<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 SEPTEMBER 30, 1999
-------------------
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 1-5759 65-0949535
(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>
<S> <C> <C>
DELAWARE 33-93576 65-0949536
(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 November 12, 1999 Brooke Group Ltd. had 21,989,782 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
----
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements:
Brooke Group Ltd. Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998............................................................................. 2
BGLS Inc. Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998................ 3
Brooke Group Ltd. Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and September 30, 1998............................................... 4
BGLS Inc. Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and September 30, 1998..................................................... 5
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the nine
months ended September 30, 1999............................................................... 6
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the nine months
ended September 30, 1999...................................................................... 7
Brooke Group Ltd. Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and September 30, 1998..................................................... 8
BGLS Inc. Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and September 30, 1998..................................................... 9
Notes to Consolidated Financial Statements.......................................................... 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................................. 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 45
Item 2. Changes in Securities and Use of Proceeds...................................................... 45
Item 3. Defaults Upon Senior Securities................................................................ 45
Item 5. Other Information.............................................................................. 45
Item 6. Exhibits and Reports on Form 8-K............................................................... 46
SIGNATURES............................................................................................. 48
</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>
September 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ................................................ $ 6,314 $ 7,396
Receivables from clearing brokers ........................................ 10,705
Investment securities available for sale ................................. 41,378
Trading securities owned ................................................. 9,779
Accounts receivable - trade .............................................. 11,138 15,160
Other receivables ........................................................ 2,172 924
Inventories .............................................................. 49,054 36,316
Restricted assets ........................................................ 1,113
Deferred income taxes .................................................... 98,470 59,613
Other current assets ..................................................... 3,108 3,151
--------- ---------
Total current assets ................................................... 233,231 122,560
Property, plant and equipment, net ......................................... 137,195 93,504
Investment in real estate, net ............................................. 52,842
Long-term investments, net ................................................. 7,431
Investment in joint venture ................................................ 51,206
Restricted assets .......................................................... 8,919
Other assets ............................................................... 18,490 12,918
--------- ---------
Total assets ........................................................... $ 509,314 $ 228,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt ...................... $ 36,071 $ 21,176
Margin loan payable ...................................................... 955
Accounts payable ......................................................... 26,880 13,880
Cash overdraft ........................................................... 173 77
Securities sold, not yet purchased ....................................... 2,696
Accrued promotional expenses ............................................. 20,368 23,760
Accrued taxes payable .................................................... 49,584 14,854
Accrued interest ......................................................... 3,776 17,189
Proceeds received for options ............................................ 150,000
Other accrued liabilities ................................................ 57,680 32,505
--------- ---------
Total current liabilities .............................................. 198,183 273,441
Notes payable, long-term debt and other obligations, less current portion .. 156,691 262,665
Noncurrent employee benefits ............................................... 19,696 21,701
Deferred income taxes ...................................................... 140,122
Other liabilities .......................................................... 73,739 65,350
Minority interests ......................................................... 45,622
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 27,822,779 shares, outstanding 21,989,782 shares ........ 2,199 2,094
Additional paid-in capital ............................................... 216,382 124,120
Deficit .................................................................. (308,391) (512,182)
Accumulated other comprehensive income (loss) ............................ (3,279) 24,774
Other .................................................................... (4,177) (5,508)
Less: 5,832,997 shares of common stock in treasury, at cost ............. (27,473) (27,473)
--------- ---------
Total stockholders' deficit .......................................... (124,739) (394,175)
--------- ---------
Total liabilities and stockholders' equity (deficit) ................. $ 509,314 $ 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>
September 30, December 31,
1999 1998
---------------- ------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ............................................. $ 6,314 $ 7,396
Receivables from clearing brokers ..................................... 10,705
Investment securities available for sale .............................. 41,378
Trading securities owned .............................................. 9,779
Accounts receivable - trade ........................................... 11,138 15,160
Other receivables ..................................................... 2,109 755
Inventories ........................................................... 49,054 36,316
Restricted assets ..................................................... 1,113
Deferred income taxes ................................................. 98,470 59,613
Other current assets .................................................. 2,776 2,946
--------- ---------
Total current assets .............................................. 232,836 122,186
Property, plant and equipment, net ...................................... 137,180 93,481
Investment in real estate, net .......................................... 52,842
Long-term investments, net .............................................. 7,431
Investment in joint venture ............................................. 51,206
Restricted assets ....................................................... 8,919
Other assets ............................................................ 17,329 11,729
--------- ---------
Total assets ...................................................... $ 507,743 $ 227,396
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt ................... $ 35,729 $ 20,955
Margin loan payable ................................................... 955
Accounts payable ...................................................... 26,755 13,746
Cash overdraft ........................................................ 69 63
Securities sold, not yet purchased .................................... 2,696
Due to parent ......................................................... 32,394
Accrued promotional expenses .......................................... 20,368 23,760
Accrued taxes payable ................................................. 49,584 14,854
Accrued interest ...................................................... 3,776 17,188
Proceeds received from options ........................................ 150,000
Other accrued liabilities ............................................. 53,221 31,556
--------- ---------
Total current liabilities ......................................... 193,153 304,516
Notes payable, long-term debt and other obligations, less current portion 156,691 262,665
Noncurrent employee benefits ............................................ 19,696 21,701
Deferred income taxes ................................................... 140,122
Other liabilities ....................................................... 76,474 69,216
Minority interests ...................................................... 45,622
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 ............................................ 175,988 69,297
Deficit ............................................................... (296,724) (524,773)
Accumulated other comprehensive income ................................ (3,279) 24,774
--------- ---------
Total stockholder's deficit ....................................... (124,015) (430,702)
--------- ---------
Total liabilities and stockholder's equity (deficit) .............. $ 507,743 $ 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 Nine Months Ended
------------- ------------- ------------- -------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Tobacco* ................................................. $ 135,932 $ 108,179 $ 353,594 $ 304,207
Broker-dealer transactions .............................. 12,711 18,587
Real estate leasing ...................................... 1,576 2,330
---------- ---------- ---------- ------------
Total revenues ......................................... $ 150,219 $ 108,179 $ 374,511 $ 304,207
Expenses:
Cost of goods sold* ...................................... 47,473 47,086 128,998 140,422
Operating, selling, administrative and general expenses .. 83,384 48,115 190,395 130,241
---------- ---------- ---------- ------------
Operating income ......................................... 19,362 12,978 55,118 33,544
Other income (expenses):
Interest and dividend income ............................. 507 75 1,239 325
Interest expense ......................................... (16,114) (20,138) (43,200) (60,561)
Equity in loss of affiliate .............................. (908) (8,935) (10,106) (20,383)
Recognition of deferred gain on sale of assets ........... 7,050
Gain in joint venture .................................... 1,740 950
Gain on sale of investments, net ......................... 151 478
Sale of assets ........................................... 3,844 707 7,969 2,025
Gain on brand transaction ................................ (189) 294,098
Other, net ............................................... (427) 256 2,494 (705)
---------- ---------- ---------- ------------
Income (loss) from continuing operations before provision
(benefit) for income taxes and minority interests ...... 7,966 (15,057) 316,090 (45,755)
Provision (benefit) for income taxes ..................... 2,782 (2,447) 86,156 (1,135)
Minority interests ....................................... 1,046 (336)
---------- ---------- ---------- ------------
Income (loss) from continuing operations ................... 6,230 (12,610) 229,598 (44,620)
Gain on discontinued operations in equity investee, net of
taxes..................................................... 1,249
Gain on disposal of discontinued operations ................ 3,208 3,208
Loss on extraordinary items, net of taxes .................. (354) (1,410)
---------- ---------- ---------- ------------
Net income (loss) .......................................... $ 5,876 $ (9,402) $ 229,437 $ (41,412)
========== ========== ========== ============
Per basic common share:
Income (loss) from continuing operations ................. $ 0.28 $ (0.58) $ 10.44 $ (2.10)
========== ========== ========== ============
Income from discontinued operations ...................... $ 0.15 $ 0.06 $ 0.15
========== ========== ============
Loss from extraordinary items ............................ $ (0.02) $ (0.06)
========== ==========
Net income (loss) applicable to common shares ............ $ 0.26 $ (0.43) $ 10.44 $ (1.95)
========== ========== ========== ============
Basic weighted average common shares outstanding ........... 21,990,917 21,867,543 21,990,917 21,262,709
========== ========== ========== ============
Per diluted common share:
Income (loss) from continuing operations ................. $ 0.21 $ (0.58) $ 7.68 $ (2.10)
========== ========== ========== ============
Income from discontinued operations ...................... $ 0.15 $ 0.04 $ 0.15
========== ========== ============
Loss from extraordinary items ............................ $ (0.01) $ (0.05)
========== ==========
Net income (loss) applicable to common shares ............ $ 0.20 $ (0.43) $ 7.67 $ (1.95)
========== ========== ========== ============
Diluted weighted average common shares outstanding ......... 29,864,048 21,867,543 29,902,071 21,262,709
========== ========== ========== ============
</TABLE>
- --------------------
* Tobacco revenues and Cost of goods sold include excise taxes of $17,374,
$20,244, $46,129 and $60,589, 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 Nine Months Ended
------------------------------- ---------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Tobacco* .............................................. $ 135,932 $ 108,179 $ 353,594 $ 304,207
Broker dealer transactions ............................ 12,711 18,587
Real estate leasing ................................... 1,576 2,330
--------- --------- --------- ---------
Total revenues ...................................... $ 150,219 $ 108,179 $ 374,511 $ 304,207
Expenses:
Cost of goods sold* ................................... 47,473 47,086 128,998 140,422
Operating, selling, administrative and general expenses 82,961 46,838 189,421 127,635
--------- --------- --------- ---------
Operating income .................................... 19,785 14,255 56,092 36,150
Other income (expenses):
Interest and dividend income .......................... 506 65 1,236 184
Interest expense ...................................... (17,060) (21,270) (46,735) (63,832)
Equity in loss of affiliate ........................... (908) (8,935) (10,106) (20,383)
Recognition of deferred gain on sale of assets ........ 8,264
Gain in joint venture ................................. 1,740 950
Gain on sale of investments, net ...................... 151 478
Sale of assets ........................................ 3,844 7,969 1,318
Gain on brand transaction ............................. (189) 294,098
Other, net ............................................ (435) 94 2,456 (870)
--------- --------- --------- ---------
Income (loss) from continuing operations before provision
(benefit) for income taxes and minority interests ... 7,434 (15,791) 314,702 (47,433)
Provision (benefit) for income taxes .................. 2,782 (2,447) 86,156 (1,135)
Minority interests .................................... 1,046 (336)
--------- --------- --------- ---------
Income (loss) from continuing operations ................ 5,698 (13,344) 228,210 (46,298)
Gain on discontinued operations in equity investee,
net of taxes ........................................ 1,249
Gain on disposal of discontinued operations ............. 3,208 3,208
Loss on extraordinary items, net of taxes ............... (354) (1,410)
--------- --------- --------- ---------
Net income (loss) ....................................... $ 5,344 $ (10,136) $ 228,049 $ (43,090)
========= ========= ========= =========
</TABLE>
- -------------------
* Tobacco revenues and cost of goods sold include excise taxes of $17,374,
$20,244, $46,129 and $60,589, 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
Common Stock Additional Other
------------------ Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Other Income (Loss) Total
--------- ------ --------- --------- -------- ------- ------------- ---------
<S> <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 ............................. 229,437 229,437
Unrealized loss on investment
securities .......................... (3,501) (3,501)
Effect of New Valley recapitalization
on other comprehensive loss ......... (24,647) (24,647)
Other New Valley capital
transactions ........................ 95 95
---------
Total other comprehensive loss .... (28,053)
---------
Total comprehensive income ............. 201,384
---------
Effect of stock dividend ............... 1,046,052 105 25,541 (25,646)
Recapitalization of New Valley ......... 72,926 72,926
New Valley purchase of preferred
stock in subsidiary .................. 850 850
Distributions on common stock .......... (8,340) (8,340)
Amortization of deferred
compensation ......................... 1,285 1,331 2,616
---------- ------ --------- --------- -------- ------- --------- ---------
Balance, September 30, 1999 ............ 21,989,782 $2,199 $ 216,382 $(308,391) $(27,473) $(4,177) $ (3,279) $(124,739)
========== ====== ========= ========= ======== ======= ========= =========
</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 (Loss) Total
------- ------ ---------- ------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 ......................... 100 $ $ 69,297 $(524,773) $ 24,774 $(430,702)
Net income ......................................... 228,049 228,049
Unrealized loss on investment securities ......... (3,501) (3,501)
Other New Valley capital transactions ............ 95 95
Effect of New Valley recapitalization on other
comprehensive loss ............................. (24,647) (24,647)
---------
Total other comprehensive loss ............... (28,053)
---------
Total comprehensive income ......................... 199,996
---------
Capital contribution ............................... 31,260 31,260
Recapitalization of New Valley ..................... 72,926 72,926
New Valley purchase of preferred stock in subsidiary 850 850
Amortization of deferred compensation .............. 1,655 1,655
--- --- -------- --------- --------- ---------
Balance, September 30, 1999 ........................ 100 $ $175,988 $(296,724) $ (3,279) $(124,015)
=== === ======== ========= ========= =========
</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>
Nine Months Ended
----------------------------------
Sept. 30, Sept. 30,
1999 1998
---------------- -----------------
<S> <C> <C>
Net cash provided by (used in) operating activities......................... $ 30,750 $ (17,847)
-------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net.......................... 932 2,377
Proceeds from brand transaction........................................... 145,000
Sale or maturity of investment securities................................. 3,234
Purchase of investment securities......................................... (6,737)
Purchase of long-term investments......................................... (2,902)
Proceeds from sale or purchase of real estate, net........................ 47,550
Payment of prepetition claims............................................. (67)
Capital expenditures...................................................... (44,372) (17,289)
-------- --------
Net cash provided by (used in) investing activities......................... 142,638 (14,912)
-------- --------
Cash flows from financing activities:
Proceeds from debt........................................................ 4,976 4,425
Repayments of debt........................................................ (187,582) (1,520)
Borrowings under revolver................................................. 262,084 208,434
Repayments on revolver.................................................... (247,196) (210,050)
Purchase of preferred stock in subsidiary................................. (1,509)
Effect of New Valley recapitalization..................................... 9,055
Decrease in margin loan payable........................................... (5,046)
Increase in cash overdraft................................................ 95 460
Distributions on common stock............................................. (8,446) (3,055)
Proceeds from participating loan.......................................... 25,000
Issuance of common stock.................................................. 10,144
-------- --------
Net cash (used in) provided by financing activities......................... (173,569) 33,838
-------- --------
Effect of exchange rate changes on cash and cash equivalents................ (901) 557
Net (decrease) increase in cash and cash equivalents........................ (1,082) 1,636
Cash and cash equivalents, beginning of period.............................. 7,396 4,754
-------- --------
Cash and cash equivalents, end of period.................................... $ 6,314 $ 6,390
======== ========
Supplemental non-cash investing and financing activities:
Issuance of stock to Liggett bondholders.................................... 4,105
Issuance of stock to consultants............................................ 3,705
Issuance of warrants........................................................ 22,421
Issuance of stock dividends................................................. 25,646
</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>
Nine Months Ended
---------------- -----------------
Sept. 30, Sept. 30,
1999 1998
---------------- -----------------
<S> <C> <C>
Net cash provided by (used in) operating activities ........ $ 22,513 $ (9,783)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ......... 932 1,670
Proceeds from brand transaction .......................... 145,000
Sale or maturity of investment securities ................ 3,234
Purchase of investment securities ........................ (6,737)
Purchase of long-term investments ........................ (2,902)
Proceeds from sale or purchase of real estate, net ....... 47,550
Payment of prepetition claims ............................ (67)
Capital expenditures ..................................... (44,372) (17,289)
--------- ---------
Net cash provided by (used in) investing activities ........ 142,638 (15,619)
--------- ---------
Cash flows from financing activities:
Proceeds from debt ....................................... 4,500 3,950
Repayments of debt ....................................... (187,226) (1,433)
Borrowings under revolver ................................ 262,084 208,434
Repayments on revolver ................................... (247,196) (210,050)
Purchase of preferred stock in subsidiary ................ (1,509)
Effect of New Valley recapitalization .................... 9,055
Increase in margin loan payable .......................... (5,046)
Increase in cash overdraft ............................... 6 514
Proceeds from participating loan ......................... 25,000
--------- ---------
Net cash (used in) provided by financing activities ........ (165,332) 26,415
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (901) 557
Net (decrease) increase in cash and cash equivalents ....... (1,082) 1,570
Cash and cash equivalents, beginning of period ............. 7,396 4,754
--------- ---------
Cash and cash equivalents, end of period ................... $ 6,314 $ 6,324
========= =========
Supplemental non-cash investing and financing activities:
Issuance of stock to Liggett bondholders ................... 4,105
Issuance of stock to consultants ........................... 3,705
Issuance of warrants ....................................... 22,421
</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
primarily in the investment banking and brokerage business through its
ownership of Ladenburg Thalmann & Co. Inc., in the real estate
development business in Russia and in investment in Internet-related
businesses.
Effective October 1, 1999, the Company was reorganized into a holding
company form of organizational structure. The new corporate structure was
implemented by the merger of a wholly-owned indirect subsidiary of the
former Brooke Group Ltd. (the "Predecessor") with the Predecessor, which
was the surviving corporation. As a result of this merger, each share of
the common stock of the Predecessor issued and outstanding or held in its
treasury was converted into one share of common stock of the Company
(formerly known as BGL Successor Inc.). The Company became the holding
company for the business and operations previously conducted by the
Predecessor and its subsidiaries, and the Predecessor became an indirect
wholly-owned subsidiary of the Company. On the effective date of the
merger, the name of the Company was changed to Brooke Group Ltd. and the
name of the Predecessor was changed to Brooke Group Holding Inc. ("Brooke
Group Holding"). The holding company reorganization had no impact on these
consolidated financial statements.
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.
-10-
<PAGE> 12
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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.
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:
Information concerning the Company's common stock has been adjusted to
give effect to the 5% stock dividend paid to Company stockholders on
September 30, 1999. The dividend was charged to retained earnings in the
net amount of $25,646, which was based on the fair value of the Company's
common stock. In connection with the 5% dividend, the Company increased
the number of warrants and stock options by 5% and reduced the exercise
prices accordingly. All share amounts have been presented as if the stock
dividend had occurred on January 1, 1998.
For the three and nine months ended September 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 nine months ended September 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 nine months ended September 30, 1999, total
comprehensive income was $201,384. For the nine months ended September
30, 1998, the total comprehensive loss was $22,225.
-11-
<PAGE> 13
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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
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 11.)
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.
-12-
<PAGE> 14
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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".
Summarized financial information for New Valley for the periods ended May
31, 1999 and September 30, 1998 when the Company was an equity investor
follows:
<TABLE>
<CAPTION>
Five Months Ended Nine Months Ended
May 31, 1999 Sept. 30, 1998
-------------------------- ---------------------------
<S> <C> <C>
Revenues .................................... $ 39,452 $ 78,552
Costs and expenses.............................. 50,659 95,633
Loss from continuing operations................. (10,668) (15,458)
Gain from discontinued operations............... 4,100 7,740
Net loss applicable to common shares(A)......... (44,327) (67,051)
</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 exercisable 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
-13-
<PAGE> 15
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Company's ownership of the outstanding Common Shares of New Valley
increased from 42.3% to 55.1%, and its total voting power increased 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.
On August 30, 1999, New Valley completed the sale of five of its shopping
centers for an aggregate purchase price of $46,125 (before closing
adjustments and expenses) including the assumption of $35,023 of mortgage
financing. In connection with the transaction, New Valley recorded a gain
of $3,849 for the three and nine months ended September 30, 1999.
