<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 MARCH 31, 1999
---------------
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-5759 51-0255124
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
BGLS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 33-93576 13-3593483
(State or other jurisdiction of Commission File Number (I.R.S. Employer 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 May 14, 1999 Brooke Group Ltd. had 20,943,730 shares of common stock
outstanding, and BGLS Inc. had 100 shares of common stock outstanding, all of
which are held by Brooke Group Ltd.
================================================================================
<PAGE> 2
BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
Item 1. Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements:
<S> <C>
Brooke Group Ltd. Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998............................................................................. 2
BGLS Inc. Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.................... 3
Brooke Group Ltd. Consolidated Statements of Operations for the three months ended
March 31, 1999 and March 31, 1998............................................................. 4
BGLS Inc. Consolidated Statements of Operations for the three months ended
March 31, 1999 and March 31, 1998............................................................. 5
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the three
months ended March 31, 1999................................................................... 6
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 1999.......................................................................... 7
Brooke Group Ltd. Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 1998............................................................. 8
BGLS Inc. Consolidated Statements of Cash Flows for the three months ended
March 31, 1999 and March 31, 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..................................... 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 43
Item 2. Changes in Securities and Use of Proceeds...................................................... 43
Item 3. Defaults Upon Senior Securities................................................................ 43
Item 6. Exhibits and Reports on Form 8-K............................................................... 43
SIGNATURES............................................................................................. 45
</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>
March 31, December 31,
1999 1998
--------------------------------
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents ............................................. $ 5,519 $ 7,396
Accounts receivable - trade ........................................... 17,920 15,160
Other receivables ..................................................... 979 924
Inventories ........................................................... 42,740 36,316
Deferred income taxes ................................................. 54,328 59,613
Other current assets .................................................. 4,756 3,151
--------- ---------
Total current assets ............................................ 126,242 122,560
Property, plant and equipment, at cost, less accumulated
depreciation of $35,427 and $33,856 ................................. 108,919 93,504
Intangible assets, at cost, less accumulated amortization
of $21,555 and $21,551 .............................................. 167 171
Other assets ............................................................ 13,017 12,747
--------- ---------
Total assets .................................................... $ 248,345 $ 228,982
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt ................... $ 29,077 $ 21,176
Accounts payable ...................................................... 13,552 13,880
Cash overdraft ........................................................ 43 77
Accrued promotional expenses .......................................... 22,117 23,760
Accrued taxes payable ................................................. 12,420 14,854
Accrued interest ...................................................... 7,737 17,189
Proceeds received for options ......................................... 150,000 150,000
Other accrued liabilities ............................................. 32,296 32,505
--------- ---------
Total current liabilities ........................................... 267,242 273,441
Notes payable, long-term debt and other obligations, less current
portion ............................................................... 280,410 262,665
Noncurrent employee benefits ............................................ 20,383 21,701
Other liabilities ....................................................... 60,361 65,350
Commitments and contingencies
Stockholders' equity (deficit):
Preferred Stock, par value $1.00 per share, authorized
10,000,000 shares ...................................................
Series G Preferred Stock, 2,184,834 shares, convertible,
participating, cumulative, each share convertible to 1,000
shares of common stock and cash or stock distribution,
liquidation preference of $1.00 per share ...........................
