<PAGE> 1
===============================================================================
Securities And Exchange Commission
Washington, D.C. 20549
------------
FORM 10-Q
------------
JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
------------
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 1-5759 51-0255124
<S> <C> <C>
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
BGLS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 33-93576 13-3593483
<S> <C> <C>
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
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)
------------
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
At August 13, 1999 Brooke Group Ltd. had 20,943,730 shares of common
stock outstanding, and BGLS Inc. had 100 shares of common stock outstanding,
all of which are held by Brooke Group Ltd.
===============================================================================
<PAGE> 2
BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements:
Brooke Group Ltd. Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998............................................................................. 2
BGLS Inc. Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998..................... 3
Brooke Group Ltd. Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and June 30, 1998......................................................... 4
BGLS Inc. Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and June 30, 1998............................................................... 5
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the six
months ended June 30, 1999.................................................................... 6
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the six months
ended June 30, 1999........................................................................... 7
Brooke Group Ltd. Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 1998............................................................... 8
BGLS Inc. Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 and June 30, 1998............................................................... 9
Notes to Consolidated Financial Statements.......................................................... 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................................. 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 43
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 44
Item 2. Changes in Securities and Use of Proceeds...................................................... 44
Item 3. Defaults Upon Senior Securities................................................................ 44
Item 6. Exhibits and Reports on Form 8-K............................................................... 44
SIGNATURES............................................................................................. 46
</TABLE>
-1-
<PAGE> 3
Item 1. Consolidated Financial Statements
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
----------- -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................................. $ 8,368 $ 7,396
Receivables from clearing brokers......................................... 13,427
Investment securities available for sale.................................. 48,114
Trading securities owned.................................................. 11,695
Accounts receivable - trade............................................... 12,366 15,160
Other receivables......................................................... 2,200 924
Inventories............................................................... 46,421 36,316
Restricted assets......................................................... 3,266
Deferred income taxes..................................................... 87,983 59,613
Other current assets...................................................... 8,608 3,151
--------- ---------
Total current assets.................................................... 242,448 122,560
Property, plant and equipment, net.......................................... 132,603 93,504
Investment in real estate, net.............................................. 92,887
Long-term investments, net.................................................. 5,762
Investment in joint venture................................................. 49,466
Restricted assets........................................................... 8,310
Other assets................................................................ 19,056 12,918
--------- ---------
Total assets............................................................ $ 550,532 $ 228,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt....................... $ 34,257 $ 21,176
Margin loan payable....................................................... 4,853
Accounts payable.......................................................... 28,680 13,880
Cash overdraft............................................................ 1,250 77
Securities sold, not yet purchased........................................ 2,979
Accrued promotional expenses.............................................. 18,750 23,760
Accrued taxes payable..................................................... 49,181 14,854
Accrued interest.......................................................... 9,389 17,189
Proceeds received for options............................................. 150,000
Other accrued liabilities................................................. 59,818 32,505
--------- ---------
Total current liabilities............................................... 209,157 273,441
Notes payable, long-term debt and other obligations, less current portion... 191,193 262,665
Noncurrent employee benefits................................................ 20,874 21,701
Deferred income taxes....................................................... 132,982
Other liabilities........................................................... 68,366 65,350
Minority interests.......................................................... 51,793
Commitments and contingencies...............................................
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares..
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 26,498,043 shares, outstanding
20,943,730 shares...................................................... 2,094 2,094
Additional paid-in capital................................................ 194,788 124,120
Deficit................................................................... (288,621) (512,182)
Accumulated other comprehensive income.................................... (12) 24,774
Other..................................................................... (4,609) (5,508)
Less: 5,554,313 shares of common stock in treasury, at cost.............. (27,473) (27,473)
--------- ---------
Total stockholders' deficit........................................... (123,833) (394,175)
--------- ---------
Total liabilities and stockholders' equity (deficit).................. $ 550,532 $ 228,982
========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-2-
<PAGE> 4
Item 1. Consolidated Financial Statements - (Continued)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................................. $ 8,368 $ 7,396
Receivables from clearing brokers......................................... 13,427
Investment securities available for sale.................................. 48,114
Trading securities owned.................................................. 11,695
Accounts receivable - trade............................................... 12,366 15,160
Other receivables......................................................... 2,098 755
Inventories............................................................... 46,421 36,316
Restricted assets......................................................... 3,266
Deferred income taxes..................................................... 87,983 59,613
Other current assets...................................................... 8,187 2,946
--------- ---------
Total current assets.................................................. 241,925 122,186
Property, plant and equipment, net.......................................... 132,584 93,481
Investment in real estate, net.............................................. 92,887
Long-term investments, net.................................................. 5,762
Investment in joint venture................................................. 49,466
Restricted assets........................................................... 8,310
Other assets................................................................ 17,929 11,729
--------- ---------
Total assets.......................................................... $ 548,863 $ 227,396
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt....................... $ 33,829 $ 20,955
Margin loan payable....................................................... 4,853
Accounts payable.......................................................... 28,555 13,746
Cash overdraft............................................................ 1,243 63
Securities sold, not yet purchased........................................ 2,979
Due to parent............................................................. 32,543 32,394
Accrued promotional expenses.............................................. 18,750 23,760
Accrued taxes payable..................................................... 49,181 14,854
Accrued interest.......................................................... 9,389 17,188
Proceeds received from options............................................ 150,000
Other accrued liabilities................................................. 58,828 31,556
--------- ---------
Total current liabilities............................................. 240,150 304,516
Notes payable, long-term debt and other obligations, less current portion... 191,193 262,665
Noncurrent employee benefits................................................ 20,874 21,701
Deferred income taxes....................................................... 132,982
Other liabilities........................................................... 70,744 69,216
Minority interests.......................................................... 51,793
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................................................ 143,207 69,297
Deficit................................................................... (302,068) (524,773)
Accumulated other comprehensive income.................................... (12) 24,774
--------- ---------
Total stockholder's deficit........................................... (158,873) (430,702)
--------- ---------
Total liabilities and stockholder's equity (deficit).................. $ 548,863 $ 227,396
========= =========
</TABLE>
The accompanying notes are an integral part of
the consolidated financial statements.
-3-
<PAGE> 5
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Tobacco* ................................................ $ 109,265 $ 111,262 $ 217,662 $ 196,065
Broker-dealer transactions .............................. 5,876 5,876
Real estate leasing ..................................... 754 754
------------ ------------ ------------ ------------
Total revenues ........................................ 115,895 111,262 224,292 196,065
Expenses:
Cost of goods sold* ..................................... 40,098 51,680 81,525 93,336
Operating, selling, administrative and general expenses . 62,199 46,643 107,036 82,126
------------ ------------ ------------ ------------
Operating income ...................................... 13,598 12,939 35,731 20,603
Other income (expenses):
Interest and dividend income ............................ 672 185 732 250
Interest expense ........................................ (12,073) (19,637) (27,061) (40,423)
Equity in loss of affiliate ............................. (1,569) (7,261) (9,198) (11,448)
Recognition of deferred gain on sale of assets .......... 7,050
Loss in joint venture ................................... (790) (790)
Gain on sale of investments, net ........................ 327 327
Sale of assets .......................................... 3,984 468 4,125 1,318
Gain on brand transaction ............................... 294,287 294,287
Other, net .............................................. 405 (1,079) 2,921 (998)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before provision
for income taxes and minority interests ................ 298,841 (14,385) 308,124 (30,698)
Provision for income taxes .............................. 81,645 381 83,374 1,312
Minority interests ...................................... 1,382 1,382
------------ ------------ ------------ ------------
Income (loss) from continuing operations .................. 215,814 (14,766) 223,368 (32,010)
Gain on discontinued operations in equity investee,
net of taxes............................................. 1,249
Loss on extraordinary items, net of taxes ................. (1,056) (1,056)
------------ ------------ ------------ ------------
Net income (loss) ......................................... $ 214,758 $ (14,766) $ 223,561 $ (32,010)
============ ============ ============ ============
Per basic common share:
Income (loss) from continuing operations ................ $ 10.30 $ (0.72) $ 10.67 $ (1.60)
============ ============ ============ ============
Income from discontinued operations ..................... $ 0.06
============
Loss from extraordinary items ........................... $ (0.05) $ (0.05)
============ ============
Net income (loss) applicable to common shares ........... $ 10.25 $ (0.72) $ 10.68 $ (1.60)
============ ============ ============ ============
Basic weighted average common shares outstanding .......... 20,943,730 20,444,353 20,943,730 19,957,412
============ ============ ============ ============
Per diluted common share:
Income (loss) from continuing operations ................ $ 8.25 $ (0.72) $ 8.56 $ (1.60)
============ ============ ============ ============
Income from discontinued operations ..................... $ 0.05
============
Loss from extraordinary items ........................... $ (0.04) $ (0.04)
============ ============
Net income (loss) applicable to common shares ........... $ 8.21 $ (0.72) $ 8.57 $ (1.60)
============ ============ ============ ============
Diluted weighted average common shares outstanding ........ 26,167,956 20,444,353 26,094,156 19,957,412
============ ============ ============ ============
</TABLE>
- -----------------------
* Tobacco revenues and Cost of goods sold include excise taxes of $14,718,
$22,427, $28,756 and $40,345, respectively.
The accompanying notes are an integral part of
the consolidated financial statements.
-4-
<PAGE> 6
Item 1. Consolidated Financial Statements - (Continued)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
------------------------------ -------------------------------
Three Months Ended Six Months Ended
------------------------------ -------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Tobacco*.................................................. $109,265 $111,262 $217,662 $196,065
Broker dealer transactions................................ 5,876 5,876
Real estate leasing....................................... 754 754
-------- -------- -------- --------
Total revenues.......................................... 115,895 111,262 224,292 196,065
Expenses:
Cost of goods sold*....................................... 40,098 51,680 81,525 93,336
Operating, selling, administrative and general expenses... 62,050 45,426 106,485 80,797
-------- -------- -------- --------
Operating income........................................ 13,747 14,156 36,282 21,932
Other income (expenses):
Interest and dividend income.............................. 670 63 730 119
Interest expense.......................................... (13,406) (20,738) (29,650) (42,562)
Equity in loss of affiliate............................... (1,569) (7,261) (9,198) (11,448)
Recognition of deferred gain on sale of assets............ 8,264
Loss in joint venture..................................... (790) (790)
Gain on sale of investments, net.......................... 327 327
Sale of assets............................................ 3,984 468 4,125 1,318
Gain on brand transaction................................. 294,287 294,287
Other, net................................................ 405 (1,079) 2,891 (1,001)
-------- -------- -------- --------
Income (loss) from continuing operations before provision
for income taxes and minority interests................. 297,655 (14,391) 307,268 (31,642)
Provision for income taxes................................ 81,645 381 83,374 1,312
Minority interests........................................ 1,382 1,382
-------- -------- -------- --------
Income (loss) from continuing operations.................... 214,628 (14,772) 222,512 (32,954)
Gain on discontinued operations in equity investee.......... 1,249
Loss on extraordinary items, net of taxes................... (1,056) (1,056)
-------- -------- -------- --------
Net income (loss)........................................... $213,572 $ (14,772) $222,705 $ (32,954)
======== ========= ======== =========
</TABLE>
- ----------------
* Tobacco revenues and cost of goods sold include excise taxes of $14,718,
$22,427, $28,756 and $40,345, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 7
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Common Stock Additional Compre-
------------------- Paid-In Treasury hensive
Shares Amount Capital Deficit Stock Other Income Total
---------- ------ -------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.............. 20,943,730 $2,094 $124,120 $(512,182) $(27,473) $(5,508) $ 24,774 $(394,175)
Net income.............................. 223,561 223,561
Unrealized loss on investment
securities............ (139) (139)
Effect of New Valley recapitalization
on other comprehensive income....... (24,647) (24,647)
--------
Total other comprehensive loss..... (24,786)
--------
Total comprehensive income.............. 198,775
--------
Recapitalization of New Valley.......... 72,926 72,926
Distributions on common stock........... (3,104) (3,104)
Amortization of deferred
compensation.......................... 846 899 1,745
---------- ------ -------- --------- -------- ------- -------- ---------
Balance, June 30, 1999.................. 20,943,730 $2,094 $194,788 $(288,621) $(27,473) $(4,609) $ (12) $(123,833)
========== ====== ======== ========= ======== ======= ======== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-6-
<PAGE> 8
Item 1. Consolidated Financial Statements - (Continued)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
------------------- Paid-In Comprehensive
Shares Amount Capital Deficit Income Total
----------- ------- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998........................... 100 $ $ 69,297 $(524,773) $ 24,774 $(430,702)
Net income........................................... 222,705 222,705
Unrealized loss on investment securities........... (139) (139)
Effect of New Valley recapitalization on other
comprehensive income............................. (24,647) (24,647)
--------
Total other comprehensive loss................... (24,786)
--------
Total comprehensive income........................... 197,919
--------
Recapitalization of New Valley....................... 72,926 72,926
Amortization of deferred compensation................ 984 984
--- ----- -------- --------- -------- ---------
Balance, June 30, 1999............................... 100 $ $143,207 $(302,068) $ (12) $(158,873)
--- ----- -------- --------- -------- ---------
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-7-
<PAGE> 9
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30, June 30,
1999 1998
--------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities......................... $ 12,116 $ (17,409)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net.......................... 5,214 1,686
Proceeds from brand transaction........................................... 145,000
Sale or maturity of investment securities................................. 491
Purchase of investment securities......................................... (2,529)
Sale or liquidation of long-term investments.............................. 217
Purchase of real estate................................................... (338)
Payment of prepetition claims............................................. (23)
Capital expenditures...................................................... (37,864) (7,138)
--------- ---------
Net cash provided by (used in) investing activities......................... 110,168 (5,452)
--------- ---------
Cash flows from financing activities:
Proceeds from debt........................................................ 4,976
Repayments of debt........................................................ (142,906) (1,068)
Borrowings under revolver................................................. 163,978 133,671
Repayments on revolver.................................................... (152,599) (129,464)
Effect of New Valley recapitalization..................................... 9,055
Decrease in margin loan payable........................................... (1,147)
Decrease (increase) in cash overdraft..................................... 1,173 (824)
Distributions on common stock............................................. (3,210) (3,055)
Proceeds from participating loan.......................................... 20,000
Issuance of common stock.................................................. 10,144
--------- ---------
Net cash (used in) provided by financing activities......................... (120,680) 29,404
--------- ---------
Effect of exchange rate changes on cash and cash equivalents................ (632) 84
Net increase in cash and cash equivalents................................... 972 6,627
Cash and cash equivalents, beginning of period.............................. 7,396 4,749
--------- ---------
Cash and cash equivalents, end of period.................................... $ 8,368 $ 11,376
========= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-8-
<PAGE> 10
Item 1. Consolidated Financial Statements - (Continued)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
June 30, June 30,
1999 1998
---------- ----------
<S> <C> <C>
Net cash provided by (used in) operating activities......................... $ 9,327 $ (10,298)
---------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net.......................... 5,214 1,686
Proceeds from brand transaction........................................... 145,000
Sale or maturity of investment securities................................. 491
Purchase of investment securities......................................... (2,529)
Sale or liquidation of long-term investments.............................. 217
Purchase of real estate................................................... (338)
Payment of prepetition claims............................................. (23)
Capital expenditures...................................................... (37,864) (7,138)
---------- ---------
Net cash provided by (used in) investing activities......................... 110,168 (5,452)
---------- ---------
Cash flows from financing activities:
Proceeds from debt........................................................ 4,500
Repayments of debt........................................................ (142,858) (1,023)
Borrowings under revolver................................................. 163,978 133,671
Repayments on revolver.................................................... (152,599) (129,464)
Effect of New Valley recapitalization..................................... 9,055
Decrease in margin loan payable........................................... (1,147)
Decrease (increase) in cash overdraft..................................... 1,180 (891)
Proceeds from participating loan.......................................... 20,000
---------- ---------
Net cash (used in) provided by financing activities......................... (117,891) 22,293
---------- ---------
Effect of exchange rate changes on cash and cash equivalents................ (632) 84
Net increase in cash and cash equivalents................................... 972 6,627
Cash and cash equivalents, beginning of period.............................. 7,396 4,749
---------- ---------
Cash and cash equivalents, end of period.................................... $ 8,368 $ 11,376
========== =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-9-
<PAGE> 11
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. PRINCIPLES OF REPORTING
The consolidated financial statements of Brooke Group Ltd. (the
"Company") include the consolidated statements of its wholly-owned
subsidiary, BGLS Inc. ("BGLS"). The consolidated statements of BGLS
include the accounts of Liggett Group Inc. ("Liggett"), Brooke (Overseas)
Ltd. ("BOL"), Liggett-Ducat Ltd. ("Liggett-Ducat") and other less
significant subsidiaries. As of June 1, 1999, New Valley Corporation
("New Valley") became a consolidated subsidiary of the Company as a
result of New Valley's recapitalization in which the Company's interest
in New Valley's common shares increased to 55.1%. (See Note 3.) All
significant intercompany balances and transactions have been eliminated.
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. New Valley is engaged in
the investment banking and brokerage business through its ownership of
Ladenburg Thalmann & Co. Inc., in the real estate development business in
Russia, in the ownership and management of commercial real estate in the
United States and in the acquisition of operating companies.
The interim consolidated financial statements of the Company and BGLS are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's and BGLS' consolidated financial position, results of
operations and cash flows. These consolidated financial statements should
be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's and BGLS' Annual Report on Form
10-K, as amended, for the year ended December 31, 1998, as filed with the
Securities and Exchange Commission. The consolidated results of
operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
RISKS AND UNCERTAINTIES:
In 1998, the Russian Federation entered a period of economic instability
which has continued in 1999. The impact includes, but is not limited to,
a steep decline in prices of domestic debt and equity securities, a
severe devaluation of the currency, a moratorium on foreign debt
repayments, an increasing rate of inflation and increasing rates on
government and corporate borrowings. The return to economic stability is
dependent to a large extent on the effectiveness of the fiscal measures
taken by government and other actions beyond the control of companies
operating in the Russian Federation. The Company's Russian operations may
be significantly affected by these factors for the foreseeable future.
USE OF 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 and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
-10-
<PAGE> 12
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
RECLASSIFICATIONS:
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
PROVISION FOR INCOME TAXES:
The effective tax rate does not bear a customary relationship to pre-tax
accounting income principally as a consequence of the change in the
valuation allowance relating to deferred tax assets and foreign taxes.
EARNINGS PER SHARE:
For the three and six months ended June 30, 1999, basic net income per
share is computed by dividing net income by the weighted-average number
of shares outstanding. Diluted net income per share includes the dilutive
effect of stock options and warrants (both vested and non-vested). For
the three and six months ended June 30, 1998, stock options and warrants
(both vested and non-vested) were excluded from the calculation of
diluted per share results because their effect was accretive.
COMPREHENSIVE INCOME:
Comprehensive income is a component of stockholders' equity and includes
the Company's net income and other comprehensive income, unrealized gains
and losses on investment securities and minimum pension liability
adjustments. For the six months ended June 30, 1999, total comprehensive
income was $198,775. For the six months ended June 30, 1998, the total
comprehensive loss was $21,505.
2. PHILIP MORRIS BRAND TRANSACTION
On November 20, 1998, the Company and Liggett granted Philip Morris
Incorporated options to purchase interests in Trademarks LLC which holds
three cigarette brands, L&M, Chesterfield and Lark, formerly held by
Liggett's subsidiary, Eve Holdings Inc.
Under the terms of the Philip Morris agreements, Eve contributed the
three brands to Trademarks, a newly-formed limited liability company, in
exchange for 100% of two classes of Trademarks' interests, the Class A
Voting Interest and the Class B Redeemable Nonvoting Interest. Philip
Morris acquired two options to purchase the interests from Eve. On
December 2, 1998, Philip Morris paid Eve a total of $150,000 for the
options, $5,000 for the option for the Class A interest and $145,000 for
the option for the Class B interest. Liggett used the payments to fund
the redemption of Liggett's Senior Secured Notes on December 28, 1998.
The Class A option entitled Philip Morris to purchase the Class A
interest for $10,100. On March 19, 1999, Philip Morris exercised the
Class A option, and the closing occurred on May 24, 1999.
The Class B option entitles Philip Morris to purchase the Class B
interest for $139,900. The Class B option will be exercisable during the
90-day period beginning on December 2, 2008, with Philip Morris being
entitled to extend the 90-day period for up to an additional six months
under certain circumstances. The Class B interest will also be redeemable
by Trademarks for $139,900 during the same period the Class B option may
be exercised.
On May 24, 1999, Trademarks borrowed $134,900 from a lending institution.
The loan is guaranteed by Eve and collateralized by a pledge by
Trademarks of the three brands and Trademarks' interest in the trademark
-11-
<PAGE> 13
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
license agreement (discussed below) and by a pledge by Eve of its Class B
interest. In connection with the closing of the Class A option,
Trademarks distributed the loan proceeds to Eve as the holder of the
Class B interest. The cash exercise price of the Class B option and
Trademarks' redemption price were reduced by the amount distributed to
Eve. Upon Philip Morris' exercise of the Class B option or Trademarks'
exercise of its redemption right, Philip Morris or Trademarks, as
relevant, will be required to obtain Eve's release from its guaranty. The
Class B interest will be entitled to a guaranteed payment of $500 each
year with the Class A interest allocated all remaining income or loss of
Trademarks. The proceeds of the loan and the exercise of the Class A
option were used to retire a portion of BGLS' 15.75% Senior Secured
Notes. (Refer to Note 10.)
Trademarks has granted Philip Morris an exclusive license of the three
brands for an 11-year term expiring May 24, 2010 at an annual royalty
based on sales of cigarettes under the brands, subject to a minimum
annual royalty payment equal to the annual debt service obligation on the
loan plus $1,000.
If Philip Morris fails to exercise the Class B option, Eve will have an
option to put its Class B interest to Philip Morris, or Philip Morris'
designees, at a put price that is $5,000 less than the exercise price of
the Class B option (and includes Philip Morris' obtaining Eve's release
from its loan guarantee). The Eve put option is exercisable at any time
during the 90-day period beginning March 2, 2010.
If the Class B option, Trademarks' redemption right and the Eve put
option expire unexercised, the holder of the Class B interest will be
entitled to convert the Class B interest, at its election, into a Class A
interest with the same rights to share in future profits and losses, the
same voting power and the same claim to capital as the entire existing
outstanding Class A interest, i.e., a 50% interest in Trademarks.
The $150,000 in proceeds received from the sale of the Class A and B
options was presented as a liability on the consolidated balance sheet
until the closing of the exercise of the Class A option and the
distribution of the loan proceeds on May 24, 1999. Upon closing, Philip
Morris obtained control of Trademarks, and the Company recognized a
pre-tax gain of $294,287 in its consolidated financial statements to the
extent of the total cash proceeds received from the payment of the option
fees, the exercise of the Class A option and the distribution of the loan
proceeds.
3. NEW VALLEY CORPORATION
Until May 31, 1999, the Company was an equity investor in New Valley. The
Class A Senior Preferred Shares and the Class B Preferred Shares of New
Valley that the Company owned were 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
were classified as available-for-sale. The Common Shares were accounted
for pursuant to APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock".
-12-
<PAGE> 14
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Summarized financial information for New Valley for the periods ended May
31, 1999 and June 30, 1998 follows:
<TABLE>
<CAPTION>
Five Months Ended Six Months Ended
May 31, 1999 June 30, 1998
----------------- ----------------
<S> <C> <C>
Revenues ................................. $ 39,452 $ 59,112
Costs and expenses........................ 50,659 66,969
Loss from continuing operations........... (10,668) (6,719)
Gain from discontinued operations......... 4,100 880
Net loss applicable to common shares(A)... (44,327) (44,429)
</TABLE>
(A) Considers all preferred accrued dividends, whether or not
declared.
Recapitalization. On June 4, 1999, following approval by New Valley's
stockholders, New Valley consummated a plan of recapitalization. Pursuant
to the plan of recapitalization:
o each Class A Senior Preferred Share was reclassified into 20
Common Shares and one Warrant to purchase a Common Share at
$12.50 per share exerciseable for five years,
o each Class B Preferred Share was reclassified into 1/3 of a
Common Share and five Warrants, and
o each outstanding Common Share was reclassified into 1/10 of a
Common Share and 3/10 of a Warrant.
The recapitalization had a significant effect on the Company's financial
position and results of operations. The recapitalization resulted in the
elimination of the existing redeemable preferred shares of New Valley and
the on-going dividend accruals thereon, as well as the redemption
obligation for the Series A Senior Preferred Shares in January 2003. The
Company increased its ownership of the outstanding Common Shares of New
Valley from 42.3% to 55.1%, and its total voting power from 42% to 55.1%.
As a result of the increase in ownership, New Valley became a
consolidated subsidiary of the Company as of June 1, 1999. In addition,
the Company's equity in New Valley increased by $59,263 which, presented
net of tax, is $38,331.
In connection with the sale by BOL of the common shares of BrookeMil
Ltd. ("BML") to New Valley in 1997, a portion of the gain was deferred in
recognition of the fact that the Company retained an interest in BML
through its 42% equity ownership of New Valley prior to recapitalization
and 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 was used
by Liggett-Ducat for its cigarette factory operation) was subject to a put
option held by New Valley. The option expired when Liggett-Ducat ceased
factory operations at the site in March 1999. The Company recognized that
portion of the deferred gain, $7,050, in March 1999.
Subsequent Event. In July 1999, New Valley agreed to sell five of its
shopping centers for an aggregate purchase price of $46,100 (before
closing adjustments and expenses) including the assumption of $35,000 of
mortgage financing. Closing of the sale is subject to completion of due
diligence and other customary conditions.
-13-
<PAGE> 15
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
4. PRO FORMA EFFECTS OF BRAND TRANSACTION AND NEW VALLEY RECAPITALIZATION
The following table presents unaudited pro forma results of operations as
if the brand transaction and New Valley's recapitalization had occurred
immediately prior to January 1, 1998. These pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what would have occurred had these transactions been
consummated as of such date.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1998 June 30, 1999
----------------- ----------------
<S> <C> <C>
Revenues................................. $467,564 $241,743
======== ========
Operating income......................... $ 23,658 $ 15,367
======== ========
Income from continuing operations........ $ 6,970 $ 5,734
======== ========
Net income............................... $ 11,235 $ 6,246
======== ========
Net income per common share:
Basic................................ $ 0.55 $ 0.30
======== ========
Diluted.............................. $ 0.45 $ 0.24
======== ========
</TABLE>
5. INVESTMENT IN WESTERN REALTY
WESTERN REALTY DEVELOPMENT LLC. In February 1998, New Valley and Apollo
Real Estate Investment Fund III, L.P. ("Apollo") organized Western Realty
Development LLC ("Western Realty Ducat") to make real estate and other
investments in Russia. New Valley agreed to contribute the real estate
assets of BML, including Ducat Place II and the site for Ducat Place III,
to Western Realty Ducat and Apollo agreed to contribute up to $58,750,
including the investment in Western Realty Repin discussed below.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and New Valley. Apollo will be entitled to a preference
on distributions of cash from Western Realty Ducat to the extent of its
investment commitment of $40,000, of which $38,494 had been funded
through June 30, 1999, together with a 15% annual rate of return. New
Valley will then be entitled to a return of $20,000 of BML-related
expenses incurred and cash invested 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 Ducat is
managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and New Valley. Material corporate
transactions by Western Realty Ducat generally require the unanimous
consent of the Board of Managers. Accordingly, New Valley accounts for
its non-controlling interest in Western Realty Ducat using the equity
method of accounting.
New Valley recorded its basis in the investment in Western Realty Ducat
in the amount of $60,169 based on the carrying value of assets less
liabilities transferred. There was no difference between the carrying
-14-
<PAGE> 16
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
value of the investment and New Valley's proportionate interest in the
underlying value of net assets of Western Realty Ducat. New Valley
recognizes losses in its investment in Western Realty Ducat to the extent
that cumulative earnings of Western Realty Ducat are not sufficient to
satisfy Apollo's preferred return.
Summarized balance sheet information as of June 30, 1999 for Western
Realty Ducat follows:
June 30, 1999
-------------
Current assets....................... $ 4,873
Participating loan receivable........ 32,242
Real estate, net..................... 85,910
Furniture and fixtures, net.......... 169
Noncurrent assets.................... 450
Goodwill, net........................ 6,398
Notes payable - current.............. 5,938
Current liabilities.................. 5,940
Notes payable - long-term............ 11,561
Long-term liabilities................ 759
Members' equity...................... 105,844
Western Realty Ducat has made a $30,000 participating loan to Western
Tobacco Investments LLC ("Western Tobacco), which holds BOL's interest in
Liggett-Ducat and the new factory constructed by Liggett-Ducat. (Refer to
Note 10 for information concerning a pledge of interests in Western
Tobacco.) The loan bears no fixed interest and is payable only out of 30%
of distributions made by Western Tobacco to BOL. After the prior payment
of debt service on loans to finance the construction of the new factory,
30% of distributions from Western Tobacco to BOL will be applied first to
pay the principal of the loan and then as contingent participating
interest on the loan. Any rights of payment on the loan are subordinate to
the rights of all other creditors of Western Tobacco. For the three and
six months ended June 30, 1999, a preference requirement equal to 30% of
Western Tobacco's net (loss) income of $(741) and $261, respectively, has
been charged to interest expense. The loan is classified in other
long-term liabilities on the consolidated balance sheet at June 30, 1999.
WESTERN REALTY REPIN LLC. In June 1998, New Valley and Apollo organized
Western Realty Repin LLC to make a loan to BML. The proceeds of the loan
will be used by BML for the acquisition and preliminary development of
the Kremlin sites, two adjoining sites totaling 10.25 acres located in
Moscow across the Moscow River from the Kremlin. BML is planning the
development of a 1.1 million sq. ft. hotel, office, retail and
residential complex on the Kremlin sites. In May 1999, BML acquired an
additional 48% interest in the second Kremlin site and the related land
lease rights. BML owned 95.9% of one site and 100% of the other site at
June 30, 1999. Apollo will be entitled to a preference on distributions
of cash from Western Realty Repin to the extent of its investment of
$18,750 together with a 20% annual rate of return, and New Valley will
then be entitled to a return of its investment of $6,250, together with a
20% annual rate of return; subsequent distributions will be made 50% to
New Valley and 50% to Apollo. Western Realty Repin is managed by a Board
of Managers consisting of an equal number of representatives chosen by
Apollo and New Valley. Material corporate transactions by Western Realty
Repin will generally require the unanimous consent of the Board of
Managers.
-15-
<PAGE> 17
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Through June 30, 1999, Western Realty Repin has advanced $25,000, of
which $18,773 was funded by Apollo, under the Western Realty Repin loan.
The loan is classified in other long-term obligations on the consolidated
balance sheet at June 30, 1999. The loan bears no fixed interest and is
payable only out of 100% of the distributions by the entities owning the
Kremlin sites to BML. Such distributions will be applied first to pay the
principal of the loan and then as contingent participating interest on
the loan. Any rights of payment on the loan are subordinate to the rights
of all other creditors of BML. BML used a portion of the proceeds of the
loan to repay New Valley for certain expenditures on the Kremlin sites
previously incurred. The loan is due and payable upon the dissolution of
BML and is collateralized by a pledge of New Valley's shares of BML.
As of June 30, 1999, BML had invested $29,940 in the Kremlin sites and
held $2,852, in cash, which was restricted for future investment. In
acquiring its interest in one of the Kremlin sites, BML agreed with the
City of Moscow to invest an additional $6,000 in 1999 (which has been
funded) and $22,000 in 2000 in the development of the property. Failure to
make the required investment could result in forfeiture of 34.8% interest
in the site.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. New Valley is considering
potential financing alternatives on behalf of Western Realty Ducat and
BML. However, in light of the recent economic turmoil in Russia, no
assurance can be given that such financing will be available on acceptable
terms. Failure to obtain sufficient capital for the projects would force
Western Realty Ducat and BML to curtail or delay the planned development
of Ducat Place III and the Kremlin sites.
6. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains or losses included as a component of
accumulated other comprehensive income. Investment securities available
for sale totaling $48,114 at June 30, 1999 is comprised of marketable
equity securities and warrants of $46,109 and notes receivable of $2,005.
7. INVENTORIES
Inventories consist of:
June 30, December 31,
1999 1998
-------- -----------
Leaf tobacco.................................... $16,139 $13,882
Other raw materials............................. 10,871 4,629
Work-in-process................................. 3,315 2,001
Finished goods.................................. 16,544 15,446
Replacement parts and supplies.................. 4,556 4,130
------- -------
Inventories at current cost..................... 51,425 40,088
LIFO adjustments................................ (5,004) (3,772)
------- -------
$46,421 $36,316
======= =======
At June 30, 1999, Liggett and Liggett-Ducat had leaf tobacco purchase
commitments of approximately $5,123 and $34,870, respectively.
-16-
<PAGE> 18
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
June 30, December 31,
1999 1998
-------- -----------
Land and improvements................ $ 416 $ 412
Buildings............................ 5,852 5,823
Machinery and equipment.............. 116,994 54,144
Construction-in-progress............. 48,526 66,981
-------- --------
171,788 127,360
Less accumulated depreciation........ (39,185) (33,856)
-------- --------
$132,603 $ 93,504
======== ========
In May 1999, Liggett-Ducat completed construction of a new cigarette
factory on the outskirts of Moscow and began production in June 1999. At
June 30, 1999, the remaining liability under the construction contracts
is $4,045 and the remaining liability under equipment purchase agreements
is $21,795.
9. LONG-TERM INVESTMENTS
At June 30, 1999, long-term investments consisted primarily of investments
in limited partnerships of $3,162. The Company believes the fair value of
the limited partnerships exceeds their carrying amount by approximately
$3,889 based on the indicated market values of the underlying investment
portfolio provided by the partnerships. The Company's investments in
limited partnerships are illiquid and the ultimate realization of these
investments are subject to the performance of the underlying partnership
and its management by the general partners.
Also included in long-term investments are various Internet-related
businesses which are carried at $2,600 at June 30, 1999. These
investments include an approximate 10% interest in Orchard/JFAX Investors
LLC, which is the beneficial owner of 40.6% of JFAX.COM, Inc. JFAX is an
Internet-based messaging and communications services provider to
individuals and businesses, which completed an initial public offering in
July 1999. New Valley also holds a 45% interest in Ant 21, LLC, which is
engaged in the online music industry and operates the Internet site
www.atomicpop.com.
-17-
<PAGE> 19
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
10. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
BGLS:
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $9,018 and $17,374..... $ 91,159 $215,490
Deferred interest on 15.75% Series B Senior Secured
Notes due 2001........................................ 23,000 24,985
New Valley:
Notes payable............................................. 54,801
Liggett:
Revolving credit facility................................. 2,958 2,538
Note payable.............................................. 4,394
BOL:
Foreign credit facilities................................. 22,285 11,600
Notes payable............................................. 23,753 28,057
Other..................................................... 3,100 1,171
--------- ---------
Total notes payable, long-term debt and other obligations. 225,450 283,841
Less:
Current maturities.................................... 34,257 21,176
--------- --------
Amount due after one year................................. $ 191,193 $262,665
========= ========
</TABLE>
15.75% Series B Senior Secured Notes Due 2001 - BGLS:
On May 25, 1999, BGLS repurchased $132,687 principal amount of its 15.75%
Senior Secured Notes due 2001 (the "Notes"), together with accrued
interest thereon of $18,276, for a purchase price of $147,694. The
purchases were made using the proceeds of the Philip Morris brand
transaction which closed on May 24, 1999. The Company recognized an
extraordinary loss on early extinguishment of debt primarily due to the
unamortized imputed interest associated with the related Notes. At June
30, 1999, the principal amount of Notes outstanding was $100,177. Of this
amount, $60,100 principal amount of the Notes are held by the holders who
have agreed to defer payment of interest as discussed below. On August 6,
1999, the Company repurchased $897 principal amount of the Notes.
On March 2, 1998, the Company 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 held approximately 41.8% of the
$232,864 principal amount of the Notes then outstanding. The Apollo
Holders (and any transferees) agreed to defer the payment of interest on
the 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 Notes on January 31, 2001 or upon an
event of default under the Indenture for the Notes. In connection with
the agreement, the Company pledged 50.1% of Western Tobacco to
collateralize the Notes held by the Apollo Holders (and any transferees).
-18-
<PAGE> 20
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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.
Based on the fair value of the equity instruments given to the holders of
the debt, and the difference between the fair value of the modified debt
and the carrying value of the debt held by the Apollo Holders prior to
the transaction, no gain or loss was recorded on the transaction. The
fair value of the equity instruments was estimated based on the
Black-Scholes option pricing model and the following assumptions:
volatility of 77%, risk-free interest rate of 6%, expected life of five
to seven years and a dividend rate of 0%. Imputed interest of
approximately $23,000 is being accreted over the term of the modified
debt based on its recorded fair value.
The Notes outstanding are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and
New Valley. The Notes Indenture contains certain covenants which, among
other things, limit the ability of BGLS to make distributions to the
Company to $12,000 per year (which amount increased from $6,000 per year
in May 1999 when more than 50% of the original principal amount of the
Notes were retired) plus any unpaid distribution amounts from prior
years. The Notes also 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 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.
Notes Payable - New Valley:
At June 30, 1999, New Valley's investment in real estate collateralized
seven promissory notes aggregating $54,801 due 2001 related to shopping
centers located throughout the United States. 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.
Revolving Credit Facility - Liggett:
Liggett entered into a revolving credit facility (the "Facility") for
$40,000 with a syndicate of commercial lenders in 1994 which is
collateralized by all inventories and receivables of Liggett. At June 30,
1999, $15,634 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, bore a rate of 9.25% at June 30, 1999. The Facility requires
Liggett's compliance with certain financial and other covenants including
restrictions on the payment of cash dividends and distributions by
Liggett. In addition, the Facility, as amended, imposes requirements with
-19-
<PAGE> 21
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
respect to Liggett's permitted maximum adjusted net worth (not to fall
below a deficit of $195,000 as computed in accordance with the agreement,
this computation was $40,300 at June 30, 1999) and net working capital
(not to fall below a deficit of $17,000 as computed in accordance with
the agreement, this computation was $34,826 at June 30, 1999). The
Facility expires on March 8, 2000 subject to automatic renewal for an
additional year unless notice of termination is given by the lender at
least 60 days prior to the anniversary date.
Equipment Loan - Liggett:
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase from a third party. The loan, which is
collateralized by the equipment and guaranteed by BGLS and the Company,
is payable in 60 monthly installments of $56 including annual interest of
7.67% with a final payment of $2,550.
Foreign Loans - Liggett-Ducat:
At June 30, 1999, Liggett-Ducat had various credit facilities under which
approximately $22,300 was outstanding. One facility for $10,000, which is
fully utilized and bears interest at 25%, expires in May 2000. Another
facility for $5,000, of which $2,500 is utilized and bears interest at
20%, expires in December 1999. The remaining facilities, denominated in
rubles (approximately $9,800 at the June 30, 1999 exchange rate), have
terms of six - twelve months with interest rates of 52% - 63%. The
facilities are collateralized by factory equipment and tobacco inventory.
Notes Payable - BOL:
In 1997, Western Tobacco entered into several contracts for the purchase
of cigarette manufacturing equipment. Approximately 85% of the contracts
are being financed with promissory notes generally over a period of 5
years. The outstanding balance on these notes, which are denominated in
various European currencies, is $20,386 at June 30, 1999. BOL also has
issued a promissory note for $1,339 at June 30, 1999 covering deposits for
equipment being purchased for the new factory. The note is due March 31,
2000.
On July 29, 1998, BOL borrowed $3,000, subsequently reduced to $2,034,
from an unaffiliated third party with interest at 14% per annum. The
remaining principal and interest on the loan of $1,950 was paid on August
2, 1999.
11. CONTINGENCIES
TOBACCO-RELATED LITIGATION:
OVERVIEW. Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in numerous direct and
third-party actions predicated on the theory that cigarette manufacturers
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
-20-
<PAGE> 22
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
commenced against the Company or Liggett). There has been a noteworthy
increase in the number of cases commenced against Liggett and the other
cigarette manufacturers in recent years. The cases generally fall into
four 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 individual plaintiffs ("Class Actions");
(iii) health care cost recovery actions brought by various governmental
entities ("Governmental Actions"); and (iv) health care cost recovery
actions brought by third-party payors including insurance companies,
union health and welfare trust funds, asbestos manufacturers and others
("Third-Party Payor Actions"). As new cases are commenced, defense costs
and the risks attendant to the inherent unpredictability of litigation
continue to increase. The future financial impact of the risks and
expenses of litigation and the effects of the tobacco litigation
settlements discussed below is not quantifiable at this time. For the six
months ended June 30, 1999, Liggett incurred counsel fees and costs
totaling approximately $3,001, compared to $2,562 for the comparable
prior year period.
INDIVIDUAL ACTIONS. As of June 30, 1999, there were approximately 275
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, 80 were
pending in Florida, 91 in New York, 31 in Massachusetts and 22 in Texas.
The balance of the individual cases were pending in 21 states. There are
six 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.
In February 1999, a state court jury in San Francisco awarded $51,500 in
damages to a woman who claimed lung cancer from smoking Marlboro
cigarettes made by Philip Morris. The award includes $1,500 in
compensatory damages and $50,000 in punitive damages. The court
subsequently reduced the punitive damages award to $25,000.
In March 1999, a state court jury in Portland awarded $80,311 in damages
to the family of a deceased smoker who smoked Marlboro made by Philip
Morris. The award includes $79,500 in punitive damages. The court
subsequently reduced the punitive damages award to $32,000. A Notice of
Appeal has been filed by Philip Morris.
CLASS ACTIONS. As of June 30, 1999, there were approximately 50 actions
pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named
defendant.
-21-
<PAGE> 23
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
In March 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. In February 1995, the District Court
granted plaintiffs' motion for class certification (the "Class
Certification Order").
In May 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 were
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
Louisiana (Liggett is not a defendant in this proceeding) and Maryland
have certified "addiction-as-injury" class actions that covered only
citizens in those states. Two class actions were certified in state court
in Florida prior to the Fifth Circuit's decision, Broin and Engle. The
Castano decision has had no measurable impact on litigation brought by or
on behalf of single individual claimants.
In May 1994, an action entitled Engle, et al. v. R.J. Reynolds Tobacco
Company, et al., Circuit Court Eleventh Judicial Circuit, Dade County,
Florida, was filed against Liggett and others. This case was brought by
plaintiffs, on behalf of all individuals in the State of Florida, who
allegedly have been injured as a result of smoking cigarettes. In July
1998, Phase I of the trial in this action commenced. (See "Subsequent
Events".)
Class certification motions are pending in a number of putative class
actions. Class certification has been denied or reversed in several
actions while classes remain certified in two cases against the Company
in Florida and one in Maryland. A number of class certification decisions
are on appeal.
GOVERNMENTAL ACTIONS. As of June 30, 1999, there were approximately 20
Governmental Actions pending against Liggett. In these proceedings, the
governmental entities 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
-22-
<PAGE> 24
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under RICO.
On January 19, 1999, at the State of the Union Address, President Clinton
announced that the Department of Justice ("DOJ") was preparing a
litigation plan to take the tobacco industry to court to recover monies
that Medicare and other programs allegedly expended to treat
smoking-related illnesses. The effects of this lawsuit cannot be
predicted at this time; however, an adverse verdict could have a material
adverse effect on the Company and Liggett.
THIRD-PARTY PAYOR ACTIONS. As of June 30, 1999, there were approximately
70 Third-Party Payor Actions pending against Liggett. The claims in these
cases are similar to those in the Governmental Actions but have been
commenced by insurance companies, union health and welfare trust funds,
asbestos manufacturers and others. In April 1998, a group known as the
"Coalition for Tobacco Responsibility", which represents Blue Cross and
Blue Shield Plans in more than 35 states, filed federal lawsuits against
the industry seeking payment of health-care costs allegedly incurred as a
result of cigarette smoking and ETS. The lawsuits were filed in Federal
District Courts in New York, Chicago, and Seattle and seek billions of
dollars in damages. The lawsuits allege conspiracy, fraud,
misrepresentation and violation of federal racketeering and antitrust
laws as well as other claims. In January 1999, a federal judge in Seattle
dismissed the Third-Party Payor Action brought by seven Blue Cross/Blue
Shield Plans. The court ruled that the insurance providers did not have
standing to bring the lawsuit. However, in February 1999, a federal judge
in the Eastern District of New York denied pleas by the industry to
dismiss the Third-Party Payor Action brought by 24 Blue Cross/Blue Shield
Plans. Similarly, in March 1999, a federal judge in the Northern District
of Illinois denied the industry's motion to dismiss.
In other Third-Party Payor Actions claimants have set forth several
additional theories of 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 understood that
requested damages against the tobacco company defendants in these cases
might be in the billions of dollars.
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. In March 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
-23-
<PAGE> 25
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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. In May 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. In September 1996, shortly after the
class was decertified, the Castano plaintiffs withdrew the motion for
approval of the Castano settlement.
In March 1996, March 1997 and March 1998, the Company and Liggett entered
into settlements of tobacco-related litigation with the Attorneys General
of a total of 45 states and territories. The settlements released the
Company and Liggett from all tobacco-related claims including claims for
health care cost reimbursement and claims concerning sales of cigarettes
to minors.
On November 23, 1998, Philip Morris, Brown & Williamson Tobacco
Corporation, R.J. Reynolds Tobacco Company and Lorillard Tobacco Company
(collectively, the "Original Participating Manufacturers" or "OPMs") and
Liggett (together with the OPMs and any other tobacco product
manufacturer that becomes a signatory, the "Participating Manufacturers")
entered into the Master Settlement Agreement (the "MSA") with 46 states,
the District of Columbia, Puerto Rico, Guam, the United States Virgin
Islands, American Samoa and the Northern Marianas (collectively, the
"Settling States") to settle the asserted and unasserted health care cost
recovery and certain other claims of those Settling States. As described
below, the Company and Liggett had previous settlements with a number of
these Settling States and also had previously settled similar claims
brought by Florida, Mississippi, Texas and Minnesota.
The MSA is subject to final judicial approval in each of the Settling
States, which approval has been obtained, to date, in 42 states and
territories.
The MSA restricts tobacco product advertising and marketing within the
Settling States and otherwise restricts the activities of Participating
Manufacturers. Among other things, the MSA: prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products;
bans the use of cartoon characters in all tobacco advertising and
promotion; limits each Participating Manufacturer to one tobacco brand
name sponsorship during any 12-month period; bans all outdoor
advertising, with the exception of signs 14 square feet or less in
dimension at retail establishments that sell tobacco products; prohibits
payments for tobacco product placement in various media; bans gift offers
based on the purchase of tobacco products without sufficient proof that
the intended recipient is an adult; prohibits Participating Manufacturers
from licensing third parties to advertise tobacco brand names in any
manner prohibited under the MSA; prohibits Participating Manufacturers
from using as a tobacco product brand name any nationally recognized
non-tobacco brand or trade name or the names of sports teams,
entertainment groups or individual celebrities; and prohibits
Participating Manufacturers from selling packs containing fewer than
twenty cigarettes.
-24-
<PAGE> 26
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The MSA also requires Participating Manufacturers to affirm corporate
principles to comply with the MSA and to reduce underage usage of tobacco
products and imposes requirements applicable to lobbying activities
conducted on behalf of Participating Manufacturers.