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, New Valley's recapitalization and the sale of
New Valley's office buildings, shopping centers and the Thinking Machines
assets 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 Nine Months Ended
December 31, 1998 Sept. 30, 1999
-------------------------- -------------------------
<S> <C> <C>
Revenues................................. $462,235 $389,187
======= =======
Operating income......................... $ 24,135 $ 39,358
======= =======
Income from continuing operations........ $ 7,447 $ 13,853
======= =======
Net income............................... $ 11,712 $ 14,516
======= =======
Net income per common share:
Basic................................ $0.55 $0.66
======= =======
Diluted.............................. $0.45 $0.49
======= =======
</TABLE>
-14-
<PAGE> 16
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 $65,875,
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 $39,581 had been funded
through September 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
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 September 30, 1999 for Western
Realty Ducat follows:
September 30, 1999
------------------
Current assets .............. $ 5,174
Participating loan receivable 36,470
Real estate, net ............ 85,519
Furniture and fixtures, net . 335
Other noncurrent assets ..... 371
Goodwill, net ............... 5,778
Notes payable-current ....... 6,192
Other current liabilities ... 6,939
Notes payable - long-term ... 9,915
Other long-term liabilities . 753
Members' equity ............. 109,848
Western Realty Ducat has made a $30,000 participating loan to, and
payable out of a 30% profits interest in, 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 11 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
-15-
<PAGE> 17
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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. In addition, Western Realty Ducat is entitled to receive a
15% annual rate of return on amounts advanced as the loan under certain
circumstances in the event of a sale or refinancing of Western Tobacco or
the new factory. Any rights of repayment on the loan are subordinate to
the rights of all other creditors of BML. Western Tobacco has recognized
net interest expense of $4,218 and $4,479 for the three and nine months
ended September 30, 1999, which represents a 15% cumulative adjustment to
realizable value on the loan plus 30% of any net expense applicable to
common interests in Western Tobacco. The loan is classified in other
long-term liabilities on the consolidated balance sheet at September 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 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 September 30, 1999.
Apollo will be entitled to a preference on distributions of cash from
Western Realty Repin to the extent of its investment of $25,875 together
with a 20% annual rate of return, and New Valley will then be entitled to
a return of its investment of $10,525, 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.
Through September 30, 1999, Western Realty Repin has advanced $29,298, of
which $18,773 was funded by Apollo under the Western Realty Repin loan.
Apollo funded an additional advance of $7,125 under the Repin loan on
October 1, 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,
including the $7,125 advance in October 1999, 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 September 30, 1999, BML had invested $31,651 in the Kremlin sites
and held $1,999 in cash and $1,392 in receivables from Western Realty
Ducat, both of which were 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 $22,000 by May 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.
-16-
<PAGE> 18
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 $41,378 at September 30, 1999 is comprised of
marketable equity securities and warrants of $39,298 and notes receivable
of $2,080.
7. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ -------------------
<S> <C> <C>
Leaf tobacco..................................... $14,714 $13,882
Other raw materials.............................. 9,074 4,629
Work-in-process.................................. 2,758 2,001
Finished goods................................... 21,615 15,446
Replacement parts and supplies................... 4,786 4,130
------- -------
Inventories at current cost...................... 52,947 40,088
LIFO adjustments................................. (3,893) (3,772)
------- -------
$49,054 $36,316
====== ======
</TABLE>
At September 30, 1999, Liggett and Liggett-Ducat had leaf tobacco
purchase commitments of approximately $4,019 and $30,770, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------------ -------------------
<S> <C> <C>
Land and improvements ................... $ 415 $ 412
Buildings ............................... 51,167 5,823
Machinery and equipment ................. 122,567 54,144
Construction-in-progress ................ 5,049 66,981
--------- ---------
179,198 127,360
Less accumulated depreciation ........... (42,003) (33,856)
--------- ---------
$ 137,195 $ 93,504
========= =========
</TABLE>
-17-
<PAGE> 19
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
In May 1999, Liggett-Ducat completed construction of a new cigarette
factory on the outskirts of Moscow and began production in June 1999. At
September 30, 1999, the remaining liability under the construction
contracts is $1,980 and the remaining liability under equipment purchase
agreements is $23,428.
9. LADENBURG, THALMANN & CO. INC.
On September 14, 1999, New Valley agreed to sell for $10,200 a 19.9%
interest in its subsidiary Ladenburg, Thalmann & Co., Inc. ("Ladenburg")
to Berliner Effektengesellschaft AG ("BEAG"). Pursuant to the agreement,
BEAG will also acquire a three-year option to purchase additional
interests in Ladenburg subject to certain conditions. Consummation of the
transaction is subject to the approval of the New York Stock Exchange and
other closing conditions.
10. LONG-TERM INVESTMENTS
At September 30, 1999, long-term investments consisted primarily of
investments in limited partnerships of $7,649. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $4,413 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 $4,516 at September 30, 1999. New Valley
owns a 33.33% interest in AtomicPop, an online music company, and smaller
interests in other Internet companies.
-18-
<PAGE> 20
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---------------- -----------------
<S> <C> <C>
BGLS:
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $7,027 and $17,374 .... $ 86,043 $215,490
Deferred interest on 15.75% Series B Senior Secured
Notes due 2001 ....................................... 27,863 24,985
New Valley:
Notes payable ............................................ 19,881
Liggett:
Revolving credit facility ................................ 3,818 2,538
Note payable ............................................. 4,288
BOL:
Foreign credit facilities ................................ 24,464 11,600
Notes payable ............................................ 23,428 28,057
Other .................................................... 2,977 1,171
-------- --------
Total notes payable, long-term debt and other obligations 192,762 283,841
Less:
Current maturities ................................... 36,071 21,176
-------- --------
Amount due after one year ................................ $156,691 $262,665
======== ========
</TABLE>
15.75% Series B Senior Secured Notes Due 2001 - BGLS:
Through September 30, 1999, BGLS had repurchased $139,794 principal
amount of its 15.75% Senior Secured Notes due 2001 (the "Notes"),
together with accrued interest thereon. The purchases were funded
primarily with proceeds from 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 September 30, 1999, the
principal amount of Notes outstanding was $93,070. Of this amount,
$60,600 principal amount of the Notes are held by the holders who have
agreed to defer payment of interest as discussed below.
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).
-19-
<PAGE> 21
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
2,100,000 shares of the Company's common stock at a price of $4.76 per
share. The Apollo Holders were also issued a second warrant expiring
October 31, 2004 to purchase an additional 2,257,500 shares of the
Company's common stock at a price of $0.095 per share. The second warrant
became exercisable on October 31, 1999.
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:
On August 30, 1999, New Valley completed the sale of five of its shopping
centers for an aggregate purchase price of $46,125 before closing
adjustments and expenses. The shopping centers were subject to
approximately $35,023 of mortgage financing, which was assumed by the
purchasers at closing.
During the third quarter 1999, New Valley refinanced the notes payable
for $19,898, in the aggregate, on its two remaining shopping centers in
Florida and West Virginia. Interest rates range from 7.5% to 9.03% per
annum. The four notes are due between 2002 and 2024. Two, for $8,510, are
subject to call in 2001 under certain conditions.
Revolving Credit Facility - Liggett:
Liggett has a revolving credit facility (the "Facility") for $40,000 with
a syndicate of commercial lenders which is collateralized by all
inventories and receivables of Liggett. At September 30, 1999, $14,755
was available under the Facility based on eligible collateral. Borrowings
-20-
<PAGE> 22
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 9.75%
at September 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
permitted maximum adjusted net worth (not to fall below a deficit of
$195,000 as computed in accordance with the agreement, this computation
was $30,707 at September 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 $24,670 at September 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 Credit Facilities - Liggett-Ducat:
At September 30, 1999, Liggett-Ducat had various credit facilities under
which approximately $24,464 was outstanding. Facilities denominated in
dollars amount to $17,000, of which $14,500 has been utilized, bear
interest at rates of 20% to 25% and expire within the next twelve months.
The remaining facilities, denominated in rubles (approximately $9,964 at
the September 30, 1999 exchange rate), have terms of six to twelve months
with interest rates of 50% to 63%. The facilities are collateralized by
factory equipment and tobacco inventory.
On November 1, 1999, Liggett-Ducat entered into an agreement with a
Russian bank for a revolving credit facility for $14,500 denominated in
dollars and collateralized by the new factory building bearing interest of
13% and $3,000 denominated in rubles and collateralized by certain
equipment bearing interest of 40%. The credit facility will be used to
repay existing credit lines.
Notes Payable - BOL:
Western Tobacco has 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 $22,046 at September 30, 1999. BOL also has issued
a promissory note for approximately $1,382 covering deposits for equipment
being purchased for the new factory. The note is due March 31, 2000.
12. EQUITY
On November 4, 1999, the Company adopted its 1999 Long-Term Incentive
Plan (the "Plan") subject to approval by the stockholders of the Company
at next year's annual meeting. The Plan authorizes the granting of up to
5,000,000 shares of the Company's common stock through awards of stock
-21-
<PAGE> 23
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
options (which may include incentive stock options and/or nonqualified
stock options), stock appreciation rights and shares of restricted
Company common stock. All officers, employees and consultants of the
Company and its subsidiaries are eligible to receive awards under the
Plan.
On November 4, 1999, the Company granted non-qualified stock options to
six executive officers of the Company or its subsidiaries (the "Option
Holders") pursuant to the Plan. The grant of the options to the Option
Holders is conditioned upon the approval of the Plan by the Company's
stockholders. Under the options, the Option Holders have the right to
purchase an aggregate of 2,100,000 shares of the Company's common stock
at an exercise price of $15 7/16 per share (the fair market value of a
share of common stock on the date of grant), subject to increase under
certain circumstances. Common stock dividend equivalents will be paid on
each option share. The options have a ten-year term and become
exercisable on the fourth anniversary of the date of grant. However, the
options will earlier vest and become immediately exercisable upon (i) the
occurrence of a "Change in Control" or (ii) the termination of the Option
Holder's employment with the Company due to death or disability.
13. 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 Brooke Group Holding, the Company's predecessor and a
wholly-owned subsidiary of BGLS, 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
the following categories: (i) smoking and health cases alleging personal
injury brought on behalf of individual plaintiffs ("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
nine months ended September 30, 1999, Liggett incurred counsel fees and
costs totaling approximately $4,210, compared to $3,713 for the
comparable prior year period.
Individual Actions. As of September 30, 1999, there were approximately
280 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, 82 were
pending in Florida, 91 in New York, 30 in Massachusetts and 17 in Texas.
The balance of the individual cases were pending in 22 states. There are
six individual cases pending where Liggett is the only named defendant.
-22-
<PAGE> 24
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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, breach of special duty, 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 and
violations of deceptive trade practice laws, the Federal Racketeer
Influenced and Corrupt Organization Act ("RICO"), state RICO statutes and
antitrust statutes. In many of these cases, in addition to compensatory
damages, plaintiffs also seek other forms of relief including,
treble/multiple damages, 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 September 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. Many of these actions purport to constitute
statewide class actions and were filed after May 1996 when the Fifth
Circuit Court of Appeals, in the Castano case (discussed below), reversed
a Federal district court's certification of a purported nationwide class
action on behalf of persons who were allegedly "addicted" to tobacco
products.
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.
-23-
<PAGE> 25
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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, Broin and Engle, were
certified in state court in Florida prior to the Fifth Circuit's
decision. 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. The class consists of all
Florida residents and citizens, and their survivors, who have suffered,
presently suffer or have died from diseases and medical conditions caused
by their addiction to cigarettes that contain nicotine. In July 1998,
Phase I of the trial in this action commenced. On July 7, 1999, the jury
returned the Phase I verdict. The Phase I verdict concerned certain issues
determined by the trial court to be "common" to the causes of action of
the plaintiff class. Among other things, the jury found that smoking
cigarettes causes 20 diseases or medical conditions, that cigarettes are
addictive or dependence producing, defective and unreasonably dangerous,
that defendants made materially false statements with the intention of
misleading smokers, that defendants concealed or omitted material
information concerning the health effects and/or the addictive nature of
smoking cigarettes and agreed to misrepresent and conceal the health
effects and/or the addictive nature of smoking cigarettes, and that
defendants were negligent and engaged in extreme and outrageous conduct or
acted with reckless disregard with the intent to inflict emotional
distress. The jury also found that defendants' conduct "rose to a level
that would permit a potential award or entitlement to punitive damages."
The court has decided that Phase II of the trial, which commenced November
1, 1999, will be a causation and damages trial for three 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.
(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 one case against Liggett in
Florida and one in Maryland. A number of class certification decisions
are on appeal.
Governmental Actions. As of September 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, breach of 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.
-24-
<PAGE> 26
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
On or about September 22, 1999, the United States of America commenced
litigation against Liggett and the other tobacco companies in the United
States District Court for the District of Columbia. The action seeks to
recover healthcare costs paid for and furnished, and to be paid for and
furnished, by the Federal Government for lung cancer, heart disease,
emphysema and other tobacco-related illnesses caused by the fraudulent
and tortious conduct of defendants, and to restrain defendants and
co-conspirators from engaging in fraud and other unlawful conduct in the
future, and to compel defendants to disgorge the proceeds of their
unlawful conduct. The action is allegedly brought under the Medical Care
Recovery Act and the Medicare secondary payer provisions of the Social
Security Act and RICO.
Third-Party Payor Actions. As of September 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, Brooke Group Holding and Liggett entered into
an agreement, subject to court approval, to settle the Castano class
action tobacco litigation. The Castano class was subsequently decertified
by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and
Liggett entered into settlements of tobacco-related litigation with the
Attorneys General of 45 states and territories. The settlements released
Brooke Group Holding and Liggett from all tobacco-related claims,
including claims for health care cost reimbursement and claims concerning
sales of cigarettes to minors.
In November 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,
-25-
<PAGE> 27
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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, Brooke Group Holding 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 45 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
-26-
<PAGE> 28
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 Brooke Group Holding 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 Brooke Group Holding 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, Brooke Group Holding 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, Brooke Group Holding and plaintiffs filed
an amended class action settlement agreement in Fletcher which agreement
was preliminarily approved by the court in December 1998. On July 22,
1999, the court denied approval of the Fletcher class action settlement.
The parties' motion for reconsideration is still pending.
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 Brooke Group Holding or Liggett
scheduled for the remainder of 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 (April), two asbestos company contribution lawsuits in
Mississippi and New York (February), one Class Action in Maryland
(February) and a Third-Party Payor Action brought by unions in New York
(June). Also, two Individual Actions 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. 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.
-27-
<PAGE> 29
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict has been returned in the first
phase of the Engle smoking and health class action trial pending in
Florida. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the
Engle case. An unfavorable outcome of a pending smoking and 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 Brooke Group Holding or Liggett, 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.
SUBSEQUENT EVENTS:
In connection with the Engle case, on October 20, 1999, the Third
District Court of Appeal denied the defendants' motion to order the trial
court to assess punitive damages on an individual basis. On October 29,
1999, the defendants petitioned the Florida Supreme Court for relief. On
November 3, 1999, the Florida Supreme Court requested briefing from the
plaintiffs.
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
-28-
<PAGE> 30
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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
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. Oral argument has been
scheduled for December 1999. 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
-29-
<PAGE> 31
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 legislative and 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. These developments may negatively affect the
perception of potential triers of fact with respect to the tobacco
industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
OTHER MATTERS:
In March 1997, a shareholder derivative suit was filed against New
Valley, as a nominal defendant, its directors and Brooke Group Holding 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. Brooke Group Holding's and New Valley's time to
respond to the complaint has not yet expired. Brooke Group Holding and
New Valley believe that the allegations are without merit. Although there
can be no assurances, the Company is of the opinion, after consultation
with counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the Company's consolidated financial position,
results of operations or cash flows.
On July 2, 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
Group Holding 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. Brooke Group Holding
and New Valley believe that the allegations are without merit. Although
there can be no assurances, Brooke Group Holding 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
consolidated financial position, results of operations or cash flows.
On October 18, 1999, an action was commenced against a subsidiary of
Brooke Group Holding. in the Supreme Court of the State of New York,
County of New York. The Complaint alleges that under the terms of a 1993
Put Agreement, Brooke Group Holding's subsidiary was obligated to
purchase certain shares of plaintiff's stock for $7.5 million. In
addition, the Complaint seeks prejudgment interest in the amount of
approximately $3 million. The Company believes, and has been so advised
by counsel, that it has a number of valid defenses to this matter.
-30-
<PAGE> 32
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
14. SEGMENT INFORMATION
Financial information for the Company's continuing operations before
taxes and minority interest for the three and nine months ended September
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>
Three Months Ended Sept. 30, 1999:
Net revenues............................ $108,676 $ 27,256 $12,711 $ 1,576 $ $150,219
Operating income (loss)................. 19,689 4,262 (2,424) 1,683 (3,848) 19,362
Depreciation and amortization........... 747 1,649 244 450 12 3,102
Capital expenditures.................... 1,112 5,350 46 6,508
Three Months Ended Sept. 30, 1998:
Net revenues............................ 85,630 22,549 108,179
Operating income (loss)................. 8,685 2,177 2,116 12,978
Depreciation and amortization........... 1,738 253 60 2,051
Capital expenditures.................... 488 9,663 10,151
Nine Months Ended Sept. 30, 1999:
Net revenues............................ 288,649 64,945 18,587 2,330 374,511
Operating income (loss)................. 55,904 4,830 (2,531) 1,312 (4,397) 55,118
Identifiable assets..................... 107,785 135,268 39,841 59,872 166,548 509,314
Depreciation and amortization........... 2,567 2,921 144 863 8 6,503
Capital expenditures.................... 8,084 35,915 373 44,372
Nine Months Ended Sept. 30, 1998:
Net revenues............................ 234,654 69,553 304,207
Operating income (loss)................. 23,830 9,651 63 33,544
Identifiable assets..................... 61,678 69,031 10,621 141,330
Depreciation and amortization........... 5,031 412 228 5,671
Capital expenditures.................... 1,182 16,107 17,289
</TABLE>
- ---------------------
*Broker-Dealer, Real Estate and New Valley's portion of Corporate and Other
are included for the three and four months ended September 30, 1999 when New
Valley became a consolidated subsidiary of the Company.
-31-
<PAGE> 33
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, real estate operations in Russia and investment in
Internet-related businesses 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.
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.
-32-
<PAGE> 34
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. In August
1999, Philip Morris increased list prices by $1.80 per carton. Other major
manufacturers, including Liggett, followed suit.
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. On August 30, 1999, New Valley completed
the sale of five of its shopping centers for an aggregate purchase price of
$46,125 (before closing adjustments and expenses) including the assumption of
$35,023 of mortgage financing. In connection with the transaction, New Valley
recorded a gain of $3,849 on the sale.
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 September 30, 1999, there were approximately 280
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. An unfavorable
verdict has been returned in the first phase of the Engle smoking and health
class action trial pending in Florida. It is possible that additional cases
could be decided unfavorably and that there could be further adverse
developments in the Engle case. 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
-33-
<PAGE> 35
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
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 13 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 13
to the Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Net revenues:
Liggett....................... $108,676 $ 85,630 $288,649 $234,654
Liggett-Ducat................. 27,256 22,549 64,945 69,553
-------- -------- -------- --------
Total tobacco............. 135,932 108,179 353,594 304,207
*Broker-dealer.................. 12,711 18,587
*Real estate.................... 1,576 2,330
-------- -------- -------- --------
Total revenues............ 150,219 108,179 374,511 304,207
Operating income:
Liggett....................... 19,689 8,685 55,904 23,830
Liggett-Ducat................. 4,262 2,177 4,830 9,651
-------- -------- -------- --------
Total tobacco............. 23,951 10,862 60,734 33,481
*Broker-dealer.................. (2,424) (2,531)
*Real estate.................... 1,683 1,312
Corporate and other........... (3,848) 2,116 (4,397) 63
-------- -------- -------- --------
Total operating income.... $ 19,362 $ 12,978 $ 55,118 $ 33,544
======== ======== ======== ========
</TABLE>
*New Valley became a consolidated subsidiary on June 1, 1999. Results of
operations for New Valley are included for the three and four months ended
September 30, 1999.