Common stock, par value $0.10 per share, authorized 100,000,000
and 40,000,000 shares, issued 26,498,043 shares, outstanding
20,943,730 shares ................................................... 2,094 2,094
Additional paid-in capital ............................................ 123,041 124,120
Deficit ............................................................... (503,379) (512,182)
Accumulated other comprehensive income ................................ 30,694 24,774
Other ................................................................. (5,028) (5,508)
Less: 5,554,313 shares of common stock in treasury, at cost .......... (27,473) (27,473)
--------- ---------
Total stockholders' equity (deficit) .............................. (380,051) (394,175)
--------- ---------
Total liabilities and stockholders' equity (deficit) .............. $ 248,345 $ 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>
March 31 December 31,
1999 1998
--------------------------------
ASSETS:
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................................... $ 5,519 $ 7,396
Accounts receivable - trade .................................................. 17,920 15,160
Other receivables ............................................................ 824 755
Inventories .................................................................. 42,740 36,316
Deferred income taxes ........................................................ 54,328 59,613
Other current assets ......................................................... 4,681 2,946
--------- ---------
Total current assets ..................................................... $ 126,012 122,186
Property, plant and equipment, at cost, less accumulated depreciation of
$35,421 and $33,852 .......................................................... 108,899 93,481
Intangible assets, at cost, less accumulated amortization of $21,555 and
$21,551 ...................................................................... 167 171
Other assets ................................................................... 11,878 11,558
--------- ---------
Total assets ............................................................. $ 246,956 $ 227,396
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt .......................... $ 29,037 $ 20,955
Accounts payable ............................................................. 13,427 13,746
Cash overdraft ............................................................... 43 63
Due to parent ................................................................ 32,560 32,394
Accrued promotional expenses ................................................. 22,117 23,760
Accrued taxes payable ........................................................ 12,420 14,854
Accrued interest ............................................................. 7,737 17,188
Proceeds received from options ............................................... 150,000 150,000
Other accrued liabilities .................................................... 31,211 31,556
--------- ---------
Total current liabilities ................................................ 298,552 304,516
Notes payable, long-term debt and other obligations, less current portion ...... 280,410 262,665
Noncurrent employee benefits ................................................... 20,383 21,701
Other liabilities .............................................................. 62,768 69,216
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 ................................................... 69,789 69,297
Deficit ...................................................................... (515,640) (524,773)
Accumulated other comprehensive income ....................................... 30,694 24,774
--------- ---------
Total stockholder's equity (deficit) ..................................... (415,157) (430,702)
--------- ---------
Total liabilities and stockholder's equity (deficit) ..................... $ 246,956 $ 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
--------------------------------
March 31, March 31,
1999 1998
--------------------------------
<S> <C> <C>
Revenues* .................................................. $ 108,409 $ 84,803
Cost of goods sold* ........................................ 41,427 41,656
------------ ------------
Gross profit ............................................... 66,982 43,147
Operating, selling, administrative and general expenses .... 44,837 35,604
------------ ------------
Operating income ........................................... 22,145 7,543
Other income (expenses):
Interest income ........................................ 60 65
Interest expense ....................................... (14,988) (20,786)
Equity in loss of affiliate ............................ (7,629) (4,187)
Recognition of deferred gain on sale of assets ......... 7,050
Foreign currency gain .................................. 2,270 79
Other, net ............................................. 375 852
------------ ------------
Income (loss) from continuing operations before income
taxes..................................................... 9,283 (16,434)
Provision for income taxes ................................. 1,729 931
------------ ------------
Income (loss) from continuing operations ................... 7,554 (17,365)
------------ ------------
Gain on discontinued operations in equity investee ......... 1,249
------------ ------------
Net income (loss) .......................................... $ 8,803 $ (17,365)
============ ============
Net income (loss) applicable to common shares .............. $ 8,803 $ (17,365)
============ ============
Per basic common share:
Income (loss) from continuing operations ............... $ 0.36 $ (0.89)
============ ============
Income from discontinued operations .................... $ 0.06