Pursuant to the MSA, Liggett has no payment obligations unless its market
share exceeds 125% of its 1997 market share (the "Base Share"), or 1.67%
of total cigarettes sold in the United States. In the year following any
year in which Liggett's market share does exceed the Base Share, Liggett
will pay on each excess unit an amount equal (on a per-unit basis) to
that paid during such following year by the OPMs pursuant to the annual
and strategic contribution payment provisions of the MSA, subject to
applicable adjustments, offsets and reductions. Pursuant to the annual
and strategic contribution payment provisions of the MSA, the OPMs (and
Liggett to the extent its market share exceeds the Base Share) will pay
the following annual amounts (subject to certain adjustments):
Year Amount
---- ------
2000 $4,500,000
2001 $5,000,000
2002 - 2003 $6,500,000
2004 - 2007 $8,000,000
2008 - 2017 $8,139,000
2018 and each $9,000,000
year thereafter
These annual payments will be allocated based on relative unit volume of
domestic cigarette shipments. The payment obligations under the MSA are
the several, and not joint, obligations of each Participating
Manufacturer and are not the responsibility of any parent or affiliate of
a Participating Manufacturer.
The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. In the
event the MSA does not receive final judicial approval in any state or
territory, Liggett's prior settlement with that state or territory, if
any, will be revived.
The states of Florida, Mississippi, Texas and Minnesota, prior to the
effective date of the MSA, negotiated and executed settlement agreements
with each of the other major tobacco companies separate from those
settlements reached previously with Liggett. Because these states'
settlement agreements with Liggett provided for "most favored nation"
protection for both the Company and Liggett, the payments due these
states by Liggett (with certain possible exceptions) have been
eliminated. With respect to all non-economic obligations under the
previous settlements, both the Company and Liggett are entitled to the
most favorable provisions as between the MSA and each state's respective
settlement with the other major tobacco companies. Therefore, Liggett's
non-economic obligations to all states and territories are now defined by
the MSA.
In March 1997, Liggett, the Company and a nationwide class of individuals
that allege smoking-related claims 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. In July
1998, Liggett, the Company and plaintiffs filed an amended class action
settlement agreement in Fletcher which agreement was preliminarily
approved by the court in December 1998. (See "Subsequent Events".)
-25-
<PAGE> 27
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company previously accrued approximately $4,000 for the present value
of the fixed payments under the March 1996 Attorneys General settlements
and $16,902 for the present value of the fixed payments under the March
1998 Attorneys General settlements. As a result of the Company's
treatment under the MSA, $14,928 of net charges accrued for the prior
settlements were reversed in 1998.
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. There are no trials involving the Company or Liggett scheduled
for 1999, other than the Engle case. Cases currently scheduled for trial
during the first six months of 2000 include a lawsuit brought by several
Blue Cross/Blue Shield plans in federal court in New York (January), two
asbestos company contribution lawsuits in Mississippi and New York
(February), one class action in Maryland (February) and two third-party
payor actions brought by unions in West Virginia (March) and New York
(April). Also, three individual cases and an adequacy of warning case are
currently scheduled for trial during the first six months of 2000. Trial
dates, however, are subject to change.
OTHER RELATED MATTERS. 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 essentially have been consolidated into one investigation
conducted by the DOJ. In April 1998, the Company announced that Liggett
had reached an agreement with the DOJ to cooperate in both the Eastern
District Investigation and the DOJ Investigation. The agreement does not
constitute an admission of any wrongful behavior by Liggett. The DOJ has
not provided immunity to Liggett and has full discretion to act or
refrain from acting with respect to Liggett in the investigation. The
Company and Liggett are unable, at this time, to predict the outcome of
this investigation.
In September 1998, Liggett received a subpoena from a federal grand jury
in the Eastern District of Philadelphia investigating possible antitrust
violations in connection with the purchase of tobacco by and for tobacco
companies. Liggett has responded to this subpoena. Liggett and the
Company 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
-26-
<PAGE> 28
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
health case could encourage the commencement of additional similar
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 many 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 typically stated
as being for the minimum necessary to invoke the jurisdiction of the
court.
It is possible that the Company's consolidated financial position,
results of operations or cash flow could be materially adversely affected
by an unfavorable outcome in any such tobacco-related litigation.
Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rises 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 and certain of its consolidated subsidiaries 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:
In 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. In July 1998, the court ruled that the EPA made procedural and
scientific mistakes when it declared in its 1993 report that secondhand
smoke caused as many as 3,000 cancer deaths a year among nonsmokers. On
June 6, 1999, the Fourth Circuit Court of Appeals heard oral argument in
the appeal taken by the EPA from the district court order invalidating
the EPA report.
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
-27-
<PAGE> 29
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
right to import tobacco under the quota would be initially assigned based
on domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company and Liggett.
In August 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 Fourth Circuit reversed the district court on
appeal and in August 1998 held that the FDA cannot regulate tobacco
products because Congress had not given them the authority to do so. In
April 1999, the Supreme Court granted certiorari to review the Fourth
Circuit's decision that the FDA does not have the authority to regulate
access to, and labeling of, tobacco products. 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 Governmental Actions settlements above.
In August 1996, 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, in December 1997,
Liggett began complying with this legislation by providing ingredient
information to the Massachusetts Department of Public Health. Several
other states have enacted, or are considering, legislation similar to
that enacted in Massachusetts.
As part of the 1997 budget agreement 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.
Additionally, in November 1998, the citizens of California voted in favor
of a 50 cents per pack tax on cigarettes sold in that state.
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 March 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 in January 1997 of the BML shares from BOL
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 and New Valley's time to respond to
the complaint has not yet expired. The Company and New Valley believe
that the allegations are without merit. Although there can be no
-28-
<PAGE> 30
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 or New Valley's consolidated
financial position, results of operations or cash flows.
SUBSEQUENT EVENTS: On July 2, 1999, a purported class action was
commenced on behalf of New Valley's former Class B preferred shareholders
against New Valley, the Company and certain directors and officers of New
Valley in Delaware Chancery Court. The complaint alleges that the
recapitalization, approved by a majority of each class of New Valley's
stockholders in May 1999, was fundamentally unfair to the Class B
preferred shareholders, the proxy statement relating to the
recapitalization was materially deficient and the defendants breached
their fiduciary duties to the Class B preferred shareholders in approving
the transaction. The plaintiffs seek class certification of the action
and an award of unspecified compensatory damages as well as all costs and
fees. The Company and New Valley believe that the allegations are without
merit. Although there can be no assurances, the Company and New Valley
believe, after consultation with counsel, that the ultimate resolution of
this matter will not have a material adverse effect on the Company's or
New Valley's consolidated financial position, results of operations or
cash flows.
On July 7, 1999, the jury in the Engle matter returned a verdict in Phase
I of the trial finding that smoking causes various diseases and is
addictive and finding the defendants liable on various tort and warranty
claims. Additionally, the jury found that the class may be entitled to
punitive damages from the defendants. It is expected that the defendants
will appeal the Phase I liability verdict. The court has decided that
Phase II of the trial will commence September 7, 1999, with a causation
and damages trial for two of the class representatives and a punitive
damages trial on a class-wide basis. Phase III of the trial will be
conducted before separate juries to address absent class members' claims,
including issues of specific causation and other individual issues
regarding entitlement to compensatory damages. On August 2, 1999, the
companies filed a motion to disqualify the trial judge. On August 5,
1999, the trial judge denied the motion.
On July 22, 1999, the Circuit Court of Mobile County, Alabama denied
approval of the Fletcher class action settlement.
-29-
<PAGE> 31
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
12. SEGMENT INFORMATION
Financial information for the Company's continuing operations before
taxes and minority interest for the three and six months ended June 30,
1999 and 1998 follows:
<TABLE>
<CAPTION>
United
States Russia Broker- Real Corporate
Tobacco Tobacco Dealer* Estate* and Other* Total
-------- -------- -------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Three Months Ended June 30, 1999:
Net revenues............................ $ 93,926 $15,339 $ 5,876 $ 754 $ $115,895
Operating income (loss)................. 16,146 (807) (107) (371) (1,263) 13,598
Depreciation and amortization........... 965 429 80 168 103 1,745
Capital expenditures.................... 603 17,317 327 18,247
Three Months Ended June 30, 1998:
Net revenues............................ $ 83,398 $27,864 $ $111,262
Operating income (loss)................. 8,895 7,018 (2,974) 12,939
Depreciation and amortization........... 1,708 10 1,718
Capital expenditures.................... 341 6,092 310 6,743
Six Months Ended June 30, 1999:
Net revenues............................ $179,973 $37,689 $ 5,876 $ 754 $ $224,292
Operating income (loss)................. 36,215 568 (107) (371) (574) 35,731
Identifiable assets..................... 102,650 133,130 44,390 100,360 170,002 550,532
Depreciation and amortization........... 1,820 1,182 80 168 151 3,401
Capital expenditures.................... 6,972 30,565 327 37,864
Six Months Ended June 30, 1998:
Net revenues............................ $149,024 $47,041 $ $196,065
Operating income (loss)................. 15,146 8,728 (3,271) 20,603
Identifiable assets..................... 66,322 57,055 21,796 145,173
Depreciation and amortization........... 3,293 159 168 3,620
Capital expenditures.................... 694 6,444 7,138
</TABLE>
- ----------------------
* Broker-Dealer, Real Estate and New Valley's portion of Corporate and Other
are included for the month ended June 30, 1999 when New Valley became a
consolidated subsidiary of the Company.
-30-
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
INTRODUCTION
The following discussion provides an assessment of the consolidated
results of operations, capital resources and liquidity of Brooke Group Ltd.
(the "Company") and its subsidiaries and should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company and BGLS
Inc. ("BGLS") included elsewhere in this document. BGLS is a wholly owned
subsidiary of the Company. The consolidated financial statements include the
accounts of BGLS, Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd.
("BOL"), Liggett-Ducat Ltd. ("Liggett-Ducat") and other less significant
subsidiaries. As of June 1, 1999, New Valley Corporation ("New Valley") became
a consolidated subsidiary of the Company as a result of New Valley's
recapitalization in which the Company's interest in New Valley's common shares
increased to 55.1%.
The Company is a holding company for a number of businesses which it
holds through its wholly-owned subsidiary BGLS. Accordingly, a separate
Management's Discussion and Analysis of Financial Condition and Results of
Operations for BGLS is not presented herein as it would not differ materially
from the discussion of the Company's consolidated results of operations,
capital resources and liquidity. The Company is principally engaged in the
manufacture and sale of cigarettes in the United States through its subsidiary
Liggett; in the manufacture and sale of cigarettes in Russia through its
subsidiary Liggett-Ducat; and in the investment banking and brokerage business
in the United States and real estate operations in Russia and the United States
through its majority-owned subsidiary New Valley.
RECENT DEVELOPMENTS
MASTER SETTLEMENT AGREEMENT. On November 23, 1998, Liggett and the
four largest U.S. cigarette manufacturers, Philip Morris Incorporated, Brown &
Williamson Tobacco Corporation, R. J. Reynolds Tobacco Company and Lorillard
Tobacco Company, entered into the Master Settlement Agreement with 46 states,
the District of Columbia, Puerto Rico and various other territories to settle
their asserted and unasserted health care cost recovery and certain other
claims caused by cigarette smoking.
Pursuant to the Master Settlement Agreement, Liggett has no payment
obligation unless its market share exceeds 125% of its 1997 domestic market
share, or 1.67% of total cigarettes sold in the United States. In the year
following any year in which Liggett's market share exceeds 1.67%, Liggett will
pay on each excess unit an amount equal (on a per-unit basis) to that paid
during the year by the four original participating manufacturers pursuant to
the annual and strategic contribution payments provided for under the Master
Settlement Agreement. Under the Master Settlement Agreement terms, the original
participating manufacturers (and Liggett to the extent its market share exceeds
1.67%) will make annual payments based on relative unit volume of domestic
cigarette shipments.
PHILIP MORRIS BRAND TRANSACTION. On November 20, 1998, the Company and
Liggett granted Philip Morris options to purchase interests in Trademarks LLC
which holds three cigarette brands, L&M, Chesterfield and Lark, formerly held
by Liggett's subsidiary, Eve Holdings Inc.
-31-
<PAGE> 33
Under the terms of the Philip Morris agreements, Eve contributed the
three brands to Trademarks, a newly-formed limited liability company, in
exchange for 100% of two classes of LLC interests, the Class A and the Class B
interests. Philip Morris acquired two options to purchase the interests from
Eve. On December 2, 1998, Philip Morris paid Eve a total of $150,000 for the
options. Liggett used the payments to fund the redemption of Liggett's Senior
Secured Notes on December 28, 1998.
On May 24, 1999, Philip Morris paid Eve $10,100 upon exercise of the
option to purchase the Class A interest and Trademarks borrowed $134,900, the
proceeds of which were distributed to Eve. These proceeds were used to retire a
portion of BGLS' Senior Secured Notes. Financial information related to these
three brands, which represented approximately one-half of Liggett's premium
brand sales, are reflected in the Company's financial statements through May
21, 1999.
CIGARETTE PRICING ACTIVITY. During 1998, the major cigarette
manufacturers, including Liggett, announced list price increases of $6.35 per
carton. This included an increase of $4.50 per carton announced by the industry
in December following the signing of the Master Settlement Agreement.
NEW LIGGETT-DUCAT FACTORY. During the second quarter of 1999,
Liggett-Ducat completed construction of a new cigarette factory on the
outskirts of Moscow. This factory uses Western cigarette making technology and
has a capacity of approximately 35 billion cigarettes per year. Production
began at the new factory in June 1999.
NEW VALLEY RECAPITALIZATION. On June 4, 1999, following approval by
New Valley's stockholders, New Valley consummated a plan of recapitalization.
Under the recapitalization, New Valley's outstanding preferred and common
shares were exchanged for new common shares and warrants. As a result of the
recapitalization, the Company increased its ownership from approximately 42.3%
of New Valley's outstanding common shares to 55.1%. New Valley became a
consolidated subsidiary of the Company as of June 1, 1999. In addition, the
Company's equity in New Valley increased by $59,263($38,331, net of taxes).
Prior to the recapitalization, the Company had accounted for its investment in
New Valley's common shares using the equity method and its New Valley preferred
shares were classified as available for sale and carried at fair value.
NEW VALLEY SHOPPING CENTERS. In July 1999, New Valley agreed to sell
five of its shopping centers for an aggregate purchase price of $46,100 (before
closing adjustments and expenses) including the assumption of $35,000 of
mortgage financing. Closing of the sale is subject to completion of due
diligence and other customary conditions.
RECENT DEVELOPMENTS IN LEGISLATION, REGULATION AND LITIGATION
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of June 30, 1999, there were approximately 275 individual
suits, 50 purported class actions and 90 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was 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 restrictive regulatory actions from various Federal administrative
bodies, including the United States Environmental Protection Agency and the
Food and Drug Administration. There have also been 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 third-party payor actions. These developments generally receive
widespread media attention. The Company is not able to evaluate the effect of
-32-
<PAGE> 34
these developing matters on pending litigation or the possible commencement of
additional litigation, but the Company's consolidated financial position,
results of operations or cash flows could be materially adversely affected by
an unfavorable outcome in any of such tobacco-related litigation. See Part II,
Item 1, "Legal Proceedings" and Note 11 to the Company's Consolidated Financial
Statements for a description of legislation, regulation and litigation.
In March 1996, March 1997 and March 1998, the Company and Liggett
entered into settlements of tobacco-related litigation with the Attorneys
General of 45 states and territories. The settlements released the Company and
Liggett from all tobacco claims including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors. The Company
accrued approximately $4,000 for the present value of the fixed payments under
the March 1996 Attorneys General settlements and $16,902 for the present value
of the fixed payments under the March 1998 Attorneys General settlements. As a
result of the Company's treatment under the Master Settlement Agreement,
$14,928 of net charges accrued for the prior settlements were reversed in 1998.
See the discussions of the tobacco litigation settlements appearing in Note 11
to the Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net revenues:
Liggett..................... $ 93,926 $ 83,398 $179,973 $149,024
Liggett-Ducat............... 15,339 27,864 37,689 47,041
-------- -------- -------- --------
Total tobacco............. 109,265 111,262 217,662 196,065
*Broker-dealer.................. 5,876 5,876
*Real estate.................... 754 754
---------- ------------- ---------- --------
Total revenues............ 115,895 111,262 224,292 196,065
Operating income:
Liggett..................... 16,146 8,895 36,215 15,146
Liggett-Ducat............... (807) 7,018 568 8,728
--------- --------- ---------- ---------
Total tobacco............. 15,339 15,913 36,783 23,874
*Broker-dealer.................. (107) (107)
*Real estate.................... (371) (371)
Corporate and other........... (1,263) (2,974) (574) (3,271)
--------- -------- ---------- ---------
Total operating income.... $ 13,598 $ 12,939 $ 35,731 $ 20,603
======== ======== ======== ========
</TABLE>
- --------------------
* New Valley became a consolidated subsidiary on June 1, 1999. Results of
operations are included for the month ended June 30, 1999.
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues. Total revenues were $115,895 for the three months ended June
30, 1999 compared to $111,262 for the three months ended June 30, 1998. This
4.2% increase in revenues was due to a $10,528 or 12.6% increase in revenues at
Liggett and the addition of one month's revenues from New Valley of $6,630
offset by a decrease in revenues of $12,525 at Liggett-Ducat. The decline in
Liggett-Ducat's revenues was due primarily to the closing of its old factory in
March 1999 and the temporary halt in production in connection with the move to
its new factory which became operational in mid-June 1999.
-33-
<PAGE> 35
Tobacco Revenues. Total tobacco revenues were $109,265 for the three
months ended June 30, 1999 compared to $111,262 for the three months ended June
30, 1998. This 1.8% decrease in revenues was primarily due to a decline in
tobacco revenues at Liggett-Ducat of $12,525 offset by an increase at Liggett
of $10,528. Revenues at Liggett increased in both the premium and discount
segments by 12.6% ($10,528) due to price increases of $30,189 (see "Recent
Developments-Cigarette Pricing Activity"), partially offset by a 22.2% decline
in unit sales volume (approximately 332.1 million units), accounting for
$18,535 in volume variance and an unfavorable product mix of $1,126. The
decline in Liggett's unit sales volume was due primarily to an overall decline
in industry volume, certain competitors continuing leveraged rebate programs
tied to their products and increased promotional activity by certain other
manufacturers and, to a lesser degree, the closing of the Philip Morris brand
transaction on May 24, 1999.
Premium sales at Liggett for the second quarter of 1999 amounted to
$23,297 and represented 24.8% of Liggett's total sales, compared to $26,994 and
32.4% of total sales in the second quarter of 1998. Premium revenues declined
by 13.7% ($3,697) for the three months ended June 30, 1999, compared to the
prior year period, due, in part, to the overall industry decline and also to
the contribution of the three premium brands, Lark, Chesterfield and L & M, to
Trademarks LLC on May 24, 1999 which accounts in part for an unfavorable volume
variance of $10,688 reflecting a 39.6% decline in unit sales volume
(approximately 158.7 million units), which was partially offset by price
increases of $6,991.
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the three months ended June 30, 1999 amounted to $70,629 and
represented 75.2% of Liggett's total sales, compared to $56,404 and 67.6% of
total sales for the three months ended June 30, 1998. In the discount segment,
revenues grew by 25.2% ($14,225) for the three months ended June 30, 1999
compared to the prior year period, due to price increases of $23,198, which
were partially offset by a 15.8% decline in unit sales volume (approximately
173.4 million units), accounting for $8,944 in volume variance and an
unfavorable product mix among the discount brand categories of $29.
For the three months ended June 30, 1999, fixed manufacturing costs at
Liggett were $1,068 higher than in the same period 1998, with an increase in
costs per thousand units of $1.59 per thousand due to the impact of lower
volumes on fixed costs.
Net tobacco revenues at Liggett-Ducat for the three months ended June
30, 1999 decreased 45.0% over the same period in 1998 due to a 26.9% decrease
in unit sales volume ($7,484) and an 18.6% decrease in prices ($5,189),
slightly offset by a small favorable product mix ($148). The decline in sales
volume was due in large part to the temporary halt in production in connection
with the move to the new factory.
Tobacco Gross Profit. Tobacco consolidated gross profit was $69,167
for the three months ended June 30, 1999 compared to $59,582 for the three
months ended June 30, 1998, an increase of $9,585 or 16.1% when compared to the
same period last year, reflecting an increase in gross profit at Liggett of
$16,146 offset by a decrease at Liggett-Ducat of $6,561 for the three months
ended June 30, 1999 compared to the same period in the prior year. For the
three months ended June 30, 1999, Liggett's premium brands contributed 24.8%
and discount brands contributed 71.5% to the Company's gross profit.
Liggett-Ducat contributed 3.7%. Over the same period in 1998, Liggett's premium
brands contributed 29.6%, Liggett's discount brands contributed 55.0% and
Liggett-Ducat contributed 15.4% to the Company's gross profit.
Gross profit at Liggett of $66,462 for the three months ended June 30,
1999 increased $16,146 from gross profit of $50,316 for the second quarter of
1998, due primarily to the price increases discussed above. (See "Recent
Developments-Cigarette Pricing Activity".) In the second quarter of 1999,
-34-
<PAGE> 36
Liggett's premium and discount brands contributed 25.8% and 74.2%,
respectively, to Liggett's gross profit. Over the same period in 1998,
Liggett's premium and discount brands contributed 35.0% and 65.0%,
respectively, to Liggett's gross profit. As a percent of revenues (excluding
federal excise taxes), gross profit at Liggett increased to 82.7% for the three
months ended June 30, 1999 compared to 76.5% for the same period in 1998, with
gross profit for the premium segment at 84.0% in the 1999 period compared to
79.4% in the 1998 period. Gross profit for the discount segment was 82.3% for
the three months ended June 30, 1999 and 75.1% for the three months ended June
30, 1998. This increase is primarily the result of the 1998 list price
increases.
As a percent of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased to 17.9% for the three months ended June 30,
1999 compared to 39.6% in the same period in 1998, primarily due to lower
prices and lower sales volumes coinciding with the move to the new factory.
Broker-Dealer and Real Estate Revenues. For the month ended June 30,
1999, Ladenburg's revenues were $5,876 and real estate revenues were $754.
Expenses. Operating, selling, general and administrative expenses were
$62,199 for the three months ended June 30, 1999 compared to $46,643 for the
same period last year, an increase of $15,556 due primarily to increased
expenses at Liggett of $8,895, an increase of $1,265 at Liggett-Ducat and an
increase of $7,392 caused by consolidation of New Valley, which was not a
consolidated subsidiary during the prior year. The increase in operating
expenses at Liggett was due primarily to higher spending for promotional and
marketing programs. The increase at Liggett-Ducat was primarily due to
increased administrative costs relating to the completion of the new factory.
These expenses were primarily offset by reduction in amortization expenses and
decreased systems development costs.
Other Income (Expenses). For the three months ended June 30, 1999,
Liggett recognized a gain of $294,287 in connection with the closing of the
Philip Morris brand transaction. In addition, New Valley recognized a gain of
$3,801 on the sale of substantially all of Thinking Machines' assets.
Interest expense was $12,073 for the three months ended June 30, 1999
compared to $19,637 for the same period last year. This decrease of $7,564 was
primarily due to a savings of $6,943 because of the redemption by Liggett of
its Senior Secured Notes on December 28, 1998 and lower interest expense of
approximately $1,690 at corporate due to the retirement of debt in May 1999.
This was offset by higher interest expense at BOL of $259 primarily due to
increased interest rates on credit facilities in Russia and the addition of
$784 interest expense of New Valley.
Equity in earnings of affiliate was a loss of $1,569 for the two
months ended May 31, 1999 compared to a loss of $7,261 for the three months
ended June 30, 1998 and relates in both periods to New Valley's net loss
applicable to common shares of $20,525 and $25,754, respectively.
Income tax expense for the second quarter of 1999 was $81,645 compared
to $381 for the second quarter of 1998. The effective tax rate for the three
months ended June 30, 1998 does not bear a customary relationship to pre-tax
accounting income principally as a consequence of the change in the valuation
allowance relating to deferred tax assets and foreign taxes.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues. Total revenues were $224,292 for the six months ended June
30, 1999 compared to $196,065 for the six months ended June 30, 1998. This
14.4% increase in revenues was due to a $30,949 or 20.8% increase in revenues
-35-
<PAGE> 37
at Liggett and the addition of one month's revenues from New Valley of $6,630
offset by a decrease in revenues of $9,352 at Liggett-Ducat due primarily to
the temporary halt in production in connection with the move to the new
factory.
Tobacco Revenues. Tobacco revenues at Liggett increased for both the
premium and discount segments due to price increases of $60,570 (see "Recent
Developments-Cigarette Pricing Activity") partially offset by an 18.6%
($27,692) decline in unit sales volume (approximately 510.0 million units) and
$1,929 in unfavorable sales mix. The decline in Liggett's unit sales volume was
due to an overall decline in industry volume, certain competitors continuing
leveraged rebate programs tied to their products and increased promotional
activity by certain other manufacturers. Also contributing to the decline in
the premium segment was the closing of the Philip Morris brand transaction on
May 24, 1999. The decrease in tobacco revenues at Liggett-Ducat is attributable
to decreased prices of $10,115 and a minor volume variance slightly offset by a
favorable product mix of $906 compared to the prior year period.
Liggett-Ducat's sales volume during the 1999 period was adversely affected by
the move to the new factory and price declines in Russia, following the
continued decline in the value of the ruble.
Premium sales at Liggett for the six months ended June 30, 1999
amounted to $48,663 and represented 27.0% of total Liggett sales, compared to
$49,932 and 33.5% of total sales for the same period in 1998. In the premium
segment, revenues declined by 2.5% ($1,269) over the six months ended June 30,
1999, compared to the same period in 1998, due to an unfavorable volume
variance of $16,375, reflecting a 32.8% decline in unit sales volume
(approximately 249.6 million units), which was partially offset by price
increases of $15,106.
Liggett's discount sales over the six month period amounted to
$131,310 and represented 73.0% of total Liggett sales, compared to $99,092 and
66.5% of total Liggett sales for the same period in 1998. In the discount
segment, revenues grew by 32.5% ($32,218) over the six months ended June 30,
1999 compared to the same period in 1998, due to price increases of $45,464,
partially offset by a 13.1% decline in unit sales volume (approximately 260.4
million units) accounting for $13,010 in volume variance and an unfavorable
product mix of $236. For the six months ended June 30, 1999, fixed
manufacturing costs on a basis comparable to the same period in 1998 were $937
higher, with an increase in costs per thousand units of $0.80 per thousand due
to the impact of lower volumes on fixed costs.
Tobacco Gross Profit. Gross profit was $135,837 for the six months
ended June 30, 1999 compared to $102,397 for the six months ended June 30,
1998, an increase of $33,440 or 32.7% when compared to the same period last
year, due primarily to price increases at Liggett offset by the price declines
at Liggett-Ducat discussed above. Liggett's premium brands contributed 26.8% to
the Company's gross profit, the discount segment contributed 68.4% and
Liggett-Ducat contributed 4.8% for the six months ended June 30, 1999. Over the
same period in 1998, Liggett's premium brands contributed 12.4%, the discount
segment contributed 55.9% and Liggett-Ducat contributed 31.7%.
Liggett's gross profit of $129,344 for the six months ended June 30,
1999 increased $39,590 from gross profit of $89,754 for the same period in
1998, due primarily to the price increases discussed above. In 1999, Liggett's
premium brands contributed 28.1% and Liggett's discount brands contributed
71.9% to Liggett's overall gross profit. Over the same period in 1998,
Liggett's premium brands contributed 36.2% and Liggett's discount brands
contributed 63.8% to Liggett's gross profit. As a percent of revenues
(excluding federal excise taxes), gross profit at Liggett increased to 84.1%
for the six months ended June 30, 1999 compared to 77.0% for the same period in
1998, with gross profit for the premium segment at 85.3% and 79.6% in the six
months ended June 30 of 1999 and 1998, respectively, and gross profit for the
discount segment at 83.6% and 75.6% in 1999 and 1998, respectively. This
increase is primarily the result of the 1998 list price increases.
-36-
<PAGE> 38
As a percentage of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased to 18.5% for the six months ended June 30,
1999 compared to 32.44% in the same period in 1998, due to lower prices and
reduced volume in connection with the move to the new factory.
Broker-Dealer and Real Estate Revenues. New Valley's broker-dealer
revenues were $5,876 and real estate revenues were $754 for the month ended
June 30, 1999.
Expenses. Operating, selling, general and administrative expenses were
$107,036 for the six months ended June 30, 1999 compared to $82,126 for the
prior year period. The increase of $24,910 is due primarily to an $18,045
increase at Liggett and additional expenses of $7,392 as a result of the
consolidation of New Valley. The increase in operating expenses at Liggett was
due primarily to higher spending for promotional and marketing programs.
Other Income (Expenses). For the six months ended June 30, 1999,
Liggett recognized a gain of $294,287 in connection with the closing of the
Philip Morris brand transaction. In addition, New Valley recognized a gain of
$3,801 on the sale of substantially all of Thinking Machines' assets.
Interest expense was $27,061 for the six months ended June 30, 1999
compared to $40,423 for the same period in the prior year. The decrease of
$13,662 is largely due to a saving of $13,319 because of the redemption by
Liggett of its Senior Secured Notes on December 28, 1998, and a savings of
$2,501 at BGLS due to the repurchase of a portion of BGLS' Senior Secured
Notes. This was offset by additional interest expense at Liggett-Ducat of
$1,689 and interest at New Valley of $784.
Equity in earnings of affiliate was a loss of $9,198 for the five
months ended May 31, 1999 compared to a loss of $11,488 for the six months
ended June 30, 1998 and relates in both periods to New Valley's net loss
applicable to common shares of $44,326 and $44,429, respectively.
Income tax expense for the six months ended June 30, 1999 was $83,374
compared to $1,312 for the six months ended June 30, 1998. The effective tax
rate does not bear a customary relationship to pre-tax accounting income
principally as a consequence of the change in the valuation allowance relating
to deferred tax assets and foreign taxes.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents increased $972 for the six months ended
June 30, 1999 and increased $6,627 for the six months ended June 30, 1998. Net
cash provided by operations for the six months ended June 30, 1999 was $12,116
compared to net cash used in operations of $17,409 for the comparable period of
1998. The increase of $29,525 in net cash provided by operating activities in
1999 over the prior year was primarily due to an increase in operating income
at Liggett, a reduction in debt service, resulting primarily from Liggett's
note redemption on December 28, 1998, an increase in deferred interest expense
at BGLS and an increase in accrued liabilities. In the 1998 period, cash
payments included interest payments by BGLS and Liggett of approximately
$28,800. In addition, increases in inventories and receivables were partially
offset by increases in payables and in other long-term liabilities.
Cash provided by investing activities of $110,168 compares to cash
used of $5,452 for the periods ended June 30, 1999 and 1998, respectively. For
the six months ended June 30, 1999, the majority of the proceeds were from the
purchase of the Class A option by Philip Morris in May 1999 and loan proceeds
which Trademarks borrowed and distributed to Eve. In the 1999 period, these
proceeds were partially offset by capital expenditures for machinery and
-37-
<PAGE> 39
equipment at Liggett of $6,972 and equipment and construction costs for the new
factory of $30,565 at Liggett-Ducat. Other payments made principally pertained
to broker-dealer transactions and real estate at New Valley. In 1998, capital
expenditures at Liggett of $694 and $6,444 at Liggett-Ducat were partially
offset by proceeds from the sale of equipment.
Cash used in financing activities was $120,680 for the six months
ended June 30, 1999 as compared with cash provided of $29,404 for the six
months ended June 30, 1998. Cash was used in the 1999 period to retire the BGLS
Senior Secured Notes in the amount of $142,584. Cash was also used in 1999 to
decrease the margin loan at New Valley and for distributions on the Company's
common stock. Net borrowings under the revolving credit facilities were
$11,379, of which $420 is attributable to Liggett and $10,959 is attributable
to Liggett-Ducat. Proceeds included $4,976 of equipment financing and the
effect of the New Valley recapitalization. Proceeds in the 1998 period included
$20,000 from a participating loan made by Western Realty Ducat, $10,144 from
the issuance of stock and net borrowings under revolving credit facilities at
both Liggett and Liggett-Ducat of $4,207. These proceeds were offset primarily
by distributions on common stock of $3,055 and repayments on debt of $1,068.
Liggett. On December 28, 1998, Liggett redeemed the $144,891 principal
amount of the Liggett Notes at 100% of the principal amount together with
accrued interest. Proceeds of $150,000 from the purchase by Philip Morris of
two options to purchase interests in the entity which acquired the three brands
of Eve were used to fund the redemption.
The closing of the exercise by Philip Morris of the Class A option
occurred on May 24, 1999. Upon closing, Liggett received $145,000 from the
purchase of the Class A interest and the distribution of certain loan proceeds
by the entity to Eve, which guaranteed the loan.
Liggett has a $40,000 credit facility under which $2,958 was
outstanding at June 30, 1999. Availability under the facility was approximately
$15,634 based on eligible collateral at June 30, 1999. The facility is
collateralized by all inventories and receivables of Liggett. Borrowings under
the facility, whose interest is calculated at a rate equal to 1.5% above
Philadelphia National Bank's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate, bore a rate of 9.25% at June 30,
1999. The facility requires Liggett's compliance with certain financial and
other covenants including restrictions on the payment of cash dividends and
distributions by Liggett. In addition, the facility, as amended, 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 June 30, 1999, Liggett was in compliance with all covenants
under the facility; Liggett's adjusted net worth was $40,300 and net working
capital was $34,826, as computed in accordance with the agreement. The facility
expires on March 8, 2000 subject to automatic renewal for an additional year
unless a notice of termination is given by the lender at least 60 days prior to
the anniversary date.
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase from a third party. The loan, which is
collateralized by the equipment, is payable in 60 monthly installments of $56
including annual interest of 7.6% with a final payment of $2,550.
On May 28, 1999, a newly formed entity owned by Liggett signed an
agreement to purchase an industrial facility for $8.4 million in Mebane, North
Carolina. Liggett plans to relocate its tobacco manufacturing operations to the
new facility. Liggett is currently seeking financing for the purchase, which is
subject to the completion of due diligence and other customary conditions.
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
-38-
<PAGE> 40
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 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. 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 or regulation. See Note 11 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 adversely affected by an unfavorable outcome in any such
tobacco-related litigation.
BGLS. On May 25, 1999, BGLS repurchased $132,687 principal amount of
its 15.75% Senior Secured Notes due 2001 (the "Notes"), together with accrued
interest thereon of $18,276, for a discounted purchase price of $147,694. The
purchases were made using the proceeds of the Philip Morris brand transaction
which closed on May 24, 1999.
At June 30, 1999, BGLS had outstanding $100,177 principal amount of
the BGLS Notes which mature on January 31, 2001. Of this amount, $60,100 of the
Notes carry deferred interest. On March 2, 1998, BGLS entered into a standstill
agreement with the holders of $97,239 principal amount of its notes, who were
affiliated with Apollo, under which the Apollo holders (and any transferees)
agreed to the deferral of interest payments, commencing with the interest
payment due July 31, 1997 through the interest payment due July 31, 2000. BGLS
had a total of $23,000 of deferred interest outstanding as of June 30, 1999.
On August 6, 1999, the Company repurchased an additional $897 principal
amount of the BGLS Notes together with accrued interest thereon. BGLS and its
subsidiaries may, from time to time, based on current market conditions,
purchase additional BGLS Notes in the open market or in privately negotiated
transactions.
BOL. Liggett-Ducat has recently completed construction of a new
cigarette factory on the outskirts of Moscow which became operational in June
1999. The new factory, which utilizes Western cigarette making technology and
has a capacity of approximately 35 billion units per year, will produce
American and international blend cigarettes, as well as traditional Russian
cigarettes. Western Realty Ducat has made a $30,000 participating loan to, and
payable out of a 30% profits interest in, a company organized by BOL which,
among other things, holds BOL's interest in Liggett-Ducat and the new factory.
In addition, BOL has entered into promissory notes for equipment purchases
which have a liability of approximately $21,795 at June 30, 1999. The Company
is a guarantor on purchases for which the remaining obligation is approximately
$8,500. The remaining costs for construction and equipment for the new factory
are being financed by loans from Russian banks and approximately $13,000 of
loans from BOL made during the first half of 1999.
The Company. The Company has substantial near-term consolidated debt
service requirements, with aggregate required principal payments of
approximately $220,500 due in the years 1999 through 2001. The Company believes
that it will continue to meet its liquidity requirements through 1999, although
the BGLS Notes Indenture limits the amount of restricted payments BGLS is
permitted to make to the Company during the calendar year. At June 30, 1999,
-39-
<PAGE> 41
the remaining amount available through December 31, 1999 in the Restricted
Payment Basket related to BGLS' payment of dividends to the Company (as defined
by the BGLS Notes Indenture) is $19,982. Corporate expenditures (exclusive of
Liggett, BOL and New Valley) over the next twelve months for current operations
include cash interest expense of approximately $5,250, dividends on the
Company's shares (currently at an annual rate of approximately $6,300) and
corporate expenses. The Company anticipates funding its expenditures for current
operations with public and/or private debt and equity financing, management fees
from subsidiaries and tax sharing and other payments from Liggett or 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.
MARKET RISK
The Company is exposed to market risks principally from fluctuations
in interest rates, foreign currency exchange rates and equity prices. The
Company seeks to minimize these risks through its regular operating and
financing activities and its long-term investment strategy.
Foreign Market Risk
Europe. The Company has foreign currency exchange risk relating to its
outstanding obligations under foreign currency denominated construction and
equipment contracts with various European companies where costs are affected by
fluctuations in the United States dollar as compared to certain European
currencies. Management believes that currencies in which it presently has such
exposure are relatively stable.
Russia. Liggett-Ducat's, Western Tobacco's, BrookeMil Ltd.'s and
Western Realty Ducat's operations are conducted in Russia. During 1998, the
economy of the Russian Federation entered a period of economic instability
which has continued in 1999. The impact includes, but is not limited to, a
steep decline in prices of domestic debt and equity securities, a severe
devaluation of the currency, a moratorium on foreign debt repayments, an
increasing rate of inflation and increasing rates on government and corporate
borrowings. The Company seeks to minimize such risks by reducing its cash
exposure when appropriate. The return to economic stability is dependent to a
large extent on the effectiveness of the fiscal measures taken by government
and other actions beyond the control of companies operating in the Russian
Federation. The Company's Russian operations may be significantly affected by
these factors for the foreseeable future.
Domestic Market Risk
New Valley's market risk management procedures cover all market risk
sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking
and other commitments at Ladenburg are subject to due diligence reviews by
Ladenburg's senior management, as well as professionals in the appropriate
business and support units involved. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and maintaining
collateral. Ladenburg monitors its exposure to counterparty risk through the
use of credit exposure information, the monitoring of collateral values and the
establishment of credit limits.
Equity Price Risk. Ladenburg maintained inventories of trading
securities at June 30, 1999 with fair values of $11,695 in long positions and
$2,979 in short positions. Ladenburg performed an entity-wide analysis of its
financial instruments and assessed the related risk and materiality. Based on
this analysis, in the opinion of management the market risk associated with the
Ladenburg's financial instruments at June 30, 1999 will not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
-40-
<PAGE> 42
New Valley held investment securities available for sale totaling
$48,114 at June 30, 1999. Approximately 43% of these securities represent an
investment in RJ Reynolds Tobacco Holdings and Nabisco Group Holdings, which
are defendants in numerous tobacco products-related litigation, claims and
proceedings. An adverse outcome in any of these proceedings against these
companies could have a significant effect on the value of New Valley's
investment.
New Valley also holds long-term investments in limited partnerships
and limited liability companies. These investments are illiquid, and their
ultimate realization is subject to the performance of the investee entities.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. The Company has not yet determined the impact that the adoption of
SFAS 133 will have on its earnings or statement of financial position.
YEAR 2000 COSTS
The "Year 2000 issue" is the result of computer programs that were
written using two digits rather than four digits to define the applicable year.
If the Company's or its subsidiaries' computer programs with date-sensitive
functions are not Year 2000 compliant, they may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in system failure or
miscalculations causing disruption to operations, including, among other
things, an inability to process transactions or engage in similar normal
business activities.
The Company, New Valley and Liggett-Ducat. The Company, New Valley and
Liggett-Ducat use personal computers for all transactions. All such computers
and related systems and software are less than three years old and are Year
2000 compliant. As a result, the Company, New Valley and Liggett-Ducat believe
they are Year 2000 compliant.
Liggett. Liggett utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its operations.
Liggett 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. To date, the focus of Year 2000 compliance
and verification efforts has been directed at the implementation of new
customer service, inventory control and financial reporting systems at each of
the three regional Strategic Business Units formed as part of Liggett's
reorganization which began in January 1997. Liggett estimates that
approximately $138 of the expenditures for this reengineering effort related to
Year 2000 compliance, validation and testing. In January of 1998, Liggett
initiated a major conversion of factory accounting, materials management and
information systems at its Durham production facility with upgrades that have
been successfully tested for Year 2000 compliance. This conversion was
completed in November 1998. Program upgrades to Liggett's payroll system were
completed in July 1999 with parallel upgrades to the human resources system
software scheduled for completion in August 1999. Enhancements to Liggett's
-41-
<PAGE> 43
finished goods inventory system are expected to be completed in September 1999.
It is anticipated that all factory, corporate, field sales and physical
distribution systems will be completed in sufficient time to support Year 2000
compliance and verification.
Although such costs may be a factor in describing changes in operating
profit in any given reporting period, Liggett 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. Based on the progress
Liggett has made in addressing Year 2000 issues and its strategy and timetable
to complete its compliance program, Liggett does not foresee significant risks
associated with its Year 2000 initiatives at this time.
Ladenburg. Ladenburg has recently completed a plan to address Year 2000
compliance. Ladenburg's plan addresses external interfaces with third party
computer systems necessary in the broker-dealer industry. It also addresses
internal operations software necessary to continue operations on a daily basis.
Ladenburg believes that all phases of its Year 2000 plan have been completed and
cost approximately $650. The cost was inclusive of hardware and software
upgrades and replacements as well as consulting. All costs were incurred by July
1999. Ladenburg completed the contingency planning phase in May 1999.
External Service Providers. The modifications for Year 2000 compliance
by the Company and its subsidiaries are proceeding according to plan and are
expected to be completed by 1999, the failure of the Company's service
providers or vendors to resolve their own processing issues in a timely manner
could result in a material financial risk. The most significant outside service
provider is Ladenburg's clearing agent. Ladenburg has been informed by its
clearing agent that it has initiated an extensive effort to ensure that it is
Year 2000 compliant and that the clearing agent will conduct system-wide
testing of its Year 2000 software throughout 1999.
It is unclear whether the Russian government and other organizations
who provide significant infrastructure services in Russia have addressed the
Year 2000 problem sufficiently to mitigate potential substantial disruption to
these infrastructure services. The substantial disruption to these services
would have an adverse affect on the operations of Liggett-Ducat. Furthermore,
the current financial crises in Russia could affect the ability of the
government and other organizations to fund Year 2000 compliance programs.
Although the Company and its subsidiaries are in the process of
confirming that their service providers are adequately addressing Year 2000
issues, there can be no complete assurance of success, or that interaction with
other service providers will not impair the Company's or its subsidiaries'
services.
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 stockholders, which reflect management's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties and, in connection with the
"safe-harbor" provisions of the Reform Act, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company. Liggett continues to be subject to risk factors endemic to the
domestic tobacco industry including, without limitation, health concerns
-42-
<PAGE> 44
relating to the use of tobacco products and exposure to environmental tobacco
smoke, the effects of legislative actions, including tax increases,
governmental regulation and privately imposed smoking restrictions, decline in
consumption, 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, BrookeMil's and Western Realty
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. The Indenture for the BGLS Notes provides for, among other
things, the restriction of certain affiliated transactions between the Company
and its affiliates, as well as for certain restrictions on the use of future
distributions received from New Valley. The failure of the Company or its
significant suppliers and customers, especially Ladenburg's clearing agent, to
adequately address the "Year 2000" issue could result in misstatement of
reported financial information or could adversely affect its business. 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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk" is
incorporated herein by reference.
-43-
<PAGE> 45
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 11, incorporated herein by reference,
to the Consolidated Financial Statements of Brooke Group Ltd. and
BGLS Inc. included elsewhere in this Report on Form 10-Q which
contains 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 for additional information regarding the pending material
legal proceedings to which the Company, BGLS and/or Liggett are
party. A copy of Exhibit 99.1 will be furnished to security
holders of the Company and its subsidiaries without charge upon
written request to the Company at its principal executive
offices, 100 S.E. Second St., Miami, Florida 33131, Attn.
Investor Relations.
Item 2. Changes in Securities and Use of Proceeds
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by
the Company during the three months ended June 30, 1999.
Item 3. Defaults Upon Senior Securities
On June 4, 1999, New Valley consummated a recapitalization under
which its outstanding Class A Senior Preferred Shares, Class B
Preferred Shares and Common Shares were exchanged for new Common
Shares and warrants. As a result of the recapitalization, all
accrued and unpaid dividends on the preferred shares were
eliminated.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 10.1 Amended and Restated Limited Liability Company
Agreement (Second Restatement) dated as of February
20, 1998 by and among Western Realty Development
LLC, New Valley, BrookeMil Ltd. ("BML") and Apollo
Real Estate Investment Fund III, L.P. ("Apollo")
(incorporated by reference to Exhibit 10.1 in New
Valley's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998, Commission
File No. 1-2493).
* 10.2 Limited Liability Company Agreement, dated as of
June 18, 1998, by and among Western Realty Repin
LLC, Apollo and New Valley (incorporated by
reference to Exhibit 10.3 in New Valley's Quarterly
Report on Form 10-Q for the quarterly period ended
June 30, 1998, Commission File No. 1-2493).
-44-
<PAGE> 46
* 10.3 Participating Loan Agreement, dated as of June 18,
1998, by and between Western Realty Repin LLC and
BML (incorporated by reference to Exhibit 10.4 in
New Valley's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998, Commission
File No. 1-2493).
10.4 Amended and Restated Formation and Limited Liability
Company Agreement of Trademarks LLC, dated as of May
24, 1999, among the Company, Liggett & Myers Inc.,
Eve Holdings Inc. ("Eve"), Liggett and Philip Morris
Incorporated, including the form of Trademark
License Agreement.
10.5 Pledge Agreement dated as of May 24, 1999 from Eve,
as grantor, in favor of Citibank, N.A., as agent.
10.6 Guaranty dated as of June 10, 1999 from Eve, as
guarantor, in favor of Citibank, N.A., as agent.
* 10.7 Sale-Purchase Agreement, dated as of September 2,
1998, by and between New Valley and PW/MS OP Sub I,
LLC (incorporated by reference to Exhibit 2.1 in New
Valley's Current Report on Form 8-K dated September
28, 1998, Commission File No. 1-2493).
10.8 Employment Agreement dated as of August 1, 1999,
between the Company and Joselynn D. Van Siclen.
27.1 Brooke Group Ltd.'s Financial Data Schedule (for SEC
use only).
27.2 BGLS Inc.'s Financial Data Schedule (for SEC use
only).