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Revenues. Total revenues were $150,219 for the three months ended
September 30, 1999 compared to $108,179 for the three months ended September
30, 1998. This 38.9% increase in revenues was due to a $23,046 or 26.9%
increase in revenues at Liggett, an increase of $4,707 or 20.9% in revenues at
Liggett-Ducat and the addition of three months' revenues from New Valley of
$14,287.
-34-
<PAGE> 36
Tobacco Revenues. Total tobacco revenues were $135,932 for the three
months ended September 30, 1999 compared to $108,179 for the three months ended
September 30, 1998. This 25.7% increase in revenues was primarily due to an
increase in tobacco revenues at Liggett and at Liggett-Ducat discussed above.
Revenues at Liggett increased in both the premium and discount segments
combined by 26.9% ($23,046) due to price increases of $33,224 (see "Recent
Developments-Cigarette Pricing Activity"), partially offset by a 7.0% decline
in unit sales volume (approximately 99.5 million units), accounting for $5,971
in volume variance and an unfavorable product mix of $4,207. The decline in
Liggett's unit sales volume was due primarily to the closing of the Philip
Morris brand transaction on May 24, 1999 as well as an overall decline in
industry volume, certain competitors continuing leveraged rebate programs tied
to their products and increased promotional activity by certain other
manufacturers.
Premium sales at Liggett for the third quarter of 1999 amounted to
$15,114 and represented 13.9% of Liggett's total sales, compared to $26,986 and
31.5% of total sales in the third quarter of 1998. Premium revenues declined by
44.0% ($11,872) for the three months ended September 30, 1999, compared to the
prior year period, due primarily 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 $15,693 reflecting a
58.2% decline in unit sales volume (approximately 221.8 million units), which
was partially offset by price increases of $3,821. As adjusted for the
contribution of the three brands, the decline in Liggett's premium segment
compared to the prior year period was 13.5% (approximately 25.2 million units).
This compares to an overall industry decline in the premium segment of
approximately 10.4% in the third quarter of 1999 compared to prior year period.
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 September 30, 1999 amounted to
$93,562 and represented 86.1% of Liggett's total sales, compared to $58,644 and
68.5% of total sales for the three months ended September 30, 1998. In the
discount segment, revenues grew by 59.5% ($34,918) for the three months ended
September 30, 1999 compared to the prior year period, due to price increases of
$29,403, along with an 11.7% increase in unit sales volume (approximately 122.3
million units), accounting for $6,860 in volume variance partially offset by an
unfavorable product mix among the discount brand categories of $1,345.
For the three months ended September 30, 1999, fixed manufacturing
costs at Liggett were $1,541 lower than in the same period in 1998, with a
decrease in costs per thousand units of $1.25 per thousand due primarily to a
reduction in the fixed portion of indirect labor costs.
Net tobacco revenues at Liggett-Ducat for the three months ended
September 30, 1999 increased 20.8% over the same period in 1998 due to a 36.5%
increase in unit sales volume ($8,236) (approximately 1,809 million units) and
a small favorable product mix of $317 offset by a 17.1% decrease in prices
($3,846).
Tobacco Gross Profit. Tobacco consolidated gross profit was $88,459
for the three months ended September 30, 1999 compared to $61,093 for the three
months ended September 30, 1998, an increase of $27,366 or 44.8% when compared
to the same period last year, reflecting an increase in gross profit at Liggett
of $25,916 and at Liggett-Ducat of $1,450 for the three months ended September
30, 1999 compared to the same period in the prior year. For the three months
ended September 30, 1999, Liggett's premium brands contributed 13.0% and
discount brands contributed 77.8% to the Company's gross tobacco profit.
Liggett-Ducat contributed 9.2%. Over the same period in 1998, Liggett's premium
brands contributed 30.0%, Liggett's discount brands contributed 59.0% and
Liggett-Ducat contributed 11% to the Company's gross profit.
-35-
<PAGE> 37
Gross profit at Liggett of $80,163 for the three months ended
September 30, 1999 increased $25,916 from gross profit of $54,247 for the third
quarter of 1998, due primarily to the price increases discussed above. (See
"Recent Developments-Cigarette Pricing Activity".) As a percent of revenues
(excluding federal excise taxes), gross profit at Liggett increased to 85.6%
for the three months ended September 30, 1999 compared to 78.9% for the same
period in 1998, with gross profit for the premium segment at 86.7% in the 1999
period compared to 80.8% in the 1998 period. Gross profit for the discount
segment was 85.8% for the three months ended September 30, 1999 and 78.0% for
the three months ended September 30, 1998. This increase is primarily the
result of the 1998 list price increases, followed by the August 1999 increase.
As a percent of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased 2.6% to 32.4% for the three months ended
September 30, 1999 compared to 35.0% in the same period in 1998, primarily due
to lower prices offset by higher sales volumes.
Broker-Dealer and Real Estate Revenues. For the three months ended
September 30, 1999, Ladenburg's revenues were $12,711 and real estate revenues
were $1,576.
Expenses. Operating, selling, general and administrative expenses were
$83,384 for the three months ended September 30, 1999 compared to $48,115 for
the same period last year, an increase of $35,269 due to increased expenses at
Liggett of $14,912 and an increase of $19,482 caused by consolidation of New
Valley, which was not a consolidated subsidiary during the prior year slightly
offset by a decrease of $464 at Liggett-Ducat. The increase in operating
expenses at Liggett was due primarily to higher spending for promotional and
marketing programs and increased administrative costs partially offset by a
reduction in legal expense and in amortization charges. At Liggett-Ducat, other
selling, general and administrative expenses were reduced over the prior year
period offset by increased depreciation due to the opening of the new factory
in June 1999 and increased marketing and advertising expense due primarily to
the introduction of western style cigarettes.
Other Income (Expenses). For the three months ended September 30,
1999, other expense was $11,396 compared to expense of $28,035 for the prior
year period.
Interest expense was $16,114 for the three months ended September 30,
1999 compared to $20,138 for the same period last year. This decrease of $4,024
was primarily due to a savings of $6,979 at Liggett because of the redemption
by Liggett of its Senior Secured Notes on December 28, 1998 and lower interest
expense of approximately $5,706 at corporate due to the repurchase of a portion
of BGLS' 15.75% Senior Secured Notes beginning in May 1999. This was offset by
the addition of $2,209 in interest expense of New Valley and higher interest
expense at Western Tobacco Investment LLC ("Western Tobacco") of $6,211
primarily due to increased interest rates on credit facilities in Russia and
non-cash interest expense under the participating loan agreement.
New Valley contributed gains of $1,740 from its joint venture, $151
from sale of investments, and $3,849 from the sale of five of its U. S.
shopping centers.
Equity in earnings of affiliate was a loss of $908 for the three
months ended September 30, 1999 compared to a loss of $8,935 for the three
months ended September 30, 1998. The 1999 loss relates to New Valley's minority
interests in its equity investees while the 1998 loss for the period relates to
New Valley's net loss applicable to common shares of $22,622 when the Company
accounted for its interest in New Valley on the equity method.
-36-
<PAGE> 38
Income tax expense for the third quarter of 1999 was $2,782 compared
to a tax benefit of $2,447 for the third quarter of 1998. The effective tax
rates for the three months ended September 30, 1999 and 1998 do 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.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended
September 30, 1998
Revenues. Total revenues were $374,511 for the nine months ended
September 30, 1999 compared to $304,207 for the nine months ended September 30,
1998. This 23.1% increase in revenues was due to a $53,995 or 23.0% increase in
revenues at Liggett and the addition of revenues from New Valley of $20,917
offset by a decrease in revenues of $4,608 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 $94,328 (see "Recent
Developments-Cigarette Pricing Activity") partially offset by a 14.6% ($34,290)
decline in unit sales volume (approximately 609.6 million units) and $6,043 in
unfavorable sales mix. The decline in Liggett's unit sales volume was due to an
overall decline in industry volume, the closing of the Philip Morris brand
transaction, certain competitors continuing leveraged rebate programs tied to
their products and increased promotional activity by certain other
manufacturers. The decrease in tobacco revenues at Liggett-Ducat is
attributable to decreased prices of $15,366 offset by a positive volume
variance of $9,011 and a favorable product mix of $1,747 compared to the prior
year period. Although volume increased by approximately 1,791 million units in
the nine months ended September 30, 1999, Liggett-Ducat's sales volume was
adversely affected by the move to the new factory and price declines in Russia.
Premium sales at Liggett for the nine months ended September 30, 1999
amounted to $63,777 and represented 22.1% of total Liggett sales, compared to
$76,898 and 32.8% of total sales for the same period in 1998. In the premium
segment, revenues declined by 17.1% over the nine months ended September 30,
1999, compared to the same period in 1998, due to an unfavorable volume
variance of $31,728, reflecting a 41.3% decline in unit sales volume
(approximately 471.4 million units), primarily due to the closing of the Philip
Morris brand transaction on May 24, 1999, which was partially offset by price
increases of $18,607. As adjusted for the contribution of the three brands in
the Philip Morris brand transaction, the decline in Liggett's premium segment
from the prior year period was 21.5% (approximately 184.4 million units).
Although this decline compares unfavorably to an overall industry decline in
the premium segment of approximately 9.7% during the nine months of 1999,
Liggett's management believes that the percentage decline is consistent with
other, smaller premium brands.
Liggett's discount sales over the nine month period amounted to
$224,872 and represented 77.9% of total Liggett sales, compared to $157,756 and
67.2% of total Liggett sales for the same period in 1998. In the discount
segment, revenues grew by 42.5% ($67,116) over the nine months ended September
30, 1999 compared to the same period in 1998, due to price increases of
$75,721, partially offset by a 4.6% decline in unit sales volume
(approximately 138.2 million units) accounting for $7,197 in volume variance
and an unfavorable product mix of $1,408.
For the nine months ended September 30, 1999, fixed manufacturing
costs on a basis comparable to the same period in 1998 were $604 lower, with an
increase in costs per thousand units of $0.04 per thousand against a 6.0%
decline in production volume from the previous year.
Tobacco Gross Profit. Tobacco consolidated gross profit was $224,596
for the nine months ended September 30, 1999 compared to $163,785 for the nine
months ended September 30, 1998, an increase of $60,811 or 37.1% 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
-37-
<PAGE> 39
premium brands contributed 21.2% to the Company's gross profit, the discount
segment contributed 72.2% and Liggett-Ducat contributed 6.6% for the nine
months ended September 30, 1999. Over the same period in 1998, Liggett's
premium brands contributed 31%, the discount segment contributed 57% and
Liggett-Ducat contributed 12%.
Liggett's gross profit of $209,507 for the nine months ended September
30, 1999 increased $66,139 from gross profit of $143,368 for the same period in
1998, due primarily to the price increases discussed above. As a percent of
revenues (excluding federal excise taxes), gross profit at Liggett increased to
84.5% for the nine months ended September 30, 1999 compared to 77.4% for the
same period in 1998, with gross profit for the premium segment at 85.5% and
79.8% in the nine months ended September 30 of 1999 and 1998, respectively, and
gross profit for the discount segment at 84.7% and 76.1% in 1999 and 1998,
respectively. This increase is primarily the result of the 1998 list price
increases and, to a lesser degree, list price increases in August 1999.
As a percentage of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat increased to 49.5% for the nine months ended September
30, 1999 compared to 33.3% in the same period in 1998, due to larger volume and
better product mix.
Broker-Dealer and Real Estate Revenues. New Valley's broker-dealer
revenues were $18,587 and real estate revenues were $2,330 for the four months
ended September 30, 1999.
Expenses. Operating, selling, general and administrative expenses were
$190,395 for the nine months ended September 30, 1999 compared to $130,241 for
the prior year period. The increase of $60,154 is due primarily to a $33,277
increase at Liggett and additional expenses of $26,849 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
partially offset by a reduction in amortization charges and legal expenses.
Other Income (Expenses). For the nine months ended September 30, 1999,
Liggett recognized a gain of $294,098 in connection with the closing of the
Philip Morris brand transaction. In addition, New Valley recognized a gain of
$7,877 primarily on the sale of substantially all of Thinking Machines' assets
and the sale of five U. S. shopping centers. The Company also recognized in
March 1999 a deferred gain of $7,050 relating to the expiration of the put
obligation on Ducat Place III (the site of the old cigarette factory in Russia)
in connection with the 1997 sale of the BrookeMil Ltd. common shares.
Interest expense was $43,200 for the nine months ended September 30,
1999 compared to $60,561 for the same period in the prior year. The decrease of
$17,361 is largely due to a savings of $20,297 because of the redemption by
Liggett of its Senior Secured Notes on December 28, 1998, and a savings of
$8,207 at BGLS due to the repurchase of a portion of BGLS' Senior Secured
Notes. This was offset by additional interest expense at Western Tobacco of
$8,174 and interest at New Valley of $3,018.
Equity in earnings of affiliate was a loss of $10,106 and includes the
Company's loss in New Valley which was accounted for on the equity method for
the five months ended May 31, 1999 as well as losses at New Valley on its
equity method investees compared to a loss of $20,383 for the nine months ended
September 30, 1998 which relates to New Valley's net loss applicable to common
shares of $67,051 also accounted for on the equity method.
Income tax expense for the nine months ended September 30, 1999 was
$86,156 compared to a benefit of $1,135 for the nine months ended September 30,
1998. The effective tax rates do 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.
-38-
<PAGE> 40
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents decreased $1,082 for the nine months
ended September 30, 1999 and increased $1,636 for the nine months ended
September 30, 1998. Net cash provided by operations for the nine months ended
September 30, 1999 was $30,750 compared to net cash used in operations of
$17,847 for the comparable period of 1998. The increase of $48,597 in net cash
provided by operating activities in the 1999 period 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 at BGLS and an increase in accrued
liabilities. In the 1998 period, cash payments included interest payments by
BGLS and Liggett of approximately $50,000. In addition, increases in
inventories were partially offset by decreases in receivables and in payables
and in other long-term liabilities.
Cash provided by investing activities of $142,638 compares to cash
used of $14,912 for the periods ended September 30, 1999 and 1998,
respectively. For the nine months ended September 30, 1999, the majority of the
proceeds were from the purchase of the Class A option by Philip Morris in May
1999, loan proceeds which Trademarks borrowed and distributed to Eve and the
sale of real estate. In the 1999 period, these proceeds were partially offset
by capital expenditures primarily for machinery and equipment at Liggett of
$8,084 and equipment and construction costs for the new factory of $35,915 at
Liggett-Ducat. Other payments made principally pertained to broker-dealer
transactions and the sale of assets at New Valley. In the 1998 period, capital
expenditures at Liggett of $1,182 and $16,107 at Liggett-Ducat were partially
offset by proceeds from the sale of equipment.
Cash used in financing activities was $173,569 for the nine months
ended September 30, 1999 as compared with cash provided of $33,838 for the nine
months ended September 30, 1998. Cash was used in the 1999 period to retire the
BGLS Senior Secured Notes in the amount of $149,735 and retire $35,023 of New
Valley mortgage financing relating to the five shopping centers sold in August
1999. Cash was also used in the 1999 period to decrease the margin loan at New
Valley, to purchase preferred stock in a New Valley subsidiary and for
distributions on the Company's common stock. Net borrowings under the revolving
credit facilities were $14,888, of which $1,380 is attributable to Liggett and
$13,508 is attributable to Liggett-Ducat. Proceeds included $4,976 of equipment
financing and the effect of the New Valley recapitalization ($9,055). Proceeds
in the 1998 period included $25,000 from a participating loan made by Western
Realty Ducat, $10,144 from the issuance of stock and net proceeds from debt of
$2,905. These proceeds were offset primarily by distributions on common stock
of $3,055 and repayments under revolving credit facilities of $1,616.
Liggett. On December 28, 1998, Liggett redeemed the entire outstanding
$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 $3,818 was
outstanding at September 30, 1999. Availability under the facility was
approximately $14,755 based on eligible collateral at September 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%
through June 30, 1999, 9.50% for the months of July and August 1999 and 9.75%
at September 30, 1999. The facility requires Liggett's compliance with certain
-39-
<PAGE> 41
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 September 30, 1999, Liggett was in
compliance with all covenants under the facility; Liggett's adjusted net worth
was $30,707 and adjusted net working capital was $24,670, 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. The loan, which is collateralized by the
equipment, is payable in 60 monthly installments of $56 including annual
interest of 7.67% 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's predecessor, Brooke
Group Holding) and other United States cigarette manufacturers have been named
as defendants in a number of direct and third-party actions (and purported
class actions) predicated on the theory that they should be liable for damages
from cancer and other adverse health effects alleged to have been caused by
cigarette smoking or by exposure to so-called secondary smoke (environmental
tobacco smoke) from cigarettes. The Company believes, and has been so advised
by counsel handling the respective cases, that Brooke Group Holding and Liggett
have a number of valid defenses to claims asserted against them. Litigation is
subject to many uncertainties. An unfavorable verdict has been returned in the
first phase of the Engle smoking and health class action trial pending in
Florida. It is possible that additional cases could be decided unfavorably and
that there could be further adverse developments in the Engle case. 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 13 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 Brooke Group Holding or 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. Through September 30, 1999, BGLS repurchased $139,794 principal
amount of its 15.75% Senior Secured Notes due 2001 (the "Notes"), together with
accrued interest thereon for a discounted purchase price of $157,288. The
purchases were made using primarily the proceeds of the Philip Morris brand
transaction which closed on May 24, 1999.
At September 30, 1999, BGLS had outstanding $93,070 principal amount
of the BGLS Notes which mature on January 31, 2001. Of this amount, $60,600 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 $27,863 of deferred interest outstanding as of
September 30, 1999.
-40-
<PAGE> 42
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, produces American
and international blend cigarettes, as well as traditional Russian cigarettes.
Western Realty Ducat has made a $30,000 participating loan to Western Tobacco
which 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 $23,428 at September 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 $14,500 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 $150,000 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 September 30,
1999, 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 $14,864. Corporate expenditures
(exclusive of Liggett, BOL and New Valley) over the next twelve months for
current operations include cash interest expense of approximately $5,114,
dividends on the Company's shares (currently at an annual rate of approximately
$21,990) 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.
-41-
<PAGE> 43
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 September 30, 1999 with fair values of $9,779 in long positions
and $2,697 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 September 30, 1999 will not have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
New Valley held investment securities available for sale totaling
$41,378 at September 30, 1999. Approximately 38% 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.
-42-
<PAGE> 44
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 completed in August 1999. Enhancements to Liggett's warehouse
management finished goods inventory tracking systems were completed in October
1999. Y2K testing is currently underway on manufacturing's
database/applications software (in addition to all other related software and
hardware used in production operations). This project timetable calls for the
completion of all tests, along with resolution of any issues encountered, by
December 11, 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.
-43-
<PAGE> 45
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
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 investigations and litigation. An unfavorable verdict
has been returned in the first phase of the Engle smoking and health class
action trial pending in Florida, and there could be further adverse
developments in the Engle case or in other cases. 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.
-44-
<PAGE> 46
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 13, 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 Brooke Group Holding, 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 September 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 5. Other Information
On October 1, 1999, pursuant to Section 251(g) of the Delaware
General Corporation Law and the Agreement and Plan of Merger,
dated as of September 30, 1999, by and among Brooke Group
Holding, the predecessor of the Company (the "Predecessor"), the
Company and BGL Merger Inc., an indirect wholly-owned Delaware
subsidiary of the Company ("BGL Merger"), BGL Merger merged (the
"Merger") with and into the Predecessor, which was the surviving
corporation in the Merger, and BGL Merger ceased to exist.