============ ============
Net income (loss) applicable to common shares .......... $ 0.42 $ (0.89)
============ ============
Basic weighted average common shares outstanding ........... 20,943,730 19,465,056
============ ============
Per diluted common share:
Income (loss) from continuing operations ............... $ 0.29 $ (0.89)
============ ============
Income from discontinued operations .................... $ 0.05
============ ============
Net income (loss) applicable to common shares .......... $ 0.34 $ (0.89)
============ ============
Diluted weighted average common shares outstanding ......... 26,020,356 19,465,056
============ ============
</TABLE>
- ---------------
* Revenues and Cost of goods sold include federal excise taxes of $14,038
and $17,918 for the three months ended March 31, 1999 and 1998,
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
--------------------------
March 31, March 31,
1999 1998
--------------------------
<S> <C> <C>
Revenues* .................................................. $ 108,409 $ 84,803
Cost of goods sold* ........................................ 41,427 41,656
--------- ---------
Gross profit ............................................... 66,982 43,147
Operating, selling, administrative and general expenses .... 44,435 35,371
--------- ---------
Operating income ........................................... 22,547 7,776
Other income (expenses):
Interest income ......................................... 60 56
Interest expense ........................................ (16,244) (21,824)
Equity in loss of affiliate ............................. (7,629) (4,187)
Recognition of deferred gain on sale of assets .......... 8,264
Foreign currency gain ................................... 2,270 79
Other, net .............................................. 345 849
--------- ---------
Income (loss) from continuing operations before income taxes 9,613 (17,251)
Provision for income taxes ................................. 1,729 931
--------- ---------
Income (loss) from continuing operations ................... 7,884 (18,182)
--------- ---------
Gain on discontinued operations of equity investee ......... 1,249
--------- ---------
Net income (loss) .......................................... $ 9,133 $ (18,182)
========= =========
</TABLE>
- ----------
*Revenues and Cost of goods sold include federal excise taxes of $14,038 and
$17,918 for the three months ended March 31, 1999 and 1998, 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>
-----------------------------------------------------------------------------------
Accumulated
Common Stock Additional Other
------------------- Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Other Income Total
---------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.................. 20,943,730 $2,094 $124,120 $(512,182) $(27,473) $(5,508) $24,774 $(394,175)
Net income.................................. 8,803 8,803
Unrealized holding gain on
investment in New Valley................. 8,159 8,159
Effect of New Valley capital
transactions............................. (2,239) (2,239)
---------
Total other comprehensive income...... 5,920
---------
Total comprehensive income.................. 14,723
---------
Distributions on common stock............... (1,534) (1,534)
Amortization of deferred compensation....... 455 480 935
---------- ------ -------- --------- -------- ------- ------- ----------
Balance, March 31, 1999..................... 20,943,730 $2,094 $123,041 $(503,379) $(27,473) $(5,028) $30,694 $ (380,051)
========== ====== ======== ========= ======== ======= ======= =========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-6-
<PAGE> 8
Item 1. Consolidated Financial Statements - (Continued)
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
--------------------------------------------------------------------
Accumulated
Common Stock Additional Other
----------------- Paid-In Comprehensive
Shares Amount Capital Deficit Income Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998........................ 100 $ $69,297 $(524,773) $24,774 $(430,702)
Net income........................................ 9,133 9,133
Unrealized holding gain on
investment in New Valley...................... 8,159 8,159
Effect of New Valley capital transactions....... (2,239) (2,239)
---------
Total other comprehensive income.............. 5,920
---------
Total comprehensive income........................ 15,053
---------
Amortization of deferred compensation............. 492 492
------ ------ ------- --------- ------- ---------
Balance, March 31, 1999........................... 100 $ $69,789 $(515,640) $30,694 $(415,157)
====== ====== ======= ========= ======= =========
</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>
Three Months Ended
------------------------------
March 31, March 31,
1999 1998
------------------------------
<S> <C> <C>
Net cash provided by (used in) operating activities ........ $ 2,571 $(25,984)
-------- --------
Cash flows from investing activities:
Proceeds from sale of business and assets ................ 36 1,217
Capital expenditures ..................................... (19,617) (395)
-------- --------
Net cash (used in) provided by investing activities ........ (19,581) 822
-------- --------
Cash flows from financing activities:
Proceeds from debt ....................................... 4,500
Repayments of debt ....................................... (323) (102)
Borrowings under revolver ................................ 83,986 63,961
Repayments on revolver ................................... (71,319) (58,799)
Decrease in cash overdraft ............................... (34) (45)
Distributions on common stock ............................ (1,358) (900)
Proceeds from participating loan ......................... 11,000
