendant tobacco company. Under the
March 1996 Settlement and March 1997 Settlements, in the event of a global
settlement involving federal legislation with any other defendant tobacco
company, the settling Attorneys General agreed to use their "best efforts"
to ensure that the Company and Liggett's liability under such legislation
should be no more onerous than under these settlements. Under the March
1998 Settlements, the settling Attorneys General agreed to write letters
to Congress and the President of the United States to ensure that the
Company and Liggett's liability under any such legislation should be no
more onerous than under these settlements.
Copies of the various settlement agreements are filed as exhibits to the
Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.
Trials. Liggett is a defendant in trials currently proceeding in the State
of Minnesota by Hubert H. Humphrey, III, its Attorney General and Blue
Cross and Blue Shield of Minnesota v. Philip Morris Incorporated, et al.,
District Court of the Second Judicial District, Ramsey County, Minnesota,
which commenced on January 20, 1998. Liggett settled the claims of the
State of Minnesota on March 20, 1997, but still remains a defendant in the
case with respect to the State's co-plaintiff, Blue Cross and Blue Shield
of Minnesota. Liggett is also a defendant in Dunn and Wiley v. RJR Nabisco
Holdings Corp., et al., Superior Court, Delaware County, Indiana, which
trial commenced on February 9, 1998.
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BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
There are several other trial dates scheduled during 1998 for individual
cases; however, trial dates are subject to change.
Proposed Resolution. In June 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
"Resolution"). The proposed Resolution mandates a total reformation and
restructuring of how tobacco products are manufactured, marketed and
distributed in the United States.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access
restrictions, licensing of tobacco retailers, the adoption and enforcement
of "no sales to minors" laws by states, surcharges against the industry
for failure to achieve underage smoking reduction goals, regulation of
tobacco products by the FDA, public disclosure of industry documents and
research, smoking cessation programs, compliance programs by the industry,
public smoking and smoking in the workplace, enforcement of the proposed
Resolution, industry payments and litigation.
The proposed Resolution would require the FDA to impose annual surcharges
on the industry if targeted reductions in underage smoking incidence are
not achieved in accordance with a legislative timetable. The surcharge
would be based upon an approximation of the present value of the profit
the companies would earn over the lives of all underage consumers in
excess of the target, and would be allocated among participating
manufacturers based on their market share of the United States cigarette
industry.
The proposed Resolution would require participating manufacturers to make
substantial payments in the year of implementation and thereafter
("Industry Payments"). Participating manufacturers would be required to
make an aggregate $10 billion initial Industry Payment on the date that
federal legislation implementing the terms of the proposed Resolution is
signed. This Industry Payment would be based on relative market
capitalization. Thereafter, the participating companies would be required
to make specified annual Industry Payments determined and allocated among
the companies based on volume of domestic sales as long as the companies
continue to sell tobacco products in the United States. These Industry
Payments, which would begin on December 31 of the first full year after
implementing federal legislation is signed, would be in the following
amounts (at 1996 volume levels) -- year 1: $8.5 billion; year 2: $9.5
billion; year 3: $11.5 billion; year 4: $14 billion; and each year
thereafter: $15 billion. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate, and would be adjusted
to reflect changes from 1996 domestic sales volume levels.
The Industry Payments would be separate from any surcharges. The Industry
Payments would receive priority and would not be dischargeable in any
bankruptcy or reorganization proceeding and would be the obligation only
of entities selling tobacco products in the United States (and not their
affiliated companies). The proposed Resolution provides that all payments
by the industry would be ordinary and necessary business expenses in the
year of payment, and no part thereof would be either in settlement of an
actual or potential liability for a fine or penalty (civil or criminal) or
the cost of a tangible or intangible asset. The proposed Resolution would
provide for the pass-through to consumers of the annual Industry Payments
in order to promote the maximum reduction in underage use.
F-46
<PAGE> 102
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
If enacted, the federal legislation provided for in the proposed
Resolution would settle present attorney general health care cost recovery
actions (or similar actions brought by or on behalf of any governmental
entity other than the federal government), parens patriae and smoking and
health class actions and all "addiction"/dependence claims, and would bar
similar actions from being maintained in the future. However, the proposed
Resolution provides that no stay applications will be made in pending
governmental actions without the mutual consent of the parties. The
proposed Resolution would not affect any smoking and health class action
or any health care cost recovery action that is reduced to final judgment
before implementing federal legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, except as expressly changed by
implementing federal legislation. Claims, however, could not be maintained
on a class or other aggregated basis, and could be maintained only against
tobacco manufacturing companies (and not their retailers, distributors or
affiliated companies). In addition, all punitive damage claims based on
past conduct would be resolved as part of the proposed Resolution, and
future claimants could seek punitive damages only with respect to claims
predicated upon conduct taking place after the effective date of
implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could
be maintained only if based on subrogation of individual claims. Under
subrogation principles, a payor of medical costs can seek recovery from a
third party only by "standing in the shoes" of the injured party and being
subject to all defenses available against the injured party.
The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil
liabilities relating to past conduct. Judgments and settlements arising
from tort actions would be paid as follows: The proposed Resolution would
set an annual aggregate cap of up to 33% of the annual base Industry
Payment (including any reductions for volume declines). Any judgments or
settlements exceeding the cap in a particular year would roll over into
the next year. While judgments and settlements would run against the
defendant, they would give rise to an 80-cents-on-the-dollar credit
against the annual Industry Payment. Finally, any individual judgments in
excess of $1 million would be paid at the rate of $1 million per year
unless every other judgment and settlement could first be satisfied within
the annual aggregate cap. In all circumstances, however, the companies
would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in
the litigation settled by the proposed Resolution.
Under the proposed Resolution, the Company and Liggett would be deemed to
be a "non-participating manufacturer". The proposed Resolution provides,
among other things, that a non-participating manufacturer would be
required to place into escrow, each year, an amount equal to 150% of its
share of the payment required of participating manufacturers (other than
the portion allocated to public health programs and federal and state
enforcement). These funds would be earmarked for potential liability
payments and could be reclaimed, with interest, after 35 years, to the
extent they had not been paid out in liability.
The proposals are currently being reviewed by the White House, Congress
and various public interest groups. Separately, the other tobacco
companies negotiated settlements of the Attorneys General health care cost
recovery actions in Mississippi, Florida and Texas. 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.
F-47
<PAGE> 103
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Other Related Matters. 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 (the "Eastern District Investigation") regarding possible
violations of criminal law relating to the activities of The Council for
Tobacco Research - USA, Inc. (the "CTR"). Liggett was a sponsor of the CTR
at one time. In May 1996, Liggett received a subpoena from a Federal grand
jury sitting in the Eastern District of New York, to which Liggett has
responded.
In March 1996, and in each of March, July, October and December 1997, the
Company and/or Liggett received subpoenas from a Federal grand jury in
connection with an investigation by the United States Department of
Justice (the "DOJ Investigation") involving the industry's knowledge of:
the health consequences of smoking cigarettes; the targeting of children
by the industry; and the addictive nature of nicotine and the manipulation
of nicotine by the industry. Liggett has responded to the March 1996,
March 1997 and July 1997 subpoenas and is in the process of responding to
the October and December 1997 subpoenas. The Company understands that the
Eastern District Investigation and the DOJ Investigation have, for all
intents and purposes, been consolidated into one investigation being
conducted by the Department of Justice. The Company and Liggett are
unable, at this time, to predict the outcome of this investigation.
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.
The Company is unable to make a meaningful estimate with respect to the
amount of loss that could result from an unfavorable outcome of the cases
pending against the Company, because the complaints filed in these cases
rarely detail alleged damages. Typically, the claims set forth in an
individual's complaint against the tobacco industry pray for money damages
in an amount to be determined by a jury, plus punitive damages and costs.
These damage claims are usually stated as being for at least the minimum
necessary to invoke the jurisdiction of the court.
Third-party payor claimants and others have set forth several additional
variations on relief sought: funding of corrective public education
campaigns relating to issues of smoking and health; funding for clinical
smoking cessation programs; disgorgement of profits from sales of
cigarettes; restitution; treble damages; and attorneys' fees.
Nevertheless, no specific amounts are provided. It is, however, understood
that requested damages against the tobacco company defendants in these
cases may be in the billions of dollars.
F-48
<PAGE> 104
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
It is possible that the Company's consolidated financial position, results
of operation and cash flow could be materially adversely affected by an
unfavorable outcome in any of such pending tobacco-related litigation.
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 management believes that current operations are
conducted in material compliance 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,
has not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending against
the Company unrelated to smoking or tobacco 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.
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. 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.
In December 1997, the United States District Court for the District of
Massachusetts enjoined this legislation from going into effect, however,
on December 15, 1997, Liggett began complying with this legislation by
providing ingredient information to the Massachusetts Department of Public
Health.
On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("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.
F-49
<PAGE> 105
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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. In a
speech on September 17, 1997, President Clinton called for federal
legislation that, among other things, would raise cigarette prices by up
to $1.50 per pack. Since then, several bills have been introduced in the
Senate that purport to propose legislation along these lines. Management
is 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.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco
industry, the effects of which, at this time, the Company is not able to
evaluate.
Other Matters:
In June 1993, the Company obtained expropriation and forced abandonment
insurance coverage for its investment in its Ducat Place I real estate
project in Moscow, Russia. Shortly thereafter, the Company submitted a
Notice of Loss to the insurer, under and pursuant to the policy. The
insurer denied the claim and, in July 1994, arbitration proceedings were
commenced in the United Kingdom. In January 1997, the Company recognized a
gain of $4,125 in settlement of the dispute.
On or about March 13, 1997, a shareholder derivative suit was filed
against New Valley, as a nominal defendant, its directors and the Company
in the Delaware Chancery Court, by a shareholder of New Valley. The suit
alleges that New Valley's purchase of the BML Shares constituted a
self-dealing transaction which involved the payment of excessive
consideration by New Valley. The plaintiff seeks (i) a declaration that
New Valley's directors breached their fiduciary duties, the Company aided
and abetted such breaches and such parties are therefore liable to New
Valley, and (ii) unspecified damages to be awarded to New Valley. The
Company's time to respond to the complaint has not yet expired. The
Company believes that the allegations are without merit. Although there
can be no assurances, management is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
F-50
<PAGE> 106
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
17. RELATED PARTY TRANSACTIONS
On March 7, 1997, a partnership controlled by the Chairman transferred to
the Company the remaining 400,000 pledged shares of the Company's common
stock with a market value of $1,800 in final satisfaction of an obligation
to make certain payments to the Company on account of a former executive's
outstanding indebtedness of $5,477 (deducted from equity).
On December 16, 1996, the Company entered into a Stock Option Agreement
relating to 1,000,000 shares of the Company's common stock with a
consultant who serves as a director and President of New Valley. In
addition, the Company granted the same consultant options to purchase
500,000 shares in 1995. (Refer to Note 15.) During 1997 and 1996, the
consultant received consulting fees of $480 per year from the Company and
a subsidiary.
An outside director of the Company is a stockholder of and serves as the
secretary and treasurer of a registered broker-dealer that has performed
services for the Company and its affiliates since before December 31,
1994. The broker-dealer received brokerage commissions and other income of
approximately $522, $317 and $584 from the Company and/or its affiliates
during 1997, 1996 and 1995, respectively. The broker-dealer, in the
ordinary course of its business, engages in brokerage activities with New
Valley's broker-dealer subsidiary on customary terms. In connection with
the acquisition of certain office buildings by New Valley on January 10,
1996, this director received a commission of $220 from the seller.
During 1995, the Company and New Valley entered into an expense sharing
agreement whereby certain lease, legal and administrative expenses are
allocated to the entity incurring the expense. Expense reimbursements
amounted to $375, $462 and $571 for the years ended December 31, 1997,
1996 and 1995, respectively.
During 1996, the Company and BGLS entered into a court-approved
Stipulation and Agreement (the "Settlement") with New Valley relating to
the Company's and BGLS' application under the Federal Bankruptcy Code for
reimbursement of legal fees and expenses incurred by them in connection
with New Valley's bankruptcy reorganization proceedings. Pursuant to the
Settlement, New Valley reimbursed the Company and BGLS $655 for such legal
fees and expenses. The terms of the Settlement were substantially similar
to the terms of previous settlements between New Valley and other
applicants who had sought reimbursement of reorganization-related legal
fees and expenses.
On December 18, 1996, New Valley loaned BGLS $990 under a short-term
promissory note due January 31, 1997 and bearing interest at 14%. On
January 2, 1997, New Valley loaned BGLS an additional $975 under another
short-term promissory note due January 31, 1997 and bearing interest at
14%. Both loans including interest were repaid on January 31, 1997. At
December 31, 1996, the loan and accrued interest thereon of $996 was
included in current liabilities as notes payable.
In connection with their agreement to serve as the Company's nominees at
RJR Nabisco's 1996 annual meeting of stockholders, two directors of New
Valley were each paid $30 by the Company during the fourth quarter of
1995. As discussed in Note 3, the Company has entered into certain other
agreements with New Valley in connection with RJR Nabisco.
On January 31, 1997, New Valley entered into a stock purchase agreement
with BOL pursuant to which New Valley acquired 10,483 shares of BML common
stock (99.1%) for a purchase price of
F-51
<PAGE> 107
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
$55,000, consisting of $21,500 in cash and a $33,500 promissory note with
an interest rate of 9%. The note was paid in full in 1997. (Refer to Note
4.)
18. SEGMENT INFORMATION
On January 31, 1997, BOL sold all of its shares in BML to New Valley.
(Refer to Note 4). In 1997, there is only one industry segment, tobacco and,
accordingly, there is no industry segment disclosure. Information about the
Company's operations by industry in the tobacco and real estate segments in 1996
follows:
Industry Segment:
<TABLE>
<CAPTION>
Real Corporate
1996 Tobacco Estate and Others Consolidated
---- ------- ------ ---------- ------------
<S> <C> <C> <C> <C>
Net sales.................. $455,222 $ 2,675 $ 2,459 $460,356
Operating income (loss).... 4,805 99 (8,831) (3,927)
Identifiable assets........ 114,648 55,012 8,017 177,677
Capital expenditures....... 8,861 25,318 62 34,241
Depreciation and
amortization............. 8,185 253 381 8,819
</TABLE>
<TABLE>
<CAPTION>
Geographic Area:
United
1997 States Russia Consolidated
---- ------ ------ ------------
<S> <C> <C> <C>
Net sales.............................. $312,268 $77,347 $389,615
Operating income....................... 3,794 4,235 8,029
Identifiable assets.................... 80,235 46,222 126,457
<CAPTION>
United
1996 States Russia Consolidated
---- ------ ------ ------------
<S> <C> <C> <C>
Net sales.............................. $403,521 $56,835 $460,356
Operating income (loss)................ 6,045 (9,972) (3,927)
Identifiable assets.................... 105,381 72,296 177,677
</TABLE>
F-52
<PAGE> 108
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ((CONTINUED)
BROOKE GROUP LTD.
BGLS INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End
Description of Period Expenses Accounts Deductions of Period
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 Allowances for:
Doubtful accounts .................... $ 750 $ 226 $ 156 $ 820
Cash discounts ....................... 530 11,319 11,286 563
Sales returns ........................ 5,000 250 4,750
------ ------- -------- ------- ------
Total ............................. $6,280 $11,545 $ $11,692 $6,133
====== ======= ======== ======= ======
Provision for inventory obsolescence ....... $3,218 $ 221 $ $ 2,282 $1,157
====== ======= ======== ======= ======
Year ended December 31, 1996 Allowances for:
Doubtful accounts .................... $ 921 $ 903 $ 1,074 $ 750
Cash discounts ....................... 615 13,929 14,014 530
Sales returns ........................ 5,000 5,000
------ ------- -------- ------- ------
Total ............................. $6,536 $14,832 $ $15,088 $6,280
====== ======= ======== ======= ======
Provision for inventory obsolescence ....... $2,641 $ 1,341 $ $ 764 $3,218
====== ======= ======== ======= ======
Year ended December 31, 1995 Allowances for:
Doubtful accounts .................... $ 249 $ 260 $ 692(b) $ 280 $ 921
Cash discounts ....................... 720 14,579 14,684 615
Sales returns ........................ 5,800 1,030 (800)(a) 1,030 5,000
------ ------- -------- ------- ------
Total ............................. $6,769 $15,869 $ (108) $15,994 $6,536
====== ======= ======== ======= ======
Provision for inventory obsolescence ....... $1,369 $ 1,072 $ 630(b) $ 430 $2,641
====== ======= ======== ======= ======
</TABLE>
(a) Charged to net sales.
(b) Amounts include impact of consolidating Liggett-Ducat.
F-53
<PAGE> 109
NEW VALLEY CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the
Shareholders of New Valley Corporation
We have audited the accompanying consolidated balance sheets of New Valley
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years for the period ended
December 31, 1997. We have also audited the financial statement schedule of New
Valley Corporation (Schedule III - Real Estate and Accumulated Depreciation as
of December 31, 1997 and 1996) listed in the index on page 29 of this Form 10-K.
These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We did not audit the financial statements of Thinking Machines
Corporation, a consolidated subsidiary, which statements reflect total assets
constituting 1% and 3% of consolidated total assets at December 31, 1997 and
1996, respectively and a net loss (net of minority interest therein)
constituting 25% and 90% of the consolidated net loss for the years ended
December 31, 1997 and 1996, respectively. Those statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Thinking Machines Corporation, are based
solely upon the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of New Valley Corporation
and subsidiaries at December 31, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Miami, Florida
March 31, 1998
F-54
<PAGE> 111
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1997 1996
-------- ------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 11,606 $ 57,282
Investment securities available for sale.............................. 51,993 61,454
Trading securities owned.............................................. 49,988 29,761
Restricted assets..................................................... 232 2,080
Receivable from clearing brokers...................................... 1,205 23,870
Other current assets.................................................. 3,618 9,273
--------- ---------
Total current assets.............................................. 118,642 183,720
--------- ---------
Investment in real estate.................................................. 256,645 179,571
Furniture and equipment, net............................................... 12,194 --
Investment securities available for sale................................... -- 2,716
Restricted assets.......................................................... 5,484 6,766
Long-term investments, net................................................. 27,224 13,270
Other assets............................................................... 21,202 20,497
--------- ---------
Total assets...................................................... $ 441,391 $ 406,540
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Margin loan payable................................................... $ 13,012 $ --
Current portion of notes payable and long-term obligations............ 760 2,310
Accounts payable and accrued liabilities.............................. 57,722 44,888
Prepetition claims and restructuring accruals......................... 12,611 15,526
Income taxes.......................................................... 18,413 18,243
Securities sold, not yet purchased.................................... 25,610 17,143
--------- ---------
Total current liabilities......................................... 128,128 98,110
--------- ---------
Notes payable.............................................................. 173,814 157,941
Other long-term liabilities................................................ 11,210 12,282
Redeemable preferred shares................................................ 258,638 210,571
Commitments and contingencies.............................................. -- --
Shareholders' equity (deficiency):
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: 1997 - $139,412; 1996 - $115,944.............. 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 and 191,551,586 shares outstanding............ 96 96
Additional paid-in capital............................................ 604,215 644,789
Accumulated deficiency................................................ (742,427) (721,854)
Unearned compensation on stock options................................ (158) (731)
Unrealized gain on investment securities.............................. 7,596 5,057
--------- ---------
Total shareholders' equity (deficiency).................................... (130,399) (72,364)
--------- ---------
Total liabilities and shareholders' equity (deficiency)........... $ 441,391 $ 406,540
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-55
<PAGE> 112
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Principal transactions, net.................................. $ 16,754 $ 28,344 $ 18,237
Commissions.................................................. 16,727 17,755 9,888
Corporate finance fees....................................... 12,514 10,230 5,942
Gain on sale of investments.................................. 20,492 10,014 7,078
Real estate leasing.......................................... 27,067 23,559 --
Interest and dividends....................................... 9,417 16,951 21,047
Other income................................................. 5,470 5,101 5,538
--------- --------- --------
Total revenues.......................................... 108,441 111,954 67,730
--------- --------- --------
Costs and expenses:
Selling, general and administrative expenses................. 115,901 119,154 54,216
Interest..................................................... 16,988 17,760 2,102
Recovery of restructuring charges............................ -- (9,706) (2,044)
Write-down of long-term investments ......................... 3,796 1,001 11,790
--------- --------- --------
Total costs and expenses................................ 136,685 128,209 66,064
--------- --------- --------
Income (loss) from continuing operations before income
taxes, minority interests and extraordinary item............. (28,244) (16,255) 1,666
Income tax provision (benefit)................................... 186 300 292
Minority interests in loss from continuing operations of
consolidated subsidiary...................................... 3,237 3,339 --
--------- --------- --------
Income (loss) from continuing operations......................... (25,193) (13,216) 1,374
Discontinued operations (Note 4):
Income (loss) from discontinued operations, net of minority
interests of $416 in 1997 and $2,404 in 1996, and
income taxes of and $480 in 1995........................... 661 (3,818) 4,315
Gain on disposal of discontinued operations, net of minority
interests of $2,884 and $1,502 in 1997 and 1996, and in-
come taxes of and $1,400 in 1995........................... 3,959 9,544 12,558
--------- --------- --------
Income from discontinued operations..................... 4,620 5,726 16,873
--------- --------- --------
Net income (loss)................................................ (20,573) (7,490) 18,247
Dividend requirements on preferred shares........................ (68,475) (61,949) (72,303)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased......................... -- 4,279 40,342
--------- --------- --------
Net income (loss) applicable to Common Shares.................... $ (89,048) $ (65,160) $(13,714)
========== ========= ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-56
<PAGE> 113
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
----------- ---------- ----------
<S> <C> <C> <C>
Income (loss) per common share (Basic):
Continuing operations ............... $ (9.78) $ (7.40) $ (3.20)
Discontinued operations ............. .48 .60 1.77
------------- ------------- -------------
Net income (loss) .............. $ (9.30) $ (6.80) $ (1.43)
============= ============= =============
Number of shares used in computation .... 9,578,000 9,578,000 9,554,000
============= ============= =============
Income (loss) per common share (Diluted):
Continuing operations ............... $ (9.78) $ (7.40) $ (3.20)
Discontinued operations ............. .48 .60 1.77
------------- ------------- -------------
Net income (loss) .............. $ (9.30) $ (6.80) $ (1.43)
============= ============= =============
Number of shares used in computation .... 9,578,000 9,578,000 9,554,000
============= ============= =============
Supplemental information:
Additional interest expense, absent
the Chapter 11 filing ............. $ 2,314
=============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-57
<PAGE> 114
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNEARNED
CLASS B ADDITIONAL COMPENSATION
PREFERRED COMMON PAID-IN ACCUMULATED ON STOCK UNREALIZED
SHARES SHARES CAPITAL DEFICIT OPTIONS GAINS
------ ------ ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...................... $ 279 $ 1,887 $692,001 $(732,611)
Net income................................... 18,247
Undeclared dividends and accretion on
redeemable preferred shares................ (53,821)
Purchase of redeemable preferred shares 40,342
Exercise of stock options.................... 29 536
Unrealized gain on investment securities,
net of taxes............................... $2,650
----- ------- -------- --------- ------
Balance, December 31, 1995...................... 279 1,916 679,058 (714,364) 2,650
Net loss..................................... (7,490)
Undeclared dividends and accretion on
redeemable preferred shares................ (41,123)
Purchase of redeemable preferred shares 4,279
Effect of 1-for-20 reverse stock split (1,820) 1,820
Issuance of stock options.................... 755 $ (755)
Compensation expense on stock option grants.. 24
Unrealized gain on investment securities..... 2,407
----- -------- -------- --------- ------- ------
Balance, December 31, 1996...................... 279 96 644,789 (721,854) (731) 5,057
Net loss..................................... (20,573)
Undeclared dividends and accretion on
redeemable preferred shares................ (45,148)
Unrealized gain on investment securities 2,539
Compensation expense on stock option grants 15
Adjustment to unearned compensation
on stock options........................... (558) 558
Public sale of subsidiaries' common
stock, net................................. 5,132
----- -------- -------- --------- ------- ------
Balance, December 31, 1997...................... $ 279 $ 96 $604,215 $(742,427) $ (158) $7,596
===== ======== ======== ========= ======= ======
</TABLE>
F-58
<PAGE> 115
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................... $ (20,573) $ (7,490) $ 18,247
Adjustments to reconcile net income (loss) to net
cash used for operating activities:
Gain on disposal of business ...................................... -- (9,544) (12,558)
Loss (income) from discontinued operations ........................ (661) 3,818 (4,315)
Depreciation and amortization ..................................... 9,414 4,757 608
Provision for loss on long-term investments ....................... 3,796 1,001 11,790
Reversal of restructuring accruals ................................ (9,706) (2,044)
Stock Compensation Expense ........................................ 2,934 -- --
Changes in assets and liabilities, net of effects from acquisition:
Decrease (increase) in receivables and other assets.............. 1,774 (16,069) 11,684
Decrease in income taxes payable and deferred taxes.............. 170 (2,040) (32,517)
Increase (decrease) in securities sold not yet purchased ........ 8,467 4,096 (9,359)
Increase (decrease) in accounts payable and accrued
Liabilities ................................................... (3,954) 6,437 5,223
--------- --------- ---------
Net cash used for continuing operations ................................ 1,367 (24,740) (13,241)
Net cash provided from discontinued operations ......................... (1,616) 2,041 6,105
--------- --------- ---------
Net cash used for operating activities ................................. (249) (22,699) (7,136)
--------- --------- ---------
Cash flows from investing activities:
Sale or maturity of investment securities ......................... 45,472 160,088 250,129
Purchase of investment securities ................................. (30,756) (12,825) (458,017)
Sale or liquidation of long-term investments ...................... 2,807 18,292 36,109
Purchase of long-term investments ................................. (18,707) (3,051) (77,411)
Decrease (increase) in restricted assets .......................... 3,130 29,159 341,634
Purchase of furniture and equipment ............................... (3,478) (5,240) --
Purchase of and additions to real estate .......................... (7,454) (24,496) --
Sale of real estate ............................................... 8,718
Payment of prepetition claims and restructuring accruals .......... (828) (8,160) (584,397)
Payment for acquisitions, net of cash acquired .................... (20,014) 1,915 (25,750)
Collection of contract receivable ................................. -- -- 300,000
Net proceeds from disposal of business ............................ -- 10,174 17,540
--------- --------- ---------
Net cash (used for) provided from investing activities ................. (21,110) 165,856 (200,163)
--------- --------- ---------
Cash flows from financing activities:
Payment of preferred dividends .................................... -- (41,419) (132,162)
Purchase of redeemable preferred shares ........................... -- (10,530) (47,761)
Increase (decrease) in margin loan payable ........................ 13,012 (75,119) 75,119
Payment of long-term notes and other liabilities .................. (62,739) (10,549) (12,890)
Increase in long term borrowings .................................. 19,993 -- --
Issuance of subsidiary stock ...................................... 5,417 -- --
Exercise of stock options ......................................... -- -- 565
--------- --------- ---------
Net cash used for financing activities ................................. (24,317) (137,617) (117,129)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents ................... (45,676) 5,540 (324,428)
Cash and cash equivalents, beginning of year ........................... 57,282 51,742 376,170
--------- --------- ---------
Cash and cash equivalents, end of year ................................. $ 11,606 $ 57,282 $ 51,742
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-59
<PAGE> 116
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
-------- -------- ------
<S> <C> <C> <C>
Supplemental cash flow information:
Cash paid during the year for:
Interest.............................................................. $ 16,667 $17,482 $ 2,105
Income taxes.......................................................... 116 2,341 33,662
Detail of acquisitions:
Fair value of assets acquired........................................... $ 94,114 $27,301 $59,066
Liabilities assumed..................................................... 74,100 16,701 32,316
-------- -------- --------
Cash paid............................................................... 20,014 10,600 26,750
-------- -------- --------
Less cash acquired...................................................... -- (12,515) (1,000)
-------- -------- --------
Net cash (paid) received for acquisition................................ $(20,014) $ 1,915 $(25,750)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-60
<PAGE> 117
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of New
Valley Corporation and its majority owned subsidiaries (the "Company"). All
significant intercompany transactions are eliminated in consolidation.
Certain amounts in the 1995 and 1996 financial statements have been
reclassified to conform to the 1997 presentation.
NATURE OF OPERATIONS
The Company and its subsidiaries are engaged in the investment banking
and brokerage business, in the ownership and management of commercial real
estate, and in the acquisition of operating companies. As discussed in Note 21,
the investment banking and brokerage segment accounted for 52% and 64% of the
Company's revenues and 35% and 2% of the Company's operating loss from
continuing operations for the years ended December 31, 1997 and 1996,
respectively. The Company's investment banking and brokerage segment provides
its services principally for middle market and emerging growth companies through
a coordinated effort among corporate finance, research, capital markets,
investment management, brokerage and trading professionals.
REORGANIZATION
On November 15, 1991, an involuntary petition under Chapter 11 of Title
11 of the United States Code (the "Bankruptcy Code") was commenced against the
Company in the United States Bankruptcy Court for the District of New Jersey
(the "Bankruptcy Court"). On March 31, 1993, the Company consented to the entry
of an order for relief placing it under the protection of Chapter 11 of the
Bankruptcy Code.
On November 1, 1994, the Bankruptcy Court entered an order confirming
the First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan"). The terms of the Joint Plan provided for, among other things, the
sale of Western Union Financial Services Company, Inc. ("FSI"), a wholly-owned
subsidiary of the Company, and certain other Company assets related to FSI's
money transfer business, payment in cash of all allowed claims, payment of
postpetition interest in the amount of $178,000 to certain creditors, a $50 per
share cash dividend to the holders of the Company's $15.00 Class A Increasing
Rate Cumulative Senior Preferred Shares ($100 Liquidation Value), $.01 par value
per share (the "Class A Senior Preferred Shares"), a tender offer by the Company
for up to 150,000 shares of the Class A Senior Preferred Shares, at a price of
$80 per share, and the reinstatement of all of the Company's equity interests.
On November 15, 1994, pursuant to the Asset Purchase Agreement, dated
as of October 20, 1994, as amended (the "Purchase Agreement"), by and between
the Company and First Financial Management Corporation ("FFMC"), FFMC purchased
all of the common stock of FSI and other assets relating to FSI's money transfer
business for $1,193,000 (the "Purchase Price"). The Purchase Price consisted of
$593,000 in cash, $300,000 representing the assumption of the Western Union
Pension Plan obligation, and $300,000 paid on January 13, 1995 for certain
intangible assets of FSI. The Purchase Agreement contained various terms and
conditions, including the escrow of $45,000 of the Purchase Price, a put option
by the Company to sell to FFMC, and a call option by FFMC to purchase, Western
Union Data Services Company, Inc., a wholly-owned subsidiary of the Company
engaged in the messaging service business (the "Messaging Services Business"),
for $20,000, exercisable during the first quarter of 1996, and various services
agreements between the Company and FFMC.
On January 18, 1995, the effective date of the Joint Plan, the Company
paid approximately $550,000 on account of allowed prepetition claims and emerged
from bankruptcy. At December 31, 1997, the Company's remaining accruals totaled
$12,611 for unsettled prepetition claims and restructuring accruals (see
Note 17). The Company's accounting policy is to evaluate the remaining
restructuring accruals on a quarterly basis and adjust liabilities as claims
are settled or dismissed by the Bankruptcy Court.
F-61
<PAGE> 118
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
On October 31, 1995, the Company completed the sale of substantially
all of the assets (exclusive of certain contracts), and conveyed substantially
all of the liabilities, of the Messaging Services Business to FFMC for $20,000,
which consisted of $17,540 in cash and $2,460 in cancellation of intercompany
indebtedness. The sale of the Messaging Services Business was effective as of
October 1, 1995, and the Company recognized a gain on the sale of such business
of $12,558, net of income taxes of $1,400.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ESTIMATES. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REINCORPORATION AND REVERSE STOCK SPLIT. On July 29, 1996, the Company
completed its reincorporation from the State of New York to the State of
Delaware and effected a one-for-twenty reverse stock split of the Company's
Common Shares. In connection with the reverse stock split, all per share data
have been restated to reflect retroactively the reverse stock split.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid
financial instruments with an original maturity of less than three months to be
cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Investments in securities and
securities sold, not yet purchased traded on a national securities exchange or
listed on NASDAQ are valued at the last reported sales prices of the reporting
period. Futures contracts are valued at their last reported sales price.
Investments in securities, principally warrants, which have exercise or holding
period restrictions, are valued at fair value as determined by the Company's
management based on the intrinsic value of the warrants discounted for such
restrictions. For cash and cash equivalents, restricted assets, receivable from
clearing brokers, and short-term loan, the carrying value of these amounts is a
reasonable estimate of their fair value. The fair value of long-term debt,
including current portion, is estimated based on current rates offered to the
Company for debt of the same maturities. The fair value of the Company's
redeemable preferred shares is based on their last reported sales price.
INVESTMENT SECURITIES. The Company classifies investments in debt and
marketable equity securities as either trading, available for sale, or held to
maturity. Trading securities are carried at fair value, with unrealized gains
and losses included in income. Investments classified as available for sale are
carried at fair value, with net unrealized gains and losses included as a
separate component of shareholders' equity (deficit). Debt securities classified
as held to maturity are carried at amortized cost. Realized gains and losses are
included in other income, except for those relating to the Company's
broker-dealer subsidiary which are included in principal transactions revenues.
The cost of securities sold is determined based on average cost.
RESTRICTED ASSETS. Restricted assets at December 31, 1997 consisted
primarily of $5,484 pledged as collateral for a $5,000 letter of credit which is
used as collateral for a long-term lease of commercial office space. Restricted
assets at December 31, 1996 consisted primarily of $5,266 pledged as collateral
for a $5,000 letter of credit which is used as collateral for a long-term lease
of commercial office space, and $3,275 pledged as collateral for a letter of
credit which is used as collateral for an insurance policy.
PROPERTY AND EQUIPMENT. Office buildings are depreciated over periods
approximating 40 years, the estimated useful life, using the straight-line
method (see Note 7). Shopping centers are depreciated over periods approximating
25 years, the estimated useful life, using the straight-line
F-62
<PAGE> 119
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
method. Furniture and equipment (including equipment subject to capital leases)
is depreciated over the estimated useful lives, using the straight-line method.
Leasehold improvements are amortized on a straight-line basis over their
estimated useful lives or the lease term, if shorter. The cost and the related
accumulated depreciation are eliminated upon retirement or other disposition and
any resulting gain or loss is reflected in operations. Depreciation and
amortization expense was $9,414, $4,757, and $608 in 1997, 1996, and 1995,
respectively.
INCOME TAXES. Under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", deferred taxes reflect the
impact of temporary differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts recognized for tax
purposes as well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates. A valuation
allowance reduces deferred tax assets when it is deemed more likely than not
that some portion or all of the deferred tax assets will not be realized.
SECURITIES SOLD, NOT YET PURCHASED. Securities sold, not yet purchased
represent obligations of the Company to deliver a specified security at a
contracted price and thereby create a liability to repurchase the security in
the market at prevailing prices. Accordingly, these transactions involve, to
varying degrees, elements of market risk, as the Company's ultimate obligation
to satisfy the sale of securities sold, not yet purchased may exceed the amount
recognized in the consolidated balance sheet.
REAL ESTATE LEASING REVENUES. The real estate properties are being
leased to tenants under operating leases. Base rental revenue is generally
recognized on a straight-line basis over the term of the lease. The lease
agreements for certain properties contain provisions which provide for
reimbursement of real estate taxes and operating expenses over base year
amounts, and in certain cases as fixed increases in rent. In addition, the lease
agreements for certain tenants provide additional rentals based upon revenues in
excess of base amounts, and such amounts are accrued as earned. The future
minimum rents scheduled to be received on non-cancelable operating leases at
December 31, 1997 are $29,130, $25,796, $21,138, $14,156, $12,341 for
the years 1998, 1999, 2000, 2001 and 2002, respectively, and $30,259 for
subsequent years.
BASIC INCOME (LOSS) PER COMMON SHARE. Basic net income (loss) per
common share is based on the weighted average number of Common Shares
outstanding. Net income (loss) per common share represents net income (loss)
after dividend requirements on redeemable and non-redeemable preferred shares
(undeclared) and any adjustment for the difference between excess of carrying
value of redeemable preferred shares over the cost of the shares purchased.
Diluted net income (loss) per common share assuming full dilution is based on
the weighted average number of Common Shares outstanding plus the additional
common shares resulting from the conversion of convertible preferred shares and
the exercise of stock options and warrants if such conversion was dilutive.
Options to purchase 330,000 common shares at $.58 per and 40,417 common
shares issuable upon the conversion of Class B Preferred Shares were not
included in the computation of diluted loss per share as the effect would have
been anti-dilutive.