Pursuant to the Merger, (i) each share of common stock, par value
$.01 per share, of BGL Merger issued and outstanding immediately
prior to the effective time of the Merger (the "Effective Time"),
was converted into one share of common stock, par value $.10 per
share, of the Predecessor, (ii) each share of common stock, par
value $.10 per share, of the Predecessor issued and outstanding
or held in its treasury immediately prior to the Effective Time
was converted into one share of common stock, par value $.10 per
share, of the Company (the "Company Common Stock"), and (iii)
each share of the Company Common Stock issued and outstanding
immediately prior to the Effective Time was canceled.
-45-
<PAGE> 47
In connection with the Merger, BGLS Inc. ("BGLS"), a subsidiary
of the Predecessor, sold the stock of all of its direct
wholly-owned subsidiaries, other than Liggett Group Inc., to BGLS
Holding Inc. ("BGLS Holding"), a Delaware corporation which is a
direct wholly-owned subsidiary of the Company. In consideration
for such shares, BGLS transferred and assigned to BGLS Holding,
and BGLS Holding assumed and agreed to perform and discharge,
pursuant to a supplemental indenture, all of BGLS' obligations
under the Indenture dated as of January 1, 1996 between BGLS and
State Street Bank and Trust Company, as Trustee, pursuant to
which BGLS had issued its 15.75% Series B Senior Secured Notes
due 2001. In addition, BGLS Holding assumed all of BGLS'
liability as plan sponsor of three pension plans. Following these
transactions, BGLS merged into the Predecessor and the name of
BGLS Holding was changed to "BGLS Inc."
As a result of the Merger, all the business and operations
previously conducted by the Predecessor and its direct and
indirect subsidiaries are now conducted by the Company and its
direct and indirect subsidiaries. The assets and liabilities of
the Company and its direct and indirect subsidiaries on a
consolidated basis are the same as the assets and liabilities of
the Predecessor and its direct and indirect subsidiaries
immediately before the Merger. The Certificate of Incorporation
and the Bylaws of the Company immediately after the Merger were
identical to the Restated Certificate of Incorporation, as
amended, and the Amended and Restated Bylaws of the Predecessor
as in effect immediately prior to the Merger. The capital stock
of the Company has the same designations, rights and preferences
as the capital stock of the Predecessor immediately prior to the
Merger. In addition, the persons who held offices as directors
and officers of the Predecessor prior to the Merger hold the same
offices in the Company after the Merger. The Company Common Stock
is listed for trading on the NYSE under the symbol "BGL", as was
the common stock of the Predecessor. Stockholders of the
Predecessor do not recognize gain or loss for U.S. Federal income
tax purposes as a result of the Merger.
The conversion of shares in the Merger occurred without an
exchange of certificates. Accordingly, certificates formerly
representing shares of common stock of the Predecessor are deemed
to represent shares of Company Common Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
*2.1 Agreement and Plan of Merger, dated as of September
30, 1999, by and among Brooke Group Ltd., BGL Successor
Inc. and BGL Merger Inc. (incorporated by reference to
Exhibit 2.1 in the Company's Report on Form 8-K dated
October 1, 1999, Commission File No. 1-5759).
3.1 Amended and Restated Certificate of Incorporation of
Brooke Group Ltd.
3.2 By-Laws of Brooke Group Ltd.
3.3 Certificate of Incorporation of BGLS Inc.
3.4 By-Laws of BGLS Inc.
*4.1 First Supplemental Indenture, dated as of September
30, 1999, to the Indenture, dated as of January 1, 1996,
between BGLS Inc., BGLS Holding Inc. and State Street
Bank and Trust Company, as Trustee (incorporated by
reference to Exhibit 4.1 in the Company's Report on Form
8-K dated October 1, 1999, Commission File No. 1-5759).
-46-
<PAGE> 48
*4.2 Amendment No. 1, dated as of September 30, 1999, to
the Pledge and Security Agreement, dated as of January 1,
1996, between BGLS Holding Inc., Brooke Group Holding
Inc., BGLS Inc. and State Street Bank and Trust Company,
as Trustee (incorporated by reference to Exhibit 4.2 in
the Company's Report on Form 8-K dated October 1, 1999,
Commission File No. 1-5759).
*10.1 Purchase Agreement, dated as of September 30, 1999,
between BGLS Inc. and BGLS Holding Inc. (incorporated by
reference to Exhibit 10.1 in the Company's Report on Form
8-K dated October 1, 1999, Commission File No. 1-5759).
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 September 30,
1999 and 1998.
*99.3 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly periods ended
September 30, 1999 and 1998 (incorporated by reference to
New Valley's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1999, Commission
File No. 1-2493).
99.4 Brooke (Overseas) Ltd.'s Interim Consolidated Financial
Statements for the quarterly periods ended September 30,
1999 and 1998.
- ----------------
*Incorporated by reference
(b) Reports on Form 8-K
None.
-47-
<PAGE> 49
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: November 15, 1999
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
-----------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: November 15, 1999
48
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
BROOKE GROUP LTD.
FIRST. The name of the Corporation is Brooke Group Ltd.
SECOND. The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington,
County of New Castle, Delaware 19801. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH. The total number of shares of capital stock which the
Corporation shall have authority to issue is 100,000,000 shares of Common
Stock, par value $0.10 per share (the "Common Stock"), and 10,000,000 share of
Preferred Stock, par value $1.00 per share.
The powers, preferences and rights of the shares of Preferred Stock
and the shares of Common Stock, and the qualifications, limitations or
restrictions thereof are as follows:
A. Preferred Stock
1. Issuance in Series. The shares of Preferred Stock may be
dividend into and issued in one or more series, and each series shall be so
designated as to distinguish the shares thereof from the shares of all other
series. All shares of Preferred Stock shall be of equal rank and identical
except to the extent that variations in the relative preferences and rights
enumerated in subparagraphs (a) through (g), inclusive, of Section 2 of
Paragraph A of this Article Fourth may be fixed and determined by the Board of
Directors between series hereafter established; and each share of a series
shall be identical in all respects with the other shares of such series.
2. Authority of the Board with Respect to Series. Authority
is hereby expressly granted to the Board of Directors, subject to the
provisions of this Article Fourth, to divide the shares of Preferred Stock into
one or more series, and with respect to each such series, to fix and determine
by resolution or resolutions providing for the issue of such series the
following relative preferences and rights as to which there may be variations
between the series so established:
(a) The distinctive designation of such series and
the number of shares which shall constitute such series which
number may be increased (except as otherwise provided by the
<PAGE> 2
Board of Directors in the resolution or resolutions creating
such series) or decreased (but not below the number of shares
then outstanding) from time to time by like action of the
Board of Directors;
(b) The annual rate of dividends payable on shares
of such series, the conditions, if any, upon which and the
dates when such dividends shall be redeemable;
(c) The time or times when and the price or prices
at which shares of such series shall be redeemable;
(d) The amount payable on shares of such series in
the event of any liquidation, dissolution or winding-up of
the affairs of the Corporation;
(e) If the shares of such series are to be entitled
to the benefit of a sinking or retirement fund to be applied
to the purchase or redemption of shares of such series, the
amount of the fund and the manner of its application,
including the price or prices at which the shares may be
redeemed or purchased through the application of the fund;
(f) If the shares of such series are to be
convertible into or exchangeable for shares of Common Stock
or shares of any other series of Preferred Stock, the
conversion price or prices or the rate or rates of exchange
and the terms and conditions of such conversion or exchange;
(g) The voting rights, if any, of such series, in
addition to the voting rights provided in Section 6 of this
Paragraph A; and
(h) Such other powers, preferences and rights of
shares of such series and the qualifications, limitations or
restrictions thereof as the Board of Directors may deem
advisable and as are not inconsistent with the provisions of
the Certificate of Incorporation.
3. Dividends. The holders of shares of Preferred Stock of
each series shall be entitled to receive, out of the assets of the Corporation
which are by law available for the payment of dividends, cash dividends in such
amounts and payable at such time or times as shall be fixed and determined by
the Board of Directors in any resolution providing for the issuance of any such
series, before any dividends on any class of capital stock of the Corporation
ranking junior to the Preferred Stock (other than dividends payable in shares
of any class of capital stock of the Corporation ranking junior to the
Preferred Stock) may be declared or paid or set apart for payment. The term
"class of capital stock of the Corporation ranking junior to the Preferred
Stock" shall mean the Common Stock and any other class of stock of the
Corporation hereafter authorized which ranks junior to the Preferred Stock as
to payment of dividends or the distribution of assets upon dissolution,
liquidation, or winding-up.
4. Redemption. The shares of Preferred Stock of any series
then outstanding shall be redeemable, in whole or in part, at the option of the
Corporation, by resolution of its Board of Directors at such price or prices
-2-
<PAGE> 3
and at such time or times as may be fixed and determined by the Board of
Directors in accordance with any resolution providing for the issuance of any
such series of Preferred Stock. In case of redemption of a part only of the
shares of Preferred Stock of any series at the time outstanding, the redemption
may be either pro rata or by lot, as determined by the Board of Directors.
Subject to the foregoing the Board of Directors shall have full authority and
power to prescribe the manner in which the drawing by lot or the pro rata
redemption shall be conducted and the terms and conditions upon which the
shares of Preferred Stock shall be redeemed from time to time.
Notice of every redemption of shares of Preferred Stock shall
be given by mailing such notice, postage prepaid, not less than 10 nor more
then 20 days prior to the date fixed for such redemption to each holder of
record of shares so to be redeemed at his address as the same shall appear on
the books of the Corporation. Each such notice shall specify the date fixed for
redemption and the place where payment of the redemption price is to be made
upon surrender for cancellation of the certificates representing shares called
for redemption. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to be duly given whether or not the holder receives
the notice.
If notice of redemption shall have been duly given as
hereinabove provided, on and after the date fixed for redemption (unless the
Corporation shall default in making payment of the redemption price), all
shares so called for redemption shall no longer be deemed outstanding and all
rights with respect to such shares, including, but not limited to, the right to
receive dividends thereon, shall cease and terminate, notwithstanding that any
certificate for such shares so called for redemption shall not have been
surrendered for cancellation, and the holders of such shares so called for
redemption shall cease to be shareholders and shall have no interest in or
claim against the Corporation except the right to receive the redemption price
upon surrender of their certificates for cancellation.
5. Reacquired Shares. Shares of any series of Preferred Stock
which have been acquired by the Corporation, whether by purchase or redemption
or by their having been converted into or exchanged for other shares of the
Corporation shall upon their acquisition and without any other action by the
Corporation resume the status of authorized but unissued shares of Preferred
Stock and may be reissued as shares of the series of which they were originally
a part or may be issued as shares of a new series or as shares of any other
series.
6. Voting Rights. Except as otherwise fixed and determined by
the Board of Directors in any resolution providing for the issuance of any
series of Preferred Stock or as required by law, the holders of shares of
Preferred Stock of any such series shall not be entitled to vote at any annual
or special meeting of stockholders of the Corporation, provided, however, that
so long as any shares of Preferred Stock of any series shall be outstanding the
Corporation shall not, without the affirmative vote or written consent of the
holders of record of two-thirds of the aggregate number of shares of Preferred
Stock of all series then outstanding, voting as a class, (i) increase the total
number of authorized shares of Preferred Stock, (ii) create or issue any shares
of any class of capital stock ranking, either as to payment of dividends or
distribution of assets upon dissolution, liquidation or winding-up prior to or
on a parity with the Preferred Stock, or (iii) alter or change the designation
or the powers, preferences or rights of the Preferred Stock as a class or the
-3-
<PAGE> 4
qualifications, limitations, or restrictions thereof; and provided further that
nothing herein contained shall require the class vote or consent of the holders
of shares of Preferred Stock for or in respect of (i) any increase in the total
number of authorized shares of Common Stock or (ii) the fixing of any of the
relative rights and preferences of any series of Preferred Stock that may be
fixed and determined by the Board of Directors as provided in Section 2 of
Paragraph A of this Article Fourth.
7. Dissolution, Liquidation or Winding-Up. In the event of
any dissolution, liquidation or winding-up of the affairs of the Corporation,
after payment or provision for payment of the debts or other liabilities of the
Corporation, the holders of all then outstanding shares of Preferred Stock
shall be entitled to receive, out of the net assets of the Corporation, an
amount in cash for each share equal to the amount fixed and determined by the
Board of Directors in any resolution providing for the issuance of any such
series of Preferred Stock before any distribution is made to the holders of any
class of capital stock of the Corporation ranking junior to the Preferred
Stock. If upon any dissolution, liquidation or winding-up of the affairs of the
Corporation, the net assets available for distribution shall be insufficient to
pay the holders of all outstanding shares of Preferred Stock in full amounts to
which they respectively shall be entitled, the holders of all outstanding
shares of Preferred Stock of all series shall share ratably in any distribution
of assets in accordance with the sums which would be payable upon such
distribution if all sums payable were paid in full. Neither the merger nor the
consolidation of the Corporation, nor the sale, lease or conveyance of all or a
part of its assets, shall be deemed to be a liquidation or winding-up of the
affairs of the Corporation within the meaning of this Article Fourth.
B. Common Stock
1. Dividends. Subject to the preferential rights of the
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either
in cash, in property, or in shares of Common Stock.
2. Voting Rights. At every annual or special meeting of
stockholders of the Corporation, every holder of Common Stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock standing in
his name on the books of the Corporation.
3. Dissolution, Liquidation or Winding-Up. In the event of
any dissolution, liquidation or winding-up of the affairs of the Corporation,
after payment or provision for payment of the debts and other liabilities of
the Corporation, and of the amounts to which the holders of all outstanding
shares of Preferred Stock shall be entitled, the holders of all outstanding
shares of Common Stock shall be entitled to share ratably in the remaining net
assets of the Corporation.
FIFTH. The Board of Directors is expressly authorized to adopt, amend
or repeal the By-laws of the Corporation.
-4-
<PAGE> 5
SIXTH. Elections of directors need not be by written ballot except and
to the extent provided in the by-laws of the Corporation.
SEVENTH. Any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of shares at the time
entitled to vote at any election of directors, whether or not the Board of
Directors is classified as provided in subsection (d) of Section 141 of Title 8
of the Delaware Code.
EIGHTH. A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the General Corporation
Law of the State of Delaware, or (iv) for any transaction from which the
director derived an improper personal benefit. If the General Corporation Law
of the State of Delaware is amended after the date hereof to further limit the
personal liability of directors to the Corporation or its stockholders, the
liability of directors will be limited or eliminated to the maximum extent
permitted by law as so amended.
NINTH. Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such a manner as the said courts directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which said application has been made, be
binding on all the creditors or class of creditors, and/or on all of the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
-5-
<PAGE> 1
Exhibit 3.2
BY-LAWS
OF
BROOKE GROUP LTD.
EFFECTIVE OCTOBER 1, 1999
(A Delaware Corporation)
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of the Corporation
within the State of Delaware shall be in the City of Wilmington, County of New
Castle.
SECTION 2. Other Offices. The Corporation may also have an office or
offices other than said registered office at such place or places, either
within or without the State of Delaware, as the Board of Directors shall from
time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meetings. All meetings of the stockholders for the
election of directors or for any other purpose shall be held at any such place,
either within or without the State of Delaware, as shall be designated from
time to time by the Board of Directors and stated in the notice of meeting or
in a duly executed waiver thereof.
SECTION 2. Annual Meeting. The annual meeting of stockholders shall be
held at such date and time as shall be designated from time to time by the
Board of Directors and stated in the notice of meeting or in a duly executed
waiver thereof. At such annual meeting, the stockholders shall elect, by a
plurality vote, a Board of Directors and transact such other business as may
properly be brought before the meeting.
SECTION 3. Special Meetings. Special meetings of stockholders, unless
otherwise prescribed by statute, may be called at any time by the Board of
Directors or the Chairman of the Board, if one shall have been elected, or the
President and shall be called by the Secretary upon the request in writing of a
stockholder or stockholders holding of record at least 25 percent of the voting
power of the issued and outstanding shares of stock of the Corporation entitled
to vote at such meeting.
<PAGE> 2
SECTION 4. Notice of Meetings. Except as otherwise expressly
required by statute, written notice of each annual and special meeting of
stockholders stating the date, place and hour of the meeting, and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given to each stockholder of record entitled to vote thereat not less
than ten nor more than sixty days before the date of the meeting. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice. Notice shall be given personally or by mail and,
if by mail, shall be sent in a postage prepaid envelope, addressed to the
stockholder at his address as it appears on the records of the Corporation.
Notice by mail shall be deemed given at the time when the same shall be
deposited in the United States mail, postage prepaid. Notice of any meeting
shall not be required to be given to any person who attends such meeting,
except when such person attends the meeting in person or by proxy for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened, or who, either before or after the meeting, shall submit a signed
written waiver of notice, in person or by proxy. Neither the business to be
transacted at, nor the purpose of, an annual or special meeting of stockholders
need be specified in any written waiver of notice.
SECTION 5. List of Stockholders. The officer who has charge of
the stock ledger of the Corporation shall prepare and make, at least ten days
before each meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, showing the
address of and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten days prior to the meeting, either at a place within the city, town or
village where the meeting is to be held, which place shall be specified in the
notice of meeting, or, if not specified, at the place where the meeting is to
be held. The list shall be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
SECTION 6. Quorum, Adjournments. The holders of a majority of
the voting power of the issued and outstanding stock of the Corporation
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum for the transaction of business at all meetings of
stockholders, except as otherwise provided by statute or by the Certificate of
Incorporation. If, however, such quorum shall not be present or represented by
proxy at any meeting of stockholders, the stockholders entitled to vote
thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented by proxy. At
such adjourned meeting at which a quorum shall be present or represented by
proxy, any business may be transacted which might have been transacted at the
meeting as originally called. If the adjournment is for more than thirty days,
or, if after adjournment a new record date is set, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
2
<PAGE> 3
SECTION 7. Organization. At each meeting of stockholders, the Chairman
of the Board, if one shall have been elected, or, in his absence or if one
shall not have been elected, the President shall act as chairman of the
meeting. The Secretary or, in his absence or inability to act, the person whom
the chairman of the meeting shall appoint secretary of the meeting shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 8. Order of Business. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
SECTION 9. Voting. Except as otherwise provided by statute or the
Certificate of Incorporation, each stockholder of the Corporation shall be
entitled at each meeting of stockholders to one vote for each share of capital
stock of the Corporation standing in his name on the record of stockholders of
the Corporation:
(a) on the date fixed pursuant to the provisions of Section 7
of Article V of these By-Laws as the record date for the determination
of the stockholders who shall be entitled to notice of and to vote at
such meeting; or
(b) if no such record date shall have been so fixed, then at
the close of business on the day next preceding the day on which
notice thereof shall be given, or, if notice is waived, at the close
of business on the date next preceding the day on which the meeting is
held.
Each stockholder entitled to vote at any meeting of stockholders may authorize
another person or persons to act for him by a proxy signed by such stockholder
or his attorney-in-fact, but no proxy shall be voted after three years from its
date, unless the proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of the meeting prior to the time designated in the
order of business for so delivering such proxies. When a quorum is present at
any meeting, the vote of the holders of a majority of the voting power of the
issued and outstanding stock of the Corporation entitled to vote thereon,
present in person or represented by proxy, shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of statute or of the Certificate of Incorporation or of these By-Laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Unless required by statute, or
determined by the chairman of the meeting to be advisable, the vote on any
question need not be by ballot. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his proxy, if by such proxy, and shall
state the number of shares voted.
SECTION 10. Inspectors. The Board of Directors may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the chairman of the meeting shall, or if inspectors shall not
have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares of capital stock of the
3
<PAGE> 4
Corporation outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine
all challenges and questions arising in connection with the right to vote,
count and tabulate all votes, ballots or consents, determine the results, and
do such acts as are proper to conduct the election or vote with fairness to all
stockholders. On request of the chairman of the meeting, the inspectors shall
make a report in writing of any challenge, request or matter determined by them
and shall execute a certificate of any fact found by them. No director or
candidate for the office of director shall act as an inspector of an election
of directors. Inspectors need not be stockholders.