Issuance of common stock ................................. 9,796
-------- --------
Net cash provided by financing activities .................. 15,452 24,911
-------- --------
Effect of exchange rate changes on cash and cash equivalents (319) 79
Net decrease in cash and cash equivalents .................. (1,877) (172)
Cash and cash equivalents, beginning of period ............. 7,396 4,749
-------- --------
Cash and cash equivalents, end of period ................... $ 5,519 $ 4,577
======== ========
</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>
Three Months Ended
--------------------------------
March 31, March 31,
1999 1998
--------------------------------
<S> <C> <C>
Net cash provided by (used in) operating activities ........ $ 1,019 $(17,218)
-------- --------
Cash flows from investing activities:
Proceeds from sale of business and assets ................ 36 1,217
Capital expenditures ..................................... (19,617) (395)
-------- --------
Net cash (used in) provided by investing activities ........ (19,581) 822
-------- --------
Cash flows from financing activities:
Proceeds from debt ....................................... 4,500
Repayments of debt ....................................... (143) (102)
Borrowings under revolver ................................ 83,986 63,961
Repayments on revolver ................................... (71,319) (58,799)
Decrease (increase) in cash overdraft .................... (20) 47
Proceeds from participating loan ......................... 11,000
-------- --------
Net cash provided by financing activities .................. 17,004 16,107
-------- --------
Effect of exchange rate changes on cash and cash equivalents (319) 79
Net decrease in cash and cash equivalents .................. (1,877) (210)
Cash and cash equivalents, beginning of period ............. 7,396 4,749
-------- --------
Cash and cash equivalents, end of period ................... $ 5,519 $ 4,539
======== ========
</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"), New Valley Holdings, Inc. ("NV Holdings"),
Liggett-Ducat Ltd. ("Liggett-Ducat") and other less significant
subsidiaries. Liggett is engaged primarily in the manufacture and sale
of cigarettes, principally in the United States. Liggett-Ducat is
engaged in the manufacture and sale of cigarettes in Russia. All
significant intercompany balances and transactions have been
eliminated.
The interim consolidated financial statements of the Company and BGLS
are unaudited and, in the opinion of management, reflect all
adjustments necessary (which are normal and recurring) to present
fairly the Company's and BGLS' consolidated financial position,
results of operations and cash flows. These consolidated financial
statements should be read in conjunction with the consolidated
financial statements and the notes thereto included in the Company's
and BGLS' Annual Report on Form 10-K, as amended, for the year ended
December 31, 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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
Certain amounts in the 1998 consolidated financial statements have
been reclassified to conform to the 1999 presentation.
LIQUIDITY:
The Company's anticipated sources of liquidity for 1999 include, among
other things, proceeds from the exercise of an option in an entity to
which a subsidiary of Liggett will contribute certain trademarks (the
"Marks") and the distribution of loan proceeds from the entity (refer
to Note 2), additional debt and/or equity financing, management fees
and tax sharing and other payments from Liggett and certain funds
available from New Valley Corporation ("New Valley") subject to
limitations imposed by BGLS' indenture agreements. Liggett's and New
Valley's ability to make such payments is subject to risks and
uncertainties attendant to their businesses. (Refer to Notes 3 and 8.)
New Valley may also acquire or seek to acquire additional operating
businesses through merger, purchase of assets, stock acquisition or
other means, or to make other investments, which may limit its ability
to make such distributions.
Liggett has a $40,000 revolving credit facility expiring March 8, 2000
(the "Facility"), under which $6,793 was outstanding and $12,990 was
available at March 31, 1999.
Liggett-Ducat is in the process of constructing a new tobacco factory
in Moscow, Russia, currently scheduled to be operational in June 1999.
The remaining construction costs and equipment required
-10-
<PAGE> 12
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
for the new factory will be financed primarily by equipment lease
financing currently in place and loans from banks. (Refer to Note 4.)
EARNINGS PER SHARE:
For the three months ended March 31, 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, vested restricted stock grants and warrants.
For the three months ended March 31, 1998, stock options, warrants and
contingent shares (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 such
as the proportionate interest in New Valley's capital transactions,
unrealized gains and losses on investment securities and minimum
pension liability adjustments. For the three months ended March 31,
1999, total comprehensive income was $14,723. For the three months
ended March 31, 1998, the total comprehensive loss was $13,179.
2. PHILIP MORRIS BRAND TRANSACTION
On November 20, 1998, the Company and Liggett entered into a
definitive agreement with Philip Morris Incorporated ("PM") which
provided for PM to purchase options in an entity which will hold three
cigarette brands, L&M, Chesterfield and Lark (the "Marks"), held by
Liggett's subsidiary, Eve Holdings Inc. ("Eve"). As contemplated by
the agreement, Liggett and PM entered into additional agreements
(collectively, the "PM Agreements") on January 12, 1999 to effectuate
the transactions.