99.1 Material Legal Proceedings.
99.2 Liggett Group Inc.'s Interim Consolidated Financial
Statements for the quarterly periods ended June 30,
1999 and 1998.
* 99.3 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly periods ended
June 30, 1999 and 1998 (incorporated by reference to
New Valley's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1999, Commission File
No. 1-2493).
99.4 Brooke (Overseas) Ltd.'s Interim Consolidated
Financial Statements for the quarterly periods ended
June 30, 1999 and 1998.
------------------------
*Incorporated by reference
(b) Reports on Form 8-K
The Company filed the following Report on Form 8-K during the
second quarter of 1999:
FINANCIAL
DATE ITEMS STATEMENTS
---- ----- ----------
May 26, 1999 5 None
-45-
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
BROOKE GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
--------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: August 16, 1999
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
--------------------------
Joselynn D. Van Siclen
Vice president and Chief
Financial Officer
Date: August 16, 1999
-46-
<PAGE> 1
EXHIBIT 10.4
==============================================================================
AMENDED AND RESTATED
FORMATION AND
LIMITED LIABILITY COMPANY AGREEMENT
OF
TRADEMARKS LLC
===============================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
DEFINED TERMS
<S> <C> <C>
Section 1.1 Definitions......................................................................... 2
Section 1.2 Headings............................................................................ 9
ARTICLE II
FORMATION AND TERM; CLOSING
Section 2.1 Formation........................................................................... 9
Section 2.2 Name................................................................................ 10
Section 2.3 Term................................................................................ 10
Section 2.4 Registered Agent and Office......................................................... 10
Section 2.5 Principal Place of Business......................................................... 10
Section 2.6 Qualification in Other Jurisdictions................................................ 10
Section 2.7 Closing............................................................................. 10
Section 2.8 Conditions to Closing............................................................... 12
Section 2.9 Liggett Parties' Indemnification Obligation......................................... 13
Section 2.10 Reasonable Best Efforts............................................................. 13
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES
Section 3.1 Corporate Authority................................................................. 13
Section 3.2 No Conflict; Required Filings and Consents.......................................... 14
Section 3.3 Intellectual Property............................................................... 14
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PM
Section 4.1 Corporate Authority................................................................. 15
Section 4.2 No Conflict; Required Filings and Consents.......................................... 15
ARTICLE V
COVENANTS
Section 5.1 Activities of Liggett Relating to the Brands........................................ 16
Section 5.2 Loan Agreement...................................................................... 16
Section 5.3 HSR Clearance....................................................................... 16
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 5.4 Tax Basis of Marks.................................................................. 16
Section 5.5 Access to Information............................................................... 16
Section 5.6 Representations and Warranties...................................................... 17
Section 5.7 Retention of Certain Trademarks, etc................................................ 17
ARTICLE VI
PURPOSE AND POWERS OF THE COMPANY
Section 6.1 Purpose............................................................................. 18
Section 6.2 Powers of the Company............................................................... 18
Section 6.3 Other Authority..................................................................... 18
ARTICLE VII
MEMBERS
Section 7.1 Members............................................................................. 18
Section 7.2 Powers of Members................................................................... 18
Section 7.3 Member's Shares..................................................................... 18
Section 7.4 Classes............................................................................. 19
Section 7.5 Partition........................................................................... 19
Section 7.6 Resignation......................................................................... 19
Section 7.7 Member Meetings..................................................................... 19
Section 7.8 Voting.............................................................................. 19
Section 7.9 Quorum.............................................................................. 20
Section 7.10 Notice of Meetings.................................................................. 20
Section 7.11 Action Without a Meeting............................................................ 20
Section 7.12 Admission of Class B Member upon Certain Transfers.................................. 20
ARTICLE VIII
MANAGEMENT
Section 8.1 Board of Directors.................................................................. 20
Section 8.2 Manager............................................................................. 21
Section 8.3 Officers............................................................................ 21
ARTICLE IX
SHARES AND CAPITAL ACCOUNTS
Section 9.1 Capital Contributions............................................................... 21
Section 9.2 Status of Capital Contributions..................................................... 21
Section 9.3 Capital Accounts.................................................................... 22
Section 9.4 Advances............................................................................ 22
Section 9.5 Redemption of Shares................................................................ 23
Section 9.6 Liggett Parties' Class B Put Option................................................. 23
</TABLE>
-ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 9.7 Liggett Parties' Class B Conversion Right........................................... 23
Section 9.8 Assignment and Encumbrance of Interests............................................. 24
ARTICLE X
ALLOCATIONS
Section 10.1 Allocation of Gross Income.......................................................... 24
Section 10.2 Allocation of Profits............................................................... 24
Section 10.3 Allocation of Losses................................................................ 25
Section 10.4 Allocation Rules.................................................................... 25
Section 10.5 Regulatory Allocations.............................................................. 25
Section 10.6 Treatment of Regulatory Allocations................................................. 27
Section 10.7 Tax Allocations;ss. 704(c) of the Code............................................... 27
ARTICLE XI
DISTRIBUTIONS
Section 11.1 Distributions....................................................................... 28
Section 11.2 Mandatory Distributions............................................................. 28
Section 11.3 Limitations on Distribution......................................................... 28
ARTICLE XII
BOOKS AND RECORDS
Section 12.1 Books, Records and Financial Statements............................................. 29
Section 12.2 Accounting Method................................................................... 29
Section 12.3 Annual Audit........................................................................ 30
ARTICLE XIII
TAX MATTERS
Section 13.1 Tax Matters ........................................................................ 30
Section 13.2 Section 709 Election................................................................ 30
Section 13.3 Taxation as Partnership............................................................. 30
ARTICLE XIV
LIABILITY, EXCULPATION AND INDEMNIFICATION
Section 14.1 Liability........................................................................... 30
Section 14.2 Exculpation......................................................................... 31
Section 14.3 Fiduciary Duty...................................................................... 31
Section 14.4 Indemnification..................................................................... 31
Section 14.5 Expenses............................................................................ 31
</TABLE>
-iii-
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 14.6 Insurance........................................................................... 32
Section 14.7 Outside Businesses.................................................................. 32
Section 14.8 Third-Party Beneficiaries........................................................... 32
ARTICLE XV
ADDITIONAL MEMBERS
Section 15.1 Admission........................................................................... 33
ARTICLE XVI
ASSIGNMENTS
Section 16.1 Recognition of Assignment by the Company............................................ 33
Section 16.2 Effect of Assignment................................................................ 33
ARTICLE XVII
DISSOLUTION, LIQUIDATION AND TERMINATION
Section 17.1 No Dissolution...................................................................... 33
Section 17.2 Liquidation......................................................................... 33
Section 17.3 Termination......................................................................... 34
Section 17.4 Claims of the Members............................................................... 34
ARTICLE XVIII
MISCELLANEOUS
Section 18.1 Notices............................................................................. 34
Section 18.2 Formation Expenses.................................................................. 36
Section 18.3 Failure to Pursue Remedies.......................................................... 36
Section 18.4 Cumulative Remedies................................................................. 36
Section 18.5 Binding Effect...................................................................... 36
Section 18.6 Interpretation...................................................................... 36
Section 18.7 Severability........................................................................ 36
Section 18.8 Counterparts........................................................................ 36
Section 18.9 Integration......................................................................... 37
Section 18.10 Governing Law....................................................................... 37
Section 18.11 Consent to Jurisdiction............................................................. 37
Section 18.12 Confidentiality..................................................................... 37
Section 18.13 Governmental Notices................................................................ 37
Section 18.14 Prior Agreement..................................................................... 37
</TABLE>
-iv-
<PAGE> 6
ARTICLE XIX
AMENDMENTS
<TABLE>
<S> <C> <C>
Section 19.1 Amendments.......................................................................... 38
SCHEDULE A Members
EXHIBIT A Form of License Agreement
EXHIBIT B Form of Assignment
</TABLE>
-v-
<PAGE> 7
AMENDED AND RESTATED FORMATION
AND LIMITED LIABILITY COMPANY AGREEMENT
OF
TRADEMARKS LLC
This Amended and Restated Formation and Limited Liability
Company Agreement (this "Agreement") of Trademarks LLC (formerly known as Brands
LLC) (the "Company"), dated as of May 24, 1999, is entered into among Brooke
Group Ltd., a Delaware corporation ("Brooke"), Liggett & Myers Inc., a Delaware
corporation ("LMI"), Eve Holdings Inc., a Delaware corporation ("Eve"), Liggett
Group Inc., a Delaware corporation ("Liggett", and, together with Brooke, Eve
and LMI, the "Liggett Parties"), and Philip Morris Incorporated, a Virginia
corporation ("PM" and, together with the Liggett Parties, the "Parties").
WHEREAS, the Parties, intending to form the Company for
purposes of the transactions described herein, entered into a Formation and
Limited Liability Company Agreement of Brands LLC dated as of January 12, 1999
(the "Original Agreement");
WHEREAS, Eve desires to contribute the Marks to the Company in
exchange for 100% of the Class A Shares and 100% of the Class B Shares of the
Company;
WHEREAS, concurrently with the execution of the Original
Agreement, the Liggett Parties and PM executed the Class A Option Agreement and
the Class B Option Agreement pursuant to which Eve granted to PM an option to
purchase the Class A Shares and Class B Shares, respectively;
WHEREAS, if PM exercises the Class A Option, the Company and
PM will enter into the License Agreement, pursuant to which PM and its
Affiliates will receive an exclusive, domestic license of the Marks;
WHEREAS, the Parties wish to amend and restate the Original
Agreement in its entirety;
NOW, THEREFORE, in consideration of the agreements and
obligations set forth herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Members hereby
agree to form a limited liability company pursuant to and in accordance with the
Delaware Limited Liability Company Act (6 Del. C. ss. 18-101, et seq.), as
amended from time to time (the "Delaware Act"), as provided herein, and hereby
agree as follows:
ARTICLE I
DEFINED TERMS
Section 1.1 Definitions. Unless the context otherwise
requires, the terms defined in this Article I shall, for the purposes of this
Agreement, have the meanings herein specified.
<PAGE> 8
"Adjusted Capital Account Deficit" shall mean, with respect to
any Member, the deficit balance, if any, in such Member's Capital Account as of
the end of the relevant Fiscal Year, after giving effect to the following
adjustments:
(a) Credit to such Capital Account any amounts which such
Member is deemed to be obligated to restore pursuant to the penultimate
sentence of either of Treasury Regulation ss.ss. 1.704-2(g)(1) or
1.704-2(i)(5); and
(b) Debit to such Capital Account the items described in
Treasury Regulation ss.ss. 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Treasury Regulation ss. 1.704-1(b)(2)(ii)(d) and
shall be interpreted consistently therewith.
"Affiliate" shall mean, with respect to any Person, any direct
or indirect subsidiary of such Person, any other Person that directly or through
one or more intermediaries, is controlled by, or is under common control with,
the specified Person, and, if such a Person is an individual, any member of the
immediate family (including parents, spouse and children) of such individual and
any trust whose principal beneficiary is such individual or one or more members
of such immediate family and any Person who is controlled by any such member or
trust. As used in this definition, the term "control" (including with
correlative meanings, "controlled by" and "under common control with") shall
mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies, whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise.
Notwithstanding the foregoing, for purposes of this Agreement (i) the Liggett
Parties and their Subsidiaries shall not be deemed to be Affiliates of PM, and
(ii) PM and its Subsidiaries (including the Company) shall not be deemed to be
Affiliates of the Liggett Parties.
"Agreement" shall have the meaning set forth in the recitals
hereof. The Members hereby agree that this Agreement shall constitute a "limited
liability company agreement" for purposes of the Delaware Act.
"Assign" shall mean to, directly or indirectly, sell, assign,
transfer, pledge, hypothecate, mortgage or dispose of, by gift or otherwise, or
in any way encumber, any Shares (and "Assignment" shall mean such an act).
"Brands" shall mean the "Lark," "Chesterfield" and "L&M"
brands produced by the Liggett Parties.
"Brooke" shall have the meaning set forth in the preamble
hereof.
"Capital Account" shall mean, with respect to any Member and
any Share, the account maintained for such Member and such Share in accordance
with the provisions of Section 9.3 hereof.
"Capital Contribution" shall mean, with respect to any Member
and any Share, the aggregate amount of cash and the initial Gross Asset Value of
any property (other than cash)
-2-
<PAGE> 9
contributed to the Company pursuant to Section 9.1 hereof with respect to such
Share, net of any liabilities of such Member that are assumed by the Company in
connection with such contribution or that are secured by property so
contributed, and shall include the initial Capital Contribution and any
subsequent Capital Contribution.
"Certificate" shall mean the Certificate of Formation of the
Company and any and all amendments thereto and restatements thereof filed on
behalf of the Company with the office of the Secretary of State of the State of
Delaware pursuant to the Delaware Act.
"Claims" shall have the meaning in Section 2.9 of this
Agreement.
"Class A Exercise Price" shall have the meaning in Section 2.3
of the Class A Option Agreement.
"Class B Exercise Price" shall have the meaning in Section 2.3
of the Class B Option Agreement.
"Class A Member" shall mean a permitted holder of a Class A
Share pursuant to this Agreement, in its capacity as a member of the Company.
"Class B Member" shall mean a permitted holder of a Class B
Share pursuant to this Agreement, in its capacity as a member of the Company.
"Class A Option Agreement" shall mean that certain option
agreement, dated as the date hereof, pursuant to which PM (or its designee) may
purchase from the Liggett Parties the Class A Shares owned by the Liggett
Parties and their Affiliates. Such right to purchase the Class A Shares is the
"Class A Option".
"Class B Option Agreement" shall mean that certain option
agreement, dated as of the date hereof, pursuant to which PM (or its designee)
may purchase from the Liggett Parties the Class B Shares owned by the Liggett
Parties and their Affiliates. Such right to purchase the Class B Shares is the
"Class B Option".
"Class A Option Consideration" shall have the meaning set
forth in Section 2.1 of the Class A Option Agreement.
"Class B Option Consideration" shall have the meaning set
forth in Section 2.1 of the Class B Option Agreement.
"Class A Share" and "Class B Share" shall have the respective
meanings set forth in Section 7.4 hereof.
"Closing" shall have the meaning set forth in Section 2.7(a).
"Closing Date" shall mean the date on which the Closing
occurs.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, or any corresponding United States federal tax
statute enacted after the date of this Agree-
-3-
<PAGE> 10
ment. A reference to a specific section (ss.) of the Code refers not only to
such specific section but also to any corresponding provision of any United
States federal tax statute enacted after the date of this Agreement, as such
specific section or corresponding provision is in effect on the date of
application of the provisions of this Agreement containing such reference.
"Company" shall have the meaning set forth in the preamble
hereto.
"Company Minimum Gain" shall have the meaning given the term
"partnership minimum gain" in Treasury Regulation ss. 1.704-2(b)(2) and shall be
computed in accordance with Treasury Regulation ss. 1.704-2(d).
"Covered Person" shall mean the Manager or any Officer or
director of the Company or its Affiliates (and any officer, employee or director
of the Manager or its Affiliates who acts on behalf of the Manager in its
capacity as such).
"Delaware Act" shall have the meaning set forth in the
preamble hereof.
"Depreciation" shall mean, for each Fiscal Year or other
period, an amount equal to the depreciation, amortization or other cost recovery
deduction allowable with respect to an asset for such Fiscal Year or other
period; provided, however, that, if the Gross Asset Value of an asset differs
from its adjusted basis for United States federal income tax purposes at the
beginning of such Fiscal Year or other period, Depreciation shall be an amount
that bears the same ratio to such beginning Gross Asset Value as the United
States federal income tax depreciation, amortization or other cost recovery
deduction with respect to such asset for such Fiscal Year or other period bears
to such beginning adjusted tax basis; and provided, further, that if the United
States federal income tax depreciation, amortization or other cost recovery
deduction for such Fiscal Year or other period is zero, Depreciation shall be
determined with reference to such beginning Gross Asset Value using any
reasonable method selected by the Manager.
"Distributions" shall mean distributions of cash or other
property made by the Company with respect to the Class A Shares or the Class B
Shares. Distributions shall not mean payments of cash or other property to
holders of Shares for reasons other than their ownership of such Shares.
-4-
<PAGE> 11
"Economic Risk of Loss" shall have the meaning set forth in
Treasury Regulation ss. 1.752-2.
"Eve" shall have the meaning set forth in the preamble hereof.
"Fiscal Year" shall mean (a) the period commencing upon the
date of this Agreement and ending on December 31, 1999, (b) any subsequent
twelve-month period commencing on January 1 and ending on December 31, (c) any
other twelve-month period required by the Code or the Treasury Regulations to be
used as the taxable year of the Company or (d) any portion of the periods
described in clauses (a), (b) or (c) of this sentence for which the Company is
required to allocate Profits, Losses and other items of Company income, gain,
loss or deduction pursuant to Article X hereof.
"GAAP" means generally accepted accounting principles in the
United States as in effect from time to time.
"Governmental Entity" has the meaning set forth in Section 3.2
of this Agreement.
"Gross Asset Value" means, with respect to any asset, such
asset's adjusted basis for United States federal income tax purposes, except as
follows:
(a) the initial Gross Asset Value of the Marks shall be as set
forth on Schedule A hereto, and of any other asset contributed by a
Member to the Company shall be the gross fair market value of such
asset, as determined by the Manager;
(b) the Gross Asset Value of all Company assets shall be
adjusted to equal their respective gross fair market values (taking ss.
7701(g) of the Code into account), as determined by the Manager, as of
the following times: (i) immediately prior to the acquisition of an
additional Share in the Company by any new or existing Member in
exchange for more than a de minimis Capital Contribution; (ii)
immediately prior to the distribution by the Company to a Member of
more than a de minimis amount of Company assets in redemption of a
Share in the Company; and (iii) the liquidation of the Company within
the meaning of Treasury Regulation ss. 1.704-1(b)(2)(ii)(g);
(c) the Gross Asset Value of any Company asset distributed to
any Member shall be the gross fair market value (taking ss. 7701(g) of
the Code into account) of such asset on the date of distribution, as
determined by the Manager; and
(d) the Gross Asset Values of Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to ss. 734(b) or ss. 743(b) of the Code,
but only to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Treasury Regulation ss.
1.704-1(b)(2)(iv)(m) and subparagraph (f) of the definition of
"Profits" and "Losses" or Section 10.5(e) hereof; provided, however,
that Gross Asset Values shall not be adjusted pursuant to this
subparagraph (d) to the extent that an adjustment pursuant to
subparagraph (b) is required in connection with a transaction that
would otherwise result in an adjustment pursuant to this subparagraph
(d).
-5-
<PAGE> 12
If the Gross Asset Value of an asset has been determined or
adjusted pursuant to paragraph (a), paragraph (b) or paragraph (d) above, such
Gross Asset Value shall thereafter be adjusted by the Depreciation taken into
account with respect to such asset for purposes of computing Profits and Losses.
"Guarantors" shall mean the guarantors of the Company's
obligations under the Loan Agreement.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvement
Act of 1976, as amended.
"HSR Clearance" means expiration or termination of the waiting
period under the HSR Act with respect to the filings made in connection with the
exercise of the Class A Option.
"Indemnified Parties" shall have the meaning set forth in
Section 2.9.
"LMI" shall have the meaning set forth in the preamble hereof.
"License Agreement" shall mean that certain license agreement
attached hereto as Exhibit A, dated as of the Closing Date, between the Company
and PM pursuant to which PM and its Affiliates will obtain the exclusive
(including with respect to the Company) license to use the Marks in the United
States (as defined in the License Agreement).
"Liens" shall have the meaning set forth in Section 3.3.
"Liggett" and "Liggett Parties" shall have the respective
meanings set forth in the preamble hereof.
"Loan Agreement" shall mean the loan agreement entered into
between the Company and the lending institutions named therein, with respect to
the Loan Amount, which borrowing shall be guaranteed by Eve or such other entity
designated by the Liggett Parties which has received the Option Consideration
and by any other holder of Class B Shares (such entities are referred to herein
as the Guarantors).
"Loan Amount" shall mean $134.9 million or, if less, the
maximum amount that the Company is able to borrow in the circumstances described
in Section 5.2 hereof.
"Manager" shall have the meaning set forth in Section 8.2
hereof.
"Marks" shall mean all of the interest of the Liggett Parties
and any Affiliate of any Liggett Party in all trademarks, trade names, trade
dress, service marks, registrations and applications for registrations therefor,
in each case relating to "Lark," "Chesterfield" and "L&M" brands, including any
variation or product line extension thereof and any derivative pertaining
thereto, but shall not include the rights retained by the Liggett Parties
pursuant to Section 5.7 hereof.
"Member" shall mean any Person named as a member of the
Company on Schedule A hereto (which is incorporated herein by reference), as it
may be amended from time
-6-
<PAGE> 13
to time, who acquires a Share pursuant to the provisions of this Agreement, in
its capacity as a member of the Company. For purposes of the Delaware Act, the
Members shall constitute two (2) separate classes or groups of members, referred
to as Class A Members and Class B Members, and there are no separate classes or
groups of members other than the Class A Members and the Class B Members. A
Person who ceases to own any Shares shall cease to be a Member.
"Member Minimum Gain" means an amount, with respect to each
Member Nonrecourse Liability, equal to the Company Minimum Gain that would
result if such Member Nonrecourse Debt was treated as a Nonrecourse Liability,
determined in accordance with Treasury Regulation ss. 1.704-2(i)(3).
"Member Nonrecourse Debt" has the same meaning as the term
"member nonrecourse debt" in Treasury Regulation ss. 1.704-2(b)(4).
"Member Nonrecourse Deductions" has, with respect to a Member,
the same meaning as the "partner nonrecourse deductions" in Treasury Regulation
ss.ss. 1.704-2(i)(1) and 1.704-2(i)(2).
"Member Nonrecourse Liability" has, with respect to a Member,
the same meaning as the term "partner nonrecourse debt" or "partner nonrecourse
liability" in Treasury Regulation ss. 1.704-2(b)(4).
"Nonrecourse Deductions" has the meaning set forth in Treasury
Regulation ss. 1.704-2(b)(3).
"Notice of Exercise" shall have the meaning set forth in
Section 2.5 of the Class A Option Agreement.
"Officers" means those Persons, if any, appointed by the
Manager to manage the day-to-day affairs of the Company pursuant to Section 8.3
hereof.
"Option Agreements" means the Class A Option Agreement and the
Class B Option Agreement.
"Option Consideration" means the sum of the Class A Option
Consideration and the Class B Option Consideration.
"PM" shall have the meaning set forth in the preamble hereof.
"Permitted Assignee" shall have the meaning set forth in
Section 2.2(d) of the Class A Option Agreement.
"Person" includes any individual, corporation, association,
partnership (general or limited), joint venture, trust, estate, limited
liability company or other legal entity or organization.
-7-
<PAGE> 14
"Profits" and "Losses" means, for each Fiscal Year, an amount
equal to the Company's taxable income or loss for such Fiscal Year, determined
in accordance with ss. 703(a) of the Code (but including in taxable income or
loss, for this purpose, all items of income, gain, loss or deduction required to
be stated separately pursuant to ss. 703(a)(1) of the Code), with the following
adjustments:
(a) any income of the Company exempt from federal income tax
and not otherwise taken into account in computing Profits or Losses
pursuant to this definition shall be added to such taxable income or
loss;
(b) any expenditures of the Company described in ss.
705(a)(2)(B) of the Code (or treated as expenditures described in ss.
705(a)(2)(B) of the Code pursuant to Treasury Regulation ss.
1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing
Profits or Losses pursuant to this definition shall be subtracted from
such taxable income or loss;
(c) in the event the Gross Asset Value of any Company asset is
adjusted in accordance with paragraph (b) or paragraph (c) of the
definition of "Gross Asset Value" above, the amount of such adjustment
shall be taken into account as gain (if the adjustment increases the
Gross Asset Value of an asset) or loss (if the adjustment decreases the
Gross Asset Value of an asset) from the disposition of such asset for
purposes of computing Profits or Losses;
(d) gain or loss resulting from any disposition of any asset
of the Company with respect to which gain or loss is recognized for
federal income tax purposes shall be computed by reference to the Gross
Asset Value of the asset disposed of, notwithstanding that the adjusted
tax basis of such asset differs from its Gross Asset Value;
(e) in lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing such taxable income
or loss, there shall be taken into account Depreciation for such Fiscal
Year or other period, computed in accordance with the definition of
"Depreciation";
(f) to the extent an adjustment to the adjusted tax basis of
any Company asset pursuant to Code ss. 734(b) is required, pursuant to
Treasury Regulation ss. 1.704-1(b)(2)(iv)(m)(4), to be taken into
account in determining Capital Accounts as a result of a distribution
other than in liquidation of a Member's interest in the Company, the
amount of such adjustment shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis) from the disposition of such asset and shall be
taken into account for purposes of computing Profits or Losses; and
(g) any items of income, gain, loss or deduction specially
allocated under Section 10.5 shall be excluded.
"Put Option" shall have the meaning set forth in Section 9.6.
"Put Period" shall have the meaning set forth in Section 9.6.
-8-
<PAGE> 15
"Redemption Price" shall have the meaning set forth in
Section 9.5(b).
"Regulatory Allocations" shall have the meaning set forth in
Section 10.6.
"Share" shall mean a unit of limited liability company
interest owned by a Member in the Company which represents, in respect of any
Class A Share or Class B Share, all the interest in the Company granted to such
class of Members under the provisions of this Agreement and the Delaware Act,
including, but not limited to, a right to allocations of the Profits and Losses
of the Company, a right to participate in certain voting and/or management
rights and a right to receive distributions as provided in Articles XI and XVII
hereof, in each case in accordance with the provisions of this Agreement and the
Delaware Act.
"Subsidiaries" shall mean, with respect to any Person, any
other Person in which such Person owns, directly or indirectly, 50% or more of
the voting interests.
"Tax Matters Partner" shall have the meaning set forth in
Section 13.1(a) hereof.
"Total Voting Power" means the total number of votes
represented by the Class A Shares, with each Class A Share entitled to one vote.
"Trade Loading" shall mean selling to any supplier or
distributor more inventory than such supplier or distributor can reasonably be
expected to sell in the ordinary course.
"Treasury Regulations" means the income tax regulations,
including temporary regulations, promulgated under the Code, as such regulations
may be amended from time to time (including corresponding provisions of
succeeding regulations).
Section 1.2 Headings. The headings and subheadings in this
Agreement are included for convenience and identification only and are in no way
intended to describe, interpret, define or limit the scope, extent or intent of
this Agreement or any provision hereof.
ARTICLE II
FORMATION AND TERM; CLOSING
Section 2.1 Formation. (a) Subject to, and effective upon, the
filing of the Certificate with the Office of the Secretary of State of the State
of Delaware as provided in Section 2.3, the Members hereby form the Company as a
limited liability company under and pursuant to the provisions of the Delaware
Act, and agree that the rights, duties and liabilities of the Members shall be
as provided in the Delaware Act, except as otherwise provided herein.
(b) Brooke and PM, acting jointly, by their respective duly
authorized officers, are hereby designated as authorized persons, within the
meaning of the Delaware Act, to jointly execute, deliver and file, or cause the
execution, delivery and filing of the Certificate. The Manager is hereby
designated as an authorized person, within the meaning of the Delaware Act, to
execute, deliver and file, or cause the execution, delivery and filing of, all
other certificates, notices or other instruments (and any amendments and/or
restatements thereof) required or
-9-
<PAGE> 16
permitted by the Delaware Act to be filed in the office of the Secretary of
State of Delaware and any other certificates, notices or other instruments (and
any amendments and/or restatements thereof) necessary for the Company to qualify
to do business in a jurisdiction in which the Company may wish to conduct
business.
Section 2.2 Name. The name of the Company shall be
"Trademarks LLC."
Section 2.3 Term. The term of the Company shall commence on
the date the Certificate is filed in the office of the Secretary of State of the
State of Delaware, which shall be as soon as practicable after HSR Clearance is
received, and shall continue perpetually unless the Company is dissolved
pursuant to Section 17.2, which dissolution shall be carried out pursuant to the
Delaware Act and the provisions of this Agreement.
Section 2.4 Registered Agent and Office. The Company's
registered agent and office in Delaware shall be The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County
of New Castle.
Section 2.5 Principal Place of Business. The principal place
of business of the Company shall be in New York or such other location as the
Manager may designate from time to time and embody in a writing to be filed with
the records of the Company.
Section 2.6 Qualification in Other Jurisdictions. The Manager
shall cause the Company to be qualified, formed or registered under assumed or
fictitious name statutes or similar laws in any jurisdiction in which the
Company transacts business and such qualification, formation or registration is
necessary or appropriate for the transaction of such business.
Section 2.7 Closing. (a) Subject to the conditions set forth
herein, the closing of the transactions contemplated by this Section (the
"Closing") shall take place at the offices of Wachtell, Lipton, Rosen & Katz at
10:00 a.m. on a date that is set forth in the Notice of Exercise delivered by PM
pursuant to the Class A Option Agreement. In the event that PM is not obligated
to, and does not, exercise the Class A Option and deliver the related Notice of
Exercise, the Closing shall not occur. The completion of all transactions
described in this Section shall be deemed to occur simultaneously, and the
Closing shall not be deemed to have occurred until all such transactions have
been completed; except that the transaction described in item (viii) of Section
2.7(b) shall occur immediately after the events described in items (i)-(vii).
(b) At the Closing, the following transactions shall occur and
circumstances shall exist:
(i) Eve will sell, transfer, convey and assign to the Company,
as a contribution to the capital of the Company, all right, title and
interest in and to the Marks, together with that part of the goodwill
of the business connected with the use of and symbolized by the Marks
(the "Associated Goodwill"), pursuant to the Assignment Agreement, a
form of which is attached as Exhibit B hereto, such assignment to
result in the capital account allocations set forth on Schedule A
hereto. In connection with the execution of the Assignment Agreement,
Eve shall acquire all of the Class A Shares and Class B Shares of the
Company as set forth on Schedule A hereto.
-10-
<PAGE> 17
(ii) Neither the Company nor PM or any of their respective
Affiliates shall assume any past, present or future liabilities of any
nature, express or implied, whether or not contingent, relating to the
Marks or the Brands and arising from production, sales, marketing,
consumption or use of or exposure to any product or any activity or
omission of the Liggett Parties and their Affiliates prior to the
Closing. Neither the Company's nor PM's acquisition, registration or
enforcement of the Marks, or any "goodwill" or other intangible asset
attributable to the Marks, shall be deemed an assumption, express or
implied, of any liability excluded under this paragraph or indemnified
under Section 2.9.
(iii) The Company shall acquire from the Liggett Parties only
the Marks and the Associated Goodwill, and shall not acquire any assets
other than the Marks and the Associated Goodwill.
(iv) The Company shall have no other equity or voting
interests of any kind, and no rights to acquire any such interests,
outstanding (other than as contemplated by this Agreement, the Class A
Option Agreement and the Class B Option Agreement).
(v) PM and the Company shall execute the License Agreement
in the form attached as Exhibit A hereto.
(vi) The Company and the lending institutions shall enter
into (or have entered into) the Loan Agreement and the Company shall
borrow the Loan Amount.
(vii) The Company shall distribute to the Liggett Parties
holding the Class B Shares as distributions on such Shares the proceeds
of the borrowing under the Loan Agreement, and the Class B Exercise
Price shall be reduced by the aggregate amount of such distributions.
(viii) PM or any Permitted Assignee under the Class A Option
Agreement shall purchase all of the Class A Shares from the Liggett
Parties for the Class A Exercise Price, and the Liggett Parties shall
deliver such Class A Shares, free and clear of any Liens whatsoever.
(ix) The Parties shall take such other actions and execute
such other documents as may be reasonably appropriate or necessary to
effect the transactions described in clauses (i) through (viii).
Notwithstanding the foregoing and for the avoidance of doubt, the inability of
the Company to enter into the Loan Agreement or obtain the Loan Amount (and
therefore the non-occurrence of the distributions described in clause (vii))
will not interfere with or otherwise delay the consummation of the other
transactions contemplated by this Section. In the event such events do not occur
at the Closing, the Parties shall use their reasonable best efforts to cause the
Loan Agreement to be entered into, the Loan Amount to be borrowed and the
distributions contemplated by clause (vii) to occur as promptly as practicable
following the Closing Date.
-11-
<PAGE> 18
Section 2.8 Conditions to Closing.
(a) Exercise of Class A Option. PM shall exercise, or
be obligated to exercise the Class A Option, as provided in the Class A Option
Agreement.
(b) Representations, Warranties and Covenants of the Liggett
Parties. The representations and warranties of the Liggett Parties made in this
Agreement shall be true and correct in all material respects as of the date
hereof and, except as specifically contemplated by this Agreement, on and as of
the Closing Date, as though made on and as of the Closing Date, and the Liggett
Parties shall have performed or complied in all material respects with the
obligations and covenants required by this Agreement to be performed or complied
with by the Liggett Parties by the time of the Closing; the Liggett Parties
shall have delivered to PM a certificate dated the Closing Date and signed by an
authorized officer confirming the foregoing.
(c) Representations, Warranties and Covenants of PM. The
representations and warranties of PM made in this Agreement shall be true and
correct in all material respects as of the date hereof and, except as
specifically contemplated by this Agreement, on and as of the Closing Date, as
though made on and as of the Closing Date, and PM shall have performed or
complied in all material respects with the obligations and covenants required by
this Agreement be performed or complied with by it by the time of the Closing;
PM shall have delivered to the Liggett Parties a certificate dated the Closing
Date and signed by an authorized officer confirming the foregoing.
(d) Satisfaction of Conditions in the Class A Option
Agreement. The obligations of PM under this Agreement are subject to the
satisfaction of the conditions set forth in Article VIII of the Class A Option
Agreement and the obligations of the Liggett Parties under this Agreement are
subject to the satisfaction of the conditions set forth in Article VII of the
Class A Option Agreement.
(e) Letter Agreement. Neither PM nor any of the Liggett
Parties shall have breached any of its material obligations under paragraph 9 of
that certain letter agreement dated November 20,1998 between PM and the Liggett
Parties, which obligations shall survive the execution of this Agreement and the
Closing.
(f) Waiver of Conditions. The conditions in Section 2.8(b) and
2.8(e) (with respect to the obligations of the Liggett Parties) and Article VIII
of the Class A Option Agreement are for the sole benefit of PM and may be waived
by PM, and the conditions in 2.8(c) and 2.8(e) (with respect to PM's
obligations) and Article VII of the Class A Option Agreement are for the sole
benefit of the Liggett Parties and may be waived by the Liggett Parties.
Section 2.9 Liggett Parties' Indemnification Obligation. The
Liggett Parties jointly and severally shall indemnify and hold harmless the
Company, PM, their respective Affiliates, officers, directors, employees, agents
and representatives (collectively, the "Indemnified Parties") from and against
any and all claims, actions, suits, demands, assessments, judgments, losses,
liabilities, damages, costs and expenses (including without limitation,
penalties, attorneys' fees and accounting fees and investigation costs)
(collectively, "Claims") that may be incurred by the Indemnified Parties
resulting or arising from or related to, or
-12-
<PAGE> 19
incurred in connection with, (i) the liabilities described in Section
2.7(b)(ii), none of which are being assumed by the Company, (ii) the failure by
the Liggett Parties to transfer the Marks as provided in Section 2.7(b)(i), and
(iii) any failure to comply with the limitations set forth in Section
2.7(b)(iii) regarding any other assets of the Liggett Parties other than the
Marks. The rights of the Indemnified Parties to indemnification as set forth in
this Section shall be in addition to, and not in limitation of, any other
remedies they may have, whether in law or equity, and shall survive any
termination of this Agreement or termination or dissolution of the Company.
Section 2.10 Reasonable Best Efforts. Each of the Parties
agrees to use its reasonable best efforts to cause the conditions to the Closing
to be satisfied; provided, however, that, subject to the terms and conditions of
the License Agreement, PM shall not be required to agree to divest or hold
separate any brand, product, business or assets or to take or agree to take any
action that limits its freedom of action with respect to, or its ability to
retain, any of the Marks or any brand, product, business or other asset of PM or
its Affiliates.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE LIGGETT PARTIES
Each of the Liggett Parties hereby jointly and severally
represents and warrants to PM as follows:
Section 3.1 Corporate Authority. Each of the Liggett Parties
is a corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation or organization. Each Liggett Party
has all requisite corporate power and authority to enter into this Agreement,
the Class A Option Agreement and the Class B Option Agreement (collectively, the
"Transaction Agreements") and to consummate the transactions contemplated
thereby. All corporate acts and other proceedings required to be taken by each
Liggett Party to authorize the execution, delivery and performance of each of
the Transaction Agreements and the consummation of the transactions contemplated
thereby have been duly and properly taken. The Transaction Agreements have been
duly executed and delivered by each Liggett Party, and each such agreement
constitutes the legal, valid and binding obligations of each Liggett Party,
enforceable against each Liggett Party in accordance with its terms.
Section 3.2 No Conflict; Required Filings and Consents. The
execution and delivery of each of the Transaction Agreements by each Liggett
Party, the consummation by each Liggett Party of the transactions contemplated
thereby and compliance by each Liggett Party with all of the provisions of each
of the Transaction Agreements to which it is a party will not (i) conflict with
or violate the certificate of incorporation or by-laws of any Liggett Party or
any comparable organizational documents, (ii) conflict with or violate any
statute, ordinance, rule, regulation, order, judgment or decree applicable to
any Liggett Party, or by which any of them or any of their respective properties
or assets are bound, encumbered or affected, or (iii) result in a violation or
breach of or constitute a default (or an event which with notice or lapse of
time or both would become a default) under, or give to others any rights of
termination, amendment, acceleration or cancellation of, or result in any loss
of any material benefit to, or result in increased, additional, accelerated or
guaranteed rights or entitlements of any person
-13-
<PAGE> 20
under, or the creation of any Lien on any of the Marks pursuant to, any note,
bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which any Liggett Party is a
party or by which any of the Marks are bound or affected. None of the execution
and delivery of any of the Transaction Agreements by any Liggett Party, the
consummation by each Liggett Party of the transactions contemplated thereby or
compliance by each Liggett Party with any of the provisions of any of the
Transaction Agreements to which it is a party will require any consent, waiver,
approval, authorization or permit of, license, or registration or filing with,
or notification to any government or subdivision thereof, domestic, foreign or
supranational or any administrative, governmental or regulatory authority,
agency, commission, tribunal or body, domestic, foreign or supranational (a
"Governmental Entity"), except for (i) the filing of the Certificate pursuant to
the Delaware Act and (ii) compliance with the HSR Act.
Section 3.3 Intellectual Property. At the Closing, the Company
will own and have the right in the United States (as defined in the License
Agreement) to use, execute, reproduce, display, modify, enhance, distribute,
prepare derivative works of and license the Marks without payment to any other
person and the consummation of the transactions contemplated by the Transaction
Agreements will not conflict with, alter or impair such right. Other than the
Transaction Agreements and the License Agreement, none of the Liggett Parties or
any of their respective Subsidiaries has granted any options, licenses or
agreements of any kind relating to the Marks or the marketing or distribution
thereof. At the Closing, the Company will hold the Marks free and clear of the
claims of others and of all liens, claims, charges, security interests, options
or other legal or equitable encumbrances or restrictions whatsoever (any of the
foregoing, a "Lien"). The present use of the Marks by the Liggett Parties and
their Subsidiaries does not violate, conflict with or infringe the intellectual
property of any other person or entity. No claims are pending, or to the best
knowledge of any of the Liggett Parties, threatened, by any person with respect
to the ownership, validity, enforceability, effectiveness or use of the Marks,
and during the past three years, none of the Liggett Parties has received any
communications alleging that any of the Liggett Parties or any of their
Subsidiaries through their use of the Marks has violated any rights relating to
the intellectual property of any person or entity. None of the Liggett Parties
will retain any interest whatsoever in the Marks except for its ownership of the
Class A Shares and the Class B Shares, subject to the exercise of the Class A
Option and the exercise of the Class B Option.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PM
PM hereby represents and warrants to the Liggett Parties as
follows:
Section 4.1 Corporate Authority. PM is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia. PM has all requisite corporate power and authority to
enter into each of Transaction Agreements and the License Agreement and to
consummate the transactions contemplated thereby. All corporate acts and other
proceedings required to be taken by PM to authorize the execution, delivery and
performance of the Transaction Agreements and the License Agreement and the
consummation of the transactions contemplated thereby have been duly and
properly taken. The Transaction
-14-
<PAGE> 21
Agreements have been, and, when executed and delivered, the License Agreement
will have been, duly executed and delivered by PM, and each such agreement, once
executed and delivered, does and will constitute the legal, valid and binding
obligations of PM, enforceable against it in accordance with its terms.
Section 4.2 No Conflict; Required Filings and Consents. The
execution and delivery of each of the Transaction Agreements and the License
Agreement by PM, the consummation by PM of the transactions contemplated thereby
and compliance by PM with all of the provisions of each of the Transaction
Agreements and the License Agreement will not (i) conflict with or violate the
certificate of incorporation or by-laws of PM, (ii) conflict with or violate any
statute, ordinance, rule, regulation, order, judgment or decree applicable to
PM, or by which it or any of its properties or assets are bound, encumbered or
affected, or (iii) result in a violation or breach of or constitute a default
(or an event which with notice or lapse of time or both would become a default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, or result in any loss of any material benefit to, or result in
increased, additional, accelerated or guaranteed rights or entitlements of any
person under, or the creation of any Lien on any of the property or assets of PM
pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease,
license, permit, franchise or other instrument or obligation to which PM is a
party or by which any of its properties are bound or affected. None of the
execution and delivery of any of the Transaction Agreements and the License
Agreement by PM, the consummation by PM of the transactions contemplated thereby
or compliance by PM with any of the provisions of any of the Transaction
Agreements and the License Agreement will require any consent, waiver, approval,
authorization or permit of, license, or registration or filing with, or
notification to Governmental Entity, except for (i) the filing of the
Certificate pursuant to the Delaware Act and (ii) compliance with the HSR Act.
ARTICLE V
COVENANTS
Section 5.1 Activities of Liggett Relating to the Brands.
Prior to the Closing, the Liggett Parties may only sell inventory related to the
Marks in the normal course and may not engage in any Trade Loading with respect
to the Marks. Promptly after the Closing, the Liggett Parties shall destroy any
inventory of finished goods related to the Brands, as well as all point-of-sale,
packaging, advertising and marketing materials related to the Brands.
Section 5.2 Loan Agreement. PM, the Liggett Parties and the
Company shall use their respective reasonable best efforts to enable the Company
to obtain the Loan Amount; provided, however, that PM shall not be required
pursuant to the foregoing to directly or indirectly guarantee or subsidize the
obtaining of the Loan Amount. In connection with the cooperation contemplated by
this Section 5.2, PM shall consent to the pledge by the Company of the Marks and
of the Company's interest in the License Agreement to the lenders under the Loan
Agreement, and the Liggett Parties shall (or shall cause the holder thereof to)
pledge all of the Class B Shares (including the put right set forth in Section
9.6 hereof) to such lenders. PM shall use its reasonable best efforts, which
shall include, if required, confirming the continuation of the guarantee of
Philip Morris Companies Inc. of PM's obligations under the License Agreement, to
cause the Company to cause the indebtedness represented by the Loan Amount
(including any
-15-
<PAGE> 22
extension or refinancing of the indebtedness incurred under the Loan Agreement)
to remain outstanding until the earlier of (a) the day on which the Class B
Option becomes exercisable and (b) the first day on which the Class B Shares are
no longer owned by the Liggett Parties or their Affiliates; provided, however,
that the Company may repay such indebtedness if (i) as a result of developments
subsequent to the date hereof, there is no reasonable basis to conclude that
there will be any material benefit to the Liggett Parties of having such
indebtedness remain outstanding or (ii) Eve has taken any action to repudiate
its obligation as a Guarantor.
Section 5.3 HSR Clearance. The Parties shall comply with the
covenants set forth in Sections 5.1 and 6.1 of the Option Agreements regarding
obtaining HSR Clearance and any other Governmental Filings.
Section 5.4 Tax Basis of Marks. The Liggett Parties shall
provide the Company with such information as it may reasonably request
concerning the basis of the Marks for federal income tax purposes.
Section 5.5 Access to Information. Prior to the Closing, the
Liggett Parties shall, and shall cause each of their respective Subsidiaries to,
give PM and its representatives, employees, counsel and accountants full access,
during normal business hours and upon reasonable notice, to the employees,
agents, independent contractors, properties, books and records relating to the
Marks, only to the extent, in the reasonable judgment of counsel, permitted by
law, including antitrust law, and provided that the Liggett Parties and their
Subsidiaries shall not be obligated to make any disclosure which would cause
forfeiture of attorney-client privilege. The Liggett Parties shall notify PM in
writing if any disclosure is withheld in order to avoid such forfeiture. No
investigation pursuant to this Section shall affect or be deemed to affect any
representation or warranty made by the Liggett Parties. PM agrees that all
information received pursuant to this Section shall be kept confidential and PM
shall not disclose such information to any third party unless required to do so
by applicable law.
Section 5.6 Representations and Warranties. Each of the
Parties shall give written notice to the other Party promptly upon the
occurrence of any event that would cause or constitute a material breach or
would have caused a material breach, had such event occurred or been known to it
prior to the date hereof, of any of its representations or warranties contained
in any of the Transaction Agreements.
Section 5.7 Retention of Certain Trademarks, etc. (a) PM and
the Company each acknowledge that the Liggett Parties shall continue to own in
the United States (as defined in the License Agreement) all right, title and
interest in, to and under the "LIGGETT," "MYERS" and "LIGGETT & MYERS"
trademarks, trade names, service marks, Internet domain names or any similar
electronic designation, and all registrations and applications for registration
therefor, provided, however, that any use by the Liggett Parties of "LIGGETT &
MYERS" as a trademark shall be subject to the consent of PM or the Company,
which consent shall not be unreasonably withheld or delayed so long as such use
does not encroach upon the prior trade dress, type style or logo associated with
the "L&M" Mark. Neither PM nor the Company shall use or register any trademarks,
service marks, trade dress, trade names, Internet domain names or any similar
electronic designation that is the same as or confusingly similar to "LIGGETT,"
"MYERS" or "LIGGETT & MYERS." None of the Liggett Parties shall use or register
any
-16-
<PAGE> 23
trademarks, service marks, trade dress, trade names, Internet domain names or
any similar electronic designation that is the same as or confusingly similar to
"L&M," "LARK" or "CHESTERFIELD."
(b) Except as set forth in the proviso to the first sentence
of Section 5.7(a), neither PM nor the Company, nor any of their respective
Affiliates shall (i) take any action, or permit any Affiliate to take any
action, which (x) is inconsistent with the ownership rights of the Liggett
Parties in, to and under the "LIGGETT," "MYERS" or "LIGGETT & MYERS" marks or
(y) will impair the ownership, validity, enforceability, effectiveness or use of
the "LIGGETT," "MYERS" or "LIGGETT & MYERS" marks, or (ii) challenge the
ownership, validity, enforceability, effectiveness or use of the "LIGGETT,"
"MYERS" or "LIGGETT & MYERS" marks.
ARTICLE VI
PURPOSE AND POWERS OF THE COMPANY
Section 6.1 Purpose. The Company is formed for the object and
purpose of, and the nature of the business to be conducted and promoted by the
Company is, engaging in any lawful act or activity for which limited liability
companies may be formed under the Delaware Act.