In February 1997, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards
designed to improve the earnings per share ("EPS") information provided in
financial statements by simplifying the existing computational guidelines,
revising the disclosure requirements, and increasing the comparability of EPS
data on an international basis. Prior years' EPS have been restated to conform
with standards established by SFAS No. 128.
RECOVERABILITY OF LONG-LIVED ASSETS. An impairment loss is recognized
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Beginning in 1995 with the adoption of SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", assets are grouped and evaluated at the lowest level
for which there are identifiable cash flows that are largely independent of the
cash flows of other groups of assets. The Company considers historical
performance and future estimated results in its evaluation of potential
impairment and then compares the carrying amount of the asset to the estimated
future cash flows expected to result from the use of the asset. If the carrying
amount of the asset exceeds estimated expected undiscounted future cash flows,
the Company measures the amount of the impairment by comparing the carrying
amount of the asset to its fair value. The estimation of fair value is generally
measured by discounting expected future cash flows at the rate the Company
utilizes to evaluate potential investments. The Company estimates fair value
based on the best information available making whatever estimates, judgments and
projections are considered necessary.
F-63
<PAGE> 120
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NEW ACCOUNTING PRONOUNCEMENTS.
In June 1997, the FASB released SFAS No. 130, "Reporting Comprehensive
Income). SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements and is effective for fiscal years beginning after December
15, 1997. The Company believes that adoption of SFAS No. 130 will not have a
material impact on the Company's financial statements.
In October 1997, the AICPA issued SOP 97-2, "Software Revenue
Recognition". SOP 97-2 provides guidance in recognizing revenue on software
transactions when persuasive evidence of an arrangement exists, delivery has
occurred, the vendor's fee is fixed or determinable and collectibility is
probably. SOP 97-2 is effective for transactions entered into in fiscal years
beginning after December 15, 1997. The Company believes that adoption of SOP
97-2 will not have a material impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, which establishes standards for the
way that public business enterprises report information about operating
segments. SFAS No. 131 is effective for financial statements for fiscal years
beginning after December 15, 1997. The Company is currently reviewing its
operating segments disclosures and will adopt SFAS No. 131 in the fourth quarter
of 1998.
3. ACQUISITIONS
On May 31, 1995, the Company consummated its acquisition of Ladenburg,
Thalmann & Co. Inc. ("Ladenburg"), a registered broker-dealer and investment
bank, for $25,750, net of cash acquired. The acquisition was treated as a
purchase for financial reporting purposes and, accordingly, these consolidated
financial statements include the operations of Ladenburg from the date of
acquisition. The excess of the consideration paid over the estimated fair value
of net assets acquired of $1,342 has been recorded as goodwill to be amortized
on a straight-line basis over 15 years.
On January 10 and January 11, 1996, the Company acquired four
commercial office buildings (the "Office Buildings") and eight shopping centers
(the "Shopping Centers") for an aggregate purchase price of $183,900, consisting
of $23,900 in cash and $160,000 in non-recourse mortgage financing provided by
the sellers. In addition, the Company has capitalized approximately $800 in
costs related to the acquisitions. The Company paid $11,400 in cash and executed
four promissory notes aggregating $100,000 for the Office Buildings. The
Shopping Centers were acquired for an aggregate purchase price of $72,500,
consisting of $12,500 in cash and $60,000 in eight promissory notes. In November
1997, the Company sold one of the Shopping Centers for $5,400 and realized a
gain of $1,200.
On January 11, 1996, the Company provided a $10,600 convertible bridge
loan to finance Thinking Machines Corporation ("Thinking Machines"), a developer
and marketer of data mining and knowledge discovery software and services. In
February 1996, the bridge loan was converted into a controlling interest in a
partnership which held approximately 61.4% of Thinking Machines' outstanding
common shares. In December 1997, the Company acquired for $3,150 additional
shares in Thinking Machines pursuant to a rights offering by Thinking Machines
to its existing shareholders which increased the Company's ownership to
approximately 72.7% of the outstanding Thinking Machines shares. As a result of
the rights offering, the Company recorded $2,417 as additional paid-in-capital
which represented its interest in the increase in Thinking Machines'
shareholders' equity. The acquisition of Thinking Machines through the
conversion of the bridge loan was accounted for as a purchase for financial
reporting purposes, and accordingly, the operations of Thinking Machines
subsequent to January 31, 1996 are included in the operations of the Company.
The fair value of assets acquired, including goodwill of $1,726, was $27,301 and
liabilities assumed totaled $7,613. In addition, minority interests in the
amount of $9,088 were recognized at the time of acquisition. To date, no
material revenues have been recognized by Thinking Machines with respect to the
sale or licensing of such software and services. Thinking Machines is also
subject to uncertainties relating to, without limitation, the development and
marketing of computer products, including customer acceptance and required
funding, technological changes, capitalization, and the ability to utilize and
exploit its intellectual property and propriety software technology.
F-64
<PAGE> 121
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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"), an affiliate
of the Company, pursuant to which 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, which was collateralized by the BML Shares, was paid during 1997.
BML is developing a three-phase complex on 2.2 acres of land in
downtown Moscow. 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 had been reduced to reflect prepayments of rent. In 1997,
BML completed construction of Ducat Place II, a 150,000 sq. ft. office building.
Ducat Place II has been leased to a number of leading international companies.
The third phase, Ducat Place III, is planned as a 350,000 sq. ft. mixed-use
complex, with construction anticipated to commence in 1999.
In connection with the Purchase Agreement, certain specified
liabilities of BML aggregating approximately $40,000 remained as liabilities of
BML after the purchase of the BML Shares by the Company. These liabilities
included a $20,400 loan to a Russian bank for the construction of Ducat Place II
(the "Construction Loan"). In addition, the liabilities of BML at the time of
purchase 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.
In August 1997, BML refinanced all amounts due under the Construction
Loan with borrowings under a new credit facility with another Russian bank. The
new credit facility bears interest at 16% per year, matures no later than August
2002, with principal payments commencing after the first year, and is
collateralized by a mortgage on Ducat Place II and guaranteed by the Company. At
December 31, 1997, borrowings under the new credit facility totaled $20,078.
In February 1998, the Company entered into a joint venture to make real
estate and other investments in Russia to which the real estate assets of BML,
including Ducat Place II and the site for Ducat Place III, will be contributed
(see Note 22).
4. DISCONTINUED OPERATIONS
As noted above, the Company sold the Messaging Services Business
effective October 1, 1995. During the fourth quarter of 1996, 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. Thinking Machines wrote-down certain
assets, principally inventory, related to these operations to their net
realizable value and recorded a charge of $6,200 for these reserves, which is
included in the loss on discontinued operations. Accordingly, the financial
statements reflect the financial position and the results of operations of the
discontinued operations of FSI, the Messaging Services Business, and Thinking
Machines separately from continuing operations.
Summarized operating results of the discontinued operations, as shown
below, include the discontinued operations of Thinking Machines for the year
ended December 31, 1997 and the eleven months ended December 31, 1996 and the
Messaging Services Business for the nine months ended September 30, 1995.
F-65
<PAGE> 122
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues........................................... $ 3,386 $15,017 $37,771
===== ====== ======
Operating (loss) income............................ $ 1,077 $ (6,222) $ 4,795
===== ====== =====
Income before income taxes and minority
Interests..................................... $ 1,077 $ (6,222) $ 4,795
Provision for income taxes......................... -- -- 480
Minority interests................................. 416 2,404 --
----- ------ -------
Net (loss) income.................................. $ 661 $ (3,818) $ 4,315
===== ====== =====
</TABLE>
In December 1996, Thinking Machines sold part of its discontinued
operations for $4,300 in cash which resulted in the Company recording a gain on
disposal of discontinued operations of $2,386, net of minority interests of
$1,502. In April 1997, Thinking Machines sold the remaining part of its
discontinued operations for $2,405 in cash and a percentage of certain future
operating profits. The sale 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. During 1997, Thinking Machines
received profit participation payments totaling $1,176, which the Company
recorded as a gain on discontinued operations of $742, representing its average
ownership percentage of Thinking Machines in 1997.
During the fourth quarter of 1996, the Company received $5,774 in cash
and $600 in a promissory note (paid in 1997) in settlement of a receivable claim
originally began by Western Union Telegraph Company. In addition, the Company
reduced its liability related to certain Western Union retirees by $784. The
Company recorded the gain on settlement of $6,374 and liability reduction of
$784 as gain on disposal of discontinued operations. During 1997, the Company
recorded a gain on disposal of discontinued operations of $3,687 related to
reversals in estimates of certain pre-petition claims under Chapter 11 and
restructuring which resulted from the Company's Money Transfer business.
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 net unrealized gains on sales of
investment securities available for sale of $7,596 ($12,431 of unrealized gains
and $4,835 of unrealized losses) for the year ended December 31, 1997 and $1,347
($6,114 of unrealized gains and $4,767 of unrealized losses) for the year ended
December 31, 1996.
F-66
<PAGE> 123
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The components of investment securities available for sale are as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
1997
----
Short-term investments......................... $ 6,218 -- -- $ 6,218
Marketable equity securities................... 34,494 $ 7,492 $ 2,101 39,885
Marketable warrants............................ -- 4,939 -- 4,939
Marketable debt securities .................... 3,685 -- 2,734 951
------- --------- ----- -------
Investment securities.......................... $ 44,397 $ 12,431 $ 4,835 $ 51,993
====== ====== ===== ======
1996
----
Marketable equity securities................... $ 55,429 $ 6,501 $ 476 $ 61,454
Marketable debt securities (long-term)......... 3,685 -- 969 2,716
------ ------- ------ ------
Total securities available for sale............ 59,114 6,501 1,445 64,170
Less long-term portion of investment
securities............................... (3,685) -- (969) (2,716)
------- ------- ----- -------
Investment securities - current portion........ $ 55,429 $ 6,501 $ 476 $ 61,454
====== ===== ====== ======
</TABLE>
Included in marketable debt securities are acquired securities with
a face amount of $14,900 (cost of $3,185) of a company that was in default
at the time of purchase and is currently in default under its various debt
obligations.
INVESTMENT IN RJR NABISCO
As of December 31, 1997 and 1996, the Company held 612,650 and
1,741,150, respectively, shares of common stock of RJR Nabisco Holdings Corp.
("RJR Nabisco") with a market value of $22,898 (cost of $18,780) and $59,199
(cost of $53,372), respectively. The Company expensed $100 in 1997, $11,724 in
1996 and $3,879 in 1995 relating to the RJR Nabisco investment.
In June 1996, various agreements between High River Limited Partnership
("High River"), the Company and Brooke were terminated by mutual consent.
Pursuant to these agreements the parties had agreed to take certain actions
during late 1995 and throughout 1996 designed to cause RJR Nabisco to effectuate
a spinoff of its food business, Nabisco Holdings Corp. The termination of the
High River agreements left in effect for one year certain provisions concerning
payments to be made to High River in the event the Company achieved a profit
(after deducting certain expenses) on the sale of the shares of RJR Nabisco
common stock which were held by it or they were valued at the end of such year
at higher than their purchase price or in the event Brooke or its affiliates
engaged in certain transactions with RJR Nabisco. Based on the market price of
RJR Nabisco common stock, no amounts were payable by the Company under these
agreements.
Pursuant to a December 31, 1995 agreement between the Company and
Brooke whereby the Company agreed to reimburse Brooke and its subsidiaries for
certain reasonable out-of-pocket expenses relating to RJR Nabisco, the Company
paid Brooke and its subsidiaries a total of $17 and $2,370 in 1997 and 1996.
On February 29, 1996, the Company entered into a total return equity
swap transaction (the "Swap") with an unaffiliated company (the "Counterparty")
relating to 1,000,000 shares of RJR Nabisco common stock (reduced to 750,000
shares of RJR Nabisco common stock as of August 13, 1996). The Company entered
into the Swap in order to be able to participate in any increase or decrease in
the value of the RJR Nabisco common stock during the term of the Swap. The
transaction was for a period of up to six months, unless extended by the
parties, subject to earlier termination at the election of the Company, and
provided for the Company to make a payment to the Counterparty of $1,537 upon
commencement of the Swap. At the termination of the transaction, if the price of
the RJR Nabisco common stock during a specified period prior to such date (the
"Final Price") exceeded $34.42,
F-67
<PAGE> 124
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
the price of the RJR Nabisco common stock during a specified period following
the commencement of the Swap (the "Initial Price"), the Counterparty was
required to pay the Company an amount in cash equal to the amount of such
appreciation with respect to the shares of RJR Nabisco common stock subject to
the Swap plus the value of any dividends with a record date occurring during the
Swap period. If the Final Price was less than the Initial Price, then the
Company was required to pay the Counterparty at the termination of the
transaction an amount in cash equal to the amount of such decline with respect
to the shares of RJR Nabisco common stock subject to the Swap, offset by the
value of any dividends, provided that, with respect to approximately 225,000
shares of RJR Nabisco common stock, the Company was not required to pay any
amount in excess of an approximate 25% decline in the value of the shares. The
potential obligations of the Counterparty under the Swap were guaranteed by the
Counterparty's parent, a large foreign bank, and the Company pledged certain
collateral in respect of its potential obligations under the Swap and agreed to
pledge additional collateral under certain conditions. The Company marked its
obligation with respect to the Swap to fair value with unrealized gains or
losses included in income. During the third quarter of 1997, the Swap was
terminated in connection with the Company's reduction of its holdings of RJR
Nabisco common stock, and the Company recognized a loss on the Swap of $7,305
for the year ended December 31, 1996.
6. TRADING SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The components of trading securities owned and securities sold, not yet
purchased are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
TRADING SECURITIES TRADING SECURITIES
SECURITIES SOLD, NOT YET SECURITIES SOLD, NOT YET
OWNED PURCHASED OWNED PURCHASED
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Common stock................. $ 16,208 $ 4,513 $21,248 $ 5,900
Equity and index options..... 5,290 17,494 6,241 11,243
Other........................ 28,490 3,603 2,272 --
------- ------- ------- ----------
$ 49,988 $ 25,610 $29,761 $17,143
====== ====== ====== ======
</TABLE>
7. INVESTMENT IN REAL ESTATE AND NOTES PAYABLE
The components of the Company's investment in real estate and the
related non-recourse notes payable collateralized by such real estate at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
U.S. RUSSIAN
OFFICE OFFICE SHOPPING
BUILDINGS BUILDINGS CENTERS TOTAL
--------- --------- ------- -----
<S> <C> <C> <C> <C>
Land........................................ $ 19,450 $ 19,300 $ 16,087 $ 54,837
Buildings................................... 92,332 66,688 51,430 210,450
-------- --------- -------- --------
Total.................................. 111,782 85,988 67,517 265,287
Less accumulated depreciated................ (4,616) (879) (3,147) (8,642)
-------- --------- -------- --------
Net investment in real estate.......... $107,166 $ 85,109 $ 64,370 $256,645
======== ========= ======== ========
Notes payable............................... $ 99,302 $ 20,078 $ 54,801 $174,181
Current portion of notes payable............ 336 424 760
-------- --------- -------- --------
Notes payable - long-term portion........... $ 98,966 $ 19,654 $ 54,801 $173,421
======== ========= ======== ========
</TABLE>
F-68
<PAGE> 125
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At December 31, 1997, the Company's investment in real estate
collateralized four promissory notes aggregating $99,302 related to the Office
Buildings and eight promissory notes aggregating $54,801 related to the Shopping
Centers. The Office Building notes bear interest at 7.5%, require principal
amortization over approximately 40 years, with maturity dates ranging from 2006
to 2011. The Office Building notes have fixed monthly principal and interest
payments aggregating $648. Each Shopping Center note has a term of five years,
requires no principal amortization, and bears interest payable monthly at the
rate of 8% for the first two and one-half years and at the rate of 9% for the
remainder of the term. In November 1997, the Company sold one of the Shopping
Centers for $5,400 and realized a gain of $1,200.
Required principal payments on the notes payable over the next five
years are $760 in 1998, $5,675 in 1999, $7,243 in 2000, $62,741 in 2001 and $462
in 2002 and $97,300 thereafter.
8. LONG-TERM INVESTMENTS
Long-term investments consisted of investments in the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
<S> <C> <C> <C> <C>
Limited partnerships....... $ 27,224 $ 33,329 $ 7,054 $ 7,914
Foreign corporations....... -- -- 2,000 2,000
Joint venture.............. -- -- 3,796 3,796
Other...................... -- -- 420 420
------- ------- -------- --------
Total ..................... $ 27,224 $ 33,329 $13,270 $14,130
====== ====== ====== ======
</TABLE>
The principal business of the limited partnerships is investing in
investment securities. The estimated fair value of the limited partnerships was
provided by the partnerships based on the indicated market values of the
underlying investment portfolio. The Company is required under certain limited
partnership agreements to make additional investments up to an aggregate of
$5,740 as of December 31, 1997. The Company's investments in limited
partnerships are illiquid, and the ultimate realization of these investments is
subject to the performance of the underlying partnership and its management by
the general partners. During 1997, the Company sold for an amount which
approximated its $2,000 cost an investment in a foreign corporation which owned
an interest in a Russian bank. During 1997, 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 with a charge to operations of
$3,796.
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 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.
The Company's estimate of the fair value of its long-term investments
are subject to judgment and are not necessarily indicative of the amounts that
could be realized in the current market.
F-69
<PAGE> 126
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
9. PENSIONS AND RETIREE BENEFITS
Ladenburg has a Profit Sharing Plan (the "Plan") for substantially all
its employees. The Plan includes two features: profit sharing and a deferred
compensation vehicle. Contributions to the profit sharing portion of the Plan
are made by Ladenburg on a discretionary basis. The deferred compensation
feature of the Plan enables non-salaried employees to invest up to 15% of their
pre-tax annual compensation. For the years ended December 31, 1996 and 1995,
employer contributions to the Plan were approximately $200 in each year,
excluding those made under the deferred compensation feature described above.
The Plan was inactive in 1997.
The Company maintains 401(k) plans for substantially all employees,
except those employees of Thinking Machines. These 401(k) plans allow eligible
employees to invest a percentage of their pre-tax compensation. The Company
committed to contribute $500 of matching contributions in 1997. The Company did
not make discretionary contributions to these 401(k) plans in 1996.
10. COMMITMENT AND CONTINGENCIES
LEASES
The Company, Thinking Machines and Ladenburg are currently obligated
under three noncancelable lease agreements for office space, expiring in
September 2000, October 1998 and December 2015, respectively. The following is a
schedule by fiscal year of future minimum rental payments required under the
agreements that have noncancelable terms of one year or more at December 31,
1997:
1998...................................... $ 4,615
1999...................................... 4,279
2000...................................... 4,042
2001...................................... 3,552
2002...................................... 3,795
2003 and thereafter....................... 50,246
--------
Total................................ $ 70,529
======
Rental expense for operating leases during 1997, 1996 and 1995 was
$4,076, $3,914 and $1,677, respectively.
LAWSUITS
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 were without merit. Although there can
be no assurances, management is of the opinion, after consultation with counsel,
that the ultimate resolution of this matter will not have a material adverse
effect on the Company's consolidated financial position, results of operations
or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a securities
broker-dealer and participation in public underwritings. These lawsuits involve
claims for substantial or indeterminate amounts and are in varying stages of
legal proceedings. In the opinion of management, after consultation with
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
F-70
<PAGE> 127
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11. FEDERAL INCOME TAX
At December 31, 1997, the Company had $97,444 of unrecognized net
deferred tax assets, comprised primarily of net operating loss carryforwards,
available to offset future taxable income for federal tax purposes. A valuation
allowance has been provided against this deferred tax 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 income
taxes, which represented the effect of the Alternative Minimum Tax and state
income taxes, for the three years ended December 31, 1997, 1996 and 1995, does
not bear a customary relationship with pre-tax accounting income from continuing
operations principally as a consequence of the change in the valuation allowance
relating to deferred tax assets. The provision for income taxes on continuing
operations differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate (35%) to pretax income from
continuing operations as a result of the following differences:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Loss) income from continuing operations.................. $ (25,007) $(12,916) $1,666
------- ------- ------
(Credit) provision under statutory U.S. tax rates......... (8,752) (4,521) 583
(Decrease) increase in taxes resulting from:
Nontaxable items...................................... 2,603 (224) 543
State taxes, net of Federal benefit................... 55 195 180
Foreign Taxes......................................... 108
Increase (decrease) in valuation reserve.................. 6,172 4,850 (1,014)
------- ------- ------
Income tax provision (benefit).................. $ 186 $ 300 $ 292
======= ======= ======
</TABLE>
Income taxes associated with discontinued operations and extraordinary
items have been shown net of the utilization of the net operating loss
carryforward and the change in other deferred tax assets.
Deferred tax amounts are comprised of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward:
Restricted net operating loss........................... $15,561 $18,675
Unrestricted net operating loss......................... 70,216 65,237
Other..................................................... 17,209 10,399
-------- --------
Total deferred tax assets................................. 102,986 94,311
-------- --------
Deferred tax liabilities:
Other..................................................... (5,542) (3,039)
-------- --------
Total deferred tax liabilities................................ (5,542) (3,039)
-------- --------
Net deferred tax assets....................................... 97,444 91,272
Valuation allowance........................................... (97,444) (91,272)
-------- --------
Net deferred taxes............................................ $ -- $ --
======== ========
</TABLE>
F-71
<PAGE> 128
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In December 1987, the Company consummated certain restructuring
transactions that included certain changes in the ownership of the Company's
stock. The Internal Revenue Code restricts the amount of future income that may
be offset by losses and credits incurred prior to an ownership change. The
Company's annual limitation on the use of its net operating losses is
approximately $7,700, computed by multiplying the "long-term tax exempt rate" at
the time of change of ownership by the fair market value of the company's
outstanding stock immediately before the ownership change. The limitation is
cumulative; any unused limitation from one year may be added to the limitation
of a following year. Operating losses incurred subsequent to an ownership change
are generally not subject to such restrictions.
As of December 31, 1997, the Company had consolidated net operating
loss carryforwards of approximately $213,000 for tax purposes, which expire at
various dates through 2008. Approximately $38,700 net operating loss
carryforwards constitute pre-change losses and $174,300 of net operating losses
were unrestricted.
12. OTHER LONG-TERM LIABILITIES
The components of other long-term liabilities, excluding notes payable,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
----------------------- -----------------------
LONG-TERM CURRENT LONG-TERM CURRENT
PORTION PORTION PORTION PORTION
--------- ------- --------- -------
<S> <C> <C> <C> <C>
Retiree and disability obligations.............. $ 3,638 $ 2,000 $ 6,774 $1,700
Minority interests.............................. 6,112 -- 4,775 --
Other long-term liabilities..................... 1,460 -- 733 300
------ ------ ------- ------
Total other long-term liabilities............... $ 11,210 $ 2,000 $12,282 $2,000
====== ===== ====== =====
</TABLE>
13. REDEEMABLE PREFERRED SHARES
At December 31, 1997 and 1996, the Company had authorized and
outstanding 2,000,000 and 1,071,462, respectively, of its Class A Senior
Preferred Shares. At December 31, 1997 and 1996, respectively, the carrying
value of such shares amounted to $258,638 and $210,571, including undeclared
dividends of $163,302 and $117,117, or $152.41 and $109.31 per share.
The holders of Class A Senior Preferred Shares are currently entitled
to receive a quarterly dividend, as declared by the Board, payable at the rate
of $19.00 per annum. The Class A Senior Preferred Shares are mandatorily
redeemable on January 1, 2003 at $100 per share plus accrued dividends. The
Class A Senior Preferred Shares were recorded at their market value ($80 per
share) at December 30, 1987, the date of issuance. The discount from the
liquidation value is accreted, utilizing the interest method, as a charge to
additional paid-in capital and an increase to the recorded value of the Class A
Senior Preferred Shares, through the redemption date. As of December 31, 1997,
the unamortized discount on the Class A Senior Preferred Shares was $4,918.
In the event a required dividend or redemption is not made on the Class
A Senior Preferred Shares, no dividends shall be paid or declared and no
distribution made on any junior stock other than a dividend payable in junior
stock. If at any time six quarterly dividends payable on the Class A Senior
Preferred Shares shall be in arrears or such shares are not redeemed when
required, the number of directors will be increased by two and the
F-72
<PAGE> 129
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
holders of the Class A Senior Preferred Shares, voting as a class, will have the
right to elect two directors until full cumulative dividends shall have been
paid or declared and set aside for payment. Such directors were designated
pursuant to the Joint Plan in November 1994.
Pursuant to the Joint Plan, the Company declared a cash dividend in
December 1994 on the Class A Senior Preferred Shares of $50 per share which was
paid in January 1995. The Company declared and paid cash dividends on the Class
A Senior Preferred Shares of $40 per share in 1996 and $50 per share in 1995.
Undeclared dividends are accrued quarterly and such accrued and unpaid dividends
shall accrue additional dividends in respect thereof compounded monthly at the
rate of 19% per annum, both of which accruals are included in the carrying
amount of redeemable preferred shares, offset by a charge to additional paid-in
capital.
On April 6, 1995, the Company's Board of Directors (the "Board")
authorized the Company to repurchase as many as 200,000 shares of its Class A
Senior Preferred Shares. The Company completed the repurchase for an aggregate
consideration of $18,674 and thereafter, on June 21, 1995, the Board authorized
the Company to repurchase as many as 300,000 additional shares. The Company
repurchased in the open market 33,000 of such shares in July 1995 and 106,400 of
such shares in September 1995 for an aggregate consideration of $24,732. During
the first quarter of 1996, the Company repurchased 72,104 of such shares for an
aggregate consideration of $10,530. The repurchase of the Class A Senior
Preferred Shares increased the Company's additional paid-in capital by $4,279
for the 72,104 shares acquired in 1996 and by $32,984 for the 339,400 shares
acquired in 1995 based on the difference between the purchase price and the
carrying values of the shares.
On November 18, 1996, the Company granted to an executive officer and
director of the Company 36,000 Class A Senior Preferred Shares (the "Award
Shares"). The Award Shares are identical with all other Class A Senior Preferred
Shares issued and outstanding as of July 1, 1996, including undeclared dividends
of $3,776 and declared dividends of $1,080. The Award Shares vested one-sixth on
July 1, 1997 and one-sixth on each of the five succeeding one-year anniversaries
thereof through and including July 1, 2002. The Company recorded deferred
compensation of $5,436 representing the fair market value of the Award Shares on
November 18, 1996 and $3,020 of original issue discount representing the
difference between the book value of the Award Shares on November 18, 1996 and
their fair market value. The deferred compensation will be amortized over the
vesting period and the original issue discount will be accreted, utilizing the
interest method, through the redemption date, both through a charge to
compensation expense. During 1997 and 1996, the Company recorded $2,934 and
$359, respectively, in compensation expense related to the Award Shares and, at
December 31, 1997 and 1996, the balance of the deferred compensation and the
unamortized discount related to the Award Shares was $6,890 and $8,097,
respectively.
For information on Class A Senior Preferred Shares owned by Brooke, see
Note 18.
14. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The holders of the $3.00 Class B Cumulative Convertible Preferred
Shares ($25 Liquidation Value), $.10 par value per share (the "Class B Preferred
Shares"), 12,000,000 shares authorized and 2,790,776 shares outstanding as of
December 31, 1997 and 1996, are entitled to receive a quarterly dividend, as
declared by the Board, at a rate of $3.00 per annum. Undeclared dividends are
accrued quarterly at a rate of 12% per annum, and such accrued and unpaid
dividends shall accrue additional dividends in respect thereof, compounded
monthly at the rate of 12% per annum.
Each Class B Preferred Share is convertible at the option of the holder
into .41667 Common Shares based on a $25 liquidation value and a conversion
price of $60 per Common Share.
F-73
<PAGE> 130
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
At the option of the Company, the Class B Preferred Shares are
redeemable in the event that the closing price of the Common Shares equals or
exceeds 140% of the conversion price at a specified time prior to the
redemption. If redeemed by New Valley, the redemption price would equal $25 per
share plus accrued dividends.
In the event a required dividend is not paid on the Class B Preferred
Shares, no dividends shall be paid or declared and no distribution made on any
junior stock other than a dividend payable in junior stock. If at any time six
quarterly dividends on the Class B Preferred Shares are in arrears, the number
of directors will be increased by two, and the holders of Class B Preferred
Shares and any other classes of preferred shares similarly entitled to vote for
the election of two additional directors, voting together as a class, will have
the right to elect two directors to serve until full cumulative dividends shall
have been paid or declared and set aside for payment. Such directors were
designated pursuant to the Joint Plan in November 1994.
No dividends on the Class B Preferred Shares have been declared since
the fourth quarter of 1988. The undeclared dividends, as adjusted for
conversions of Class B Preferred Shares into Common Shares, cumulatively
amounted to $139,412 and $115,944 at December 31, 1997 and 1996, respectively.
These undeclared dividends represent $49.95 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.
15. COMMON SHARES
On November 18, 1996, the Company granted an executive officer and
director of the Company nonqualified options to purchase 330,000 Common Shares
at a price of $.58 per share and 97,000 Class B Preferred Shares at a price of
$1.85 per share. These options may be exercised on or prior to July 1, 2006 and
vest one-sixth on July 1, 1997 and one-sixth on each of the five succeeding
anniversaries thereof through and including July 1, 2002. The Company recognized
compensation expense of $15 in 1997 and $24 in 1996 from these option grants and
recorded deferred compensation of $158 and $755 representing the intrinsic value
of these options at December 31, 1997 and December 31, 1996, respectively.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock options. In 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which, if fully adopted, changes the
methods of recognition of cost on certain stock options. Had compensation cost
for the nonqualified stock options been determined based upon the fair value at
the grant date consistent with SFAS No. 123, the Company's net loss in 1997 and
1996 would have been increased by $316 and $33, respectively. The fair value of
the nonqualified stock options was estimated at $1,774 using the Black-Scholes
option-pricing model with the following assumptions: volatility of 171% for the
Class B Preferred Shares and 101% for the Common Shares, a risk free interest
rate of 6.2%, an expected life of 10 years, and no expected dividends or
forfeiture.
16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The composition of accounts payable and accrued liabilities is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Accounts payable and accrued liabilities:
Accrued compensation......................................... $11,202 $10,378
Excise tax payable (a)....................................... 4,400 6,000
Subordinated loan payable (b)................................ 2,500 4,000
Deferred rent................................................ 4,560 4,388
Unearned Revenues............................................ 10,163
Taxes (property and miscellaneous)........................... 5,029 2,637
</TABLE>
F-74
<PAGE> 131
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C>
Accrued expenses and other liabilities....................... 19,868 17,485
------ ------
Total.................................................... $57,722 $44,888
====== ======
</TABLE>
- ---------------
(a) Represents an estimated liability related to excise taxes imposed
on annual contributions to retirement plans that exceed a certain
percentage of annual payroll. The Company intends to vigorously
contest this tax liability. Management's estimate of such amount is
potentially subject to material change in the near term.
(b) Represents a subordinated note payable held by Ladenburg's clearing
broker.
17. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
On January 18, 1995, approximately $550,000 of the approximately
$620,000 of prepetition claims were paid pursuant to the Joint Plan. Another
$57,000 of prepetition claims and restructuring accruals have been settled and
paid or adjusted since January 18, 1995. The remaining prepetition claims may be
subject to future adjustments depending on pending discussions with the various
parties and the decisions of the Bankruptcy Court.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
---- ----
<S> <C> <C>
Restructuring accruals(a)....................... $ 8,196 $ 9,024
Money transfer payable(b)....................... 4,415 6,502
----- -----
Total..................................... $12,611 $15,526
====== ======
</TABLE>
- ---------------
(a) Restructuring accruals at December 31, 1997 consisted of $6,907 of
disputed claims, primarily related to leases and former employee
benefits, and $1,289 of other restructuring accruals. In 1997, 1996
and 1995, the Company reversed $0, $9,706 and $2,044, respectively,
of prior year restructuring accruals as a result of settlements on
certain of its prepetition claims and vacated real estate lease
obligations.
(b) Represents unclaimed money transfers issued by the Company prior to
January 1, 1990. The Company is currently in litigation in Bankruptcy
Court seeking a determination that these monies are not an obligation
of the Company. There can be no assurance as to the outcome of the
litigation.
18. RELATED PARTY TRANSACTIONS
At December 31, 1997, Brooke, a company under the control of Bennett S.
LeBow, Chairman of the Company's Board of Directors, held 3,989,710 Common
Shares (approximately 41.7% of such class), 618,326 Class A Senior Preferred
Shares (approximately 57.7% of such class), and 250,885 Class B Preferred Shares
(approximately 8.9% of such class) which represented in the aggregate 42.1% of
all voting power. Several of the other officers and directors of the Company are
also affiliated with Brooke. In 1995, the Company signed an expense sharing
agreement with Brooke pursuant to which certain lease, legal and administrative
expenses are allocated to the entity incurring the expense. The Company expensed
approximately $312, $462 and $571 under this agreement in 1997, 1996 and 1995,
respectively.
F-75
<PAGE> 132
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The Joint Plan imposes a number of restrictions on transactions between
the Company and certain affiliates of the Company, including Brooke.
On December 18, 1996, the Company loaned BGLS Inc. ("BGLS"), a
wholly-owned subsidiary of Brooke, $990 under a short-term promissory note due
January 31, 1997 and bearing interest at 14%. On January 2, 1997, the Company
loaned BGLS an additional $975 under another short-term promissory note due
January 31, 1997 and bearing interest at 14%. Both loans including interest were
repaid on January 31, 1997. At December 31, 1996, the loan and accrued interest
thereon of $996 was included in other current assets.
Two directors of the Company are or have been affiliated with law firms
that rendered legal services to the Company. The Company paid these firms $568
and $4,141 during 1997 and 1996, respectively, for legal services. An executive
officer and director of the Company is a shareholder and registered
representative in a broker-dealer to which the Company paid $522 and $317 in
1997 and 1996, respectively, in brokerage commissions and other income, and is
also a shareholder in an insurance company that received ordinary and customary
insurance commissions from the Company and its affiliates of $133 and $136 in
1997 and 1996, respectively. The broker-dealer, in the ordinary course of its
business, engages in brokerage activities with Ladenburg on customary terms.
As discussed in Note 5, the Company has entered into certain other
agreements with Brooke in connection with its investment in RJR Nabisco.
Further, two directors of the Company were each paid $30 by Brooke during the
fourth quarter of 1995 in connection with their agreement to serve as Brooke
nominees of RJR Nabisco's 1996 annual meeting.
During 1996, the Company entered into a court-approved Stipulation and
Agreement (the "Settlement") with Brooke and BGLS relating to Brooke's and
BGLS's application under the Federal Bankruptcy code for reimbursement of legal
fees and expenses incurred by them in connection with the Company's bankruptcy
reorganization proceedings. Pursuant to the Settlement, the Company reimbursed
Brooke and BGLS $655 for such legal fees and expenses. The terms of the
Settlement were substantially similar to the terms of previous settlements
between the Company and other applicants who had sought reimbursement of
reorganization-related legal fees and expenses.
In connection with the acquisition of the Office Buildings by the
Company in 1996, a director of Brooke received a commission of $220 from the
seller.
See Note 3 for information concerning the purchase by the Company on
January 31, 1997 of BML from a subsidiary of Brooke.
19. OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
LADENBURG - As a nonclearing broker, Ladenburg's transactions are
cleared by other brokers and dealers in securities pursuant to clearance
agreements. Although Ladenburg clears its customers through other brokers and
dealers in securities, Ladenburg is exposed to off-balance-sheet risk in the
event that customers or other parties fail to satisfy their obligations. In
accordance with industry practice, agency securities transactions are recorded
on a settlement-date basis. Should a customer fail to deliver cash or securities
as agreed, Ladenburg may be required to purchase or sell securities at
unfavorable market prices.
The clearing operations for Ladenburg's securities transactions are
provided by several brokers. At December 31, 1997, substantially all of the
securities owned and the amounts due from brokers reflected in the consolidated
balance sheet are positions held at and amounts due from one clearing broker.
Ladenburg is subject to credit risk should this broker be unable to fulfill its
obligations.
F-76
<PAGE> 133
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
In the normal course of its business, Ladenburg enters into
transactions in financial instruments with off-balance-sheet risk. These
financial instruments consist of financial futures contracts and written index
option contracts. Financial futures contracts provide for the delayed delivery
of a financial instrument with the seller agreeing to make delivery at a
specified future date, at a specified price. These futures contracts involve
elements of market risk in excess of the amounts recognized in the consolidated
statement of financial condition. Risk arises from changes in the values of the
underlying financial instruments or indices. At December 31, 1997, Ladenburg had
commitments to purchase and sell financial instruments under futures contracts
of $37,552 and $1,494, respectively.