Under the terms of the PM Agreements, Eve will contribute the Marks to
Brands LLC ("LLC"), a newly-formed limited liability company, in
exchange for 100% of two classes of LLC interests, the Class A Voting
Interest (the "Class A Interest") and the Class B Redeemable Nonvoting
Interest (the "Class B Interest"). PM acquired two options to purchase
such interests (the "Class A Option" and the "Class B Option"). On
December 2, 1998, PM paid Eve a total of $150,000 for such options,
$5,000 for the Class A Option and $145,000 for the Class B Option. The
payments were used to fund the redemption of the Liggett Notes on
December 28, 1998.
The Class A Option entitles PM to purchase the Class A Interest for
$10,100. The statutory waiting period under the Hart-Scott-Rodino Act
regarding the exercise by PM of the Class A Option expired on February
12, 1999. On March 19, 1999, PM exercised the Class A Option with the
closing scheduled for no later than June 10, 1999 (currently scheduled
to close May 24, 1999), subject to customary closing conditions.
The Class B Option will entitle PM 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 PM 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 the LLC
for $139,900 during the same period the Class B Option may be
exercised.
-11-
<PAGE> 13
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The LLC will seek to borrow $134,900 (the "Loan") from a lending
institution. The Loan will be guaranteed by Eve and collateralized by
a pledge by the LLC of the Marks and of the LLC's 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, the LLC will distribute the Loan proceeds to Eve with respect
to its Class B Interest. The cash exercise price of the Class B Option
and the LLC's redemption price will be reduced by the amount
distributed to Eve. Upon PM's exercise of the Class B Option or the
LLC's exercise of its redemption right, PM or the LLC, as relevant,
will be required to procure 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 LLC income or loss.
The LLC will grant PM an exclusive license of the Marks for an 11-year
term at an annual royalty based on sales of cigarettes under the
Marks, subject to a minimum annual royalty payment equal to the annual
debt service obligation on the Loan plus $1,000.
If PM fails to exercise the Class B Option, Eve will have an option to
put its Class B Interest to PM, or PM's designees (the "Eve Put
Option"), at a put price that is $5,000 less than the exercise price
of the Class B Option (and includes PM's procuring 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, the LLC's 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% LLC
interest.
The $150,000 in proceeds received from the sale of the Class A and B
Options is 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 which is scheduled to occur during
the second quarter of 1999. Upon such closing, PM will obtain control
of the LLC, and the Company anticipates, based on the expected
structure of the transactions, to recognize a gain 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. INVESTMENT IN NEW VALLEY CORPORATION
At March 31, 1999 and December 31, 1998, the Company's investment in
New Valley consisted of an approximate 42% voting interest. At March
31, 1999 and December 31, 1998, the Company owned 57.7% of the
outstanding $15.00 Class A Increasing Rate Cumulative Senior Preferred
Shares ($100 Liquidation Value), $.01 par value (the "Class A
Preferred Shares"), 9.0% of the outstanding $3.00 Class B Cumulative
Convertible Preferred Shares ($25 Liquidation Value), $.10 par value
(the "Class B Preferred Shares"), and 41.7% of New Valley's common
shares, $.01 par value (the "Common Shares").
The Class A Preferred Shares and the Class B Preferred Shares are
accounted for as debt and equity securities, respectively, pursuant to
the requirements of SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", and are classified as
available-for-sale. The
-12-
<PAGE> 14
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Common Shares are accounted for pursuant to APB No. 18, "The Equity
Method of Accounting for Investments in Common Stock".
The Company determines the fair value of the Class A Preferred Shares
and Class B Preferred Shares based on the quoted market price. Through
September 1996, earnings on the Class A Preferred Shares were
comprised of dividends accrued during the period and the accretion of
the difference between the Company's basis and their mandatory
redemption price. During the quarter ended September 30, 1996, the
decline in the market value of the Class A Preferred Shares, the
dividend received on the Class A Preferred Shares and the Company's
equity in losses incurred by New Valley caused the carrying value of
the Company's investment in New Valley to be reduced to zero.
Beginning in the fourth quarter of 1996, the Company suspended the
recording of its earnings on the dividends accrued and the accretion
of the difference between the Company's basis in the Class A Preferred
Shares and their mandatory redemption price.