Section 6.2 Powers of the Company. The Company shall have the
power and authority to take any and all actions necessary, appropriate, proper,
advisable, incidental or convenient to or for the furtherance of the purpose set
forth in Section 6.1.
Section 6.3 Other Authority. Notwithstanding anything to the
contrary contained in this Agreement, the Company, and the Manager on behalf of
the Company, may enter into the License Agreement, the Loan Agreement and any
agreements or documents contemplated by any of the foregoing agreements, and the
Company is authorized to perform its obligations under the License Agreement,
the Loan Agreement and such agreements or documents, all without any further
act, vote or approval of any Member or any other Person.
ARTICLE VII
MEMBERS
Section 7.1 Members. The name and mailing address of each
Member and the number and class of Shares owned thereby shall be listed on
Schedule A attached hereto. The Manager or a designated Officer shall be
required to update Schedule A from time to time as necessary to accurately
reflect changes in address and/or the ownership of Shares. Any amendment or
revision to Schedule A made to reflect an action taken in accordance with this
Agreement shall not be deemed an amendment to this Agreement. Any reference in
this Agreement to Schedule A shall be deemed to be a reference to Schedule A as
amended and in effect from time to time.
-17-
<PAGE> 24
Section 7.2 Powers of Members. The Members shall have the
power to exercise any and all rights or powers granted to the Members pursuant
to the express terms of this Agreement. Members shall not have the authority to
bind the Company by virtue of their status as Members.
Section 7.3 Member's Shares. A Member's Shares shall for all
purposes be personal property. No holder of a Share or Member shall have any
interest in specific Company assets or property, including any assets or
property contributed to the Company by such Member as part of any Capital
Contribution.
Section 7.4 Classes. (a) The Shares shall be divided between
Class A Shares and Class B Shares.
(b) The Class A Shares and Class B Shares may not be
subdivided, and each of such Shares shall have identical rights and terms in all
respects except as specifically set forth in this Agreement.
(c) The Class A Shares and Class B Shares shall be securities
governed by Article 8 of the Uniform Commercial Code as in effect in the States
of New York and Delaware. Each Member shall be entitled to receive one or more
certificates registered in its name and representing all or any portion of the
Class A Shares or the Class B Shares then held by it (each, a "Certificate of
Interest"). A security interest in any Class A Shares or Class B Shares may be
perfected by control (as defined in Article 8 of the Uniform Commercial Code as
in effect in States of New York and Delaware) of a Certificate of Interest
representing such Class A Shares or Class B Shares, and the Company hereby makes
any elections which may be required under the Uniform Commercial Code as in
effect in the States of New York and Delaware to give effect to the provisions
of this paragraph (c).
Section 7.5 Partition. Each Member waives any and all rights
that it may have to maintain an action for partition of the Company's property.
Section 7.6 Resignation. A Member shall cease to be a Member
at the time such Member ceases to own any Shares. Shares are redeemable only
pursuant to Section 9.5 of this Agreement.
Section 7.7 Member Meetings. (a) A meeting of Class A Members
for such business as may be stated in the notice of the meeting shall be held at
such dates, time and place as is determined by the Manager.
(b) Special meetings of the Class A Members for any purpose or
purposes may be called only by the Manager.
(c) Class B Members shall have no right to attend any meeting
of the Company.
Section 7.8 Voting. Each Member entitled to vote in accordance
with the terms of this Agreement may vote in person or by proxy. The Members
shall be entitled to vote only to the extent expressly set forth herein. Unless
otherwise provided for by this Agreement, all matters to be decided by the
Members shall be decided by an affirmative vote (or consent in
-18-
<PAGE> 25
writing) of the majority of the Total Voting Power of the holders of the Class A
Shares, voting together as a single class, and no matter may be decided without
such affirmative vote or consent in writing. Except as required by the following
sentence, Class B Members shall have no voting rights as a Member of the
Company, and the Class A Members shall have all voting rights of the Members.
Any amendment, modification or waiver to, or with respect to, the License
Agreement, or any other action under or with respect to the License Agreement,
that would shorten the term of the License Agreement or decrease the amount of
the Minimum Royalty (as defined in the License Agreement) or postpone the date
on which any royalty under the License Agreement is payable shall require the
approval of the holders of the Class B Shares as a separate class.
Section 7.9 Quorum. Except as otherwise required by law, the
presence, in person or by proxy, of a majority of the holders of the Class A
Shares shall constitute a quorum at all meetings of the Members. In case a
quorum shall not be present at any meeting, Members holding a majority of the
Total Voting Power held by Members represented thereat, in person or by proxy,
shall have the power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until the requisite amount of Shares
shall be present. At any such adjourned meeting at which the requisite amount of
Shares shall be represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
Section 7.10 Notice of Meetings. Written notice, stating the
place, date and time of the meeting, shall be given to each Class A Member, at
such Member's address as it appears on the records of the Company, not less than
two business days before the date of the meeting (except that notice to any
Member may be waived in writing by such Member).
Section 7.11 Action Without a Meeting. Any action required or
permitted to be taken at any annual or special meeting of Members may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the number of
Members as would be required to take such action at a meeting, notice of such
action shall be given to those Members who have not so consented in writing to
such action without a meeting and such written consent is filed with the minutes
of proceedings of the Members.
Section 7.12 Admission of Class B Member upon Certain
Transfers. In the event that any lender under the Loan Agreement acquires an
interest in Class B Shares as a result of a foreclosure of the pledge
contemplated by Section 9.8(b), such lender shall be admitted as a Class B
Member without any further action by the Company or the Members.
ARTICLE VIII
MANAGEMENT
Section 8.1 Board of Directors. The Company shall have a
board of directors consisting of one or more persons elected by the Class A
Members (each, a "director" and collectively, the "directors" or "Board of
Directors"). Each person elected to the Board of Directors shall hold office for
one year or until his successor is elected and duly qualified. A majority of the
total number of directors shall constitute a quorum for the transaction of
business.
-19-
<PAGE> 26
The vote of a majority of the directors present at a meeting at which a quorum
is present shall be the act of the Board of Directors. The number of directors
shall be determined from time to time by the Class A Members. No director (as
such) shall have authority to bind the Company. The directors shall not be
"managers" within the meaning of the Delaware Act. The Board of Directors shall
act on behalf of the Members to select the Manager as provided in Section 8.2.
Section 8.2 Manager. In accordance with Section 18-402 of the
Delaware Act, management of the Company shall be vested in the manager of the
Company (the "Manager"), who shall be elected by the Board of Directors. The
Manager shall continue as such until such time as a new Manager is elected by
the Board of Directors. The business and affairs of the Company shall be managed
exclusively by and under the direction of the Manager in accordance with the
terms of this Agreement, and the Manager shall have the sole and exclusive
responsibility and authority for the management of the Company.
Section 8.3 Officers. The Manager may, but shall not be
required to, designate and appoint such Officers as may be appropriate, as
determined by the Manager, to conduct the business and affairs of the Company,
and such Officers shall hold office until their successors are duly appointed.
The Manager may also establish additional or alternate offices of the Company as
it deems advisable, and such offices shall be filled with such Officers, who
shall perform such duties and serve such terms, as the Manager shall determine
from time to time.
ARTICLE IX
SHARES AND CAPITAL ACCOUNTS
Section 9.1 Capital Contributions. The agreed value of the
initial capital contributions contemplated by Section 2.7 shall be as set forth
on Schedule A.
Section 9.2 Status of Capital Contributions. (a) No Member
shall receive any interest, salary or drawing with respect to its Capital
Contributions or its Capital Account or for services rendered on behalf of the
Company or otherwise in its capacity as a Member, except as otherwise
specifically provided in this Agreement with respect to allocations and
distributions.
(b) Except as otherwise provided herein and by the Delaware
Act, the Members shall be liable only to make their Capital Contributions
pursuant to Section 2.7 hereof, and no Member shall be required to lend any
funds to the Company or to make any additional Capital Contributions to the
Company except as provided herein or therein. Other than as provided under the
Delaware Act, no Member shall have any personal liability for the payment of any
Capital Contribution of any other Member who is not an Affiliate of such Member.
Section 9.3 Capital Accounts. (a) An individual Capital
Account shall be established and maintained for each Member by class of Share.
(b) The Capital Account of each Member by class of Share shall
be maintained in accordance with the following provisions:
-20-
<PAGE> 27
(i) to such Member's Capital Account there shall be credited
such Member's Capital Contributions, if any, when and as received,
Profits and Gross Income and other items of Company income and gain
allocated to such Member pursuant to Sections 10.1 and 10.2 hereof and
the amount of any Company liabilities that are assumed by such Member
or that are secured by any Company assets distributed to such Member;
(ii) to such Member's Capital Account there shall be debited
the amount of cash and the Gross Asset Value of any Company assets
(other than cash) transferred in kind to such Member in a Distribution
pursuant to any provision of this Agreement, Losses and other items of
Company loss and deduction allocated to such Member pursuant to
Sections 10.1 and 10.2 hereof and the amount of any liabilities of such
Member that are assumed by the Company (other than liabilities taken
into account in determining a Member's Capital Contribution);
(iii) in determining the amount of any liability for purposes
of this subsection (b), there shall be taken into account ss. 752(c) of
the Code and any other applicable provisions of the Code and the
Treasury Regulations;
(iv) Capital Accounts shall be otherwise adjusted in
accordance with Treasury Regulation ss. 1.704-1(b); and
(v) if Shares are transferred in accordance with the terms
of this Agreement, the transferee shall succeed to the Capital Account
of the transferor to the extent it relates to the transferred Shares.
The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Treasury Regulation ss. 1.704-1(b), and shall be interpreted and applied in
a manner consistent with such Treasury Regulation.
Section 9.4 Advances. If any Member shall advance any funds to
the Company in addition to its Capital Contributions, the amount of such advance
shall neither increase its Capital Account nor entitle it to any increase in its
share of the Distributions of the Company. The amount of any such advance shall
be a debt obligation of the Company to such Member and shall be repaid to it by
the Company with such interest rate, conditions and terms as mutually agreed
upon by such Member and the Manager. Any such advance shall be payable and
collectible only out of Company assets, and the other Members shall not be
personally obligated to repay any part thereof. No Person who makes any
nonrecourse loan to the Company shall have or acquire, as a result of making
such loan, any direct or indirect interest in the profits, capital or property
of the Company, other than as a creditor.
Section 9.5 Redemption of Shares. (a) Class A Shares shall not
be redeemable by the Company.
(b) The Class B Shares shall be redeemable in whole by the
Company during the exercise period for the Class B Option, as set forth in the
Class B Option, for an aggregate redemption price of $139.9 million, less the
aggregate amount of all distributions made on the Class B Shares (other than the
distributions required by Section 11.2) plus the aggregate amount of capital
contributed by the holder of the Class B Shares (other than the Marks and
Associated
-21-
<PAGE> 28
Goodwill) (as adjusted pursuant to this paragraph, the "Redemption Price"). Upon
such redemption, PM shall be required to cause each Guarantor to be released
from its obligation as guarantor of the Loan and for any related Liens on the
Class B Shares to be released. In the event of such redemption, the Company
shall provide notice to the Liggett Parties, which notice shall set forth a date
for the redemption to be effected, which date shall be a date not less than 20
days following the date such notice is provided. At the specified date, the
Liggett Parties shall deliver to the Company any certificates or other evidence
of the Class B Shares, free and clear of all Liens (other than Liens relating to
the Loan), against payment of the Redemption Price, and the parties shall
execute such other customary documents as may be required to effect the
redemption of the Class B Shares. In the event that the outstanding principal
amount under the Loan Agreement has been reduced due to payments to the lenders
by any Guarantor, then, provided that the Company or a Class A Member (i) has no
further liability (contingent or otherwise) with respect to the Loan amount so
repaid (whether to the lender, the Guarantor or another) and (ii) has not
previously repaid or otherwise reimbursed such Guarantor for such payment, the
Redemption Price shall be increased by the amount of such reduction.
Section 9.6 Liggett Parties' Class B Put Option. Provided that
either the Class A Option has been exercised or was required to have been
exercised pursuant to the Class A Option Agreement, the Liggett Parties shall
have a put option pursuant to which, upon written notice provided by the Liggett
Parties to PM, PM (or its designee) shall be required to purchase, and the
Liggett Parties shall be required to sell, all, but not less than all, of the
then-outstanding Class B Shares to PM (or PM's designee) at a put price that is
$5 million less than the then-applicable Redemption Price but in no event less
than $500,000 (the "Put Option"). The Put Option shall be exercisable at any
time during the period (the "Put Period") beginning on March 2, 2010 and ending
at 5:00 p.m. (New York City time) on May 31, 2010. The Put Option shall be
consummated on the date specified in the written notice described in this
paragraph, which date shall be a date not less than 20 days following the date
such notice is provided. Upon consummation of the Put Option exercise, PM shall
be required to cause each Guarantor to be released from its obligations as
guarantor of the Loan and for any related Liens on the Class B Shares to be
released. At the specified date, the Liggett Parties shall deliver to PM (or its
designee) any certificates or other evidence of the Class B Shares, free and
clear of all Liens against payment of the Put Option price, and the parties
shall execute such other customary documents as may be required to effect the
exchange of the Class B Shares.
Section 9.7 Liggett Parties' Class B Conversion Right. At the
expiration of the Put Period, if the Class B Option has not been exercised, and
the Class B Shares have not been redeemed by the Company pursuant to Section
9.5, the holders of the Class B Shares shall be entitled, at their election, to
convert all, but not less than all, of the then-outstanding Class B Shares into
an equivalent number of Class A Shares, which newly issued Class A Shares shall
have the same rights to share in future profits and losses of the Company, and
the same aggregate voting power, as the Class A Shares issued at the Closing.
The Class A Shares issued pursuant to this Section shall represent 50% of the
aggregate capital of the Company created pursuant to Section 2.7.
Section 9.8 Assignment and Encumbrance of Interests. (a)
Except as otherwise provided herein or in the Class A Option Agreement or the
Class B Option Agreement, the Class A Shares and the Class B Shares shall not be
transferable or otherwise subject to
-22-
<PAGE> 29
Assignment by any party, except that the Class A Shares (or, upon exercise of
the Class B Option or the Put Option, the Class B Shares) may be Assigned by PM
so long as the acquiring party assumes the obligations of PM under this
Agreement (or the pro rata portion thereof, based on the percentage interest
transferred) and such transfer shall not relieve PM of any of its obligations
hereunder.
(b) The Liggett Parties shall not in any way Assign any Class
A Shares or Class B Shares owned by them; provided, however, that the Class B
Shares may be pledged by a Guarantor to secure the borrowing under the Loan
Agreement, so long as such pledge, by its terms, provides that the encumbrance
shall be eliminated when the Guarantor is released from its obligations under
the Loan Agreement (including upon repayment of the entire Loan Amount).
ARTICLE X
ALLOCATIONS
Section 10.1 Allocation of Gross Income. Beginning on the date
immediately following the Closing Date, gross income in an amount equal to
$500,000 (prorated for periods less than twelve months) shall be credited
annually (and at such other times that such allocation would make a difference
in connection with another allocation, distribution or other event under this
Agreement) pro rata to the holders of Class B Shares.
Section 10.2 Allocation of Profits. Subject to Sections 10.3
and 10.4, the Company's Profits (taking into account the amount of any gross
income allocated under Section 10.1 above as an item of deduction) shall be
allocated annually (and at such other times that such allocation would make a
difference in connection with another allocation, distribution or other event
under this Agreement) to the Class A Members in the following order:
(i) first, pro rata to the holders of the Class A Shares
until they have been allocated Profits equal to the amount of Losses
previously allocated under Section 10.3(i) below not previously offset
by an allocation of Profits under this clause; and
(ii) second, pro rata to the holders of the Class A Shares.
Section 10.3 Allocation of Losses. Subject to Sections 10.3
and 10.4, the Company's Losses (taking into account the amount of gross income
allocated under Section 10.1 above as an item of deduction) shall be allocated
annually (and at such other times that such allocation would make a difference
in connection with another allocation, distribution or other event under this
Agreement) to the Class A Shares in the following order:
(i) first, pro rata to the holders of the Class A Shares
until such holders have been allocated an amount of Losses equal to the
amount of Profits previously allocated to the holders of Class A Shares
under Section 10.2(ii) not previously offset by an allocation of Losses
under this clause; and
(ii) second, pro rata to the holders of Class A Shares.
-23-
<PAGE> 30
Section 10.4 Allocation Rules. (a) In the event there is a
change in the respective ownership interests of Class A Members during the year,
the Profits (or Losses) allocated to the Members for each Fiscal Year during
which there is a change in the respective ownership interests of Members during
the year shall be allocated among the Members in proportion to the ownership
interests during such Fiscal Year in accordance with ss. 706 of the Code, using
any convention permitted by law and selected by the Manager.
(b) For purposes of determining the Profits, Losses or any
other items allocable to any period, Profits, Losses and any such other items
shall be determined on a daily, monthly or other basis, as determined by the
Manager using any method that is permissible under ss. 706 of the Code and the
Treasury Regulations thereunder.
(c) Except as otherwise provided in this Agreement, all items
of Company income, gain, loss, deduction, credit and any other allocations not
otherwise provided for shall be divided among the Class A Members in the same
proportions as they share Profits and Losses for the Fiscal Year in question.
(d) The Members agree to report their shares of Company
income, gain, loss, deduction and credit in conformity with the allocation
provisions contained in this Article X.
Section 10.5 Regulatory Allocations. The following allocations
shall be made in the following order of priority:
(a) Company Minimum Gain Chargeback. Except as otherwise
provided in Treasury Regulation ss. 1.704-2(f), notwithstanding any other
provision of this Article X, if there is a net decrease in Company Minimum Gain
during any Fiscal Year, each Member shall be specially allocated items of
Company income and gain for such Fiscal Year (and, if necessary, subsequent
Fiscal Years) in an amount equal to such Member's share of the net decrease in
Company Minimum Gain, determined in accordance with Treasury Regulation ss.
1.704-2(g). Allocations pursuant to the previous sentence shall be made in
proportion to the respective amounts required to be allocated to each Member
pursuant thereto. The items to be so allocated shall be determined in accordance
with Treasury Regulations ss.ss. 1.704-2(f)(6) and 1.704-2(j)(2). This Section
10.5(a) is intended to comply with the minimum gaiN chargeback requirements set
forth in Treasury Regulation ss. 1.704-2(f) and shall be interpreted
consistently therewith.
(b) Member Minimum Gain Chargeback. Except as otherwise
provided in Treasury Regulation ss. 1.704-2(i)(4), notwithstanding any other
provision of this Article X, if there is a net decrease in Member Minimum Gain
attributable to a Member Nonrecourse Debt during any Fiscal Year, each Member
who has a share of the Member Minimum Gain attributable to such Member
Nonrecourse Debt, determined in accordance with Treasury Regulation ss.
1.704-2(i)(5), shall be specially allocated items of Company income and gain for
such Fiscal Year (and, if necessary, subsequent Fiscal Years) in an amount equal
to the portion of such Member's share of the net decrease in Member Minimum Gain
attributable to such Member Nonrecourse Debt, determined in accordance with
Treasury Regulations ss. 1.704-2(i)(4). Allocations pursuant to the previous
sentence shall be made in proportion to the respective amounts required to be
allocated to each Member pursuant thereto. The items to be so allocated shall be
determined in accordance with Treasury Regulations ss.ss. 1.704-2(i)(4) and
-24-
<PAGE> 31
1.704-2(j)(2). This Section 10.5(b) is intended to comply with Treasury
Regulation ss. 1.704-2(i)(4) and shall be interpreted consistently therewith.
(c) Nonrecourse Deductions. Nonrecourse Deductions for any
Fiscal Year shall be specially allocated among the Class A Members in proportion
to the allocations for such Fiscal Year of Profits under Section 10.2 or Losses
under Section 10.3, as applicable.
(d) Allocation of Member Nonrecourse Deductions. Any Member
Nonrecourse Deduction for any Fiscal Year shall be specially allocated to the
Member who bears the Economic Risk of Loss with respect to the Member
Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in
accordance with Treasury Regulation ss. 1.704-2(i)(1). The Members acknowledge
and agree that, as collateralized guarantor of the Loan Amount, Eve shall be
deemed for purposes of this Section 10.5(d) during the period of such guaranty
to bear the Economic Risk of Loss with respect to the Loan Amount which, for
such period, shall constitute Member Nonrecourse Debt.
(e) Qualified Income Offset. In the event any Member
unexpectedly receives any adjustments, allocations or distributions described in
Treasury Regulations ss.ss. 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) or
1.704-1(b)(2)(ii)(d)(6), items of Company income and gain (consisting of a pro
rata portion of each item of Company income, including gross income, and gain
for the Fiscal Year) shall be specially allocated to each such Member in an
amount and manner sufficient to eliminate, to the extent required by the
Treasury Regulation, the Adjusted Capital Account Deficit of such Member created
by such adjustments, allocations or distributions as quickly as possible;
provided that an allocation pursuant to this Section 10.5(e) shall be made if
and only to the extent that such Member would have an Adjusted Capital Account
Deficit after all other allocations provided for in this Section 10.5 have been
tentatively made as if this Section 10.5(e) were not in this Agreement. This
Section 10.5(e) is intended to comply with the qualified income offset
requirement in Treasury Regulation ss. 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
(f) Gross Income Allocation. In the event any Member has a
deficit Capital Account at the end of any Fiscal Year that is in excess of the
sum of (i) the amount such Member is obligated to restore pursuant to the terms
of this Agreement or otherwise, and (ii) the amount such Member is deemed to be
obligated to restore pursuant to the penultimate sentence of each of Treasury
Regulations ss.ss. 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be
specially allocated items of Company income and gain in the amount of such
excess as quickly as possible, provided that an allocation pursuant to this
Section 10.5(f) shall be made if and only to the extent that such Member would
have a deficit Capital Account in excess of such sum after all other allocations
provided for in this Section 10.5 have been tentatively made as if Section
10.5(e) and this Section 10.5(f) were not in this Agreement.
(g) Member Nonrecourse Deductions. If any Class A Member bears
the Economic Risk of Loss with respect to a Member Nonrecourse Liability, any
Member Nonrecourse Deduction for any Fiscal Year shall be specially allocated to
the Member who bears the Economic Risk of Loss with respect to the Member
Nonrecourse Liability to which such Member Nonrecourse Deductions are
attributable in accordance with Treasury Regulation ss. 1.704-2(i).
-25-
<PAGE> 32
(h) Adjustments Occasioned by Code ss. 754 Election. To the
extent an adjustment to the adjusted tax basis of any Company asset pursuant to
Code ss. 734(b) or Code ss. 743(b) is required pursuant to an election under
Code ss. 754 to be taken into account in determining Capital Accounts as the
result of a distribution to a Member in complete liquidation of its interest,
the amount of such adjustment to Capital Accounts shall be treated as an item of
gain (if the adjustment increases the basis of the asset) or loss (if the
adjustment decreases such basis) and such gain or loss shall be specially
allocated to the Member in accordance with their interests in the event Treasury
Regulation ss. 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such
distribution was made in the event Treasury Regulation ss.
1.704-1(b)(2)(iv)(m)(4) applies.
(i) Deductions under ss. 709 of the Code. Deductions under ss.
709 of the Code for amortization of amounts paid or incurred to organize the
Company or, in the case of liquidation of the Company prior to the end of the
amortization period specified in ss. 709 of the Code, deductions under ss. 165
of the Code for the previously unrecovered portion of such amounts, shall be
specially allocated to the Member who paid or incurred such amounts and such
Member's Capital Account shall be credited for amounts paid or incurred by such
Member.
Section 10.6 Treatment of Regulatory Allocations. The
allocations set forth in Section 10.5 (the "Regulatory Allocations") are
intended to comply with and shall be interpreted consistently with certain
requirements of Treasury Regulations ss.ss. 1.704-1 and 1.704-2. Notwithstanding
any other provisions of this Article VI (other than the Regulatory Allocations),
the Regulatory Allocations shall be taken into account in allocating other
Profits and Losses and items of income, gain, loss and deduction among Members
so that, to the extent possible, the net amount of such allocations of other
Profits and Losses and other items and the Regulatory Allocations to each Member
shall be equal to the net amount that would have been allocated to such Member
if the Regulatory Allocations had not occurred.
Section 10.7 Tax Allocations; ss. 704(c) of the Code. (a) In
accordance with ss. 704(c) of the Code and Treasury Regulation ss. 1.704-3(c)
thereunder, income, gain, loss and deduction with respect to any property
contributed to the capital of the Company shall, solely for income tax purposes,
be allocated among the Members using the traditional method of allocation under
ss. 704(c) of the Code so as to take account of any variation between the
adjusted basis of such property to the Company for United States federal income
tax purposes and its initial Gross Asset Value (computed in accordance with
paragraph (a) of the definition of "Gross Asset Value" contained in Section 1.1
hereof).
(b) In the event the Gross Asset Value of any Company asset is
adjusted pursuant to paragraph (b) of the definition of "Gross Asset Value"
contained in Section 1.1 hereof, subsequent allocations of income, gain, loss
and deduction with respect to such asset shall, solely for income tax purposes,
take account of any variation between the adjusted basis of such asset for
United States federal income tax purposes and its Gross Asset Value in the same
manner as under ss. 704(c) of the Code and the Treasury Regulations thereunder.
(c) Allocations pursuant to this Section 10.7 are solely for
purposes of United States federal, state and local taxes, and shall not affect,
or in any way be taken into account in
-26-
<PAGE> 33
computing, any Member's Capital Account or share of Profits, Losses, other items
or distributions pursuant to any provision of this Agreement.
ARTICLE XI
DISTRIBUTIONS
Section 11.1 Distributions. Subject to Section 11.2, the
Manager may make pro rata Distributions in accordance with the Class A Members'
respective Capital Accounts, in each case in proportion to the respective
Capital Accounts at such times as it deems appropriate, at its sole discretion.
Section 11.2 Mandatory Distributions. Notwithstanding Section
11.1 above, but subject to Section 2.7(b)(vii), during each Fiscal Year that the
Class B Shares are outstanding, all Distributions made by the Company shall be
made 50% to the Class A Members and 50% to the Class B Members until such time
as the Class B Members shall have received Distributions equal to the amount of
gross income allocated to the Class B Shares pursuant to Section 10.1 and
thereafter shall be made entirely to the Class A Members. Such Distribution
shall be made to all Class B Members in accordance with their percentage
ownership of the Class B Shares.
Section 11.3 Limitations on Distribution. Notwithstanding any
provision to the contrary contained in this Agreement, the Company shall not
make any Distribution if such Distribution would violate Section 18-607 of the
Delaware Act or other applicable law, but shall instead make such Distribution
as soon as practicable after the making of such Distribution would not cause
such violation.
ARTICLE XII
BOOKS AND RECORDS
Section 12.1 Books, Records and Financial Statements. (a) The
Company shall at all times maintain, at its principal place of business,
separate books of account for the Company that shall show a true and accurate
record of all costs and expenses incurred, all charges made, all credits made
and received and all income derived in connection with the operation of the
Company in accordance with GAAP consistently applied, and, to the extent
inconsistent therewith, in accordance with this Agreement. Such books of
account, together with a copy of this Agreement and the Certificate, shall at
all times be maintained at the principal place of business of the Company and
shall be open to inspection and examination at reasonable times by each Class A
Member and its duly authorized representatives for any proper purpose reasonably
related to such Member's interest in the Company.
(b) The Manager or duly appointed Officers shall prepare and
maintain, or cause to be prepared and maintained, the books of account of the
Company. The following financial information, prepared in accordance with GAAP
and applied on a basis consistent with prior periods, shall be transmitted by
the Company to each Class A Member as soon as reasonably practicable after the
close of each Fiscal Year:
-27-
<PAGE> 34
(i) balance sheet of the Company as of the beginning and
close of such Fiscal Year;
(ii) statement of profits and losses for such Fiscal Year;
(iii) statement of each Member's Capital Account as of the
close of such Fiscal Year, and changes therein during such Fiscal Year;
and
(iv) statement of the Company's cash flows during such Fiscal
Year.
(c) The Company shall prepare in accordance with United States
federal income tax principles and transmit to each Member as soon as reasonably
practicable after the close of each Fiscal Year a statement indicating such
Member's share of each item of the Company income, gain, loss, deduction or
credit for such Fiscal Year for income tax purposes, which statement shall
include or consist of a Schedule K-1 to the Company's Internal Revenue Service
Form 1065 (or any corresponding schedule to any successor form) for such Fiscal
Year.
Section 12.2 Accounting Method. For both financial and tax
reporting purposes and for purposes of determining Profits and Losses, the books
and records of the Company shall be kept on the accrual method of accounting and
shall reflect all Company transactions and be appropriate and adequate for the
Company's business.
Section 12.3 Annual Audit. The financial statements of the
Company shall be audited by an independent certified public accountant, selected
by the Manager, with such audit to be accompanied by a report of such accountant
containing its opinion. The cost of such audit shall be an expense of the
Company.
ARTICLE XIII
TAX MATTERS
Section 13.1 Tax Matters. (a) PM shall be the "Tax Matters
Partner" of the Company for purposes of ss. 6231(a)(7) of the Code; provided,
however, that if PM shall at any time not own a majority of the Class A Shares,
the Tax Matters Partner shall be the Member owning the largest percentage of the
Class A Shares. The Tax Matters Partner shall cause to be prepared for each
taxable year of the Company the federal, state and local tax returns and
information returns, if any, which the Company is required to file.
(b) The Company shall, within ten (10) days of the receipt of
any notice from the Internal Revenue Service or any state, local or foreign tax
authority in any administrative proceeding at the Company level relating to the
determination of any Company item of income, gain, loss, deduction or credit,
mail a copy of such notice to each Member.
Section 13.2 Section 709 Election. The Tax Matters Partner may
cause the Company to file, with the Company's Internal Revenue Service Form 1065
for the taxable year in which the Company begins business, an election under ss.
709 of the Code (meeting the requirements of Treasury Regulation ss. 1.709-1(c))
to amortize its organizational expenses over
-28-
<PAGE> 35
60 months. Each Member agrees to (i) treat any amounts paid or incurred by such
Member to organize the Company as deferred expenses of the Company that are
subject to ss. 709 of the Code and (ii) maintain records of any such amounts
that are sufficiently detailed to enable the Company to file an election meeting
the requirements of Treasury Regulation ss. 1.709-1(c).
Section 13.3 Taxation as Partnership. The Company will elect
to be treated as a partnership for United States federal income tax purposes.
ARTICLE XIV
LIABILITY, EXCULPATION AND INDEMNIFICATION
Section 14.1 Liability. Except as otherwise provided by the
Delaware Act, the debts, obligations and liabilities of the Company, whether
arising in contract, tort or otherwise, shall be solely the debts, obligations
and liabilities of the Company, and no Covered Person or Member shall be
obligated personally for any such debt, obligation or liability of the Company
solely by reason of being a Covered Person or Member. Except as expressly
provided herein, no Member, in its capacity as such, shall have liability to the
Company, any other Member or the creditors of the Company.
Section 14.2 Exculpation. (a) No Covered Person shall be
liable to the Company, any Member or any other Covered Person for any loss,
damage or claim incurred by reason of any act or omission performed or omitted
by such Covered Person in good faith on behalf of the Company and in a manner
reasonably believed to be within the scope of authority conferred on such
Covered Person by this Agreement, the Board of Directors (if any), the Manager
or an appropriate Officer or employee of the Company, except that a Covered
Person shall be liable for any such loss, damage or claim incurred by reason of
such Covered Person's gross negligence, fraud or willful misconduct.
(b) A Covered Person shall be fully protected in relying in
good faith upon the records of the Company and upon such information, opinions,
reports or statements presented to the Company by any Person as to matters the
Covered Person reasonably believes are within such other Person's professional
or expert competence, including information, opinions, reports or statements as
to the value and amount of the assets, liabilities, Profits or Losses or any
other facts pertinent to the existence and amount of assets from which
distributions to Members might properly be paid.
Section 14.3 Fiduciary Duty. To the extent that, at law or in
equity, a Covered Person has duties (including fiduciary duties) and liabilities
relating thereto to the Company or to any Member, a Covered Person acting under
this Agreement shall not be liable to the Company or to any Member for its good
faith acts or omissions in reliance on the provisions of this Agreement. The
provisions of this Agreement, to the extent that they restrict the duties and
liabilities of a Covered Person otherwise existing at law or in equity, are
agreed by the parties hereto to replace such other duties and liabilities of
such Covered Person.
Section 14.4 Indemnification. To the fullest extent permitted
by applicable law, a Covered Person shall be entitled to indemnification from
the Company for any loss, damage,
-29-
<PAGE> 36
expense or claim incurred by, or asserted against, such Covered Person, or for
which such Covered Person is liable, by reason of any act or omission performed
or omitted by such Covered Person in good faith on behalf of the Company and in
a manner reasonably believed to be within the scope of authority conferred on
such Covered Person by this Agreement, except that no Covered Person shall be
entitled to be indemnified in respect of any loss, damage or claim incurred by
such Covered Person by reason of gross negligence, fraud or willful misconduct
with respect to such acts or omissions; provided, however, that any indemnity
under this Section shall be provided out of and to the extent of Company assets
only, and no Covered Person shall have any personal liability on account
thereof.
Section 14.5 Expenses. To the fullest extent permitted by
applicable law, reasonable expenses (including reasonable legal fees) incurred
by a Covered Person in defending any claim, demand, action, suit or proceeding
shall, from time to time, be advanced by the Company prior to the final
disposition of such claim, demand, action, suit or proceeding upon receipt by
the Company of an undertaking by or on behalf of the Covered Person to repay
such amount if it shall be determined that the Covered Person is not entitled to
be indemnified as authorized in Section 14.4 hereof.
Section 14.6 Insurance. The Company may purchase and maintain
insurance, to the extent and in such amounts as the Manager shall deem
reasonable or appropriate, on behalf of Covered Persons and such other Persons
as the Manager shall determine, against any liability that may be asserted
against or expenses that may be incurred by any such Person in connection with
the activities of the Company or such indemnities, regardless of whether the
Company would have the power to indemnify such Person against such liability
under the provisions of this Agreement. The Members and the Company may enter
into indemnity contracts with Covered Persons and such other Persons as the
Manager shall determine and adopt written procedures pursuant to which
arrangements are made for the advancement of expenses and the funding of
obligations under Section 10.5 hereof and containing such other procedures
regarding indemnification as are appropriate.
Section 14.7 Outside Businesses. Any Member (including any
Member that is the Manager) or Affiliate thereof may engage in or possess an
interest in other business ventures of any nature or description, independently
or with others, similar or dissimilar to the business of the Company, and the
Company and the Members shall have no rights by virtue of this Agreement in and
to such independent ventures or the income or profits derived therefrom, and the
pursuit of any such venture, even if competitive with the business of the
Company, shall not be deemed wrongful or improper. No Member or Affiliate
thereof shall be obligated to present any particular investment opportunity to
the Company even if such opportunity is of a character that, if presented to the
Company, could be taken by the Company, and any Member or Affiliate thereof
shall have the right to take for its own account (individually or as a partner
or fiduciary) or to recommend to others any such particular investment
opportunity. The Members acknowledge and agree that the Manager, and the
Officers, employees and agents of the Company may be Affiliates of a Member, or
employees of a Member or its Affiliates, and the Members hereby waive, with
respect only to their interest in the Company, any claims against such Persons
in respect of "corporate opportunities" or similar doctrines. The provisions of
this Section 14.7 shall not in any way limit, modify or amend the terms of any
noncompetition,
-30-
<PAGE> 37
license or employment agreement that may be entered into between the Company and
any Member, which terms shall be binding on the parties thereto.
Section 14.8 Third-Party Beneficiaries. There shall be no
third-party beneficiaries of this Agreement, except that the Indemnified Parties
shall be third-party beneficiaries of the provisions of Section 2.9 and Covered
Persons shall be third-party beneficiaries of this Article XIV.
ARTICLE XV
ADDITIONAL MEMBERS
Section 15.1 Admission. Except as provided in Section 2.7,
Article VII, Section 9.7 or Section 9.8, the Company may not admit any new
Members and may issue no new Class A Shares or Class B Shares.
ARTICLE XVI
ASSIGNMENTS
Section 16.1 Recognition of Assignment by the Company. No
Assignment of Shares in violation of this Agreement or the Class A Option or
Class B Option shall be valid or effective, and neither the Company nor the
Members shall recognize the same for the purpose of making allocations or
Distributions. Neither the Company nor the Members shall incur any liability as
a result of refusing to make any such allocations or Distributions with respect
to Assigned Shares in violation of this Article.
Section 16.2 Effect of Assignment. No Assignment by any Party
of its rights under this Agreement or of any interest in the Company shall
relieve such Party of its obligations hereunder.
ARTICLE XVII
DISSOLUTION, LIQUIDATION AND TERMINATION
Section 17.1 No Dissolution. The death, retirement,
resignation, expulsion, bankruptcy or dissolution of any Member or the
occurrence of any other event that terminates the continued membership of a
Member in the Company shall not, in and of itself, cause the dissolution of the
Company. In such event, the business of the Company shall be continued by the
remaining Members.
Section 17.2 Liquidation. Upon dissolution of the Company,
unless the Members continue the Company in accordance with the Delaware Act, the
Person or Persons approved by the Class A Members to carry out the winding up of
the Company shall immediately commence to wind up the Company's affairs;
provided, however, that a reasonable
-31-
<PAGE> 38
time shall be allowed for the orderly liquidation of the assets of the Company
and the satisfaction of liabilities to creditors so as to enable the Members to
minimize the normal losses attendant upon a liquidation. The Members shall
continue to share income, Profits and Losses during liquidation as specified in
Article X hereof. The proceeds of liquidation shall be distributed in the
following order and priority:
(a) to secured creditors of the Company whether or not they
are Members and to unsecured creditors that are not Members, to the
extent otherwise permitted by law, in satisfaction of the liabilities
of the Company (whether by payment or the making of reasonable
provision for payment thereof);
(b) to unsecured creditors of the Company that are Members, to
the extent otherwise permitted by law, in satisfaction of the
liabilities of the Company (whether by payment or the making of
reasonable provision for payment thereof);
(c) to the holders of the Class B Shares on a pro rata basis
in accordance with their respective Capital Accounts;
(d) to the holders of the Class A Shares on a pro rata basis
in accordance with their respective Capital Accounts; and
(e) to the holders of the Class A shares on a pro rata basis
in accordance with their respective ownership of Class A Shares.
Section 17.3 Termination. The Company shall terminate when all
of the assets of the Company, after payment, or due provision for all debts,
liabilities and obligations, of the Company shall have been distributed to the
Members in the manner provided for in this Article XVII and the Certificate
shall have been canceled in the manner required by the Delaware Act.
Section 17.4 Claims of the Members. The Members and former
Members shall look solely to the Company's assets for the return of their
Capital Contributions, and if the assets of the Company remaining after payment
of or due provision for all debts, liabilities and obligations of the Company
are insufficient to return such Capital Contributions, the Members and former
Members shall have no recourse against the Company or any other Member.
ARTICLE XVIII
MISCELLANEOUS
Section 18.1 Notices. All notices provided for in this
Agreement shall be in writing, duly signed by the party giving such notice, and
shall be hand delivered, faxed or mailed by registered or certified mail or
overnight courier service, as follows:
-32-
<PAGE> 39
(a) if given to the Company:
Trademarks LLC
c/o Philip Morris Incorporated
120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399
Attention: General Counsel, PM USA
(b) if given to any Member:
(i) to PM or its designee:
Philip Morris Incorporated
120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399
Attention: General Counsel, PM USA
with a copy to:
Wachtell, Lipton, Rosen & Katz
51 West 52nd Street
New York, NY 10019
Facsimile: (212) 403-2000
Attention: Elliott V. Stein;
(ii) to the Liggett Parties:
c/o Brooke Group Ltd.
100 S.E. Second Street, 32nd floor
Miami, FL 33131
Facsimile: (305) 579-8009
Attention: Richard J. Lampen
Executive Vice President
with a copy to:
Milbank, Tweed, Hadley & McCloy
One Chase Manhattan Plaza
New York, NY 10005
Facsimile: (212) 530-5219
Attention: Michael W. Goroff and Simon Friedman
All such notices shall be deemed to have been given when
received. The address for receipt of notice may be changed by providing written
notice to the Company.
-33-
<PAGE> 40
Section 18.2 Formation Expenses. Each party shall pay its own
expenses incurred in connection with the formation of the Company.
Section 18.3 Failure to Pursue Remedies. The failure of any
party to seek redress for violation of, or to insist upon the strict performance
of, any provision of this Agreement shall not prevent a subsequent act, which
would have originally constituted a violation, from having the effect of an
original violation.
Section 18.4 Cumulative Remedies. The rights and remedies
provided by this Agreement are cumulative and the use of any one right or remedy
by any party shall not preclude or waive its right to use any or all other
remedies. Said rights and remedies are given in addition to any other rights the
parties may have by law, statute, ordinance or otherwise.
Section 18.5 Binding Effect. This Agreement shall be binding
upon and inure to the benefit of all of the parties and, to the extent permitted
by this Agreement, their successors, legal representatives and assigns.
Section 18.6 Interpretation. All references herein to
"Articles," "Sections" and "Paragraphs" shall refer to corresponding provisions
of this Agreement. Whenever the words "include," "includes" or "including" are
used in this Agreement, they shall be deemed to be followed by the words
"without limitation." The words "hereof," "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provision of this Agreement. All terms defined
in this Agreement shall have the defined meanings when used in any certificate
or other document made or delivered pursuant hereto unless otherwise defined
therein. The definitions contained in this Agreement are applicable to the
singular as well as the plural forms of such terms and to the masculine as well
as to the feminine and neuter genders of such term. Any agreement, instrument or
statute defined or referred to herein or in any agreement or instrument that is
referred to herein means such agreement, instrument or statute as from time to
time amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent in writing and (in the case of statutes) by
succession of comparable successor statutes and references to all attachments
thereto and instruments incorporated therein. References to a Person are also to
its permitted successors and assigns.
Section 18.7 Severability. The invalidity or unenforceability
of any particular provision of this Agreement shall not affect the other
provisions hereof, and this Agreement shall be construed in all respects as if
such invalid or unenforceable provision were omitted.
Section 18.8 Counterparts. This Agreement may be executed in
any number of counterparts with the same effect as if all parties hereto had
signed the same document. All counterparts shall be construed together and shall
constitute one instrument.
Section 18.9 Integration. There are no oral agreements,
understandings, representations or warranties between the Parties with respect
to the subject matter hereof.
Section 18.10 Governing Law. This Agreement and the rights of
the parties hereunder shall be interpreted in accordance with the laws of the
State of New York (other than with respect to matters relating to the
organization and internal affairs of the Company, including
-34-
<PAGE> 41
the liabilities, obligations, rights, powers and restrictions of the Company and
the Members, which shall be interpreted in accordance with laws of the State of
Delaware), and all rights and remedies shall be governed by such laws without
regard to principles of conflict of laws.
Section 18.11 Consent to Jurisdiction. Each of the Parties (i)
consents to submit itself to the personal jurisdiction of any Federal or state
court located in the State of New York in the event that any dispute arises out
of this Agreement or any of the transactions contemplated hereby, (ii) agrees
that it will not attempt to deny or defeat such personal jurisdiction by motion
or other request for leave from any such court and (iii) agrees that it will not
bring any action relating to this Agreement or any of the transactions
contemplated by this Agreement in any court other than a Federal or state court
sitting in the State of New York.
Section 18.12 Confidentiality. Each Member expressly
acknowledges that such Member will receive confidential and proprietary
information relating to the Company, including, without limitation, information
relating to the Company's financial condition and business plans, and that the
disclosure of such confidential information to a third party would cause
irreparable injury to the Company. Except with the prior written consent of the
Company or as required by law, no Member shall disclose any such information to
a third party (other than on a "need to know" basis to any Affiliate or any
employee, agent or representative of such Member or its Affiliates (each of whom
shall agree to maintain the confidentiality of such information)), and each
Member shall use reasonable efforts to preserve the confidentiality of such
information.
Section 18.13 Governmental Notices. A Member shall, within 10
days of receipt of any notice from a Governmental Entity, including but not
limited to, the Department of Justice, the Federal Trade Commission or the
Internal Revenue Service, relating to the formation, operation or treatment of
the Company or to the transactions contemplated by the Transaction Agreements,
mail a copy of such notice to each Member.
Section 18.14 Prior Agreement. The letter agreement of
November 20, 1998 among Brooke, LMI, Liggett and PM regarding a prior
conditional settlement of certain litigation is unaffected by this Agreement and
remains in full force and effect.
ARTICLE XIX
AMENDMENTS
Section 19.1 Amendments. Any amendment to this Agreement shall
be adopted and be effective as an amendment hereto if approved by the
affirmative vote of a majority of the Total Voting Power, except that any
amendment which would adversely affect the rights or obligations of any Member
(or of the Class B Shares) shall also be approved by such Member (or by the
holders of a majority of the Class B Shares).
-35-
<PAGE> 42
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above stated.
BROOKE GROUP LTD.
By: /s/ Richard J. Lampen
-----------------------------------
Name: Richard J. Lampen
Title: Executive Vice President
LIGGETT & MYERS INC.
By: /s/ Richard J. Lampen
-----------------------------------
Name: Richard J. Lampen
Title: Vice President
EVE HOLDINGS INC.
By: /s/Joselynn D. Van Siclen
-----------------------------------
Name: Joselynn D. Van Siclen
Title: Vice President
LIGGETT GROUP INC.
By: /s/ Marc N. Bell
Name: Marc N. Bell
Title: General Counsel and Secretary
PHILIP MORRIS INCORPORATED
By: /s/ Norma Suter
-----------------------------------
Name: Norma Suter
Title: Vice President
-36-
<PAGE> 43
Schedule A
Members
<TABLE>
<CAPTION>
Agreed Value of Initial Capital Number of
Name Contribution Shares
- ---- ------------------------------- ---------
<S> <C> <C>
Eve Holdings Inc. Lark, Chesterfield and L&M trademarks 100 Class A
and associated goodwill- $15,100,000
Eve Holdings Inc. Lark, Chesterfield and L&M trademarks 100 Class B
and associated goodwill- $284,900,000
Total- $300,000,000
</TABLE>
-37-
<PAGE> 44
EXHIBIT A
TRADEMARK LICENSE AGREEMENT
TRADEMARK LICENSE AGREEMENT (the "Agreement") dated as of May 24,
1999, by and between Trademarks LLC, a Delaware limited liability company
("Licensor"), and Philip Morris Incorporated, a Virginia corporation
("Licensee").
WHEREAS, an Affiliate of Licensee acquired in 1978 the entire
business of Liggett Group Inc. in the International Territory;
WHEREAS, Licensor owns and has the right to license the Trademarks
in the United States (as defined herein) and desires to grant the Licensee such
rights in accordance with the terms of this Agreement; and
WHEREAS, upon execution of this Agreement, Licensee will have the
exclusive right (including with respect to Licensor) to use the Trademarks in
the United States (as defined herein).