Equity index options give the holder the right to buy or sell a
specified number of units of a stock market index, at a specified price, within
a specified time from the seller ("writer") of the option and are settled in
cash. Ladenburg generally enters into these option contracts in order to reduce
its exposure to market risk on securities owned. Risk arises from the potential
inability of the counterparties to perform under the terms of the contracts and
from changes in the value of a stock market index. As a writer of options,
Ladenburg receives a premium in exchange for bearing the risk of unfavorable
changes in the price of the securities underlying the option. Financial
instruments have the following notional amounts as December 31, 1997:
LONG SHORT
--------- -----------
Equity and index options................. $60,448 $70,500
Financial futures contracts.............. 37,317 1,475
The table below discloses the fair value at December 31, 1997 of these
commitments, as well as the average fair value during the year ended December
31, 1997, based on monthly observations.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 AVERAGE
------------------------ ----------------------
LONG SHORT LONG SHORT
- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C>
Equity and index options.................. $ 5,290 $17,495 $8,850 $18,988
Financial futures contracts............... 37,552 1,494 6,206 1,454
</TABLE>
For the years ended December 31, 1997, 1996 and 1995, the net loss
arising from options and futures contracts included in net gain on
principal transactions was $2,399, $6,012 and $4,504, respectively. The
Company's accounting policy related to derivatives is to value these
instruments, including financial futures contracts and written index option
contracts, at the last reported sales price. The measurement of market risk is
meaningful only when related and offsetting transactions are taken into
consideration.
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments have
been determined by the Company using available market information and
appropriate valuation methodologies described below. However, considerable
judgment is required to develop the estimates of fair value and, accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that could be realized in a current market exchange.
F-77
<PAGE> 134
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents........... $ 11,606 $ 11,606 $ 57,282 $ 57,282
Investments available for sale...... 51,993 51,993 64,170 64,170
Trading securities owned............ 49,988 49,988 29,761 29,761
Restricted assets................... 5,716 5,716 8,846 8,846
Receivable from clearing brokers.... 1,205 1,205 23,870 23,870
Long-term investments (Note 8)...... 27,224 33,329 13,270 14,130
Financial liabilities:
Notes payable....................... 174,574 174,574 158,251 158,251
Redeemable preferred shares......... 258,638 102,860 210,571 132,908
</TABLE>
21. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of and
for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
1997
----
Revenues.................... $ 56,197 $27,067 $561 $24,616 $108,441
Operating income (loss)..... (9,958) (7,827) (9,233) (1,226) (28,244)
Identifiable assets......... 77,511 276,770 5,604 81,506 441,391
Depreciation and
amortization............. 1,035 7,469 815 95 9,414
Capital expenditures........ 1,627 7,454 466 1,385 10,932
1996
----
Revenues.................... $71,960 $ 23,559 $ -- $ 16,435 $111,954
Operating income (loss)..... (345) (745) (8,860) (6,305) (16,255)
Identifiable assets......... 76,302 182,645 11,686 135,787 406,540
Depreciation and
Amortization............. 600 3,622 532 3 4,757
Capital expenditures........ 3,644 183,193 1,596 18 188,451
</TABLE>
22. SUBSEQUENT EVENTS
WESTERN REALTY. In February 1998, the Company and Apollo Real Estate
Investment Fund III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, the Company agreed, among other
things, to contribute the real estate assets of BML, including Ducat Place II
and the site for Ducat Place III, to Western Realty and Apollo agreed to
contribute up to $58,000.
Under the terms of the agreement governing Western Realty, the
ownership and voting interests in Western Realty will be held equally by Apollo
and the Company. Apollo will be entitled to a preference on
F-78
<PAGE> 135
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
distributions of cash from Western Realty to the extent of its investment,
together with a 15% annual rate of return, and the Company will then be entitled
to a return of $10,000 of BML-related expenses incurred by the Company since
March 1, 1997, together with a 15% annual rate of return; subsequent
distributions will be made 70% to the Company and 30% to Apollo. Western Realty
will be managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. All material corporate
transactions by Western Realty will generally required the unanimous consent of
the Board of Managers. Accordingly, the Company will account for its
non-controlling interest in Western Realty on the equity method.
On February 27, 1998, at an initial closing under the LLC Agreement,
Apollo made a $11,000 loan (the "Loan) to Western Realty. The Loan, which bears
interest at the rate of 15% per annum and is due September 30, 1998, is
collateralized by a pledge of the Company's shares of BML. Upon completion of
the transfer of Ducat Place II and the satisfaction of other conditions under
the LLC Agreement, the Loan and the accrued interest thereon will be converted
into a capital contribution by Apollo to Western Realty and the BML pledge
released.
Western Realty will seek to make additional real estate and other
investments in Russia. The Company and Apollo have agreed to invest, through
Western Realty or another equity, up to $25,000 in the aggregate for the
potential development of a real estate project in Moscow. In addition, Western
Realty has agreed to acquire for $20,000 a 30% profits interest in a company
organized by Brooke (Overseas) which will, among other things, acquire an
interest in an industrial site and manufacturing facility being constructed on
the outskirts of Moscow by a subsidiary of Brooke (Overseas).
F-79
<PAGE> 1
EXHIBIT 10.23
BROOKE GROUP LTD.
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
January 1, 1998
Mr. Howard M. Lorber
100 S.E. Second Street, 32nd Floor
Miami, Florida 33131
Dear Mr. Lorber:
This letter sets forth the first amendment to the Amended and Restated
Consulting Agreement (the "Agreement") dated as of January 1, 1996, between
Brooke Group Ltd. and you.
1. The Agreement is amended by deleting the date "December 31, 1996"
in Section 1 thereof and replacing it with the date "December 31, 1999".
2. The Agreement is amended by inserting the following at the end of
Section 4 thereof:
In addition to the foregoing, commencing January 1,
1998, BGL shall pay Consultant an additional bonus on or prior
to April 1st in each year during the term of this Agreement.
The additional bonus shall be in an amount equal to the
amount, if any, necessary to reimburse Consultant, on an
after-tax basis, for all applicable federal, state and self
employment taxes actually incurred by Consultant as a result
of the grant or vesting of any award of Common Stock or
options to acquire Common Stock during the prior calendar
year.
3. This letter agreement constitutes an amendment to and a
modification of the Agreement and shall for all purposes be considered a part of
the Agreement. Except as amended hereby, the Agreement is confirmed and ratified
in all respects and shall remain in full force and effect.
<PAGE> 2
Mr. Howard M. Lorber
January 1, 1998
Page 2
Please indicate your agreement with the foregoing by countersigning two
copies of this letter agreement in the space provided below and returning one of
such copies to us.
Very truly yours,
BROOKE GROUP LTD.
By: /s/ Bennett S. LeBow
-------------------------------
Bennett S. LeBow
Chairman, President and
Chief Executive Officer
AGREED TO AND ACCEPTED:
By: /s/ Howard M. Lorber
-------------------------------
Howard M. Lorber
<PAGE> 1
Exhibit 10.35
SETTLEMENT AGREEMENT
This Settlement Agreement is entered into this 12th day of March, 1998
by and among the States listed in Appendix A hereto (collectively, "Plaintiffs"
or "Settling States") and Brooke Group Ltd., a Delaware corporation ("Brooke
Group"), Liggett & Myers Inc., a Delaware corporation ("Myers"), and Liggett
Group, Inc., a Delaware corporation (which, with Myers, is hereinafter referred
to as "Liggett").
RECITALS
WHEREAS,
A. The Plaintiffs, by and through their respective Attorneys General,
(the "Attorneys General") have brought or are contemplating bringing civil
actions in various jurisdictions across the nation ("Actions") against, among
others, The American Tobacco Company, Inc., B.A.T. Industries, P.L.C.,
British-American Tobacco Company Ltd., R.J. Reynolds Tobacco Company, Brown &
Williamson Tobacco Corporation, Philip Morris, Inc., Liggett & Myers, Inc.,
Lorillard Tobacco Company, and United States Tobacco Company and their various
parent and related companies ("Defendants"), asserting claims for, among other
things, expenses allegedly arising from tobacco-related matters and injunctive
relief concerning sales of cigarettes to minors.
B. Because of the importance of this Settlement Agreement and the
undertakings by Liggett and Brooke Group herein to the goals of the Attorneys
General, including the prosecution of the Actions against Non-Settling
Defendants, the Settling States have agreed to extend financial settlement terms
to Liggett and Brooke Group, which will not be offered to any other Defendants,
all as set forth in this Settlement Agreement.
C. The Attorneys General acknowledge and agree that this Settlement
Agreement, including the cooperation provisions
1
<PAGE> 2
thereof, are important to the prosecution of their Actions against the
Non-Settling Defendants.
D. The Attorneys General and Liggett and Brooke Group recognize and
support the public interest in preventing smoking by, or promotion of smoking
to, children and adolescents.
E. Liggett and Brooke Group have denied, and continue to deny any
wrongdoing or any legal liability of any kind in all of the above-mentioned
actions. F. The Settling States and the Attorneys General recognize and
acknowledge that the cooperation being provided by Liggett and Brooke Group is
valuable to the continued prosecution of the claims against the tobacco industry
and Non-Settling Defendants. Further, the Settling States and the Attorneys
General acknowledge that the change in warning labels provided for in this
Settlement Agreement is a step toward properly informing consumers more fully of
the truth about cigarettes and the consequences of smoking, as is the statement
by Liggett also provided for herein.
G. Members of the tobacco industry have 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. Liggett and Brooke Group have determined, in
entering into agreements settling smoking-related litigation, that they will not
be party to this industry activity.
Now, therefore, in consideration of the foregoing and of the promises
and covenants set forth in this Agreement, the undersigned Attorneys General, on
their own behalf and on behalf of their respective States, and Liggett and
Brooke Group hereby stipulate and agree that the Settling States' Attorney
General Actions shall be settled as against Liggett and Brooke Group, on the
terms contained herein, as follows:
2
<PAGE> 3
SECTION 1: DEFINITIONS.
As used in and solely for the purposes of this Agreement, in addition
to terms defined elsewhere in the Agreement, the following terms shall have the
following respective meanings:
1.1. "AFFILIATE" means a Present Affiliate or a Future Affiliate, as
described below.
1.2. "AGREEMENT" means this Settlement Agreement.
1.3. "ATTORNEYS GENERAL" means those State Attorneys General who have
brought (or are contemplating bringing) civil actions against the Defendants.
1.4. "ATTORNEY GENERAL ACTIONS" OR "ACTIONS" means those tobacco
related civil actions filed by the States/Territories listed in Appendix A
hereto.
1.5. "ATTORNEY GENERAL SETTLEMENT FUND BOARD" or "ATTORNEY GENERAL
BOARD" means the entity established pursuant to Section 6 of this Settlement
Agreement.
1.6. "BROOKE GROUP" means Brooke Group Ltd. and its Present Affiliates,
other than Liggett.
1.7. "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 described in subparagraph (1).
3
<PAGE> 4
1.8. "CIGARETTE PACK" means a unit of twenty Cigarettes or one ounce of
Tobacco Snuff or any other similar method of delivery to consumers.
1.9. "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.
1.10. "DEFENDANTS" means The American Tobacco Company, Inc., B.A.T.
Industries, P.L.C., British-American Tobacco Company, LTD., R.J. Reynolds
Tobacco Company, Brown & Williamson Tobacco Corporation, Philip Morris, Inc.,
Liggett & Myers, Inc., Lorillard Tobacco Company, and United States Tobacco
Company and their various parent and related companies.
1.11. "DOMESTIC TOBACCO OPERATIONS" means the manufacture or sale of
cigarettes and any other tobacco products in the United States, its territories,
its possessions and the Commonwealth of Puerto Rico.
1.12. "DOWNSTREAM DISTRIBUTION ENTITY" means any person or entity that
furthers the distribution of tobacco products at any point from the original
place of manufacture to individuals for personal consumption, including, without
limitation, wholesalers, retailers, private label purchasers and control label
purchasers. Such term shall not include common carriers.
1.13. "FDA" means the Food and Drug Administration.
1.14. "FDA RULE" means the regulations promulgated by the FDA on August
28, 1996 concerning the sale and distribution of cigarettes and other products
at 60 Fed. Reg. 44396, to be codified at 21 C.F.R. Parts 801, 803, 804 807, 820
and 897.
4
<PAGE> 5
1.15. "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 this
Agreement but prior to March 20, 2001: (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.
1.16. "FUTURE AFFILIATE TRANSACTION" means a transaction, or series of
transactions, by which an entity becomes a Future Affiliate.
1.17. "GLOBAL SETTLEMENT" means any national disposition, settlement,
agreement or other arrangement, 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 plaintiffs for the types of claims
released under the terms of this Agreement.
1.18. "INITIAL SETTLEMENT" means the settlement agreement entered into
by the Initial Settling States and the Settling Defendants on March 15, 1996.
1.19. "INITIAL SETTLING STATES" means the States of Mississippi, West
Virginia, Florida, and Louisiana, the Commonwealth of Massachusetts and the
respective Attorneys General thereof.
5
<PAGE> 6
1.20. "LIGGETT" means Liggett Group, Inc. and Liggett & Myers, Inc.,
and their affiliates and subsidiaries.
1.21. "MARCH 1997 AGREEMENT" means the settlement agreement entered
into by the Settling Defendants and seventeen States on March 20, 1997, and
several subsequent States thereafter.
1.22. "MARKET SHARE" means, with respect to a Defendant and a specified
year, the Domestic Tobacco Operations market share in that year of all of such
Defendant's cigarettes and other tobacco products, as determined by The Maxwell
Consumer Report published by Wheat First Butcher Singer or a similar or
successor report.
1.24. "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.
1.25. "NON-RELEASING GOVERNMENTAL ENTITY" means any department, agency,
and other political subdivision or unit of any Settling State which, under the
applicable law of such Settling State, is not considered to be part of such
State and/or which is not legally represented by the Attorney General for such
State in this matter. Depending upon the laws of each such Settling State, this
may include cities, counties, municipalities, parishes, townships, boroughs,
taxing districts, special districts or other local units of government.
1.26. "NON-SETTLING TOBACCO COMPANIES" AND "NON-SETTLING DEFENDANTS"
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.
6
<PAGE> 7
1.27. "OTHER SETTLEMENT" means settlement of an action which is not a
Global Settlement.
1.28. "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.
1.29. "PARTIES" means the Attorneys General and Brooke Group and
Liggett.
1.30. "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.
1.31. "PRESENT AFFILIATE" means, with respect to a specified
corporation or entity, 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.
1.32. "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 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.
1.33. "PRETAX INCOME" means with respect to Liggett, 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 reported in filings
7
<PAGE> 8
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.
1.34. "PROTECTIVE ORDER" or "STIPULATION REGARDING LIGGETT DOCUMENTS"
means, with respect to privileged documents produced by a Settling Defendant in
an Attorney General Action, an order in that Action: (a) protecting the
confidentiality of such documents; (b) providing that such documents may be used
only in that Attorney General Action and, to the extent permitted by law, only
under seal; and, (c) providing that, to the extent such documents are or may be
subject to the attorney/client privilege or the attorney work product doctrine,
such production or use of the documents does not constitute a waiver of such
privilege, doctrine or protection with respect to any party other than the
Attorney General to whom the documents are produced subject to the order. The
provisions of the order shall not apply to documents claimed to be privileged
but which are determined by the court in any Action not to be privileged for
reasons other than waiver due to production pursuant to this Agreement.
1.35. "SETTLEMENT FUND" means the fund established in accordance with
the terms of Section 6 of this Agreement, which shall be established in a
reputable bank or other financial institution, to provide a secure and
interest-bearing fund, and which shall be solely controlled by the Attorney
General Settlement Fund Board.
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1.36. "SETTLING DEFENDANTS" means Brooke Group and/or Liggett.
1.37. "SETTLING DEFENDANTS' COUNSEL" means the law firm of Kasowitz,
Benson, Torres & Friedman L.L.P.
1.38. "SETTLING STATES" OR "STATES" means the States and Territories
listed in Appendix A hereto and Subsequent Settling States and Territories, if
any.
1.39. "STATE'S ALLOCATION" means the allocation percentage noted for
each entity as identified and listed on Appendix B attached to this Settlement
Agreement and incorporated by reference.
1.40. "SUBSEQUENT SETTLING STATES" means States and Territories, other
than those listed in Appendix A hereto, which separately execute this Agreement
with the Settling Defendants.
1.41. "TOBACCO COMPANIES" means the Defendants.
1.42. "TOBACCO OPERATIONS" means the manufacture and/or sale of
cigarettes or any other tobacco products.
1.43. "TOBACCO PRODUCTS" includes, without limitation, cigarettes,
cigars, and smokeless tobacco, including snuff, and spit, loose and chewing
tobaccos.
1.44. "TOBACCO SNUFF" means any cut, ground, powdered, or leaf tobacco
that is intended to be placed in the oral cavity.
SECTION 2: SETTLEMENT PURPOSES ONLY.
This Agreement is for settlement purposes only, and neither the fact
of, or any provision contained in, this Agreement nor any action taken hereunder
shall constitute, be construed as, or be admissible in evidence against the
Settling Defendants as any admission of the validity of any claim, any argument
or any fact
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alleged or which could have been alleged by Plaintiffs as to their standing or
as to any jurisdictional, constitutional or any other legal or factual issue in
any Attorney General 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 any Attorney General Action or in any other action or proceeding of any kind,
or as an admission by any of the Plaintiffs of the validity of any fact or
defense asserted against them in any Attorney General Action or in any other
action or proceeding of any kind.
SECTION 3: PARTIES.
3.1. This Agreement shall be binding, in accordance with the terms
hereof, upon Brooke Group, Liggett and the Settling States; provided that,
notwithstanding anything else contained in this Agreement, the payment
obligations of this Agreement shall be binding only upon Liggett.
3.2. No Settling Defendant shall sell, use, dispose or transfer
substantially all of its cigarette brands or businesses without first causing
the acquirer, on behalf of itself and its successors, to be bound by all of the
obligations of a Settling Defendant pursuant to Sections 4.2 and 4.4 through 4.9
hereunder as to such transferred brands or businesses; provided that this
Section 3.2 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.
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SECTION 4: PUBLIC STATEMENT; COOPERATION;
ADVERTISING LIMITATION.
4.1. 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:
I am, and have been for a number of years, a Director of
Liggett Group Inc., a manufacturer of cigarettes. Cigarettes were
identified as a cause of lung cancer and many other diseases as early
as 1950. I, personally, am not a scientist. But, like all of you, I am
aware of the many reports concerning the ill-effects of cigarette
smoking. We at Liggett know and acknowledge that, as the Surgeon
General and respected medical researchers have found, cigarette smoking
causes health problems, including lung cancer, heart and vascular
disease and emphysema. We at Liggett also know and acknowledge that, as
the Surgeon General, the Food and Drug Administration and respected
medical researchers have found, nicotine is addictive.
Liggett will continue to engage in the activity of selling
cigarettes to adults, but will endeavor to ensure that these adult
smokers are aware of the health risks and addictive nature of smoking.
As part of our efforts, we will do the following:
1. Liggett will add a prominent warning to each of our
packages of cigarettes and all of our cigarette advertising stating
that "Smoking is Addictive".
2. Liggett supports and will not challenge Food and Drug
Administration regulations concerning the sale and distribution of
nicotine-containing cigarettes and smokeless tobacco products to
children and adolescents.
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Accordingly, Liggett has agreed to comply with many of these
regulations even before they apply to the tobacco industry generally.
3. Liggett has instructed its advertising and marketing people
to scrupulously avoid any and all advertising or marketing which would
appeal to children or adolescents. Liggett acknowledges that the
tobacco industry markets to "youth," which means those under 18 years
of age, and not just those 18-24 years of age. Liggett condemns this
practice and will not market to children. Liggett agrees that if it
sees industry advertisements which in its view are aimed at children,
it will bring this to the attention of the Attorneys General.
4. In accordance with our settlement agreements, Liggett
agrees to fully cooperate with the Attorneys General in their lawsuits
against the other tobacco companies. To that end, Liggett will make
available to the Attorneys General, all relevant documents and
information, including documents subject to Liggett's own
attorney-client privileges and work product protections, and will
assist those parties in obtaining prompt court adjudication of the rest
of the tobacco industry's joint privilege claims.
4.2. As promptly as reasonably practicable, but no later than six
months after execution of this 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
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sells other Tobacco Products, a similar warning shall be placed on such
products.
4.3. With respect to each Settling State, upon execution of this
Agreement, each Settling Defendant shall:
(1) cooperate with such Attorney General, and the attorneys
representing such Attorney General, in that such Settling Defendant
will take no steps to impede or frustrate these counsels' civil
investigations into, or civil prosecutions of, any of the Non-Settling
Tobacco Companies in those 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 such Attorney General Action;
(3) actively assist the attorneys representing the Attorneys General in
identifying and locating any and all persons known to such Settling
Defendant to have documents or information that is discoverable in such
proceedings, to actively assist said counsel in interviewing and
obtaining documents and information from all such persons, and to
encourage such person to cooperate with the Attorneys General; and
shall actively assist counsel in interpreting documents relating to
litigation against Non-Settling Tobacco Companies; and
(4) insofar as such Settling Defendant has or obtains any material
information concerning any fraudulent or illegal conduct on the part of
any parties, including Non-Settling Tobacco Companies, their agents, or
their co-defendants designed to frustrate or defeat the
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claims of the plaintiffs against such parties, companies, agents or
co-defendants, or which have the effect of suppressing evidence
relevant to smoking claims, disclose such information to the
appropriate judicial and regulatory agencies.
4.3.1. With respect to each Settling State, subject to, and promptly
after, the entry of a "Protective Order" or a "Stipulation Regarding Liggett
Documents" by the court in which the respective Attorney General Action is
pending, 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 evidence in connection with the claims asserted in any of
the Actions, subject to the provisions of Section 4.3.1(2) hereof;
(2) waive any and all applicable attorney-client privileges and work
product doctrine protections with respect to such documents and
information. Such waiver shall not extend to (a) documents and
information not relevant to the subject matter of the Actions or not
likely to lead to admissible evidence in connection with claims
asserted in any of the Actions or (b) documents subject to a joint
defense or other privilege or protection which Settling Defendants
cannot legally waive unilaterally, except that the waiver by the
Settling Defendant shall apply, to the extent permitted by law, to its
own joint defenses or other privileges. To the extent that a Settling
Defendant has a good faith belief, or one or more Non-Settling Tobacco
Companies claims, that documents to be provided pursuant to Section
4.3.1(1) and 4.3.1(5) hereof may be
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subject to a joint defense or other privilege (or a claim of such
privilege or confidentiality) of one or more of the Non-Settling
Tobacco Companies, such documents shall be deposited under seal for IN
CAMERA inspection by the court in which a Settling State's Attorney
General Action is pending, together with a statement to such court that
such Settling Defendant has concerns as to whether some or all of such
documents should be protected from discovery, and the Parties agree to
request that such court shall retain jurisdiction to resolve that
issue. Liggett will participate in proceedings, including by way of
court appearances or declarations, concerning issues of whether such
documents are discoverable;
(3) offer their employees, and any and all other individuals over whom
they have control, and help locate former employees, to provide witness
interviews of such employees and to testify in depositions and at
trial; it being understood and agreed that Liggett will waive and
hereby does waive any and all applicable confidentiality agreements to
the extent such confidentiality agreements would restrict testimony
under this Agreement, if any, to which such witnesses may be subject;
and,
(4) demand from its past or current national legal counsel all
documents and information obtained by them in the course of
representation of any Settling Defendant which in any way relates to
the cooperation required in paragraphs 4.3(1) through 4.3.1(5) above,
which should be provided to the Settling States as provided under this
paragraph. 4.3.2. Nothing in this Agreement shall waive or alter the
rights of the Attorneys General to obtain discovery of Liggett as
required by a court order or case management order in any Attorneys
General Action, provided that no order is sought that is inconsistent
with this Agreement.
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4.4. 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.
4.5. 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 Operations, as set forth in, and modified by, paragraphs 4.5.1
through 4.5.6 herein.
4.5.1. FDA Rule section 897.16(b), as stated.
4.5.2. FDA Rule section 897.16(d), as stated.
4.5.3. FDA Rule section 897.30, as stated, and further extended such
that no Settling Defendant shall locate, disseminate or cause to be
disseminated advertising of any Tobacco Products in the out-of-doors,
including, but not limited to, advertising on billboards.
4.5.4. FDA Rule section 897.34(A), as stated.
4.5.5. FDA Rule section 897.34(B), as stated.
4.5.6. FDA Rule section 897.34(C), as stated.
4.6 Each Settling Defendant shall follow and abide by the provisions
set forth in paragraphs 4.6.1 through 4.6.7 herein.
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4.6.1. No Settling Defendant shall encourage placement of point of sale
advertisements within two feet of any fixture on which gum, candy or confection
food is displayed for sale.
4.6.2. No Settling Defendant shall make, or cause to be made, direct or
indirect payments for Tobacco Product placement in movies (screen, video, or
made for television), television programs or video games.
4.6.3. No Settling Defendant shall make, or cause to be made, direct or
indirect payments to glamorize or otherwise encourage or promote tobacco use in
any media outlets appealing to minors, including, but not limited to, recorded
and live performances of music.
4.6.4. No Settling Defendant shall locate, post, disseminate or cause
to be disseminated, any form of Tobacco Product advertising on the Internet or
any other electronic information distribution system, unless such advertising is
designed to be inaccessible in or from the United States of America.
4.6.5. Audio and video format advertising otherwise permitted under the
FDA Rule may be distributed to adult consumers at point of sale (i.e., no
"static video displays").
4.6.6. Subject to the provisions of Section 4.7, the Settling
Defendants agree that in the event of any future Settlement Agreements and/or
Consent Decrees between any Settling State and the Non-Settling Defendants
related to restrictions on advertising and marketing, or requirements for
labeling and packaging of Tobacco Products, in connection with a national or
legislative settlement, the terms of this Settlement Agreement will be revised
such that Liggett and Brooke Group will be required to abide by any additional
restrictions or more restrictive requirements which may be adopted by such
Settlement Agreement or Consent Decree.
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4.7. Notwithstanding anything to the contrary in the FDA Rule or in
this Agreement, Liggett will commence compliance with Sections 4.5 and 4.6 of
this Agreement as soon as reasonably practicable, provided that if, in any year
during the term hereof, Liggett's Market Share is less than 3%, 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, during such year, 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 Sections 4.5 and 4.6 (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 the excess of (a) the additional
out-of-pocket expenditures incurred during a particular year by Liggett in
complying with the matters specified in Sections 4.5 and 4.6, 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 Sections 4.5 and 4.6.
4.8. 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 become such a legal obligation,
Liggett shall, during the duration of this Agreement, continue to comply with
Sections 4.5 and 4.6.
4.9. Each Settling Defendant shall not use any cartoon characters, such
as "Joe Camel," in any of its advertising and promotional materials and
activities with respect to any Tobacco Products. No Settling Defendant shall
enter into any new contract for advertising and promotion with respect to
Tobacco Products
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using any such cartoon characters after the date the Settling Defendants become
bound by this Agreement.
4.10. Each Settling Defendant may, after becoming bound by this
Settlement Agreement, continue in the manufacture, advertising and/or sale of
Tobacco Products. This Settlement Agreement does not in any way abrogate or
restrict the authority or ability of the Attorneys General to enforce future
compliance with the laws of their respective States.
SECTION 5: GLOBAL SETTLEMENT.
5.1. It is the intent of the parties 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. In furtherance of this intent, the Attorneys General will
upon the execution hereof send letters, substantially in the form and substance
of Appendix C hereto, to the President of the United States, the Congressional
leadership, and the Chairpersons of Congressional committees or subcommittees
that have jurisdiction over a Global Settlement, requesting that any Global
Settlement contain financial terms, financial obligations or financial
conditions that 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.
5.2. 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
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Liggett may have, Brooke Group and Liggett shall have the right, at their
option, to withdraw from further performance of the payment obligations of
Section 6 of this Agreement.
SECTION 6. ATTORNEY GENERAL SETTLEMENT FUND BOARD.
6.1. 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 Attorney General Settlement Fund to be allocated and distributed to the
Settling States by the Attorney General Settlement Fund Board in its sole
discretion. The Attorneys General of the Settling States shall establish
operational procedures and appoint representatives to the Settlement Fund Board
for the sole purpose of distributing monies received from the Settling
Defendants pursuant to this Agreement. The Settlement Fund Board may modify the
percentages listed in Appendix B regarding States' Allocations as long as such
modification does not increase the total amount to be paid by the Settling
Defendants pursuant to this Settlement Agreement.
6.2. 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 6.1
above.
6.3. Subject to the terms of this Agreement, Liggett shall make the
following payments:
6.3.1 Liggett shall pay into the Attorneys' General Settlement Fund an
initial payment of $25 million due 120 days from the date of a Future Affiliate
Transaction. The amount payable under this Section 6.3.1 represents the same
amount, and not in addition to the amount, payable under Section 6.3.1 of the
March 1997 Agreement; and
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6.3.2. Liggett shall directly pay each Settling State and each
Subsequent Settling State:
(a) One Hundred Thousand Dollars ($100,000), of which
$50,000 is payable sixty (60) days from the date of
this Agreement, and $50,000 is payable on November
30, 1998; and
(b) Nine Hundred Thousand Dollars ($900,000) in equal
annual installments, indexed and adjusted for
inflation, payable on December 31, 1999 and the
following seven anniversaries of such date (except
that any then remaining unpaid amount under this
Section shall be due and payable within sixty (60)
days of the date Liggett defaults on any of its
payment obligations under this Agreement). These
payments shall constitute reimbursement for the
Settling States' cost of investigation, litigation,
and attorney fees and, along with the payment under
subparagraph (a) above, shall be made to each
Settling States' designated payee. Each Settling
State's share of the amounts identified in Section
6.3.2 and 6.3.3. shall be used by such state as
determined by the Attorney General of each such state
at his or her exclusive option, and as otherwise
consistent with such state's law.
6.3.3. For the duration of this Agreement pursuant to Section 9.1, and
subject to the provisions of Sections 6.6 through 6.9, Liggett shall pay into
the Settlement Fund, on a per Settling
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State basis, annual payments each equivalent to the product of such Settling
State's Allocation and 27.5% of Liggett's Pretax Income; provided that for each
State above ten (10) that becomes a signatory to this Agreement, such percentage
of Liggett's Pretax Income will increase on a pro rata basis from 27.5% to 30%
by one-fourteenth of the difference per state over the initial ten (10) states
that enter into this Agreement. Payments under this section 6.3.3 shall be due
one hundred and twenty (120) days after the end of each fiscal year of Liggett.
The first payment under this section 6.3.3 shall be due one hundred and twenty
(120) days after the end of fiscal year 1998.
6.3.4. The annual payments of $112,500 to each Settling State pursuant
to Section 6.3.2(b) shall act as a reduction of that Settling State's allocated
percentage payment under Section 6.3.3. such that for each of the eight years
referred to in Section 6.3.2(b) each Settling State will receive additional
monies under Section 6.3.3. only to the extent that said Settling States'
percentage allocation payment in that given year, is greater than $112,500.
6.4. 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 One Million Dollars
($1,000,000.00) in any year for such expenses.
6.5. Since the Settling Defendants are providing historic and valuable
cooperation and other considerations under this Agreement, the amounts payable
hereunder to the Settlement Fund shall represent the maximum amounts payable to
the Settlement Fund under this Agreement.
6.6. With respect to each Settling State, in the event of the entry of
any final non-appealable monetary judgment in such Settling State's Attorney
General Action (other than by way of
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settlement) against any one or more of the Non-Settling Tobacco Companies, then
the Settling Defendants shall have the right to reduce the payments they are
obligated to make pursuant to this Agreement to the extent necessary to make (i)
the then Present Value of all amounts theretofore paid and thereafter payable to
that Settling State pursuant to this Agreement by the Settling Defendants (such
amounts being calculated for purpose of this Section 6.6 by multiplying (a) the
total amount of the Settlement Fund allocated to all of the Settling States in
that year by (b) such Settling State's Allocation per percentage point of the
then Market Share of such Settling Defendant no more than seventy-five percent
(75%) of (ii) the then Present Value of the dollar amount of such judgment per
percentage point of the then Market Share of each such Non-Settling Tobacco
Company; [Example: For purposes of this example of Section 6.6, assume: Liggett
has a 2% Market Share (I.E., 2 points). A Non-Settling Tobacco Company has an 8%
Market Share (i.e., 8 points), and in 1998 has a final judgment entered against
it in an Attorney General Action that requires payments by such Non-Settling
Tobacco Company with a then Present Value of $20 million. The Present Value of
the amount allocable by Liggett to the Settling State in 1998 is $5 million.
Result: In 1998, Liggett would be permitted to reduce its future payments to the
extent necessary to make the Present Value of its past and future payments $3.75
million -- I.E., no more than 75% of the Present Value of the judgment, all as
adjusted for relative Market Share.
The calculation would be as follows: Present Value of Liggett payment/2
points = .75 x judgment/8 points Present Value of Liggett payments = .75 x $20
million/4 = $3,750,000. Thus, the larger the judgment, the less the reduction.
Under this example, if the judgment is $26,670,000 or more, there would be no
reduction.] provided that such Settling Defendant give written notice of such
reduction and the method of calculating such
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reduction to the Settling State's Attorney General as soon as practicable after
the entry of judgment.
6.7. In each year beginning with the second year after execution of
this Agreement, the annual payment amount due under Section 6.3.3. of this
Agreement from a 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. [Example: For purposes of this example of Section 6.7, assume: There
are 10 states as signatories to this Agreement, Liggett is obligated to pay
27.5% of Pretax Income, and Liggett's Pretax Income is $11 million each year,
thus making Liggett's obligation under Section 6.3.3 of the settlement
$3,025,000 per year during the term of this Agreement (27.5% of 11,000,000).
Liggett's Market Share drops from 2% in 1997 and 1998 to 1.75% in 1999, but
recovers to 1.9% in 2000, and then back to 2.0% in 2001.
Reduction: In 1999, Liggett's amount due will be reduced by $378,125 to
$2,646,875. Since Liggett's Market Share fell by .25 points or 12.5%, its
payments would be reduced by 12.5% or 378,125 ($3,025,000 x .125). Recapture of
Market Share: In 2000, Liggett's payments to climb commensurate to its increase
of .15 in Market Share (1.75 to 1.9% to $2,873,750 (($2,646,875 + ($2,646,875 +
.15/1.75)). In 2001, Liggett's payment would again increase commensurate to its
increase of .1 in Market Share to $3,025,000 (($2,873,750 + $2,873,750 x
.1/1.90)). Liggett would not be entitled to a "double reduction" for a decrease
in both
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Pretax Income and Market Share. Thus, if Liggett's .25 point drop in Market
Share in 1998 were accompanied by a drop in Pretax Income between 1997 and 1998
from $11 million to $8 million, there would be no Market Share reduction, as
Liggett's payment obligations (27.5% of Pretax Income) would have already fallen
from $3,025,000 to $2,200,000.]
6.8. 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 Section 6.3.3 of this Agreement so that the aggregate payments due
under that provision and all prior agreements with other States shall be no more
that 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 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).
6.9. Liggett shall receive as a credit against the amounts due under
Section 6.3.3., any and all amounts it is required to pay under a Global
Settlement.
6.10. Settling Defendants agree not to take any action the primary
purpose of which is to reduce Liggett's payment obligations under this
Agreement.
SECTION 7. RELEASE.
7.1. Upon the date each Settling State becomes bound by this Settlement
Agreement, for good and sufficient consideration as described herein, each
Settling State and each Attorney General thereof shall, for the duration or term
of this Agreement
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(whichever is shorter), be deemed to and hereby does release,
dismiss and discharge each and every civil claim, right and cause of action
(including, without limitation, all claims for damages, restitution, medical
monitoring, or any other legal or equitable relief), known or unknown, asserted
or unasserted, direct or indirect, which they had, now have or may hereafter
have in their sovereign capacity against each Settling Defendant (including its
past and present parents, subsidiaries, present affiliates, employees, directors
and shareholders, but only in such capacities, vis-a-vis each such Settling
Defendant and Downstream Distribution Entities of Settling Defendants, but only
to the extent that such Downstream Distribution Entities would have cross-claims
against Settling Defendants) which was based solely on the Settling Defendants'
past conduct and which:
(i) was asserted in that State's Attorney General Action, and/or
(ii) was not asserted in said Action but which could have been asserted
in said action and which arises out of, or is in furtherance of, or is
related to the conduct, concerns, acts, facts, transactions,
occurrences, representations, or omissions alleged therein.