The Company's and BGLS' investment in New Valley at March 31, 1999 is
summarized below:
<TABLE>
<CAPTION>
Number of Fair Carrying
Shares Value Amount
--------- ------- --------
<S> <C> <C> <C>
Class A Preferred Shares....... 618,326 $51,939 $ 51,939
Class B Preferred Shares....... 250,885 847 847
Common Shares.................. 3,989,710 1,621 (52,786)
------- --------
$54,407 $ 0
======= ========
</TABLE>
In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of
the United States Bankruptcy Court for the District of New Jersey and
on January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors
under the Joint Plan. Pursuant to the Joint Plan, among other things,
the Class A Preferred Shares, the Class B Preferred Shares, the Common
Shares and other equity interests were reinstated and retained all of
their legal, equitable and contractual rights.
The Class A Preferred Shares of New Valley are required to be redeemed
on January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option
of New Valley, at $100.00 per share plus accrued dividends. The
holders of Class A Preferred Shares are entitled to receive a
quarterly dividend, as declared by the Board of Directors, payable at
the rate of $19.00 per annum. At March 31, 1999, the accrued and
unpaid dividends arrearage was $234,581 ($218.94 per share).
Holders of the Class B Preferred Shares are entitled to receive a
quarterly dividend, as declared by the Board, at a rate of $3.00 per
annum. At March 31, 1999, the accrued and unpaid dividends arrearage
was $172,905 ($61.96 per share).
-13-
<PAGE> 15
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Summarized financial information for New Valley as of March 31, 1999
and December 31, 1998 and for the three ended March 31, 1998 and 1998
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Current assets, primarily cash and marketable
securities .................................... $ 70,851 $ 91,451
Non-current assets ............................... 183,787 181,271
Current liabilities .............................. 66,975 83,581
Non-current liabilities .......................... 83,001 78,251
Redeemable preferred shares ...................... 332,198 316,202
Shareholders' deficit ............................ (227,536) (205,312)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31, March 31,
1999 1998
--------- ----------
<S> <C> <C>
Revenues ............................................. $ 22,770 $ 33,840
Costs and expenses ................................... 28,917 34,260
(Loss) income from continuing operations ............. (5,682) 157
Gain from discontinued operations .................... 4,100
Net loss applicable to common shares(A) .............. (23,801) (18,675)
</TABLE>
(A) Considers all preferred accrued dividends, whether or not
declared.
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. In connection with the formation of Western Realty Ducat, New
Valley agreed, among other things, to contribute the real estate
assets of BrookeMil Ltd. ("BML"), including Ducat Place II and the
site for Ducat Place III, to Western Realty Ducat and Apollo agreed to
contribute up to $58,750, including the investment in Western Realty
Repin discussed below. Through March 31, 1999, Apollo had funded
$36,529 of its investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat will be
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 ($40,000), together with a 15% annual rate of
return, and 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 will be managed by a Board of Managers consisting
of an equal number of representatives chosen by Apollo and New Valley.
All material corporate transactions by Western Realty Ducat generally
require the unanimous consent of the Board of Managers. Accordingly,
New Valley has accounted 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 incurred by Western Realty
-14-
<PAGE> 16
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Ducat to the extent that cumulative earnings of Western Realty Ducat
are not sufficient to satisfy Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and
other investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in, a
company organized by BOL which, among other things, acquired an
interest in a new factory being constructed on the outskirts of Moscow
by a subsidiary of BOL. (Refer to Note 4.)
In June 1998, New Valley and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the
"Repin Loan") to BML. The proceeds of the loan will be used by BML for
the acquisition and preliminary development of two adjoining sites
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across
the Moscow River from the Kremlin. BML, which is planning the
development of a 1.1 million sq. ft. hotel, office, retail and
residential complex on the Kremlin Sites, owned 95.29% of one site and
52% of the other site at March 31, 1999. Apollo will be entitled to a
preference on distributions of cash from Western Realty Repin to the
extent of its investment ($18,750) together with a 20% annual rate of
return, and New Valley will then be entitled to a return of its
investment ($6,250), together with a 20% annual rate of return;
subsequent distributions will be made 50% to New Valley and 50% to
Apollo. Western Realty Repin will be managed by a Board of Managers
consisting of an equal number of representatives chosen by Apollo and
New Valley. All material corporate transactions by Western Realty
Repin will generally require the unanimous consent of the Board of
Managers.