NOW, THEREFORE, in consideration of the foregoing recitals, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Licensor and Licensee agree as follows:
Section 1.1 Affiliates: shall mean, with respect to any Person, any direct or
indirect subsidiary of such Person, any other Person that directly or through
one or more intermediaries, is controlled by, or is under common control with,
the specified Person, and, if such a Person is an individual, any member of the
immediate family (including parents, spouse and children) of such individual and
any trust whose principal beneficiary is such individual or one or more members
of such immediate family and any Person who is controlled by any such member or
trust. As used in this definition, the term "control" (including with
correlative meanings, "controlled by" and "under common control with") shall
mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies, whether through ownership of securities or
partnership or other ownership interests, by contract or otherwise.
Notwithstanding the foregoing, for the purposes of this Agreement, (i) Licensor
and Licensee shall not be deemed to be Affiliates and (ii) Licensor shall not be
deemed to be an Affiliate of Eve Holdings Inc., a Delaware corporation ("Eve"),
or of any Affiliate of Eve.
Section 1.2 Brands: shall mean "Lark," "Chesterfield" and "L&M."
Section 1.3 Confidential Information: shall mean all proprietary
information relating to the business and operations of Licensor or any of
Licensor's Affiliates, other than information that (i) is in the possession of
Licensee prior to the execution of this Agreement, (ii) becomes available to the
public other than as a result of a disclosure by Licensee or its officers,
employees or advisors, or (iii) is not acquired from Licensor or persons known
by Licensee to be in breach of an obligation of secrecy to Licensor.
<PAGE> 45
Section 1.4 International Territory: means (i) any place in the
world outside the United States, (ii) ships and aircraft, purchasing duty-free,
located within or outside the United States, (iii) duty-free shops, embassies,
legations and others enjoying duty-free privileges (in each case to the extent
they enjoy such privileges from time to time) located within or outside the
United States and (iv) embassies, legations and other presences of the
government of the United States of America enjoying duty-free privileges (in
each case to the extent they enjoy such privileges from time to time) located
outside the United States, but excluding sales to the United States Military
wherever situated.
Section 1.5 Inventory: shall mean Licensee's inventory of
Licensed Products and of related work in progress then on hand as reflected in
Licensee's books and records.
Section 1.6 Licensed Products: shall mean the cigarettes sold in
the United States under any of the Trademarks, conforming to the Quality
Standards and Specifications.
Section 1.7 LLC Agreement: shall mean that certain Formation and
Limited Liability Company Agreement dated as of January 12, 1999 between the
Liggett Parties (as defined therein) and Licensee.
Section 1.8 NonTobacco Materials: shall mean all components and
ingredients, other than tobacco, used in manufacturing the Licensed Products,
including casings and flavorings, tow and additives, cigarette paper, tipping
paper and packaging.
Section 1.9 Person: shall include any individual, corporation,
association, partnership (general or limited), joint venture, trust, estate,
limited liability company or other legal entity or organization.
Section 1.10 Quality Standards and Specifications: shall mean such
specifications, standards and directions of Licensor, as Licensor shall provide
to Licensee from time to time.
Section 1.11 Taxes: shall mean any and all present or future
taxes, levies, imposts, deductions, charges or withholdings, and all interest,
penalties, or other liabilities with respect thereto, excluding income taxes and
franchise taxes measured by the income of Licensor.
Section 1.12 Trademarks: shall mean all of the interest of the
Licensor in all trademarks, trade names, trade dress, service marks,
registrations and applications for registrations therefor, in each case relating
to "Lark," "Chesterfield" and "L&M" brands, including any variation or product
line extension thereof and any derivative pertaining thereto, as set forth in
Schedule A hereto.
Section 1.13 United States: means the present fifty states of the
United States of America and the District of Columbia and shall exclude (a) its
territories, possessions and the Commonwealth of Puerto Rico, all as presently
constituted, and (b) all of the International Territory. When used herein,
"sales in the United States" include sales to the United States Military,
wherever situated.
-2-
<PAGE> 46
Section 1.14 United States Military: shall mean appropriated and
non- appropriated fund activities of the United States Department of Defense,
Departments of the Army, Navy, Air Force, United States Marine Corps and United
States Coast Guard.
Section 2.1 Licensor hereby grants to Licensee, upon the terms and subject to
the conditions and restrictions of this Agreement, the exclusive right to use
the Trademarks upon and in connection with the manufacture, marketing
distribution and sale of the Licensed Products in the United States.
Section 2.2 Licensor acknowledges and agrees that the license
granted hereunder is exclusive as to Licensee, and Licensor agrees that it shall
not use the Trademarks in any manner whatsoever.
Section 2.3 Licensee agrees that, subject to the rights granted in
this Agreement, Licensor owns all right, title and interest in the United States
to the Trademarks in the United States. No rights to the Trademarks in the
United States are granted herein other than those expressly enumerated.
Section 3.1 Licensee shall do everything in its power to protect the Trademarks.
To that end, Licensee shall fully comply with all the laws and regulations in
the United States which are applicable to the manufacture, sale or purchase of
cigarettes or to the use of trademarks for cigarettes; shall give prompt notice
in writing to Licensor of any infringement or possible infringement of the
Trademarks which may come to its attention; shall not at any time claim any
right, title or interest in or to the Trademarks, other than the right to use
the same under all the terms and conditions hereof; shall not at any time use or
register any trademark or trade name identical or confusingly similar to any of
the Trademarks; and shall, without charge, assign to Licensor, upon the request
of Licensor, all such registrations and applications therefor and any right it
may acquire through use or otherwise (except the right to use the same under all
the terms and conditions hereof) in or to the Trademarks. When and if requested
by Licensor so to do, Licensee shall, at its cost and expense, take such action
as may be necessary or advisable to stop any infringement of the Trademarks and
to recover profits, damages and costs. If any sum in excess of the costs and
expenses incurred by Licensee in connection therewith is recovered in any such
suit, Licensor shall have the exclusive right thereto.
Section 3.2 Licensee may in its discretion, either in its own name
or the name of Licensor or in both names, take such action (including the
initiation of proceedings and participation in proceedings initiated by Licensor
and the defense of proceedings brought against Licensor) as it may deem
necessary or desirable, at law or in equity or otherwise, either in the United
States or elsewhere, to stop any infringement of the Trademarks or to defend the
use of the Trademarks and, in the event any sum in excess of the costs and
expenses incurred by Licensee in connection therewith is recovered, Licensor
shall have the exclusive right thereto. In the event that Licensee decides to
take any action in the name of Licensor pursuant to this Section 3(b), it shall
first obtain the consent of Licensor and such consent shall not be unreasonably
withheld; provided, however, that nothing herein shall prevent Licensee from
taking any action in its own name at any time in its absolute discretion.
-3-
<PAGE> 47
Licensee shall manufacture cigarettes for sale under the
Trademarks in accordance with Licensor's Quality Standards and Specifications,
and shall not sell under the Trademarks any cigarettes that do not meet or
exceed the Quality Standards and Specifications. Licensee represents and
warrants that the Licensed Products will be manufactured, sold and distributed
in strict compliance with the terms and conditions of this Agreement and all
applicable laws, regulations and standards in force at any time in any place in
the United States. Licensee will take all steps required with respect to the
Licensed Products, their advertising, marketing and distribution to ensure
compliance with such laws, regulations and standards.
Section 7.1 In consideration of the right and license granted to Licensee to use
the Trademarks pursuant to this Agreement, Licensee shall pay to Licensor a
royalty at the rate of four and one-half percent (4.5%) of the Licensee's Net
Sales Value of Licensed Products during each Royalty Month (as defined below) or
portion thereof that this Agreement is in effect, but in no event shall such
royalty for any such Royalty Month (or portion thereof) in which this Agreement
is in effect be less than the Minimum Royalty. For purposes of this paragraph,
the term "Net Sales Value" shall mean the gross sales price from Licensee's
factories of the Licensed Products, less any federal excise tax that is included
in such price. For purposes of this paragraph, the term "Minimum Royalty" in any
period shall mean the greater of (i) the product of $10,500,000 times a
fraction, the numerator of which is the number of days in such period, and the
denominator of which is 360, and (ii) the sum of (x) the amount of the debt
service obligation of Licensor (which shall include all obligations of the
Licensor under the Loan Agreement (as defined in the LLC Agreement)) for such
period and (y) the product of $1,000,000 times a fraction, the numerator of
which is the number of days in such period and the denominator of which is 360.
Section 7.2 On the day of the execution of this Agreement, the
Licensee will pay royalty payments (pro-rated in accordance with subsection (a)
above) for the remaining portion of the calendar month of execution and for the
immediately succeeding calendar month. For each succeeding calendar month
thereafter, beginning with July 1999 (each such calendar month as well as the
period described in the immediately preceding sentence hereinafter referred to
as a "Royalty Month"), no later than the fifth Business Day thereof, the
Licensee shall pay the royalty payments for such Royalty Month. With respect to
any such royalty payment that is made on the basis of the Licensee's Net Sales
Value of Licensed Products, the Licensee shall be entitled to estimate the Net
Sales Value of Licensed Products for the period to which the royalty payment
relates; provided that, the royalty payment for any Royalty Month that
immediately succeeds a Royalty Month in which the royalty payment was made on
the basis of such an estimate shall include any corresponding upward or downward
adjustment necessary to reconcile the difference between the estimated Net Sales
Value of Licensed Product and actual Net Sales Value of Licensed Product for the
immediately preceding Royalty Month. Any day that is not a day of the year on
which banks are not required or authorized by law to close in New York is a
"Business Day" for purposes of this Agreement. Any payment date that falls on a
day that is not a Business Day shall be made on the next succeeding Business
Day.
Section 7.3 Licensee shall keep proper and accurate accounts and
records of all cigarettes manufactured and of all cigarettes sold under this
agreement and shall, within 30 days after the end of each calendar quarter and
within thirty days after the expiration or termination of
-4-
<PAGE> 48
this Agreement for any reason, render to Licensor a written statement setting
forth separately the quantities of cigarettes manufactured, the quantities sold
under the Trademarks and the Net Sales Value of Licensed Products sold in the
most recently completed calendar quarter or in the period between the end of the
preceding calendar quarter and the effective date of expiration or termination,
as the case may be, such statement to be signed by an officer of Licensee. As
used in this paragraph, the term "cigarettes sold" in any period shall mean the
physical volume of cigarettes sold during such period less the physical volume
of cigarettes accepted during such period by Licensee as returned merchandise.
It shall in no event include cigarettes distributed by Licensee without charge.
Section 7.4 Licensor, by its duly authorized representatives,
shall have the right, at reasonable intervals and times, to enter Licensee's
premises and examine those books and records of Licensee which are relevant to
the manufacture and sale of cigarettes hereunder, and to take excerpts
therefrom.
Any and all payments made by Licensee in connection with this
Agreement shall be made free and clear of and without deduction for any and all
Taxes. If Licensee shall be required by law to deduct and withhold from the
payments to be made to Licensor any Taxes, (i) the sum payable shall be
increased as may be necessary so that after making all required deductions for
Taxes Licensor receives an amount equal to the sum it would have received had no
such deductions been made, (ii) Licensee shall make such deductions and pay the
full amount deducted to the relevant taxing or other authority in accordance
with applicable law, and (iii) Licensee shall mail to Licensor due evidence
thereof in the form specified by Licensor which shall include in all instances
the original tax receipts related to such royalty payments. Licensee shall
reimburse Licensor for the amount of any tax credits that Licensor is unable to
obtain due to the failure of Licensee to provide Licensor with the tax receipts
as required by this Section. In the event such taxes are not paid when due, all
resulting penalties and interest shall be borne by Licensee.
Section 9.1 Effective Date; Term. This Agreement shall continue in effect
through May 24, 2010, unless earlier terminated pursuant to the provisions of
this Agreement; provided that, this Agreement will renew automatically for
successive one year periods unless one party hereto gives written notice of its
desire to terminate at least 60 days prior to the date on which the Agreement
would otherwise be renewed.
Section 9.2 Early Termination for Cause.
(a) By Licensor. Licensor may terminate this Agreement immediately
in the event that:
(i) Licensee fails to perform in any material respect any of the
terms of this Agreement or otherwise breaches in any material respect any
part of this Agreement, including, without limitation, if Licensee fails
to make any payment to Licensor in accordance with the terms of this
Agreement for any reason, and such default or breach shall continue
uncured for a period of thirty (30) days after Licensor gives Licensee
written notice of such default or breach; or
-5-
<PAGE> 49
(ii) any part of this Agreement is not considered to be, or
ceases to be, in conformity with the laws, regulations, consistent
jurisprudence or court or administrative decisions (relevant to this
Agreement) of the United States and, as a result thereof, any provision
herein reasonably deemed by Licensor to be material to this Agreement
cannot be legally performed or enforced or if, as a consequence thereof,
any of the Licensed Products cannot be manufactured or sold in accordance
with the Quality Standards and Specifications.
(b) By Licensee. Licensee may terminate this Agreement immediately
in the event that (i) Licensor fails to perform any of the terms of this
Agreement or otherwise breaches any part of this Agreement and such default or
breach shall continue uncured for a period of ten (10) days after Licensee gives
Licensor written notice of such default or breach or (ii) there shall have
occurred a Material Breach by the Liggett Parties as defined in the Class A
Option Agreement dated as of January 12, 1999 among Licensee, Eve, Brooke Group
Ltd., Liggett & Myers Inc. and Liggett Group Inc.
(c) By Mutual Consent: Licensor and Licensee may agree in writing
at any time to terminate this Agreement.
Section 9.3 Effect of Termination. Upon the expiration or
termination of this Agreement for any reason:
(a) All of the rights of Licensee granted hereunder shall
terminate forthwith and shall revert immediately to Licensor, provided that
Licensee's obligations under Sections 6 and 8 of this Agreement shall survive.
All royalties on previously made sales shall become immediately due and payable,
and Licensee shall (a) discontinue forthwith all manufacture, sale and
distribution of the Licensed Products and all use of the Trademarks in the
United States; (b) no longer have the right to use the Trademarks in the United
States or any variation or simulation thereof; (c) promptly transfer to
Licensor, free of charge, all related documentary evidence of the validity of
the Trademarks in the United States and Licensee's rights as a licensee which
Licensee may have possessed at any time; (d) remove and erase forthwith all
reference to the Trademarks from the printed material and advertising used in
the United States or maintained by Licensee; and (e) cease to utilize, and
thereafter not utilize, any Confidential Information disclosed to it by Licensor
hereunder, and return to Licensor or its designee, at no charge, all
Confidential Information received by Licensee from Licensor or any of its
Affiliates before or during the term of this Agreement, and all copies of any
documents containing, reflecting, or relating to the foregoing; and not
thereafter hold forth in any manner whatsoever that Licensee has any connection
with the Licensed Products
(b) If this Agreement expires or is terminated for reasons other
than Licensee's default or bankruptcy or insolvency, Licensee shall be entitled,
for an additional period of three (3) months only, on a nonexclusive basis, to
sell the Inventory. After Licensee exercises its rights, if any, pursuant to
this Subsection, Licensee shall promptly deliver to Licensor a complete and
accurate schedule of the Inventory. Such schedule shall be prepared as of a date
as close to the date of such expiration or termination (following exercise of
Licensee's rights, if any, pursuant to this Subsection) as is reasonably
feasible given Licensee's usual and customary
-6-
<PAGE> 50
accounting practices, but in no event later than fifteen (15) days after the end
of Licensee's fiscal month during which the termination or expiration occurs,
and shall reflect Licensee's cost of each item of Inventory. Licensor thereupon
shall have the option, exercisable by notice in writing delivered to Licensee
within thirty (30) days after its receipt of the complete Inventory schedule, to
purchase any or all of the Inventory at such cost of each item of the Inventory
being purchased. In the event such notice is sent by Licensor, Licensee shall
deliver to Licensor or its designee all the Inventory referred to therein as
promptly as practicable after Licensor's said notice, and Licensor shall pay
Licensee for such Inventory as is in salable condition, and also shall pay for
applicable shipping and handling charges, within thirty (30) days after its
receipt thereof, provided in the event Licensor is unable to meet Licensee's
customary and usual credit clearance standards, such merchandise shall be sold
on a cash on delivery basis. Licensee shall have no obligation to pay royalties
on Inventory purchased by Licensor pursuant to this paragraph. To the extent
that Licensor does not elect to purchase Inventory, Licensee shall promptly
destroy such Inventory.
(c) The expiration or termination of this Agreement for any reason
shall not release either party hereto from any liability which, at the time of
expiration or termination, had already accrued to the other party or which may
accrue in respect of any act or omission prior to such expiration or
termination; provided that Licensee shall in no event be entitled, based on such
expiration or termination, to any compensation, damages or payment for goodwill
that may have been established with respect to the Licensed Products during the
term of this Agreement and that Licensee hereby irrevocably waives and renounces
any claim, based on such expiration or termination, for any such compensation,
damages, or other legal or equitable relief which it may hereafter be entitled
to assert against Licensor. Notwithstanding any termination in accordance with
this Section, Licensor shall have and hereby reserves all rights and remedies
which it has, or which are granted to it by operation of law, including, but not
limited to, the right to be compensated for damages for breach of this Agreement
and to enjoin the unlawful or unauthorized use of the Trademarks and to collect
royalties and fees payable by Licensee hereunder through the date of
termination.
If to Licensor:
Trademarks LLC
c/o Philip Morris Incorporated
120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399
Attention: General Counsel, PM USA
If to Licensee:
Philip Morris Incorporated
120 Park Avenue
New York, NY 10017
Facsimile: (917) 663-5399
Attention: General Counsel, PM USA
-7-
<PAGE> 51
This Agreement shall be subject to such United States government
approvals and consents as may from time to time be necessary or desirable in
connection with this Agreement. If any such approval or consent is not obtained
or if obtaining such consent or approval would materially diminish the value of
this Agreement to Licensor, Licensor may terminate this Agreement in accordance
with its termination provisions.
In addition to their other representations, warranties, and
covenants elsewhere herein contained, the parties represent, each to the other,
as follows:
Section 13.1 Licensor. Licensor represents and warrants that it
has full right, power and authority to enter into this Agreement and to perform
all of its obligations hereunder. Licensor further represents , that it has
granted no other existing license to use the Trademarks in the United States as
provided for in this Agreement, and that it shall grant no such other license
during the term of this Agreement.
Section 13.2 Licensee. Licensee represents and warrants that it
has full right, power, and authority to enter into this Agreement and to perform
all of its obligations hereunder. Licensee shall not assert as a defense in any
action brought under this Agreement any claim that this Agreement is
unenforceable or invalidated by any applicable law.
This Agreement shall not be modified or amended except by an
agreement in writing signed by the parties hereto.
Section 15.1 This Agreement shall be binding upon and shall inure to the benefit
of the parties and their respective heirs, successors and assigns. Licensor
shall not assign its interest in this Agreement without the consent of Licensee,
except to secure indebtedness of Licensor. It is expressly understood and agreed
that Licensee shall have the right to sell, assign or sublicense its rights
under this Agreement; provided that any such purchaser, assignee or sublicensee
agrees in writing to be subject to and bound by the terms and conditions of this
Agreement as if it were a party hereto.
Section 15.2 The Agent (as defined below) under the Assignment,
Pledge and Security Agreement dated May 24, 1999 between the Licensor and
Citibank, N.A., as agent (the "Agent") for the lenders identified therein (the
"Pledge Agreement"), shall be entitled in accordance with the terms and
conditions of the Pledge Agreement to exercise all rights of the Licensor under
this Agreement.
-8-
<PAGE> 52
This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original, and all of such counterparts shall
constitute but one and the same agreement.
Except as specifically contemplated herein, this Agreement shall
not be deemed to confer any rights or benefits on any person not a party to this
Agreement.
If one or more provisions of this Agreement shall be invalid,
illegal, or unenforceable in any respect in any jurisdiction or with respect to
any party, such invalidity, illegality, or unenforceability in such jurisdiction
or with respect to such party shall not, to the fullest extent permitted by
applicable law, invalidate or render illegal or unenforceable such provision in
any other jurisdiction or with respect to any other party, or any other
provision of this Agreement. To the fullest extent it may effectively do so
under applicable law, each of the parties hereto waives any provision of law
which renders any provision hereof invalid or illegal in any respect.
No delay or omission or failure to exercise, or any abandonment or
discontinuance of steps to enforce, any right or remedy provided for herein
shall be deemed to be a waiver thereof or acquiescence in the event giving rise
to such right or remedy, but every such right and remedy may be exercised from
time to time and so often as may be deemed expedient by the party exercising
such right or remedy. The rights and remedies provided herein are cumulative and
not exclusive of any remedies provided by law.
Nothing contained herein shall be construed to create a
partnership, joint venture, or agency relationship between Licensee and
Licensor, and neither Licensee nor Licensor shall become bound by any
representation, act or omission of the other.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be
signed and their corporate seals to be hereunto affixed as of the day and year
first above written.
TRADEMARKS LLC
By: PHILIP MORRIS INCORPORATED,
as Manager of Trademarks LLC
By:
-------------------------------------
Name:
Title:
PHILIP MORRIS INCORPORATED
By:
-------------------------------------
Name:
Title:
-9-
<PAGE> 53
EXHIBIT B
Form of Assignment
This Assignment is made the 24th day of May, 1999.
BETWEEN Eve Holdings Inc., a Delaware corporation ("Eve"), 100 S.E.
Second Street, Miami, Florida 33131,
AND Trademarks LLC, a Delaware limited liability company ("Trademarks
LLC"), 120 Park Avenue, New York, New York 10017.
WHEREAS, Eve is the owner of the trademarks referred to in the attached
Schedule A which are registered in the United States Patent and Trademark
Office.
WHEREAS, Trademarks LLC desires to acquire all right, title and interest
in and to the aforesaid trademarks and the registrations therefor, and that part
of the goodwill of the business connected with the use of and symbolized by said
trademarks;
NOW, THEREFORE, for and in consideration for the sum of Ten Dollars
($10.00) and other good and valuable consideration, the receipt of which is
hereby acknowledged, Eve hereby sells, transfers, conveys and assigns unto
Trademarks LLC, all right, title and interest in and to the aforesaid trademarks
and the registrations therefor, together with that part of the goodwill of the
business connected with the use of and symbolized by said trademarks.
IN WITNESS WHEREOF, Eve has caused this Assignment to be executed with
full effect from the day and year first above written.
EVE HOLDINGS INC.
By:
-------------------------------
Name:
Title:
<PAGE> 54
SCHEDULE A: TRADEMARKS
<TABLE>
<CAPTION>
TRADEMARK REGISTRATION NO. EXPIRATION DATE
- --------- ---------------- ---------------
<S> <C> <C>
CHESTER 753,972 August 6, 2003
CHESTERFIELD 128,430 January 6, 2000
CHESTERFIELD & Design 218,263 September 21, 2006
CHESTERFIELD & Design 695,189 March 29, 2000
CHESTERFIELD & Design 912,381 June 8, 2001
CHESTERFIELD & Design 1,781,667 July 13, 2003
LARK 142,676 May 17, 2001
LARK & Design 1,776,709 June 15, 2003
LARK II 1,098,307 August 1, 2008
L&M 582,520 November 17, 2003
L&M 594,798 September 7, 2004
L&M & Design 840,308 December 12, 2007
L&M & Design 1,062,893 April 5, 2007
L&M & Design 1,062,895 April 5, 2007
L&M FLAVOR LIGHTS 1,071,588 August 16, 2007
</TABLE>
<PAGE> 1
EXHIBIT 10.5
PLEDGE AGREEMENT
Dated as of May 24, 1999
From
EVE HOLDINGS INC.
as Grantor
in favor of
CITIBANK, N.A.
as Agent
<PAGE> 2
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
SECTION PAGE
<C> <C>
1. Grant of Security.............................................................................................1
2. Security for Obligations......................................................................................2
3. Delivery of Collateral........................................................................................2
4. Representations and Warranties................................................................................2
5. Further Assurances............................................................................................3
6. Place of Perfection; Records..................................................................................3
7. Voting Rights; Dividends; Etc.................................................................................3
8. Transfers and Other Liens; Additional Shares..................................................................4
9. Agent Appointed Attorney-in-Fact..............................................................................4
10. Agent May Perform............................................................................................5
11. The Agent's Duties...........................................................................................5
12. Remedies.....................................................................................................5
13. Indemnity and Expenses.......................................................................................6
14. Amendments; Waivers; Etc.....................................................................................7
15. Addresses for Notices........................................................................................7
16. Continuing Security Interest; Assignments Under the Credit Agreement.........................................7
17. Termination..................................................................................................7
18. Governing Law; Terms.........................................................................................7
</TABLE>
Schedule I - Pledged Shares
<PAGE> 3
PLEDGE AGREEMENT
PLEDGE AGREEMENT dated as of May 24, 1999 made by Eve Holdings
Inc., a Delaware corporation, (the "Grantor"), to Citibank, N.A. (as agent, the
"Agent") for the Lenders (as defined below).
PRELIMINARY STATEMENTS:
(1) The Grantor and the Agent have entered into a Credit
Agreement dated as of May 24, 1999 (said Agreement, as it may hereafter be
amended or otherwise modified from time to time, being the "Credit Agreement",
the terms defined therein and not otherwise defined herein being used herein as
therein defined) with Trademarks LLC, a Delaware limited liability company, as
Borrower and the banks, financial institutions and other institutional lenders
party thereto (the "Lenders"). Pursuant to Section 8.01 of the Credit Agreement,
the Grantor has guaranteed all of the Obligations of the Borrower now or
hereafter existing under the Loan Documents.
(2) The Grantor is the owner of the shares of capital stock of
the Borrower described in Schedule I hereto (the "Pledged Shares").
(3) It is a condition precedent to the making of Advances by
the Lenders under the Credit Agreement that the Grantor shall have granted the
assignment and security interest and made the pledge and assignment contemplated
by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order
to induce the Lenders to make Advances under the Credit Agreement, the Grantor
hereby agrees with the Agent for the ratable benefit of itself and the Lenders
as follows:
SECTION 1. Grant of Security. The Grantor hereby assigns and
pledges to the Agent for the ratable benefit of itself and the Lenders, and
hereby grants to the Agent for the ratable benefit of itself and the Lenders, a
security interest in the following (collectively, the "Collateral"):
(i) the Pledged Shares and the certificates representing the
Pledged Shares, and all dividends, cash, instruments and other property
from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of the Pledged Shares other
than the Initial Distribution to be made on Closing and distributions
of up to $500,000 per annum to be made thereafter;
(ii) all additional shares of stock of the issuer of the
Pledged Shares from time to time acquired by the Grantor in any manner,
and the certificates representing such additional shares, and, except
as provided in Section 1(i), all dividends, cash, instruments and other
property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of such shares;
and
<PAGE> 4
5
(iii) except as provided in Section 1(i) all proceeds of any
and all of the foregoing Collateral (including, without limitation,
proceeds that constitute property of the types described in this
Section 1).
SECTION 2. Security for Obligations. The pledge and assignment
of, and the grant of a security interest in, the Collateral by the Grantor under
this Agreement secures the payment of all the Obligations of the Borrower and
the Grantor now or hereafter existing under the Loan Documents, whether for
principal, interest, fees, expenses or otherwise (all such Obligations being the
"Secured Obligations"). Without limiting the generality of the foregoing, this
Agreement secures the payment of all amounts that constitute part of the Secured
Obligations and would be owed by the Borrower or the Grantor to the Agent or the
Lenders under the Loan Documents but for the fact that they are unenforceable or
not allowable due to the existence of a bankruptcy, reorganization or similar
proceeding involving the Borrower or the Grantor.
SECTION 3. Delivery of Collateral. All certificates or
instruments representing or evidencing Collateral shall be delivered to and held
by or on behalf of the Agent pursuant hereto and shall be in suitable form for
transfer by delivery, or shall be accompanied by duly executed instruments of
transfer or assignment in blank, all in form and substance satisfactory to the
Agent. The Agent shall have the right, at any time after the occurrence and
during the continuance of an Event of Default, in its discretion and without
notice to the Grantor, to transfer to or to register in the name of the Agent or
any of its nominees any or all of the Collateral, subject only to the revocable
rights specified in Section 7(a). In addition, the Agent shall have the right at
any time to exchange certificates or instruments representing or evidencing
Collateral for certificates or instruments of smaller or larger denominations.
SECTION 4. Representations and Warranties. The Grantor
represents and warrants as follows:
(a) The chief place of business and chief executive office of
the Grantor and the office where the Grantor keeps its records
concerning the Collateral are located at the address set forth below
its name on the signature page hereof.
(b) The Grantor is the legal and beneficial owner of the
Collateral free and clear of any Lien, except for the security interest
created by this Agreement and Liens permitted under the Loan Documents
(including, without limitation, the Class B Option). No effective
financing statement or other instrument similar in effect covering all
or any part of the Collateral is on file in any recording office,
except such as may have been filed in favor of the Agent relating to
this Agreement or as permitted under the Loan Documents. The Grantor
has no trade names.
(c) The Pledged Shares have been duly authorized and validly
issued and are fully paid and non-assessable.
(d) The Pledged Shares constitute the percentage of the issued
and outstanding units of limited liability interest of the issuer
thereof indicated on Schedule I.
(e) This Agreement and the pledge of the Collateral pursuant
hereto create a valid and perfected security interest in the
Collateral, prior to all other Liens except Liens permitted by the Loan
Documents (including, without limitation, the Class B Option) and all
filings and other actions necessary or desirable to perfect and protect
such security interests have been duly taken.
<PAGE> 5
6
(f) No consent of any other Person and no authorization,
approval or other action by, and no notice to or filing with, any
governmental authority or regulatory body or other third-party is
required either (i) for the grant by the Grantor of the assignment and
security interest granted hereby, for the pledge by the Grantor of the
Collateral pursuant hereto or for the execution, delivery or
performance of this Agreement by the Grantor, (ii) for the perfection
or maintenance of the pledge, assignment and security interest created
hereby (including the priority of such pledge, assignment or security
interest referred to in Section (4)(e) above), except for the retention
by the Agent of possession of the certificates and instruments referred
to in Section 3, or (iii) for the exercise by the Agent of its voting
or other rights provided for in this Agreement or the remedies in
respect of the Collateral pursuant to this Agreement, except as may be
required in connection with the disposition of any portion of the
Collateral by laws affecting the offering and sale of securities
generally.
SECTION 5. Further Assurances. (a) The Grantor agrees that
from time to time, at the expense of the Grantor, it will promptly execute and
deliver all further instruments and documents, and take all further action, that
may be necessary or desirable, or that the Agent may reasonably request, in
order to perfect any pledge, assignment or security interest granted or
purported to be granted hereby or to enable the Agent to exercise and enforce
its rights and remedies hereunder with respect to any Collateral. Without
limiting the generality of the foregoing, the Grantor will execute and file such
financing or continuation statements, or amendments thereto, and such other
instruments or notices, as may be necessary or desirable, or as the Agent may
request, in order to perfect and preserve the pledge, assignment and security
interest granted or purported to be granted hereby.
(b) The Grantor hereby authorizes the Agent to file one or
more financing or continuation statements, and amendments thereto, relating to
all or any part of the Collateral without the signature of the Grantor where
permitted by law. A photocopy or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law.
(c) The Grantor will furnish to the Agent from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as the Agent may reasonably
request, all in reasonable detail.
SECTION 6. Place of Perfection; Records. The Grantor shall
keep its chief place of business and chief executive office and the office where
it keeps its records concerning the Collateral at the location therefor
specified in Section 4(a) or, upon 30 days' prior written notice to the Agent,
at such other locations in a jurisdiction where all actions required by Section
5 shall have been taken with respect to the Collateral. The Grantor will hold
and preserve such records and will permit representatives of the Agent at any
time during normal business hours to inspect and make abstracts from such
records provided that the Agent shall not disclose any confidential information
of the Grantor to which it has been permitted access except (i) as contemplated
by Section 9.11 of the Credit Agreement; or (ii) with the consent of the
Grantor.
SECTION 7. Voting Rights; Dividends; Etc. (a) So long as
no Event of Default shall have occurred and be continuing:
<PAGE> 6
7
(i) The Grantor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Collateral or any
part thereof for any purpose not inconsistent with the terms of this
Agreement or the other Loan Documents; provided, however, that the
Grantor shall not exercise or refrain from exercising any such right
if, in the Agent's reasonable judgment, such action would have a
material adverse effect on the value of the Collateral or any part
thereof.
(ii) The Agent shall execute and deliver (or cause to be
executed and delivered) to the Grantor all such proxies and other
instruments as the Grantor may reasonably request for the purpose of
enabling the Grantor to exercise the voting and other rights that it is
entitled to exercise pursuant to paragraph (i) above.
(b) Any and all
(i) dividends and other distributions paid or payable other
than in cash in respect of, and instruments and other property
received, receivable or otherwise distributed in respect of, or in
exchange for, any Collateral,
(ii) dividends and other distributions paid or payable in
cash in respect of any Collateral in connection with a partial or
total liquidation or dissolution or in connection with a reduction of
capital, capital surplus or paid-in-surplus, and
(iii) cash paid, payable or otherwise distributed in
redemption of, or in exchange for, any Collateral,
other than the Initial Distribution to be made on Closing and distributions of
up to $500,000 per annum made thereafter, shall be, and shall be forthwith
delivered to the Agent to hold as, Collateral and shall, if received by the
Grantor, be received in trust for the benefit of the Agent, be segregated from
the other property or funds of the Grantor and be forthwith delivered to the
Agent as Collateral in the same form as so received (with any necessary
indorsement).
(c) Upon notice to the Grantor by the Agent following the
occurrence and during the continuance of an Event of Default, all rights of the
Grantor to exercise or refrain from exercising the voting and other consensual
rights that it would otherwise be entitled to exercise pursuant to Section
7(a)(i) shall cease, and all such rights shall thereupon become vested in the
Agent, which shall, as long as any Event of Default shall be continuing, have
the sole right to exercise or refrain from exercising such voting and other
consensual rights.
SECTION 8. Transfers and Other Liens; Additional Shares. (a)
The Grantor shall not, other than in accordance with the terms of the Credit
Agreement or the Class B Option, (i) sell, assign (by operation of law or
otherwise) or otherwise dispose of, or grant any option (other than the Class B
Option) with respect to, any of the Collateral, or (ii) create or suffer to
exist any Lien upon or with respect to any of the Collateral except for the
pledge, assignment and security interest created by this Agreement.
(b) The Grantor shall pledge hereunder, immediately upon its
acquisition (directly or indirectly) thereof, any and all additional shares of
stock or other securities of the issuer of the Pledged Shares.
<PAGE> 7
8
SECTION 9. Agent Appointed Attorney-in-Fact. The Grantor
hereby irrevocably appoints the Agent the Grantor's attorney-in-fact, with full
authority in the place and stead of the Grantor and in the name of the Grantor
or otherwise, from time to time in the Agent's discretion following the
occurrence and during the continuance of an Event of Default, to take any action
and to execute any instrument that the Agent may deem necessary or advisable to
accomplish the purposes of this Agreement, including, without limitation:
(a) to ask for, demand, collect, sue for, recover, compromise,
receive and give acquittance and receipts for moneys due and to become
due under or in respect of any of the Collateral,
(b) to receive, indorse and collect any drafts or other
instruments and documents in connection with clause (a) above, and
(c) to file any claims or take any action or institute any
proceedings that the Agent may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights
of the Agent with respect to any of the Collateral.
SECTION 10. Agent May Perform. If the Grantor fails to perform
any agreement contained herein, the Agent may itself perform, or cause
performance of, such agreement, and the expenses of the Agent incurred in
connection therewith shall be payable by the Grantor under Section 13(b).
SECTION 11. The Agent's Duties. The powers conferred on the
Agent hereunder are solely to protect its interest in the Collateral and shall
not impose any duty upon it to exercise any such powers. Except for the safe
custody of any Collateral in its possession and the accounting for moneys
actually received by it hereunder, the Agent shall have no duty as to any
Collateral, as to ascertaining or taking action with respect to calls,
conversions, exchanges, maturities, tenders or other matters relative to any
Collateral, whether or not the Agent or any Secured Party has or is deemed to
have knowledge of such matters, or as to the taking of any necessary steps to
preserve rights against any parties or any other rights pertaining to any
Collateral. The Agent shall be deemed to have exercised reasonable care in the
custody and preservation of any Collateral in its possession if such Collateral
is accorded treatment substantially equal to that which the Agent accords its
own property.
SECTION 12. Remedies. If any Event of Default shall have
occurred and be continuing:
(a) The Agent may exercise in respect of the Collateral, in
addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party upon
default under the Uniform Commercial Code in effect in the State of New
York at such time (the "N.Y. Uniform Commercial Code") (whether or not
the N.Y. Uniform Commercial Code applies to the affected Collateral)
and also may (i) require the Grantor to, and the Grantor hereby agrees
that it will at its expense and upon request of the Agent forthwith,
assemble all or part of the Collateral as directed by the Agent and
make it available to the Agent at a place to be designated by the Agent
that is reasonably convenient to both parties and (ii) without notice
except as specified below, sell the Collateral or any part thereof in
one or more parcels at public or private sale, at any of the Agent's
offices or elsewhere, for cash, on credit or for future delivery, and
upon such other terms as the Agent may deem commercially reasonable.
<PAGE> 8
9
The Grantor agrees that, to the extent notice of sale shall be required
by law, at least ten days' notice to the Grantor (with a copy to each
of Philip Morris and PM Companies) of the time and place of any public
sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Agent shall not be obligated to
make any sale of Collateral regardless of notice of sale having been
given. The Agent may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to
which it was so adjourned.
(b) All cash proceeds received by the Agent in respect of any
sale of, collection from, or other realization upon all or any part of
the Collateral may, in the discretion of the Agent, be held by the
Agent as collateral for, and/or then or at any time thereafter applied
(after payment of any amounts payable to the Agent pursuant to Section
13) in whole or in part by the Agent for the ratable benefit of the
Lenders against, all or any part of the Secured Obligations in such
order as the Agent shall elect. Any surplus of such cash or cash
proceeds held by the Agent and remaining after payment in full of all
the Secured Obligations shall be paid over to the Grantor or to
whomsoever may be lawfully entitled to receive such surplus.
(c) The Agent may exercise any and all rights and remedies of
the Grantor in respect of the Collateral.
(d) All payments received by the Grantor under or in
connection with, or in respect of, the Collateral shall be received in
trust for the benefit of the Agent, shall be segregated from other
funds of the Grantor and shall be forthwith paid over to the Agent in
the same form as so received (with any necessary indorsement).
SECTION 13. Indemnity and Expenses. (a) The Grantor agrees to
indemnify the Agent from and against any and all claims, losses and liabilities
growing out of or resulting from this Agreement (including, without limitation,
enforcement of this Agreement), except claims, losses or liabilities resulting
from the Agent's gross negligence or willful misconduct as determined by a final
judgment of a court of competent jurisdiction.
(b) The Grantor will upon demand pay to the Agent the amount
of any and all reasonable expenses, including the reasonable fees and expenses
of its counsel and of any experts and agents, that the Agent may incur in
connection with (i) the administration of this Agreement, (ii) the custody,
preservation, use or operation of, or the sale of, collection from or other
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of the Agent or the Lenders hereunder or (iv) the failure by
the Grantor to perform or observe any of the provisions hereof.
SECTION 14. Amendments; Waivers; Etc. No amendment or waiver
of any provision of this Agreement, and no consent to any departure by the
Grantor herefrom, shall in any event be effective unless the same shall be in
writing and signed by the Grantor and the Agent, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No failure on the part of the Agent to exercise, and no delay
in exercising, any right hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
<PAGE> 9
10
SECTION 15. Addresses for Notices. All notices and other
communications provided for hereunder shall be given, and shall be effective, as
provided in Section 9.02 of the Credit Agreement.
SECTION 16. Continuing Security Interest; Assignments Under
the Credit Agreement. This Agreement shall create a continuing security interest
in the Collateral and shall (a) remain in full force and effect until the
earlier of (i) the later of the payment in full in cash of the Secured
Obligations and the Termination Date and (ii) the exercise by Philip Morris of
the Class B Option, (b) be binding upon the Grantor, its successors and assigns
and (c) inure, together with the rights and remedies of the Agent hereunder, to
the benefit of the Agent, the Lenders and their respective successors,
transferees and assigns. Without limiting the generality of the foregoing clause
(c), any Lender may assign or otherwise transfer all or any portion of its
rights and obligations under the Credit Agreement (including, without
limitation, all or any portion of its Commitment, the Advances owing to it and
the Term Note or Notes held by it) to any other Person, and such other Person
shall thereupon become vested with all the benefits in respect thereof granted
to such Lender herein or otherwise, in each case only as provided in Section
9.07 of the Credit Agreement.
SECTION 17. Termination. Upon the earlier of (i) the exercise
by Philip Morris of the Class B Option and (ii) the later of the payment in full
in cash of the Secured Obligations and the Termination Date, the pledge,
assignment and security interest granted hereby shall terminate and all rights
to the Collateral shall revert to the Grantor or, if the Class B Option has been
exercised, to Philip Morris, as the case may be. Upon any such termination, the
Agent will, at the Grantor's or Philip Morris? expense, as the case may be,
execute and deliver to the Grantor or Philip Morris such documents as the
Grantor or Philip Morris shall reasonably request to evidence such termination.
SECTION 18. Governing Law; Terms. This Agreement shall be
governed by and construed in accordance with the laws of the State of New York,
except to the extent that the validity or perfection of the security interest
hereunder, or remedies hereunder, in respect of any particular Collateral are
governed by the laws of a jurisdiction other than the State of New York. Unless
otherwise defined herein or in the Credit Agreement, terms used in Article 9 of
the N.Y. Uniform Commercial Code are used herein as therein defined.
IN WITNESS WHEREOF, the Grantor has caused this Agreement to
be duly executed and delivered by its officer thereunto duly authorized as of
the date first above written.
EVE HOLDINGS INC.
By: /s/ Joselynn D. Van Siclen
--------------------------------------
Title: Vice President
Address:
<PAGE> 10
SCHEDULE I
PLEDGED SHARES
<TABLE>
<CAPTION>
Stock Certificate Percentage of Outstanding Units of
Class of Stock No(s). Number of Shares Class B LLC Interests
-------------- ------ ---------------- ---------------------
<S> <C> <C> <C>
Class B B1 100 100%
</TABLE>
<PAGE> 1
EXHIBIT 10.6
GUARANTY
Dated as of June 10, 1999
From
EVE HOLDINGS INC.
as Guarantor
in favor of
THE AGENT AND LENDERS REFERRED TO IN
THE CREDIT AGREEMENT REFERRED TO HEREIN
<PAGE> 2
T A B L E O F C O N T E N T S
<TABLE>
<S> <C>
SECTION PAGE
1. GUARANTY......................................................................................................1
2. GUARANTY ABSOLUTE.............................................................................................2
3. WAIVERS AND ACKNOWLEDGMENTS...................................................................................2
4. NOTICES, ETC..................................................................................................3
5. CONTINUING GUARANTY...........................................................................................3
6. EXECUTION IN COUNTERPARTS.....................................................................................3
7. GOVERNING LAW; JURISDICTION...................................................................................4
</TABLE>
<PAGE> 3
GUARANTY
GUARANTY dated as of June 10, 1999 made by Eve Holdings Inc.,
a Delaware corporation (the "GUARANTOR"), in favor of the Secured Parties (as
defined below).
PRELIMINARY STATEMENTS:
(1) Trademarks, LLC, a limited liability company (the "BORROWER"), is
party to the 5-Year Non-Amortizing Drawn Term Loan Agreement dated as of May 24,
1999 (as amended, amended and restated, supplemented or otherwise modified from
time to time, the "CREDIT AGREEMENT"; the capitalized terms defined therein and
not otherwise defined herein being used herein as therein defined) with the
Guarantor, certain Lender Parties party thereto and Citibank, N.A., as
Collateral Agent for such Lender Parties (the Agent and such Lender Parties,
collectively, the "SECURED PARTIES").
(2) The Guarantor, the holder of all of the Class B Shares of the
Borrower, has guaranteed the obligations of the Borrower under Article VIII of
the Credit Agreement.
(3) The Borrower and the Guarantor have requested that the Secured
Parties enter into an amendment dated the date hereof (the AMENDMENT) to
terminate the Guarantor's obligations under Article VIII of the Credit Agreement
upon the execution by the Guarantor of a separate equivalent instrument of
guaranty. The Lenders and the Agent have indicated their willingness to enter
into the Amendment on the terms and conditions set forth therein.
(4) It is a condition precedent to the effectiveness of the Amendment
that the Guarantor shall have executed and delivered this Guaranty to the
Secured Parties.
(5) The Guarantor has received, directly or indirectly, all of the
proceeds of the Advances under the Credit Agreement and will continue to derive
substantial direct and indirect benefits from the transactions contemplated by
the Credit Agreement.
NOW, THEREFORE, in consideration of the premises and in order to
induce the Secured Parties to enter into the Amendment, the Guarantor hereby
agrees as follows:
Section 1. Guaranty. Subject to Section 5, the Guarantor hereby
unconditionally and irrevocably guarantees the punctual payment when due,
whether at stated maturity, by acceleration or otherwise, of all obligations of
the Borrower now or hereafter existing under or in respect of the Credit
Agreement (including, without limitation, any extensions, modifications,
substitutions, amendments or renewals of any or all of the foregoing
obligations) whether for principal, interest, expenses or otherwise (such
obligations being the "GUARANTEED OBLIGATIONS"), and any and all expenses
(including, without limitation, fees and expenses of counsel) incurred by the
Agent or any other Secured Party in enforcing any rights under this Guaranty.
Section 2. Guaranty Absolute. The Guarantor guarantees that the
Guaranteed Obligations will be paid strictly in accordance with the terms of the
Credit Agreement, regardless of any law, regulation or order now or hereafter in
effect in any jurisdiction affecting any of such terms or the
<PAGE> 4
16
rights of any Secured Party with respect thereto. Subject to Section 5, the
liability of the Guarantor under this Guaranty shall be irrevocable, absolute
and unconditional irrespective of:
(a) any lack of validity, enforceability or genuineness of any
provision of the Credit Agreement, any Loan Document or any other
agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Guaranteed Obligations or any
other amendment or waiver of or any consent to departure from the
Credit Agreement or any other Loan Document;
(c) any exchange, release or non-perfection of any collateral,
or any release or amendment or waiver of, or consent to departure from,
any other guaranty, for all or any of the Guaranteed Obligations; or
(d) any other circumstance which might otherwise constitute a
defense available to, or a discharge of, the Borrower, the Guarantor or
any other guarantor or surety.
This Guaranty shall continue to be effective or be reinstated, as the case may
be, if at any time any payment of any of the Guaranteed Obligations is rescinded
or must otherwise be returned by any Secured Party or any other Person upon the
insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as
though such payment had not been made.
Section 3. Waivers and Acknowledgments. (a) The Guarantor
hereby unconditionally and irrevocably waives promptness, diligence, notice of
acceptance, presentment, demand for performance, notice of nonperformance,
default, acceleration, protest or dishonor and any other notice with respect to
any of the Guaranteed Obligations and this Guaranty and any requirement that any
Secured Party protect, secure, perfect or insure any lien or any property
subject thereto or exhaust any right or take any action against the Borrower or
any other Person or any collateral.