SECTION 11. Action by Consent. Whenever the vote of stockholders at a
meeting thereof is required or permitted to be taken for or in connection with
any corporate action, by any provision of statute or of the Certificate of
Incorporation or of these By-Laws, the meeting and vote of stockholders may be
dispensed with, and the action taken without such meeting and vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares of stock of the Corporation entitled to vote thereon were present
and voted.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. The Board
of Directors may exercise all such authority and powers of the Corporation and
do all such lawful acts and things as are not by statute or the Certificate of
Incorporation directed or required to be exercised or done by the stockholders.
SECTION 2. Number, Qualifications, Election and Term of Office. The
number of directors may be fixed, from time to time, by the affirmative vote of
a majority of the entire Board of Directors or by action of the stockholders of
the Corporation. Any decrease in the number of directors shall be effective at
the time of the next succeeding annual meeting of stockholders unless there
shall be vacancies in the Board of Directors, in which case such decrease may
become effective at any time prior to the next succeeding annual meeting to the
extent of the number of such vacancies. Directors need not be stockholders.
Except as otherwise provided by statute or these By-Laws, the directors shall
be elected at the annual meeting of stockholders. Each director shall hold
office until his successor shall have been elected and qualified, or until his
death, or until he shall have resigned, or have been removed, as hereinafter
provided in these By-Laws.
SECTION 3. Place of Meetings. Meetings of the Board of Directors shall
be held at such place or places, within or without the State of Delaware, as
the Board of Directors may from time to time determine or as shall be specified
in the notice of any such meeting.
4
<PAGE> 5
SECTION 4. Annual Meeting. The Board of Directors shall meet for the
purpose of the election of officers and the transaction of other business, as
soon as practicable after each annual meeting of stockholders, on the same day
and at the same place where such annual meeting shall be held. Notice of such
meeting need not be given. In the event such annual meeting is not so held, the
annual meeting of the Board of Directors may be held at such other time or
place (within or without the State of Delaware) as shall be specified in a
notice thereof given as hereinafter provided in Section 7 of this Article III.
SECTION 5. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such time and place as the Board of Directors may
fix. If any day fixed for a regular meeting shall be a legal holiday at the
place where the meeting is to be held, then the meeting which would otherwise
be held on that day shall be held at the same hour on the next succeeding
business day. Notice of regular meetings of the Board of Directors need not be
given except as otherwise required by statute or these By-Laws.
SECTION 6. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, if one shall have been
elected, or by two or more directors of the Corporation or by the President.
SECTION 7. Notice of Meetings. Notice of each special meeting of the
Board of Directors (and of each regular meeting for which notice shall be
required) shall be given by the Secretary as hereinafter provided in this
Section 7, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these By-Laws, such notice need not state the
purposes of such meeting. Notice of each such meeting shall be mailed, postage
prepaid, to each director, addressed to him at his residence or usual place of
business, by first class mail, at least two days before the day on which such
meeting is to be held, or shall be sent addressed to him at such place by
telegraph, cable, telex, telecopier or other similar means, or be delivered to
him personally or be given to him by telephone or other similar means, at least
twenty-four hours before the time at which such meeting is to be held. Notice
of any such meeting need not be given to any director who shall, either before
or after the meeting, submit a signed waiver of notice or who shall attend such
meeting, except when he shall attend for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 8. Quorum and Manner of Acting. A majority of the entire Board
of Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors and, except as otherwise expressly required
by statute or the Certificate of Incorporation or these By-Laws, the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors. In the absence of a quorum at any
meeting of the Board of Directors, a majority of the directors present thereat
may adjourn such meeting to another time and place. Notice of the time and
place of any such adjourned meeting shall be given to all of the directors
unless such time and place were announced at the meeting at which the
adjournment was taken, in which case such notice shall only be given to the
directors who were not present thereat. At any adjourned meeting at which a
quorum is present, any business may be transacted which might have been
5
<PAGE> 6
transacted at the meeting as originally called. The directors shall act only as
a Board and the individual directors shall have no power as such.
SECTION 9. Organization. At each meeting of the Board of Directors,
the Chairman of the Board, if one shall have been elected, or, in the absence
of the Chairman of the Board or if one shall not have been elected, the
President (or, in his absence, another director chosen by a majority of the
directors present) shall act as chairman of the meeting and preside thereat.
The Secretary or, in his absence, any person appointed by the Chairman of the
Board shall act as secretary of the meeting and keep the minutes thereof.
SECTION 10. Resignations. Any director of the Corporation may resign
at any time by giving written notice of his resignation to the Corporation. Any
such resignation shall take effect at the time specified therein or, if the
time when it shall become effective shall not be specified therein, immediately
upon its receipt. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 11. Vacancies. Any vacancy in the Board of Directors, whether
arising from death, resignation, removal (with or without cause), an increase
in the number of directors or any other cause, may be filled by the vote of a
majority of the directors then in office, though less than a quorum, or by the
sole remaining director or by the stockholders at the next annual meeting
thereof or at a special meeting thereof. Each director so elected shall hold
office until his successor shall have been elected and qualified.
SECTION 12. Removal of Directors. Any director may be removed, either
with or without cause, at any time, by the holders of a majority of the voting
power of the issued and outstanding capital stock of the Corporation entitled
to vote at an election of directors.
SECTION 13. Compensation. The Board of Directors shall have authority
to fix the compensation, including fees and reimbursement of expenses, of
directors for services to the Corporation in any capacity.
SECTION 14. Committees. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, including an executive committee, each committee to consist of one
or more of the directors of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
addition, in the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Except to the extent restricted by
statute or the Certificate of Incorporation, each such committee, to the extent
provided in the resolution creating it, shall have and may exercise all the
powers and authority of the Board of Directors and may authorize the seal of
the Corporation to be affixed to all papers which require it. Each such
committee shall serve at the pleasure of the Board of Directors and have such
6
<PAGE> 7
name as may be determined from time to time by resolution adopted by the Board
of Directors. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors.
SECTION 15. Action by Consent. Unless restricted by the Certificate of
Incorporation, any action required or permitted to be taken by the Board of
Directors or any committee thereof may be taken without a meeting if all
members of the Board of Directors or such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of the Board of Directors or such committee, as the
case may be.
SECTION 16. Telephonic Meeting. Unless restricted by the Certificate
of Incorporation, any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation by such means shall constitute presence in person at
a meeting.
ARTICLE IV
Officers
SECTION 1. Number and Qualifications. The officers of the Corporation
shall be elected by the Board of Directors and shall include the President, one
or more Vice-Presidents, the Secretary and the Treasurer. If the Board of
Directors wishes, it may also elect as an officer of the Corporation a Chairman
of the Board and may elect other officers (including one or more Assistant
Treasurers and one or more Assistant Secretaries) as may be necessary or
desirable for the business of the Corporation. Any two or more offices may be
held by the same person, and no officer except the Chairman of the Board need
be a director. Each officer shall hold office until his successor shall have
been duly elected and shall have qualified, or until his death, or until he
shall have resigned or have been removed, as hereinafter provided in these
By-Laws.
SECTION 2. Resignations. Any officer of the Corporation may resign at
any time by giving written notice of his resignation to the Corporation. Any
such resignation shall take effect at the time specified therein or, if the
time when it shall become effective shall not be specified therein, immediately
upon receipt. Unless otherwise specified therein, the acceptance of any such
resignation shall not be necessary to make it effective.
SECTION 3. Removal. Any officer of the Corporation may be removed,
either with or without cause, at any time, by the Board of Directors at any
meeting thereof.
SECTION 4. Chairman of the Board. The Chairman of the Board, if one
shall have been elected, shall be a member of the Board, an officer of the
Corporation and, if present, shall preside at each meeting of the Board of
Directors or the stockholders. He shall advise and counsel with the President
7
<PAGE> 8
and in his absence with other executives of the Corporation, and shall perform
such other duties as may from time to time be assigned to him by the Board of
Directors.
SECTION 5. The President. The President shall be the chief executive
officer of the Corporation. He shall, in the absence of the Chairman of the
Board or if a Chairman of the Board shall not have been elected, preside at
each meeting of the Board of Directors or the stockholders. He shall perform
all duties incident to the office of President and chief executive officer and
such other duties as may from time to time be assigned to him by the Board of
Directors.
SECTION 6. Vice-President. Each Vice-President shall perform all such
duties as from time to time may be assigned to him by the Board of Directors or
the President. At the request of the President or in his absence or in the
event of his inability or refusal to act, the Vice-President, or if there shall
be more than one, the Vice-Presidents in the order determined by the Board of
Directors (or if there be no such determination, then the Vice-Presidents in
the order of their election), shall perform the duties of the President, and,
when so acting, shall have the powers of and be subject to the restrictions
placed upon the President in respect of the performance of such duties.
SECTION 7. Treasurer. The Treasurer shall
(a) have charge and custody of, and be responsible for, all
the funds and securities of the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of
the Corporation in such depositories as may be designated by the Board
of Directors or pursuant to its direction;
(d) receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investments of its funds, taking proper vouchers therefor;
(f) render to the Board of Directors, whenever the Board of
Directors may require, an account of the financial condition of the
Corporation; and
(g) in general, perform all duties incident to the office of
Treasurer and such other duties as from time to time may be assigned
to him by the Board of Directors.
8
<PAGE> 9
SECTION 8. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books provided
for the purpose, the minutes of all meetings of the Board of
Directors, the committees of the Board of Directors and the
stockholders;
(b) see that all notices are duly given in accordance with
the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all certificates for
shares of the Corporation (unless the seal of the Corporation on such
certificates shall be a facsimile, as hereinafter provided) and affix
and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned
to him by the Board of Directors.
SECTION 9. The Assistant Treasurer. The Assistant Treasurer, or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the
event of his inability or refusal to act, perform the duties and exercise the
powers of the Treasurer and shall perform such other duties as from time to
time may be assigned by the Board of Directors.
SECTION 10. The Assistant Secretary. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries in the order determined by
the Board of Directors (or if there be no such determination, then in the order
of their election) shall, in the absence of the Secretary or in the event of
his inability or refusal to act, perform the duties and exercise the powers of
the Secretary and shall perform such other duties as from time to time may be
assigned by the Board of Directors.
SECTION 11. Officers' Bonds or Other Security. If required by the
Board of Directors, any officer of the Corporation shall give a bond or other
security for the faithful performance of his duties, in such amount and with
such surety as the Board of Directors may require.
SECTION 12. Compensation. The compensation of the officers of the
Corporation for their services as such officers, shall be fixed from time to
time by the Board of Directors. An officer of the Corporation shall not be
9
<PAGE> 10
prevented from receiving compensation by reason of the fact that he is also a
director of the Corporation.
ARTICLE V
Stock Certificates and Their Transfer
SECTION 1. Stock Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate, signed by, or in the name
of the Corporation by, the Chairman of the Board or the President or a
Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation, certifying the number of shares
owned by him in the Corporation. If the Corporation shall be authorized to
issue more than one class of stock or more than one series of any class, the
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restriction of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, provided
that, except as otherwise provided in Section 202 of the General Corporation
Law of the State of Delaware, in lieu of the foregoing requirements, there may
be set forth on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, a statement that the
Corporation will furnish without charge to each stockholder who so requests the
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights.
SECTION 2. Facsimile Signatures. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
SECTION 3. Lost Certificates. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct sufficient to indemnify it
against any claim that may be made against the Corporation on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 4. Transfers of Stock. Upon surrender to the Corporation or
the transfer agent of the Corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its records; provided, however, that the Corporation shall be
10
<PAGE> 11
entitled to recognize and enforce any lawful restriction on transfer. Whenever
any transfer of stock shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of transfer if, when the
certificates are presented to the Corporation for transfer, both the transferor
and the transferee request the Corporation to do so.
SECTION 5. Transfer Agents and Registrars. The Board of Directors may
appoint, or authorize any officer or officers to appoint, one or more transfer
agents and one or more registrars.
SECTION 6. Regulations. The Board of Directors may make such
additional rules and regulations, not inconsistent with these By-Laws, as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of stock of the Corporation.
SECTION 7. Fixing the Record Date. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of
or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 8. Registered Stockholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its records as the
owner of shares of stock to receive dividends and to vote as such owner, shall
be entitled to hold liable for calls and assessments a person registered on its
records as the owner of shares of stock, and shall not be bound to recognize
any equitable or other claim to or interest in such share or shares of stock on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
Indemnification of Directors and Officers
SECTION 1. General. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the Corporation)
by reason of the fact that he is or was or has agreed to become a director,
officer, employee or agent of the Corporation, or is or was serving or has
agreed to serve at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or by reason of any action alleged to have been taken or
omitted in such capacity, against costs, charges, expenses (including
11
<PAGE> 12
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action,
suit or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. Derivative Actions. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was or has agreed to become a director, officer, employee or agent of the
Corporation, or is or was serving or has agreed to serve at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason or any
action alleged to have been taken or omitted in such capacity, against costs,
charges and expenses (including attorneys' fees) actually and reasonably
incurred by him or on his behalf in connection with the defense or settlement
of such action or suit and any appeal therefrom, if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such costs,
charges and expenses which the Court of Chancery or such other court shall deem
proper.
SECTION 3. Indemnification in Certain Cases. Notwithstanding the other
provisions of this Article VI, to the extent that a director, officer, employee
or agent of the Corporation has been successful on the merits or otherwise,
including without limitation, the dismissal of an action without prejudice, in
defense of any action, suit or proceeding referred to in Sections 1 and 2 of
this Article VI, or in defense of any claim, issue or matter therein, he shall
be indemnified against all costs, charges and expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith.
SECTION 4. Procedure. Any indemnification under Sections 1 and 2 of
this Article VI (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth
in such Sections 1 and 2. Such determination shall be made (a) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding (the "Continuing Directors"), or (b)
12
<PAGE> 13
if such a quorum of disinterested Continuing Directors is not obtainable, or,
even if obtainable a quorum of disinterested Continuing Directors so directs,
by independent legal counsel in a written opinion, or (c) by the stockholders.
SECTION 5. Advances for Expenses. Costs, charges and expenses
(including attorneys' fees) incurred by a person referred to in Sections 1 and
2 of this Article VI in defending a civil or criminal action, suit or
proceeding shall be paid the Corporation in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of the director, officer, employee or agent to repay all amounts so advanced in
the event that it shall ultimately be determined that such director, officer,
employee or agent is not entitled to be indemnified by the Corporation as
authorized in this Article VI. Such costs, charges and expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the majority of the Continuing Directors deems appropriate. The
majority of the Continuing Directors may, in the manner set forth above, and
upon approval of such director, officer, employer, employee or agent of the
Corporation, authorize the Corporation's counsel to represent such person, in
any action, suit or proceeding, whether or not the Corporation is a party to
such action, suit or proceeding.
SECTION 6. Procedure for Indemnification. Any indemnification under
Sections 1, 2 and 3, or advance of costs, charges and expenses under Section 5
of this Article VI, shall be made promptly, and in any event within 60 days
upon the written request of the director, officer, employee or agent. The right
to indemnification or advances as granted by this Article VI shall be
enforceable by the director, officer, employee or agent in any court of
competent jurisdiction, if the Corporation denies such request, in whole or in
part, or if no disposition thereof is made within 60 days. Such person's costs
and expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charge and
expenses under Section 5 of this Article VI where the required undertaking, if
any, has been received by the Corporation) that the claimant has not met the
standard of conduct set forth in Sections 1 or 2 of this Article VI, but the
burden of proving such defense shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel, and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in Sections 1 or 2 of this Article VI, nor the fact that there has been
an actual determination by the Corporation (including its Board of Directors,
its independent legal counsel, and its stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met such applicable standard of
conduct.
SECTION 7. Other Rights; Continuation of Right to Indemnification. The
indemnification and advancement of expenses provided by this Article VI shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any law
(common or statutory), by-law, agreement, vote of stockholders, or
disinterested directors or otherwise, both as to action in his official
capacity and as to action in another capacity while holding office or while
employed by or acting as agent for the Corporation, and shall continue as to a
13
<PAGE> 14
person who has ceased to be a director, officer, employee or agent, and shall
inure to the benefit of the estate, heirs, executors and administrators of such
person. If the Delaware General Corporation Law is hereafter amended to permit
the Corporation to indemnify directors and officers to a greater extent than
otherwise permitted by this Article VI, the Corporation shall indemnify
directors and officers to such greater extent. All rights to indemnification
under this Article VI shall be deemed to be a contract between the Corporation
and each director, officer, employee or agent of the Corporation who serves or
served in such capacity at any time while this Article VI is in effect. Any
repeal or modification of this Article VI or any repeal or modification of
relevant provisions of Delaware General Corporation Law or any other applicable
laws shall not in any way diminish any rights to indemnification of such
director, officer, employee or agent of the Corporation who serves or served in
such capacity at any time while this Article VI is in effect. Any repeal or
modification of this Article VI or any repeal or modification of relevant
provisions of Delaware General Corporation Law or any other applicable laws
shall not in any way diminish any rights to indemnification of such director,
officer, employee or agent or the obligations of the Corporation arising
hereunder with respect to any action, suit or proceeding arising out of, or
relating to, any actions, transactions or facts occurring prior to the final
adoption of such modification or repeal. For the purposes of this Article VI,
references to "the Corporation" include all constituent corporations absorbed
in a consolidation or merger as well as the resulting or surviving corporation,
so that any person who is or was a director, officer, employee or agent of such
a constituent corporation or is or as serving at the request of such
constituent corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise shall stand
in the same position under the provisions of this Article VI, with respect to
the resulting or surviving corporation, as he would if he had served the
resulting or surviving corporation in the same capacity.
SECTION 8. Insurance. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was or has agreed to
become a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him and incurred by him or on
his behalf in any such capacity, or arising out of his status as such, whether
or not the Corporation would have the power to indemnify him against such
liability under the Provisions of this Article VI; provided, however, that such
insurance is available on acceptable terms, which determination shall, be made
by a vote of a majority of the Continuing Directors.
SECTION 9. Savings Clause. If this Article VI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each director, officer, employee
and agent of the Corporation as to costs, charges and expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the Corporation, to
the full extent permitted by any applicable portion of this Article VI that
shall not have been invalidated and to the full extent permitted by applicable
law.
14
<PAGE> 15
ARTICLE VII
General Provisions
SECTION 1. Dividends. Subject to the provisions of statute and the
Certificate of Incorporation, dividends upon the shares of capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting. Dividends may be paid in cash, in property or in shares of stock of
the Corporation, unless otherwise provided by statute or the Certificate of
Incorporation.
SECTION 2. Reserves. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors may, from time to time, in its absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors may think
conducive to the interests of the Corporation. The Board of Directors may
modify or abolish any such reserves in the manner in which it was created.
SECTION 3. Seal. The seal of the Corporation shall be in such form as
shall be approved by the Board of Directors.
SECTION 4. Fiscal Year. The fiscal year of the Corporation shall be
fixed, and once fixed, may thereafter be changed, by resolution of the Board of
Directors.
SECTION 5. Checks, Notes, Drafts, Etc. All checks, notes, drafts or
other orders for the payment of money of the Corporation shall be signed,
endorsed or accepted in the name of the Corporation by such officer, officers,
person or persons as from time to time may be designated by the Board of
Directors or by an officer or officers authorized by the Board of Directors to
make such designation.
SECTION 6. Execution of Contracts, Deeds, Etc. The Board of Directors
may authorize any officer or officers, agent or agents, in the name and on
behalf of the Corporation to enter into or execute and deliver any and all
deeds, bonds, mortgages, contracts and other obligations or instruments, and
such authority may be general or confined to specific instances.