Through March 31, 1999, Western Realty Repin has advanced $25,000 (of
which $18,773 was funded by Apollo) under the Repin Loan to BML. The
Repin Loan, which bears no fixed interest, is payable only out of 100%
of the distributions, if made, by the entities owning the Kremlin
Sites to BML. Such distributions shall be applied first to pay the
principal of the Repin Loan and then as contingent participating
interest on the Repin Loan. Any rights of payment on the Repin Loan
are subordinate to the rights of all other creditors of BML. BML used
a portion of the proceeds to repay New Valley for certain expenditures
on the Kremlin Sites previously incurred. The Repin 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 March 31, 1999, BML had invested $19,621 in the Kremlin sites
and held $3,525, in cash, which was restricted for future investment.
In connection with the acquisition of its interest in one of the
Kremlin Sites, BML has agreed with the City of Moscow to invest an
additional $6,000 (which has been funded) in 1999 and $22,000 in 2000
in the development of the property.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. New Valley is
actively pursuing various 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.
Proposed Recapitalization Plan:
New Valley has submitted for approval of its shareholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed
recapitalization of its capital stock (the "Recapitalization Plan").
-15-
<PAGE> 17
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Under the Recapitalization Plan, each of New Valley's outstanding
Class A Preferred Shares would be reclassified and changed into 20
Common Shares and one Warrant to purchase Common Shares (the
"Warrants"). Each of the Class B Preferred Shares would be
reclassified and changed into one-third of a Common Share and five
Warrants. The existing Common Shares would be reclassified and changed
into one-tenth of a Common Share and three-tenths of a Warrant. The
number of authorized Common Shares would be reduced from 850,000,000
to 100,000,000. The Warrants to be issued as part of the
Recapitalization Plan would have an exercise price of $12.50 per share
subject to adjustment in certain circumstances and be exercisable for
five years following the effective date of New Valley's Registration
Statement covering the underlying Common Shares. The Warrants would
not be callable by New Valley for a three-year period. Upon completion
of the Recapitalization Plan, New Valley will apply for listing of the
Common Shares and Warrants on NASDAQ. Completion of the
Recapitalization Plan is subject to, among other things, approval by
the required holders of the various classes of New Valley's shares.
The Company has agreed to vote all of its shares in New Valley in
favor of the Recapitalization Plan. As a result of the
Recapitalization Plan and assuming no warrant holder exercises its
warrants, the Company will increase its ownership of the outstanding
Common Shares of New Valley from 42.3% to 55.1% and its total voting
power from 42.3% to 55.1%. New Valley would become part of the
Company's consolidated group for financial statement purposes.
4. INVESTMENT IN BROOKE (OVERSEAS) LTD.
At March 31, 1999, BOL owned approximately 99.9% of the stock of
Liggett-Ducat through its subsidiary, Western Tobacco Investments LLC
("Western Tobacco"). (Refer to Note 7 for information concerning
pledges of interests in Western Tobacco.)
Liggett-Ducat is currently completing construction of a new cigarette
factory on the outskirts of Moscow. Production at Liggett-Ducat's
existing factory ceased in March 1999, with production scheduled to
start in the new factory in mid-1999. The remaining liability under
the factory construction contract, as amended, at March 31, 1999 is
approximately $2,500. Equipment purchase agreements in place at March
31, 1999 total $35,846, of which $29,438 is being financed by the
manufacturers.
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. The loan, which bears no fixed interest, is payable only out
of 30% of distributions, if any, made by Western Tobacco to BOL. After
the prior payment of debt service on loans to finance the construction
of the new factory, 30% of distributions from Western Tobacco to BOL
will be applied first to pay the principal of the loan and then as
contingent participating interest on the loan. Any rights of payment
on the loan are subordinate to the rights of all other creditors of
Western Tobacco. For the period ended March 31, 1999, a preference
requirement equal to 30% of Western Tobacco's net income, $1,002, has
been charged to interest expense. The loan is classified in other
long-term liabilities on the consolidated balance sheet at March 31,
1999. (Refer to Note 3.)