(b) The Guarantor hereby irrevocably waives any claims or
other rights that it may now or hereafter acquire against the Borrower that
arise from the existence, payment, performance or enforcement of the Guarantor's
obligations under this Guaranty, including, without limitation, any right of
subrogation, reimbursement, exoneration, contribution or indemnification and any
right to participate in any claim or remedy of the Agent or any Lender against
the Borrower or any collateral, whether or not such claim, remedy or right
arises in equity or under contract, statute or common law, including, without
limitation, the right to take or receive from such Borrower, directly or
indirectly, in cash or other property or by set-off or in any other manner,
payment or security on account of such claim, remedy or right. If any amount
shall be paid to the Guarantor in violation of the preceding sentence at any
time prior to the later of the cash payment in full of the Guaranteed
Obligations and all other amounts payable under this Guaranty and the
Termination Date, such amount shall be held in trust for the benefit of the
Agent and the Lenders and shall forthwith be paid to the Agent to be credited
and applied to the Guaranteed Obligations and all other amounts payable under
this Guaranty, whether matured or unmatured, in accordance with the terms of the
Credit Agreement and this Guaranty, or to be held as collateral for any
Guaranteed Obligations or other amounts payable under this Guaranty thereafter
arising.
<PAGE> 5
17
(c) The Guarantor acknowledges that it will receive direct and
indirect benefits from the financing arrangements contemplated by the Credit
Agreement and this Guaranty and that the waivers set forth in Section 2 and this
Section 3 are knowingly made in contemplation of such benefits.
Section 4. Notices, Etc. All notices and other communications
provided for hereunder shall be in writing (including telegraphic, telecopy or
telex communication) and mailed, telegraphed, telecopied, telexed or delivered
to it, if to the Guarantor at its address c/o Brooke Group Ltd., 100 S.E.
Street, 32nd Floor, Miami, Florida 33131, Attention: Richard J. Lampen,
Executive Vice-President, if to the Agent or any Lender, at its address
specified in Section 9.02 of the Credit Agreement, or, as to any party, at such
other address as shall be designated by such party in a written notice to each
other party. All such notices and other communications shall, when mailed,
telegraphed, telecopied or telexed, be effective when deposited in the mails,
delivered to the telegraph company, transmitted by telecopier or confirmed by
telex answerback, respectively. Delivery by telecopier of an executed
counterpart of a signature page to any amendment or waiver of any provision of
this Guaranty shall be effective as delivery of an original executed counterpart
thereof.
Section 5. Continuing Guaranty. Subject to the proviso to this
Section 5, this Guaranty is a continuing guaranty and shall (a) remain in full
force and effect until the later of the cash payment in full of the Guaranteed
Obligations and all other amounts payable under this Guaranty and the
Termination Date, (b) be binding upon the Guarantor, its successors and assigns,
and (c) inure to the benefit of and be enforceable by the Lenders, the Agent and
their respective successors, transferees and assigns provided, however, that,
anything to the contrary notwithstanding, this Guaranty shall terminate and the
Guarantor shall, without the requirement of any further action by any of the
parties to any Loan Document, be released from any further liability hereunder
upon the exercise by Philip Morris of the Class B Option.
<PAGE> 6
Section 6. Execution in Counterparts. This Guaranty and each
amendment, waiver and consent with respect hereto may be executed in any number
of counterparts and by different parties thereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement. Delivery of an
executed counterpart of a signature page to this Guaranty by telecopier shall be
effective as delivery of an original executed counterpart of this Guaranty.
Section 7. Governing Law; Jurisdiction. (a) This Guaranty
shall be governed by, and construed in accordance with, the laws of the State of
New York.
(b) The Guarantor hereby irrevocably and unconditionally
submits, for itself and its property, to the nonexclusive jurisdiction of any
New York State court or federal court of the United States of America sitting in
New York City, and any appellate court from any thereof, in any action or
proceeding arising out of or relating to this Guaranty or any of the other Loan
Documents to which it is or is to be a party, or for recognition or enforcement
of any judgment, and the Guarantor hereby irrevocably and unconditionally agrees
that all claims in respect of any such action or proceeding may be heard and
determined in any such New York State court or, to the extent permitted by law,
in such federal court. The Guarantor agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing in this Guaranty or any other Loan Document shall affect any right that
any party may otherwise have to bring any action or proceeding relating to this
Guaranty or any other Loan Document in the courts of any jurisdiction.
(c) The Guarantor irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Guaranty or any of the other Loan
Documents to which it is or is to be a party in any New York State or federal
court. The Guarantor hereby irrevocably waives, to the fullest extent permitted
by law, the defense of an inconvenient forum to the maintenance of such suit,
action or proceeding in any such court.
IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to
be duly executed and delivered by its officer thereunto duly authorized as of
the date first above written.
EVE HOLDINGS INC.
By: /s/ Joselynn D. Van Siclen
------------------------------------
Name: Joselynn D. Van Siclen
Title: Vice President
<PAGE> 1
Exhibit 10.8
AGREEMENT
Agreement made as of the 1st day of August, 1999, by and
between Brooke Group Ltd., a corporation incorporated under the laws of the
State of Delaware, with its principal place of business at 100 Southeast Second
Street, Miami, Florida 33131 (the "Company"), and Joselynn D. Van Siclen,
residing at 1643 Brickell Avenue, Apt. #2405, Miami, Florida 33129 (the
"Executive").
W I T N E S S E T H :
WHEREAS, the Company desires to employ Executive as its Vice
President, Treasurer and Chief Financial Officer and Executive is willing to
serve in such capacities;
WHEREAS, the Company and Executive desire to set forth the
terms and conditions of such employment.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained, the Company and Executive
agree as follows:
1. EMPLOYMENT.
The Company hereby agrees to employ Executive, and Executive
agrees to be employed by the Company, on the terms and conditions herein
contained as its Vice President, Treasurer and Chief Financial Officer and in
such other executive capacities with the Company and its affiliated entities as
assigned from time to time by more senior executives of the Company. The
Executive shall devote substantially all of her business time, energy, skill and
efforts to the performance of her duties hereunder and shall faithfully and
diligently serve the Company. The foregoing shall not prevent Executive from
participating in not-for-profit activities or from managing her passive personal
investments provided that these activities do not materially interfere with
Executive's obligations hereunder.
<PAGE> 2
2. TERM OF EMPLOYMENT.
Executive's employment under this Agreement shall be for a
term commencing on August 1, 1999 (the "Effective Date") and, subject to earlier
termination as provided in Section 7 below, terminating on August 1, 2000 (the
"Initial Term"). The Initial Term shall be extended for successive one-year
periods (the "Additional Terms") unless terminated at the end of the Initial
Term or any Additional Term by either party upon ninety (90) days prior written
notice given to the other party (the Initial Term and any Additional Terms shall
be referred to as the "Employment Term"). Notwithstanding anything else herein,
the provisions of Section 8 hereof shall survive and remain in effect
notwithstanding the termination of the Employment Term or a breach by the
Company of this Agreement or any of its terms.
3. COMPENSATION.
(a) As compensation for her services under this
Agreement, the Company shall pay Executive a salary at the rate of One Hundred
and Fifty-five Thousand Dollars ($155,000) per year (the "Base Salary"), payable
in equal installments (not less frequently than monthly) and subject to
withholding in accordance with the Company's normal payroll practices. The
Executive's Base Salary shall be reviewed annually by the Company and may be
increased, but not decreased, in the Company's sole discretion.
(b) In addition to the Base Salary, the Company
may, in its sole discretion, pay Executive bonuses from time to time.
4. BENEFITS AND FRINGES.
During the Employment Term, Executive shall be entitled to
such benefits and fringes, if any, as are generally provided from time to time
by the Company to its executive employees of a comparable level, including any
life or medical insurance plans and pension and other similar plans, provided
that the Executive shall be provided with life insurance at least equal to her
Base Salary (provided she is insurable at standard rates).
2
<PAGE> 3
5. EXPENSES.
The Company shall reimburse Executive in accordance with its
expense reimbursement policy as in effect from time to time for all reasonable
expenses including at least 40 hours of continuing professional education per
annum incurred by Executive in connection with the performance of her duties
under this Agreement upon the presentation by Executive of an itemized account
of such expenses and appropriate receipts.
6. VACATION.
During the Employment Term, Executive shall be entitled to
vacation in accordance with the Company's practices, provided that Executive
shall not be entitled to less than four weeks paid vacation in each full
contract year.
7. EARLIER TERMINATION.
(a) Executive's employment under this Agreement and
the Employment Term shall terminate prior to August 1, 2000 as follows:
(i) automatically on the date of Executive's
death.
(ii) Upon written notice given by the
Company to the Executive if Executive is unable to perform her material duties
hereunder for 180 days (whether or not continuous) during any period of 360
consecutive days by reason of physical or mental disability.
(iii) Upon written notice by the Company to
the Executive for Cause. Cause shall mean (A) the Executive's conviction
(treating a nolo contendere plea as a conviction) of a felony (whether or not
any right of appeal has been or may be exercised); (B) willful refusal to
attempt to properly perform her obligations under this Agreement, or follow the
direction of the Board of Directors of the Company (the "Board") or a more
senior executive of the Company, which in either case is not remedied promptly
after receipt by the Executive of written notice from the Company specifying the
details thereof, provided the refusal to follow a direction shall not be Cause
if the Executive in good faith believes that such
3
<PAGE> 4
direction is not legal or ethical and promptly notifies the Company in writing
of such belief; (C) the Executive's gross negligence or willful misconduct with
regard to the Company or its affiliated entities, their business, assets or
employees; (D) the Executive's breach of fiduciary duty owed to the Company or
any subsidiary thereof, including, without limitation the obligations set forth
in Section 8 hereof; or (E) any other breach by the Executive of a material
provision of this Agreement that remains uncured for ten (10) days after written
notice thereof is given to the Executive. Upon a termination for Cause, the
Executive (and her representative) shall be given the opportunity to appear
before the Board to explain why the Executive believes that Cause did not occur.
Such appearance shall be scheduled on no less than twenty (20) and no more than
forty (40) days notice to Executive. In the event the Board agrees with the
Executive, which shall be a determination made in its sole discretion, the
Executive shall be retroactively reinstated in her position.
(iv) Upon written notice by the Company
without Cause.
(v) Upon the voluntary resignation of the
Executive without Good Reason upon sixty (60) days prior written notice to the
Company (which the Company may in its sole discretion make effective earlier).
(b) Upon such earlier termination of the Employment
Term the Executive shall be entitled to receive any unpaid salary and accrued
vacation through her date of termination and any benefits under any benefit plan
in accordance with the terms of said plan. In addition, if the termination is
pursuant to (a)(iv) above or non-renewal of the Employment Term by the Company
pursuant to Section 2 above, the Executive shall receive, provided she signs a
release of all claims arising out of her employment with the Company or
termination thereof (other than her right to indemnification, which shall
survive) in such form as reasonably requested by the Company, severance pay in a
lump sum equal to the amount of Base Salary she would have received if she was
employed until one year after termination of the Employment Term. Such lump sum
severance shall be paid within ten (10) business days after the Executive's
execution of the aforesaid release. In the event termination is pursuant to
(a)(ii) alone, the Executive shall receive in monthly payments for one (1) year
thereafter her Base Salary reduced by any disability benefits or worker's
compensation salary replacement she receives from any program sponsored or made
available by the Company or a
4
<PAGE> 5
governmental entity. In addition, until the earlier of (i) Executive commencing
other full-time employment or (ii) 12 months after the end of the Employment
Term, to the extent the Executive or her dependents are eligible for COBRA
coverage, the Company shall pay for such coverage. The Company and its
affiliated entities shall have no other obligations to the Executive.
8. CONFIDENTIAL INFORMATION AND NON-COMPETITION.
(a) Executive acknowledges that as a result of her
employment by the Company, Executive will obtain secret and confidential
information as to the Company and its affiliated entities, that the Company and
its affiliated entities will suffer substantial damage, which would be difficult
to ascertain, if Executive shall enter into Competition, as defined below, with
the Company or any affiliated entity and that because of the nature of the
information that will be known to Executive it is necessary for the Company to
be protected by the prohibition against Competition set forth herein, as well as
the Confidentiality restrictions set forth herein. Executive acknowledges that
the provisions of this Agreement are reasonable and necessary for the protection
of the business of the Company and its affiliated entities and that part of the
compensation paid under this Agreement is in consideration for the agreements in
this Section 8.
(b) Competition shall mean:
(i) participating, directly or indirectly,
as an individual proprietor, partner, stockholder, officer, employee, director,
joint venturer, investor, lender, consultant or in any capacity whatsoever
(within the United States of America, Canada, or in any country where the
Company or its affiliates do business) in a business in competition with any
operating business conducted by the Company or its affiliated entities; with
regard to which Executive worked or otherwise had responsibilities or had access
to material Confidential Information while employed by the Company or its
affiliated entities or an investment opportunity within the provisions of
subpart (E) below; provided, however, that such participation shall not include:
(A) the mere ownership of not more than one percent (1%) of the total
outstanding stock of a publicly held company; (B) the performance of services
for any enterprise to the extent such services are not performed, directly or
indirectly, for a
5
<PAGE> 6
business in the aforesaid Competition; (C) any activity engaged in with the
prior written approval of the Chief Executive Officer of the Company; (D) the
practicing of accounting in an accounting firm that represents such competing
business provided that Executive does not personally represent such competing
business; or (E) investment banking activities (including without limitation
with an investment entity for its own account or a fund operated by it) provided
such activities do not involve any investment opportunity that the Company or
any affiliated entity is considering or advising on at the time of termination
of the Employment Term either for its own account, any fund managed by it or for
any customer or potential customer of the Company or such entity.
(ii) recruiting, soliciting or inducing, of
any nonclerical employee or employees of the Company or its affiliated entities
to terminate their employment with, or otherwise cease their relationship with,
the Company or its affiliated entities or hiring or assisting another person or
entity to hire any nonclerical employee of the Company or its affiliated
entities or any person who within six (6) months before had been a nonclerical
employee of the Company or any of its affiliated entities. Notwithstanding the
foregoing, if requested by an entity with which Executive is not affiliated,
Executive may serve as a reference for any person who at the time of the request
is not an employee of the Company or any of its affiliated entities.
(iii) If any restriction set forth with
regard to Competition is found by any court of competent jurisdiction, or an
arbitrator, to be unenforceable because it extends for too long a period of time
or over too great a range of activities or in too broad a geographic area, it
shall be interpreted to extend over the maximum period of time, range of
activities or geographic area as to which it may be enforceable.
(c) During and after the Employment Term, Executive
shall hold in a fiduciary capacity for the benefit of the Company and its
affiliated entities all secret or confidential information, knowledge or data
relating to the Company and its affiliates, and their respective businesses,
including any confidential information as to customers of the Company or its
affiliated entities, (i) obtained by Executive during her employment by the
Company or its affiliated entities and (ii) not otherwise public knowledge or
known within the Company's or affiliated entity's industry. Executive shall not,
without prior written consent of
6
<PAGE> 7
the Company, unless compelled pursuant to the order of a court or other
governmental or legal body having jurisdiction over such matter, communicate or
divulge any such information, knowledge or data to anyone other than the Company
and those designated by it. In the event Executive is compelled by order of a
court or other governmental or legal body to communicate or divulge any such
information, knowledge or data to anyone other than the Company and those
designated by it, Executive shall promptly notify the Company of any such order
and shall cooperate fully with the Company in protecting such information to the
extent possible under applicable law.
(d) Upon termination of Executive's employment with
the Company and its affiliated entities, or at any other time as the Company may
request, Executive will promptly deliver to the Company all documents (whether
prepared by the Company, an affiliated entity, Executive or a third party)
relating to the Company or an affiliated entity or any of their businesses or
property which Executive may possess or have under her direction or control.
(e) During the Employment Term and for one (1) year
thereafter, Executive will not enter into Competition with the Company or its
affiliated entities.
(f) In the event of a breach or potential breach of
this Section 8, Executive acknowledges that the Company and its affiliated
entities will be caused irreparable injury and that money damages may not be an
adequate remedy and agree that the Company and its affiliated entities shall be
entitled to injunctive relief (in addition to its other remedies at law) to have
the provisions of this Section 8 enforced.
9. EXECUTIVE REPRESENTATION
Executive represents and warrants that she is under no
contractual or other limitation from entering into this Agreement and performing
her obligations hereunder.
10. INDEMNIFICATION
The Executive shall be entitled to be indemnified by the
Company for her actions as an officer, director, employee, agent or fiduciary of
the Company or its affiliated
7
<PAGE> 8
entities to the fullest extent permitted by applicable law and shall have legal
fees and other expenses paid to her in advance of final disposition of a
proceeding provided she executes an undertaking to repay such amounts if, and to
the extent, required to do so by applicable law. The Company shall cover the
Executive under any directors and officers liability insurance policy to the
same extent as its other senior officers.
11. ENTIRE AGREEMENT; MODIFICATION.
This Agreement constitutes the full and complete understanding
of the parties hereto and will supersede all prior agreements and
understandings, oral or written, with respect to the subject matter hereof. Each
party to this Agreement acknowledges that no representations, inducements,
promises or agreements, oral or otherwise, have been made by either party, or
anyone acting on behalf of either party, which are not embodied herein and that
no other agreement, statement or promise not contained in this Agreement shall
be valid or binding. This Agreement may not be modified or amended except by an
instrument in writing signed by the party against whom or which enforcement may
be sought.
12. SEVERABILITY.
Any term or provision of this Agreement which is invalid or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such invalidity or unenforceability without rendering invalid
or unenforceable the remaining terms and provisions of this Agreement or
affecting the validity or enforceability of any of the terms of provisions of
this Agreement in any other jurisdiction.
13. WAIVER OF BREACH.
The waiver by any party of a breach of any provisions of this
Agreement, which waiver must be in writing to be effective, shall not operate as
or be construed as a waiver of any subsequent breach.
8
<PAGE> 9
14. NOTICES
All notices hereunder shall be in writing and shall be deemed
to have been duly given when delivered by hand, or one day after sending by
express mail or other "overnight mail service," or three days after sending by
certified or registered mail, postage prepaid, return receipt requested. Notice
shall be sent as follows: if to Executive, to the address as listed in the
Company's records; and if to the Company, to the Company at its office or set
forth at the head of this Agreement, to the attention of the Chairman. Either
party may change the notice address by notice given as aforesaid.
15. ASSIGNABILITY; BINDING EFFECT.
This Agreement shall be binding upon and inure to the benefit
of Executive and Executive's legal representatives, heirs and distributees, and
shall be binding upon and inure to the benefit of the Company, its successors
and assigns. This Agreement may not be assigned by the Executive. This Agreement
may not be assigned by the Company except in connection with a merger or a sale
by the Company of all or substantially all of its assets and then only provided
the assignee specifically assumes in writing all of the Company's obligations
hereunder.
16. GOVERNING LAW.
(a) All issues pertaining to the validity,
construction, execution and performance of this Agreement shall be construed and
governed in accordance with the laws of the State of Florida, without giving
effect to the conflict or choice of law provisions thereof.
(b) Any dispute or controversy with regard to this
Agreement, other then injunctive relief pursuant to Section 8, shall be settled
by arbitration in Miami, Florida before the American Arbitration Association
("AAA") in accordance with the rules of Commercial Arbitration of the AAA. The
decision of the arbitrators shall be final and binding upon the parties hereto
and may be entered in any court having jurisdiction. The parties shall each bear
fifty (50) percent of the cost of the AAA and the arbitrators, but each party
shall bear its or her own legal expenses.
9
<PAGE> 10
17. HEADINGS.
The headings in this Agreement are intended solely for
convenience or reference and shall be given no effect in the construction or
interpretation of this Agreement.
18. COUNTERPARTS.
This Agreement may be executed in several counterparts, each
of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
10
<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed and Executive has hereunto set her hand as of the date first
set forth above.
BROOKE GROUP LTD.
By: /s/ Bennett S. LeBow
------------------------------------
Name: Bennett S. LeBow
Title: Chairman, President and
Chief Executive Officer
By: /s/ Joselynn D. Van Siclen
------------------------------------
Joselynn D. Van Siclen
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOK GROUP LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,368
<SECURITIES> 59,809
<RECEIVABLES> 27,993
<ALLOWANCES> 0
<INVENTORY> 46,421
<CURRENT-ASSETS> 242,448
<PP&E> 132,603
<DEPRECIATION> 39,185
<TOTAL-ASSETS> 550,532
<CURRENT-LIABILITIES> 209,157
<BONDS> 191,193
0
0
<COMMON> 2,094
<OTHER-SE> (125,927)
<TOTAL-LIABILITY-AND-EQUITY> 550,532
<SALES> 217,662
<TOTAL-REVENUES> 224,292
<CGS> 81,525
<TOTAL-COSTS> 81,525
<OTHER-EXPENSES> 299,454
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (27,061)
<INCOME-PRETAX> 308,124
<INCOME-TAX> 83,374
<INCOME-CONTINUING> 223,368
<DISCONTINUED> 1,249
<EXTRAORDINARY> (1,056)
<CHANGES> 0
<NET-INCOME> 223,561
<EPS-BASIC> 10.68
<EPS-DILUTED> 8.57
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927388
<NAME> BGLS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,868
<SECURITIES> 59,809
<RECEIVABLES> 27,993
<ALLOWANCES> 0
<INVENTORY> 46,421
<CURRENT-ASSETS> 241,925
<PP&E> 132,584
<DEPRECIATION> 39,185
<TOTAL-ASSETS> 548,863
<CURRENT-LIABILITIES> 240,150
<BONDS> 191,193
0
0
<COMMON> 0
<OTHER-SE> (158,873)
<TOTAL-LIABILITY-AND-EQUITY> 548,863
<SALES> 217,662
<TOTAL-REVENUES> 224,292
<CGS> 81,525
<TOTAL-COSTS> 81,525
<OTHER-EXPENSES> 300,636
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (29,650)
<INCOME-PRETAX> 307,268
<INCOME-TAX> 83,374
<INCOME-CONTINUING> 222,512
<DISCONTINUED> 1,249
<EXTRAORDINARY> (1,056)
<CHANGES> 0
<NET-INCOME> 222,705
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
I. GOVERNMENTAL HEALTH CARE RECOVERY ACTIONS
County of Los Angeles v. R.J. Reynolds, et al., Case No. 707651,
Superior Court of California, County of San Diego (case filed 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 California, County of San Diego (case
filed 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.
People of the State of California, et al. v. Philip Morris
Incorporated, et al., Case No. BC194217, Superior Court of California,
County of Los Angeles (case filed 7/14/98). People seek injunctive
relief and economic reimbursement with respect to damages allegedly
caused by environmental tobacco smoke.
People of the State of California, et al. v. Philip Morris
Incorporated, et al., Case No. 980-864, Superior Court of California,
County of San Francisco (case filed 8/5/98). People seek injunctive
relief and economic reimbursement with respect to damages allegedly
caused by environmental tobacco smoke.
County of Cook v. Philip Morris, et al., Case No. 97L04550, Circuit
Court, State of Illinois, Cook County (case filed 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 St. Louis, et al. v. American Tobacco Company, Inc., et al.,
Case No. CV-982-09652, Circuit Court, State of Missouri, City of St.
Louis, (case filed 12/4/98). City of St. Louis and area hospitals seek
to recover past and future costs expended to provide healthcare to
Medicaid, medically indigent, and non-paying patients suffering from
tobacco-related illnesses.
1
<PAGE> 2
County of St. Louis, Missouri v. American Tobacco Company, Inc., et
al., Case No. 982-09705, Circuit Court, State of Missouri, City of St.
Louis, (case filed 12/10/98). County seeks to recover costs from
providing healthcare services to Medicaid and indigent patients, as
part of the State of Missouri's terms as a party to the Master
Settlement Agreement.
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
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.
County of Erie v. The Tobacco Institute, Inc., et al., Case No. I
1997/359, Supreme Court of New York, Erie County (case filed 1/14/97).
County seeks equitable relief and economic reimbursement for moneys
expended on payments for healthcare for Medicaid recipients and
non-Medicaid care for indigent smokers.
Allegheny General Hospital, et al. v. Philip Morris, et al., Case No.
98-18956, Court of Common Pleas, State of Pennsylvania, Allegheny
County (case filed 10/10/98). Hospitals seek to recover past and
future costs expended to provide healthcare to Medicaid, medically
indigent, and non-paying patients suffering from tobacco-related
illnesses.
County of Allegheny v. The American Tobacco Company, et al; Case No.
99-365, U.S.D.C, Western District of Pennsylvania (case filed
3/12/99). County seeks equitable relief and economic reimbursement for
moneys expended on payments for healthcare for smokers resident in the
County.
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,
State of South Dakota (case filed 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 Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et
al., Case No. 030399, Tribal Court of the Sisseton-Wahpeton Sioux
Tribe, State of North Dakota (case filed 2/3/99). Indian tribe seeks
equitable and injunctive relief for damages incurred by the tribe in
paying for the expenses of indigent smokers.
Republic of Bolivia v. Philip Morris Companies, Inc., et al., Case No.
6949-JG99, District Court, State of Texas, Brazoria County, State of
Texas (case filed 1/20/99). The Republic of Bolivia seeks compensatory
and injunctive relief for damages incurred by the Republic in paying
for the medicaid expenses of indigent smokers.
2
<PAGE> 3
Republic of Guatemala v. The Tobacco Institute, Inc., et al., Case No.
1:98CV01185, USDC, District of Columbia (case filed 5/18/98). The
Republic of Guatemala seeks compensatory and injunctive relief for
damages incurred by the Republic in paying for the medicaid expenses
of indigent smokers.
Republic of Nicaragua v. Liggett Group Inc., et al., Case No. 98-2380
RLA, USDC, District of Puerto Rico (case filed 12/10/98). The Republic
of Nicaragua seeks compensatory and injunctive relief for damages
incurred by the Republic in paying for the medicaid expenses of
indigent smokers.
Republic of Panama v. The American Tobacco Company, Inc., et al., Case
No. 98-17752, Civil District Court, State of Louisiana, Orleans Parish
(case filed 10/20/98). The Republic of Panama seeks compensatory and
injunctive relief for damages incurred by the Republic in paying for
the medicaid expenses of indigent smokers.
The Kingdom of Thailand v. The Tobacco Institute, Inc., et al, Case
No. H-99-0320, USDC, Southern District Texas (case filed 3/11/99). The
Kingdom of Thailand seeks compensatory and injunctive relief for
damages incurred by the Kingdom in paying for the medicaid expenses of
indigent smokers.
Republic of Venezuela v. Philip Morris Companies, Inc., et al., Case
No. 99-01943-CA-01, Circuit Court of the 11th Judicial Circuit, State
of Florida, Miami-Dade County (case filed 1/27/99). The Republic of
Venezuela seeks compensatory and injunctive relief for damages
incurred by the Republic in paying for the medicaid expenses of
indigent smokers.
The State of Rio de Janerio of The Federated Republic of Brazil v.
Philip Morris Companies, Inc., et al., Case No. CV-32198, District of
Angelina County , State of Texas (case filed 7/12/99). The State of
Rio de Janerio of The Federated Republic of Brazil seeks compensatory
and injunctive relief for damages incurred by the Republic in paying
for the medicaid expenses of indigent smokers.
II. THIRD-PARTY PAYOR ACTIONS
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 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 beneficiaries
suffering from smoking-related illnesses.
3
<PAGE> 4
Laborers' and Operating Engineers Utility Agreement v. Philip Morris,
et al., Case No. CIV97-1406 PHX, USDC, District of Arizona (case filed
7/29/97). 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 beneficiaries 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
9/4/97). 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 beneficiaries suffering from
smoking-related illnesses.
Bay Area Automotive Group Welfare Fund, et al. v. Philip Morris, Inc.
et al., Case No. 994380, Superior Court of California, County of San
Francisco (case filed 4/16/98). 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
beneficiaries suffering from smoking-related illnesses.
Fibreboard Corporation, et al. v. The American Tobacco Company, et
al., Case No. 791919-8, Superior Court of California, County of
Alameda (case filed 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.
Newspaper Periodical Drivers Local 921 San Francisco Newspaper Agency
Health & Welfare Trust Fund v. Philip Morris, et al., Case No. 404469,
Superior Court of California, County of San Mateo, (case filed
4/15/98). 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 beneficiaries suffering from
smoking-related illnesses.
Northern California General Teamsters Security Fund, et al. v. Philip
Morris, Inc., et al., Case No. 798492-9, Superior Court of California,
County of Alameda (case filed 5/22/98). 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
beneficiaries suffering from smoking-related illnesses.
Northern California Tile Industry Health & Welfare Trust Fund v.
Philip Morris, Inc., et al., Case No. 996822, Superior Court of
California, County of San Francisco (case filed 5/98). 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 beneficiaries suffering from smoking-related
illnesses.
4
<PAGE> 5
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 11/6/97). 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 beneficiaries suffering from smoking-related
illnesses.
Pipe Trades District Council No. 36 Health and Welfare Trust Fund v.
Philip Morris, Inc., et al., Case No. 797130-1, Superior Court of
California, County of Alameda (case filed 4/16/98). 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 beneficiaries suffering from smoking-related
illnesses.
San Francisco Newspaper Publishers and Northern California Newspaper
Guild Health & Welfare Trust v. Philip Morris, Inc., et al., Case No
.994409, Superior Court of California, County of San Francisco (case
filed 4/17/98). 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 beneficiaries
suffering from smoking-related illnesses.
Screen Actors Guild - Producers Health Plan, et al. v. Philip Morris,
et al., Case No. DC181603, Superior Court of California, County of Los
Angeles (case filed 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
beneficiaries suffering from smoking-related illnesses.
The Seibels Bruce Group, Inc. v. R.J. Reynolds, et al, Case No.
300235, Superior Court of California, County of San Francisco (case
filed 12/30/98). Insurance company seeks to recover equitable
contribution from the tobacco industry defendants for the amount that
has been, and will be paid by plaintiff for past and future defense
and indemnification costs.
Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris,
Inc., et al., Case No. 994403, Superior Court of California, County of
San Francisco (case filed 4/16/98). 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
beneficiaries suffering from smoking-related illnesses.
5
<PAGE> 6
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 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
benefaciaries suffering from smoking-related illnesses.
Teamsters Benefit Trust v. Philip Morris, et al., Case No. 796931-5,
Superior Court of California, County of Alameda (case filed 4/20/98).
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 beneficiaries suffering from
smoking-related illnesses.
UA Local No. 159 Health and Welfare Trust Fund v. Philip Morris, Inc.,
et al., Case No. 796938-8, Superior Court of California, County of
Alameda (case filed 4/15/98). 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
beneficiaries suffering from smoking-related illnesses.
UA Local No. 343 Health and Welfare Trust Fund v. Philip Morris, Inc.,
et al., Case No. 796956-4, Superior Court of California, County of
Alameda. 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 beneficiaries suffering from
smoking-related illnesses.
UA Local No. 393 Health and Welfare Trust Fund v. Philip Morris, Inc.,
et al., Case No. 798474-3, Superior Court of California, County of
Alameda (case filed 5/21/98). 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
beneficiaries suffering from smoking-related illnesses.
UA Local No. 467 Health and Welfare Trust Fund v. Philip Morris, Inc.,
et al., Case No. 404308, Superior Court of California, County of San
Mateo. 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 beneficiaries suffering from
smoking-related illnesses.
Connecticut Pipe Trades Health Fund, et al. v. Philip Morris, et al.,
Case No. 397CV01305CT, USDC, District of Connecticut (case filed
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 beneficiaries suffering from
smoking-related illnesses.
6
<PAGE> 7
Holland, et al. v. Philip Morris, Inc., et al., Case No. 1:98CV01716,
USDC, District of Columbia (case filed 7/9/98). Asbestos company seeks
reimbursement for damages paid to asbestos victims for medical and
other relief, which damages allegedly are attributable to the tobacco
companies.
S.E.I.U. Local 74 Welfare Fund, et al. v. Philip Morris, Inc., et al.,
Case No. 1:98CV01569, USDC, District of Columbia (case filed 6/22/98).
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 beneficiaries suffering from
smoking-related illnesses.
Service Employees International Union Health and Welfare Trust Fund,
et al. v. Philip Morris, Inc. et al., Case No. 1:98CV00704, USDC,
District of Columbia (case filed 3/19/98). 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 beneficiaries suffering from smoking-related
illnesses.
Raymark Industries, Inc. v. Brown & Williamson, et al., Case No.
1:97-CV-2711-RCF, USDC, Northern District of Georgia (case filed
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.
Arkansas Blue Cross and Blue Shield, et al. v. Philip Morris
Incorporated, et al., Case No. 98 C 2612, USDC, Northern District of
Illinois (case filed 5/22/98). Seven Blue Cross/Blue Shield plans seek
injunctive relief and economic reimbursement to recover moneys
expended by healthcare plans to provide medical treatment to its
participants and beneficiaries 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 5/22/97). 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
beneficiaries 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 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 beneficiaries
suffering from smoking-related illnesses.
7
<PAGE> 8
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 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 beneficiaries 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
9/15/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Union Fund to
provide medical treatment to its participants and beneficiaries
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 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 beneficiaries 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
6/20/97). 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 beneficiaries 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 of
Massachusetts, Suffolk County (case filed 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 beneficiaries 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
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 beneficiaries suffering from
smoking-related illnesses.
8
<PAGE> 9
Conwed Corporation, et al. v. R.J. Reynolds Tobacco Company, et al.,
Case No. C1-98-3620, District Court, Ramsey County, State of Minnesota
(case filed 4/30/98). Plaintiffs operate several industrial plants in
the state of Minnesota, and seek reimbursement for damages paid to
asbestos victims for medical and other relief, which damages allegedly
are attributable to the tobacco companies.
Group Health Plan, Inc., et al. v. Philip Morris, et al., Case No.
98-1036 DSD/JMM, USDC, Second Judicial District, Ramsey County, State
of Minnesota (case filed 3/13/98). 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
beneficiaries suffering from smoking-related illnesses.
Thomas, Ezell, et al. v. R.J. Reynolds Tobacco Company, et al., Case
No. 96-0065, Circuit Court of Mississippi, Jefferson County (case
filed 10/9/98). Plaintiffs in this putative personal injury class
action seek a judgment against both tobacco companies and asbestos
companies, and represent all similarly situated adult smokers resident
in the state of Mississippi. Owens Corning Fiberglass is also a
plaintiff in this action and seeks reimbursement for damages paid to
asbestos victims for medical and other relief, which damages allegedly
are attributable to the tobacco companies.
Construction Laborers of Greater St. Louis Welfare Fund, Case No.
4:97CV02030ERW, USDC, Eastern District of Missouri (case filed
12/1/98). 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 beneficiaries suffering from
smoking-related illnesses.
Contractors, Laborers, Teamsters & Engineers Health & Welfare Plan v.
Philip Morris, Inc. et al., Case No. 8:98CV364, USDC, District of
Nebraska (case filed 8/17/98). 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
beneficiaries 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 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 beneficiaries suffering from
smoking-related illnesses.
Blue Cross and Blue Shield of New Jersey, et al. v. Philip Morris,
Incorporated, et al., Case No. CV-98-3287(JBW), USDC, Eastern District
of New York (case filed 4/29/98). Twenty-five health plans seek to
recover moneys expended on healthcare costs purportedly attributed to
tobacco-related diseases caused by Defendants.
9
<PAGE> 10
Day Care Council-Local 205 D.C. 1707 Welfare Fund v. Philip Morris, et
al., Case No. 606240/97, Supreme Court of New York, New York County
(case filed 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 beneficiaries
suffering from smoking-related illnesses.
Eastern States Health and Welfare Fund, et al. v. Philip Morris, et
al., Case No. 603869/97, Supreme Court of New York, New York County
(case filed 7/28/97). 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 beneficiaries
suffering from smoking-related illnesses.
Falise v. The American Tobacco Co., et al., Case No. CV 97-7640(JBW),
USDC, Eastern District of New York (case filed 11/31/97). Asbestos
company seeks reimbursement for damages paid to asbestos victims for
medical and other relief, which damages allegedly are attributable to
the tobacco companies.
H.K. Porter Company, Inc. v. B.A.T. Industries, P.L.C., et al., Case
No. 97-7658(JBW), USDC, Eastern District of New York (case filed
6/19/98). Asbestos company seeks reimbursement for damages paid to
asbestos victims for medical and other relief, which damages allegedly
are attributable to the tobacco companies.
IBEW Local 25 Health and Benefit Fund v. Philip Morris, et al., Case
No. 122255/97, Supreme Court of New York, New York County (case filed
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 beneficiaries suffering from
smoking-related illnesses.
IBEW Local 363 Welfare Fund v. Philip Morris, et al., Case No.
122254/97, Supreme Court of New York, New York County (case filed
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 beneficiaries suffering from
smoking-related illnesses.
Keene Creditors Trust v. Brown & Williamson Tobacco Corp., et al.,
Case no. 606479/97, Supreme Court of New York, New York County (case
filed 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.
10
<PAGE> 11
Laborers' Local 17 Health Benefit Fund, et al. v. Philip Morris, et
al., Case No. 98-7944, 2nd Circuit Court of Appeals, State of New York
(case filed 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.
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, et al.,
Case No. 606249/97, Supreme Court of New York, New York County (case
filed 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 beneficiaries
suffering from smoking-related illnesses.
Local 1199 National Benefit Fund for Health & Human Services Employees
v. Philip Morris, et al., Case No. 606241/97, Supreme Court of New
York, New York County (case filed 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 beneficiaries suffering from smoking-related
illnesses.
Local 138, 138A & 138B International Union of Operating Engineers
Welfare Fund v. Philip Morris, et al., Case No. 122257/97, Supreme
Court of New York, New York County (case filed 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 beneficiaries suffering from smoking-related
illnesses.
Local 840 International Brotherhood of Teamsters Health & Insurance
Fund v. Philip Morris, et al., Case No. 122256/97, Supreme Court of
New York, New York County (case filed 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 beneficiaries 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. 122258/97, Supreme Court of New York,
New York County (case filed 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
beneficiaries suffering from smoking-related illnesses.
11
<PAGE> 12
National Asbestos Workers Medical Fund, et al. v. Philip Morris
Incorporated, et al., Case No. 98-1492, USDC, Eastern District of New
York (case filed 3/23/98). 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
beneficiaries suffering from smoking-related illnesses.
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris, et al.,
Case No. 604785-97, Supreme Court of New York, New York County (case
filed 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 beneficiaries
suffering from smoking-related illnesses.
Raymark Industries, Inc. v. Brown & Williamson, et al., Case No.
98-CV-675, USDC, Eastern District of New York (case filed 5/21/98).
Asbestos company seeks reimbursement for damages paid to asbestos
victims for medical and other relief, which damages allegedly are
attributable to the tobacco companies.
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 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 beneficiaries
suffering from smoking-related illnesses.
UNR Asbestos-Disease Claims Trust v. Brown & Williamson, et al., Case
No. 105152/99, Supreme Court of the State of New York, New York County
(case filed 3/15/99). The Trust brings this action to recover
contribution, indemnity and/or reimbursement from the tobacco
defendants.
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 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
beneficiaries suffering from smoking-related illnesses.
Rhode Island Laborers' Health & Welfare Fund v. The American Tobacco
Company, et al., Case No. 97-500L, USDC, District of Rhode Island
(case filed 10/24/97). 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 beneficiaries
suffering from smoking-related illnesses.
12
<PAGE> 13
Steamfitters Local Union No. 614 Health and Welfare Fund v. Philip
Morris, et al., Case No. 92260-2, Circuit Court for the 30th Judicial
District at Memphis, State of Tennessee (case filed 1/7/98). 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 beneficiaries 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
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 beneficiaries suffering from
smoking-related illnesses.
Utah Laborers' Health and Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al., Case No. 2:98CV403C, USDC, District of Utah,
Central Division (case filed 6/11/98). 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
beneficiaries suffering from smoking-related illnesses.
Association of Washington Public Hospital Districts, et al v. Philip
Morris Incorporated, et al, Case No. C98-1675, USDC, Western District
of Washington (case filed 3/17/99). Public Hospital Districts seek
injunctive relief and economic reimbursement to recover moneys
expended in providing medical treatment to its patients suffering from
smoking-related illnesses.
Northwest Laborers-Employers Health & Security Trust Fund, et al. v.
Philip Morris, et al., Case No. C97-849-WD, USDC, Western District of
Washington (case filed 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 beneficiaries suffering from
smoking-related illnesses.
Regence Blueshield, et al. v. Philip Morris Incorporated, et al., Case
No. C98-559R, USDC, Western District of Washington (case filed
4/29/98). Blue Cross/Blue Shield plans seek injunctive relief and
economic reimbursement to recover moneys expended by healthcare plans
to provide medical treatment to its participants and beneficiaries
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 8/27/97). 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 beneficiaries
suffering from smoking-related illnesses.
13
<PAGE> 14
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 9/19/97). 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
beneficiaries suffering from smoking-related illnesses.
Milwaukee Carpenters' District Council Health Fund, et al. v. Philip
Morris, et al., Case No. 98CV002394, Circuit Court of Wisconsin,
Milwaukee County (case filed 3/30/98). 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
beneficiaries suffering from smoking-related illnesses.
III. CLASS ACTION CASES
Crozier, et al. v. American Tobacco Company, et al., Case No. CV
96-1508 PR, Circuit Court of Montgomery County, Alabama (case filed
8/2/96). This taxpayer putative class action seeks reimbursement of
Medicaid expenses made by the government of the State of Alabama for
smokers resident in Alabama allegedly injured by tobacco products.
Hansen, et al. v. The American Tobacco Company, et al., Case No.
LR-C-96-881, USDC, Eastern District of Arkansas (case filed 4/4/97).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in Arkansas.
Brown, et al. v. The American Tobacco Company, et al., Case No.
711400, Superior Court of California, County of San Diego (case filed
10/1/97). This personal injury class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in California.
Daniels, et al. v. Philip Morris Companies, Inc., et al., Case No.
719446, Superior Court of California, County of San Diego (case filed
8/13/98). This personal injury class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers resident
in California.
14
<PAGE> 15
Pechanga Band of Luiseno Mission Indians, et al. v. Philip Morris,
Inc., et al., Case No. 725419, Superior Court of California, County of
San Diego (case filed 10/30/98). This personal injury class action is
brought on behalf of plaintiff tribe and all similarly situated
American Indian smokers resident in California.
Smokers for Fairness, LLC, et al. v. The State of California, et al.,
Case No. 7076751, Superior Court of California, County of San Diego
(case filed 9/25/98). Plaintiffs bring this putative class action on
behalf of all similarly situated adult smokers resident in the State
of California.
Harris, et al. v. Bill Owens, et al., Case No. 99-S-953, USDC,
District of Colorado (case filed 5/19/99). This action is brought on
behalf of all persons, including the estates of those deceased persons
who received medical assistance paid for by Medicaid in Colorado for a
smoking-related disease or illness whose claim for past and future
medical expenses were assigned to the State of Colorado and whose
claims were released by the State of Colorado in the Master Settlement
Agreement entered between the State of Colorado and the Tobacco
Company Defendants.
Reed, et al. v. Philip Morris, et al., Case No. 96-05070, Superior
Court of the District of Columbia (case filed 6/21/96). This
"addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated allegedly addicted smokers
resident in the District of Columbia.
Broin, et al. v. Philip Morris, et al., Case No. 91-49738 CA 22,
Circuit Court, State of Florida, Dade County (case filed 10/31/91).
This action brought on behalf of all flight attendants that have
allegedly 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 and
affirmed by the Third District Court of Appeal in March 1999. A
request for discretionary review presently is before the Florida
Supreme Court.
Engle, et al. v. R.J. Reynolds, et al., Case No. 94-08273 CA 20,
Circuit Court, State of Florida, Dade County (case filed 5/5/94). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers resident in Florida. The
case was certified as a class action on October 31, 1994. Trial
commenced in July 1998. In July 1999, the jury returned a verdict with
respect to Phase I of the trial finding the companies liable on
various tort, warranty and conspiracy theories, and determined a
possible cause for punitive damages. Phase II of the trial, which is
to include a compensatory damages trial as to two of the class
representatives and a punitive damages trial as to the class, is set
to begin on September 7, 1999.
15
<PAGE> 16
Peterson, et al. v. The American Tobacco Company, et al., Case No.
97-0490-02, First Circuit Court of the First Circuit, State of Hawaii
(case filed 2/6/97). This "addiction-as-injury" putative class action
is brought on behalf of plaintiff and all similarly situated allegedly
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 5/22/97).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in 34 states.
Cleary, et al. v. Philip Morris, Inc., et al., Case No. 98 L06427,
Circuit Court of the State of Illinois, Cook County (case filed
6/11/98). This personal injury class action is brought on behalf of
plaintiff and all similarly situated smokers resident in Illinois.
Norton, et al. v. R.J. Reynolds, et al., Case No. 48-D01-9605-CP-0271,
Superior Court of Indiana, Madison County (case filed 5/3/96). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated injured smokers resident in Indiana.
Brammer, et al. v. R.J. Reynolds, et al., Case No. 4-97-CV-10461,
USDC, Southern District of Iowa (case filed 6/30/97). This
"addiction-as-injury" putative class action is brought on behalf of
plaintiffs and all similarly situated allegedly addicted smokers
resident in Iowa.
Castano, et al. v. The American Tobacco Company, et al., Case No.
95-30725, USDC, Eastern District of Louisiana (case filed 3/29/94).
This case was settled by Liggett and Brooke on March 12, 1996.
Nationwide "addiction-as-injury" class action was decertified by the
Fifth Circuit in May 1996.
Granier, et al. v. The American Tobacco Company, et al., USDC, Eastern
District of Louisiana (case filed 9/29/94). This case currently is
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, State of Louisiana, Orleans
Parish (case filed 11/12/97). This personal injury class action is
brought on behalf of plaintiff and all similarly situated allegedly
injured smokers resident in Louisiana.
Richardson, et al. v. Philip Morris, et al., Case No.
96145050/CL212596, Circuit Court, Baltimore City, Maryland (case filed
on 5/29/96). This "addiction-as-injury" putative class action is
brought on behalf of plaintiff and all similarly situated allegedly
addicted smokers resident in Maryland.
16
<PAGE> 17
Baker, et al. v. The American Tobacco Company, et al., Case
No.97-703444-NP, Circuit Court of Michigan, Wayne County (case filed
2/4/97). This personal injury putative class action is brought on
behalf of plaintiff and all similarly situated allegedly injured adult
smokers resident in Michigan.
Taylor, Terry, et al. v. The American Tobacco Company, et al., Case
No. 97-715975, Circuit Court of Michigan, Wayne County (case filed
7/28/97). This personal injury class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in Michigan.
Collier, et al. v. Philip Morris, et al., Case No. 1:98 ov 246RG,
USDC, Southern District of Mississippi (case filed 6/5/98). This
putative class action is brought on behalf of all non-smoking
policemen and seamen employed in the United States who allegedly have
been injured by exposure to second hand smoke.
White, Henry Lee, et al. v. Philip Morris, et al., Case No.
5:97-CV-91BRS, Chancery Court of Mississippi, Jefferson County (case
filed 4/24/97). This personal injury class action is brought on behalf
of plaintiff and all similarly situated allegedly injured smokers
resident in Mississippi.
Badillo, et al. v. The American Tobacco Company, et al., Case No.
CV-N-97-573-HDM (RAM), USDC, District of Nevada (case filed 11/4/97).
This action is brought on behalf of all Nevada casino workers that
allegedly have been injured by exposure to environmental tobacco
smoke.