SECTION 7. Voting of Stock in Other Corporations. Unless otherwise
provided by resolution of the Board of Directors, the Chairman of the Board or
the President, from time to time, may (or may appoint one or more attorneys or
agents to) cast the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose shares or
securities may be held by the Corporation, at meetings of the holders of the
shares or other securities of such other corporation. In the event one or more
attorneys or agents are appointed, the Chairman of the Board or the President
may instruct the person or persons so appointed as to the manner of casting
such votes or giving such consent. The Chairman of the Board or the President
may, or may instruct the attorneys or agents appointed, to execute or cause to
15
<PAGE> 16
be executed in the name and on behalf of the Corporation and under its seal or
otherwise, such written proxies, consents, waivers or other instruments as may
be necessary or proper in the circumstances.
ARTICLE VIII
Amendments
These By-Laws may be amended or repealed or new by-laws adopted (a) by
action of the stockholders entitled to vote thereon at any annual or special
meeting of stockholders or (b) if the Certificate of Incorporation so provides,
by action of the Board of Directors at a regular or special meeting thereof.
Any by-law made by the Board of Directors may be amended or repealed by action
of the stockholders at any annual or special meeting of stockholders.
/s/ Marc N. Bell
--------------------------------------
CORPORATE SEAL Marc N. Bell
Secretary
16
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF INCORPORATION
OF
BGLS INC.
FIRST: The name of the corporation is BGLS Inc. (the "Corporation").
SECOND: The address of the Corporation's registered office in the State
of Delaware is the Corporation Trust Center, 1209 Orange Street, Wilmington,
Delaware 19801, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "DGCL").
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is one hundred (100) shares of common stock, with a par
value of one cent ($.01) each.
FIFTH: The name and mailing address of the incorporator is Richard J.
Lampen, 100 S. E. Second Street, 32nd Floor, Miami, Florida 33131.
SIXTH: A director of the Corporation shall not be personally liable to
the Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of
<PAGE> 2
loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived any improper personal benefit. If
the DGCL is amended after the date of the filing of this Certificate to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the DGCL, as
so amended. No repeal or modification of this Article SIXTH shall apply to or
have any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such repeal or modification.
SEVENTH: The directors shall have power to make, alter or repeal
by-laws, except as may otherwise be provided in the by-laws.
EIGHTH: Elections of directors need not be written ballot, except as
may otherwise be provided in the by-laws.
2
<PAGE> 1
EXHIBIT 3.4
BY-LAWS
OF
BGLS INC.
EFFECTIVE OCTOBER 4, 1999
(A Delaware Corporation)
ARTICLE I
Offices
SECTION 1. REGISTERED OFFICE. The registered office of the Corporation
within the State of Delaware shall be in the City of Wilmington, County of New
Castle.
SECTION 2. OTHER OFFICES. The Corporation may also have an office or
offices other than said registered office at such place or places, either within
or without the State of Delaware, as the Board of Directors shall from time to
time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. PLACE OF MEETINGS. All meetings of the stockholders for the
election of directors or for any other purpose shall be held at any such place,
either within or without the State of Delaware, as shall be designated from time
to time by the Board of Directors and stated in the notice of meeting or in a
duly executed waiver thereof.
SECTION 2. ANNUAL MEETING. The annual meeting of stockholders shall be
held at such date and time as shall be designated from time to time by the Board
of Directors and stated in the notice of meeting or in a duly executed waiver
thereof. At such annual meeting, the stockholders shall elect, by a plurality
vote, a Board of Directors and transact such other business as may properly be
brought before the meeting.
SECTION 3. SPECIAL MEETINGS. Special meetings of stockholders, unless
otherwise prescribed by statute, may be called at any time by the Board of
Directors or the Chairman of the Board, if one shall have been elected, or the
President and shall be called by the Secretary upon the request in writing of a
stockholder or stockholders holding of record at least 25 percent of the voting
power of the issued and outstanding shares of stock of the Corporation entitled
to vote at such meeting.
<PAGE> 2
SECTION 4. NOTICE OF MEETINGS. Except as otherwise expressly required
by statute, written notice of each annual and special meeting of stockholders
stating the date, place and hour of the meeting, and, in the case of a special
meeting, the purpose or purposes for which the meeting is called, shall be given
to each stockholder of record entitled to vote thereat not less than ten nor
more than sixty days before the date of the meeting. Business transacted at any
special meeting of stockholders shall be limited to the purposes stated in the
notice. Notice shall be given personally or by mail and, if by mail, shall be
sent in a postage prepaid envelope, addressed to the stockholder at his address
as it appears on the records of the Corporation. Notice by mail shall be deemed
given at the time when the same shall be deposited in the United States mail,
postage prepaid. Notice of any meeting shall not be required to be given to any
person who attends such meeting, except when such person attends the meeting in
person or by proxy for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened, or who, either before or after the meeting, shall submit a
signed written waiver of notice, in person or by proxy. Neither the business to
be transacted at, nor the purpose of, an annual or special meeting of
stockholders need be specified in any written waiver of notice.
SECTION 5. LIST OF STOCKHOLDERS. The officer who has charge of the
stock ledger of the Corporation shall prepare and make, at least ten days before
each meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, showing the address of and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city, town or village where the
meeting is to be held, which place shall be specified in the notice of meeting,
or, if not specified, at the place where the meeting is to be held. The list
shall be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present.
SECTION 6. QUORUM, ADJOURNMENTS. The holders of a majority of the
voting power of the issued and outstanding stock of the Corporation entitled to
vote thereat, present in person or represented by proxy, shall constitute a
quorum for the transaction of business at all meetings of stockholders, except
as otherwise provided by statute or by the Certificate of Incorporation. If,
however, such quorum shall not be present or represented by proxy at any meeting
of stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented by proxy. At such adjourned meeting at which a
quorum shall be present or represented by proxy, any business may be transacted
which might have been transacted at the meeting as originally called. If the
adjournment is for more than thirty days, or, if after adjournment a new record
date is set, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
2
<PAGE> 3
SECTION 7. ORGANIZATION. At each meeting of stockholders, the Chairman
of the Board, if one shall have been elected, or, in his absence or if one shall
not have been elected, the President shall act as chairman of the meeting. The
Secretary or, in his absence or inability to act, the person whom the chairman
of the meeting shall appoint secretary of the meeting shall act as secretary of
the meeting and keep the minutes thereof.
SECTION 8. ORDER OF BUSINESS. The order of business at all meetings of
the stockholders shall be as determined by the chairman of the meeting.
SECTION 9. VOTING. Except as otherwise provided by statute or the
Certificate of Incorporation, each stockholder of the Corporation shall be
entitled at each meeting of stockholders to one vote for each share of capital
stock of the Corporation standing in his name on the record of stockholders of
the Corporation:
(a) on the date fixed pursuant to the provisions of Section 7
of Article V of these By-Laws as the record date for the determination
of the stockholders who shall be entitled to notice of and to vote at
such meeting; or
(b) if no such record date shall have been so fixed, then at
the close of business on the day next preceding the day on which notice
thereof shall be given, or, if notice is waived, at the close of
business on the date next preceding the day on which the meeting is
held.
Each stockholder entitled to vote at any meeting of stockholders may authorize
another person or persons to act for him by a proxy signed by such stockholder
or his attorney-in-fact, but no proxy shall be voted after three years from its
date, unless the proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of the meeting prior to the time designated in the
order of business for so delivering such proxies. When a quorum is present at
any meeting, the vote of the holders of a majority of the voting power of the
issued and outstanding stock of the Corporation entitled to vote thereon,
present in person or represented by proxy, shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of statute or of the Certificate of Incorporation or of these By-Laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Unless required by statute, or
determined by the chairman of the meeting to be advisable, the vote on any
question need not be by ballot. On a vote by ballot, each ballot shall be signed
by the stockholder voting, or by his proxy, if by such proxy, and shall state
the number of shares voted.
SECTION 10. INSPECTORS. The Board of Directors may, in advance of any
meeting of stockholders, appoint one or more inspectors to act at such meeting
or any adjournment thereof. If any of the inspectors so appointed shall fail to
appear or act, the chairman of the meeting shall, or if inspectors shall not
have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number
3
<PAGE> 4
of shares of capital stock of the Corporation outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the results, and do such acts as are proper to conduct the election or
vote with fairness to all stockholders. On request of the chairman of the
meeting, the inspectors shall make a report in writing of any challenge, request
or matter determined by them and shall execute a certificate of any fact found
by them. No director or candidate for the office of director shall act as an
inspector of an election of directors. Inspectors need not be stockholders.
SECTION 11. ACTION BY CONSENT. Whenever the vote of stockholders at a
meeting thereof is required or permitted to be taken for or in connection with
any corporate action, by any provision of statute or of the Certificate of
Incorporation or of these By-Laws, the meeting and vote of stockholders may be
dispensed with, and the action taken without such meeting and vote, if a consent
in writing, setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares of
stock of the Corporation entitled to vote thereon were present and voted.
ARTICLE III
Board of Directors
SECTION 1. GENERAL POWERS. The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors. The Board
of Directors may exercise all such authority and powers of the Corporation and
do all such lawful acts and things as are not by statute or the Certificate of
Incorporation directed or required to be exercised or done by the stockholders.
SECTION 2. NUMBER, QUALIFICATIONS, ELECTION AND TERM OF OFFICE. The
number of directors may be fixed, from time to time, by the affirmative vote of
a majority of the entire Board of Directors or by action of the stockholders of
the Corporation. Any decrease in the number of directors shall be effective at
the time of the next succeeding annual meeting of stockholders unless there
shall be vacancies in the Board of Directors, in which case such decrease may
become effective at any time prior to the next succeeding annual meeting to the
extent of the number of such vacancies. Directors need not be stockholders.
Except as otherwise provided by statute or these By-Laws, the directors shall be
elected at the annual meeting of stockholders. Each director shall hold office
until his successor shall have been elected and qualified, or until his death,
or until he shall have resigned, or have been removed, as hereinafter provided
in these By-Laws.
SECTION 3. PLACE OF MEETINGS. Meetings of the Board of Directors shall
be held at such place or places, within or without the State of Delaware, as the
Board of Directors may from time to time determine or as shall be specified in
the notice of any such meeting.
4
<PAGE> 5
SECTION 4. ANNUAL MEETING. The Board of Directors shall meet for the
purpose of the election of officers and the transaction of other business, as
soon as practicable after each annual meeting of stockholders, on the same day
and at the same place where such annual meeting shall be held. Notice of such
meeting need not be given. In the event such annual meeting is not so held, the
annual meeting of the Board of Directors may be held at such other time or place
(within or without the State of Delaware) as shall be specified in a notice
thereof given as hereinafter provided in Section 7 of this Article III.
SECTION 5. REGULAR MEETINGS. Regular meetings of the Board of Directors
shall be held at such time and place as the Board of Directors may fix. If any
day fixed for a regular meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting which would otherwise be held on that
day shall be held at the same hour on the next succeeding business day. Notice
of regular meetings of the Board of Directors need not be given except as
otherwise required by statute or these By-Laws.
SECTION 6. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by the Chairman of the Board, if one shall have been elected, or
by two or more directors of the Corporation or by the President.
SECTION 7. NOTICE OF MEETINGS. Notice of each special meeting of the
Board of Directors (and of each regular meeting for which notice shall be
required) shall be given by the Secretary as hereinafter provided in this
Section 7, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these By-Laws, such notice need not state the
purposes of such meeting. Notice of each such meeting shall be mailed, postage
prepaid, to each director, addressed to him at his residence or usual place of
business, by first class mail, at least two days before the day on which such
meeting is to be held, or shall be sent addressed to him at such place by
telegraph, cable, telex, telecopier or other similar means, or be delivered to
him personally or be given to him by telephone or other similar means, at least
twenty-four hours before the time at which such meeting is to be held. Notice of
any such meeting need not be given to any director who shall, either before or
after the meeting, submit a signed waiver of notice or who shall attend such
meeting, except when he shall attend for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 8. QUORUM AND MANNER OF ACTING. A majority of the entire Board
of Directors shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors and, except as otherwise expressly required by
statute or the Certificate of Incorporation or these By-Laws, the act of a
majority of the directors present at any meeting at which a quorum is present
shall be the act of the Board of Directors. In the absence of a quorum at any
meeting of the Board of Directors, a majority of the directors present thereat
may adjourn such meeting to another time and place. Notice of the time and place
of any such adjourned meeting shall be given to all of the directors unless such
time and place were announced at the meeting at which the adjournment was taken,
in which case such notice shall only be given to the directors who were not
present thereat. At any adjourned meeting at which a quorum is present, any
business may be transacted which might have been transacted at the
5
<PAGE> 6
meeting as originally called. The directors shall act only as a Board and the
individual directors shall have no power as such.
SECTION 9. ORGANIZATION. At each meeting of the Board of Directors, the
Chairman of the Board, if one shall have been elected, or, in the absence of the
Chairman of the Board or if one shall not have been elected, the President (or,
in his absence, another director chosen by a majority of the directors present)
shall act as chairman of the meeting and preside thereat. The Secretary or, in
his absence, any person appointed by the Chairman of the Board shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 10. RESIGNATIONS. Any director of the Corporation may resign at
any time by giving written notice of his resignation to the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
when it shall become effective shall not be specified therein, immediately upon
its receipt. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 11. VACANCIES. Any vacancy in the Board of Directors, whether
arising from death, resignation, removal (with or without cause), an increase in
the number of directors or any other cause, may be filled by the vote of a
majority of the directors then in office, though less than a quorum, or by the
sole remaining director or by the stockholders at the next annual meeting
thereof or at a special meeting thereof. Each director so elected shall hold
office until his successor shall have been elected and qualified.
SECTION 12. REMOVAL OF DIRECTORS. Any director may be removed, either
with or without cause, at any time, by the holders of a majority of the voting
power of the issued and outstanding capital stock of the Corporation entitled to
vote at an election of directors.
SECTION 13. COMPENSATION. The Board of Directors shall have authority
to fix the compensation, including fees and reimbursement of expenses, of
directors for services to the Corporation in any capacity.
SECTION 14. COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the entire Board of Directors, designate one or more
committees, including an executive committee, each committee to consist of one
or more of the directors of the Corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
addition, in the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he or they constitute a quorum, may unanimously appoint
another member of the Board of Directors to act at the meeting in the place of
any such absent or disqualified member. Except to the extent restricted by
statute or the Certificate of Incorporation, each such committee, to the extent
provided in the resolution creating it, shall have and may exercise all the
powers and authority of the Board of Directors and may authorize the seal of the
Corporation to be affixed to all papers which require it. Each such committee
shall serve at the pleasure of the Board of Directors and have such name as may
be determined from time to time by resolution adopted by the
6
<PAGE> 7
Board of Directors. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors.
SECTION 15. ACTION BY CONSENT. Unless restricted by the Certificate of
Incorporation, any action required or permitted to be taken by the Board of
Directors or any committee thereof may be taken without a meeting if all members
of the Board of Directors or such committee, as the case may be, consent thereto
in writing, and the writing or writings are filed with the minutes of the
proceedings of the Board of Directors or such committee, as the case may be.
SECTION 16. TELEPHONIC MEETING. Unless restricted by the Certificate of
Incorporation, any one or more members of the Board of Directors or any
committee thereof may participate in a meeting of the Board of Directors or such
committee by means of a conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other.
Participation by such means shall constitute presence in person at a meeting.
ARTICLE IV
Officers
SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the Corporation
shall be elected by the Board of Directors and shall include the President, one
or more Vice-Presidents, the Secretary and the Treasurer. If the Board of
Directors wishes, it may also elect as an officer of the Corporation a Chairman
of the Board and may elect other officers (including one or more Assistant
Treasurers and one or more Assistant Secretaries) as may be necessary or
desirable for the business of the Corporation. Any two or more offices may be
held by the same person, and no officer except the Chairman of the Board need be
a director. Each officer shall hold office until his successor shall have been
duly elected and shall have qualified, or until his death, or until he shall
have resigned or have been removed, as hereinafter provided in these By-Laws.
SECTION 2. RESIGNATIONS. Any officer of the Corporation may resign at
any time by giving written notice of his resignation to the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
when it shall become effective shall not be specified therein, immediately upon
receipt. Unless otherwise specified therein, the acceptance of any such
resignation shall not be necessary to make it effective.
SECTION 3. REMOVAL. Any officer of the Corporation may be removed,
either with or without cause, at any time, by the Board of Directors at any
meeting thereof.
SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board, if one
shall have been elected, shall be a member of the Board, an officer of the
Corporation and, if present, shall preside at each meeting of the Board of
Directors or the stockholders. He shall advise and
7
<PAGE> 8
counsel with the President and in his absence with other executives of the
Corporation, and shall perform such other duties as may from time to time be
assigned to him by the Board of Directors.
SECTION 5. THE PRESIDENT. The President shall be the chief executive
officer of the Corporation. He shall, in the absence of the Chairman of the
Board or if a Chairman of the Board shall not have been elected, preside at each
meeting of the Board of Directors or the stockholders. He shall perform all
duties incident to the office of President and chief executive officer and such
other duties as may from time to time be assigned to him by the Board of
Directors.
SECTION 6. VICE-PRESIDENT. Each Vice-President shall perform all such
duties as from time to time may be assigned to him by the Board of Directors or
the President. At the request of the President or in his absence or in the event
of his inability or refusal to act, the Vice-President, or if there shall be
more than one, the Vice-Presidents in the order determined by the Board of
Directors (or if there be no such determination, then the Vice-Presidents in the
order of their election), shall perform the duties of the President, and, when
so acting, shall have the powers of and be subject to the restrictions placed
upon the President in respect of the performance of such duties.
SECTION 7. TREASURER. The Treasurer shall
(a) have charge and custody of, and be responsible for, all
the funds and securities of the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) deposit all moneys and other valuables to the credit of
the Corporation in such depositories as may be designated by the Board
of Directors or pursuant to its direction;
(d) receive, and give receipts for, moneys due and payable to
the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and supervise the
investments of its funds, taking proper vouchers therefor;
(f) render to the Board of Directors, whenever the Board of
Directors may require, an account of the financial condition of the
Corporation; and
(g) in general, perform all duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to
him by the Board of Directors.
8
<PAGE> 9
SECTION 8. SECRETARY. The Secretary shall
(a) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board of Directors, the
committees of the Board of Directors and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and affix and attest the seal to all certificates for
shares of the Corporation (unless the seal of the Corporation on such
certificates shall be a facsimile, as hereinafter provided) and affix
and attest the seal to all other documents to be executed on behalf of
the Corporation under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to
him by the Board of Directors.
SECTION 9. THE ASSISTANT TREASURER. The Assistant Treasurer, or if
there shall be more than one, the Assistant Treasurers in the order determined
by the Board of Directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the Treasurer or in the event
of his inability or refusal to act, perform the duties and exercise the powers
of the Treasurer and shall perform such other duties as from time to time may be
assigned by the Board of Directors.
SECTION 10. THE ASSISTANT SECRETARY. The Assistant Secretary, or if
there be more than one, the Assistant Secretaries in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the Secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and shall perform such other duties as from time to time may be
assigned by the Board of Directors.
SECTION 11. OFFICERS' BONDS OR OTHER SECURITY. If required by the Board
of Directors, any officer of the Corporation shall give a bond or other security
for the faithful performance of his duties, in such amount and with such surety
as the Board of Directors may require.
SECTION 12. COMPENSATION. The compensation of the officers of the
Corporation for their services as such officers, shall be fixed from time to
time by the Board of Directors. An
9
<PAGE> 10
officer of the Corporation shall not be prevented from receiving compensation by
reason of the fact that he is also a director of the Corporation.