This Section 7.1 is not intended, in any fashion, to release or
discharge any of the Non-Settling Tobacco Companies or any other Defendants in
any Attorney General Action. Moreover nothing contained herein is intended in
any fashion to release any claim other than claims that have been asserted by
the settling states in their Attorney General Actions against the Settling
Defendants by individuals, private entities, or Non-Releasing Governmental
Entities.
7.2. Upon the date each Settling State becomes bound by this Settlement
Agreement, for good and sufficient consideration as described herein, each
Settling Defendant shall for the duration or term of this Agreement (whichever
is shorter) be deemed to and
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hereby does release, dismiss and discharge each and every claim, right, and
cause of action (including, without limitation, all claims for damages,
restitution, fees, expenses, or any other legal or equitable relief), whether
known or unknown, asserted or unasserted, direct or indirect, which they had,
now have or may hereafter have against each Settling State, and its public
officials, employees, and agents which:
1) was asserted in that State's Attorney General Action, and/or
2) was not asserted in said action, but which could have been asserted
in such action and which otherwise arises out of, or is in furtherance
of, or is related to the conduct, concerns, acts, facts, transactions,
occurrences, representations, or omissions alleged therein.
7.3. Provided, however, as follows:
1) If this Agreement expires upon completion of its full term, the
releases set forth in Sections 7.1 and 7.2 herein shall continue and
apply in full force and effect with respect to all released claims 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, these releases shall be of no further
force and effect and Settling Defendants shall be entitled to a credit
to the extent otherwise provided in the Agreement against all claims
covered by the release for the full amount paid by such Settling
Defendants hereunder.
2) Except as specifically provided herein, the releases set forth in
Sections 7.1 and 7.2 herein do
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<PAGE> 28
not pertain or apply to any other existing or potential party in any
present or future Attorney General Action.
3) The releases set forth in Sections 7.1 and 7.2 herein do not in any
way release claims which may be asserted by a releaser involving
conduct unrelated to the manufacture and/or sale of Tobacco Products.
4) The releases set forth in Section 7.1 and 7.2 herein do not in any
way abrogate or restrict the authority or ability of the Attorneys
General to enforce future compliance with the laws of their respective
States, including the full range of remedies available to them for
future violation of state law and/or this Agreement.
5) Nothing in this Agreement is intended to prohibit the manufacture or
sale of Tobacco Products in compliance with the provisions of this
Agreement and all applicable Federal, State and local laws.
6) With respect to the claims of any county, municipality or political
subdivision within a Settling State that, as of the date of this
Agreement, has brought an action against Settling Defendants separate
and apart from the action brought against Settling Defendants by the
Settling States encompassing such county, municipality or political
subdivision, the releases set forth in Sections 7.1 and 7.2 herein do
not release the claims of such county, municipality or political
subdivision, except for the exclusively State share of the Medicaid
funds claimed in any such action.
7.4. Except as specifically provided herein, nothing in this Agreement
shall prejudice or in any way interfere with the rights of Settling States or
Settling Defendants to pursue any or all of their rights and remedies against
Non-Settling Tobacco Companies or other parties not released hereunder.
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<PAGE> 29
SECTION 8: CONSENT DECREE; REMEDIES; JURISDICTION OF COURT.
8.1. The parties agree that this Settlement Agreement may be filed as a
Consent Decree in those Settling States where Attorney General Actions are
pending. Settling Defendants agree to fully cooperate with the Settling States
to effectuate this provision by jointly requesting the court in any Attorney
General Action, via motion or other appropriate pleading, that the court approve
this Settlement Agreement in its entirety for filing as a Consent Decree.
8.2. Nothing set forth in this Agreement shall be construed as waiving
or limiting the rights and remedies (including any action for contempt of Court)
of any of the Settling States to seek enforcement of this Agreement and the
Consent Decree (in each such Settling State's Attorney General Action) in the
event that one or more of the Settling Defendants defaults or otherwise violates
any term of this Agreement or the Consent Decree. Each Settling State which has
not filed an Attorney General Action against the Settling Defendants shall
prosecute any violations of this Agreement through the filing of a separate
Action to enforce the terms of this Agreement.
8.3. This Agreement and the corresponding Consent Decree are intended
to resolve all claims of the Settling States and the Settling Defendants: (1) in
the Attorney General Actions and (2) in any other litigation in which claims
released herein are asserted.
8.4. The court in each Attorney General Action shall retain
jurisdiction over this matter for the limited purpose of enforcing compliance
with the Consent Decree and this Agreement.
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<PAGE> 30
SECTION 9: TERM.
9.1. Unless earlier terminated in accordance with the provisions of
this Agreement, the duration of this Agreement shall be twenty-five (25) years
from March 20, 1997, provided that in the event of a Global Settlement, the
duration of this Agreement shall be equal to the duration of the Global
Settlement.
9.2. In the event of a termination of this Agreement with respect to
any Settling State, such Settling Defendant shall be entitled to offset any
payments made to such Settling State prior thereto against any judgments
thereafter obtained by such Settling State against such Settling Defendant in an
Attorney General Action.
9.3. If any Settling Defendant subsequently withdraws from this
Agreement, or this Agreement, for whatever reason, is terminated other than by
reason of expiration of its term, then the applicable statute of limitations or
any similar time requirement for a Settling State or a terminating Settling
Defendant to file a claim that would otherwise be released hereunder against, or
by any Settling Defendant shall be tolled from the date such Settling State
became bound by this Agreement until the later of the time permitted by
applicable law or for one year from the date of such termination with the effect
that the parties shall be in the same position as they were at the time the
Settling State filed its original Attorney General Action with respect to the
statute of limitations.
9.4. 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 shall not
30
<PAGE> 31
affect any prior cooperation or require the return of any documents produced to
a Settling State pursuant to this Agreement.
SECTION 10: CONTINUING ENFORCEABILITY.
Unless earlier terminated, as to the Settling States, 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, 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"). The Settling
States agree that Brooke Group has the right, but not the obligation, to perform
any and all monetary obligations of Liggett under this Agreement, including the
cure of any default under Section 13.1 of this Agreement, notwithstanding the
occurrence and continuation of any Bankruptcy Proceeding with respect to
Liggett. The Settling States agree that they shall have no right to terminate or
to call a default under Section 13.1 of this Agreement during any period of time
in which Brooke Group is performing Liggett's monetary obligations herein.
31
<PAGE> 32
SECTION 11: CONTRIBUTION
AND INDEMNITY CLAIMS.
It is the intent of the parties that the payments to be made by Liggett
with respect to the Attorneys General Actions settled hereby be limited to those
payments set forth in this Agreement, and that Settling Defendants not be
responsible for any payments relating to any contribution or indemnity claim
asserted, or to be asserted, by any Non-Settling Defendant that may arise from
any of such Attorneys General Actions. It is the further intent of the Parties
that any protection that the Settling Defendants may enjoy from claims of
contribution or indemnity shall be governed by the laws of the various States
where such Attorneys General Actions are pending.
SECTION 12: TAX STATUS OF SETTLEMENT FUND.
12.1. 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, 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 any changes to the Agreement
which may be necessary to obtain IRS approval of the Settlement Fund as a QSF.
12.2. Representatives of the Settling States 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
32
<PAGE> 33
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.
12.3. The Settling Defendants, as transferors of the Settlement Fund
shall prepare and file the information statements concerning their settlement
payments to the Settlement Fund as required to be provided to the IRS pursuant
to the regulations under IRC section 468B.
SECTION 13: EFFECT OF A DEFAULT OF SETTLING DEFENDANT.
13.1. In the event a Settling Defendant fails to make a payment due and
owing under the terms of this Agreement, the Settling Defendant shall have sixty
(60) calendar days to cure the default subject to the additional payment of
interest on the unpaid overdue amount at an interest rate of prime plus three
(3) percent. If the defaulting Settling Defendant does not cure the default in
the time period provided in this Section 13.1, a Settling State shall have the
right to terminate this Agreement as to their State or may apply to the court in
which its respective Attorney General Action is pending for relief, in addition
to any other remedies it may have hereunder.
13.2. If after a reasonable notification period a Settling Defendant is
in default of a non-remunerative provision of this Agreement, except for
Sections 4.5 through 4.9, the Settling Defendant shall have thirty (30) calendar
days to cure the default, unless the time period is shortened pursuant to court
order as is reasonably necessary under the circumstances. If the defaulting
Settling Defendant does not cure the default in the
33
<PAGE> 34
time period provided in this Section 13.2, a Settling State may apply for
relief, including termination of this Agreement, to the court in which its
respective Attorney General Action is pending, in addition to any other remedies
it may have hereunder.
13.3. In the event that a Settling Defendant is in default of any
provision contained in Sections 4.5 through 4.9 of this Agreement, a Settling
State shall have the right to immediately apply for relief, including
termination of this agreement, to the court in which the Attorney General Action
is pending.
SECTION 14: REPRESENTATIONS AND WARRANTIES.
14.1. Each Settling Defendant represents and warrants that it (i) 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; (iii) the Agreement has been duly and validly executed and delivered
by such Settling Defendant and constitutes its legal, valid and binding
obligation; and (iv) this Agreement does not violate the charter of bylaws of
such Settling Defendants or any Agreement to which the Settling Defendant is a
party.
14.2. Each Settling State represents and warrants that pursuant to its
statutory and/or common law authority (i) it has all requisite 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 State of this Agreement and the consummation by it of the
actions contemplated herein have been duly authorized by all necessary action on
the part of such Settling State; and (iii) the Agreement has been duly executed
and authorized by such Settling State and constitutes its legal, valid and
binding obligation.
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<PAGE> 35
SECTION 15: ARBITRATION.
In the event that the Parties are unable to agree, after good faith
efforts, to the determination or calculation for any applicable year of Market
Share or Pretax Income hereunder, such determination or calculation shall be
submitted to binding arbitration in accordance with the rules of the American
Arbitration Association.
SECTION 16. MOST FAVORED NATION.
16.1. It is the intent of the Parties hereto that the Settling
Defendants enjoy a preferred position with respect to Non-Settling Tobacco
Companies, in recognition of the Settling Defendants' willingness to enter into
this Agreement. Accordingly, it is generally contemplated that settlements which
involve all Settling States and a Non-Settling Tobacco Company (a "Group Other
Settlement") or involving one Settling State and a Non-Settling Tobacco Company
(a "Single State Other Settlement") shall meet certain minimum requirements in
terms of the initial, periodic or lump sum payments to be made by the
Non-Settling Tobacco Company (each a "Benchmark Figure"). The recital of these
Benchmark Figures herein is solely for the purposes of insuring that the
Settling Defendants enjoy a preferred position with respect to Non-Settling
Tobacco Companies and is not intended in any way to reflect the value of the
Settling States' claims against Non-Settling Tobacco Companies. For purposes of
this
35
<PAGE> 36
Section 16, a settlement involving a Non-Settling Tobacco Company and some,
but not all, Settling States shall be deemed a Single Other Settlement, and the
preferred position of the Settling Defendant shall be governed by Subsections
16.1.3 and 16.1.4 hereof, and determined on a state-by-state basis.
16.1.1. In the case of a Group Other Settlement which includes an
initial payment such as that provided for in Section 6.3.1 hereof, the Benchmark
Figure shall be that figure which represents three times the Present Value of
the initial payment made hereunder, adjusted for Market Share at the time of
such payment. Thus, if at the time of the initial payment hereunder, the
Settling Defendant had a market share of 2 percent and made a payment the
Present Value of which is $15 million, and the Settling States subsequently
enter into a Group other Settlement with a Non-Settling Tobacco Company which
has a market share of ten percent (10%) the Benchmark Figure for the initial
payment shall be $225 million. To the extent that the initial payment actually
provided for in such Group Other Settlement is less than the Benchmark Figure,
the Settling Defendant shall receive a credit in like amount, up to the amount
of the present value of the initial payment made hereunder, against all future
payment obligations hereunder.
16.1.2. In the case of a (i) Group Other Settlement which included only
a lump sum or periodic payments, and (ii) with respect to the periodic payments
included in a Group Other Settlement which also includes an initial payment, the
Benchmark Figure shall be that amount which constitutes three times the Present
Value of all amounts paid or payable by the Settling Defendant hereunder
(excluding, if the Group Other Settlement contains an initial payment, the
initial payment hereunder), assuming, in the case of future payments, no
increase or decrease in Market Share but assuming inflation in revenues, all
adjusted
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<PAGE> 37
for Market Share. Thus, if the Present Value of a Settling Defendant's
payments made or to be made hereunder is $60 million and such Settling Defendant
enjoys a Market Share of 2%, the Benchmark Figure for a Non-Settling Defendant
which at the time of a Group Other Settlement enjoys a Market Share of 15% would
be $1,350 million. Similarly, the Benchmark Figure for a Non-Settling Defendant
which at the time of a Group Other Settlement enjoys a Market Share of 5% would
be $450 million. To the extent that the Present Value of the lump sum or
periodic payments to be made under a Group Other Settlement is less than the
Benchmark Figure, the Settling Defendant shall receive a credit in like amount,
up to the amount of any remaining payment obligations hereunder.
16.1.3. In the case of a Single State Other Settlement which includes
an initial payment such as that provided for in Section 6.3.2 hereof, the
Benchmark Figure shall be that figure which represents three times the Present
Value of the initial payment made hereunder to such Settling State, adjusted for
Market Share at the time of such payment, computed in accordance with Section
16.1.1. To the extent that the initial payment actually provided for in such
Single State Other Settlement is less than the Benchmark Figure, the Settling
Defendant shall receive a credit in like amount, up to the amount of the present
value of the initial payment made to the Settling State hereunder, against all
future payment obligations to the Settling State hereunder.
16.1.4. In the case of a Single Other Settlement which includes only a
lump sum or periodic payments, and with respect to the periodic payments
included in a Single State Other Settlement which also includes an initial
payment, the Benchmark Figure shall be that amount which constitutes three times
the Present Value of all amounts paid or payable by the Settling Defendant to
the Settling State hereunder (excluding, if the Single State Other
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<PAGE> 38
Settlement contains an initial payment, the Initial Payment hereunder),
assuming, in the case of future payments, no increase or decrease in Market
Share but assuming inflation in revenues, all adjusted for Market Share,
computed as set forth in Section 16.1.2. To the extent that the Present Value of
the lump sum or periodic payments to be made under a Single State Other
Settlement is less than the Benchmark Figure receive a credit in like amount, up
to the amount of any remaining payment obligations to the Settling State
hereunder.
16.1.5. Solely for the purposes of Section 16.1, the payments due to
each of the Settling States in a year shall be deemed to be equivalent to the
product of (a) 10% of the Settling Defendant's Pretax Income and (b) that
State's Allocation.
16.1.6. The Benchmark Figure set for in Sections 16.1.1 through 16.1.4
does not reflect in any fashion the Settling States' view as to an appropriate
settlement or resolution with any Non-Settling Tobacco Company.
16.2. Except as provided in Section 16.1 hereof, in the event that,
subsequent to the date of this Agreement, any settlement of any Settling State's
Attorney General Action is reached with any Non-Settling Defendant, which is not
a Party hereto and such settlement is on any terms more favorable to such
Non-Settling Defendant than are the terms of this Agreement to a Settling
Defendant, such Settling Defendant shall each have the right to replace or
modify any or all of the terms of this Agreement with, or add to this Agreement,
any or all such more favorable terms.
16.3. In the event that, subsequent to the date of this Agreement, any
of the Settling Defendants enters into a settlement agreement with any State
other than a Settling State on terms (relating to the then Present Value of
amounts payable under such settlement agreement, compliance with the FDA Rule or
cooperation)
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<PAGE> 39
that are more favorable to the State than those contained herein (as adjusted
for relative State's Allocation), the Settling States shall have the right with
respect to such Settling Defendant to replace or modify any or all of the terms
of this Agreement with, or add to this Agreement, any or all such more favorable
terms (adjusted for relative State's Allocation).
SECTION 17: FUTURE AFFILIATE.
17.1. 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 17.
17.2. In the event of a Future Affiliate Transaction, the Settling
States shall not (a) 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 as of the date of the execution of this Agreement a Parent of a
company engaged in Domestic Tobacco Operations or itself engaged in Domestic
Tobacco Operations ("Spinoff Affiliate"), (b) bring suit or otherwise take
action against the Parent of the Future Affiliate with respect to such spinoff
or like disposition of stock or assets, or (c) bring suit or otherwise take
action against a Spinoff Affiliate for claims asserted in or related to an
Attorneys General Action (and thereby release such Spinoff Affiliate pursuant
to, MUTATIS MUTANDIS, Section 7.1 hereof). The Settling States reserve the right
to take the actions described in this Section 17.2 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.
17.3. With respect to subsection 17.2, nothing in this provision, or
elsewhere in this Agreement, limits the authority of the Attorneys General to
challenge any transaction which they
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reasonably believe is in violation of federal or state antitrust law.
17.4. 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 6.3.3 hereof shall remain in effect with respect to
Pretax Income solely attributable to such separate entity. In the event of a
Future Affiliate Transaction by which Liggett's Pretax Income is not readily
calculable, 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 6.3.3. Nothing in this
Section 17.4 affects in any way Liggett's payment obligations under Sections
6.3.1 or 6.3.2 hereof.
17.5. Promptly after a Future Affiliate Transaction, a Future Affiliate
shall abide by Sections 4.4 through 4.8 of the March 1997 Agreement.
17.6. Promptly after 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 settlement of all Attorneys
General Actions against a Future Affiliate's Domestic Tobacco Operations.
17.7. 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, Settling States reserve all of their rights to prevent
the Future Affiliate from diminishing or impairing the Future Affiliate's
Tobacco assets, other than in the
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established and/or ordinary course of business of such Future Affiliate.
SECTION 18: MISCELLANEOUS.
18.1. All terms of this Agreement and/or obligations created thereby
shall be deemed to include a covenant of good faith and fair dealing on behalf
of all parties.
18.2. Brooke Group shall provide to all Settling States at the time of
execution of this Agreement, an opinion in form satisfactory to the Settling
States from legal counsel for Brooke Group as to the due execution of the
Settlement Agreement by Brooke Group and Liggett and its enforceability against
Brooke Group and Liggett and such other matters contemplated by Section 14.1
(other than the "agreements" referenced in clause (iv)).
18.3. In the event that a termination occurs pursuant to any section of
this Agreement, neither the Attorney General Settlement Fund Board, nor any
Settling State shall be required to return any payment received pursuant to this
Agreement.
18.4. Subject to the provisions of Section 18 herein, this Agreement,
including all Appendices attached hereto, if any, shall constitute the entire
Agreement among the parties with regard to the subject of this Agreement and
shall supersede any previous agreement and understandings between the Parties
with respect to the subject matter of this Agreement. This Agreement may be
changed, modified, or amended only in writing signed by all Parties or by Court
Order.
18.5. With respect to each Settling State, this Agreement shall be
construed under and governed by the laws of such State applied without regard to
its law applicable to choice of law.
18.6. This Agreement may be executed by the Parties in one or more
counterparts, each of which shall be deemed an original
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but all of which together shall constitute one and the same instrument.
18.7. Any judgment by a court that any provision of this Agreement, as
applied to any party or to any circumstance, is invalid or unenforceable shall
in no way affect any other provision of this Agreement or the application
thereof in any other circumstances, and such provision so adjudged invalid or
unenforceable shall be enforced to the maximum extent permitted by law.
18.8. This Agreement shall be binding upon and inure to the benefit of
the Settling States, the Settling Defendants, and their representatives, heirs,
successors, and assigns.
18.9. Nothing in this Agreement shall be construed to subject any
Settling Defendant's parent or affiliated company to the financial obligations
or liabilities of that Settling Defendant.
18.10. 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.
18.11. Any notice, request, instruction, 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 Settling Defendants' Counsel, if to a Settling
State to the attention of that State's Attorney General.
18.12. References to or use of a singular noun or pronoun in this
Agreement shall include the plural, unless the context implies otherwise.
18.13. The Settling Defendants shall not represent directly or
indirectly that the court or the Settling States or any Attorney General's
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18.12. References to or use of a singular noun or pronoun in this
Agreement shall include the plural, unless the context implies otherwise.
18.13. The Settling Defendants shall not represent directly or
indirectly that the court or the Settling States or any Attorney General's
<PAGE> 44
Office has sanctioned, condoned, or approved any part or aspect of their
business operation or practices.
18.14. In the event that any Settling State's Attorney General must
initiate legal action or incur any costs to compel the Settling Defendants to
abide with the terms of this Agreement, the Settling Defendants shall be liable
for any such costs, including but not limited to a reasonable sum for attorneys'
fees.
18.15. The Settling Defendants shall pay their own attorney's fees and
costs related in any way to this Settlement Agreement including any fees or
costs incurred in connection with any investigation, compliance action, or
Attorney General Action by the Settling States or any Subsequent Settling
States.
SECTION 19: CONTINUING JURISDICTION
For those Settling States which have Attorney General Actions pending,
this Agreement is intended to be filed in the courts in which such Actions are
pending along with an appropriate motion or other pleading seeking to have this
Agreement entered as a Final Judgment and Consent Decree or other comparable
Order of the court. In each such Action, such Motion or other pleading shall be
filed jointly by the Settling State and the Settling Defendants. Such Motion or
other pleading shall include language requesting that jurisdiction be retained
by the Court for the purpose of enabling any party to that Consent Decree to
apply to the Court for further orders, to ensure compliance, seek relief, and/or
request sanctions.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and date first written above.
BROOKE GROUP LTD.
/s/ BENNETT S. LEBOW
- ------------------------
By Bennett S. LeBow
DATE:
-------------------
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<PAGE> 45
LIGGETT GROUP, INC.
/s/ BENNETT S. LEBOW
- ------------------------
By Bennett S. LeBow
DATE:
-------------------
LIGGETT & MYERS INC.
/s/ BENNETT S. LEBOW
- ------------------------
By Bennett S. LeBow
DATE:
-------------------
KASOWITZ, BENSON, TORRES & FRIEDMAN
/s/ MARC E. KASOWITZ
- ------------------------
By Marc E. Kasowitz
DATE:
-------------------
Attorneys for BROOKE GROUP LTD.,
LIGGETT GROUP, INC. AND
LIGGETT & MYERS INC.
44
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APPENDIX A
----------
OHIO
PENNSYLVANIA
COLORADO
NEW MEXICO
WYOMING
IDAHO
NEW HAMPSHIRE
MONTANA
NEBRASKA
RHODE ISLAND
ARKANSAS
MISSOURI
NORTH DAKOTA
MAINE
WASHINGTON, D.C.
U.S. VIRGIN ISLANDS
NORTH MARIANA ISLANDS
TERRITORY OF GUAM
45
<PAGE> 47
APPENDIX B
ALABAMA 1.4686090%
ALASKA 0.2109795%
ARIZONA 1.3393470%
ARKANSAS 0.7524795%
CALIFORNIA 10.1783580%
COLORADO 1.2457280%
CONNECTICUT 1.6870710%
DELAWARE 0.2600965%
D.C. 0.5517000%
FLORIDA 4.9931995%
GEORGIA 2.2304125%
HAWAII 0.4476520%
IDAHO 0.2308300%
ILLINOIS 4.2294035%
INDIANA 1.7995035%
IOWA 0.7902830%
KANSAS 0.7575730%
KENTUCKY 1.6003985%
LOUISIANA 2.0167520%
MAINE 0.6991235%
MARYLAND 2.0541205%
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<PAGE> 48
MASSACHUSETTS 3.6702975%
MICHIGAN 3.9546980%
MINNESOTA 2.0636765%
MISSISSIPPI 0.7856500%
MISSOURI 2.0669735%
MONTANA 0.2867125%
NEBRASKA 0.4413985%
NEVADA 0.4549855%
NEW HAMPSHIRE 0.6051470%
NEW JERSEY 3.3842275%
NEW MEXICO 0.4426765%
NEW YORK 11.3673610%
NORTH CAROLINA 2.1193920%
NORTH DAKOTA 0.2333295%
OHIO 4.5660970%
OKLAHOMA 0.9415575%
OREGON 1.0428990%
PENNSYLVANIA 5.2222805%
RHODE ISLAND 0.6532830%
SOUTH CAROLINA 1.0689735%
SOUTH DAKOTA 0.2178195%
TENNESSEE 2.2180875%
TEXAS 5.0998475%
UTAH 0.3050030%
VERMONT 0.2743775%
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<PAGE> 49
VIRGINIA 1.8580990%
WASHINGTON 1.8658350%
WEST VIRGINIA 0.8055435%
WISCONSIN 1.8829015%
WYOMING 0.1264015%
AMERICAN SAMOA 0.0078600%
N. MARIANA ISLAND 0.0012700%
GUAM 0.0057040%
U.S. VIRGIN ISLANDS 0.0044130%
PUERTO RICO 0.4116015%
TOTAL 100.0000000%
48
<PAGE> 50
APPENDIX C
Date
Re: Comprehensive Tobacco Control Legislation
Dear____________________:
The undersigned Attorneys General have reached a settlement with Brooke
Group, Ltd., Liggett & Myers, Inc. and the Liggett Group, Inc. (collectively
referred to as "Liggett"). Because of the Liggett's willingness to turn state's
evidence in our litigation against the tobacco industry, we believe that Liggett
deserves special consideration with respect to the FINANCIAL terms of any
comprehensive tobacco control legislation enacted by Congress.
Specifically, in the event that such legislation mirrors the resolution
reached between the Attorneys General and the tobacco industry in June 1997, we
suggest that Liggett's financial obligations be as follows:
Liggett shall have no obligation with respect to the $10
billion up front payment.
Liggett shall be excused from any of the required per year
payments to the extent that its market share is not more than
3%.
To the extent that Liggett's share ever exceeds 3%, it shall
be required to pay its share of the annual payments required
by any legislation on the amount over 3%.
Sincerely,
[Insert AG Name]
[Insert Position]
49
<PAGE> 51
STATE OF OHIO
/s/ BETTY D. MONTGOMERY
----------------------------------------
BETTY D. MONTGOMERY
Attorney General
30 East Broad Street, 17th Floor
Columbus, Ohio 43215-3428
Telephone: (614) 466-3376
FAX: (614) 466-5087
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 52
STATE OF COLORADO
/s/ GALE A. NORTON
----------------------------------------
Gale A. Norton
Attorney General
1525 Sherman Street, 5th Floor
Denver, Colorado 80203
Telephone: (303) 866-3052
FAX: (303) 866-3955
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 53
STATE OF WYOMING
/s/ WILLIAM U. HILL
----------------------------------------
William U. Hill
Attorney General
123 Capital Building
Cheyenne, WY 82002
Telephone: (307) 777-7841
FAX: (307) 777-6869
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 54
STATE OF IDAHO
/s/ ALAN G. LANCE
----------------------------------------
Alan G. Lance
Attorney General
Office of the Attorney General
Consumer Protection Unit
Len B. Jordan Building
650 W. State St., Lower Level
P.O. Box 83720
Boise, Idaho 83720-0010
Telephone: (208) 334-2424
FAX: (208) 334-2830
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 55
STATE OF NEW HAMPSHIRE
Philip T. McLaughlin
Attorney General
/s/ WALTER L. MARONEY
----------------------------------------
Walter L. Maroney
Senior Assistant Attorney General
(Bar No. 8206)
33 Capitol Street
Concord, New Hampshire 03301
Telephone: (603) 271-3643
FAX: (603) 271-2110
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 56
STATE OF MONTANA
/s/ CHRIS D. TWEETEN
----------------------------------------
Chris D. Tweeten
Chief Counsel
Joseph P. Mazurek
Attorney General of Montana
Justice Building
215 North Sanders
P.O. Box 201401
Helena, MT 59620-1401
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 57
STATE OF NEBRASKA
/s/ DON STENBERG
----------------------------------------
Don Stenberg
Attorney General
2115 State Capitol
Lincoln, NE 68509
Telephone: (402) 471-2682
FAX: (402) 471-3297
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 58
Respectfully submitted,
STATE OF RHODE ISLAND
By Its Attorney,
/s/ JEFFREY B. PINE
----------------------------------------
Jeffrey B. Pine
Attorney General
Attorney Bar #2278
Maureen G. Glynn
Assistant Attorney General
Attorney Bar #3800
150 South Main Street
Providence, Rhode Island 02903
Telephone: (401) 274-4400, Ext. 2301
FAX: (401) 274-3050
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 59
STATE OF ARKANSAS
/s/ WINSTON BRYANT
----------------------------------------
Winston Bryant
Attorney General
Shirley Guntharp
Deputy Attorney General
Timothy Gauger
Assistant Attorney General
323 Center Street, Suite 200
Little Rock, Arkansas 72201
Telephone: (501) 682-2007
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 60
DISTRICT OF COLUMBIA
John M. Ferren
Corporation Counsel
Robert R. Rigsby
Deputy Corporation Counsel
Enforcement Division
Louis E. Rumbaut
Director
Civil Branch
/s/ STUART CAMERON
----------------------------------------
Stuart Cameron
Assistant Corporation Counsel
Enforcement Division, Rm 6N72
441 4th Street, N.W.
Washington, D.C. 20001
Telephone: (202) 727-6240
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 61
STATE OF MISSOURI
/s/ JEREMIAH W. NIXON
----------------------------------------
Jeremiah W. (Jay) Nixon
Attorney General
P.O. Box 899
Jefferson City, Missouri 65102
Telephone: (573) 751-5227
FAX: (573) 751-0774
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 62
TERRITORY OF THE UNITED STATES
VIRGIN ISLANDS
/s/ JULIO A. BRADY
----------------------------------------
Julio A. Brady
Attorney General
VI Department of Justice
48B-50C Kronprindsens Gade
GERS Building, Second Floor
St. Thomas, U.S.V.I. 00802
Telephone: (340) 774-5666
FAX: (340) 774-9710
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 63
STATE OF MAINE
/s/ ANDREW KETTERER
----------------------------------------
Andrew Ketterer
Attorney General
Dept. of the Attorney General
Six State House Station
Augusta, ME 04333
Telephone: (207) 626-8800
FAX: (207) 287-3145
LIGGETT III SETTLEMENT AGREEMENT
<PAGE> 1
EXHIBIT 10.43
BROOKE GROUP LTD.
100 S.E. SECOND STREET, 32ND FLOOR
MIAMI, FLORIDA 33131
January 1, 1998
Ms. Joselynn D. Van Siclen
3610 Yacht Club Drive, #612
Aventura, Florida 33180
Dear Ms. Van Siclen:
We are pleased to inform you that Brooke Group Ltd. (the "Company") has
granted you a nonqualified option (the "Option") to purchase 30,000 shares of
the Company's common stock, par value $.10 per share (the "Common Stock"), at a
price of $5.00 per share (any of the underlying shares of Common Stock to be
issued upon exercise of the Option are referred to hereinafter as the "Shares"),
subject to the following terms and conditions:
1. The Option may be exercised on or prior to December 31, 2006 (at
which date the Option will, to the extent not previously exercised, expire), as
follows: (a) as to 5,000 of the Shares, on and after the date hereof; (b) as to
5,000 of the Shares, on and after January 1, 1999; (c) as to 5,000 of the
Shares, on and after January 1, 2000; (d) as to 5,000 of the Shares, on and
after January 1, 2001; (e) as to 5,000 of the Shares, on and after January 1,
2002; and (f) as to the final 5,000 of the Shares, on and after January 1, 2003.
Each such installment shall be cumulative and your right of purchase thereunder
shall continue, unless exercised or terminated as herein provided, through the
expiration date of the Option.
2. Any installment of the Option, from and after the date it becomes
exercisable pursuant to Section 1 hereof, may be exercised in whole or in part
by delivering to the Company a written notice of exercise in the form attached
hereto as Exhibit A, specifying the number of the Shares to be purchased,
together with payment of the purchase price of the Shares to be purchased. The
purchase price is to be paid in cash or by delivering shares of Common Stock
already owned by you and having a fair market value on the date of exercise
equal to the exercise price of the Option, or a combination of such shares and
cash.
3. Except to the extent provided in Section 4 hereof, in the event your
employment with the Company is terminated for any reason, the Option shall
forthwith terminate, provided that you may exercise any then unexercised
installments of the Option then exercisable at any time prior to the earlier of
three months after the termination of your employment or the expiration of the
Option.
<PAGE> 2
Ms. Joselynn D. Van Siclen
January 1, 1998
Page 2
4. In the event of the occurrence of any Change of Control of the
Company or of New Valley Corporation (as the term "Change of Control" is defined
in Section 6(f) of the Employment Agreement, dated as of January 1, 1995, as
amended as of January 1, 1996, between Howard M. Lorber and New Valley
Corporation), other than any Change of Control arising by reason of a
testamentary bequest by Bennett S. LeBow to or for the benefit of his surviving
spouse of any or all securities of the Company or of New Valley Corporation
beneficially owned by him as of his date of death so long as, following the
bequest, the event referenced in Section 6(f)(ii) of such Employment Agreement
shall not have occurred, all installments of the Option (to the extent not
previously exercised) shall become immediately exercisable at any time prior to
the earlier of three months after the termination of your employment or the
expiration of the Option.
5. The Option is not transferable otherwise than by will or by the
applicable laws of descent and distribution and may be exercised during your
lifetime only by you (or in the event of your Disability, by your personal
representative or representatives).
6. In the event of your death, the Option may be exercised by your
personal representative or representatives or by the person or persons to whom
your rights under the Option shall pass by will or by the applicable laws of
descent or distribution.
7. In the event of any change in the outstanding Common Stock by reason
of a stock dividend, recapitalization, merger, consolidation, split-up,
subdivision, combination or exchange of shares, or the like, the aggregate
number and kind of shares subject to the Option and the exercise price thereof
shall be proportionately adjusted by the Company.
8. Unless at the time of the exercise of the Option a registration
statement under the Securities Act of 1933, as amended (the "Act"), is in effect
as to the Shares, the Shares shall be acquired for investment and not for sale
or distribution, and if the Company so requests, upon any exercise of the
Option, in whole or in part, you agree to execute and deliver to the Company a
certificate to such effect.
9. You understand and acknowledge that, under existing law, unless at
the time of the exercise of the Option a registration statement under the Act is
in effect as to the Shares so issuable: (i) any Shares purchased by you upon
exercise of the Option may be required to be held indefinitely unless such
Shares are subsequently registered under the Act or an exemption from such
registration is available; (ii) any sales of such Shares made in reliance upon
Rule 144 promulgated under the Act may be made only in accordance with the terms
and conditions of that Rule (which, under certain circumstances, restrict the
number of shares which may be sold and the manner in which shares may be sold);
(iii) in the case of securities to which Rule 144 is not
<PAGE> 3
Ms. Joselynn D. Van Siclen
January 1, 1998
Page 3
applicable, compliance with Regulation A promulgated under the Act or some other
disclosure exemption shall be required; (iv) certificates for Shares to be
issued to you hereunder shall bear a legend to the effect that the Shares have
not been registered under the Act and that the Shares may not be sold,
hypothecated or otherwise transferred in the absence of an effective
registration statement under the Act relating thereto or an opinion of counsel
satisfactory to the Company that such registration is not required; and (v) the
Company shall place an appropriate "stop transfer" order with its transfer agent
with respect to such Shares.
10. Promptly following the date hereof, the Company shall use its best
efforts to file and keep in effect a Registration Statement on Form S-8, Form
S-3 or other applicable form to register under the Act the Shares issuable to
you upon exercise of the Option and the resale thereof by you.
<PAGE> 4
Ms. Joselynn D. Van Siclen
January 1, 1998
Page 4
Would you kindly evidence your acceptance of the Option and your
agreement to comply with the provisions hereof by executing this letter in the
space provided below.
Very truly yours,
BROOKE GROUP LTD.
By: /s/ Bennett S. LeBow
-------------------------------
Bennett S. LeBow
Chairman, President
and Chief Executive Officer
AGREED TO AND ACCEPTED:
/s/ Joselynn D. Van Siclen
- -------------------------------
Joselynn D. Van Siclen
<PAGE> 5
EXHIBIT A
Brooke Group Ltd.
100 S.E. Second Street, 32nd Floor
Miami, Florida 33131
Gentlemen:
Notice is hereby given of my election to purchase __________ shares of
Common Stock, $.10 par value (the "Shares"), of Brooke Group Ltd., at a price of
$5.00 per Share, pursuant to the provisions of the stock option granted to me on
January 1, 1998. Enclosed in payment for the Shares is:
[ ] my check in the amount of $ ____________________.
[ ] _______________ Shares having a total value of $______________,
such value being based on the closing price(s) of the Shares on
the date hereof.
The following information is supplied for use in issuing an registering
the Shares purchased hereby:
Number of Certificates
and Denominations _________________________
Name _________________________
Address _________________________
_________________________
Social Security _________________________
Dated:
Very truly yours,
Joselynn D. Van Siclen
<PAGE> 1
EXHIBIT 10.56
BROOKE GROUP LTD.