DiEnno, Vito and Martin N. Hallnan, et al. v. Liggett Group Inc., et
al., Case No. CV-S-98-489-DWH (RLH), District Court, Clark County,
Nevada (case filed 12/22/97). This action is brought on behalf of all
Nevada casino workers that allegedly have been injured by exposure to
environmental tobacco smoke.
Selcer, et al. v. R.J. Reynolds, et al., Case No. CV-S-97-00334-PMP
(RLH), USDC, District of Nevada (case filed 9/3/97). This personal
injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers resident in Nevada.
Avallone, et al. v. The American Tobacco Company, et al., Case No.
MID-L-4883-98, Superior Court of New Jersey, Middlesex County (case
filed 5/5/98). This personal injury class action is brought on behalf
of plaintiff and all similarly situated non-smokers allegedly injured
from exposure to second hand smoke resident in New Jersey.
17
<PAGE> 18
Consentino, et al. v. Philip Morris, et al., Case No. L-5135-97,
Superior Court of New Jersey, Law Division, Middlesex County (case
filed 5/21/97). This "addiction-as-injury" putative class action is
brought on behalf of plaintiff and all similarly situated allegedly
addicted smokers resident in New Jersey.
Piscitello, et al. v. Philip Morris Inc., et al., Case No.
98-CIV-4613, Superior Court of New Jersey, Middlesex County (case
filed 3/6/98). This "addiction-as-injury" class action is brought on
behalf of plaintiff and all similarly situated allegedly addicted
smokers resident in New Jersey.
Tepper and Watkins, et al. v. Philip Morris Inc., et al., Case No.
BER-L-4983-97-E, Superior Court of New Jersey, Middlesex County (case
filed 5/28/97). This personal injury putative class action is brought
on behalf of plaintiff and all similarly situated allegedly injured
smokers resident in New Jersey.
Geiger, et al. v. The American Tobacco Company, et al., Index No.
10657/97, Supreme Court of New York, Queens County (case filed
1/12/97). This personal injury class action is brought on behalf of
plaintiff and all similarly situated injured smokers resident in New
York.
Nwanze, et al. v. Philip Morris, et al., Case No. 97-CIV-7344, USDC,
Southern District of New York (case filed 10/17/97). This action is
brought on behalf of all prisoners nationwide that have allegedly been
injured by exposure to environmental tobacco smoke.
Sturgeon, et al. v. Philip Morris Inc, et al., Case No CV 99 1998,
USDC, Eastern District of New York (case filed 4/9/99), This personal
injury action is brought on behalf of plaintiffs seeking certification
of a nation wide class under the applicable provisions of Rule 23 of
the Federal Rules of Civil Procedure, on behalf of persons who have
smoked defendant's cigarettes and who have presently have a claim for
personal injuries or damages, or wrongful death, arising from the
smoking of defendants' cigarettes.
Creekmore, Estate of, et al. v. Brown & Williamson Tobacco
Corporation, et al., Case No. 98 CV 03403, Superior Court of North
Carolina, Buncombe County (case filed 11/19/98). This personal injury
class action is brought on behalf of plaintiffs and all similarly
situated allegedly injured smokers resident in North Carolina.
18
<PAGE> 19
Chamberlain, et al. v. The American Tobacco Company, et al., Case No.
1:96CV2005, USDC, Northern District of Ohio (case filed 8/20/97). This
"addiction-as-injury" putative class action is brought on behalf of
plaintiff and all similarly situated allegedly addicted smokers
resident in Ohio.
Barnes, et al. v. The American Tobacco Company, et al., Case No.
96-5903, USDC, Eastern District of Pennsylvania (case filed 8/8/96).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in Pennsylvania.
Brown, Rev. Jesse, et al. v. Philip Morris, Inc., et al., Case No.
98-CV-5518, USDC, Eastern District of Pennsyvania (case filed
10/22/98). This civil rights putative class action is brought by
several national African-American organizations, on behalf of all
African-Americans resident in the United States who have smoked
menthol cigarettes.
Sweeney, et al. v. American Tobacco Company, et al., Case No.
GD98-16226, Court of Common Pleas, State of Pennsylvania, Allegheny
County (case filed 10/15/98). This putative class action is brought on
behalf of all current smokers who began smoking prior to the age of
eighteen resident in the State of Pennsylvania.
Aksamit, et al. v. Brown & Williamson, et al., Case No. 6:97-3636-21,
USDC, District of South Carolina, Greenville Division (case filed
11/24/97). This personal injury putative class action is brought on
behalf of plaintiff and all similarly situated allegedly injured
smokers resident in South Carolina.
Newborn, et al. v. Brown & Williamson, et al., Case No. 97-2938 GV,
USDC, Western District of Tennessee (case filed 10/1/97). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers resident in Tennessee.
Mason, et al. v. The American Tobacco Company, et al., Case No.
7-97CV-293-X, USDC, Northern District of Texas (case filed 12/23/97).
This nationwide taxpayer putative class action seeks reimbursement of
Medicaire expenses made by the United States government.
Herrera, et al. v. The American Tobacco Company, et al., Case No.
2:98-CV-00126, USDC, District of Utah (case filed 1/28/98). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers under the age of nineteen
(at time of original filing) resident in Utah.
19
<PAGE> 20
Jackson, et al. v. Philip Morris, Inc., et al., Case No. 980901634PI,
3rd Judicial Court of Utah, Salt Lake County (case filed 3/10/98).
This "addiction-as-injury" class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in Utah.
Ingle, et al. v. Philip Morris, et al., Case No. 97-C-21-S, Circuit
Court, State of West Virginia, McDowell County (case filed 2/4/97).
This personal injury putative class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in West Virginia.
McCune v. The American Tobacco Company, et al., Case No. 97-C-204,
Circuit Court, State of West Virginia, Kanawha County (case filed
1/31/97). This "addiction-as-injury" putative class action is brought
on behalf of plaintiff and all similarly situated allegedly addicted
smokers resident in West Virginia.
Parsons, et al. v. Liggett Group Inc., et al., Case No. 98-C-388,
Circuit Court, State of West Virginia, Kanawha County (case filed
4/9/98). This personal injury class action is brought on behalf of
plaintiff's decedent and all West Virginia residents having claims for
personal injury arising from exposure to both cigarette smoke and
asbestos fibers.
Walker, et al. v. Liggett Group Inc., et al., Case No. 2:97-0102,
USDC, Southern District of West Virginia (case filed 2/12/97).
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,
Circuit Court of Wisconsin, Rock County (case filed 4/4/97). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers resident in Wisconsin.
Bowden, et al. v. R.J. Reynolds Tobacco Company, et al., Case No.
98-0068-L, USDC, Western District of Virginia (case filed 1/6/99).
This personal injury class action is brought on behalf of plaintiff
and all similarly situated injured smokers resident in Virginia.
Fletcher, et al. v. Brooke Group Ltd., Civil Action No. 97-913,
Circuit Court of Mobile County, Alabama (Case filed 3/19/97).
Nationwide class of individuals alleging smoking-related claims. The
limited fund settlement was preliminarily approved by the court in
December 1998. Final approval of the limited fund settlement was
denied on July 22, 1999.
20
<PAGE> 21
IV. INDIVIDUAL SMOKER CASES
Springer v. Liggett Group Inc. and Liggett & Myers, Inc., Case No.
LR-C-98-428, USDC, Eastern District of Arkansas (case filed 7/19/98).
Two individuals suing. Liggett only defendant.
Baker, et al v. Safeway, Inc., et al., Case No. 304532, Superioir
Court of California, County of San Francisco (case filed 6/28/99). Two
individuals suing.
Colfield, et al. v. The American Tobacco Company, et al., Case No. CIV
S-98-1695, USDC, Eastern District of California (case filed 9/3/98).
Eleven individuals suing.
Cook, et al. v. The American Tobacco Company, et al., Case No. CIV.
S-98-1698, USDC, Eastern District of California (case filed 9/2/98).
Eight individuals suing.
Donaldson, et al. v. Raybestos Manhattan, Inc., et al., Case
No.998147, Superior Court of California, County of San Francisco (case
filed 9/25/98). Two individuals suing.
Ellis v. The American Tobacco Co., et al., Case No. 804002, Superior
Court of California, County of Orange (case filed 1/13/99). One
individual suing.
Guzman, et al. v. Philip Morris Tobacco Company, et al., Case No.
300200, Superior Court of California, County of San Francisco (case
filed 12/29/98). Four individuals suing.
Helt, et al. v. The American Tobacco Company, et al., Case No. CIV
S-98-1697, USDC, Eastern District of California (case filed 9/3/98).
Eight individuals suing.
Rein v. Philip Morris Incorporated, et al., Case No. 807453-1,
Superior Court of California, County of Alameda (case filed 5/5/99).
One individual suing.
Robinson, et al. v. Raybestos-Manhattan, Inc., et al., Case No.
996378, Superior Court of California, County of San Francisco (case
filed 7/23/98). Two individuals suing.
Rovai v. Raybestos-Manhattan, et al., Case No. 996380, Superior Court
of California, County of San Francisco (case filed 7/23/98). One
individual suing.
21
<PAGE> 22
Sellers, et al. v. Raybestos-Manhattan, et al., Case No. 996382,
Superior Court of California, County of San Francisco (case filed
7/23/98). Two individuals suing.
Stern, et al. V. Liggett Group Inc., et al., Case No. M37696, Superior
Court of California, County of Monterey (case filed 4/28/97). Two
individuals suing.
Adams v. R.J. Reynolds, et al., Case No. 97 05442, Circuit Court of
the 17th Judicial Circuit, State of Florida, Broward County (case
filed 4/10/97). Two individuals suing.
Allman v. Liggett Group Inc., et al., Case No. 97-91348 CICI, Circuit
Court of the 7th Judicial Circuit, State of Florida, Volusia County
(case filed 6/2/97). Two individuals suing.
Altieri v. Philip Morris, et al., Case No. CI 97-4289, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (cased
filed 8/12/97). One individual suing.
Armand v. Philip Morris, et al., Case No. 97-31179-CICI, Circuit Court
of the 7th Judicial Circuit, State of Florida, Volusia County (case
filed 7/9/97). Two individuals suing.
Atcheson v. R.J. Reynolds, et al., Case No. 97-31148-CICU, Circuit
Court of the 7th Judicial Circuit, State of Florida, Volusia County
(case filed 7/29/97). One individual suing.
Atkins v. R.J. Reynolds, et al., Case No. CI97-6597, Circuit Court of
the 9th Judicial Circuit, State of Florida, Orange County (case filed
9/16/97). One individual suing.
Bailey, et al. v. Liggett Group Inc., et al., Case No. 97-18056 CA15,
Circuit Court of the 11th Judicial Circuit, State of Florida, Duval
County (case filed 8/18/97). Two individuals suing.
Bartley, et al. v. Brown & Williamson, et al., Case No. 97-11153,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/21/97). Two individuals suing.
Blair v. R.J. Reynolds, et al., Case No. 97-31177, Circuit Court of
the 7th Judicial Circuit, State of Florida, Volusia County (case filed
7/29/97). One individual suing.
Blank v. Philip Morris, et al., Case No. 97-05443, Circuit Court of
the 17th Judicial Circuit, State of Florida, Broward County (case
filed 4/10/97). Two individuals suing.
22
<PAGE> 23
Bouchard v. Philip Morris, et al., Case No. 97-31347, Circuit Court of
the 7th Judicial Circuit, State of Florida, Volusia County (case filed
6/2/97). Two individuals suing.
Bronstein, et al. v. Brown & Williamson, et al., Case No. 97-008769,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
Brown v. Brown & Williamson, et al., Case No. CI-97-5050, Circuit
Court of the 9th Judicial Circuit, State of Florida, Orange County
(case filed 9/16/97). Two individuals suing.
Burns, et al. v. Liggett Group Inc., et al., Case No. 97-11175-27,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 4/3/98). One individual suing.
Clark v. Liggett Group Inc., Case No. 95-3333-CA, Circuit Court of the
4th Judicial Circuit, State of Florida, Dade County (case filed
8/18/95). One individual suing. Liggett only defendant.
Cowart v. Liggett Group Inc, et al., Case No.98-01483CA, Circuit Court
of the 11th Judicial Circuit, State of Florida, Duval County (case
filed 3/16/98). One individual suing.
Davis, et al. v. Liggett Group Inc., et al., Case No. 97-11145,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). One individual suing.
Davison, et al. v. Brown & Williamson, et al., Case No. 97008776,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
De La Torre, et al. v. Brown & Williamson, et al., Case No. 97-11161,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). One individual suing.
Dell v. Philip Morris, et al., Case No.97 1023-CA-10-A, Circuit Court
of the 18th Judicial Circuit, State of Florida, Seminole County (case
filed 7/29/97). One individual suing.
Dick v. Liggett Group Inc., et al., Case No. CI 97-4544, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 8/21/97). Two individuals suing.
23
<PAGE> 24
Dill v. Philip Morris, et al., Case No. 97-05446, Circuit Court of the
17th Judicial Circuit, State of Florida, Broward County (case filed
4/10/97). One individual suing.
Doyle, et al. v. Philip Morris, et al., Case No. 97-627-CA, Circuit
Court of the 7th Judicial Circuit, State of Florida, Flagler County
(case filed 9/16/97). Two individuals suing.
Driscoll v. R.J. Reynolds, et al., Case No. 97 1049-CA-10, Circuit
Court of the 18th Judicial Circuit, State of Florida, Seminole County
(case filed 7/29/97). Two individuals suing.
Duecker v. Liggett Group Inc., Case No. 98-03093 CA, Circuit Court of
the 4th Judicial Circuit, State of Florida, Duval County (case filed
7/5/98). One individual suing. Liggett only defendant.
Eastman v. Brown & Williamson Tobacco Corp., et al., Case No.
01-98-1348, Circuit Court of the 13th Judicial Circuit, State of
Florida, Hillsborough County (case filed 3/11/98). One individual
suing.
Fischetti v. R.J. Reynolds, et al., Case No. CI 97-9792, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 11/17/97). One individual suing.
Flaks, et al. v. Brown & Willaimson, et al., Case No. 97-008750,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
Garretson, et ux. v. R.J. Reynolds, et al., Case No. 97-32441 CICI,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 10/22/96). One individual suing.
Goldberg, et al. v. Liggett Group Inc., et al., Case No. 97-008780,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
Gray, et al. v. The American tobacco Co., et al., Case No. 97-21657 CA
42, Circuit Court of the 11th Judicial Circuit, State of Florida,
Putnam County (case filed 10/15/97). Two individuals suing.
Habib v. R.J. Reynolds, et al., Case No. 97-30960 CICI, Circuit Court
of the 7th Judicial Circuit, State of Florida, Volusia County (case
filed 7/10/97). One individual suing.
24
<PAGE> 25
Halen v. R.J. Reynolds, et al., Case No. CL 96005308, Circuit Court of
the 15th Judicial Circuit, State of Florida, Palm Beach County (case
filed 6/19/96). One individual suing.
Harris, et al. v. Brown & Williamson, et al., Case No. 97-1151,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). Two individuals suing.
Hart, et al. v. Brown & Williamson, et al., Case No. 9708781, Circuit
Court of the 17th Judicial Circuit, State of Florida, Broward County
(case filed 6/10/97). One individual suing.
Hayes, et al. v. R.J. Reynolds, et al., Case No. 97-31007, Circuit
Court of the 7th Judicial Circuit, State of Florida, Volusia County
(case filed 6/30/97). Two individuals suing.
Henin v. Philip Morris, et al., Case No. 97-29320 CA 05, Circuit Court
of the 11th Judicial Circuit, State of Florida, Dade County (case
filed 12/26/97). One individual suing.
Henning, et al. v. Brown & Williamson, et al., Case No. 97-11159,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). Two individuals suing.
Hitchens, et al. v. Brown & Williamson, et al., Case No.97008783,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97).
Humpal, et al. v. R.J. Reynolds, et al., Case No. 97-10456 CIDL,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 6/30/97). Two individuals suing.
Katz v. Brown & Williamson, et al., Case No. 95-15307-CA-01, USDC,
Southern District of Florida (case filed 8/3/95). One individual
suing. Plaintiff has dismissed all defendants except Liggett Group
Inc.
Kaloustian v. Liggett Group Inc., et al., Case No. 95-5498, Circuit
Court for the 13th Judicial Circuit, State of Florida, Hillsborough
County (case filed 8/28/95). Two individuals suing.
Krueger, et al. v. Brown & Williamson, et al., Case No.
96-1692-CIV-T-24A, USDC, Middle District of Florida (case filed
8/30/96). Two individuals suing.
25
<PAGE> 26
Lappin v. R.J. Reynolds, et al., Case No. 97-31371 CICI, Circuit Court
of the 7th Judicial Circuit, State of Florida, Volusia County (case
filed 6/2/97). One individual suing.
Laschke, et al. v. R.J. Reynolds, et al., Case No. 96-8131-CI-008,
Circuit Court of the 6th Judicial Circuit, State of Florida, Pinellas
County (case filed 12/20/96). Two individuals suing.
Lass v. R.J. Reynolds, et al., Case No. 96-04469, Circuit Court of the
4th Judicial Circuit, State of Florida, Duval County (case filed
12/23/96). Two individuals suing.
Leombruno, et al. v. Philip Morris, et al., Case No. CI 97-4540,
Circuit Court of the 9th Judicial Circuit, State of Florida, Orange
County (case filed 9/16/97). Two individuals suing.
Levine v. R.J. Reynolds, et al., Case No. CL 95-98769 (AH), Circuit
Court of the 15th Judicial Circuit, State of Florida, Palm Beach
County (case filed 7/24/96). One individual suing.
Lobley v. Philip Morris, et al., Case No. 97-1033-CA-10-L, Circuit
Court of the 18th Judicial Circuit, State of Florida, Seminole County
(case filed 7/29/97). Two individuals suing.
Lustig, et al. v. Brown & Williamson Tobacco Co., et al., Case No. 97
11168, Circuit Court of the 17th Judicial Circuit, State of Florida,
Broward County (case filed 7/21/97). One individual suing.
Magliarisi, et al. v. Brown & Williamson, et al., Case No. 97008895,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/11/97). One individual suing.
Manley, et al. v. Liggett Group Inc., et al., Case No. 97-11173-27,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 4/3/98). Two individuals suing.
McMahon v. R.J. Reynolds, et al., Case No. G-97-1391, Circuit Court of
the 10th Judicial Circuit, State of Florida, Polk County (case filed
4/29/97). Two individuals suing.
Meagher v. Philip Morris, et al., Case No. CI 97-4543, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 5/22/97). Two individuals suing.
26
<PAGE> 27
Meckler, et al. v. Brown & Williamson, et al., Case No. 97-03949-CA,
Circuit Court of the 4th Judicial Circuit, State of Florida, Duval
County (case filed 7/10/97). One individual suing.
Mullin v. Philip Morris, et al., Case No. 95-15287 CA 15, Circuit
Court of the 11th Judicial Circuit, State of Florida, Dade County
(case filed 11/7/95). One individual suing.
Mullins v. Philip Morris, et al., Case No. 97-4749-37, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 9/16/97). Two individuals suing.
O'Rourke v. Liggett Group Inc., et al., Case No. 97-31345-CICI,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 6/2/97). One individual suing.
Perez, et al. v. Brown & Williamson, et al., Case No.
96-1721-CIV-T-24B, USDC, Middle District of Florida (case filed
8/20/96). One individual suing.
Phillips v. R.J. Reynolds, et al., Case No. 97-31278, Circuit Court of
the 7th Judicial Circuit, State of Florida, Volusia County (case filed
5/27/97). One individual suing.
Pipolo v. Philip Morris, et al., Case No. 97-05448, Circuit Court of
the 17th Judicial Circuit, State of Florida, Broward County (case
filed 4/10/97). Two individuals suing.
Poythress v. R.J. Reynolds, et al., Case No. 97-30844, Circuit Court
of the 7th Judicial Circuit, State of Florida, Volusia County (case
filed 5/5/97). One individual suing.
Rauch, et al. v. Brown & Williamson, et al., Case No. 97-11144,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). Two individuals suing.
Rawls, et al. v. Liggett Group Inc., et al., Case No. 97-01354 CA,
Circuit Court of the 4th Judicial Circuit, State of Florida, Duval
County (case filed 3/6/97). One individual suing.
Reilly, et al. v. Brown & Williamson, et al., Case No. 97-2468-CA,
Circuit Court of the 5th Judicial Circuit, State of Florida, Lake
County (case filed 10/22/97). Two individuals suing.
27
<PAGE> 28
Rix v. R.J. Reynolds, et al., Case No. 96-1778 CA, Circuit Court of
the 4th Judicial Circuit, State of Florida, Duval County (case filed
4/29/96). One individual suing.
Shaw, et al. v. Brown & Williamson, et al., Case No. 97-008755,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
Shira v. Philip Morris, et al., Case No. CI 97-4576, Circuit Court of
the 9th Judicial Circuit, State of Florida, Orange County (case filed
5/30/97). Two individuals suing.
Spotts v. R.J. Reynolds, et al., Case No. 97-31373 CICI, Circuit Court
of the 4th Judicial Circuit, State of Florida, Volusia County (case
filed 9/16/97). One individual suing.
Stafford v. Brown & Williamson, et al., Case No. 97-7732-CI-019,
Circuit Court of the 6th Judicial Circuit, State of Florida, Pinellas
County (case filed 11/14/97). One individual suing.
Stewart v. R.J. Reynolds, et al., Case No. 97 2025 CA, Circuit Court
of the 5th Judicial Circuit, State of Florida, Lake County (case filed
9/16/97). Two individuals suing.
Strickland, et al. v. The American Tobacco Company, et al., Case No.
98-00764, Circuit Court of the 11th Judicial Circuit, State of
Florida, Dade County (case filed 1/8/98). Two individuals suing.
Strohmetz v. Philip Morris, et al., Case No. 98-03787 CA, Circuit
Court of the 4th Judicial Circuit, State of Florida, Duval County
(case filed 7/16/98). One individual suing.
Swank-Reich v. Brown & Williamson, et al., Case No. 97008782, Circuit
Court of the 17th Judicial Circuit, State of Florida, Broward County
(case filed 6/10/97). One individual suing.
Thomson, Barry, v. R.J. Reynolds, et al., Case No. 97-400-CA, Circuit
Court of the 7th Judicial Circuit, State of Florida, Flagler County
(case filed 9/2/97). One individual suing.
Thomson, Eileen, et al. v. Brown & Williamson, et al., Case No.
97-11170, Circuit Court of the 17th Judicial Circuit, State of
Florida, Broward County (case filed 7/21/97). One individual suing.
28
<PAGE> 29
Uffner v. Philip Morris, et al., Case No. 18142, Circuit Court of the
17th Judicial Circuit, State of Florida, Broward County (case filed
12/31/96). Two individuals suing.
Ventura v. R.J. Reynolds Tobacco Co., et al., Case No. 97-27024 CA
(09), Circuit Court of the 11th Judicial Circuit, State of Florida,
Dade County (case filed 11/26/97). One individual suing.
Washington, et al. v. Philip Morris, et al., Case No. 97-10575 CIDL,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 9/16/97). Two individuals suing.
Weiffenbach, et ux. v. Philip Morris, et al., Case No.
96-1690-CIV-T-24C, USDC, Middle District of Florida (case filed
8/30/96). Two individuals suing.
Wisch v. Liggett Group Inc., et al., Case No. 97-008759, Circuit Court
of the 17th Judicial Circuit, State of Florida, Broward County (case
filed 6/10/97). One individual suing.
Young v. Brown & Williamson, et al., Case No. 96-03566, Circuit Court
of the 4th Judicial Circuit, State of Florida, Duval County (case
filed 11/30/95). One individual suing.
Brown-Jones v. The American Tobacco Co., et al., Case No. 98-RCCV-28,
Superior Court of Georgia, Richmond County (case filed 1/13/98). Two
individuals suing.
Daley, et al. v. American Brands, Inc., et al., Case No.97L07963,
USDC, Northern District of Illinois (case filed 8/13/97). 17
individuals suing.
Rogers v. R.J. Reynolds, et al., Case No. 49 D 02-9301-CT-0008,
Superior Court of Indiana, Marion County (case filed 3/7/97). Two
individuals suing.
Sumpter v. The American Tobacco Co., et al., Case No. IP98-0401-C-M/G,
USDC, District of Indiana, Marion County (case filed 2/26/98). 15
individuals suing.
Gronberg, et al. v. Liggett & Myers, et al., Case No. LA-CV-080487,
District Court, State of Iowa, Black Hawk County (case filed 3/30/98).
Two individuals suing.
Kobold, et al. v. BAT Industries, et al., Case No. CL-77551, District
Court, State of Iowa, Polk County (case filed 9/15/98). Two
individuals suing.
29
<PAGE> 30
Mason v. American Brands, Inc., et al., Case No. CL7922, District
Court, Satat of Iowa, Polk County (case filed 4/13/99). One individual
suing.
Badon, et ux. v. RJR Nabisco Inc., et al., Case No. 10-13653, USDC,
Western District of Louisiana (case filed 5/24/94). Six individuals
suing.
Bird, et al. v. The American Tobacco Co., et al., Case No. 507-532,
24th Judicial District Court, State of Louisiana, Jefferson Parish
(case filed 4/10/97). Four individuals suing.
Brakel, et al. v. The American Tobacco Co., et al., Case No.
96-13672-D, USDC, Eastern District of Louisiana (case filed 8/30/96).
Seven individuals suing.
Hebert, et al. v. United States Tobacco, et al., Case No. 96-2281,
14th Judicial District Court, State of Louisiana, Calcasieu Parish
(case filed 5/8/96). Two individuals suing.
Higgins, et al. v. Liggett Group Inc., et al., Case No. 96-2205, USDC,
Eastern District of Louisiana (case filed 6/1/96). One individual
suing.
Jackson v. Brown & Williamson Tobacco Corp., et al., Case No.
97-441-C-MI, USDC, Middle District of Louisiana (case filed 7/3/97).
One individual suing.
Kennon v. Brown & Williamson, et al., Case No. 98-586, USDC, Middle
District of Louisiana (case filed 12/5/97). One individual suing.
Oser v. The American Tobacco Co., et al., Case No. 97-9293, Civil
District of the Judicial District Court, State of Louisiana, Orleans
Parish (case filed 5/27/97). One individual suing.
Pitre, et al. v. R.J. Reynolds , et al., Case No. 97 CA 0059, 19th
Judicial District Court, State of Louisiana, East Baton Rouge Parish
(case filed 8/7/92). Five individuals suing.
Racca, et al. v. R.H. Reynolds, et al., Case No. 10-14999, 38th
Judicial District Court, State of Louisiana, Cameron Parish (case
filed 7/16/98). Eleven individuals suing.
Anderson v. R.J. Reynolds Tobacco Company, Case No. 99-2915, Superior
Court of Massachusetts, Middlesex County (case filed 6/8/99). One
individual suing.
Bakoian, Estate of Myda v. R.J. Reynolds, et al., Case No. 98-3737,
Superior Court of Massachusetts, Middlesex County (case filed
6/22/98). One individual suing.
30
<PAGE> 31
Bohl v. R.J. Reynolds Tobacco Co., et al., Case No. 98-6195, Superior
Court of Massachusetts, Middlesex County (case filed 12/18/98). One
individual suing.
Brandano v. The Tobacco Institute, Inc., et al., Superior Court of
Massachusetts, Middlesex County (case filed 8/25/98). One individual
suing.
Cameron v. The Tobacco Institute, Inc., et al., Case No. 98-4960,
Superior Court of Massachusetts, Middlesex County (case filed 8/3/98).
One individual suing.
Carmichael-Foley v. Lowney, et al., Case No. 98-3694, Superior Court
of Massachusetts, Middlesex County (case filed 7/17/98). One
individual suing.
Curtis v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4488,
Superior Court of Massachusetts, Middlesex County (case filed
8/27/98). One individual suing.
Feeney v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4241,
Superior Court of Massachusetts, Middlesex County (case filed
7/15/98). One individual suing.
Francis, Estate of Ralph v. The Tobacco Institute, Inc., et al., Case
No. 98-4963, Superior Court of Massachusetts, Middlesex County (case
filed 8/25/98). One individual suing.
Gordon v. R.J. Reynolds Tobacco Co., et al., Case No. 98-5417,
Superior Court of Massachusetts, Middlesex County (case filed
8/10/98). One individual suing.
Grebauski v. R.J. Reynolds Tobacco Company, et al., Case No. 99-1063B,
Superior Court of Massachusetts, Middlesex County (case filed
1/25/99). One individual suing.
Harb v. The Tobacco Institute, Inc., et al., Case No. 98-597, Superior
Court of Massachusetts, Middlesex County (case filed 9/10/98). One
individual suing.
Hiscock v. R.J. Reynolds Tobacco Co., et al., Case No.98-446, Superior
Court of Massachusetts, Middlesex County (case filed 7/15/98). One
individual suing.
Jones v. The Tobacco Institute, Inc., et al., Case No. 98-4940,
Superior Court of Massachusetts, Middlesex County (case filed 8/1/98).
One individual suing.
Maienza v. the Tobacco Institute, Inc., et al., Case No. 98-4888,
Superior Court of Massachusetts, Middlesex County (case filed
8/25/98). Two individuals suing.
31
<PAGE> 32
McKenney, et al. v. R.J. Reynolds Tobacco Co., et al., Case No.
98-3910, Superior Court of Massachusetts, Middlesex County (case filed
7/27/98). One individual suing.
Mulcahy v. The Tobacco Institute, Inc., et al., Case No. 98-5208,
Superior Court of Massachusetts, Middlesex County (case filed 9/5/98).
One individual suing.
Reedy, Estate of Marie, et al. v. R.J. Reynolds Tobacco Co., et al.,
Case No. 98-5056, Superior Court of Massachusetts, Middlesex County
(case filed 8/13/98). One individual suing.
Semprucci v. R.J. Reynolds Tobacco Co., et al., Case No. 98-6268,
Superior Court of Massachusetts, Middlesex County (case filed
12/21/98). One individual suing.
Tenerillo v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4214,
Superior Court of Massachusetts, Middlesex County (case filed
7/14/98). One individual suing.
Varghesse v. R.J. Reynolds Tobacco Co., et al., Case No. 98-6124,
Superior Court of Massachusetts, Middlesex County (case filed
12/17/98). One individual suing.
Varney v. R.J. Reynolds Tobacco Co., et al., Case No. 98-5835,
Superior Court of Massachusetts, Middlesex County (case filed
10/27/98). One individual suing.
Wajda v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4959, Superior
Court of Massachusetts, Middlesex County (case filed 7/17/98). One
individual suing.
Watt v. Liggett Group Inc., et al., Case No. 98-5499, USDC, District
of Massachusetts (case filed 8/18/98). One individual suing.
Whiting v. Liggett Group, Inc., et al., Case No. 98-5026, Superior
Court of Massachusetts, Middlesex County (case filed 9/4/98). One
individual suing.
Woods, Estate of Helen v. The Tobacco Institute, Inc., et al., Case
No. 98-5721, Superior Court of Massachusetts, Middlesex County (case
filed 11/18/98). One individual suing.
Woods, Joseph v. The Tobacco Institute, Inc., et al., Case No.
98-5723, Superior Court of Massachusetts, Middlesex County (case filed
11/18/98). One individual suing.
Blythe v. Rapid American Corporation, et al., Case No. CI 96-0080-AS,
Circuit Court, State of Mississippi, Jackson County (case filed
9/23/96). One individual suing.
32
<PAGE> 33
Butler, Estate of Burl v. Philip Morris, et al., Case No. 94-5-53,
Circuit Court of the 2nd Judicial District, State of Mississippi,
Jones County (case filed 5/12/94). One individual suing.
Evans v. Philip Morris, et al., Case No. 97-0027, Circuit Court of the
1st Judicial District, State of Mississippi, Jasper County (case filed
6/10/97). One individual suing.
Rose v. R.J. Reynolds, et al., Case No. 2:98 CV 132, USDC, Northern
District of Mississippi (case filed 7/30/98). One individual suing.
Gatlin v. The American Tobacco Co., et al., Case No. 982-10021,
Circuit Court, State of Missouri, City of St. Louis (case filed
1/19/99). One individual suing.
Murphy v. The American Tobacco Co., et al., Case No. CV-S-98-00021-HDM
(RJJ), USDC, Southern District of Nevada (case filed 1/6/98). Liggett
has not yet been served. One individual suing.
Haines (etc.) V. Liggett Group Inc., et al., Case No. C 6568-96B,
USDC, District of New Jersey (case filed 2/2/94). One individual
suing.
Altman, et al. v. Fortune Brands, Inc., et al., Case No. 97-123521,
Supreme Court of New York, New York County (case filed 12/16/97).
Seven individuals suing.
Anderson, et al. v. Fortune Brands, Inc., et al., Case No. 42821-97,
Supreme Court of New York, Kings County (case filed 11/13/97). Six
individuals suing.
Arnett, et al. v. The American Tobacco Co., et al., Case No.
109416/98, Supreme Court of New York, New York County (case filed
5/29/98). Nine individuals suing.
Bellows, et al. v. The American Tobacco Co., et al., Case No.
122518/97, Supreme Court of New York, New York County (case filed
11/26/97). Five individuals suing.
Brand, et al. v. Philip Morris Inc., et al., Case No. 29017/98,
Supreme Court of New York, Kings County (case filed 12/21/98). Two
individuals suing.
Caiazzo, et al. v. The American Tobacco Co., et al., Case No.
13213/97, Supreme Court of New York, Richmond County (case filed
10/27/97). Six individuals suing.
Cameron v. The American Tobacco Co., et al., Case No. 019125/97,
Supreme Court of New York, Nassau County (case filed 7/18/97). Five
individuals suing.
33
<PAGE> 34
Canaan v. Philip Morris Inc., et al., Case No. 105250/98, Supreme
Court of New York, New York County (case filed 3/24/98). One
individual suing.
Carll, et al. v. The American Tobacco Co., et al., Case No. 112444/97,
Supreme Court of New York, New York County (case filed 8/12/97). Five
individuals suing.
Cavanagh, et al. v. The American Tobacco Co., et al., Case
No.11533/97, Supreme Court of New York, Richmond County (case filed
4/23/97). Two individuals suing.
Collins, et al. v. The American Tobacco Co., et al., Case No.
08322/97, Supreme Court of New York, Westchester County (case filed
7/2/97). Nine individuals suing.
Condon, et al. v. The American Tobacco Co., et al., Case No.
108902/97, Supreme Court of New York, New York County (case filed
2/4/97). Seven individuals suing.
Crane, et al. v. The American Tobacco Co., et al., Case No.106202-97,
USDC, Southern District of New York (case filed 4/4/97). Four
individuals suing.
Creech, et al. v. The American Tobacco Co., et al., Case No.
106202-97, Supreme Court of New York, Richmond County (case filed
1/14/97). Four individuals suing.
Cresser, et al. v. The American Tobacco Co., et al., Case No.
36009/96, Supreme Court of New York, Kings County (case filed
10/4/96). Two individuals suing.
Da Silva, et al. v. The American Tobacco Co., et al., Case
No.106095/97, Supreme Court of New York, New York County (case filed
1/14/97). Six individuals suing.
Domeracki v. Philip Morris, et al., Case No. 98/6859, Supreme Court of
New York, Erie County (case filed 8/3/98). One individual suing.
Dougherty, et al. v. The American Tobacco Co., et al., Case No.
97-09768, Supreme Court of New York, Suffolk County (case filed
4/18/97). Two individuals suing.
Dzak, et al. v. The American Tobacco Co., et al., Case No. 26283/96,
Supreme Court of New York, Queens County (case filed 12/2/96). Five
individuals suing.
Evans, et al. v. The American Tobacco Co., et al., Case No. 28926/96,
Supreme Court of New York, Kings County (case filed 8/23/96). Two
individuals suing.
34
<PAGE> 35
Fink, et al. v. The American Tobacco Co., et al., Case No. 110336/97
Supreme Court of New York, New York County (case filed 4/25/97). Six
individuals suing.
Golden, et al. v. The American Tobacco Co., et al., Case No.
112445/97, Supreme Court of New York, New York County (case filed
8/11/97). Six individuals suing.
Greco, et al. v. The American Tobacco Co., et al., Case No. 15514-97,
Supreme Court of New York, Queens County (case filed 7/18/97). Three
individuals suing.
Gruder, et al. v. Fortune Brands, Inc., et al., Case No.48487/97,
Supreme Court of New York, New York County (case filed 12/8/97). Four
individuals.
Guilloteau, et al. v. The American Tobacco Co., et al., Case No.
46398/97, Supreme Court of New York, Kings County (case filed
11/26/97). Four individuals suing.
Hansen, et al. v. the American Tobacco Co., et al., Case No.97-26291,
Supreme Court of New York, Suffolk County (case filed 4/12/97). Six
individuals suing.
Hellen, et al. v. The American Tobacco Co., et al., Case No. 28927/96,
Supreme Court of New York, Kings County (case filed 8/23/96). Two
individuals suing.
Inzerilla, et al. v. The American Tobacco Co., et al., Case No.
11754/96, Supreme Court of New York, Queens County (case filed
7/16/96). Two individuals suing.
Jaust, et al. v. The American Tobacco Co., et al., Case No. 116249/97,
Supreme Court of New York, New York County (case filed 10/14/97). Ten
individuals suing.
Juliano, et al. v. The American Tobacco Co., et al., Case No.
12470/97, Supreme Court of New York, Richmond County (case filed
8/12/96). Four individuals suing.
Keenan, et al. v. The American Tobacco Co., et al., Case No.
116545-97, Supreme Court of New York, New York County (case filed
10/6/97). Eight individuals suing.
Kestenbaum, et al. v. The American Tobacco Co., et al., Case No.
109350/97, Supreme Court of New York, New York County (case filed
6/4/97). Eight individuals suing.
Knutsen, et al. v. The American Tobacco Co., et al., Case No.
36860/96, Supreme Court of New York, Kings County (case filed
4/25/97). Two individuals suing.
35
<PAGE> 36
Kotlyar, et al. v. the American Tobacco Co., et al., Case No.
28103/97, Supreme Court of New York, Queens County (case filed
11/26/97). Five individuals suing.
Kristich, et al. v. The American Tobacco Co., et al., Case No.
96-29078, Supreme Court of New York, Suffolk County (case filed
10/12/97). Two individuals suing.
Krochtengel v. The American Tobacco Co., et al., Case No. 24663/98,
Supreme Court of New York, Kings County (case filed 7/15/98). One
individual suing.
Labroila, et al. v. the American Tobacco Co., et al., Case No.
97-12855, Supreme Court of New York, Suffolk County (case filed
7/20/97). Four individuals suing.
Lehman, et al. v. The American Tobacco Co., et al., Case No.
112446/97, Supreme Court of New York, New York County (case filed
8/11/97). One individual suing.
Leibstein, et al. v. The American Tobacco Co., et al., Case No.
97-019145, Supreme Court of New York, Nassau County (case filed
7/25/97). Six individuals suing.
Leiderman, et al. v. The American Tobacco Co., et al., Case No.
22691/97, Supreme Court of New York, Kings County (case filed
7/23/97). Three individuals suing.
Lennon, et al. v. The American Tobacco Co., et al., Case No.
120503/97, Supreme Court of New York, New York County (case filed
11/19/97). Seven individuals suing.
Le Paw v. B.A.T. Industries, et al., Case No. 17695-96, USDC, Southern
District of New York (case filed 8/14/96). Four individuals suing.
Levinson, et al. v. The American Tobacco Co., et al., Case No.
13162/97, Supreme Court of New York, Kings County (case filed
4/17/97). Seven individuals suing.
Lien, et al. v. The American Tobacco Co., et al., Case No. 97-9309,
Supreme Court of New York, Suffolk County (case filed 4/28/97). Two
individuals suing.
Litke, et al. v. The American Tobacco Co., et al., Case No. 15739/97,
Supreme Court of New York, Kings County (case filed 5/1/97). Five
individuals suing.
Lohn v. Liggett Group Inc., et al., Case No. 105249/98, Supreme Court
of New York, New York County (case filed 3/26/98). One individual
suing.
36
<PAGE> 37
Lombardo, et al. v. The American Tobacco Co., et al., Case No.
16765/97, Supreme Court of New York, Nassau County (case filed
6/6/97). Five individuals suing.
Long, et al. v. The American Tobacco Co., et al., Case No. 22574-97,
Supreme Court of New York, Bronx County (case filed 10/22/97). Four
individuals suing.
Lopardo, et al. v. The American Tobacco Co., et al., Case No.
027182/97, Supreme Court of New York, Nassau County (case filed
10/27/97). Six individuals suing.
Lucca, et al. v. The American Tobacco Co., et al., Case No. 3583/97,
Supreme Court of New York, Kings County (case filed 1/27/97). Two
individuals suing.
Lynch, et al. V. The American Tobacco Co., et al., Case No. 117244/97,
Supreme Court of New York, New York County (case filed 10/22/97). Five
individuals suing.
Magnus v. Fortune Brands, Inc., et al., Case No. CV-98-3441, USDC,
Eastern District of New York (case filed 5/6/98). Three individuals
suing.
Maisonet, et al. v. The American Tobacco Co., et al., Case No.
17289/97, Supreme Court of New York, Kings County (case filed
5/20/97). Three individuals suing.
Margolin, et al. v. The American Tobacco Co., et al., Case No.
120762/96, Supreme Court of New York, New York County (case filed
11/22/96). One individual suing.
Martin, et al. v. The American Tobacco Co., et al., Case No. 15982-97,
Supreme Court of New York, Queens County (case filed 7/18/97). Three
individuals suing.
McGuinness, et al. v. The American Tobacco Co., et al., Case No.
112447/97, Supreme Court of New York, New York County (case filed
7/28/97). Six individuals suing.
McLane, et al. v. The American Tobacco Co., et al., Case No. 11620/97,
Supreme Court of New York, Richmond County (case filed 5/13/97). Four
individuals suing.
Mednick, et al. v. The American Tobacco Co., et al., Case No.
29140/1997, Supreme Court of New York, Kings County (case filed
9/19/97). Eight individuals suing.
Mishk, et al. v. The American Tobacco Co., et al., Case No. 108036/97,
Supreme Court of New York, New York County (case filed 5/1/97). Five
individuals suing.
37
<PAGE> 38
Morey v. Philip Morris, et al., Case No. I1998/9921, Supreme Court of
New York, Erie County (case filed 10/30/98). Two individuals suing.
Newell, et al. v. The American Tobacco Co., et al., Case No. 97-25155,
Supreme Court of New York, New York County (case filed 10/3/97). Six
individuals suing.
Nociforo, et al. v. The American Tobacco Co., et al., Case No.
96-16324, Supreme Court of New York, Suffolk County (case filed
7/12/96). One individual suing.
O'Hara, et al. v. The American Tobacco Co., et al., Case No.
103095/98, Supreme Court of New York, New York County (case filed
2/23/98). Two individuals suing.
Ornstein v. Philip Morris, et al., Case No. 117548/97, Supreme Court
of New York, New York County (case filed 9/29/97). One individual
suing.
Perez, et al. v. The American Tobacco Co., et al., Case No. 26347/97,
Supreme Court of New York, Kings County (case filed 8/26/97). Seven
individuals suing.
Perri, et al. v. the American Tobacco Co., et al., Case No. 029554/97,
Supreme Court of New York, Nassau County (case filed 11/24/97). Six
individuals suing.
Piccione, et al. v. The American Tobacco Co., et al., Case No.
34371/97, Supreme Court of New York, Kings County (case filed
10/27/97). Five individuals suing.
Portnoy, et al. v. The American Tobacco Co., et al., Case No.
16323/96, Supreme Court of New York, Suffolk County (case filed
7/16/96). Two individuals suing.
Reitano, et al. v. The American Tobacco Co., et al., Case No.
28930/96, Supreme Court of New York, Kings County (case filed
8/22/96). One individual suing.
Rico, et al. v. The American Tobacco CompaState of New York, et al.,
Case No. 120693/98, Supreme Court of New York, New York County (case
filed 11/16/98). Nine individuals suing.
Rinaldi, et al. v. The American Tobacco Co., et al., Case No.
48021/96, Supreme Court of New York, Kings County (case filed
12/11/96). Five individuals suing.
Rose, et al. v. The American Tobacco Co., et al., Case No. 122131/96,
Supreme Court of New York, New York County (case filed 12/18/96).
Eight individuals suing.
38
<PAGE> 39
Roseff v. The American Tobacco Co., et al., Case No. 123143/97,
Supreme Court of New York, New York County (case filed 12/10/97). One
individual suing.
Rubinobitz, et al. v. The American Tobacco Co., et al., Case No.
15717/97, Supreme Court of New York, Nassau County (case filed
5/28/97). Five individuals suing.
Schulhoff, et al. v. The American Tobacco Co., et al., Case No.
23737-97, Supreme Court of New York, Queens County (case filed
11/21/97). Six individuals suing.
Schwartz, Irwin v. The American Tobacco Co., et al., Case No.14841/97,
Supreme Court of New York, Nassau County (case filed 5/19/97). One
individual suing.
Schwartz, Pearl v. The American Tobacco Co., et al., Case No.47239/96,
Supreme Court of New York, Kings County (case filed 12/2/96). One
individual suing.
Senzer, et al. v. The American Tobacco Co., et al., Case No. 11609/97,
Supreme Court of New York, Queens County (case filed 5/13/97). Eight
individuals suing.
Shapiro, et al. v. The American Tobacco Co., et al., Case No.
111179/97, Supreme Court of New York, New York County (case filed
7/21/96). Four individuals suing.
Siegel, et al. v. The American Tobacco Co., et al., Case No.36857/96,
Supreme Court of New York, Kings County (case filed 10/8/96). Two
individuals suing.
Silverman, et al. v. Lorillard Tobacco Company., et al., Case No.
11328/99, Supreme Court of New York, Kings County (case filed 7/9/99).
Five individuals suing.
Smith, et al. v. The American Tobacco Co., et al., Case No. 020525/97,
Supreme Court of New York, Queens County (case filed 9/19/97). Eight
individuals suing.
Sola, et al. v. The American Tobacco Co., et al., Case No. 18205/96,
Supreme Court of New York, Bronx County (case filed 7/16/96). Two
individuals suing.
Sprung, et al. v. The American Tobacco Co., et al., Case No. 16654/97,
Supreme Court of New York, Kings County (case filed 5/14/97). Ten
individuals suing.
Standish, et al. v. The American Tobacco Co., et al., Case No.
18418-97, Supreme Court of New York, Bronx County (case filed
7/28/97). Five individuals suing.
39
<PAGE> 40
Valentin, et al. v. Fortune Brands, Inc., et al., Case No. 019539/97,
Supreme Court of New York, Queens County (case filed 9/16/97). Seven
individuals suing.
Walgreen, et al. v. The American Tobacco, et al., Case No. 109351/97,
Supreme Court of New York, New York County (case filed 5/23/97). Eight
individuals suing.
Werner, et al. v. Fortune Brands, Inc., et al., Case No. 029071-97,
Supreme Court of New York, Queens County (case filed 12/12/97). Four
individuals suing.
Zarudsky, et al. v. The American Tobacco Co., et al., Case No.
15773-97, Supreme Court of New York, New York County (case filed
5/28/97). Six individuals suing.