ARTICLE V
Stock Certificates and Their Transfer
SECTION 1. STOCK CERTIFICATES. Every holder of stock in the Corporation
shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the Chairman of the Board or the President or a Vice-President
and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant
Secretary of the Corporation, certifying the number of shares owned by him in
the Corporation. If the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restriction of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of the State of
Delaware, in lieu of the foregoing requirements, there may be set forth on the
face or back of the certificate which the Corporation shall issue to represent
such class or series of stock, a statement that the Corporation will furnish
without charge to each stockholder who so requests the designations, preferences
and relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
SECTION 2. FACSIMILE SIGNATURES. Any or all of the signatures on a
certificate may be a facsimile. In case any officer, transfer agent or registrar
who has signed or whose facsimile signature has been placed upon a certificate
shall have ceased to be such officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
as if he were such officer, transfer agent or registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The Board of Directors may direct a new
certificate or certificates to be issued in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen, or destroyed. When authorizing such issue of a new certificate or
certificates, the Board of Directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
Corporation a bond in such sum as it may direct sufficient to indemnify it
against any claim that may be made against the Corporation on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
SECTION 4. TRANSFERS OF STOCK. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its records; provided, however, that the Corporation shall be
10
<PAGE> 11
entitled to recognize and enforce any lawful restriction on transfer. Whenever
any transfer of stock shall be made for collateral security, and not absolutely,
it shall be so expressed in the entry of transfer if, when the certificates are
presented to the Corporation for transfer, both the transferor and the
transferee request the Corporation to do so.
SECTION 5. TRANSFER AGENTS AND REGISTRARS. The Board of Directors may
appoint, or authorize any officer or officers to appoint, one or more transfer
agents and one or more registrars.
SECTION 6. REGULATIONS. The Board of Directors may make such additional
rules and regulations, not inconsistent with these By-Laws, as it may deem
expedient concerning the issue, transfer and registration of certificates for
shares of stock of the Corporation.
SECTION 7. FIXING THE RECORD DATE. In order that the Corporation may
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 8. REGISTERED STOCKHOLDERS. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its records as the
owner of shares of stock to receive dividends and to vote as such owner, shall
be entitled to hold liable for calls and assessments a person registered on its
records as the owner of shares of stock, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares of stock on the
part of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
Indemnification of Directors and Officers
SECTION 1. GENERAL. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was or has agreed to become a director,
officer, employee or agent of the Corporation, or is or was serving or has
agreed to serve at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise or by reason of any action alleged to have been taken or
omitted in such capacity, against costs, charges, expenses (including
11
<PAGE> 12
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him or on his behalf in connection with such action, suit
or proceeding and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction or upon a
plea of NOLO CONTENDERE or its equivalent shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
SECTION 2. DERIVATIVE ACTIONS. The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was or has agreed to become a director, officer, employee or agent of the
Corporation, or is or was serving or has agreed to serve at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason or any
action alleged to have been taken or omitted in such capacity, against costs,
charges and expenses (including attorneys' fees) actually and reasonably
incurred by him or on his behalf in connection with the defense or settlement of
such action or suit and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such costs, charges and expenses
which the Court of Chancery or such other court shall deem proper.
SECTION 3. INDEMNIFICATION IN CERTAIN CASES. Notwithstanding the other
provisions of this Article VI, to the extent that a director, officer, employee
or agent of the Corporation has been successful on the merits or otherwise,
including without limitation, the dismissal of an action without prejudice, in
defense of any action, suit or proceeding referred to in Sections 1 and 2 of
this Article VI, or in defense of any claim, issue or matter therein, he shall
be indemnified against all costs, charges and expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith.
SECTION 4. PROCEDURE. Any indemnification under Sections 1 and 2 of
this Article VI (unless ordered by a court) shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
such Sections 1 and 2. Such determination shall be made (a) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding (the "Continuing Directors"), or (b)
if such a quorum of disinterested Continuing
12
<PAGE> 13
Directors is not obtainable, or, even if obtainable a quorum of disinterested
Continuing Directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders.
SECTION 5. ADVANCES FOR EXPENSES. Costs, charges and expenses
(including attorneys' fees) incurred by a person referred to in Sections 1 and 2
of this Article VI in defending a civil or criminal action, suit or proceeding
shall be paid the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by or on behalf of the
director, officer, employee or agent to repay all amounts so advanced in the
event that it shall ultimately be determined that such director, officer,
employee or agent is not entitled to be indemnified by the Corporation as
authorized in this Article VI. Such costs, charges and expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the majority of the Continuing Directors deems appropriate. The majority
of the Continuing Directors may, in the manner set forth above, and upon
approval of such director, officer, employer, employee or agent of the
Corporation, authorize the Corporation's counsel to represent such person, in
any action, suit or proceeding, whether or not the Corporation is a party to
such action, suit or proceeding.
SECTION 6. PROCEDURE FOR INDEMNIFICATION. Any indemnification under
Sections 1, 2 and 3, or advance of costs, charges and expenses under Section 5
of this Article VI, shall be made promptly, and in any event within 60 days upon
the written request of the director, officer, employee or agent. The right to
indemnification or advances as granted by this Article VI shall be enforceable
by the director, officer, employee or agent in any court of competent
jurisdiction, if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within 60 days. Such person's costs and expenses
incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charge and
expenses under Section 5 of this Article VI where the required undertaking, if
any, has been received by the Corporation) that the claimant has not met the
standard of conduct set forth in Sections 1 or 2 of this Article VI, but the
burden of proving such defense shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel, and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in Sections 1 or 2 of this Article VI, nor the fact that there has been an
actual determination by the Corporation (including its Board of Directors, its
independent legal counsel, and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met such applicable standard of conduct.
SECTION 7. OTHER RIGHTS; CONTINUATION OF RIGHT TO INDEMNIFICATION. The
indemnification and advancement of expenses provided by this Article VI shall
not be deemed exclusive of any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under any law (common
or statutory), by-law, agreement, vote of stockholders, or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for
13
<PAGE> 14
the Corporation, and shall continue as to a person who has ceased to be a
director, officer, employee or agent, and shall inure to the benefit of the
estate, heirs, executors and administrators of such person. If the Delaware
General Corporation Law is hereafter amended to permit the Corporation to
indemnify directors and officers to a greater extent than otherwise permitted by
this Article VI, the Corporation shall indemnify directors and officers to such
greater extent. All rights to indemnification under this Article VI shall be
deemed to be a contract between the Corporation and each director, officer,
employee or agent of the Corporation who serves or served in such capacity at
any time while this Article VI is in effect. Any repeal or modification of this
Article VI or any repeal or modification of relevant provisions of Delaware
General Corporation Law or any other applicable laws shall not in any way
diminish any rights to indemnification of such director, officer, employee or
agent of the Corporation who serves or served in such capacity at any time while
this Article VI is in effect. Any repeal or modification of this Article VI or
any repeal or modification of relevant provisions of Delaware General
Corporation Law or any other applicable laws shall not in any way diminish any
rights to indemnification of such director, officer, employee or agent or the
obligations of the Corporation arising hereunder with respect to any action,
suit or proceeding arising out of, or relating to, any actions, transactions or
facts occurring prior to the final adoption of such modification or repeal. For
the purposes of this Article VI, references to "the Corporation" include all
constituent corporations absorbed in a consolidation or merger as well as the
resulting or surviving corporation, so that any person who is or was a director,
officer, employee or agent of such a constituent corporation or is or as serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise shall stand in the same position under the provisions of this Article
VI, with respect to the resulting or surviving corporation, as he would if he
had served the resulting or surviving corporation in the same capacity.
SECTION 8. INSURANCE. The Corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was or has agreed to become
a director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him or on his behalf
in any such capacity, or arising out of his status as such, whether or not the
Corporation would have the power to indemnify him against such liability under
the Provisions of this Article VI; provided, however, that such insurance is
available on acceptable terms, which determination shall, be made by a vote of a
majority of the Continuing Directors.
SECTION 9. SAVINGS CLAUSE. If this Article VI or any portion hereof
shall be invalidated on any ground by any court of competent jurisdiction, then
the Corporation shall nevertheless indemnify each director, officer, employee
and agent of the Corporation as to costs, charges and expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement with respect
to any action, suit or proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the Corporation, to the
full extent permitted by any applicable portion of this Article VI that shall
not have been invalidated and to the full extent permitted by applicable law.
14
<PAGE> 15
ARTICLE VII
General Provisions
SECTION 1. DIVIDENDS. Subject to the provisions of statute and the
Certificate of Incorporation, dividends upon the shares of capital stock of the
Corporation may be declared by the Board of Directors at any regular or special
meeting. Dividends may be paid in cash, in property or in shares of stock of the
Corporation, unless otherwise provided by statute or the Certificate of
Incorporation.
SECTION 2. RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Board of Directors may, from time to time, in its absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors may think
conducive to the interests of the Corporation. The Board of Directors may modify
or abolish any such reserves in the manner in which it was created.
SECTION 3. SEAL. The seal of the Corporation shall be in such form as
shall be approved by the Board of Directors.
SECTION 4. FISCAL YEAR. The fiscal year of the Corporation shall be
fixed, and once fixed, may thereafter be changed, by resolution of the Board of
Directors.
SECTION 5. CHECKS, NOTES, DRAFTS, ETC. All checks, notes, drafts or
other orders for the payment of money of the Corporation shall be signed,
endorsed or accepted in the name of the Corporation by such officer, officers,
person or persons as from time to time may be designated by the Board of
Directors or by an officer or officers authorized by the Board of Directors to
make such designation.
SECTION 6. EXECUTION OF CONTRACTS, DEEDS, ETC. The Board of Directors
may authorize any officer or officers, agent or agents, in the name and on
behalf of the Corporation to enter into or execute and deliver any and all
deeds, bonds, mortgages, contracts and other obligations or instruments, and
such authority may be general or confined to specific instances.
SECTION 7. VOTING OF STOCK IN OTHER CORPORATIONS. Unless otherwise
provided by resolution of the Board of Directors, the Chairman of the Board or
the President, from time to time, may (or may appoint one or more attorneys or
agents to) cast the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose shares or
securities may be held by the Corporation, at meetings of the holders of the
shares or other securities of such other corporation. In the event one or more
attorneys or agents are appointed, the Chairman of the Board or the President
may instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent. The Chairman of the Board or the President may, or
may instruct the attorneys or agents appointed, to execute or cause to be
executed in the name and on behalf of the Corporation and under its seal or
15
<PAGE> 16
otherwise, such written proxies, consents, waivers or other instruments as may
be necessary or proper in the circumstances.
ARTICLE VIII
Amendments
These By-Laws may be amended or repealed or new by-laws adopted (a) by
action of the stockholders entitled to vote thereon at any annual or special
meeting of stockholders or (b) if the Certificate of Incorporation so provides,
by action of the Board of Directors at a regular or special meeting thereof. Any
by-law made by the Board of Directors may be amended or repealed by action of
the stockholders at any annual or special meeting of stockholders.
CORPORATE SEAL /s/ Marc N. Bell
------------------------------
Marc N. Bell
Secretary
16
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOKE GROUP LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,314
<SECURITIES> 51,157
<RECEIVABLES> 24,015
<ALLOWANCES> 0
<INVENTORY> 49,054
<CURRENT-ASSETS> 233,231
<PP&E> 137,195
<DEPRECIATION> 0
<TOTAL-ASSETS> 509,314
<CURRENT-LIABILITIES> 198,183
<BONDS> 156,691
0
0
<COMMON> 2,199
<OTHER-SE> (126,938)
<TOTAL-LIABILITY-AND-EQUITY> 509,314
<SALES> 353,594
<TOTAL-REVENUES> 374,511
<CGS> 128,998
<TOTAL-COSTS> 128,998
<OTHER-EXPENSES> 113,777
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (43,200)
<INCOME-PRETAX> 316,090
<INCOME-TAX> 86,156
<INCOME-CONTINUING> 229,598
<DISCONTINUED> 1,249
<EXTRAORDINARY> (1,410)
<CHANGES> 0
<NET-INCOME> 229,437
<EPS-BASIC> 10.44
<EPS-DILUTED> 7.67
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927388
<NAME> BGLS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,314
<SECURITIES> 51,157
<RECEIVABLES> 23,952
<ALLOWANCES> 0
<INVENTORY> 49,054
<CURRENT-ASSETS> 232,836
<PP&E> 137,180
<DEPRECIATION> 0
<TOTAL-ASSETS> 507,743
<CURRENT-LIABILITIES> 193,153
<BONDS> 156,691
0
0
<COMMON> 0
<OTHER-SE> (124,015)
<TOTAL-LIABILITY-AND-EQUITY> 507,743
<SALES> 353,594
<TOTAL-REVENUES> 374,511
<CGS> 128,998
<TOTAL-COSTS> 128,998
<OTHER-EXPENSES> 115,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (46,735)
<INCOME-PRETAX> 314,702
<INCOME-TAX> 86,156
<INCOME-CONTINUING> 228,210
<DISCONTINUED> 1,249
<EXTRAORDINARY> (1,410)
<CHANGES> 0
<NET-INCOME> 228,049
<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 (ETS).
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 (ETS).
United States of America v. Philip Morris, Inc., et al., Case No.
1:99CVO2496, USDC, District of Columbia (case filed 9/22/99). The
United States of America seeks to recover health care costs paid for
and furnished, and to be paid for and furnished, by the federal
government through Medicare and otherwise, for lung cancer, heart
disease, emphysema and other tobacco-related illnesses
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 Goias, Brazil v. Philip Morris Companies, Inc., et al.,
Case No. 99-24202-CA 02, Circuit Court of the 11th Judicial Circuit,
State of Florida-Dade County (case filed 10/19/99). The State of
Goias, Brazil seeks compensatory and injunctive relief for damages for
personal injuries and misrepresentation of risk regarding the use
1
<PAGE> 2
Exhibit 99.1
of tobacco products manufactured by defendants.
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.
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.
2
<PAGE> 3
Exhibit 99.1
County of Allegheny v. The American Tobacco Company, et al; Case No.
99-365, USDC, 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.
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
3
<PAGE> 4
Exhibit 99.1
compensatory and injunctive relief for damages incurred by the Kingdom
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.
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).
4
<PAGE> 5
Exhibit 99.1
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.
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.
PTI, Inc., et al.v. Philip Morris Incorporated, et al., Case No.
99-08235 NM, USDC, Central District of California (case filed
8/13/99). Plaintiffs seek damages, declaratory, equitable, injunctive
relief and to invalidate the Master Settlement Agreement between the
largest manufacturers of cigarettes in the United States and the
Attorneys General of forty-six states and the settlement entered into
by the State of Texas settlement.
5
<PAGE> 6
Exhibit 99.1
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.
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
beneficiaries 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
6
<PAGE> 7
Exhibit 99.1
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.
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.
7
<PAGE> 8
Exhibit 99.1
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.
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
8
<PAGE> 9
Exhibit 99.1
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.
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.
9
<PAGE> 10
Exhibit 99.1
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.
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.
10
<PAGE> 11
Exhibit 99.1
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.
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.
11
<PAGE> 12
Exhibit 99.1
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.
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.
12
<PAGE> 13
Exhibit 99.1
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.
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.
13
<PAGE> 14
Exhibit 99.1
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.
14
<PAGE> 15
Exhibit 99.1
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.
The Navajo Nation v. Philip Morris, Incorporated, et al., Case No.
WR-CV-449-99, District Court of the Navajo Nation, Judicial District
of Window Rock, Arizona (case filed 8/11/99). The Navajo nation seeks
civil penalties, damages, remediation through tobacco education and
anti-addiction programs, injunctive relief, attorney's fees and cost.
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.
15
<PAGE> 16
Exhibit 99.1
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. In
September 1999, all objections to the settlement were resolved with
finality.
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 three of the class
representatives and a punitive
16
<PAGE> 17
Exhibit 99.1
damages trial as to the class, commenced on November 1, 1999. An
appeal regarding the feasibility of a class-wide punitive damages
trial presently is pending before the Florida Supreme Court.
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 Aaddiction-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
17
<PAGE> 18
Exhibit 99.1
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.
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.
18
<PAGE> 19
Exhibit 99.1
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.
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
19
<PAGE> 20
Exhibit 99.1
who have smoked defendant's cigarettes and who 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.
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 Pennsylvania (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.
20
<PAGE> 21
Exhibit 99.1
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
Medicare 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.
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 Aaddiction-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.
21
<PAGE> 22
Exhibit 99.1
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. A motion for reconsideration of that order
presently is pending.
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, Superior 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.
22
<PAGE> 23
Exhibit 99.1
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.
Jones v. Philip Morris Incorporated, et al., Case No. 812307, Superior
Court, County of Orange (case filed 7/26/99). One individual 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.
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.
23
<PAGE> 24
Exhibit 99.1
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.
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.
24
<PAGE> 25
Exhibit 99.1
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.
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.
25
<PAGE> 26
Exhibit 99.1
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.
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.
26
<PAGE> 27
Exhibit 99.1
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.
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.
27
<PAGE> 28
Exhibit 99.1
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.
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.
28
<PAGE> 29
Exhibit 99.1
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.
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.
29
<PAGE> 30
Exhibit 99.1
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.
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.
30
<PAGE> 31
Exhibit 99.1
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.
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.
31
<PAGE> 32
Exhibit 99.1
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.
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.
32
<PAGE> 33
Exhibit 99.1
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.
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.
Estate of Etta Nysko, et al. v. R.J. Reynolds Tobacco Company, et al.,
Demand letter and draft complaint, Superior Court of Massachusetts,
Middlesex County. Three individual suing.
33
<PAGE> 34
Exhibit 99.1
Piscione V. R.J. Reynolds Tobacco Company, et al., Demand letter and
draft complaint, Superior Court of Massachusetts, Middlesex County.
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.
Wolf v. Philip Morris Incorporated, et al., Case No. 99-01260,
Superior Court of Massachusetts, Norfolk County (case filed 9/1/99).
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.
34
<PAGE> 35
Exhibit 99.1
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.
Mumin v, Philip Morris, et al., Case No. 4:99CV-03005, USDC, District
Court of Nebraska (case filed 7/5/99). Eleven individuals 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.
35
<PAGE> 36
Exhibit 99.1
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.
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.
36
<PAGE> 37
Exhibit 99.1
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.
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.
37
<PAGE> 38
Exhibit 99.1
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.
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.
38
<PAGE> 39
Exhibit 99.1
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.
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.
39
<PAGE> 40
Exhibit 99.1
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 May 1, 1997).
Five individuals suing.
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.
40
<PAGE> 41
Exhibit 99.1
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.
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.
41
<PAGE> 42
Exhibit 99.1
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.
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.
Buscemi v. Brown & Williamson, et al., Case No. 002007, Court of
Common Pleas, Philadelphia County (case filed 9/21/99). Two
individuals suing.
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.
42
<PAGE> 43
Exhibit 99.1
Tantum v. American Tobacco Co., et al., Case No. 3762, Court of Common
Pleas, 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.
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.
Burleson et al. v. Liggett Group, Inc., et al., Case No. 9:99CV233,
USDC, Eastern District (case filed 9/10/99). Two individuals 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.
This case currently is stayed until 5/10/99.
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.
43
<PAGE> 44
Exhibit 99.1
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.
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.
44
<PAGE> 45
Exhibit 99.1
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.
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.
45
<PAGE> 1
EXHIBIT 99.2
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
<PAGE> 2
LIGGETT GROUP INC.