STOCK OPTION AGREEMENT
THIS AGREEMENT is made and entered into as of the 12th day of
March, 1998, by and between BROOKE GROUP LTD., a Delaware corporation (the
"Company"), and KASOWITZ, BENSON, TORRES & FRIEDMAN LLP, a New York limited
liability partnership, MARC E. KASOWITZ and DANIEL R. BENSON (collectively, the
"Holder").
WHEREAS, the Company desires to issue, and the Holder desires
to receive, a nonqualified non-transferable option to purchase shares of the
Common Stock, $.10 par value, of the Company (the "Common Stock"), pursuant to
the terms described herein.
NOW, THEREFORE, in consideration of the terms and conditions
contained herein and other good and valuable consideration the receipt of which
is hereby acknowledged, and intending to be legally bound hereby, the parties
agree as follows:
1. GRANT OF OPTION. The Company hereby grants to the Holder an option
(the "Option") to purchase, in accordance with the terms hereof, at an option
price of $17.50 per share, (i) commencing May 1, 1998, up to 250,000 (two
hundred and fifty thousand) shares of the Common Stock and (ii) commencing on
the earlier of a Change of Control or April 1, 1999, up to an additional
1,000,000 (one million) shares of the Common Stock. The Option will expire at
the close of business on March 31, 2003.
For purposes of this Agreement, a "Change of Control" shall
occur if or upon the occurrence of:
(i) Any "Person" (as the term person is used for
purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")) acquires
"Beneficial Ownership" (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of any securities of the
Company which generally entitles the holder thereof to vote
for the election of directors of the Company (the "Voting
Securities"), which, when added to the Voting Securities then
"Beneficially Owned" by such person, would result in such
Person "Beneficially Owning" forty percent (40%) or more of
the combined voting power of the Company's then outstanding
Voting Securities; provided, however, that for purposes of
this paragraph (i), a Person shall not be deemed to have made
an acquisition of Voting Securities if such Person: (a)
acquires Voting Securities as a result of a stock split, stock
dividend or other corporate restructuring in which all
stockholders of the class of such Voting Securities are
treated on a pro rata basis: (b) acquires the Voting
Securities directly from the Company; (c) becomes the
Beneficial Owner of more than the permitted percentage of
Voting Securities solely as a result of the acquisition of
Voting Securities by the Company which, by
<PAGE> 2
reducing the number of Voting Securities outstanding,
increases the proportional number of shares Beneficially Owned
by such Person; (d) is the Company or any corporation or other
Person of which a majority of its voting power or its equity
securities or equity interest is owned directly or indirectly
by the Company (a "Controlled Entity"); or (e) acquires Voting
Securities in connection with a "Non-Control Transaction" (as
defined in paragraph (iii) below); or
(ii) The individuals who, as of March 12, 1998, are
members of the Board (the "Incumbent Board") cease for any
reason to constitute at least two-thirds of the Incumbent
Board; provided, however, that if either the election of any
new director or the nomination for election of any new
director was approved by a vote of more than two-thirds of the
Incumbent Board, such new director shall be considered as a
member of the Incumbent Board; provided further, however, that
no individual shall be considered a member of the Incumbent
Board if such individual initially assumed office as a result
of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the Exchange Act)
or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board (a
"Proxy Contest"), including by reason of any agreement
intended to avoid or settle any Election Contest or Proxy
Contest; or
(iii) Shareholder approval of:
(a) A merger, consolidation or
reorganization involving the Company (a "Business
Combination"), unless
(1) the stockholders of the Company immediately
before the Business Combination, own, directly or indirectly
immediately following the Business Combination, at least
fifty-one percent (51%) of the combined voting power of the
outstanding Voting Securities of the corporation resulting
from the Business Combination (the "Surviving Corporation")
in substantially the same proportion as their ownership of
the Voting Securities immediately before the Business
Combination, and
(2) the individuals who were members of the
Incumbent Board immediately prior to the execution of the
agreement providing for the Business Combination constitute
at least a majority of the members of the Board of Directors
of the Surviving Corporation, and
(3) no Person (other than the Company or any
Controlled Entity, a trustee or other fiduciary holding
securities under one or more employee benefit plans or
arrangements (or any trust forming a part thereof) maintained
by the Company, the Surviving Corporation or any Controlled
Entity, or any Person who, immediately prior to the Business
Combination, had Beneficial Ownership of forty percent (40%)
or more of the then outstanding Voting Securities) has
Beneficial Ownership of forty percent (40%) or more of the
combined voting power
2
<PAGE> 3
of the Surviving Corporation's then outstanding voting securities (a
transaction described in this subparagraph (a) shall be referred to as a
"Non-Control Transaction");
(b) A complete liquidation or dissolution of the Company; or
(c) The sale or other disposition of all or substantially all of the
assets of the Company to any Person (other than a transfer to a Controlled
Entity).
Notwithstanding the foregoing, (x) a Change in Control shall not be
deemed to occur solely because forty percent (40%) or more of the then
outstanding Voting Securities is Beneficially Owned by (A) a trustee or other
fiduciary holding securities under one or more employee benefit plans or
arrangements (or any trust forming a part thereof) maintained by the Company or
any Controlled Entity or (B) any corporation which, immediately prior to its
acquisition of such interest, is owned directly or indirectly by the
stockholders of the Company in the same proportion as their ownership of stock
in the Company immediately prior to such acquisition; and (y) a Change of
Control shall not be deemed to occur by reason of a testamentary bequest by
Bennett S. LeBow to or for the benefit of his surviving spouse of any or all
securities of the Company beneficially owned by him as of his date of death.
2. ACCEPTANCE OF GRANT OF OPTION. The Holder accepts the grant of the
Option confirmed hereby and agrees to be bound by the terms and conditions of
this Agreement.
3. INVESTMENT PURPOSE. The Holder represents to the Company that the
Holder is acquiring the Option and any securities which may be acquired pursuant
to the Option for investment and not with a view to or for sale in connection
with any distribution thereof. The Holder represents that it will not sell or
transfer any securities acquired pursuant to the Option in violation of the
Securities Act of 1933, as amended (the "Act"), or the rules and regulations
promulgated thereunder. Without limiting the scope of the foregoing
representation and warranty, the Holder agrees that it will not sell or transfer
any such securities unless either (a) a registration statement under the Act
shall be in effect with respect to such securities and the Holder shall comply
with the provisions of the Act in connection with the sale of such securities;
or (b) the Holder has, prior to any transfer or attempt to transfer such
securities, obtained an opinion of counsel satisfactory to the Company, stating
that such transfer may be effected without registration of such securities under
the Act.
4. LEGEND. The Holder of the Option agrees that the Company may place a
legend reflecting the provisions of Section 3 on each certificate evidencing any
securities delivered to the Holder pursuant to the Option and the Company may
place an appropriate "stop transfer" order with its transfer agent with respect
to such securities.
5. RECAPITALIZATION, ETC. In the event of any change in the outstanding
Common Stock by reason of a stock dividend, recapitalization, merger,
consolidation, split-up, subdivision, combination or exchange of shares, or the
like, the aggregate number and kind of shares subject to the Option and the
exercise price thereof shall be proportionately adjusted by the Company.
3
<PAGE> 4
6. REGISTRATION. The Company agrees to use its best efforts to file and
keep effective during the entire term of the Option, a Registration Statement on
Form S-8, Form S-3 or other applicable form with respect to the shares of Common
Stock issuable upon the exercise of the Option.
7. PROCEDURE FOR EXERCISE OF OPTION. The Option may be exercised only
by (a) delivery by the Holder to the Company of written notice of exercise and
(b) surrender of this Agreement to the Company. Each exercise notice must set
forth the number of shares of Common Stock for which the Option is exercised and
must be dated and signed on behalf of the Holder by both Marc E. Kasowitz and
Daniel R. Benson. Upon partial exercise hereof, a new Agreement containing the
same provisions as this Agreement shall be issued by the Company to the Holder
for the number of shares of Common Stock with respect to which the Option shall
not have been exercised.
Subject to the last paragraph of this Section 7, the exercise is not
effective until the Company receives payment of the full option price for the
number of shares of Common Stock for which the Option is exercised. The option
price shall be paid to the Company in full in cash.
The date of exercise of the Option is the date on which notice of
exercise and payment of the option price are received by the Company.
8. ISSUANCE OF CERTIFICATES. Subject to Section 7 above and this
Section 8, the Company will issue, without transfer or issue tax or other
incidental expense, a certificate or certificates representing the number of
shares of Common Stock for which the Option is exercised as soon as practicable
after the date of exercise. Unless otherwise directed, the certificate(s) will
be registered in the name of the person exercising the Option and delivered to
such person.
9. NON-TRANSFERABILITY OF OPTION. Without the prior written consent of
the Company, the Option is not transferable.
10. BINDING EFFECT. This Agreement shall be binding upon the successors
and assigns of the Company and inure to and be binding upon the legal
representatives, heirs and legatees of the Holder.
11. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties and supersedes all prior agreements and understandings, oral
or written, between the parties with respect to the subject matter of this
Agreement.
12. AMENDMENT. This Agreement may be amended only a written instrument
signed by the Company and the Holders.
4
<PAGE> 5
13. GOVERNING LAW. This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, the Company and the Holder have executed this
Agreement as of the date first written above.
BROOKE GROUP LTD. KASOWITZ, BENSON, TORRES &
FRIEDMAN LLP
By: /s/ Bennett S. LeBow By: /s/ Marc E. Kasowitz
--------------------------------- ------------------------------
Name: Bennett S. LeBow Name: Marc E. Kasowitz
Title: Chairman, President and Title:
Chief Executive Officer
By: /s/ Daniel R. Benson
-------------------------------
Name: Daniel R. Benson
Title:
/s/ Marc E. Kasowitz
---------------------------------
Marc E. Kasowitz
/s/ Daniel R. Benson
---------------------------------
Daniel R. Benson
5
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE COMPANY
The following is a list of the active subsidiaries of the Company as of
March 30, 1998, indicating the jurisdiction of incorporation of each and the
names under which such subsidiaries conduct business. In the case of each
subsidiary which is indented, its immediate parent owns beneficially all of the
voting securities.
NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
------------------ -----------------------------
BGLS Inc. Delaware
Liggett Group Inc. Delaware
Brooke (Overseas) Ltd. Delaware
New Valley Holdings, Inc. Delaware
Not included above are other subsidiaries which, if considered in the
aggregate as a single subsidiary, would not constitute a significant subsidiary,
as such term is defined by Rule 1-02(w) of Regulation S-X.
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTS
We consent to the incorporation by reference in the registration statements of
Brooke Group Ltd. on Form S-3 (File No. 33-38869 and File No. 33-63119) and
Form S-8 (File No. 333-24217) of: (i) our report, dated April 8, 1998, on our
audits of the consolidated financial statements and financial statements
schedule of Brooke Group Ltd. and Subsidiaries as of December 31, 1997 and
1996, and for the years ended December 31, 1997, 1996 and 1995 and (ii) our
report, dated March 31, 1998 on our audits of the consolidated financial
statements of New Valley Corporation and Subsidiaries as of December 31, 1997
and 1996, and for the years ended December 31, 1997, 1996, and 1995, which
reports are included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Miami, Florida
April 8, 1998
<PAGE> 1
Exhibit 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Brooke Group Ltd.
We consent to the incorporation by reference of our report dated January 23,
1998 in the registration statements on Form S-3 (No. 33-38869 and No. 33-63119)
and Form S-8 (No. 333-24217) of Brooke Group Ltd., relating to the consolidated
balance sheets of Thinking Machines Corporation and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year ended December 31, 1997 and the
period from February 8, 1996 (inception) to December 31, 1996, which report
appears in the December 31, 1997 annual report on Form 10-K of New Valley
Corporation.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
- -----------------------
Boston, Massachusetts
April 3, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927388
<NAME> BGLS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,754
<SECURITIES> 0
<RECEIVABLES> 10,462
<ALLOWANCES> 0
<INVENTORY> 39,312
<CURRENT-ASSETS> 67,985
<PP&E> 45,943
<DEPRECIATION> 0
<TOTAL-ASSETS> 202,323
<CURRENT-LIABILITIES> 139,704
<BONDS> 400,635
0
0
<COMMON> 1,850
<OTHER-SE> (490,247)
<TOTAL-LIABILITY-AND-EQUITY> 126,460
<SALES> 389,615
<TOTAL-REVENUES> 389,615
<CGS> 202,121
<TOTAL-COSTS> 202,121
<OTHER-EXPENSES> 27,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 61,778
<INCOME-PRETAX> (50,687)
<INCOME-TAX> 1,123
<INCOME-CONTINUING> (51,810)
<DISCONTINUED> 1,925
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,885)
<EPS-PRIMARY> (2.74)
<EPS-DILUTED> (2.74)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOKE GROUP, LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,754
<SECURITIES> 0
<RECEIVABLES> 10,462
<ALLOWANCES> 0
<INVENTORY> 39,312
<CURRENT-ASSETS> 67,366
<PP&E> 45,775
<DEPRECIATION> 0
<TOTAL-ASSETS> 128,916
<CURRENT-LIABILITIES> 160,675
<BONDS> 400,635
0
0
<COMMON> 0
<OTHER-SE> (513,115)
<TOTAL-LIABILITY-AND-EQUITY> 128,916
<SALES> 389,615
<TOTAL-REVENUES> 389,615
<CGS> 202,121
<TOTAL-COSTS> 202,121
<OTHER-EXPENSES> 27,035
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 65,581
<INCOME-PRETAX> (53,665)
<INCOME-TAX> 1,135
<INCOME-CONTINUING> (54,800)
<DISCONTINUED> 1,925
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,875)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
MATERIAL LEGAL PROCEEDINGS
STATE MEDICAID REIMBURSEMENT CASES
STATE OF MINNESOTA, ET AL. V. PHILIP MORRIS, ET AL., Case No.
C1-94-8565, District Court, County of Ramsey, 2nd Judicial District (case filed
on August 18, 1994). This case was settled by Liggett and Brooke as to the State
of Minnesota on March 20, 1997. The case remains pending as to claims by Blue
Cross/Shield of Minnesota.
COMMONWEALTH OF PUERTO RICO, ET AL. V. BROWN & WILLIAMSON, ET AL., Case
No. 97-1910 (JAF), USDC, District Court of Puerto Rico (case filed on June 27,
1997). This case brought on behalf of the Commonwealth of Puerto Rico seeks
compensatory and injunctive relief for damages incurred by the Commonwealth in
paying for the medicaid expenses of indigent smokers. This case is presently
stayed.
STATE OF SOUTH CAROLINA V. BROWN & WILLIAMSON, ET AL., Case No.
97-CP-40-1686, Court of Common Pleas, Richland County (case filed on May 12,
1997). This case brought on behalf of the State of South Carolina seeks
compensatory and injunctive relief for damages incurred by the state in paying
for the medicaid expenses of indigent smokers. This case is presently stayed
pending the outcome of Congressional debate concerning national tobacco policy.
STATE OF SOUTH DAKOTA, ET AL. V. PHILIP MORRIS, ET AL., Case No. 98-65,
Circuit Court of 6th Circuit, Hughes County (case filed on February 23, 1998).
This case brought on behalf of the State of South Dakota seeks compensatory and
injunctive relief for damages incurred by the state in paying for the medicaid
expenses of indigent smokers. This case is presently stayed pending the outcome
of Congressional debate concerning national tobacco policy.
STATE OF VERMONT V. PHILIP MORRIS, ET AL., Case No. 744-97CnC,
Chittenden County Superior Court (case filed on May 29, 1997). This case brought
on behalf of the State of Vermont seeks compensatory and injunctive relief for
damages incurred by the state in paying for the medicaid expenses of indigent
smokers.
<PAGE> 2
CLASS ACTION CASES
FLETCHER, ET AL. V. BROOKE GROUP, LTD., ET AL., Case No. CV-97-913,
Circuit Court of Mobile County, Alabama (case filed on March 20, 1997).
Nationwide class certified and limited fund class action settlement
preliminarily approved with respect to Liggett and Brooke Group on March 20,
1997.
HANSEN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
LR-C-96-881, USDC, Eastern District of Arkansas (case filed on April 4, 1997).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Arkansas.
Plaintiffs filed a motion for class certification on September 15, 1997, which
motion remains pending.
BROWN, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No. 711400,
Superior Court of San Diego, California (case filed on October 1, 1997). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in California. No motion for class
certification has been brought by plaintiff.
FINELLI, ET AL. V. PHILIP MORRIS, ET AL., Case No. 96-04348, DC,
Superior Court of District of Columbia. Liggett is named as a defendant in this
putative class action, but has not been served.
REED, ET AL. V. PHILIP MORRIS, ET AL., Case No. 96-05070, DC, Superior
Court of District of Columbia (case filed on June 21, 1996). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in the District of
Columbia. On August 18, 1997, the court issued an order declining to certify the
class.
BROIN, ET AL. V. PHILIP MORRIS, ET AL., Case No. 91-49738 CA 22, FL,
Circuit Court Dade County (case filed on October 31, 1991). This action brought
on behalf of all flight attendants that have been injured by exposure to
environmental tobacco smoke was certified as a class action on December 12,
1994. This case was settled with respect to all defendants on October 10, 1997,
which settlement was finally approved by the court on February 2, 1998. A notice
of appeal is currently pending.
ENGLE, ET AL. V. R.J. REYNOLDS, ET AL., Case No. 94-08273 CA 20, FL,
Circuit Court, Dade County (case filed on May 5, 1994). This personal injury
class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Florida. The case was certified
<PAGE> 3
as a class action on October 31, 1994, and trial is expected to commence during
the Summer, 1998.
PETERSON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
97-0490-02, First Circuit Court, Honolulu, Hawaii (case filed on February 6,
1997). This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Hawaii.
CLAY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
97-4167-JPG, USDC, Southern District of Illinois (case filed on May 22, 1997).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in 34 states. No
motion for class certification has been brought by plaintiff.
NORTON, ET AL. V. R.J. REYNOLDS, ET AL., Case No. 48-D01-9605-CP-0271,
Superior Court, Madison County, Indiana (case filed on May 3, 1996). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in Indiana. No motion for class certification
has been brought by plaintiff.
BRAMMER, ET AL. V. R.J. REYNOLDS, ET AL., Case No. 4-97-CV-10461, USDC,
Southern District of Iowa, (case filed on June 30, 1997). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Iowa. To date, no motion
for class certification has been filed by plaintiff.
EMIG, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
97-1121-MLB, USDC, District of Kansas (case filed on April 11, 1997). This
"addiction-as-injury" putative class action is brought on behalf of plaintiff
and all similarly situated addicted smokers resident in Kansas. Plaintiff's
motion for class certification currently is pending.
CASTANO, ET AL. V. THE AMERICAN TOBACCO COMPANY ET AL.,
Case No. 95-30725, USDC, Eastern District of Louisiana (case filed on March 29,
1994). This case was certified as a class action by the district could on
February 17, 1995. This case was settled by Liggett and Brooke on March 12,
1996. The class was decertified by the Fifth Circuit in May 1996. Plaintiffs'
motion for approval of the settlement was withdrawn on September 6, 1996.
GRANIER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., USDC, Eastern
District of Louisiana (case filed on September 29, 1994). This case is currently
stayed pursuant to a decision in Castano.
YOUNG, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
2:97-CV-03851, Civil District Court, Parish of Orleans, Louisiana (case filed on
November 12, 1997). This personal injury class action is brought on behalf of
plaintiff and all similarly situated injured smokers resident in Louisiana. No
motion for class certification has been brought by plaintiff.
RICHARDSON, ET AL. V. PHILIP MORRIS, ET AL., Case No.
96145050/CL212596, Circuit Court, Baltimore City, Maryland (case filed on May
29, 1996). This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated addicted smokers resident in Maryland.
This class action was certified by the court on January 28, 1998.
-2-
<PAGE> 1
Exhibit 99.2
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 2
LIGGETT GROUP, INC.
INDEX TO
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
------
<S> <C>
FINANCIAL STATEMENTS - LIGGETT GROUP INC.:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995. . . . . . . . . . . 3
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS - EVE HOLDINGS INC.:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Balance Sheets as of December 31, 1997 and 1996.. . . . . . . . . . . . . . . . . . . . 32
Statements of Operations for the years ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Statements of Stockholder's Equity (Deficit) for the years ended
December 31, 1997, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . 39
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholder
Liggett Group Inc.
We have audited the consolidated financial statements and the financial
statement schedule of Liggett Group Inc. listed in the index on page 15 of this
Form 10-K. These financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and the financial schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Liggett Group
Inc. as of December 31, 1997 and 1996 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all materially respects, the information required to
be included therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2a to the
financial statements, the Company suffered a loss of $14,179,000 for the year
ended December 31, 1997 and had net capital and working capital deficiencies of
$192,857,000 and $17,542,000, respectively, at December 31, 1997. The Company
also has a $144,891,000 principal payment due on its Senior Secured Notes on
February 1, 1999 and the Company's revolving credit facility (the "Facility"),
which had a balance of $23,427,000 at December 31, 1997, is due on March 8,
1999. The Company's financial resources are not sufficient to repay the Senior
Secured Notes when they become due, nor will the Company be able to repay the
Facility when it becomes due. In addition, as disclosed in Note 2a to the
financial statements, due to the many risk and uncertainties associated with
the cigarette industry and the impact of tobacco litigation, there can be no
assurance that the Company will be able to meet its future earnings or cash
flow goals. These facts raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 2a. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 8, 1998
2
<PAGE> 4
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable:
Trade, less allowances of $1,062 and $1,280,respectively. $ 9,572 $19,316
Other ................................................... 743 744
Inventories ................................................. 35,057 50,122
Other current assets (Note 6) .............................. 738 1,205
------- -------
Total current assets ................................ 46,110 71,387
Property, plant and equipment, at cost, less accumulated
depreciation of $29,452 and $29,511, respectively ............ 17,756 18,705
Intangible assets, at cost, less accumulated amortization
of $19,111 and $17,388, respectively ......................... 1,609 3,327
Other assets and deferred charges, at cost, less accumulated
amortization of $9,000 and $7,410, respectively .............. 3,000 4,258
------- -------
Total assets ....................................... $68,475 $97,677
======= =======
</TABLE>
(continued)
3
<PAGE> 5
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt ...................................... $ 28 $ 31,807
Cash overdraft ............................................................ 891 6
Accounts payable, principally trade ....................................... 6,413 18,505
Accrued expenses:
Promotional ............................................................ 26,993 30,257
Taxes, principally excise taxes ........................................ 3,643 7,565
Estimated allowance for sales returns .................................. 4,750 5,000
Interest ............................................................... 8,070 8,435
Settlement accruals .................................................... 4,030 --
Other .................................................................. 8,834 10,506
--------- ---------
Total current liabilities ............................................ 63,652 112,081
Long-term debt, less current maturities ..................................... 168,112 144,698
Non-current employee benefits ............................................... 11,168 11,340
Other long-term liabilities ................................................. 18,400 6,036
Commitments and contingencies (Notes 5 and 12)
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 ....................................................... (240,497) (226,318)
--------- ---------
Total stockholder's deficit ....................................... (192,857) (176,478)
--------- ---------
Total liabilities and stockholder's equity (deficit) .............. $ 68,475 $ 97,677
========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales* ........................................ $ 312,268 $ 401,062 $ 455,666
Cost of sales* .................................... 139,310 187,799 212,314
--------- --------- ---------
Gross profit ............................ 172,958 213,263 243,352
Selling, general and administrative expenses ...... 151,186 203,214 212,830
Settlement charges ................................ 16,527 -- 3,976
Restructuring ..................................... 1,557 3,296 1,927
--------- --------- ---------
Operating income ........................ 3,688 6,753 24,619
Other income (expense):
Interest income ............................... 60 23 3
Interest expense .............................. (23,755) (23,901) (23,449)
Equity in income (loss) of affiliates ......... 498 (1,116) --
Sale of assets ................................ 3,595 3,669 --
Miscellaneous, net ............................ 1,735 -- 1,133
--------- --------- ---------
(Loss) income before income taxes ....... (14,179) (14,572) 2,306
Income tax provision .............................. -- 3,800 1,751
--------- --------- ---------
Net (loss) income ....................... $ (14,179) $ (18,372) $ 555
========= ========= =========
</TABLE>
*Net sales and cost of sales include federal excise taxes of $75,316, $104,518
and $123,420 respectively.
The accompanying notes are an integral part
of these financial statements.
5
<PAGE> 7
LIGGETT GROUP INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Total
Stock and Stockholder's
Contributed Equity
Capital Deficit (Deficit)
------- ------- ---------
<S> <C> <C> <C>
Balance at December 31, 1994 ...................... $ 53,240 $(207,703) $(154,463)
Net income ..................................... -- 555 555
Excess of investment over cost basis of
net assets acquired from indirect parent ... -- (798) (798)
-------- --------- ---------
Balance at December 31, 1995 ..................... 53,240 (207,946) (154,706)
Net loss ....................................... -- (18,372) (18,372)
Consideration for option to acquire affiliate
stock in excess of its net assets (Note 13). (3,400) -- (3,400)
-------- --------- ---------
Balance at December 31, 1996 ...................... 49,840 (226,318) (176,478)
Net loss ....................................... -- (14,179) (14,179)
Excess of investment over cost basis of
net assets acquired from indirect parent ... (2,200) -- (2,200)
-------- --------- ---------
Balance at December 31, 1997 ..................... $ 47,640 $(240,497) $(192,857)
======== ========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE> 8
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ...................................... $ (14,179) $ (18,372) $ 555
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization ......................... 7,025 7,969 7,972
Deferred income taxes ................................. -- 3,800 1,259
Gain on sale of property, plant and equipment ......... (3,595) (3,669) (375)
Gain on retirement of notes ........................... (2,963) -- (1,273)
Deferred finance charges and debt discount
written off ........................................ 130 -- 160
Equity in (income) loss of affiliate .................. (498) 1,116 --
Changes in assets and liabilities:
Accounts receivable ................................ 9,745 4,691 7,060
Inventories ........................................ 15,065 4,220 (7,658)
Accounts payable ................................... (12,092) (330) 7,671
Accrued expenses ................................... (5,442) 8,479 (10,638)
Non-current employee benefits ...................... (172) (276) (225)
Other, net ......................................... 12,027 (1,461) 9,079
--------- --------- ---------
Net cash provided by operating activities ...... 5,051 6,167 13,587
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ..... 4,494 4,424 570
Capital expenditures .................................... (2,462) (4,319) (1,104)
Investment in affiliates ................................ (2,200) (5,500) (800)
--------- --------- ---------
Net cash used in investing activities ........... (168) (5,395) (1,334)
--------- --------- ---------
Cash flows from financing activities:
Repayments of long-term debt ............................ (4,775) (254) (8,208)
Borrowings under revolving credit facility .............. 278,442 351,428 397,873
Repayments under revolving credit facility .............. (279,286) (348,173) (401,703)
Deferred finance charges ................................ (149) (18) --
Increase (decrease) in cash overdraft ................... 885 (3,755) (215)
--------- --------- ---------
Net cash used in financing activities ........... (4,883) (772) (12,253)
--------- --------- ---------
Net change in cash and cash equivalents ..................... -- -- --
Cash and cash equivalents:
Beginning of period ..................................... -- -- --
--------- --------- ---------
End of period ........................................... $ -- $ -- $ --
========= ========= =========
Supplemental cash flow information:
Cash payments during the period for:
Interest ............................................ $ 23,491 $ 23,228 $ 23,196
Income taxes ........................................ $ 162 $ 189 $ 130
</TABLE>
The accompanying notes are an integral part
of these financial statements.
7
<PAGE> 9
LIGGETT GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
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 13).
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". SFAS No. 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 No. 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 No. 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 No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information". SFAS No. 131 specifies revised
guidelines for determining an entity" operating segments and the type and level
of financial information to be disclosed. SFAS No. 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 No. 131 also requires disclosure of
certain "second level" information by geographic area and for
products/services. SFAS No. 131 also makes a number of changes to existing
disclosure requirements. Management believes that the adoption of this
pronouncement will not have a material effect on the Company's financial
statement disclosures. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997, with earlier application encouraged.
In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" was issued which revises required disclosures
about pensions and postretirement benefit plans. SFAS No. 132 is effective for
the Company for the year ended 1998. The Company has not yet determined the
impact of its implementation.
2. Summary of Significant Accounting Policies
a. Going Concern
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 $192,857 as of December 31, 1997, is highly leveraged and
has substantial near-term debt service requirements. (See Note 10.) Due to the
many risks and uncertainties associated with the cigarette industry and the
impact of tobacco litigation (see Note 12), 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 its debt covenants, including
covenants limiting the maximum permitted net worth and working capital
deficiencies, and if its lenders were to exercise acceleration rights under its
revolving credit facility (the
8
<PAGE> 10
"Facility") or the indenture for the 11.50% Secured Notes due February 1, 1999
and the Variable Rate Series C Senior Secured Notes due February 1, 1999
(together, 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.
On January 30, 1998, the Company obtained the consents of the required
majority of the holders of the Liggett Notes to various amendments to the
Indenture governing the Liggett Notes. The amendments provide, among other
things, for a deferral of the February 1, 1998 mandatory redemption of $37,500
principal amount of the Liggett Notes to the date of final maturity, February 1,
1999. (Refer to Note 10.) At maturity, the Liggett Notes will require a
principal payment of $144,891. Based on Liggett's results of operations for
1997, the Company does not anticipate it will be able to generate sufficient
cash from operations to make such payments. In addition, the Company has a
$40,000 Facility expiring March 8, 1999 under which $23,427 was outstanding at
December 31, 1997. While management currently intends to refinance and/or
restructure with the Company's note holders the maturity requirements on the
Liggett Notes and to extend the Facility, there are no refinancing or
restructuring arrangements for the notes or commitments to extend the Facility
at this time, and no assurances can be given in this regard. If the Company is
unable to refinance or restructure the terms of the Liggett Notes or otherwise
make all payments thereon, substantially all of the Company'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 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.
b. Principles of Consolidation
The consolidated financial statements include the accounts of Liggett
and its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve"), Cigarette
Exporting Company of America Ltd. ("CECOA") and Carolina Tobacco Express Company
("CTEC"). Intercompany accounts and transactions have been eliminated.
c. Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1997 and 1996
and the reported amounts of revenues and expenses during the three year period
ended December 31, 1997. Significant estimates subject to material changes in
the near term include deferred tax assets, allowance for doubtful accounts,
promotion accruals, sales returns and allowances, actuarial assumptions of
pension plans and litigation and defense costs. Actual results could differ from
those estimates.
d. 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.
e. Inventories
Inventories are valued at the lower of cost (LIFO) or market. Although
portions of leaf tobacco inventories may not be used or sold within one year
because of the time required for aging, they are included in current assets,
which is common practice in the industry. It is not practicable to determine the
amount that will not be used or sold within one year.
9
<PAGE> 11
f. Property, Plant and Equipment
Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets which are twenty
years for buildings and four to ten years for machinery and equipment.
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. The cost
and related accumulated depreciation of property, plant and equipment are
removed from the accounts upon retirement or other disposition and any resulting
gain or loss is reflected in operations.
The Company is required to review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Accordingly, when indicators of impairment are
present, the Company evaluates the carrying value of property, plant and
equipment and intangibles in relation to the operating performance and estimates
of future discounted cash flows of the underlying business.
g. Trademarks
Trademarks are amortized using the straight-line method over twelve
years. Amortization expense for the years ended December 31, 1997, 1996 and 1995
amounted to $1,723, $1,726 and $1,725, respectively. Management periodically
reviews the carrying value of trademarks to determine whether asset values are
impaired.
h. Sales and Sales Returns
Revenue from sales is recognized upon the shipment of finished goods to
customers. The Company provides for expected sales returns, net of related
inventory cost recoveries. As Liggett does not have any other lines of business,
the Company's financial position and its results of operations could be
materially adversely affected by significant unit sales volume declines,
litigation and defense costs, increased tobacco costs or reductions in the
selling price of cigarettes.
i. Advertising and Promotional Costs
Advertising and promotional costs are expensed as incurred. Advertising
expenses were $40,534, $74,238 and $75,713 for the years ended December 31,
1997, 1996 and 1995, respectively.
j. Employee Benefits
The Company sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such benefits
involves an estimate of unpaid claims as of December 31, 1997 and 1996 which are
subject to significant fluctuations in the near term.
BGLS maintains defined benefit retirement plans for substantially all
of the Company's employees. The Company records as an expense the portion of
BGLS' annual funding requirements applicable to the Company.
The Company sponsors a postretirement benefit plan and records an
actuarially determined liability and charges operations for the estimated cost
of postretirement benefits for current employees and retirees.
10
<PAGE> 12
k. Income Taxes
Deferred taxes reflect the impact of temporary differences between the
amounts of assets and liabilities recognized for financial reporting purposes
and the amounts recognized for tax purposes as well as tax credit carryforwards
and loss carryforwards. These deferred taxes are measured by applying currently
enacted tax rates. A valuation allowance reduces deferred tax assets when it is
deemed more likely than not that future taxable income will be insufficient to
realize some portion or all of the deferred tax assets.
l. Legal Costs
The Company's accounting policy is to accrue legal and other costs
related to contingencies as services are performed.
2. Fair Value of Financial Instruments
The fair values of the Company's Senior Secured Notes have been based
upon market quotations (see Note 10). The carrying amount of borrowings
outstanding under the revolving credit facility and other long-term debt is a
reasonable estimate of fair value, based upon estimated current borrowing rates
for loans with similar terms and maturities. The estimates presented herein are
not necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair values.
3. Changes in Accounting Estimates
In September 1995, the Company adjusted an accrual estimate recorded in
prior years which had the effect of increasing operating income by approximately
$1,214 for the year ended December 31, 1995. Liggett increased its valuation
allowance for deferred tax assets by $443 in the fourth quarter of 1995.
Liggett increased its valuation allowance for deferred tax assets by
$3,800 in the third quarter of 1996. In December 1996, Liggett increased its
estimate of coupon promotions which resulted in a decrease in the Company's
operating income of $1,800 for the year ended December 31, 1996.
As a consequence of certain litigation settlements (see Note 12),
Liggett charged approximately $16,421 to operations in the fourth quarter of
1997. Possible future payments under the litigation settlements which are based
on a percentage of Liggett's pretax income, if any, will be charged to
operations in the period that the Company's operating results are known.
4. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett's largest
single customer accounted for approximately 19.4% in 1997, approximately 13.9%
of net sales in 1996 and approximately 11.6% of net sales in 1995. Sales to this
customer were primarily in the private label discount market segment.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the remainder of the Company's
customer base. Ongoing credit evaluations of customers' financial condition
11
<PAGE> 13
are performed and, generally, no collateral is required. The Company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's estimates.
5. Inventories
Inventories consist of:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Finished goods ................................................ $ 13,273 $ 15,304
Work-in-process ............................................... 1,926 4,382
Raw materials ................................................. 21,211 31,338
Replacement parts and supplies ................................ 3,545 3,554
-------- --------
Inventories at current cost ................................... 39,955 54,578
LIFO adjustment ............................................... (4,898) (4,456)
-------- --------
Inventories at LIFO cost ...................................... $ 35,057 $ 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 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 $10,200 at December 31, 1997.
6. Sale of Assets
On May 14, 1996, Liggett sold to the County of Durham certain surplus
realty in Durham, North Carolina, for a sale price of $4,300 and recognized a
gain of approximately $3,600.
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 net book value of those assets
($309) for which the agreement was signed was classified as current assets on
the Company's Consolidated Balance Sheet as of December 31, 1996. The
transaction closed on March 11, 1997. A gain of $1,147 was recognized, net of
costs required to prepare the properties for sale and selling costs. (See Note
13 for sales to affiliates.)
7. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Land and improvements ........................................... $ 411 $ 455
Buildings ....................................................... 6,228 5,848
Machinery and equipment ......................................... 40,569 41,913
-------- --------
Property, plant and equipment ................................... 47,208 48,216
Less accumulated depreciation ................................... (29,452) (29,511)
-------- --------
Property, plant and equipment, net .............................. $ 17,756 $ 18,705
======== ========
</TABLE>
12
<PAGE> 14
8. Employee Benefits Plans
Defined Benefit Retirement Plans
Prior to 1994, substantially all of Liggett's employees participated in
two noncontributory defined benefit retirement plans sponsored by BGLS. The
Company records as an expense the portion of BGLS' annual funding requirements
applicable to the Company. There was no pension expense recorded in 1997, 1996
or 1995.