Zimmerman, et al. v. The American Tobacco Co., et al., Supreme Court
of New York, Queens County (case filed 1997).
Zuzalski, et al. v. Brown & Williamson, et al., Case No. 001378/97,
Supreme Court of New York, Queens County (case filed 4/3/97). Seven
individuals suing.
Tompkin, et al. v. American Brands, et al., Case No. 5:94 CV 1302,
USDC, Northern District of Ohio (case filed 7/25/94). One individual
suing.
Hise, et al. v. Philip Morris, et al., Case No. 98 cv 947 C (E), USDC,
Northern District of Oklahoma (case filed 12/15/98). Two individuals
suing. Price-fixing action concerning price increases resulting from
the M.S.A.
Hall v. R.J. Reynolds Tobacco Co., et al., Case No. 4:97-cv-01723,
USDC, Middle District of Pennsylvania (case filed 2/18/98). One
individual suing.
Tantum v. American Tobacco Co., et al., Case No. 3762, Court of Common
Pleas, State of Pennsylvania, Philadelphia County (case filed
1/26/99). Two individuals suing.
Brown v. Brown & Williamson Tobacco Corp., et al., Case No. 98-5447,
Superior Court of Rhode Island (case filed 10/30/98). One individual
suing.
Nicolo v. Philip Morris, et al., Case No. 96-528 B, USDC, District of
Rhode Island (case filed 9/24/96). One individual suing.
Labelle v. Brown & Williamson Tobacco Corp., et al., Case No.
2-98-1879-23, USDC, District of South Carolina (case filed 11/4/98).
One individual suing.
40
<PAGE> 41
Little v. Brown & Williamson, et al., Case No. 98-CD-10-2156, USDC,
District of South Carolina (case filed 6/26/98). Two individuals
suing.
Perry, et al. v. Brown & Williamson, et al., Case No. 2-473-95,
Circuit Court, State of Tennessee, Knox County (case filed 7/20/95).
One individual suing.
Adams v. Brown & Williamson, et al., Case No. 96-17502, District Court
of the 164th Judicial District, State of Texas, Harris County (case
filed 4/30/96). One individual suing.
Bush, et al. v. Philip Morris, et al., Case No. 597CV180, USDC,
Eastern District of Texas (case filed 9/22/97). Two individuals suing.
Cole, et al. v. The Tobacco Institute, et al., Case No. 1:97CV0256,
USDC, Eastern District of Texas (case filed 5/12/97). Two individuals
suing.
Colunga v. American Brands, Inc., et al., Case No. C-97-265, USDC,
Southern District of Texas (case filed 4/17/97). One individual suing.
Dieste v. Philip Morris, et al., Case No.597CV117, USDC, Eastern
District of Texas (case filed 11/3/97). Two individuals suing.
Hale, et al. v. American Brands, Inc., et al., Case No. C-6568-96B,
District Court of the 93rd Judicial District, State of Texas, Hidalgo
County (case filed 1/30/97). One individual suing.
Hamilton, et al. v. BGLS, Inc., et al., Case No. C 70609 6 D, USDC,
Southern District of Texas (case filed 2/26/97). Five individuals
suing.
Harris, et al. v. Koch Refining Co., et al., Case No. 98-03426-00-0-G,
Distrit Court of Texas, 319th Judicial District (case Filed 6/10/99).
Three individuals suing.
Hodges, et vir v. Liggett Group, Inc., et al., Case No. 8000-JG99,
District Court of Texas, Brazoria County, Texas 239th Judicial
District (case filed 5/5/99). Two individuals suing.
Luna v. American Brands, et al., Case No. 96-5654-H, USDC, Southern
District of Texas (case filed 2/18/97). One individual suing.
41
<PAGE> 42
McLean, et al. v. Philip Morris, et al., Case No. 2-96-CV-167, USDC,
Eastern District of Texas (case filed 8/30/96). Three individuals
suing.
Mireles v. American Brands, Inc., et al., Case No. 966143A, District
Court of the 28th Judicial District, State of Texas, Nueces County
(case filed 2/14/97). One individual suing.
Misell, et al. v. American Brands, et al., Case No. 96-6287-H,
District Court of the 347th Judicial District, State of Texas, Nueces
County (case filed 1/3/97). Four individuals suing.
Ramirez v. American Brands, Inc., et al., Case No. M-97-050, USDC,
Southern District of Texas (case filed 12/23/96). One individual
suing.
Sanchez v. American Brands, et al., Case No. 97-04-35562, USDC,
Southern District of Texas (case filed 7/22/97). Two individuals
suing.
Thompson, et al. v. Brown & Williamson, et al., Case No. 97-2981-D,
District Court of the 105th Judicial District, State of Texas, Nueces
County (case filed 12/15/97). Two individuals suing.
Weingarten v. The Liggett Group Inc., Case No. 98-1541, USDC, Western
District of Vermont (case filed 7/19/97). One individual suing.
Liggett only defendant.
Vaughan v. Mark L. Earley, et al., Case No. 760 CH 99 K 00011-00,
Circuit Court, State of Virginia, Richmond (case filed 1/8/99). One
individual suing.
Allen, et al. v. Philip Morris Inc., et al., Case No. 98-C-2337
through 2401, Circuit Court, State of West Virginia, Kanawha County
(case filed 10/1/98). 118 individuals suing.
Anderson, et al. v. Philip Morris, et al., Case No.98-C-1773 through
1799, Circuit Court, State of West Virginia, Kanawha County (case
filed 7/31/98). 50 individuals suing.
Ball v. Liggett & Myers Inc., et al., Case No. 2:97-0867, USDC,
Southern District of West Virginia (case filed 5/1/98). One individual
suing.
Bishop, et al. v. Liggett Group Inc., et al., Case No. 97-C-2696
through 2713, Circuit Court, State of West Virginia, Kanawha County
(case filed 10/28/98). One individual suing.
42
<PAGE> 43
Hissom, et al. v. the American Tobacco Co., et al., Case No.
97-C-1479, Circuit Court, State of West Virginia, Kanawha County (case
filed 9/13/97). Two individuals suing.
Huffman v. The American Tobacco Co., et al., Case No. 98-C-276,
Circuit Court, State of West Virginia, Kanawha County (case filed
2/13/98). Two individuals suing.
Jividen v. The American Tobacco Co., et al., Case No. 98-C-278,
Circuit Court, State of West Virginia, Mason County (case filed
1/19/99). Two individuals suing.
Newkirk, et al. v. Liggett Group Inc., et al., Case No. 98-C-1699,
Circuit Court, State of West Virginia, Kanawha County (case filed
7/22/98). One individual suing.
Floyd v. State of Wisconsin, et al., Case No. 99 CV 001125, Circuit
Court, State of Wisconsin, Milwaukee County (case filed 2/10/99). One
individual suing.
43
<PAGE> 1
EXHIBIT 99.2
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
<PAGE> 2
LIGGETT GROUP INC.
Index to
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998.................... 2
Consolidated Statements of Operations for the three and six months
ended June 30, 1999 and 1998 ....................................................... 4
Consolidated Statement of Stockholder's Equity for the six months
ended June 30, 1999 ............................................................... 5
Consolidated Statements of Cash Flows for the six months ended June 30, 1999
and 1998 ........................................................................... 6
Notes to Consolidated Financial Statements .............................................. 7
</TABLE>
<PAGE> 3
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable:
Trade, less allowances of $1,120 and $1,686, respectively $ 9,767 $14,510
Other....................................................... 1,563 821
Inventories..................................................... 29,014 25,974
Deferred tax assets............................................. 9,340 10,178
Other current assets............................................ 30,811 383
-------- ------
Total current assets.................................... 80,495 51,866
Property, plant and equipment, at cost, less accumulated
depreciation of $32,450 and $30,893, respectively................ 20,720 16,195
Intangible assets, at cost, less accumulated amortization
of $20,560 and $20,550, respectively............................. 161 171
Other assets......................................................... 8,426 6,491
-------- -------
Total assets........................................... $109,802 $74,723
======== =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
2
<PAGE> 4
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturity of note payable............................. $ 341 $ --
Cash overdraft............................................... 1,243 63
Accounts payable, principally trade.......................... 3,357 3,206
Accrued expenses:
Promotional............................................... 18,750 23,760
Income taxes.............................................. 11,660 115
Other taxes, principally excise taxes..................... 2,651 3,397
Estimated allowance for sales returns..................... 7,100 7,100
Settlement accruals....................................... 1,867 1,120
Proceeds received for options............................. -- 150,000
Other..................................................... 4,046 10,709
-------- ---------
Total current liabilities............................. 51,015 199,470
Credit facility and note payable, less current maturities......... 7,011 2,538
Non-current employee benefits..................................... 10,966 10,902
Other long-term liabilities....................................... 5,515 6,999
Commitments and contingencies (Note 7)
Stockholder's equity (deficit):
Redeemable preferred stock (par value $1.00 per share;
authorized 1,000 shares; no shares issued and
outstanding)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital.................................... 58,358 57,380
Accumulated deficit.......................................... (23,063) (202,566)
------- -------
Total stockholder's equity (deficit)................. 35,295 (145,186)
-------- ---------
Total liabilities and stockholder's equity (deficit). $109,802 $ 74,723
======== =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE> 5
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1999 1998 1999 1998
--------- ------- -------- ---------
<S> <C> <C> <C> <C>
Net sales*............................................... $ 93,926 $83,398 $179,973 $149,024
Cost of sales*........................................... 27,464 33,082 50,629 59,270
-------- ------- -------- --------
Gross profit................................... 66,462 50,316 129,344 89,754
Selling, general and administrative expenses............. 48,739 40,022 90,949 72,728
Settlement charges....................................... (11) 1,399 104 1,881
Non-cash compensation expense............................ 488 -- 976 --
Restructuring............................................ 1,100 -- 1,100 --
-------- ------- -------- --------
Operating income............................... 16,146 8,895 36,215 15,145
Other income (expense):
Interest expense.................................... (409) (7,352) (1,116) (14,434)
Sale of assets...................................... 259 468 212 836
Gain on brand transaction........................... 294,287 -- 294,287 --
-------- ------- -------- --------
Income before income taxes.................... 310,283 2,011 329,598 1,547
Income tax provision..................................... 119,763 -- 127,395 --
-------- ------- -------- --------
Net income..................................... $190,520 $ 2,011 $202,203 $ 1,547
======== ======= ======== ========
</TABLE>
- --------------------
* Net sales and cost of sales include federal excise taxes of $13,607,
$17,666, $26,160 and $32,476, respectively.
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock and Total
Contributed Stockholder's
Capital Deficit Equity
----------- --------- -------------
<S> <C> <C> <C>
Balance at December 31, 1998 $57,380 $(202,566) $(145,186)
Net income........................................ -- 202,203 202,203
Accretion of capital contribution................. 978 -- 978
Distributions and other payments.................. -- (22,700) (22,700)
------- --------- ---------
Balance at June 30,1999.............................. $58,358 $ (23,063) $ 35,295
======= == ====== =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE> 7
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities..................................... $(122,221) $ 2,213
Cash flows from investing activities:
Proceeds from brand transaction...................................... 145,000 --
Proceeds from sale of property, plant and equipment.................. 899 1,171
Capital expenditures................................................. (6,972) (694)
--------- ---------
Net cash provided by investing activities.................... 138,927 477
Cash flows from financing activities:
Repayments of note................................................... (106) (28)
Issuance of note payable............................................. 4,500 --
Borrowings under revolving credit facility........................... 153,019 124,042
Repayments under revolving credit facility........................... (152,599) (124,792)
Deferred finance charges............................................. -- (439)
Distributions and other payments..................................... (22,700) --
Increase (decrease) in cash overdraft................................ 1,180 (891)
--------- ---------
Net cash used in financing activities........................ (16,706) (2,108)
Net increase in cash and cash equivalents................................ -- 582
Cash and cash equivalents:
Beginning of period.................................................. -- --
--------- ---------
End of period........................................................ $ -0- $ 582
========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE> 8
LIGGETT GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. THE COMPANY
Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned subsidiary of
BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group Ltd. ("BGL").
Liggett is engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. Certain management and administrative
functions are performed by affiliates. (See Note 8.)
The interim consolidated financial statements included herein are unaudited
and, in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1998 balance
sheet has been derived from audited financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included as Exhibit 99.2 in Brooke's
and BGLS' Annual Report on Form 10-K, as amended, for the year ended December
31, 1998, as filed with the Securities and Exchange Commission. The
consolidated results of operations for interim periods should not be regarded
as necessarily indicative of the results that may be expected for the entire
year.
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.
2. ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Significant estimates subject to material changes in the near term
include allowance for doubtful accounts, sales returns and allowances,
actuarial assumptions of pension plans and litigation and defense costs. Actual
results could differ from those estimates.
3. PHILIP MORRIS BRAND TRANSACTIONS
On November 20, 1998, Liggett and BGL granted Philip Morris Incorporated
options to purchase interests in Trademarks LLC which holds three cigarette
brands, L&M, Chesterfield and Lark, formerly held by Liggett's subsidiary, Eve
Holdings Inc.
Under the terms of the Philip Morris agreements, Eve contributed the three
brands to Trademarks, a newly-formed limited liability company, in exchange for
100% of two classes of Trademarks' interests, the Class A Voting Interest and
the Class B Redeemable Nonvoting Interest. Philip Morris acquired two options
to purchase the interests from Eve. On December 2, 1998, Philip Morris paid Eve
a total of $150,000 for the options, $5,000 for the option for the Class A
interest and $145,000 for the option for the Class B interest. Liggett used the
payments to fund the redemption of Liggett's Senior Secured Notes on December
28, 1998.
7
<PAGE> 9
The Class A option entitled Philip Morris to purchase the Class A interest for
$10,100. On March 19, 1999, Philip Morris exercised the Class A option, and the
closing occurred on May 24, 1999.
The Class B option entitles Philip Morris to purchase the Class B interest for
$139,900. The Class B option will be exercisable during the 90-day period
beginning on December 2, 2008, with Philip Morris being entitled to extend the
90-day period for up to an additional six months under certain circumstances.
The Class B interest will also be redeemable by Trademarks for $139,900 during
the same period the Class B option may be exercised.
On May 24, 1999, Trademarks borrowed $134,900 from a lending institution. The
loan is guaranteed by Eve and collateralized by a pledge by Trademarks of the
three brands and Trademarks' interest in the trademark license agreement
(discussed below) and by a pledge by Eve of its Class B interest. In connection
with the closing of the Class A option, Trademarks distributed the loan
proceeds to Eve as the holder of the Class B interest. The cash exercise price
of the Class B option and Trademarks' redemption price were reduced by the
amount distributed to Eve. Upon Philip Morris' exercise of the Class B option
or Trademarks' exercise of its redemption right, Philip Morris or Trademarks,
as relevant, will be required to obtain Eve's release from its guaranty. The
Class B interest will be entitled to a guaranteed payment of $500 each year
with the Class A interest allocated all remaining income or loss of Trademarks.
Trademarks has granted Philip Morris an exclusive license of the three brands
for an 11-year term expiring May 24, 2010 at an annual royalty based on sales
of cigarettes under the brands, subject to a minimum annual royalty payment
equal to the annual debt service obligation on the loan plus $1,000.
If Philip Morris fails to exercise the Class B option, Eve will have an option
to put its Class B interest to Philip Morris, or Philip Morris' designees, at a
put price that is $5,000 less than the exercise price of the Class B option
(and includes Philip Morris' obtaining Eve's release from its loan guarantee).
The Eve put option is exercisable at any time during the 90-day period
beginning March 2, 2010.
If the Class B option, Trademarks' redemption right and the Eve put option
expire unexercised, the holder of the Class B interest will be entitled to
convert the Class B interest, at its election, into a Class A interest with the
same rights to share in future profits and losses, the same voting power and
the same claim to capital as the entire existing outstanding Class A interest,
i.e., a 50% interest in Trademarks.
The $150,000 in proceeds received from the sale of the Class A and B options was
presented as a liability on the consolidated balance sheet until the closing of
the exercise of the Class A option and the distribution of the loan proceeds on
May 24, 1999. Upon closing, Philip Morris obtained control of Trademarks and the
Company recognized a pre-tax gain of $294,287 in its consolidated financial
statements to the extent of the total cash proceeds received from the payment of
the option fees, the exercise of the Class A option and the distribution of the
loan proceeds.
8
<PAGE> 10
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- ------------
<S> <C> <C>
Leaf tobacco......................................... $10,734 $10,796
Other raw materials.................................. 1,963 1,741
Work-in-process...................................... 2,943 1,828
Finished goods....................................... 15,201 12,231
Replacement parts and supplies....................... 3,178 3,150
------- -------
Inventories at current cost.......................... 34,019 29,746
LIFO adjustment...................................... (5,005) (3,772)
------- -------
Inventories at LIFO cost............................. $29,014 $25,974
======= =======
</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 $5,123 at June 30, 1999.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- ------------
<S> <C> <C>
Land and improvements.................................. $ 416 $ 412
Buildings.............................................. 5,852 5,823
Machinery and equipment................................ 46,902 40,853
------ ------
Property, plant and equipment.......................... 53,170 47,088
Less accumulated depreciation.......................... (32,450) (30,893)
-------- --------
Property, plant and equipment, net..................... $ 20,720 $ 16,195
======== ========
</TABLE>
9
<PAGE> 11
6. CREDIT FACILITY AND NOTE PAYABLE
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- ------------
<S> <C> <C>
Borrowings outstanding under revolving credit
facility........................................... $2,958 $2,538
Note payable.......................................... 4,394 --
------ ------
7,352 2,538
Current portion...................................... (341) --
------ ------
Amount due after one year............................ $7,011 $2,538
====== ======
</TABLE>
Revolving Credit Facility:
On March 8, 1994, Liggett entered into a revolving credit facility (the
"Facility") under which it can borrow up to $40,000 (depending on the amount of
eligible inventory and receivables as determined by the lenders) from a
syndicate of commercial lenders. The Facility is collateralized by all
inventories and receivables of the Company. Availability under the Facility was
approximately $15,634 based upon eligible collateral at June 30, 1999.
Borrowings under the Facility whose interest is calculated at a rate equal to
1.5% above Philadelphia National Bank's prime rate bore a rate of 9.25% at June
30, 1999. The Facility requires Liggett's compliance with certain financial and
other covenants including restrictions on the payment of cash dividends and
distributions by Liggett. In addition, the Facility, as amended April 8, 1998,
imposes requirements with respect to Liggett's permitted maximum adjusted net
worth (not to fall below a deficit of $195,000 as computed in accordance with
the agreement, this computation was $40,300 at June 30, 1999) and net working
capital (not to fall below a deficit of $17,000 as computed in accordance with
the agreement, this computation was $34,826 at June 30, 1999). The Facility
expires on March 8, 2000 subject to automatic renewal for an additional year
unless a notice of termination is given by the lender at least 60 days prior to
the anniversary date.
Note Payable:
In January 1999, Liggett purchased equipment for $5,750 and borrowed $4,500
from a third party to fund the purchase. The loan, which is collateralized by
the equipment and guaranteed by BGLS and BGL, is payable in 60 monthly
installments of $56 including annual interest of 7.67% with a final payment of
$2,550.
7. COMMITMENTS AND CONTINGENCIES
TOBACCO-RELATED LITIGATION:
OVERVIEW. Since 1954, Liggett and other United States cigarette manufacturers
have been named as defendants in numerous direct and third-party actions
predicated on the theory that cigarette manufacturers 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 commenced against Liggett and the
other cigarette manufacturers in recent years. The cases generally fall into
four 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
10
<PAGE> 12
class of individual plaintiffs ("Class Actions"); (iii) health care cost
recovery actions brought by various governmental entities ("Governmental
Actions"); and (iv) health care cost recovery actions brought by third-party
payors including insurance companies, union health and welfare trust funds,
asbestos manufacturers and others ("Third-Party Payor Actions"). As new cases
are commenced, defense costs and the risks attendant to the inherent
unpredictability of litigation continue to increase. The future financial
impact of the risks and expenses of litigation and the effects of the tobacco
litigation settlements discussed below is not quantifiable at this time. For
the six months ended June 30, 1999, Liggett incurred counsel fees and costs
totaling approximately $3,001, compared to $2,562 for the comparable prior year
period.
INDIVIDUAL ACTIONS. As of June 30, 1999, there were approximately 275 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, 80 were pending in Florida, 91 in New York,
31 in Massachusetts and 22 in Texas. The balance of the individual cases were
pending in 21 states. There are six 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.
In February 1999, a state court jury in San Francisco awarded $51,500 in
damages to a woman who claimed lung cancer from smoking Marlboro cigarettes
made by Philip Morris. The award includes $1,500 in compensatory damages and
$50,000 in punitive damages. The court subsequently reduced the punitive
damages award to $25,000.
In March 1999, a state court jury in Portland awarded $80,311 in damages to the
family of a deceased smoker who smoked Marlboro made by Philip Morris. The award
includes $79,500 in punitive damages. The court subsequently reduced the
punitive damages award to $32,000. A Notice of Appeal has been filed by Philip
Morris.
CLASS ACTIONS. As of June 30, 1999, there were approximately 50 actions
pending, for which either a class has been certified or plaintiffs are seeking
class certification, where Liggett, among others, was a named defendant.
In March 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. In February 1995, the District Court granted plaintiffs'
motion for class certification (the "Class Certification Order").
In May 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
11
<PAGE> 13
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 were
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 Louisiana
(Liggett is not a defendant in this proceeding) and Maryland have certified
"addiction-as-injury" class actions that covered only citizens in those states.
Two class actions were certified in state court in Florida prior to the Fifth
Circuit's decision, Broin and Engle. The Castano decision has had no measurable
impact on litigation brought by or on behalf of single individual claimants.
In May 1994, an action entitled Engle, et al. v. R.J. Reynolds Tobacco Company,
et al., Circuit Court Eleventh Judicial Circuit, Dade County, Florida, was
filed against Liggett and others. This case was brought by plaintiffs, on
behalf of all individuals in the State of Florida, who allegedly have been
injured as a result of smoking cigarettes. In July 1998, Phase I of the trial
in this action commenced. (See "Subsequent Events".)
Class certification motions are pending in a number of putative class actions.
Class certification has been denied or reversed in several actions while
classes remain certified in two cases against the Company in Florida and one in
Maryland. A number of class certification decisions are on appeal.
GOVERMENTAL ACTIONS. As of June 30, 1999, there were approximately 20
Governmental Actions pending against Liggett. In these proceedings, the
governmental entities 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.
On January 19, 1999, at the State of the Union Address, President Clinton
announced that the Department of Justice ("DOJ") was preparing a litigation
plan to take the tobacco industry to court to recover monies that Medicare and
other programs allegedly expended to treat smoking-related illnesses. The
effects of this lawsuit cannot be predicted at this time; however, an adverse
verdict could have a material adverse effect on the Company and Liggett.
THIRD-PARTY PAYOR ACTIONS. As of June 30, 1999, there were approximately 70
Third-Party Payor Actions pending against Liggett. The claims in these cases
are similar to those in the Governmental Actions but have been commenced by
insurance companies, union health and welfare trust funds, asbestos
manufacturers and others. In April 1998, a group known as the "Coalition for
Tobacco Responsibility", which represents Blue Cross and Blue Shield Plans in
more than 35 states, filed federal lawsuits against the industry seeking
payment of health-care costs allegedly incurred as a result of cigarette
smoking and ETS. The lawsuits were filed in Federal District Courts in New
York, Chicago, and Seattle and seek billions of dollars in damages. The
lawsuits allege conspiracy, fraud, misrepresentation and violation of federal
12
<PAGE> 14
racketeering and antitrust laws as well as other claims. In January 1999, a
federal judge in Seattle dismissed the Third-Party Payor Action brought by
seven Blue Cross/Blue Shield Plans. The court ruled that the insurance
providers did not have standing to bring the lawsuit. However, in February
1999, a federal judge in the Eastern District of New York denied pleas by the
industry to dismiss the Third-Party Payor Action brought by 24 Blue Cross/Blue
Shield Plans. Similarly, in March 1999, a federal judge in the Northern
District of Illinois denied the industry's motion to dismiss.
In other Third-Party Payor Actions, claimants have set forth several
additional theories of 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 understood that requested damages against the
tobacco company defendants in these cases might be in the billions of dollars.
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.
In March, 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 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. In May
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. In September 1996, shortly after the class
was decertified, the Castano plaintiffs withdrew the motion for approval of the
Castano settlement.
In March 1996, March 1997 and March 1998, Liggett and BGL entered into
settlements of tobacco-related litigation with the Attorneys General of a total
of 45 states and territories. The settlements released Liggett and BGL from all
tobacco-related claims including claims for health care cost reimbursement and
claims concerning sales of cigarettes to minors.
On November 23, 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (collectively, the
"Original Participating Manufacturers" or "OPMs") and Liggett (together with
the OPMs and any other tobacco product manufacturer that becomes a signatory,
the "Participating Manufacturers") entered into the Master Settlement Agreement
(the "MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas
(collectively, the "Settling States") to settle the asserted and unasserted
health care cost recovery and certain other claims of those Settling States. As
described below, Liggett and BGL had previous settlements with a number of
these Settling States and also had previously settled similar claims brought by
Florida, Mississippi, Texas and Minnesota.
13
<PAGE> 15
The MSA is subject to final judicial approval in each of the Settling States,
which approval has been obtained, to date, in 42 states and territories.
The MSA restricts tobacco product advertising and marketing within the Settling
States and otherwise restricts the activities of Participating Manufacturers.
Among other things, the MSA: prohibits the targeting of youth in the
advertising, promotion or marketing of tobacco products; bans the use of
cartoon characters in all tobacco advertising and promotion; limits each
Participating Manufacturer to one tobacco brand name sponsorship during any
12-month period; bans all outdoor advertising, with the exception of signs 14
square feet or less in dimension at retail establishments that sell tobacco
products; prohibits payments for tobacco product placement in various media;
bans gift offers based on the purchase of tobacco products without sufficient
proof that the intended recipient is an adult; prohibits Participating
Manufacturers from licensing third parties to advertise tobacco brand names in
any manner prohibited under the MSA; prohibits Participating Manufacturers from
using as a tobacco product brand name any nationally recognized non-tobacco
brand or trade name or the names of sports teams, entertainment groups or
individual celebrities; and prohibits Participating Manufacturers from selling
packs containing fewer than twenty cigarettes.
The MSA also requires Participating Manufacturers to affirm corporate
principles to comply with the MSA and to reduce underage usage of tobacco
products and imposes requirements applicable to lobbying activities conducted
on behalf of Participating Manufacturers.
Pursuant to the MSA, Liggett has no payment obligations unless its market share
exceeds 125% of its 1997 market share (the "Base Share") or 1.67% of total
cigarettes sold in the United States. In the year following any year in which
Liggett's market share does exceed the Base Share, Liggett will pay on each
excess unit an amount equal (on a per-unit basis) to that paid during such
following year by the OPMs pursuant to the annual and strategic contribution
payment provisions of the MSA, subject to applicable adjustments, offsets and
reductions. Pursuant to the annual and strategic contribution payment
provisions of the MSA, the OPMs (and Liggett to the extent its market share
exceeds the Base Share) will pay the following annual amounts (subject to
certain adjustments):
Year Amount
---- ------
2000 $4,500,000
2001 $5,000,000
2002 - 2003 $6,500,000
2004 - 2007 $8,000,000
2008 - 2017 $8,139,000
2018 and each $9,000,000
year thereafter
These annual payments will be allocated based on relative unit volume of
domestic cigarette shipments. The payment obligations under the MSA are the
several, and not joint, obligations of each Participating Manufacturer and are
not the responsibility of any parent or affiliate of a Participating
Manufacturer.
The MSA replaces Liggett's prior settlements with all states and territories
except for Florida, Mississippi, Texas and Minnesota. In the event the MSA does
not receive final judicial approval in any state or territory, Liggett's prior
settlement with that state or territory, if any, will be revived.
The states of Florida, Mississippi, Texas and Minnesota, prior to the effective
date of the MSA, negotiated and executed settlement agreements with each of the
other major tobacco companies separate from those settlements reached
previously with Liggett. Because these states' settlement agreements with
Liggett provided for "most favored nation" protection for both Liggett and BGL,
14
<PAGE> 16
the payments due these states by Liggett (with certain possible exceptions)
have been eliminated. With respect to all non-economic obligations under the
previous settlements, both Liggett and BGL are entitled to the most favorable
provisions as between the MSA and each state's respective settlement with the
other major tobacco companies. Therefore, Liggett's non-economic obligations to
all states and territories are now defined by the MSA.
In March 1997, Liggett, BGL and a nationwide class of individuals that allege
smoking-related claims 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. In July 1998, Liggett, BGL and
plaintiffs filed an amended class action settlement agreement in Fletcher which
agreement was preliminarily approved by the court in December 1998. (See
"Subsequent Events".)
Liggett previously accrued approximately $4,000 for the present value of the
fixed payments under the March 1996 Attorneys General settlements and $16,902
for the present value of the fixed payments under the March 1998 Attorneys
General settlements. As a result of Liggett's treatment under the MSA, $14,928
of net charges accrued for the prior settlements were reversed in 1998.
Copies of the various settlement agreements are filed as exhibits to BGL's Form
10-K and the discussion herein is qualified in its entirety by reference
thereto.
TRIALS. There are no trials involving the Company or BGL scheduled for 1999,
other than the Engle case. Cases currently scheduled for trial during the first
six months of 2000 include a lawsuit brought by several Blue Cross/Blue Shield
plans in federal court in New York (January), two asbestos company contribution
lawsuits in Mississippi and New York (February), one class action in Maryland
(February) and two third-party payor actions brought by unions in West Virginia
(March) and New York (April). Also, three individual cases and an adequacy of
warning case are currently scheduled for trial during the first six months of
2000. Trial dates, however, are subject to change.
OTHER RELATED MATTERS. 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 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 essentially have been consolidated into one investigation
conducted by the DOJ. In April 1998, BGL announced that Liggett had reached an
agreement with the DOJ to cooperate in both the Eastern District Investigation
and the DOJ Investigation. The agreement does not constitute an admission of
any wrongful behavior by Liggett. The DOJ has not provided immunity to Liggett
and has full discretion to act or refrain from acting with respect to Liggett
in the investigation. Liggett and BGL are unable, at this time, to predict the
outcome of this investigation.
In September 1998, Liggett received a subpoena from a federal grand jury in the
Eastern District of Philadelphia investigating possible antitrust violations in
connection with the purchase of tobacco by and for tobacco companies. Liggett
has responded to this subpoena. Liggett and BGL are unable, at this time, to
predict the outcome of this investigation.
15
<PAGE> 17
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 make a
meaningful estimate with respect to the amount of loss that could result from
an unfavorable outcome of many 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 typically stated
as being for the minimum necessary to invoke the jurisdiction of the court.
It is possible that Liggett's consolidated financial position, results of
operations or cash flow could be materially adversely affected by an
unfavorable outcome in any such tobacco-related litigation.
Liggett has been involved in certain environmental proceedings, none of which,
either individually or in the aggregate, rises 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 BGL
and certain of its consolidated subsidiaries 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.
SUBSEQUENT EVENTS. On July 7, 1999, the jury in the Engle matter returned a
verdict in Phase I of the trial finding that smoking causes various diseases
and is addictive and finding the defendants liable on various tort and warranty
claims. Additionally, the jury found that the class may be entitled to punitive
damages from the defendants. It is expected that the defendants will appeal the
Phase I liability verdict. The court has decided that Phase II of the trial
will commence September 7, 1999, with a causation and damages trial for two of
the class representatives and a punitive damages trial on a class-wide basis.
Phase III of the trial will be conducted before separate juries to address
absent class members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages. On August 2,
1999, the companies filed a motion to disqualify the trial judge. On August 5,
1999, the trial judge denied the motion.
On July 22, 1999, the Circuit Court of Mobile County, Alabama denied approval
of the Fletcher class action settlement.
LEGISLATION AND REGULATION:
In 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. In July
16
<PAGE> 18
1998, the court ruled that the EPA made procedural and scientific mistakes when
it declared in its 1993 report that secondhand smoke caused as many as 3,000
cancer deaths a year among nonsmokers. On June 6, 1999, the Fourth Circuit
Court of Appeals heard oral argument in the appeal taken by the EPA from the
district court order invalidating the EPA report.
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 based on domestic market share. Such an approach, if
adopted, could have a material adverse effect on Liggett and BGL.
In August 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 Fourth Circuit reversed the district
court on appeal and in August 1998 held that the FDA cannot regulate tobacco
products because Congress had not given them the authority to do so. In April
1999, the Supreme Court granted certiorari to review the Fourth Circuit's
decision that the FDA does not have the authority to regulate access to, and
labeling of, tobacco products. 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 Governmental Actions
settlements above.
In August 1996, 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, in December 1997, Liggett began complying with this
legislation by providing ingredient information to the Massachusetts Department
of Public Health. Several other states have enacted, or are considering,
legislation similar to that enacted in Massachusetts.
As part of the 1997 budget agreement 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. Additionally, in November
1998, the citizens of California voted in favor of a 50 cents per pack tax on
cigarettes sold in that state.
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.
YEAR 2000 COSTS:
Liggett utilizes management information systems and software technology that
may be affected by Year 2000 issues throughout its operations. 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. To date, the focus of Year 2000 compliance and
verification efforts has been directed at the implementation of new customer
service, inventory control and financial reporting systems at each of the three
regional Strategic Business Units, part of the Company's reorganization which
began in January 1997. Liggett estimates that approximately $138 of the
expenditures related to this reengineering effort related to Year 2000
17
<PAGE> 19
compliance, validation and testing. In January of 1998, Liggett initiated a
major conversion of factory accounting, materials management and information
systems at its Durham production facility with upgrades that have been
successfully tested for Year 2000 compliance. This conversion was completed in
November 1998. Program upgrades to Liggett's payroll system were completed in
July of 1999, with parallel upgrades to human resources system software
scheduled for completion in August. Enhancements to the Company's finished
goods inventory system are expected to be completed in September 1999. It is
anticipated that all factory, corporate, field sales and physical distribution
systems will be completed in sufficient time to support Year 2000 compliance
and verification.
Although such costs may be a factor in describing changes in operating profit
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. Based on the progress Liggett
has made in addressing Year 2000 issues and its strategy and timetable to
complete its compliance program, the Company does not foresee significant risks
associated with its Year 2000 initiatives at this time. Although the Company is
in the process of confirming that service providers are adequately addressing
Year 2000 issues, there can be no complete assurance of success, or that
interaction with other service providers will not impair the Company's service.
8. RELATED PARTY TRANSACTIONS
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.
In addition, 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
$1,829 in the first six months of 1999 and $918 in the first six months of
1998.
The Company leases equipment from a subsidiary of BGLS for $50 per month.
18
<PAGE> 1
Exhibit 99.4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
<PAGE> 2
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998............................... 2
Consolidated Statements of Operations for the three and six months ended
June 30, 1999 and June 30, 1998............................................................... 3
Consolidated Statement of Stockholder's Equity (Deficit) for the six months
ended June 30, 1999........................................................................... 4
Consolidated Statements of Cash Flows for the six months ended June 30,
1999 and June 30, 1998........................................................................ 5
Notes to Consolidated Financial Statements.......................................................... 6
</TABLE>
-1-
<PAGE> 3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
==============================================================================================================
June 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,142 $ 2,722
Accounts receivable - trade...................................... 1,200 650
Inventories...................................................... 17,407 10,342
Other current assets............................................. 6,511 2,928
--------- --------
Total current assets.......................................... 26,260 16,642
Property, plant and equipment, at cost, less
accumulated depreciation of $4,231 and $2,959................ 103,102 77,286
Other.............................................................. 3,719 5,782
--------- --------
Total assets.................................................. $133,081 $ 99,710
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Credit facilities and current portion of notes payable......... $ 30,816 $ 20,005
Accounts payable - trade....................................... 20,967 10,415
Due to affiliates.............................................. 68,749 51,533
Accrued taxes.................................................. 5,603 7,658
Accrued interest............................................... 741 228
Other accrued liabilities...................................... 5,023 3,628
--------- --------
Total current liabilities................................... 131,899 93,467
Long-term portion of notes payable............................... 15,222 19,652
Deferred gain.................................................... 4,004 20,392
Participating loan............................................... 32,253 31,991
Other liabilities................................................ 1,200 4,252
Commitments and contingencies....................................
Stockholder's equity (deficit):
Common stock, par value $1 per share, 701,000 shares authorized,
authorized, issued and outstanding.......................... 701 701
Additional paid-in-capital..................................... 29,017 17,104
Deficit........................................................ (81,215) (87,849)
--------- --------
Total stockholder's equity (deficit)........................ (51,497) (70,044)
--------- --------
Total liabilities and stockholder's equity (deficit)........ $133,081 $ 99,710
========= ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
<PAGE> 4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
======================================================================================================================
Three Months Ended Six Months Ended
------------------------------ ---------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
Net sales*............................................ $15,339 $27,865 $37,689 $47,042
Cost of sales*........................................ 12,784 18,749 31,198 34,333
------ ------ ------ ------
Gross profit.......................................... 2,555 9,116 6,491 12,709
Operating, selling, administrative and
general expenses............................... 3,468 3,057 6,114 5,198
------- ------- ------- -------
Operating income...................................... (913) 6,059 377 7,511
Other income (expense):
Interest expense................................... (3,005) (2,645) (6,971) (6,088)
Recognition of deferred gain on sale of assets..... 8,478
Gain on foreign currency exchange.................. 341 5 2,611 84
Amortization of goodwill........................... (1,023) (1,054)
Other, net......................................... 169 7 259 (32)
-------- ---------- -------- --------
(Loss) income before income taxes..................... (3,408) 2,403 4,754 421
(Benefit) provision for income taxes.................. (164) 1,546 (1,880) 1,311
-------- ------- ------- -------
Net (loss) income..................................... $ (3,244) $ 857 $ 6,634 $ (890)
======= ======== ======= ========
</TABLE>
- --------------------
* Net sales and cost of sales include excise taxes of $1,111, $4,761, $2,596
and $7,869, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE> 5
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
==============================================================================================================================
Common Stock Additional
----------------------- Paid-in
Shares Amount Capital Deficit Total
------ ------ ---------- ------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998.................... 701,000 $701 $17,104 $(87,849) $(70,044)
Net income.................................... 6,634 6,634
Effect of New Valley recapitalization......... 11,913 11,913
------- ---- ------- -------- --------
Balance, June 30, 1999........................ 701,000 $701 $29,017 $(81,215) $(51,497)
======= ==== ======= --====== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
<PAGE> 6
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
================================================================================================
Six Months Ended
----------------------------
June 30, June 30,
1999 1998
--------- --------
<S> <C> <C>
Net cash provided by operating activities.................... $ 18,812 $ 3,634
-------- --------
Cash flows from investing activities:
Capital expenditures................................... (30,565) (6,444)
-------- --------
Net cash used in investing activities........................ (30,565) (6,444)
-------- --------
Cash flows from financing activities:
Proceeds from debt..................................... 11,995
Repayments of debt..................................... (155) (7,000)
Borrowings under credit facility....................... 10,959
Proceeds from participating loan....................... 20,000
Capital contributions.................................. 9,000
Repayment of intercompany debt......................... (27,080)
Distributions paid to parent........................... (1,275)
-------- --------
Net cash provided by financing activities.................... 10,804 5,640
-------- --------
Effect of exchange rate changes on cash
and cash equivalents................................. (631) 84
-------- --------
Net (decrease) increase in cash and cash equivalents......... (1,580) 2,914
Cash and cash equivalents, beginning of period............... 2,722 968
-------- --------
Cash and cash equivalents, end of period..................... $ 1,142 $ 3,882
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 7
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
Brooke (Overseas) Ltd. ("the Company"), a Delaware corporation, is a
wholly-owned subsidiary of BGLS Inc. ("BGLS") and an indirect
subsidiary of Brooke Group Ltd. ("Brooke"). The consolidated financial
statements of the Company include Western Tobacco Investments LLC
("Western Tobacco"), a Delaware limited liability company. Western
Tobacco holds the Company's interest in Liggett-Ducat Ltd.
("Liggett-Ducat"), a Russian closed joint stock company engaged in the
manufacture and sale of cigarettes in Russia, and Liggett-Ducat
Tobacco ("LDT"), a wholly-owned subsidiary of Liggett-Ducat which
recently completed construction of a new cigarette factory.
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included as Exhibit 99.4 in Brooke's and BGLS' Annual Report
on Form 10-K, as amended, for the year ended December 31, 1998, as
filed with the Securities and Exchange Commission. The consolidated
results of operations for interim periods should not be regarded as
necessarily indicative of the results that may be expected for the
entire year.
RISKS AND UNCERTAINTIES:
During 1998, the Russian Federation entered a period of economic
instability which has continued in 1999. The impact includes, but is
not limited to, a steep decline in prices of domestic debt and equity
securities, a severe devaluation of the currency, a moratorium on
foreign debt repayments, an increasing rate of inflation and
increasing rates on government and corporate borrowings. The return to
economic stability is dependent to a large extent on the effectiveness
of the fiscal measures taken by government and other actions beyond
the control of companies operating in the Russian Federation. The
Company's operations may be significantly affected by these factors
for the foreseeable future.
USE OF 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 disclosures of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
RECLASSIFICATIONS:
Certain amounts in the 1998 consolidated financial statements have
been reclassified to conform to the 1999 presentation.
-6-
<PAGE> 8
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
2. LIQUIDITY
At June 30, 1999, the Company had net capital and working capital
deficiencies of $51,497 and $105,639, respectively. Factory management
is currently using credit facilities totaling $22,285. Availability
under these facilities is $2,500. In addition, the Company has
obtained funding from BGLS of approximately $12,900 to complete the
factory. In connection with the move to the new factory in June 1999,
Liggett-Ducat began the manufacture and marketing of western style
cigarettes. Management believes that such activities will result in
improved operations and cash flow, but there can be no assurances in
this regard.
3. SALE OF BROOKEMIL
In connection with the sale by the Company of the common shares of
BrookeMil Ltd. ("BML") to New Valley Corporation ("New Valley") in
1997, a portion of the gain was deferred in recognition of the fact
that the Company's parent, BGLS, retained an interest in BML through
its then 42% equity ownership of New Valley and 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 was used by Liggett-Ducat
for its cigarette factory operation) was subject to a put option held
by New Valley. The option expired when Liggett-Ducat ceased factory
operations at the site in March 1999. The Company recognized that
portion of the deferred gain, $8,478, in March 1999.
As of June 1, 1999, New Valley became a consolidated subsidiary of
Brooke. The deferred gain remaining related to the sale of BML,
$11,913, was reclassified as a contribution to capital.
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Leaf tobacco............................. $ 5,405 $ 3,086
Other raw materials...................... 8,908 2,888
Work-in-process.......................... 372 173
Finished goods........................... 1,343 3,215
Replacement parts and supplies........... 1,379 980
------- -------
$17,407 $10,342
======= =======
</TABLE>
Replacement parts and supplies are shown net of a provision for
obsolescence of $408 and $545 at June 30, 1999 and December 31, 1998,
respectively.
During the six months ended June 30, 1999, Liggett-Ducat exchanged
$251 of cigarettes for the equivalent value in tobacco, other
-7-
<PAGE> 9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
materials and services as compared to $2,510 for the same period in
1998. Sales and purchases were priced at what management believes are
normal sales prices for cigarettes and the normal market price for
tobacco, other materials and services.
At June 30, 1999, the Company had leaf tobacco purchase commitments
of approximately $34,870.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Factory machinery and equipment.......... $ 54,922 $10,589
Computers and software................... 737 466
Office furniture and equipment........... 622 470
Vehicles................................. 2,527 1,767
Construction-in-progress................. 48,526 66,953
-------- -------
107,334 80,245
Less accumulated depreciation............ (4,232) (2,959)
-------- -------
$103,102 $77,286
======== =======
</TABLE>
Liggett-Ducat completed construction of a new cigarette factory on the
outskirts of Moscow and began production in June 1999. Production at
Liggett-Ducat's old factory ceased in March 1999. At June 30, 1999,
the remaining liability under the construction contracts is $4,045 and
the remaining liability under equipment purchase agreements is
$21,795.
6. NOTES PAYABLE, CREDIT FACILITIES AND PARTICIPATING LOAN
Notes payable and credit facilities consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Notes payable............................ $23,753 $28,057
Credit facilities........................ 22,285 11,600
------- ------
Total notes payable and credit
facilities............................. 46,038 39,657
Less:
Current maturities....................... 30,816 20,005
------- -------
Amount due after one year................ $15,222 $19,652
======= =======
</TABLE>
At June 30, 1999, Liggett-Ducat had various credit facilities under
which approximately $22,285 was outstanding. One facility for $10,000,
which is fully utilized and bears interest at 25%, expires in May
-8-
<PAGE> 10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
2000. Another facility for $5,000, of which $2,500 is utilized and
bears interest at 20%, expires in December 1999. The remaining
facilities, denominated in rubles (approximately $9,800 at the June
30, 1999 exchange rate), have terms of six - twelve months with
interest rates of 52% - 63%. The facilities are collateralized by
factory equipment and tobacco inventory.
In 1997, Western Tobacco entered into several contracts for the
purchase of cigarette manufacturing equipment. Approximately 85% of
the contracts are being financed with promissory notes generally over
a period of 5 years. The outstanding balance on these notes, which are
denominated in various European currencies, is $20,386 at June 30,
1999. The Company also has issued a promissory note for $1,339 due
March 31, 2000 covering deposits for equipment being purchased for the
factory.
On July 29, 1998, the Company borrowed $3,000, subsequently reduced to
$2,034, from an unaffiliated third party with interest at 14% per
annum. The remaining principal of the note and accrued interest on the
loan of $1,950 was paid on August 2, 1999.
In February 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. organized Western Realty Development LLC ("Western Realty
Ducat") to make real estate and other investments in Russia. Through
June 30, 1999, Western Realty Ducat had made a $30,000 participating
loan to Western Tobacco with the proceeds used by the Company to
reduce intercompany debt to BGLS and for payments on the new factory
construction contracts. The loan bears no fixed interest and is
payable only out of 30% of distributions made by Western Tobacco to
the Company. After the prior payment of debt service on loans to
finance the construction of the new factory, 30% of distributions from
Western Tobacco to the Company will be applied first to pay the
principal of the loan and then as contingent participating interest on
the loan. Any rights of payment on the loan are subordinate to the
rights of all other creditors of the Company. For the three and six
months ended June 30, 1999, a preference requirement equal to 30% of
Western Tobacco's net (loss) income of $(741) and $261 has been
charged to interest expense.
7. INCOME TAXES
For the six months ended June 30, 1999 and 1998, the tax (benefit)
provision of $(1,880) and $1,311, respectively, consisted of income
tax (benefit) expense pursuant to Russian statutory requirements of
$(171) and $1,311, respectively, and U.S. income tax benefit of $2,051
and $0 in accordance with the Company's tax sharing agreement with
Brooke.
8. 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 due 2001 ("BGLS Notes").
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
-9-
<PAGE> 11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
(together, the "Apollo Holders"), who held approximately 41.8% of the
BGLS Notes then outstanding. The Apollo Holders (and any transferees)
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 Western
Tobacco to collateralize the BGLS Notes held by the Apollo Holders
(and any transferees).
-10-