Index to
Financial Statements
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 .................. 2
Consolidated Statements of Operations for the three and nine months
ended September 30, 1999 and 1998 ...................................................... 4
Consolidated Statement of Stockholder's Equity for the nine months
ended September 30, 1999 .............................................................. 5
Consolidated Statements of Cash Flows for the nine months ended September 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>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Accounts receivable:
Trade, less allowances of $1,096 and $1,686, respectively .... $ 7,911 $14,510
Other ........................................................ 1,591 821
Inventories ...................................................... 28,748 25,974
Deferred tax assets .............................................. 9,340 10,178
Other current assets ............................................. 29,903 383
-------- -------
Total current assets ..................................... 77,493 51,866
Property, plant and equipment, at cost, less accumulated
depreciation of $33,367 and $30,893, respectively ................. 20,876 16,195
Intangible assets, at cost, less accumulated amortization
of $20,561 and $20,550, respectively .............................. 160 171
Other assets .......................................................... 9,256 6,491
-------- -------
Total assets ............................................ $107,785 $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>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturity of note payable ............................................ $ 350 $ --
Cash overdraft .............................................................. 69 63
Accounts payable, principally trade ......................................... 4,501 3,206
Accrued expenses:
Promotional .............................................................. 20,368 23,760
Income taxes ............................................................. 5,950 115
Other taxes, principally excise taxes .................................... 930 3,397
Estimated allowance for sales returns .................................... 5,851 7,100
Settlement accruals ...................................................... 1,867 1,120
Proceeds received for options ............................................ -- 150,000
Other .................................................................... 17,180 10,709
--------- ---------
Total current liabilities ............................................ 57,066 199,470
Credit facility and note payable, less current maturities ........................ 7,756 2,538
Non-current employee benefits .................................................... 10,958 10,902
Other long-term liabilities ...................................................... 5,191 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 ................................................... 58,844 57,380
Accumulated deficit ......................................................... (32,030) (202,566)
--------- ---------
Total stockholder's equity (deficit) ............................... 26,814 (145,186)
--------- ---------
Total liabilities and stockholder's equity (deficit) ............... $ 107,785 $ 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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Net sales* .................................................. $ 108,676 $ 85,630 $ 288,649 $ 234,654
Cost of sales* .............................................. 28,513 31,383 79,142 91,286
--------- -------- --------- ---------
Gross profit ....................................... 80,163 54,247 209,507 143,368
Selling, general and administrative expenses ................. 59,985 45,562 150,934 117,657
Settlement charges ........................................... -- -- 104 1,881
Non-cash compensation expense ................................ 489 -- 1,465 --
Restructuring ................................................ -- -- 1,100 --
--------- -------- --------- ---------
Operating income ................................... 19,689 8,685 55,904 23,830
Other income (expense):
Interest expense ........................................ (291) (7,270) (1,407) (21,704)
Sale of assets .......................................... (5) (16) 207 820
Gain on brand transaction ............................... (189) -- 294,098 --
--------- -------- --------- ---------
Income before income taxes ........................ 19,204 1,399 348,802 2,946
Income tax provision ......................................... 7,171 -- 134,566 --
--------- -------- --------- ---------
Net income ......................................... $ 12,033 $ 1,399 $ 214,236 $ 2,946
========= ======== ========= =========
</TABLE>
* Net sales and cost of sales include federal excise taxes of $15,245, $16,889,
$41,405 and $49,365, 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 .......................................... -- 214,236 214,236
Accretion of capital contribution ................... 1,464 -- 1,464
Distributions and other payments .................... -- (43,700) (43,700)
------- --------- ---------
Balance at September 30,1999 .......................... $58,844 $ (32,030) $ 26,814
======= ========= =========
</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>
Nine Months Ended
September 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities ....................................... $ (99,793) $ 5,733
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment .................... 903 1,155
Proceeds from brand transaction ........................................ 145,000 --
Capital expenditures ................................................... (8,084) (1,182)
--------- ---------
Net cash provided by (used in) investing activities ............ 137,819 (27)
Cash flows from financing activities:
Repayments of note payable ............................................. (212) (28)
Issuance of note payable ............................................... 4,500 --
Borrowings under revolving credit facility ............................. 239,860 196,188
Repayments under revolving credit facility ............................. (238,580) (201,941)
Deferred finance charges ............................................... 100 (439)
Distributions and other payments ....................................... (43,700) --
Increase in cash overdraft ............................................. 6 514
--------- ---------
Net cash used in financing activities .......................... (38,026) (5,706)
Net increase in cash and cash equivalents .................................. -- --
Cash and cash equivalents:
Beginning of period .................................................... -- --
--------- ---------
End of period .......................................................... $ -0- $ -0-
========= =========
</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
Brooke Group Holding Inc. ("Brook Group Holding"), 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 Brooke Group Holding. 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.
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.
7
<PAGE> 9
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 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. This gain was reduced by $189 in additional legal expenses incurred
in July.
8
<PAGE> 10
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Leaf tobacco ........................................... $ 8,942 $ 10,796
Other raw materials .................................... 1,894 1,741
Work-in-process ........................................ 2,514 1,828
Finished goods ......................................... 16,130 12,231
Replacement parts and supplies ......................... 3,161 3,150
-------- --------
Inventories at current cost ............................ 32,641 29,746
LIFO adjustment ........................................ (3,893) (3,772)
-------- --------
Inventories at LIFO cost ............................... $ 28,748 $ 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 $4,019 at
September 30, 1999.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Land and improvements .................................. $ 415 $ 412
Buildings .............................................. 5,852 5,823
Machinery and equipment ................................ 47,976 40,853
-------- --------
Property, plant and equipment .......................... 54,243 47,088
Less accumulated depreciation .......................... (33,367) (30,893)
-------- --------
Property, plant and equipment, net ..................... $ 20,876 $ 16,195
======== ========
</TABLE>
9
<PAGE> 11
6. CREDIT FACILITY AND NOTE PAYABLE
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- -----------
<S> <C> <C>
Borrowings outstanding under revolving credit
facility ............................................ $ 3,818 $2,538
Note payable ........................................... 4,288 --
------- ------
8,106 2,538
Current portion ........................................ (350) --
------- ------
Amount due after one year .............................. $ 7,756 $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 $14,755 based upon eligible collateral at September 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 9.50%, which
changed to 9.75% on September 1, 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
$30,707 at September 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 $24,670 at September 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 Brooke Group Holding, BGL's predecessor, 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 the following categories: (i) smoking and health cases
alleging personal injury brought on behalf of individual plaintiffs ("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");
10
<PAGE> 12
(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
nine months ended September 30, 1999, Liggett incurred counsel fees and costs
totaling approximately $4,210, compared to $3,713 for the comparable prior year
period.
INDIVIDUAL ACTIONS. As of September 30, 1999, there were approximately 280 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, 82 were pending in Florida, 91 in New York,
30 in Massachusetts and 17 in Texas. The balance of the individual cases were
pending in 22 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,
breach of special duty, 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 and violations of deceptive trade practice laws, the Federal
Racketeer Influenced and Corrupt Organization Act ("RICO"), state RICO statutes
and antitrust statutes. In many of these cases, in addition to compensatory
damages, plaintiffs also seek other forms of relief including, treble/multiple
damages, 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 September 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. Many of
these actions purport to constitute statewide class actions and were filed after
May 1996 when the Fifth Circuit Court of Appeals, in the CASTANO case (discussed
below), reversed a Federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
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
11
<PAGE> 13
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, BROIN AND ENGLE, were
certified in state court in Florida prior to the Fifth Circuit's decision. 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. The class consists of all Florida residents and
citizens, and their survivors, who have suffered, presently suffer or have died
from diseases and medical conditions caused by their addiction to cigarettes
that contain nicotine. In July 1998, Phase I of the trial in this action
commenced. On July 7, 1999, the jury returned the Phase I verdict. The Phase I
verdict concerned certain issues determined by the trial court to be "common" to
the causes of action of the plaintiff class. Among other things, the jury found
that smoking cigarettes causes 20 diseases or medical conditions, that
cigarettes are addictive or dependence producing, defective and unreasonably
dangerous, that defendants made materially false statements with the intention
of misleading smokers, that defendants concealed or omitted material information
concerning the health effects and/or the addictive nature of smoking cigarettes
and agreed to misrepresent and conceal the health effects and/or the addictive
nature of smoking cigarettes, and that defendants were negligent and engaged in
extreme and outrageous conduct or acted with reckless disregard with the intent
to inflict emotional distress. The jury also found that defendants' conduct
"rose to a level that would permit a potential award or entitlement to punitive
damages." The court has decided that Phase II of the trial, which commenced
November 1, 1999, will be a causation and damages trial for three 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. (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 one case against Liggett in Florida and one in Maryland. A
number of class certification decisions are on appeal.
GOVERNMENTAL ACTIONS. As of September 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, breach of
special duty, fraud, negligent
12
<PAGE> 14
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 or about September 22, 1999, the United States of America commenced
litigation against Liggett and the other tobacco companies in the United States
District Court for the District of Columbia. The action seeks to recover
healthcare costs paid for and furnished, and to be paid for and furnished, by
the Federal Government for lung cancer, heart disease, emphysema and other
tobacco-related illnesses caused by the fraudulent and tortious conduct of
defendants, and to restrain defendants and co-conspirators from engaging in
fraud and other unlawful conduct in the future, and to compel defendants to
disgorge the proceeds of their unlawful conduct. The action is allegedly brought
under the Medical Care Recovery Act and the Medicare secondary payer provisions
of the Social Security Act and RICO.
THIRD-PARTY PAYOR ACTIONS. As of September 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, Brooke Group Holding and Liggett entered into an
agreement, subject to court approval, to settle the CASTANO class action tobacco
litigation. The CASTANO class was subsequently decertified by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and Liggett
entered into settlements of tobacco-related litigation with the Attorneys
General of 45 states and territories. The settlements released Brooke Group
Holding and Liggett from all tobacco-related claims, including claims for health
care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 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,
Brooke Group Holding 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 45 states and territories.
13
<PAGE> 15
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 Brooke Group Holding 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 Brooke Group Holding and Liggett are entitled to the most
favorable provisions as between the MSA and each state's respective settlement
with
14
<PAGE> 16
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, Brooke Group Holding 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, Brooke Group Holding and plaintiffs filed an amended class action
settlement agreement in FLETCHER which agreement was preliminarily approved by
the court in December 1998. On July 22, 1999, the court denied approval of the
FLETCHER class action settlement. The parties' motion for reconsideration is
still pending.
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 Brooke Group Holding or Liggett scheduled
for the remainder of 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 (April), two
asbestos company contribution lawsuits in Mississippi and New York (February),
one Class Action in Maryland (February) and a Third-Party Payor Action brought
by unions in New York (June). Also, two Individual Actions 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. 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.
The Company is not able to predict the outcome of the litigation pending against
Brooke Group Holding or Liggett. Litigation is subject to many uncertainties. An
unfavorable verdict has been returned in the first phase of the ENGLE smoking
and health class action trial pending in Florida. It is possible that additional
cases could be decided unfavorably and that there could be further adverse
developments in the ENGLE case. An unfavorable outcome of a pending smoking and
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 Brooke Group Holding or Liggett, 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.
15
<PAGE> 17
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.
SUBSEQUENT EVENTS:
In connection with the ENGLE case, on October 20, 1999, the Third District Court
of Appeal denied the defendants' motion to order the trial court to assess
punitive damages on an individual basis. On October 29, 1999, the defendants
petitioned the Florida Supreme Court for relief. On November 3, 1999, the
Florida Supreme Court requested briefing from the plaintiffs.
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 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. Oral argument has been
scheduled for December 1999. 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.
16
<PAGE> 18
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 legislative and 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. These
developments may negatively affect the perception of potential triers of fact
with respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional similar
litigation.
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 re-engineering 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 of 1999, with parallel upgrades to human resources system software in
August. Enhancements to the Company's warehouse management/finished goods
inventory tracking systems (WMS/FITS) were completed in October 1999. Y2K
testing is currently underway on manufacturing's Oracle Database/Applications
software (in addition to all other related software and hardware used in
production operations), with no serious issues having arisen. This project
timetable calls for the completion of all tests, along with resolution of any
issues encountered, by no later than December 11. 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.
17
<PAGE> 19
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
$2,744 in the first nine months of 1999 and $1,377 in the first nine 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
SEPTEMBER 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 September 30, 1999 and December 31, 1998.......................... 2
Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and September 30, 1998..................................................... 3
Consolidated Statement of Stockholder's Equity (Deficit) for the nine months
ended September 30, 1999...................................................................... 4
Consolidated Statements of Cash Flows for the nine months ended September 30,
1999 and September 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>
September 30, December 31,
1999 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 1,297 $ 2,722
Accounts receivable - trade...................................... 2,351 650
Inventories...................................................... 20,306 10,342
Other current assets............................................. 483 2,928
---------- -------
Total current assets.......................................... 24,437 16,642
Property, plant and equipment, at cost, less
accumulated depreciation of $4,982 and $2,959................ 107,747 77,286
Other 3,084 5,782
--------- -------
Total assets.................................................. $135,268 $ 99,710
======= ======
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Credit facilities and current portion of notes payable......... $ 32,744 $ 20,005
Accounts payable - trade....................................... 20,769 10,415
Due to affiliates.............................................. 394 51,533
Accrued taxes.................................................. 2,758 7,658
Accrued interest............................................... 525 228
Other accrued liabilities...................................... 2,325 3,628
--------- -------
Total current liabilities................................... 59,515 93,467
Long-term portion of notes payable............................... 15,148 19,652
Deferred gain.................................................... 5,133 20,392
Participating loan............................................... 36,470 31,991
Other liabilities................................................ 950 4,252
Commitments and contingencies....................................
Stockholder's equity (deficit):
Common stock, par value $1 per share, 701,000 shares
authorized, issued and outstanding.......................... 701 701
Additional paid-in-capital..................................... 103,097 17,104
Deficit........................................................ (85,746) (87,849)
-------- ------
Total stockholder's equity (deficit)........................ 18,052 (70,044)
-------- ------
Total liabilities and stockholder's equity (deficit)........ $135,268 $ 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 Nine Months Ended
-------------- --------------- --------------- ---------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1999 1998 1999 1998
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales*............................................ $27,255 $22,549 $64,944 $69,553
Cost of sales*........................................ 19,433 15,854 50,304 50,186
------ ------ ------ ------
Gross profit.......................................... 7,822 6,695 14,640 19,367
Operating, selling, administrative and
general expenses............................... 4,054 4,518 10,169 9,716
------- ------- ------ -------
Operating income...................................... 3,768 2,177 4,471 9,651
Other income (expense):
Interest expense................................... (8,745) (2,824) (15,596) (8,912)
Recognition of deferred gain on sale of assets..... 8,478
(Loss) gain on foreign currency exchange........... (868) 243 1,743 328
Amortization of goodwill........................... (1,054)
Other, net......................................... 77 (112) 4
--------- ----------- -------- ----------
(Loss) income before income taxes..................... (5,768) (404) (1,016) 17
Benefit for income taxes.............................. (4,529) (2,447) (3,119) (1,136)
------- ------- ------- -------
Net (loss) income..................................... $ (1,239) $ 2,043 $ 2,103 $ 1,153
======= ======= ======== =======
</TABLE>
* Net sales and cost of sales include excise taxes of $2,128, $3,355, $4,724 and
$11,224, 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.................................... 2,103 2,103
Capital contribution.......................... 74,080 74,080
Effect of New Valley recapitalization......... 11,913 11,913
------- ------ ------ ------- ------
Balance, September 30, 1999................... 701,000 $701 $103,097 $(85,746) $ 18,052
======= ====== ======= ======= =======
</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>
Nine Months Ended
-------------------------------------
September 30, September 30,
1999 1998
------------------ ------------------
<S> <C> <C>
Net cash provided by operating activities .......... $ 23,971 $ 8,666
-------- --------
Cash flows from investing activities:
Capital expenditures ......................... (35,915) (16,107)
-------- --------
Net cash used in investing activities .............. (35,915) (16,107)
-------- --------
Cash flows from financing activities:
Proceeds from debt ........................... 17,612
Repayments of debt ........................... (2,088) (10,715)
Borrowings under credit facility ............. 22,224
Repayments under credit facility ............. (8,716)
Proceeds from participating loan ............. 25,000
Capital contributions ........................ 9,000
Repayment of intercompany debt ............... (30,218)
Distributions paid to parent ................. (1,275)
-------- --------
Net cash provided by financing activities .......... 11,420 9,404
-------- --------
Effect of exchange rate changes on cash
and cash equivalents ....................... (901) 557
-------- --------
Net (decrease) increase in cash and cash equivalents (1,425) 2,520
Cash and cash equivalents, beginning of period ..... 2,722 968
-------- --------
Cash and cash equivalents, end of period ........... $ 1,297 $ 3,488
======== ========
</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 September 30, 1999, the Company had net capital of $18,052 and a
working capital deficiency of $35,078. Factory management is currently
using credit facilities totaling approximately $26,964. Availability
under these facilities is $2,500. In connection with the move to the
new factory in June 1999, Liggett-Ducat began the manufacture and
marketing of western style cigarettes. On August 31, 1999, Brooke and
BGLS cancelled notes and interest thereon which amounted to $74,080.
This amount is recorded as a capital contribution in the consolidated
statement of stockholder's equity. 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>
September 30, December 31,
1999 1998
------------------- -------------------
<S> <C> <C>
Leaf tobacco............................. $ 5,772 $ 3,086
Other raw materials...................... 7,180 2,888
Work-in-process.......................... 244 173
Finished goods........................... 5,485 3,215
Replacement parts and supplies........... 1,625 980
------- --------
$20,306 $10,342
====== ======
</TABLE>
At December 31, 1998, replacement parts and supplies are shown net of
a provision for obsolescence of $545.
-7-
<PAGE> 9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
During the nine months ended September 30, 1999, Liggett-Ducat
exchanged $2,120 of cigarettes for the equivalent value in tobacco,
other materials and services as compared to $2,859 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 September 30, 1999, the Company had leaf tobacco purchase
commitments of approximately $30,770.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Buildings................................ $ 45,288
Factory machinery and equipment.......... 58,053 $10,589
Computers and software................... 736 466
Office furniture and equipment........... 797 470
Vehicles................................. 2,806 1,767
Construction-in-progress................. 5,049 66,953
--------- ------
112,729 80,245
Less accumulated depreciation............ (4,982) (2,959)
--------- -------
$107,747 $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 September 30,
1999, the remaining liability under the construction contracts is
$1,980 and the remaining liability under equipment purchase agreements
is $23,428.
6. NOTES PAYABLE, CREDIT FACILITIES AND PARTICIPATING LOAN
Notes payable and credit facilities consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Notes payable............................ $23,428 $28,057
Credit facilities........................ 24,464 11,600
------ ------
Total notes payable and credit
facilities............................. 47,892 39,657
Less:
Current maturities....................... 32,744 20,005
------ ------
Amount due after one year................ $15,148 $19,652
====== ======
</TABLE>
-8-
<PAGE> 10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
At September 30, 1999, Liggett-Ducat had various credit facilities
under which approximately $24,464 was outstanding. Facilities
denominated in dollars amount to $17,000, of which $14,500 has been
utilized, bear interest at rates of 20% to 25% and expire within the
next twelve months. The remaining facilities, denominated in rubles
(approximately $9,964 at the September 30, 1999 exchange rate), have
terms of six to twelve months with interest rates of 50% to 63%. The
facilities are collateralized by factory equipment and tobacco
inventory.
On November 1, 1999, Liggett-Ducat entered into an agreement with a
Russian bank for a revolving credit facility, for $14,500 denominated
in dollars bearing interest at 13% collateralized by the new factory
building and $3,000 denominated in rubles bearing interest at 40%
collateralized by certain new equipment. The credit facility will be
used to repay existing credit lines.
Western Tobacco has 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 $22,046 at September 30, 1999. The
Company also has issued a promissory note for $1,382 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
September 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.
In addition, Western Realty Ducat is entitled to receive a 15%
cumulative annual rate of return on amounts advanced under the
participating loan agreement under certain circumstances in the event
of sale or refinancing of Western Tobacco or the new factory. For the
three and nine months ended September 30, 1999, the net effect of
these preference requirements is recorded as interest expense of
$4,218 and $4,479.
-9-
<PAGE> 11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
7. INCOME TAXES
For the nine months ended September 30, 1999 and 1998, the tax
(benefit) provision of $(3,119) and $(1,136), respectively, consisted
of income tax expense (benefit) pursuant to Russian statutory
requirements of $702 and $(1,136), respectively, and U.S. income tax
benefit of $3,821 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
(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