Future Pension Benefits to be Funded by BGLS
Actuarial estimates of the total future minimum pension benefits to be
funded by BGLS, prior to the effect of unamortized purchase accounting
adjustments, are as follows:
<TABLE>
<S> <C>
1998................................................. $ 350
1999................................................. 300
2000................................................. 300
2001................................................. 250
2002................................................. 200
Thereafter .......................................... 2,000
------
Total............................................. $3,400
======
</TABLE>
Postretirement Medical and Life Insurance Plans
Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Effective January 1, 1995, retirees are required to fund 100% of
participant medical premiums.
The components of net periodic postretirement benefit expense are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service cost, benefits attributed to employee
service during the year ......................... $ 24 $ 68 $ 68
Interest cost on accumulated postretirement
benefit obligation .............................. 703 829 970
Charge for special termination benefits ............. 47 137 489
Amortization of net gain ............................ (193) (92) (26)
----- ----- -------
Net periodic postretirement benefit expense ......... $ 581 $ 942 $ 1,501
===== ===== =======
</TABLE>
13
<PAGE> 15
The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") applicable to each employee group for
benefits:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
<S> <C> <C>
Retired employees .................................. $ 6,870 $ 7,899
Active employees - fully eligible .................. 498 674
Active employees - not fully eligible .............. 810 515
-------- --------
8,178 9,088
APBO ............................................... 3,992 3,324
Purchase accounting valuation adjustment
related to income taxes ....................... (963) (1,072)
-------- --------
Postretirement liability ........................... $ 11,207 $ 11,340
======== ========
</TABLE>
The APBO at December 31, 1997 and 1996 was determined using discount
rates of 7.5% and 8%, respectively, and a health care cost trend rate of 4% in
1997 and 1996. A 1% increase in the trend rate for health care costs would have
increased the APBO and net periodic postretirement benefit expense by $360 and
$26, respectively, for the year ended December 31, 1997. The Company does not
hold any assets reserved for use in the plan.
Profit Sharing Plans
Liggett's 401(k) plans originally called for Company contributions
matching up to a 3% employee contribution, plus additional Company contributions
of up to 6% of salary based on the achievement of Company profit objectives.
Effective January 1, 1994, the Company suspended the 3% match for the salaried
employees' 401(k) Plan, but reinstated it on April 1, 1996. The Company
contributed and expensed $497, $591 and $900 to the 401(k) plans for the years
ended December 31, 1997, 1996 and 1995, respectively.
9. Income Taxes
Liggett's operations are included in the consolidated federal income
tax return of its indirect parent, BGL. Pursuant to a tax allocation agreement,
the Company's federal income tax provision is calculated as if the Company filed
a separate federal income tax return except that the tax sharing agreement with
BGL effectively limits the ability of the Company to carry back losses for
refunds.
The amounts provided for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal ......................................... $ -- $ -- $ (233)
State ........................................... -- -- 216
Deferred:
Federal ......................................... -- 3,800 1,768
State ........................................... -- -- --
-------- ------ -------
Total tax provision ................................. $ -- $3,800 $ 1,751
======== ====== =======
</TABLE>
14
<PAGE> 16
Temporary differences which give rise to a significant portion of
deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Deferred Tax Deferred Tax
Asset Liability Asset Liability
------ --------- ----- ---------
<S> <C> <C> <C> <C>
Sales and product allowances ............. $ 1,738 $ -- $ 2,504 $ --
Inventory ................................ 457 1,568 1,269 683
Coupon accruals .......................... 2,369 -- 4,492 --
Property, plant and equipment ............ -- 4,427 -- 4,890
Employee benefit plan accruals ........... 4,680 -- 5,303 --
USDA marketing assessment ................ 1,312 -- 1,681 --
Tobacco litigation settlements ........... 7,872 -- 1,229 --
Difference in basis in investment ........ 2,535 -- 1,864 --
Net operating loss carryforward .......... 11,506 -- 7,244 --
Valuation allowance ...................... (26,474) -- (20,013) --
Reclassifications ........................ (5,995) (5,995) (5,573) (5,573)
------- ------- ------- -------
Total deferred taxes...................... $ - $ - $ - $ -
======= ======= ======= =======
</TABLE>
The $26,474 net valuation allowance at December 31, 1997 is composed of
$24,265 for net deferred assets arising from items which have been reflected in
book income or loss and $2,209 for deferred assets arising for basis differences
in the investments which were reflected as direct entries to equity.
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rates are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
(Loss) income before income taxes ................... $(14,179) $(14,572) $2,306
======== ======== ======
Federal income tax at statutory rates ............... $ (4,963) $ (5,100) $ 807
Increases (decreases) resulting from:
State income tax expense (benefit) net of
federal income tax expense (benefit).......... -- (634) 216
Other, net ...................................... (1,498) (247) 285
Change in valuation allowance ................... 6,461 9,781 443
-------- -------- ------
Total tax provision ................................. $ -- $ 3,800 $1,751
======== ======== ======
</TABLE>
As of December 31, 1997, the Company's net operating loss ("NOL")
carryforward pursuant to its tax sharing agreement with BGL is approximately
$29,000 which expires from 2008 to 2012. However, if the Company were
deconsolidated from BGL, its allocable share of NOL could be significantly
different. The liability method of accounting for deferred income taxes requires
a valuation allowance against deferred tax assets if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized. The Company established a valuation allowance
against deferred tax assets of $26,474 and $20,013 at December 31, 1997 and
1996, respectively.
15
<PAGE> 17
10. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
------------------------ ---------
Estimated Carrying Carrying
Fair Value Value Value
---------- -------- ---------
<S> <C> <C> <C>
11.5% Senior Secured Notes due February 1, 1999
net of unamortized discount of $206 and
$424, respectively ............................................ $ 75,312 $ 112,406 $ 119,688
Variable Rate Series C Senior Secured Notes due
February 1, 1999 .............................................. 23,564 32,279 32,279
Borrowings outstanding under revolving credit
facility ...................................................... 23,427 23,427 24,272
Other ............................................................ 28 28 266
--------- --------- ---------
122,331 168,140 176,505
Current portion .................................................. (28) (28) (31,807)
--------- --------- ---------
Amount Due After One Year ........................................ $ 122,303 $ 168,112 $ 144,698
========= ========= =========
</TABLE>
Maturities of long-term debt, net of discount, at December 31, 1997 are
as follows:
<TABLE>
<S> <C>
1998............................................... $ 28
1999............................................... 168,112
--------
Total ..................................... $168,140
========
</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") required
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 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 100% of the principal amount 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.
The Series C Notes, issued in 1994, 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%.
On January 30, 1998, with the consent of the required majority of the
holders of the Liggett Notes, Liggett entered into various amendments to the
Indenture governing the Liggett Notes, which provided, among other things, for a
deferral of the February 1, 1998 mandatory redemption payment of $37,500 to the
date of final maturity of the Liggett Notes on February 1, 1999. In connection
with the deferral, BGL agreed to issue 482,970 shares of BGL's common stock
to the
16
<PAGE> 18
holders of record on January 15, 1998 of the Liggett Notes. As a result of this
transaction, the Company will record a non-cash charge of approximately $4,100
during the first quarter of 1998 reflecting the fair value of the instruments
issued. The Indenture under which the Liggett Notes are outstanding was also
amended to prohibit, with limited exceptions, payments of dividends and
incurrence of new debt by Liggett and to tighten restrictions on the disposition
of proceeds of asset sales. BGL and BGLS also agreed to guarantee the payment by
Liggett of the August 1, 1998 interest payment on the Liggett Notes and to
subordinate, until repayment in full of all amounts outstanding in respect of
the Liggett Notes, their reimbursement rights with respect to the guarantee of
borrowings under the Facility made in connection with the Company's August 1,
1997 interest installment and any future advances in connection with the
guarantee of the August 1, 1998 interest payment. In consideration of, among
other things, the contribution of the BGL common stock, the waiver of certain
management and other fees, the guarantee of the interest payments and
subordination of certain reimbursement rights, the Company transferred its
ownership interest in, and options to acquire additional shares of stock of
Liggett-Ducat Ltd. ("Liggett-Ducat") to Brooke (Overseas) Ltd. ("BOL"). In
addition, the Liggett Noteholders were granted a security interest in 16% of the
stock of Liggett-Ducat or a successor entity held by BOL.
On February 1, 1999, all of the Liggett Notes, approximately $144,891,
will reach maturity. There are no refinancing or restructuring arrangements in
place at this time for the notes and no assurances can be given in this regard.
(Refer to Note 2 (a).)
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 $7,728 based upon
eligible collateral at December 31, 1997. The Facility is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility are
charged interest 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. Liggett's interest rate is currently 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, as amended April 7,
1998, imposes requirements with respect to the Company's adjusted net worth (not
to fall below a deficit of $195,000 as computed in accordance with the
agreement, this computation is currently $187,959) and working capital (not to
fall below a deficit of $17,000 as computed in accordance with the agreement,
this computation is currently $12,616).
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. On April 7, 1998, the Facility was further amended to increase
the maximum permitted adjusted net worth and net working capital deficiencies to
$195,000 and $17,000, respectively.
On August 29, 1997, the Facility was amended to permit the Company to
borrow an additional $6,000 which was used on that date in making the interest
payment of $9,700 due on August 1, 1997 to the Liggett note holders. BGLS
guaranteed the additional $6,000 advance under the Facility and collateralized
the guarantee with $6,000 in cash, deposited with Liggett's lenders.
In November 1997, the Facility was extended until March 8, 1999. For
information concerning Liggett's substantial near-term debt service requirements
and other related matters, see Note 2(a).
17
<PAGE> 19
11. Operating Leases
At December 31, 1997, the Company has operating leases for building
space and computer equipment. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
1998 ........................................... $1,651
1999 ........................................... 653
2000 ........................................... 198
2001 ........................................... 185
2002 ........................................... 62
------
Total ..................................... $2,749
======
</TABLE>
Rental expense for the years ended December 31, 1997, 1996 and 1995
amounted to approximately $2,919, $3,121 and $3,112, respectively.
12. Commitments and 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: (i) smoking and
health cases alleging personal injury brought on behalf of individual smokers
("Individual Actions"), (ii) smoking and health cases alleging personal injury
and purporting to be brought on behalf of a class of plaintiffs ("Class
Actions") and (iii) health care cost recovery actions brought by state and local
governments, although recently numerous health care cost recovery actions have
been commenced on behalf of other third-party payors including asbestos
manufacturers, unions and taxpayers ("Attorneys General Actions"). 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 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, which, for the most part, consisted of the
payment of counsel fees and costs, but this assistance terminated in 1997. In
1995 and 1996, approximately $1,500 and $6,500, respectively, in counsel fees
and costs were paid. In 1995 and 1996, Liggett incurred additional fees and
costs in connection with tobacco-related litigation in the amount of
approximately $4,500 and $3,500, respectively. In 1997, Liggett incurred fees
and costs in the amount of approximately $5,750. 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.
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
18
<PAGE> 20
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.
INDIVIDUAL ACTIONS. As of December 31, 1997, there were approximately
250 cases pending against Liggett, and in most cases the other tobacco
companies, 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, 108 are pending in the State of
Florida, 82 are pending in the State of New York and 19 are pending in the State
of Texas. The balance of individual cases are pending in 16 states. There are
four individual cases pending where Liggett is the only named defendant.
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. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. 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.
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 October 6, 1997, the parties
settled this matter.
CLASS ACTIONS. As of December 31, 1997, there were approximately 40
actions pending, for which either a class has been certified or plaintiffs 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 "Settlements"
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 has been
brought by plaintiffs on behalf of all flight attendants that have worked or are
presently working for airlines based in the United States and who have never
regularly smoked cigarettes but allege that they have been damaged by
involuntary exposure to ETS. On October 10, 1997, the other major tobacco
companies settled this matter which settlement provides for a release of Liggett
and BGL. In February 1998, the Circuit Court approved the settlement, however, a
Notice of Appeal was filed in the Third District Court of Appeal by an objector
to the settlement.
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. On February 17, 1995, the District Court granted plaintiffs' motion
for class certification (the "Class Certification Order").
On May 23, 1996, the Court of Appeals for the Fifth Circuit reversed
the Class Certification Order and instructed the District Court to dismiss the
class complaint. The Fifth Circuit ruled that the District Court erred in its
analysis of the class certification issues by failing to consider how variations
in state law affect predominance of common questions and the superiority of the
class action mechanism. The appeals panel also held that the District Court's
predominance inquiry did not include consideration
19
<PAGE> 21
of how a trial on the merits in Castano would be conducted. The Fifth Circuit
further ruled that the "addiction-as-injury" tort is immature and, accordingly,
the District Court could not know whether common issues would be a "significant"
portion of the individual trials. According to the Fifth Circuit, any savings in
judicial resources that class certification may bring about is speculative and
would likely be overwhelmed by the procedural problems certification brings.
Finally, the Fifth Circuit held that in order to make the class action
manageable, the District Court would be forced to bifurcate issues in violation
of the Seventh Amendment.
The extent of the impact of the Castano decision on tobacco-related
class action litigation is still uncertain, although the decertification of the
Castano class by the Fifth Circuit may preclude any federal court from
certifying a nationwide class action for trial purposes with respect to
tobacco-related claims. The Castano decision has had, however, only limited
effect with respect to courts' decisions regarding narrower tobacco-related
classes or class actions brought in state rather than federal court. For
example, since the Fifth Circuit's ruling, courts in New York, Louisiana and
Maryland have certified "addiction-as-injury" class actions that covered only
citizens in those states. Two class actions pending in state court in Florida
have also been certified and one of the actions, the Broin case, had begun trial
before settling in 1997. The Castano decision has had no measurable impact on
litigation brought by or on behalf of single individual claimants.
ATTORNEYS GENERAL ACTIONS. As of December 31, 1997, 39 Attorneys
General actions were filed against Liggett and BGL. In February 1998, one
additional action was commenced. As more fully discussed below, through March
1998, Liggett has settled 37 of these actions. In addition, Liggett has reached
settlements with 6 Attorneys General representing states or territories which
have not yet commenced litigation. As of December 31, 1997, there were
approximately 35 additional third-party payor actions pending. 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 use of tobacco products. The claims asserted in these health care cost
recovery actions vary. In most of these cases, 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. In March 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) 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
settlement. Liggett and BGL have the right to terminate the Castano settlement
under certain circumstances. On March 14, 1996, Liggett, 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 Liggett
$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 Liggett in accordance with its terms, Liggett and
its affiliates will not enter into any business transaction with any third party
which would cause the termination of the Castano
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settlement agreement. If Liggett 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. 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 September 6, 1996, shortly after the class was
decertified, the Castano plaintiffs withdrew the motion for approval of the
Castano settlement.
In March 1996, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia (the "March 1996 Settlements"). The
March 1996 Settlements release Liggett and BGL from all tobacco-related claims
including claims for health case cost reimbursement and claims concerning sales
of cigarettes to minors. Certain of the terms of the March 1996 Settlements are
summarized below.
Under the March 1996 Settlements, the five settling 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 settling 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
settling 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 March 1996 Settlements.
Settlement funds received by the Attorneys General will be used to
reimburse the states for smoking-related health care 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 March 1996 Settlements with respect to any
settling state if any of the remaining defendants in the litigation succeed on
the merits in that state's respective Attorney General action. Liggett and BGL
may also terminate the March 1996 Settlements if they conclude that too many
states have filed Attorney General actions and have not settled such cases with
Liggett and BGL.
On March 20, 1997, Liggett, BGL and the five settling states executed
an addendum pursuant to which Liggett and BGL agreed to provide to the five
settling states, among other things, the additional cooperation and compliance
with advertising restrictions that is provided for in the March 1997 Settlements
(discussed below). Also, pursuant to the addendum, the initial settling states
agreed to use best efforts to ensure that in the event of a global tobacco
settlement enacted through federal legislation or otherwise, Liggett's and BGL's
financial obligations under such a global settlement would be no more onerous
than under this settlement.
At December 31, 1995, Liggett had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Settlements. At
December 31, 1997, in connection with the March 1998 Settlements, the Company
accrued $16,421 for the present value of the fixed payments under the March 1998
Settlements. 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.
In March 1997, Liggett and BGL 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, during 1997, settlements were
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reached with four more states through their respective Attorneys General
(settlements with these 21 Attorneys General and with the nationwide class are
hereinafter referred to as the "March 1997 Settlements"). On March 12, 1998,
Liggett and BGL, announced settlements with the Attorneys General of 14 states,
the District of Columbia and the U.S. Virgin Islands (the "March 1998
Settlements"). On March 26, 1998, Liggett and BGL settled with the Attorney
General of Georgia. The foregoing settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against Liggett and
BGL, brought by the Attorneys General and, upon court approval, the nationwide
class.
The states and territories where settlements have been reached with
Attorneys General are: Alaska, Arizona, Arkansas, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois,
Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan,
Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New
Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon,
Pennsylvania, Rhode Island, Texas, Utah, U.S. Virgin Islands, Washington, West
Virginia, Wisconsin and Wyoming. Other states have either recently filed health
care cost recovery actions or indicated intentions to do so. Both Liggett and
BGL will endeavor to resolve those actions on substantially the same terms and
conditions as the March 1998 Settlements, however, there can be no assurance
that any such settlements will be completed.
As mentioned above, in March 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 Company anticipates that
should the court in Fletcher, after dissemination of notice to the class of the
pending limited fund class action settlement and a full fairness hearing with
respect thereto, issue a final order and judgment approving the settlement, such
an order would preclude further prosecution by class members of tobacco-related
claims against Liggett and BGL. Under the Full Faith and Credit Act, a final
judgment entered in a nationwide class action pending in a state court has a
preclusive effect against any class member with respect to the claims settled
and released in the nationwide class action. As the class definition in Fletcher
encompasses all individual and third party-payor claimants, it is anticipated
that upon final order and judgment, all such class members would be barred from
further prosecution of tobacco-related claims against Liggett and BGL.
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.
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, which decision is
currently on appeal. The Walker court relied on the Supreme Court's decision in
Amchem Products Inc. v. Windsor in reaching its decision. In Amchem, the Supreme
Court affirmed a decision of the Third Circuit vacating the certification of a
settlement class that involved asbestos-exposure claims. The Supreme Court held
that the proposed settlement class did not meet the requirements for Rule 23 of
the Federal Rules of Civil Procedure for predominance of common issues and
adequacy of representation. The Third Circuit had held that, although classes
could be certified for settlement purposes only, Rule 23's requirements had to
be satisfied as if the case were going to be litigated. The Supreme Court agreed
that the fairness and adequacy of the settlement are not pertinent to the
predominance inquiry under Rule 23(b)(3), and thus, the proposed class must have
sufficient unity so that absent class members can fairly be bound by decisions
of class representatives.
After the Amchem opinion was issued by the Supreme Court on June 25,
1997, objectors to Liggett's settlement in Walker moved for decertification.
Although Liggett's settlements, particularly in
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the Walker action, are "limited fund" class action settlements proceeding under
Rule 23(b)(1), and Amchem was a Rule 23(b)(3) case, the court in the Walker
action, nonetheless, decertified the Walker class. Applying Amchem to the Walker
case, the District Court, in a decision issued on August 5, 1997, determined
that while plaintiffs in Walker have a common interest in "maximizing the
limited fund available from the defendants," there remained "substantial
conflicts among class members relating to distribution of the fund and other key
concerns" that made class certification inappropriate.
The Amchem decision's ultimate effect on the viability of the Walker
and Fletcher settlements remains uncertain given the Fifth Circuit's recent
ruling reaffirming the limited fund class action settlement in In re Asbestos
Litigation ("Ahearn"). In June 1997, the Supreme Court remanded Ahearn to the
Fifth Circuit for consideration in light of Amchem. On remand, the Fifth Circuit
made two decisive distinctions between Amchem and Ahearn. First, the Ahearn
class action proceeded under Rule 23(b)(1) while Amchem was a Rule 23(b)(3) case
and second, in Ahearn, there was no allocation or difference in award, according
to nature or severity of injury, as there was in Amchem. The Fifth Circuit
concluded that all members of the class and all class representatives share
common interests and none of the uncommon questions, abounding in Amchem, exist.
The remaining material terms of the March 1996 Settlements, the March
1997 Settlements and the March 1998 Settlements are described below.
Pursuant to each of the settlements, both 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.
Pursuant to the March 1996 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or BGL, prior
to the third anniversary of the settlement, would receive certain settlement
benefits, including limitations on potential liability. Pursuant to the
agreement, any such combining tobacco company would be released from the
lawsuits brought by the five initial settling states. Such combining tobacco
company would be obligated to pay into the settlement fund within sixty days of
becoming bound to the agreement $135,000, and make annual payments of 2.5% of
the combining company's pre-tax income (but not less than $30,000 per year).
Such combining tobacco company would also have to comply with the advertising
and access restrictions provided for in the agreement, and would have to
withdraw their objections to the FDA rule.
Pursuant to the March 1997 Settlements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or BGL, prior
to the fourth anniversary of the settlements, would receive certain settlement
benefits, including limitations on potential liability for affiliates not
engaged in domestic tobacco operations and a waiver of any obligation to post a
bond to appeal any future adverse judgment. In addition, within 120 days
following any such combination, Liggett would be required to pay the settlement
fund $25,000. Under all settlements, the plaintiffs have agreed not to seek
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an injunction preventing a defendant tobacco company combining with Liggett or
BGL from spinning off any affiliate which is not engaged in the domestic tobacco
business.
Pursuant to the March 1998 Settlements, Liggett is required to pay each
of settling states and territories their relative share (based on the Medicaid
population of each state over the total Medicaid population of the United
States) of between 27.5% and 30% of Liggett's pre-tax income each year for 25
years, with a minimum payment guarantee of $1,000 per state over the first nine
years of the agreement. The liability was computed using a discount rate of 18%.
The aggregate liability under the March 1996 Settlements, the March 1997
Settlements, and the March 1998 Settlements is $39,556, the present value of
which, when discounted at the rate of 18% per annum, is $19,365 at December 31,
1997. Minimum payments to be made for these settlements over the next five years
and thereafter are: 1998: $4,044; 1999: $4,406; 2000: $4,406; 2001: $4,465:
2002: $4,518; thereafter: $17,717. The annual percentage is subject to increase,
pro rata from 27.5% up to 30%, depending on the number of additional states
joining the settlement. Pursuant to the "most favored nation" provisions under
the March 1996 Settlements and the March 1997 Settlements, each of the states
settling under those settlements could benefit from the economic terms of the
March 1998 Settlements. In the case of the March 1997 Settlements, in the event
that the Fletcher class is approved, 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. In all settlements, 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. The March 1998 Settlements provide for
additional restrictions and regulations on Liggett's advertising, including a
prohibition on outdoor advertising and product advertising on the Internet and
on payments for product placement in movies and television.
Under all settlements, Liggett and BGL are also entitled to most
favored nation treatment in the event any settling Attorney General reaches a
settlement with any other defendant tobacco company. Under the March 1996
Settlements and March 1997 Settlements, in the event of a global settlement
involving federal legislation with any other defendant tobacco company, the
settling Attorneys General agreed to use their "best efforts" to ensure that the
Liggett and BGL's liability under such legislation should be no more onerous
than under these settlements. Under the March 1998 Settlements, the settling
Attorneys General agreed to write letters to Congress and the President of the
United States to ensure that Liggett and BGL's liability under any such
legislation should be more onerous than under these settlements.
Copies of the various settlement agreements are filed as exhibits to
the Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.
TRIALS. Liggett is a defendant in trials currently proceeding in the
State of Minnesota by Hubert H. Humphrey, III, its Attorney General and Blue
Cross and Blue Shield of Minnesota v. Philip Morris Incorporated, et al.,
District Court of the Second Judicial District, Ramsey County, Minnesota, which
commenced on January 20, 1998. Liggett settled the claims of the State of
Minnesota on March 20, 1997, but still remains a defendant in the case with
respect to the State's co-plaintiff, Blue Cross and Blue Shield of Minnesota.
Liggett is also a defendant in Dunn and Wiley v. RJR Nabisco Holdings Corp., et
al., Superior Court, Delaware County, Indiana, which trial commenced on February
9, 1998. There are several other trial dates scheduled during 1998 for
individual cases; however, trial dates are subject to change.
PROPOSED RESOLUTION. In June 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
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ancillary undertakings, incorporating the features described in a proposed
resolution (the "Resolution"). The proposed Resolution mandates a total
reformation and restructuring of how tobacco products are manufactured, marketed
and distributed in the United States.
The proposed Resolution includes provisions relating to advertising and
marketing restrictions, product warnings and labeling, access restrictions,
licensing of tobacco retailers, the adoption and enforcement of "no sales to
minors" laws by states, surcharges against the industry for failure to achieve
underage smoking reduction goals, regulation of tobacco products by the FDA,
public disclosure of industry documents and research, smoking cessation
programs, compliance programs by the industry, public smoking and smoking in the
workplace, enforcement of the proposed Resolution, industry payments and
litigation.
The proposed Resolution would require the FDA to impose annual
surcharges on the industry if targeted reductions in underage smoking incidence
are not achieved in accordance with a legislative timetable. The surcharge would
be based upon an approximation of the present value of the profit the companies
would earn over the lives of all underage consumers in excess of the target, and
would be allocated among participating manufacturers based on their market share
of the United States cigarette industry.
The proposed Resolution would require participating manufacturers to
make substantial payments in the year of implementation and thereafter
("Industry Payments"). Participating manufacturers would be required to make an
aggregate $10 billion initial Industry Payment on the date that federal
legislation implementing the terms of the proposed Resolution is signed. This
Industry Payment would be based on relative market capitalization. Thereafter,
the participating companies would be required to make specified annual Industry
Payments determined and allocated among the companies based on volume of
domestic sales as long as the companies continue to sell tobacco products in the
United States. These Industry Payments, which would begin on December 31 of the
first full year after implementing federal legislation is signed, would be in
the following amounts (at 1996 volume levels) -- year 1: $8.5 billion; year 2:
$9.5 billion; year 3: $11.5 billion; year 4: $14 billion; and each year
thereafter: $15 billion. These Industry Payments would be increased by the
greater of 3% or the previous year's inflation rate, and would be adjusted to
reflect changes from 1996 domestic sales volume levels.
The Industry Payments would be separate from any surcharges. The
Industry Payments would receive priority and would not be dischargeable in any
bankruptcy or reorganization proceeding and would be the obligation only of
entities selling tobacco products in the United States (and not their affiliated
companies). The proposed Resolution provides that all payments by the industry
would be ordinary and necessary business expenses in the year of payment, and no
part thereof would be either in settlement of an actual or potential liability
for a fine or penalty (civil or criminal) or the cost of a tangible or
intangible asset. The proposed Resolution would provide for the pass-through to
consumers of the annual Industry Payments in order to promote the maximum
reduction in underage use.
If enacted, the federal legislation provided for in the proposed
Resolution would settle present attorney general health care cost recovery
actions (or similar actions brought by or on behalf of any governmental entity
other than the federal government), parens patriae and smoking and health class
actions and all "addiction"/dependence claims, and would bar similar actions
from being maintained in the future. However, the proposed Resolution provides
that no stay applications will be made in pending governmental actions without
the mutual consent of the parties. The proposed Resolution would not affect any
smoking and health class action or any health care cost recovery action that is
reduced to final judgment before implementing federal legislation is effective.
Under the proposed Resolution, the rights of individuals to sue the
tobacco industry would be preserved, except as expressly changed by implementing
federal legislation. Claims, however, could not be maintained on a class or
other aggregated basis, and could be maintained only against tobacco
manufacturing companies (and not their retailers, distributors or affiliated
companies). In addition, all
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punitive damage claims based on past conduct would be resolved as part of the
proposed Resolution, and future claimants could seek punitive damages only with
respect to claims predicated upon conduct taking place after the effective date
of implementing federal legislation. Finally, except with respect to actions
pending as of June 9, 1997, third-party payor (and similar) claims could be
maintained only if based on subrogation of individual claims. Under subrogation
principles, a payor of medical costs can seek recovery from a third party only
by "standing in the shoes" of the injured party and being subject to all
defenses available against the injured party.
The proposed Resolution contemplates that participating tobacco
manufacturers would enter into a joint sharing agreement for civil liabilities
relating to past conduct. Judgments and settlements arising from tort actions
would be paid as follows: The proposed Resolution would set an annual aggregate
cap of up to 33% of the annual base Industry Payment (including any reductions
for volume declines). Any judgments or settlements exceeding the cap in a
particular year would roll over into the next year. While judgments and
settlements would run against the defendant, they would give rise to an
80-cents-on-the-dollar credit against the annual Industry Payment. Finally, any
individual judgments in excess of $1 million would be paid at the rate of $1
million per year unless every other judgment and settlement could first be
satisfied within the annual aggregate cap. In all circumstances, however, the
companies would remain fully responsible for costs of defense and certain costs
associated with the fees of attorneys representing certain plaintiffs in the
litigation settled by the proposed Resolution.
Under the proposed Resolution, Liggett and BGL would be deemed to be a
"non-participating manufacturer". The proposed Resolution provides, among other
things, that a non-participating manufacturer would be required to place into
escrow, each year, an amount equal to 150% of its share of the payment required
of participating manufacturers (other than the portion allocated to public
health programs and federal and state enforcement). These funds would be
earmarked for potential liability payments and could be reclaimed, with
interest, after 35 years, to the extent they had not been paid out in liability.
The proposals are currently being reviewed by the White House, Congress
and various public interest groups. Separately, the other tobacco companies
negotiated settlements of the Attorneys General health care cost recovery
actions in Mississippi, Florida and Texas. 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 and BGL.
OTHER RELATED MATTERS. 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
(the "Eastern District Investigation") regarding possible violations of criminal
law relating to the activities of The Council for Tobacco Research - USA, Inc.
(the "CTR"). Liggett was a sponsor of the CTR at one time. In May 1996, Liggett
received a subpoena from a Federal grand jury sitting in the Eastern District of
New York, to which Liggett has responded.
In March 1996, and in each of March, July, October and December 1997,
Liggett and/or BGL received subpoenas from a Federal grand jury in connection
with an investigation by the United States
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Department of Justice (the "DOJ Investigation") involving the industry's
knowledge of the health consequences of smoking cigarettes; the targeting of
children by the industry and the addictive nature of nicotine and the
manipulation of nicotine by the industry. Liggett has responded to the March
1996, March 1997 and July 1997 subpoenas and is in the process of responding to
the October and December 1997 subpoenas. Liggett understands that the Eastern
District Investigation and the DOJ Investigation have, for all intents and
purposes, been consolidated into one investigation being conducted by the
Department of Justice. Liggett and BGL are unable, at this time, to predict the
outcome of this investigation.
Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against Liggett
or BGL. 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.
Liggett is unable to make a meaningful estimate with respect to the
amount of loss that could result from an unfavorable outcome of the cases
pending against the Company, because the complaints filed in these cases rarely
detail alleged damages. Typically, the claims set forth in an individual's
complaint against the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage claims are
usually stated as being for at least the minimum necessary to invoke the
jurisdiction of the court.
Third-party payor claimants and others have set forth several
additional variations on relief sought: funding of corrective public education
campaigns relating to issues of smoking and health; funding for clinical smoking
cessation programs; disgorgement of profits from sales of cigarettes;
restitution; treble damages; and attorneys' fees. Nevertheless, no specific
amounts are provided. It is, however, understood that requested damages against
the tobacco company defendants in these cases may be in the billions of dollars.
It is possible that Liggett's consolidated financial position, results
of operation and cash flow could be materially adversely affected by an
unfavorable outcome in any of such pending tobacco-related litigation.
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 material compliance
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, has not had a material effect on the capital expenditures, earnings
or competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to smoking or tobacco 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.
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.
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
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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. In December 1997, the
United States District Court for the District of Massachusetts enjoined this
legislation from going into effect, however, on December 15, 1997, Liggett began
complying with this legislation by providing ingredient information to the
Massachusetts Department of Public Health.
On February 20, 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("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
Liggett and BGL.
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. In a speech on
September 17, 1997, President Clinton called for federal legislation that, among
other things, would raise cigarette prices by up to $1.50 per pack. Since then,
several bills have been introduced in the Senate that purport to propose
legislation along these lines. Management is 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 and BGL.
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.
28
<PAGE> 30
13. Related Party Transactions
On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat's tobacco operations from BOL, for $2,100. Liggett-Ducat produces
and markets cigarettes in Russia. Liggett also acquired on that date for $3,400
a ten-year option 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%. On March 13, 1997, Liggett
acquired a second ten-year option to purchase BOL's remaining shares in
Liggett-Ducat (an additional 33%) for $2,200 of which $2,049 was paid in cash.
Liggett accounted for its investment in Liggett-Ducat under the equity method of
accounting. Liggett's equity in the net income of Liggett-Ducat amounted to $498
for the year ended December 31, 1997. On December 31, 1997, the carrying value
of Liggett-Ducat amounted to $1,208. 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. On January 30, 1998, in connection with the
restructuring of the Liggett Notes, BOL acquired the Liggett-Ducat shares and
options held by Liggett. (Refer to Note 10.)
On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000. Liggett recognized a gain of $2,578.
During 1995 and 1996, Liggett provided certain administrative and
technical support to Liggett-Ducat in exchange for which Liggett-Ducat provided
assistance to Liggett in its pursuit of selling cigarettes in the Russian
Republic. The expenses associated with Liggett's activities amounted to $76 and
$229 for the years ended December 31, 1996 and 1995, respectively.
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
$3,318 in 1997, $3,160 in 1996 and $3,010 in 1995. This fee is in addition to
the management fee and overhead reimbursements described above. In connection
with the January 30, 1998 amendment to the Liggett Notes Indenture, BGL and BGLS
agreed to waive corporate services and management fees above $3,600 per year,
effective January 1, 1998.
Since April 1994, the Company has leased equipment from BGLS for $50
per month.
The Company acquired CTEC from its indirect parent during 1995 for
$800. The excess of cost over the carrying amount of the net assets acquired has
been charged to stockholder's equity (deficit). The effect of the accounting
treatment presents the investment in CTEC at carryover basis. Accounts
receivable from affiliates relate principally to advances for expenses paid by
the Company on behalf of its affiliates.
29
<PAGE> 31
During 1997, the Company reduced its headcount by 108 full-time
positions and recorded a $1,964 restructuring charge to operations ($407 of
which was included in cost of sales) for severance programs, primarily salary
continuation and related benefits for terminated employees. The Company expects
to continue its cost reduction programs. Of the total restructuring recorded
during 1997, $1,671 was funded during 1997, leaving $293 remaining to be funded
in 1998.
During 1996, the Company reduced its headcount by 38 positions and
recorded a $3,428 restructuring charge to operations ($132 of which was included
in cost of sales) for severance programs, primarily salary continuation and
related benefits for terminated employees. Of the total restructuring recorded
during 1996, $1,416 was funded during 1996, leaving $2,012 remaining to be
funded in subsequent years.
During 1995, Liggett continued its efforts towards reducing costs by,
among other things, offering voluntary retirement programs to eligible
employees. The Company's 1995 cost reduction programs reduced the Company's
headcount by approximately 120 positions. In connection therewith, the Company
recorded charges totaling $2,548 to operating income including $621 relating to
manufacturing operations which has been charged to cost of sales.
30
<PAGE> 32
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholder
Eve Holdings Inc.
We have audited the accompanying balance sheets of Eve Holdings Inc. (the
"Company") as of December 31, 1997 and 1996 and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eve Holdings Inc. at December
31, 1997 and 1996 and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2a to the
financial statements, the Company's revenues are comprised solely of royalties
and interest from Liggett Group Inc. ("Liggett"). Liggett suffered a lost of
$14,179,000 for the year ended December 31, 1997 and had net capital and
working capital deficiencies of $192,857,000 and $17,542,000, respectively, at
December 31, 1997. Liggett also has a $144,891,000 principal payment due on its
Senior Secured Notes on February 1, 1999 and Liggett's revolving credit
facility (the "Facility"), which has a balance of $23,427,000 at December 31,
1997, is due on March 8, 1999. Liggett's financial resources are not sufficient
to repay the Senior Secured Notes when they become due, nor will Liggett be
able to repay the Facility when it becomes due. In addition, due to the many
risk and uncertainties associated with the cigarette industry and the impact of
tobacco litigation, there can be no assurance that Liggett will be able to meet
its future earnings or cash flow goals. These facts raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 8, 1998
31
<PAGE> 33
EVE HOLDINGS INC.
BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1997 1996
---- ----
ASSETS
<S> <C> <C>
Cash ...................................................................... $ 1 $ --
Office equipment .......................................................... 2 2
Trademarks, at cost, less accumulated amortization of
$18,995 and $17,294, respectively .................................... 1,418 3,119
-------- --------
Total assets ............................................... $ 1,421 $ 3,121
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Federal income taxes currently payable to parent .......................... $ 91 $ --
Dividends payable ......................................................... 1,273 4,623
Cash overdraft ............................................................ -- 92
Other current liabilities ................................................. 3 19
Deferred income taxes ..................................................... 496 1,092
-------- --------
Total liabilities .......................................... 1,863 5,826
-------- --------
Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital ........................................................... 45,442 46,548
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 ...................................... (44,520) (44,520)
Other ........................................................... (1,364) (4,733)
-------- --------
Total stockholder's equity (deficit) ...................... (442) (2,705)
-------- --------
Total liabilities and stockholder's equity (deficit) ....... $ 1,421 $ 3,121
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
32
<PAGE> 34
EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues:
Royalties - parent ........................... $ 7,122 $ 8,608 $ 10,452
Interest - parent ............................ 6,306 6,306 6,306
------- ------- --------
13,428 14,914 16,758
Expenses:
Amortization of trademarks ................... 1,701 1,701 1,702
Miscellaneous ................................ 83 129 93
------- ------- --------
Operating income ............................. 11,644 13,084 14,963
Interest expense ................................. -- 49 --
------- ------- --------
Income before income taxes ................... 11,644 13,035 14,963
Income tax provision ............................. 1,886 2,480 5,237
------- ------- --------
Net income ................................... $ 9,758 $10,555 $ 9,726
======= ======= ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
33
<PAGE> 35
EVE HOLDINGS INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock and Receivables Total
Capital in Retained From Stockholder's
Excess of Par Earnings Parent Equity
------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ..................... $ 48,759 $ -- $(47,272) $ 1,487
Net income ..................................... -- 9,726 -- 9,726
Dividends/capital distributions ................ (1,106) (9,726) -- (10,832)
Net change in receivables from parent ........... -- -- 62 62
-------- -------- -------- --------
Balance at December 31, 1995 ...................... 47,653 -- (47,210) 443
Net income ..................................... -- 10,555 -- 10,555
Dividends/capital distributions ................ (1,105) (10,555) -- (11,660)
Net change in receivables from parent........... -- -- (2,043) (2,043)
-------- -------- -------- --------
Balance at December 31, 1996 ...................... 46,548 -- (49,253) (2,705)
Net income ..................................... -- 9,758 -- 9,758
Dividends/capital distributions ................ (1,106) (9,758) -- (10,864)
Net change in receivables from parent........... -- -- 3,369 3,369
-------- -------- -------- --------
Balance at December 31, 1997 ...................... $ 45,442 $ -- $(45,884) $ (442)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
34
<PAGE> 36
EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ............................................................ $ 9,758 $ 10,555 $ 9,726
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ..................................... 1,701 1,701 1,703
Deferred income taxes ............................................. (596) (595) (596)
Changes in assets and liabilities:
Federal income taxes currently payable to parent................... 91 (164) 157
Other current liabilities ......................................... (16) 19 --
-------- -------- --------
Net cash provided by operating activities ..................... 10,938 11,516 10,990
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .................................................. -- -- --
-------- -------- --------
Net cash used in investing activities .......................... -- -- --
-------- -------- --------
Cash flows from financing activities:
(Decrease) increase in cash overdraft ................................. (92) 92 --
Dividends/capital distributions ....................................... (14,214) (9,573) (11,046)
Decrease (increase) in receivable from parent ......................... 3,369 (2,043) 62
-------- -------- --------
Net cash used in financing activities .......................... (10,937) (11,524) (10,984)
-------- -------- --------
Net increase (decrease) in cash ........................................... 1 (8) 6
Cash:
Beginning of period ................................................... -- 8 2
-------- -------- --------
End of period ......................................................... $ 1 $ -- $ 8
======== ======== ========
Supplemental cash flow information:
Payments of income taxes through receivable from parent ............... $ 2,424 $ 5,159 $ 5,676
======== ======== ========
Dividends/capital distributions declared but not paid ................. $ 1,273 $ 4,623 $ 2,536
======== ======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
35
<PAGE> 37
EVE HOLDINGS INC.
Notes to Financial Statements
(Dollars in thousands, except per share amounts)
1. The Company
Eve Holdings Inc. ("Eve" or the "Company") is a wholly-owned subsidiary
of Liggett Group Inc. ("Liggett"). Eve's predecessor, Chesterfield Assets Inc.,
was organized in March 1987. 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 of $236,952, $296,544 and $332,246 for the years
ended December 31, 1997, 1996 and 1995, respectively. Generally, royalties are
earned based on a rate of either 2% of sales for generic product trademarks and
5% of sales for branded product trademarks. In recent fiscal years, Liggett has
experienced greater growth in the sales of generic rather than branded products
resulting in a lower overall royalty rate. The Trademarks are pledged as
collateral for borrowings under the Liggett Notes (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 $17,542 and a net capital deficiency of
$192,857 as of December 31, 1997, is highly leveraged and has substantial
near-term debt service requirements. These matters raise substantial doubt about
Eve and Liggett meeting their liquidity needs and their ability to continue as
going concerns.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
b. Basis of Presentation
On February 11, 1992, Eve consummated an Agreement and Plan of Merger
(the "Merger Agreement") with LGC Corp. (a wholly-owned subsidiary of Liggett)
whereby the operations of LGC Corp., consisting primarily of holding an
unsecured $44,250 note receivable (bearing interest at 14%, due November 2,
1996) from Liggett and related interest thereon, were merged into those of Eve.
The merger was accounted for at historical cost similar to that in pooling of
interests accounting. On March 7, 1994, Liggett and Eve agreed to extend the due
date of the note to no sooner than February 1, 1999 from November 2, 1996. All
other terms of the note remained the same.
c. 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.
36
<PAGE> 38
d. Trademarks
Trademarks are amortized using the straight-line method over 12 years.
Management periodically reviews the carrying value of trademarks to determine
whether asset values are impaired.
e. 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.
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.
4. Income Taxes
Eve's operations are included in the consolidated federal income tax
return of its indirect parent, Brooke Group Ltd. ("Brooke"). Eve's federal
income tax provisions are calculated as if it filed a separate federal income
tax return. SFAS No. 109 "Accounting for Income Taxes" requires that deferred
taxes be recorded under the liability method.
The amounts provided for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 2,455 $ 2,883 $ 5,832
State ........................................... 27 192 --
Deferred:
Federal.......................................... (596) (595) (595)
State ........................................... -- -- --
------- ------- -------
Total tax provision ................................. $ 1,886 $ 2,480 $ 5,237
======= ======= =======
</TABLE>
Eve's deferred tax liability relates entirely to the difference in
the basis of the Trademarks for book and tax purposes. As permitted in SFAS No.
109, Eve has not adjusted the basis of the Trademarks that were previously
adjusted to net of tax amounts to be consistent with the accounting treatment
adopted by Liggett.
37
<PAGE> 39
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory rate are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income before income taxes.......................... $ 11,644 $ 13,035 $14,963
======== ======== =======
Federal income tax at statutory rates............... 4,075 4,563 5,237
(Decreases) increases resulting from:
Exclusion of interest income between
related parties............................ (2,207) (2,207) --
State income taxes, net of federal.............. 18 124 --
-------- -------- -------
Total tax provision................................. $ 1,886 $ 2,480 $ 5,237
======== ======== =======
</TABLE>
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.
38
<PAGE> 40
<TABLE>
<CAPTION>
LIGGETT GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Net at End
of Period Expenses Sales Deductions of Period
--------- -------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowances for:
Doubtful accounts ...................... $ 750 $ 226 $ -- $ 156(a) $ 820
Cash discounts ......................... 530 10,998 -- 11,286(b) 242
------ ------- --------- ------- ------
Total .............................. $1,280 $11,224 $ -- $11,442 $1,062
====== ======= ========= ======= ======
Sales returns allowance ................... $5,000 $ -- $ -- $ 250(c) $4,750
====== ======= ========= ======= ======
Provision for inventory obsolescence ...... $3,218 $ 221 $ -- $ 2,282(d) $1,157
====== ======= ========= ======= ======
Year ended December 31, 1996
Allowances for:
Doubtful accounts ...................... $ 200 $ 903 $ -- $ 353(a) $ 750
Cash discounts ......................... 615 13,929 -- 14,014(b) 530
------ ------- --------- ------- ------
Total .............................. $ 815 $14,832 $ -- $14,367 $1,280
====== ======= ========= ======= ======
Sales returns allowance ................... $5,000 $ -- $ -- $ --(c) $5,000
====== ======= ========= ======= ======
Provision for inventory obsolescence ...... $2,069 $ 1,341 $ -- $ 192(d) $3,218
====== ======= ========= ======= ======
Year ended December 31, 1995
Allowances for:
Doubtful accounts ...................... $ 249 $ 231 $ -- $ 280(a) $ 200
Cash discounts ......................... 720 14,579 -- 14,684(b) 615
------ ------- --------- ------- ------
Total .............................. $ 969 $14,810 $ -- $14,964 $ 815
====== ======= ========= ======= ======
Sales returns allowance ................... $5,800 $ 1,030 $ (800) $ 1,030(c) $5,000
====== ======= ========= ======= ======
Provision for inventory obsolescence ...... $1,369 $ 911 $ -- $ 211(d) $2,069
====== ======= ========= ======= ======
</TABLE>
(a) Represents uncollectible accounts written off.
(b) Represents cash discounts taken.
(c) Represents adjustments to lower the allowance based on revised
estimates of sales returns by management.
(d) Represents inventory written off, disposed of, or written down to lower of
cost or market value.
39
<PAGE> 1
Exhibit 99.3
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 2
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................................................. 2
Balance Sheets as of December 31, 1997 and December 31, 1996...................................... 3
Statements of Operations for the years ended December 31, 1997, December 31, 1996
and December 31, 1995....................................................................... 4
Statements of Stockholder's Equity (Deficit) for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995..................................................... 5
Statements of Cash Flows for the years ended December 31, 1997, December 31, 1996
and December 31, 1995....................................................................... 6
Notes to Financial Statements..................................................................... 7
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of New Valley Holdings, Inc.
We have audited the accompanying balance sheets of New Valley Holdings, Inc.
(the "Company") as of December 31, 1997 and 1996 and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Valley Holdings, Inc. at
December 31, 1997 and 1996 and the results of their operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 8, 1998
<PAGE> 4
NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
===============================================================================================
December 31, December 31,
1997 1996
----------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 6 $ 1
Investment in New Valley:
Redeemable preferred stock ............................... 59,359 72,962
Common stock ............................................. (59,359) (72,962)
-------- --------
Total investment in New Valley............................ -------- --------
Total assets ............................................... $ 6 $ 1
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Payable to parent .......................................... $ 56 $ 4
Accrued expenses ........................................... 7
Current income taxes payable to parent ..................... 6,298 6,312
-------- --------
Total liabilities .......................................... 6,354 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 .................................................... (25,737) (727)
Other ...................................................... 11,756 (13,228)
-------- --------
Total stockholder's equity (deficit) ....................... (6,348) (6,322)
-------- --------
Total liabilities and stockholder's equity (deficit) ....... $ 6 $ 1
======== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
3
<PAGE> 5
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
================================================================================================
December 31, December 31, December 31,
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Equity in (loss) earnings of New Valley ......... $(26,908) $(7,877) $ 330
Interest income ................................. 6 55 429
General and administrative expenses ............. (47) (28) (20)
-------- ------- --------
(Loss) income from continuing operations before
income taxes ............................... (26,949) (7,850) 739
-------- ------- --------
(Benefit) provision for income taxes:
Current ...................................... (14) 1,840 4,472
Deferred ..................................... (673) (800) (12,799)
-------- ------- --------
Income tax (benefit) provision .................. (687) 1,040 (8,327)
-------- ------- --------
(Loss) income from continuing operations ........ (26,262) (8,890) 9,066
Income from discontinued operations of New Valley
net of taxes of $673 and $800 in 1997 and
1996, respectively ......................... 1,252 1,542 4,553
-------- ------- --------
Net (loss) income ............................... $(25,010) $(7,348) $ 13,619
======== ======= ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
4
<PAGE> 6
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
==================================================================================================================================
Additional Retained Stock Retained
Common Stock Paid-In Earnings Subscription Earnings
Shares Amount Capital (Deficit) Other Receivable (Deficit)
------ ------ ------- --------- ----- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ................................. 100 $ 10 $ 80,012 $ 7,257 $ (10) $ 87,269
Increase in capital from New Valley's repurchase
of Class A Shares and other capital
transactions, net of tax ............................... 11,020 11,020
Reduction of unrealized holding gain on
investment in New Valley, net of tax .................. (2,432) (2,432)
Proportionate share of New Valley's unrealized
appreciation in investments, net of tax ................ 716 716
Net income ................................................. 13,619 13,619
Dividends .................................................. (61,503) (61,503)
Satisfaction of stock subscription receivable .............. (10) 10
--- -- ------- -------- -------- ----- --------
Balance, December 31, 1995 ................................. 100 11,020 32,128 5,541 48,689
Increase in capital from New Valley's repurchase
of Class A Shares, net of tax .......................... 1,152 1,152
Proportionate share of New Valley's unrealized
appreciation in investments, net of tax ................. 2,227 2,227
Increase in unrealized holding loss on investment
in New Valley, net of tax ............................... (20,996) (20,996)
Net loss ................................................... (7,348) (7,348)
Increase in valuation allowance on deferred tax
assets .................................................. (4,539) (4,539)
Dividends .................................................. (25,507) (25,507)
--- -- ------- -------- -------- ----- --------
Balance, December 31, 1996 ................................. 100 7,633 (727) (13,228) (6,322)
Proportionate share of New Valley's unrealized
appreciation in investments, ............................ 3,179 3,179
Reduction of unrealized holding loss on investment
in New Valley ........................................... 21,805 21,805
Net loss ................................................... (25,010) (25,010)
--- -- ------- -------- -------- ----- --------
Balance, December 31, 1997 ................................. $ 7,633 $(25,737) $ 11,756 $ (6,348)
=== == ======= ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
5
<PAGE> 7
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
======================================================================================================
December 31, December 31, December 31,
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ..................................... $(25,010) $(7,348) $ 13,619
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Equity in (loss) earnings of New Valley ........... 26,908 7,877 (330)
Deferred income taxes ............................. (673) (800) (12,799)
Income from discontinued operations of New Valley (1,252) (1,542) (4,553)
(Decrease) increase in income taxes payable ....... (14) 1,840 4,472
Other ............................................. 46 10
-------- ------- --------
Net cash provided by operating activities ............... 5 37 409
-------- ------- --------
Cash flows from investing activities:
Dividends received from New Valley .................... 24,733 61,832
-------- ------- --------
Net cash provided by investing activities ............... 24,733 61,832
-------- ------- --------
Cash flows from financing activities:
Distributions paid to parent .......................... (25,507) (61,503)
-------- ------- --------
Net cash used in financing activities ................... (25,507) (61,503)
-------- ------- --------
Net increase (decrease) in cash and cash equivalents..... 5 (737) 738
Cash and cash equivalents at beginning of period......... 1 738
-------- ------- --------
Cash and cash equivalents at end of period .............. $ 6 $ 1 $ 738
======== ======= ========
</TABLE>
The accompanying notes are an integral part
of the financial statements.
6
<PAGE> 8
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Organization. New Valley Holdings, Inc. (the "Company") was formed on
September 9, 1994, pursuant to the laws of Delaware, by BGLS Inc. ("BGLS")
to act as a holding company for certain stock investments in New Valley
Corporation ("New Valley"). BGLS, which owns 100% of the authorized,
issued and outstanding common stock of the Company, is a wholly-owned
subsidiary of Brooke Group Ltd. ("Brooke"), a Delaware corporation whose
stock is traded on the New York Stock Exchange.
Estimates and Assumptions. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Cash and Cash Equivalents. For purposes of statements of cash flows, cash
includes cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or less.
Interest on short-term investments is recognized when earned.
New Accounting Pronouncements. In June 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting comprehensive Income". SFAS No. 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 No. 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. For the Company, other components
of stockholders' equity include such items as the Company's proportionate
interest in New Valley's capital transactions and unrealized gains and
losses on investment securities. SFAS No. 130 is effective for fiscal
years beginning after December 15, 1997. The Company does not anticipate
that implementation of SFAS No. 130 will have a material impact on the
consolidated financial statements.
2. INVESTMENT IN NEW VALLEY CORPORATION
At December 31, 1997 and 1996, the Company's investment in New Valley
consisted of a 41.5% voting interest. At December 31, 1997 and 1996, the
Company owned 57.7% of the outstanding $15.00 Class A Increasing Rate
Cumulative Senior Preferred Shares ($100 Liquidation Value) $.01 par value
(the "Class A Preferred Shares"), and 41.5% of New Valley's common shares,
$.01 par value (the "Common Shares").
The Class A Preferred Shares are accounted for as debt and equity
securities pursuant to the requirements of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and are classified as
available-for-sale. The Common Shares are accounted for pursuant to
Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock".
The Company determines the fair value of the Class A Preferred Shares
based on the quoted market price. 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. 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.
7
<PAGE> 9
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company's investment in New Valley at December 31, 1997 and 1996,
respectively, is summarized below:
<TABLE>
<CAPTION>
Unrealized
Number of Fair Carrying Holding
1997 Shares Value Amount Gain (Loss)
- ---- ------ ----- ------ -----------
<S> <C> <C> <C> <C>
Class A Preferred Shares....... 618,326 $59,359 $59,359 $ (3,083)
Common Shares.................. 3,969,962(A) 1,995 (59,359)
------- ------ --------
$61,354 $ $ (3,083)
======= ======= ========
1996
- ----
Class A Preferred Shares....... 618,326 $72,962 $72,962 $(24,881)
Common Shares.................. 3,969,962(A) 5,955 (72,962)
------- ------- --------
$78,917 $ $(24,881)
======= ======= ========
</TABLE>
(A) Gives effect to July 1996 one-for-twenty reverse stock split.
In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of the
United States Bankruptcy Court for the District of New Jersey and on
January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors
under the Joint Plan. Pursuant to the Joint Plan, among other things, the
Class A Preferred Shares, the Class B Preferred Shares, the Common Shares
and other equity interests were reinstated and retained all of their
legal, equitable and contractual rights.
In February 1995, New Valley repurchased 54,445 Class A Preferred Shares
pursuant to a tender offer made as part of the Joint Plan. During 1995,
New Valley repurchased 339,400 additional Class A Preferred Shares on the
open market at an aggregate cost of $43,405. During 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 and $16,802
for the years ended December 31, 1996 and 1995, respectively.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per
annum. At December 31, 1997 and 1996, respectively, the accrued and unpaid
dividends arrearage was $163,302 ($152.41 per share) and $117,117 ($109.31
per share). The Company received $24,733 ($40.00 per share) and $61,832
($100.00 per share) in dividend distributions in 1996 and 1995,
respectively.
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of and for the years
ended December 31, 1997, 1996 and 1995 follows:
8
<PAGE> 10
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current assets, primarily cash and marketable securities...... $118,474 $183,720
Noncurrent assets............................................. 322,749 222,820
Current liabilities........................................... 128,128 98,110
Noncurrent liabilities........................................ 185,024 170,223
Redeemable preferred stock.................................... 258,638 210,571
Shareholders' equity (deficit)................................ (130,399) (72,364)
Revenues...................................................... 108,441 111,954 $67,730
Costs and expenses............................................ 136,685 128,209 66,064
(Loss) income from continuing operations...................... (25,193) (13,216) 1,374
Income from discontinued operations........................... 4,620 5,726 16,873
Net (loss) income applicable to common shares(A).............. (89,048) (65,160) (13,714)
Company's share of discontinued operations.................... 1,925 2,373 7,005
</TABLE>
(A)Considers all preferred accrued dividends, whether or not declared and,
in 1995 and 1996, the excess of carrying value of redeemable preferred
shares over cost of shares purchased.
On January 31, 1997, New Valley entered into a stock purchase agreement
with Brooke (Overseas) Ltd. ("BOL"), a wholly-owned subsidiary of BGLS,
and acquired all of BOL's shares (the "BML Shares") in BrookeMil Ltd.
("BML"), representing 99.1% of the common stock of BML, which is engaged
in real estate development in Russia. New Valley paid BOL a purchase price
of $55,000 for the BML Shares, consisting of $21,500 in cash and a New
Valley $33,500 9% promissory note. The note was paid in full in 1997.
On February 20, 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC ("Western
Realty") to make real estate and other investments in Russia. In
connection with the formation of Western Realty, New Valley agreed, among
other things, to contribute to Western Realty the real estate assets of
its subsidiary BML and Apollo agreed to contribute up to $58,000.
Under the terms of the agreement governing Western Realty (the "LLC
Agreement"), the ownership and voting interests in Western Realty will be
held equally by Apollo and New Valley. Apollo will be entitled to a
preference on distributions of cash from Western Realty to the extent of
its investment, together with a 15% annual rate of return, and New Valley
will then be entitled to a return of $10,000 of BML-related expenses
incurred by New Valley since March 1, 1997, together with a 15% annual
rate of return; subsequent distributions will be made 70% to New Valley
and 30% to Apollo. Western Realty will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and New
Valley. All material corporate transactions by Western Realty will
generally require the unanimous consent of the Board of Managers.
Accordingly, New Valley will account for its non-controlling interests in
Western Realty on the equity method.
The organization of Western Realty was effected pursuant to the LLC
Agreement. On January 11, 1996, New Valley acquired from an affiliate of
Apollo eight shopping centers for $72,500. New Valley and pension plans
sponsored by BGL have invested in investment partnerships managed by an
affiliate of Apollo. Apollo's affiliate owns a substantial amount of debt
securities of Brooke and warrants to purchase common stock of the Company.
9
<PAGE> 11
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Western Realty will seek to make additional real estate and other
investments in Russia. New Valley and Apollo have agreed to invest,
through Western Realty or another entity, up to $25,000 in the aggregate
for the potential development of a real estate project in Moscow. In
addition, Western Realty has agreed to acquire for $20,000 a 30% profits
interest in a company organized by BOL which, among other things, owns an
interest in a new factory being constructed on the outskirts of Moscow by
a subsidiary of BOL.
4. RJR NABISCO HOLDINGS CORP.
As of December 31, 1997 and 1996, New Valley held approximately 612,650
and 1,700,000 shares of RJR Nabisco Holdings Corp. ("RJR Nabisco") common
stock, respectively, with a market value of $22,898 and $59,200 (cost of
approximately $18,780 and $53,400). During 1997, 1996 and 1995 New Valley
expensed $100, $11,724 and $3,879, respectively, for costs relating to its
RJR Nabisco investment.
In June 1996, various agreements between High River Limited Partnership
("High River"), the Company, BGLS and New Valley were terminated by mutual
consent. Pursuant to these agreements, the parties had agreed to take
certain actions during late 1995 and in 1996 designed to cause RJR Nabisco
to effectuate a spinoff of its food business, Nabisco Holdings Corp.
("Nabisco"). The terminations of the High River agreements left in effect
for one year certain provisions concerning payments to be made to High
River in the event New Valley achieved a profit (after deducting certain
expenses) on the sale of the shares of RJR Nabisco common stock which were
held by it or they were valued at the end of such year at higher than
their purchase price or in the event the Company or its affiliates engaged
in certain transactions with RJR Nabisco. Based on the market price of RJR
Nabisco common stock, no amounts were payable by New Valley under these
agreements.
Pursuant to an agreement between Brooke and New Valley whereby New Valley
agreed to reimburse Brooke and its subsidiaries for reasonable
out-of-pocket expenses in connection with RJR Nabisco, New Valley paid
Brooke and its subsidiaries a total of $17 and $2,370 in 1997 and 1996,
respectively.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company relating to
1,000,000 shares of RJR Nabisco common stock. During the third quarter of
1996, the Swap was terminated. New Valley recognized a loss on the Swap of
$7,305 for the year ended December 31, 1996.
5. FEDERAL INCOME TAX
The Company's operations are included in the consolidated tax return of
Brooke. Income taxes in these financial statements are shown as if the
Company filed a separate tax return.
10
<PAGE> 12
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The amounts provided for income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------------------------------------
<S> <C> <C>
Current:
U.S. Federal......................... $ (14) $1,840 $ 4,472
State................................
Deferred:
U.S. Federal......................... (673) (800) (12,799)
State................................
----- ------ --------
Total provision (benefit) for continuing
operations....................... $(687) $1,040 $ (8,327)
===== ====== ========
</TABLE>
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets and liabilities is as follows:
<TABLE>
<CAPTION>
December 31, 1997
Deferred Deferred
Tax Asset Tax Liability
---------------------------------
<S> <C> <C>
Excess of tax basis over book basis
of non-consolidated entities............ $ 8,400 $
Valuation allowance....................... (8,400)
------- ------
Total................................ $ $
======= ======
<CAPTION>
December 31, 1996
Deferred Deferred
Tax Asset Tax Liability
---------------------------------
<S> <C> <C>
Excess of book basis over tax basis
of non-consolidated entities............ $ 8,400 $
Valuation allowance....................... (8,400)
-------
Total................................ $ $
======= =======
</TABLE>
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory rate of 35% are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C>
(Loss) income from continuing
operations before income taxes........ $(26,949) $(7,850) $ 739
======== ======= ======
Federal income tax (benefit) provision at
statutory rate........................ (9,432) (2,748) 259
Decrease resulting from 80% dividends
received deduction under Internal
Revenue Code Section 243.............. (8,586)
Net effect of equity transactions.......... 8,745
Establishment of valuation allowance....... 3,788
-------- ------- -------
Total................................. $ (687) $ 1,040 $ 8,327
======== ======= =======
</TABLE>
11
<PAGE> 13
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
At December 31, 1997, the Company had $8,400 of unrecognized net deferred
tax assets, comprised primarily of future deductible temporary
differences. A valuation allowance has been provided against this deferred
tax asset as it is presently deemed more likely than not that the benefit
of the tax asset will not be utilized. The Company continues to evaluate
the realizability of its deferred tax assets and its estimate is subject
to change.
6. 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.
On March 2, 1998, BGLS entered into an agreement with AIF II, L.P. and an
affiliated investment manager on behalf of a managed account (together,
the "Apollo Holders") who hold approximately 41.9% of the BGLS Notes in
which the Apollo Holders agreed to defer the payment of interest on the
BGLS Notes held by them, commencing with the interest payment that was due
July 31, 1997, which they had previously agreed to defer, through the
interest payment due July 31, 2000. The deferred interest payments will be
payable at final maturity of the BGLS Notes on January 31, 2001 or upon an
event of default under the Indenture for the BGLS Notes.
12
<PAGE> 14
BAKER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case
No.97-703444-NP, Wayne County Circuit Court, Michigan (case filed on February 4,
1997). This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Michigan. No
motion for class certification has been brought by plaintiff.
TAYLOR, TERRY, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
97-715975, Wayne County Circuit Court, Michigan (case filed on July 28, 1997).
This personal injury class action is brought on behalf of plaintiff and all
similarly situated injured smokers resident in Michigan. No motion for class
certification has been brought by plaintiff.
WHITE, HENRY LEE, ET AL. V. PHILIP MORRIS, ET AL., Case No.
5:97-CV-91BRS, Chancery Court of Jefferson County, Mississippi (case filed on
April 24, 1997). This personal injury class action is brought on behalf of
plaintiff and all similarly situated injured smokers resident in Mississippi. No
motion for class certification has been brought by plaintiff.
BADILLO, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
CV-N-97-573-HDM (RAM), USDC, District of Nevada (case filed on November 4,
1997). This action is brought on behalf of all Nevada casino workers that have
been injured by exposure to environmental tobacco smoke. No motion for class
certification has been brought by plaintiff.
DIENNO, VITO AND MARTIN N. HALLNAN, ET AL. V. LIGGETT GROUP INC., ET
AL., Case No. unknown, District Court, Clark County, Nevada (case filed on
December 22, 1997). This action is brought on behalf of all Nevada casino
workers that have been injured by exposure to environmental tobacco smoke. No
motion for class certification has been brought by plaintiff.
SELCER, ET AL. V. R.J. REYNOLDS, ET AL., Case No. CV-S-97-00334-PMP
(RLH), USDC, District of Nevada (case filed on September 3, 1997). This personal
injury class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Nevada. No motion for class certification has been
brought by plaintiff.
PISCITELLO, HELEN, ET AL. V. PHILIP MORRIS INC., ET AL., Case No.
98-CIV-4613, Superior Court, Middlesex County, New Jersey (case filed on March
6, 1998). This personal injury class action is brought on behalf of plaintiff
and all similarly situated injured smokers resident in New Jersey. No motion for
class certification has been brought by plaintiff.
TEPPER AND WATKINS, ET AL. V. PHILIP MORRIS INC., ET AL., Case No.
BER-L-4983-97-E, Middlesex County Superior Court, New Jersey (case filed on May
28, 1997). This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated addicted smokers resident in New Jersey.
To date, no motion for class certification has been filed by plaintiff.
-3-
<PAGE> 1
Exhibit 99.4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<PAGE> 2
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants................................................................... 2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1996........................... 3
Consolidated Statements of Operations for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995....................................................... 4
Consolidated Statements of Stockholder's Equity (Deficit) for the years ended
December 31, 1997, December 31, 1996 and December 31, 1995.................................... 5
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
December 31, 1996 and December 31, 1995....................................................... 6
Notes to Consolidated Financial Statements.......................................................... 7
</TABLE>
1
<PAGE> 3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
===================================================================================================
December 31, December 31,
1997 1996
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 968 $ 1,875
Accounts receivable - trade .................................... 1,584 166
Inventories .................................................... 4,255 3,569
Prepaid expenses ............................................... 9,290 2,640
--------- ---------
Total current assets ........................................ 16,097 8,250
Property, plant and equipment, at cost, less
accumulated depreciation of $1,020 and $676 ................ 29,122 59,607
Goodwill, net .................................................... 1,001 1,094
Deferred finance costs ........................................... 2,805
Other ............................................................ 2 540
--------- ---------
Total assets ................................................ $ 46,222 $ 72,296
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt ............ $ 5,000 $ 21,658
Accounts payable - trade ....................................... 3,798 13,074
Due to affiliates .............................................. 67,539 48,875
Unearned revenue ............................................... 1 7,406
Accrued taxes .................................................. 18,077 8,474
Accrued interest ............................................... 597
Other accrued liabilities ...................................... 8,397 2,692
--------- ---------
Total current liabilities ................................... 102,812 102,776
Deferred gain .................................................... 25,498 1,494
Unearned revenue ................................................. 9,458
Other liabilities ................................................ 2,000
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 ........................................................ (90,389) (45,533)
--------- ---------
Total stockholder's equity (deficit) ........................ (84,088) (41,432)
--------- ---------
Total liabilities and stockholder's equity (deficit) ........ $ 46,222 $ 72,296
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
3
<PAGE> 4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder
of Brooke (Overseas) Ltd.
We have audited the accompanying consolidated balance sheets of Brooke
(Overseas) Ltd. and Subsidiaries (the "Company") as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholder's
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Brooke
(Overseas) Ltd. and Subsidiaries at December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Miami, Florida
April 8, 1998
<PAGE> 5
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
=======================================================================================
December 31, December 31, December 31,
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Net sales* ........................... $ 77,349 $ 56,835 $ 44,752
Cost of sales* ....................... 63,819 52,799 34,304
-------- -------- --------
Gross profit ......................... 13,530 4,036 10,448
Operating, selling, administrative and
general expenses ................ 9,293 14,008 5,621
-------- -------- --------
Operating income (loss) .............. 4,237 (9,972) 4,827
Other income (expense):
Interest income ................... 1,508
Interest expense .................. (10,187) (7,548) (6,286)
Gain on sale of BML ............... 27,055
Gain on foreign currency exchange . 80 1,199 503
Other, net ........................ (126) (3,027) (853)
-------- -------- --------
Income (loss) before income taxes .... 22,567 (19,348) (1,809)
Provision for income taxes ........... 11,868 1,454 1,669
-------- -------- --------
Net income (loss) .................... $ 10,699 $(20,802) $ (3,478)
======== ======== ========
</TABLE>
-----------------
*Net sales and Cost of sales include excise taxes of $12,367, $7,700
and $6,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
4
<PAGE> 6
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
============================================================================================================================
Additional
Common Stock Paid-in
Shares Amount Capital Deficit Total
------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.................... 701,000 $ 701 $ $(12,528) $(11,827)
Net loss...................................... (3,478) (3,478)
Distributions to parent....................... (8,725) (8,725)
------- ----- ------- -------- --------
Balance, December 31, 1995.................... 701,000 701 (24,731) (24,030)
Net loss...................................... (20,802) (20,802)
Capital contribution.......................... 3,400 3,400
-------- ----- ------- -------- --------
Balance, December 31, 1996.................... 701,000 701 3,400 (45,533) (41,432)
Net income.................................... 10,699 10,699
Distributions to parent....................... (55,555) (55,555)
Capital contribution.......................... 2,200 2,200
------- ----- ------- -------- --------
Balance, December 31, 1997.................... 701,000 $ 701 $ 5,600 $(90,389) $(84,088)
======= ===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
5
<PAGE> 7
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
===========================================================================================================
December 31, December 31, December 31,
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................... $ 10,699 $(20,802) $ (3,478)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ......................... 783 1,399 870
Gain on sale of assets ................................ (27,055)
Deferred taxes ........................................ 1,061 (1,061)
Provision for doubtful accounts........................ (495)
Provision for loss on inventory........................ (105)
Provision for obsolete equipment....................... 47
Changes in assets and liabilities (net of effect of
disposition):
Accounts receivable ................................... (1,418) 796 852
Inventories ........................................... (686) 2,364 (3,046)
Accounts payable and accrued liabilities 5,463 12,717 2,395
Deferred gain ......................................... (2,985)
Due to affiliates ..................................... 30,404 7,606 15,716
Unearned revenue ...................................... 9,227 4,728
Other assets and liabilities, net...................... (2,093) 1,490 (6,123)
-------- -------- --------
Net cash provided by operating activities 13,112 15,858 10,300
-------- -------- --------
Cash flows from investing activities:
Capital expenditures .................................. (20,680) (29,860) (16,755)
Proceeds from sale of BML, net ........................ 55,000
Purchase of stock in Liggett-Ducat..................... (25) (2,829) (435)
Proceeds from sale of stock in Liggett-Ducat, net...... 2,100
Proceeds from sale of option to purchase
stock in Liggett-Ducat .............................. 2,200 3,400
-------- -------- --------
Net cash provided by (used in) investing activities 36,495 (27,189) (17,190)
-------- -------- --------
Cash flows from financing activities:
Proceeds from debt ............. 10,305 12,995 10,841
Repayments of debt ............. (5,345) (1,329) (1,044)
Borrowings under credit facility 1,677 798
Repayments on credit facility .. (1,672) (2,198)
Distributions paid to parent ... (55,555)
-------- -------- --------
Net cash (used in) provided by financing activities (50,595) 11,671 8,397
-------- -------- --------
Effect of exchange rate changes on cash
and cash equivalents ......... 81 (125) (395)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (907) 215 1,112
Cash and cash equivalents, beginning of period 1,875 1,660 548
-------- -------- --------
Cash and cash equivalents, end of period $ 968 $ 1,875 $ 1,660
======== ======== ========
Supplemental cash flow information:
Cash payments during the period for:
Interest ....................... $ 1,919 $ 5,573 $ 3,636
Income taxes ................... 1,280 393 58
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
6
<PAGE> 8
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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"). Prior to October 1, 1993,
Brooke and Ducat Factory were operating a Russian cigarette factory
under a joint venture agreement (the "Joint Venture") in Moscow,
Russia. On October 1, 1993, the parties to the Joint Venture agreed to
form a Russian closed joint stock company, Liggett-Ducat Ltd.
("Liggett-Ducat"), an entity predominantly engaged in the manufacture
of cigarettes. Brooke then transferred ownership of the stock it held
of Liggett-Ducat to the Company. At December 31, 1997 and 1996, the
Company owned 75% of the stock of Liggett-Ducat. The business of
Liggett-Ducat included the cigarette operations, Liggett-Ducat Tobacco
("LDT"), a wholly-owned subsidiary engaged in the construction of a new
cigarette factory, and, prior to December 1996, BrookeMil Ltd. ("BML"),
a wholly-owned subsidiary engaged in construction of office buildings
and property management in Moscow, Russia. 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. (Refer to Note 3.)
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 then in place enabled Liggett to increase its ownership in
Liggett-Ducat to 95%. (Refer to Note 10.)
On January 30, 1998, in connection with the restructuring of Liggett's
long-term debt, Liggett agreed to transfer to the Company all of its
shares of Liggett-Ducat and to cancel its option agreements to acquire
additional shares of Liggett-Ducat. At January 30, 1998 the Company
owned approximately 96% of the shares of common stock of Liggett-Ducat;
however, holders of Liggett's debt were granted a security interest in
16% of the stock of Liggett-Ducat or a successor entity held by the
Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) Basis of Presentation:
The consolidated financial statements and accompanying notes
include the accounts of the Company and its subsidiaries.
Significant intercompany accounts and transactions have been
eliminated in consolidation.
b) Liquidity:
The Company has historically relied on Brooke and BGLS for
sources of financing. At December 31, 1997 and 1996, the
Company had a working capital deficiency of $86,715 and
$94,526, respectively, and a net capital deficiency of $84,088
and $41,432, respectively. On February 2, 1998, Brooke and
BGLS cancelled a note and interest which amounted to $20,384
at December 31, 1997. On February 5, 1998, Brooke made a
capital contribution of $9,000 to the Company,
7
<PAGE> 9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
which was used to repay intercompany indebtedness to BGLS.
These contributions to capital reduced the net capital
deficiency and amounts due affiliates by $29,384. Management
believes that it will continue to receive financing from BGLS
as needed. In addition to a new factory under construction,
the Company has upgraded the present cigarette operations'
tobacco processing complex, increased production with over 14
billion units sold in 1997 as compared with 11.3 billion units
sold in 1996, and is continuing to implement cost-saving
measures. Liggett-Ducat plans to begin the manufacture and
marketing of western style cigarettes in late 1998. Management
believes that such activities will result in improved
operations and cash flow, but there can be no assurances in
this regard. (Refer to Note 13.)
c) Estimates and Assumptions:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities and the reported amounts of revenues
and expenses. Actual results could differ from those
estimates.
d) Foreign Currency Translation:
The Company's Russian subsidiaries historically operate in a
highly inflationary economy and use the U.S. dollar as the
functional currency. Therefore, certain assets (principally
inventories and property, plant and equipment) are translated
at historical exchange rates with all other assets and
liabilities translated at year-end exchange rates and all
translation adjustments are reflected in the consolidated
statements of operations.
e) Cash and Cash Equivalents:
For purposes of the statements of cash flows, cash includes
cash on hand, cash on deposit in banks and cash equivalents,
comprised of short-term investments which have an original
maturity of 90 days or less. Interest on short-term
investments is recognized when earned.
f) Inventories:
Inventories are stated at the lower of cost or market. Cost is
determined on a first-in, first-out (FIFO) basis.
g) Property, Plant and Equipment:
Property, plant and equipment are stated at cost. Depreciation
has been calculated on the straight-line method based upon the
following useful lives: buildings - 20 years, factory
machinery and equipment - 10 years, office furniture and
equipment - 5 years, and computers and vehicles - 3 years.
Depreciation is not provided on construction-in-progress until
the related assets are placed in service.
8
<PAGE> 10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Interest costs are capitalized in connection with the
construction of major facilities. Capitalized interest is
recorded as part of the asset to which it relates and is
amortized over the asset's estimated useful life. In 1997,
1996 and 1995, interest costs of $693, $6,157 and $1,004,
respectively, were capitalized.
The cost of major renewals and betterments are capitalized.
The cost and related accumulated depreciation of property,
plant and equipment are removed from the financial statements
upon retirement or other disposition and any resulting gain or
loss is reflected in the consolidated statements of
operations. Repairs and maintenance are charged to expense as
incurred.
h) Goodwill:
Goodwill is being amortized using the straight-line method
over ten years and relates to the purchase by the Company of
additional shares of Liggett-Ducat stock. Amortization expense
for the years ended December 31, 1997, 1996 and 1995 was $118,
$51 and $68, respectively.
i) Impairment of Long-Lived Assets:
Impairment losses on long-lived assets are recognized when
expected future cash flows are less than the assets' carrying
value. Accordingly, when indicators of impairment are present,
the Company evaluates the carrying value of property, plant
and equipment and intangibles in relation to the operating
performance and future undiscounted cash flows of the
underlying business. The Company adjusts the net book value of
the underlying assets by the excess of the assets' carrying
values over the sum of expected discounted future cash flows.
j) Deferred Finance Costs:
Deferred finance costs consist of the discounts on lease
prepayments which are being amortized over the life of the
leases and the fees incurred in obtaining a bank loan which
are being amortized over the term of the loan.
k) Revenue Recognition:
Sales, net of sales returns and discounts are recognized upon
the shipment of finished goods to customers. Rental income is
recognized ratably over the life of the lease.
l) Income Taxes:
Applicable income and deferred taxes have been provided for
based on tax rates applicable to the Company in the United
States and Russia. A valuation allowance is provided against
Russian deferred tax assets when it is
9
<PAGE> 11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
deemed more likely than not that some portion or all of the
deferred tax assets will not be realized.
m) Concentration of Credit and Other Risks:
The Company sells its products primarily to companies in the
wholesale distribution and retail industries in the Russian
Federation. Two distributors account for 24.9% and 22.0% of
sales in 1997. Prepayment for goods and services is a
customary business practice in Russia and the Company receives
payment in advance for the majority of its sales. Although the
Company does not require collateral and, as a consequence, is
exposed to credit risk with respect to its tobacco operations,
the Company does perform ongoing credit evaluations of its
customers and believes that its trade accounts receivable risk
exposure is limited. At December 31, 1997, 1996 and 1995, the
Company had approximately $9,290, $2,141 and $2,500,
respectively, in prepayments made to suppliers of raw
materials.
The Company maintains its cash deposits with United States,
various foreign and Russian banks. Management assesses the
financial condition of the institutions on an on-going basis.
The performance of Liggett-Ducat's cigarette operations in
Russia is affected by uncertainties in Russia which may
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.
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. The note, with an annual interest rate of 9%, was paid in full
in 1997. The consideration received exceeded the carrying value of the
Company's investment in BML by $52,500. The Company recognized a gain
on the sale in 1997 in the amount of $25,500. The remaining $27,000 was
deferred, reflecting recognition that the Company's parent, BGLS,
retains an interest in BML through its 42% equity ownership in New
Valley, and, further, that a portion of the property sold (the site of
the third phase of the Ducat Place real estate project being developed
by BML, which is currently used by Liggett-Ducat for its existing
cigarette factory) is subject to a put option held by New Valley. The
option allows New Valley to put this site back to the Company at the
greater of the appraised fair value of the property at the date of
exercise or $13,600, during the period Liggett-Ducat operates the
factory on such site. The Company distributed the $21,500 cash proceeds
and the proceeds from the $33,500 promissory note received from the
sale of BML to BGLS.
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 December 31, 1997, the balance of the
deferred gain was approximately $25,500.
10
<PAGE> 12
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
In connection with the sale of the BML shares, certain specified
liabilities aggregating $40,800, including a Russian bank loan with a
balance of $20,418, remained with BML. The bank loan was paid in full
during the third quarter, 1997. 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 which includes obligations for
costs involved in carrying the site. The Use Agreement is terminable by
BML on 270 days' prior notice.
4. NON-MONETARY TRANSACTIONS
During 1997, 1996 and 1995, certain supplies and inventory purchase
transactions were made whereby payment for such transactions was
facilitated by the Company's customers who forwarded payment on the
Company's behalf to raw material suppliers. Such transactions amounted
to approximately $4,753, $3,040 and $8,200 in 1997, 1996 and 1995,
respectively. Sales and purchases were priced at what management
believes are normal sales price for cigarettes and the normal market
price for tobacco and other raw materials.
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------------------------------
<S> <C> <C>
Finished goods........................... $ $
Work-in-process.......................... 50 53
Raw materials............................ 3,284 2,664
Replacement parts and supplies........... 921 852
------ ------
$4,255 $3,569
====== ======
</TABLE>
Purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at the
date of the commitment. At December 31, 1997, the Company had leaf tobacco
purchase commitments of approximately $27,800.
11
<PAGE> 13
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------------------------------
<S> <C> <C>
Buildings................................ $ $ 8,064
Factory machinery and equipment.......... 10,864 4,419
Computers and software................... 293 289
Office furniture and equipment........... 272 129
Vehicles................................. 534 416
Construction-in-progress................. 18,179 46,966
------- -------
30,142 60,283
Less accumulated depreciation............ (1,020) (676)
------- -------
$29,122 $59,607
======= =======
</TABLE>
The amounts provided for depreciation for the years ended December 31,
1997, 1996 and 1995 were $641, $469 and $352, respectively.
On December 29, 1995, Liggett-Ducat relinquished its 59.4% ownership in
a joint real estate venture, Neftecominvest Ltd., in exchange for 100%
ownership of a partially constructed manufacturing facility owned by
the venture. Liggett-Ducat is developing this facility, located on the
outskirts of Moscow, into a new cigarette factory. In connection with
this exchange, a 49-year land lease was renegotiated in 1996 for the
site on which the factory is being constructed. Liggett-Ducat's cost
basis in the joint real estate venture of $2,675 was transferred to its
basis in the new cigarette factory.
Further, Liggett-Ducat has entered into a construction contract for the
new factory. The remaining liability under that contract at December
31, 1997 is approximately $11,500. Equipment purchase agreements in
place at December 31, 1997 total $26,955 of which $22,950 will be
financed by the manufacturers. In February 1998, additional equipment
for the new factory was purchased for $7,400 of which $5,841 will be
financed by the manufacturers. Brooke has guaranteed this obligation.
Subsequent Event:
In February 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. organized Western Realty Development LLC ("Western Realty")
to make real estate and other investments in Russia. Among other
things, Western Realty agreed to acquire for $20,000, a 30% profits
interest in a company organized by the Company, which will, among
things, acquire an interest in the new factory discussed above.
7. EMPLOYEE BENEFITS
The Company complies with Russian Federation regulations covering
pensions, education, day care, medical and other benefits to employees.
These items are funded as a percentage of gross wages and are paid on a
current basis. Medical clinic and day
12
<PAGE> 14
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
care facilities are provided on site and related costs are expensed as
incurred. All Russian citizen employees are required to participate in
the pension fund. The total expense for these programs recognized in
1997, 1996 and 1995 was approximately $2,638, $860 and $1,050,
respectively.
8. NOTES PAYABLE, CREDIT FACILITIES AND LONG-TERM DEBT
Current and long-term debt consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
-------------------------------------
<S> <C> <C>
Revolving credit facilities.............. $5,000 $
Bank loan................................ 20,418
Deferred financing fees.................. 1,240
------ -------
5,000 21,658
Less:
Current maturities....................... 5,000 21,658
------ -------
Amount due after one year................ $ $
====== =======
</TABLE>
In connection with the sale of its BML shares to New Valley, certain
specified liabilities aggregating $40,800 remained with BML, including
a Russian bank loan with a balance of $20,418, which was paid in full
during the third quarter, 1997.
At December 31, 1997, Liggett-Ducat had two 6-month credit facilities
open with a Russian bank. The first, for $2,000, expires on April 30,
1998, initially bore an interest rate of 21%, subsequently raised to
28% on December 2, 1997. The second, for $3,000, expires on May 16,
1998, initially bore an interest rate of 25%, subsequently raised to
28% on December 2, 1997.
9. COMMITMENTS
The following is a schedule of the Company's future minimum rental
payments required under operating leases with noncancelable lease terms
in excess of one year as of December 31, 1997:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998...................................... $ 440
1999...................................... 82
2000...................................... 82
2001...................................... 82
2002...................................... 81
Thereafter................................ 2,155
------
$2,922
======
</TABLE>
Lease commitments for 2002 and thereafter relate primarily to the
remaining 45 years of a land lease and 23 years of an equipment lease.
13
<PAGE> 15
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company's rental expense for the years ended December 31, 1997,
1996 and 1995 was $375, $1,026 and $1,107, respectively.
10. STOCK OF LIGGETT-DUCAT
During the second quarter of 1996, the Company further increased its
ownership of Liggett-Ducat through the purchase of an additional
142,558 shares for approximately $2,143. In July 1996, the Company sold
140,000 shares (19.97%) of Liggett-Ducat's tobacco operations to
Liggett for $2,100. Liggett also acquired a ten-year option to buy up
to an additional 292,407 shares for $3,400, which has been accounted
for as a capital contribution, thereby entitling Liggett to increase
its interest in Liggett-Ducat to approximately 62%. The option fee
would be credited against the purchase price. As part of the same
transaction, Liggett acquired on March 13, 1997 for $2,200 another
ten-year option from the Company on the same terms to purchase the
remaining shares, approximately 33%, of Liggett-Ducat owned by the
Company.
In 1997 and 1996, the Company purchased 1,666 and 46,337 additional
shares of Liggett-Ducat stock from other shareholders for $25 and $695,
respectively. At December 31, 1997, the Company owned 75.3% of the
stock of Liggett-Ducat and Liggett owned 19.97%. In connection with
1996 purchases of Liggett-Ducat common stock, the Company recorded
goodwill in the amount of $729. Unamortized goodwill is $1,001 and
$1,094 at December 31, 1997 and 1996, respectively.
On January 30, 1998, in connection with the restructuring of Liggett's
long-term debt, Liggett agreed to transfer to the Company all of its
shares and to cancel its option agreements to acquire additional
shares. At January 30, 1998, the Company owned approximately 96% of the
shares of common stock of Liggett-Ducat.
11. RELATED PARTY TRANSACTIONS
The Company has obtained funding through a revolving credit facility
with Brooke and BGLS at an annual interest rate of 20% to cover certain
expenses including the cost of certain administrative services and
personnel, tobacco and material purchases and upgrades of factory
equipment. In addition, Brooke and BGLS have advanced funds to BML for
its real estate developments projects. Amounts due to Brooke and BGLS
under this facility at December 31, 1997 and 1996 were $68,437 and
$48,875 including interest of $19,367 and $12,725, respectively. In
January and February 1998, Brooke and BGLS contributed $29,384 to the
Company, reducing the liability to $39,053. (Refer to Note 2(b).)
On March 2, 1995, the Company dividended to Brooke certain notes
receivable of the Company from Liggett-Ducat and BML in the amount of
$8,725, including interest.
On July 2, 1996, the Company repaid portions of outstanding loans to
BGLS in principal amount of $3,679 together with accrued interest of
$1,521.
14
<PAGE> 16
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
During 1996, indebtedness relating to the real estate development
business including the loan agreement between a Russian bank and
Liggett-Ducat (refer to Note 8) and intercompany indebtedness in the
amount of $3,586 together with accrued interest of $1,270 was assigned
by Liggett-Ducat to BML.
Liggett has provided certain administrative and technical support to
Liggett-Ducat. Liggett's expenses associated with these activities were
$0, $76 and $229 for the years ended December 31, 1997, 1996 and 1995,
respectively.
On April 3, 1996, the Company entered into a stock purchase agreement
(the "purchase agreement") with the former chairman of Liggett-Ducat.
Under the purchase agreement, the Company acquired the 84,540 shares
for $15 per share ($1,268). The stock purchase price was paid in
installments during 1996 and the shares of Liggett-Ducat stock
collateralizing the installment payments were released, ratably, as
payments were made.
Concurrently, the Company entered into a consulting and non-compete
agreement with the former chairman for services through December 31,
1998. Under the terms of the agreements, the Company will pay him
approximately $5,232 over five years. At December 31, 1997, 43,285
shares of Liggett-Ducat stock collateralizing the Company's obligations
under the agreements had been released to the Company and 41,255 shares
of Liggett-Ducat stock remain as collateral under the terms of the
agreements.
On June 14, 1996, the Company entered into a second stock purchase
agreement with the former General Director (the "Director") of the
cigarette manufacturing operations. Under this purchase agreement, the
Company acquired the 58,018 shares held by the Director for
approximately $15 per share ($875). The stock purchase price was paid
in installments during 1996.
Concurrently, the Company entered into a consulting and non-compete
agreement with the Director for services through December 31, 1998.
Under the terms of the agreement, the Company paid the Director
approximately $1,000 during 1997 and will pay him $1,000 during 1998.
Also, Liggett-Ducat extended the Director's employment agreement with
Liggett-Ducat until December 31, 1998 at $175 annually. At December 31,
1997, 39,893 shares of Liggett-Ducat stock collateralizing the
Company's obligations under the agreements had been released; 18,125
shares of Liggett-Ducat stock remain as collateral under the terms of
the agreements.
12. INCOME TAXES
The provision for income taxes relates to income taxes payable in
United States and Russian jurisdictions.
15
<PAGE> 17
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current............... $11,868 $ 393 $2,730
Deferred.............. 1,061 (1,061)
------- ------ ------
$11,868 $1,454 $1,669
======= ====== ======
</TABLE>
Deferred taxes have been recognized for significant temporary
differences arising between the financial statement and tax basis of
assets and liabilities. The principal items giving rise to temporary
differences relate to management fees and interest expense incurred
during 1997 and 1996 which are not deductible for Russian tax purposes
until paid. The tax effect of these temporary differences and net
deferred taxes recorded as of December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets............. $2,151 $1,566
Deferred tax liability.......... (305)
------ ------
Net deferred tax asset.......... 2,151 1,261
Valuation allowance............. (2,151) (1,261)
------ -----
Net deferred taxes.............. $ $
====== ======
</TABLE>
In 1996, Russian tax authorities assessed Liggett-Ducat $7,600 for
outstanding tax liabilities relating to 1995. The liability is payable
in two parts, 50% within 2-1/2 years, the remaining 50% over the
succeeding five years. At December 31, 1997, the remaining liability
was $4,405.
13. 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.
On March 2, 1998, BGLS entered into an agreement with AIF II, L.P. and
an affiliated investment manager on behalf of a managed account
(together, the "Apollo Holders"), who hold approximately 41.8% of the
BGLS Notes in which the Apollo Holders agreed to defer the payment of
interest on the BGLS Notes held by them, commencing with the interest
payment that was due July 31, 1997, which they had previously agreed to
defer, through the interest payment due July 31, 2000. The deferred
interest payments will be payable at final maturity of the BGLS Notes
on January 31, 2001 or upon an event of default under the Indenture for
the BGLS Notes. In connection with the agreement, the Company pledged
50.1% of a subsidiary formed to hold the Company's shares of
Liggett-Ducat to collateralize the BGLS Notes held by the Apollo
Holders.
16
<PAGE> 18
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The performance of Liggett-Ducat's cigarette operations in Russia is
affected by uncertainties in Russia which may 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.
17
<PAGE> 19
GEIGER, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Index No.
10657/97, Supreme Court, Queens County, New York (case filed on January 12,
1997). This personal injury class action is brought on behalf of plaintiff and
all similarly situated injured smokers resident in New York. The case was
certified as a class action on May 1, 1997, and currently is stayed pending
appeal.
NWANZE, ET AL. V. PHILIP MORRIS, ET AL., Case No. 97-CIV-7344, USDC,
Southern District of New York (case filed on October 17, 1997). This action is
brought on behalf of all prisoners nationwide that have been injured by exposure
to environmental tobacco smoke. No motion for class certification has been
brought by plaintiff.
WOODS, DELISA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
97-CVS-7869, General Court of Justice, Superior Ct. Div., North Carolina (case
filed on July 10, 1997). This personal injury action is brought on behalf of
plaintiff and all similarly situated injured smokers resident in North Carolina.
CHAMBERLAIN, ET AL. V. THE AMERICAN TOBACCO COMPANY, Case No.
1:96CV2005, USDC, Northern District of Ohio (case filed on August 20, 1997).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Ohio. To date,
no motion for class certification has been filed by plaintiff.
BARNES, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
96-5903, USDC, Eastern District of Pennsylvania (case filed on August 8, 1996).
This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Pennsylvania.
The district court decertified the class in this case on October 17, 1997.
AKSAMIT, ET AL. V. BROWN & WILLIAMSON, ET AL., Case No. 6:97-3636-21,
SC, USDC, Dist. of South Carolina, Greenville Division (case filed on November
24, 1997). This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated addicted smokers resident in South
Carolina. To date, no motion for class certification has been filed by
plaintiff.
NEWBORN, ET AL. V. BROWN & WILLIAMSON, ET AL., Case No. 97-2938 GV,
USDC, Western District of Tennessee (case filed on October 1, 1997). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in Tennessee. No motion for class
certification has been brought by plaintiff.
MASON, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
7-97CV-293-X, USDC, Northern District of Texas (case filed on December 23,
1997). This "addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated addicted smokers resident in Texas. To
date, no motion for class certification has been filed by plaintiff.
-4-
<PAGE> 20
HERRERA, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
2:98-CV-00126, USDC, District of Utah (case filed on January 28, 1998). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in Utah. No motion for class certification has
been brought by plaintiff.
JACKSON ET AL. V. PHILIP MORRIS INC., Case No. 980901634PI, 3rd
Judicial Court, Salt Lake City County, Utah (case filed on March 10, 1998). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in Utah. No motion for class certification has
been brought by plaintiff.
INGLE, ET AL. V. PHILIP MORRIS, ET AL., Case No. 97-C-21-S, Circuit
Court of McDowell County, West Virginia (case filed on February 4, 1997). This
personal injury class action is brought on behalf of plaintiff and all similarly
situated injured smokers resident in West Virginia. No motion for class
certification has been brought by plaintiff.
MCCUNE, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL., Case No.
97-C-204, Circuit Court of Kanawha County, West Virginia (case filed on January
30, 1997). This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated addicted smokers resident in West
Virginia. To date, no motion for class certification has been filed by
plaintiff.
WALKER, ET AL. V. LIGGETT GROUP INC., ET AL., Case No. 2:97-0102, USDC,
Southern District of West Virginia (case filed on February 12, 1997). Nationwide
class certified and limited fund class action settlement preliminarily approved
with respect to Liggett and Brooke Group on May 15, 1997. Class decertified and
preliminary approval of settlement withdrawn by order of district court on
August 5, 1997, which order currently is on appeal to the Fourth Circuit.
INSOLIA, ET AL. V. PHILIP MORRIS, ET AL., Case No. 97-CV-230-J, Rock
County Circuit Court, Wisconsin (case filed on April 4, 1997). This personal
injury class action is brought on behalf of plaintiff and all similarly situated
injured smokers resident in Wisconsin. No motion for class certification has
been brought by plaintiff.
-5-
<PAGE> 21
OTHER REIMBURSEMENT ACTIONS
CITY OF BIRMINGHAM, ET AL. V. THE AMERICAN TOBACCO CO., ET AL., Case
No. CV97-081, Greene County, Alabama, Circuit Court (case filed on 5/28/97).
City of Birmingham seeks to recover money damages resulting from payment by the
City to hospitals and other medical providers on behalf of their employees for
tobacco-related disease and death. The City's amended complaint was dismissed by
the court on March 4, 1998, holding that, under the common law of Alabama, the
City lacked standing to recover damages from alleged third-party tortfeasors for
amounts paid on behalf of the plaintiffs' injured employees. The court has,
however, permitted the City to amend its complaint to bring a claim under an
Alabama statute which, the court held, provided a limited authority to recover
such damages under certain circumstances.
COUNTY OF LOS ANGELES V. R.J.REYNOLDS, ET AL., Case No. 707651,
Superior Court of San Diego (case filed on 8/5/97). County seeks to obtain
declaratory and equitable relief and restitution as well as to recover money
damages resulting from payment by the County for tobacco-related medical
treatment for its citizens and health insurance for its employees.
ELLIS, ON BEHALF OF THE GENERAL PUBLIC V. R.J. REYNOLDS, ET AL., Case
No. 00706458, Superior Court of San Diego (case filed on 12/13/96). Plaintiffs,
two individuals, seek equitable and injunctive relief for damages incurred by
the State of California in paying for the expenses of indigent smokers.
COUNTY OF COOK V. PHILIP MORRIS, ET AL., Case No. 97L04550, Circuit
Court, Cook County (case filed on 7/21/97). County of Cook seeks to obtain
declaratory and equitable relief and restitution as well as to recover money
damages resulting from payment by the County for tobacco-related medical
treatment for its citizens and health insurance for its employees.
CITY OF NEW YORK, ET AL. V. THE TOBACCO INSTITUTE, ET AL., Case No.
97-CIV-0904, Supreme Court of New York, New York County (case filed on
10/17/96). City of New York seeks to obtain declaratory and equitable relief
and restitution as well as to recover money damages resulting from payment by
the City for tobacco-related medical treatment for its citizens and health
insurance for its employees.
STATE OF TENNESSEE V. THE AMERICAN TOBACCO CO., ET AL., Case No.
12,263, Monroe County Chancery Court (case filed on 5/7/97). Individual seeks
equitable and injunctive relief for damages incurred by the State of Tennessee
in paying for the expenses of indigent smokers.
THE CROW CREEK SIOUX TRIBE V. THE AMERICAN TOBACCO COMPANY, ET AL.,
Case No. CV 97-09-082, Tribal Court of The Crow Creek Sioux Tribe (case filed on
9/26/97). Indian tribe seeks equitable and injunctive relief for damages
incurred by the tribe in paying for the expenses of indigent smokers.
THE REPUBLIC OF MARSHALL ISLANDS V. THE AMERICAN TOBACCO CO., ET AL.,
Case No. 1997-261, Republic of the Marshall Islands, The High Court (case filed
on 10/30/97). Republic seeks equitable and injunctive relief for damages
incurred by the Republic in paying for the expenses of indigent smokers.
-6-
<PAGE> 22
SCREEN ACTORS GUILD - PRODUCERS HEALTH PLAN, ET AL. V. PHILIP MORRIS,
ET AL., Case No. DC181603, Superior Court of Los Angeles County (case filed on
11/20/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
STATIONARY ENGINEERS LOCAL 39 HEALTH & WELFARE TRUST FUND V. PHILIP
MORRIS, ET AL., Case No. C-97-1519-DLJ, USDC, Northern District of California
(case filed on 4/25/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.
STEAMFITTERS LOCAL UNION NO. 614 HEALTH AND WELFARE FUND V. PHILIP
MORRIS, ET AL., Case No. 92260-2, Circuit Court for 30th Judicial District at
Memphis (case filed on 1/7/98). Union Health and Welfare Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
TEXAS CARPENTERS HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, ET AL.,
Case No. 1:97C0625, USDC, Eastern District of Texas (case filed on 11/7/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.
NORTHWEST LABORERS-EMPLOYERS HEALTH & SECURITY TRUST FUND, ET AL. V.
PHILIP MORRIS, ET AL., Case No. C97-849-WD, WA, USDC, Western District (case
filed on 6/26/97). Health and Welfare Trust Fund seeks economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.
IRON WORKERS LOCAL UNION NO.17 INSURANCE FUND, ET AL. V. PHILIP MORRIS,
ET AL., Case No. 1:97CV 1422, USDC, Northern District of Ohio, Eastern Div.
(case filed on 5/20/97). Union Insurance Trust Fund seeks economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.
STEAMFITTERS LOCAL UNION NO. 420 WELFARE FUND, ET AL. V. PHILIP MORRIS,
INC, ET AL., Case No. 97-CV-5344, USDC, Eastern District of Pennsylvania (case
filed on 10/7/97). Union Health and Welfare Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.
-7-
<PAGE> 23
RHODE ISLAND LABORERS' HEALTH & WELFARE FUND V. THE AMERICAN TOBACCO
COMPANY, ET AL., Case No. 97-500L, USDC, District of Rhode Island (case filed on
10/24/97). Union Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
TEAMSTERS UNION NO. 142, ET AL. V. PHILIP MORRIS, ET AL., Case No.
71C019709CP01281, USDC, Northern District of Indiana (case filed on 9/15/97).
Union seeks injunctive relief and economic reimbursement to recover moneys
expended by Union Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.
KENTUCKY LABORERS DISTRICT COUNCIL HEALTH & WELFARE TRUST FUND V.
PHILIP MORRIS, ET AL., Case No.3-97-394, USDC, Western District of Kentucky
(case filed on 6/20/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Trust Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
ARK-LA-MISS LABORERS WELFARE FUND, ET AL. V. PHILIP MORRIS, ET AL.,
Case No. 97-1944, USDC, Eastern District of Louisiana (case filed on 6/20/97).
Welfare Fund seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.
NEW JERSEY CARPENTERS HEALTH FUND, ET AL. V. PHILIP MORRIS, ET AL.,
Case No. 97-3421, USDC, District of New Jersey (case filed on 10/7/97). Health
Fund seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.
LABORERS' LOCAL 17 HEALTH BENEFIT FUND, ET AL. V. PHILIP MORRIS, ET
AL., Case No. 97-CIV-4550, USDC, Southern District of New York (case filed on
7/17/97). Health Fund seeks injunctive relief and economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.
OPERATING ENGINEERS LOCAL 12 HEALTH AND WELFARE TRUST V. THE AMERICAN
TOBACCO COMPANY, ET AL., Case No. CV-97-7620 TJH, USDC, Central District of
California (case filed on 11/6/97). Health and Welfare Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
pmedical treatment to its participants and benefactors suffering from
smoking-related illnesses.
-8-
<PAGE> 24
CONNECTICUT PIPE TRADES HEALTH FUND, ET AL. V. PHILIP MORRIS, ET AL.,
Case No. 397CV01305CT, USDC, District of Connecticut (case filed on 7/17/97).
Health Fund seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.
SOUTHEAST FLORIDA LABORERS DISTRICT COUNCIL HEALTH AND WELFARE TRUST
FUND V. PHILIP MORRIS, ET AL., Case No. 97-8715 Circuit Court, Dade County (case
filed 10/7/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.
CENTRAL ILLINOIS LABORERS HEALTH & WELFARE TRUST FUND, ET AL. V. PHILIP
MORRIS, ET AL., Case No. 97-L516, USDC, Southern District of Illinois (case
filed on 5/22/97). Laborers' Union Health Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.
LABORERS' AND OPERATING ENGINEERS UTILITY AGREEMENT V. PHILIP MORRIS,
ET AL., Case No. CIV97-1406 PHX, USDC, District of Arizona (case filed on
7/29/97). Union Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
ARKANSAS CARPENTERS HEALTH & WELFARE FUND V. PHILIP MORRIS, ET AL.,
Case No. LR-C-97-0754, USDC, Eastern District of Arkansas (case filed on
9/4/97). Union's Health and Welfare Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
WEST VIRGINIA LABORERS' PENSION TRUST FUND V. PHILIP MORRIS, ET AL.,
Case No. 397-0708, USDC, Southern District of West Virginia (case filed on
8/27/97). Laborers' Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.
WEST VIRGINIA - OHIO VALLEY AREA I.B.E.W., ET AL. V. LIGGETT GROUP
INC., ET AL., Case No. 97-C-2135, USDC, Southern District of West Virginia (case
filed on 9/19/97).
-9-
<PAGE> 25
and Welfare Trust Fund seeks injunctive relief and economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.
MASSACHUSETTS LABORERS' HEALTH & WELFARE FUND, ET AL. V. PHILIP MORRIS,
ET AL., Case No. C.A. 97-2892G, Superior Court, Suffolk County (case filed on
6/2/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
B.A.C. LOCAL NO. 32 INSURANCE TRUST FUND, ET AL. V. PHILIP MORRIS, ET
AL., Case No. 97-75675MI, USDC, Eastern District of Michigan (case filed on
11/18/97). Health Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.
OPERATING ENGINEERS LOCAL 324 HEALTH CARE FUND, ET AL. V. PHILIP
MORRIS, INC., ET AL., Case No. 598--CV-60020, Circuit Court, Wayne County (case
filed on 3/9/98). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and benefactors suffering from smoking-related
illnesses.
NEW MEXICO AND WEST TEXAS MULTI-CRAFT HEALTH AND WELFARE TRUST FUND, ET
AL. V. PHILIP MORRIS, ET AL., Case No. CV97 0009118NM, Second Judicial District
Court, Bernalillo County (case filed on 1/29/98). Health Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
OREGON LABORERS-EMPLOYERS HEALTH & WELFARE TRUST FUND, ET AL. V. PHILIP
MORRIS, ET AL., Case No. 97-1051-HA, USDC, District of Oregon (case filed on
6/18/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
CENTRAL STATES JOINT BOARD HEALTH & WELFARE FUND V. PHILIP MORRIS, ET
AL., Case No. 97L12855, USDC, Northern District of Illinois (case filed on
10/30/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment to
its participants and benefactors suffering from smoking-related illnesses.
-10-
<PAGE> 26
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, LOCAL 734 HEALTH & WELFARE TRUST
FUND V. PHILIP MORRIS, ET AL., Case No. 97L12852, USDC, Northern District of
Illinois (case filed on 10/30/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended by Fund
to provide medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
SEAFARERS WELFARE PLAN AND UNITED INDUSTRIAL WORKERS WELFARE PLAN V. PHILIP
MORRIS, ET AL., Case No. MJG-97-2127MD, USDC, District of Maryland (case filed
on 8/8/97). Welfare Plan seeks injunctive relief and economic reimbursement to
recover moneys expended by Plan to provide medical treatment to its participants
and benefactors suffering from smoking-related illnesses.
CARPENTERS & JOINERS WELFARE FUND, ET AL. V. PHILIP MORRIS, ET AL., Case
No. 60,633-001, USDC, District of Minnesota (case filed on 12/31/97). Health and
Welfare Trust Plan seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.
United Federation of Teachers Welfare Fund, et al. v. Philip Morris, et al.,
Case No. 97-CIV-4676, USDC, Southern District of New York (case filed on
7/17/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants and benefactors suffering from smoking-related illnesses.
United Food and Commercial Workers Unions, et al. v. Philip Morris, et al.,
Case No. CV-97-1340, Circuit Court of Tuscaloosa, Alabama (case filed on
11/13/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants and benefactors suffering from smoking-related illnesses.
Day Care Council-Local 205 D.C. 1707 Welfare Fund v. Philip Morris, et al.,
Case No. 97-CIV-606240, USDC, Southern District of New York (case filed on
12/4/97). Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants and benefactors suffering from smoking-related illnesses.
Eastern States Health and Welfare Fund, et al., v. Philip Morris, et al., Case
No. 97-CIV-7346, USDC, Southern District of New York (case filed on 7/28/97).
Health and Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provided medical treatment to its
participants and benefactors suffering from smoking-related illnesses.
IBEW Local 25 Health and Benefit Fund v. Philip Morris, et al., Case No.
97-CIV-9400, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants and benefactors suffering from smoking-related illnesses.
IBEW Local 363 Welfare Fund v. Philip Morris, et al., Case No. 97-CIV-9396,
USDC, Southern District of New York (case filed on 11/25/97). Health and Welfare
Trust Fund seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
benefactors suffering from smoking-related illnesses.
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, et al., Case No.
97-606249, USDC, Southern District of New York (case filed on 12/4/97). Health
and Welfare Trust Fund seeks injunctive relief and economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its
participants and benefactors suffering from smoking-related illnesses.
Local 1199 National Benefit Fund for Health & Human Services Employees v.
Philip Morris, et al., Case No. 97-606-241, USDC, Southern District of New
York (case filed on 12/4/97). Health and Welfare Trust Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
Local 138, 138A & 138B International Union of Operating Engineers Welfare Fund
v. Philip Morris, et al., Case No. 97-CIV-9402, USDC, Southern District of New
York (case filed on 11/25/97). Health and Welfare Trust Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
Local 840 International Brotherhood of Teamsters Health & Insurance Fund v.
Philip Morris, et. al., Case No. 97-CIV-9398, USDC, Southern District of New
York (case filed on 11/25/97). Health and Welfare Trust Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and benefactors suffering from
smoking-related illnesses.
Long Island Regional Council of Carpenters Welfare Local 840 International
Brotherhood of Teamsters Health & Insurance Fund v. Philip Morris, et al., Case
No. 97-CIV-9397, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants and benefactors suffering from smoking-related illnesses.
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris, et al., Case No.
97-CIV-8462, USDC, Southern District of New York (case filed on 11/25/97).
Health and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical treatment
to its participants and benefactors suffering from smoking-related illnesses.
RAYMARK INDUSTRIES, INC. V. BROWN & WILLIAMSON, ET AL., Case No.
1:97-CV-2711-RCF, Circuit Court of the Fourth Judicial Circuit, Duval County
(case filed on 11/5/97). Asbestos company seeks reimbursement for damages paid
to asbestos victims for medical and other relief, which damages allegedly are
attributable to the tobacco companies.
FIBREBOARD CORPORATION, ET AL. V. THE AMERICAN TOBACCO COMPANY, ET AL.,
Case No. 791919-8, CA, Superior Court of Alameda (case filed on 11/10/97).
Asbestos company seeks reimbursement for damages paid to asbestos victims for
medical and other relief, which damages allegedly are attributable to the
tobacco companies.
Keene Creditors Trust v. Brown & Williamson Tobacco Corp., et al., Case no.
606479/97, Supreme Court of New York, New York County (case filed on 12/19/97).
Asbestos company seeks reimbursement for damages paid to asbestos victims for
medical and other relief, which damages allegedly are attributable to the
tobacco companies.
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