In connection with the sale by BOL of the common shares of BML to New
Valley in 1997, a portion of the gain was deferred in recognition of
the fact that the Company retains an interest in BML through its 42%
equity ownership of New Valley and that a portion of the property sold
(the site of the third
-16-
<PAGE> 18
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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.
In 1998, the Russian Federation entered a period of economic
instability. 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 operations of Liggett-Ducat may be
significantly affected by these factors for the foreseeable future.
5. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Leaf tobacco ..................................... $ 10,884 $ 13,882
Other raw materials .............................. 5,445 4,629
Work-in-process .................................. 2,481 2,001
Finished goods ................................... 23,209 15,446
Replacement parts and supplies ................... 4,195 4,130
-------- --------
Inventories at current cost ...................... 46,214 40,088
LIFO adjustments ................................. (3,474) (3,772)
-------- --------
$ 42,740 $ 36,316
======== ========
</TABLE>
At March 31, 1999, Liggett and Liggett-Ducat had leaf tobacco purchase
commitments of approximately $4,754 and $11,560, respectively.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Land and improvements ............................ $ 412 $ 412
Buildings ........................................ 5,823 5,823
Machinery and equipment .......................... 60,732 54,144
Construction-in-progress ......................... 77,379 66,981
--------- --------
144,346 127,360
Less accumulated depreciation .................... (35,427) (33,856)
--------- --------
$ 108,919 $ 93,504
========= ========
</TABLE>
Equipment purchase commitments for $3,011 were outstanding at BOL at
March 31, 1999.
-17-
<PAGE> 19
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
7. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $15,449 and $17,374 ...... $ 217,415 $215,490
Deferred interest on 15.75% Series B Senior Secured
Notes due 2001 .......................................... 34,602 24,985
Liggett:
Revolving credit facility ................................... 6,793 2,538
Note payable ................................................ 4,475
BOL:
Foreign credit facilities ................................... 19,737 11,600
Notes payable ............................................... 25,475 28,057
Other ....................................................... 990 1,171
--------- --------
Total notes payable, long-term debt and other obligations ... 309,487 283,841
Less:
Current maturities ...................................... 29,077 21,176
--------- --------
Amount due after one year ................................... $ 280,410 $262,665
========= ========
</TABLE>
15.75% Series B Senior Secured Notes Due 2001 - BGLS:
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 15.75% Series B Senior Secured
Notes (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).
In connection with the March 2, 1998 agreement with the Apollo
Holders, the Company issued to the Apollo Holders a five-year warrant
to purchase 2,000,000 shares of the Company's common stock at a price
of $5.00 per share. The Apollo Holders were also issued a second
warrant expiring October 31, 2004 to purchase an additional 2,150,000
shares of the Company's common stock at a price of $0.10 per share.
The second warrant will become exercisable on October 31, 1999, and
the Company will have the right under certain conditions prior to that
date to substitute for that warrant a new warrant for 9.9% of the
common stock of Liggett.
-18-
<PAGE> 20
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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.
On February 17, 1999, BGLS entered into an agreement with a third
party to purchase, during the second quarter of 1999, approximately
$31,139 principal amount of the Notes, originally held by the Apollo
Holders and subject to the standstill agreement. The purchase price is
95% of the principal amount of the notes and the accrued interest
thereon. Such purchase is contingent upon receipt by the Company of
approximately $145,000 (in addition to the $150,000 option fee paid in
December 1998) on terms substantially consistent with the transactions
contemplated by the PM Agreements. (Refer to Note 2.)
In April 1999, the Company agreed with a third party to purchase
during the second quarter 1999, approximately $3,697 of the BGLS
Notes. The purchase price is 98% of the principal amount of the notes
and the accrued interest thereon. BGLS will fund both purchases with
tax sharing payments from Liggett.
The Notes are collateralized by substantially all of BGLS' assets,
including a pledge of BGLS' equity interests in Liggett, BOL and NV
Holdings as well as a pledge of all of the New Valley securities held
by BGLS and NV Holdings. The Notes Indenture contains certain
covenants, which among other things, limit the ability of BGLS to make
distributions to the Company to $6,000 per year ($12,000 if less than
50% of the Notes remain outstanding), limit additional indebtedness of
BGLS to $10,000, limit guaranties of subsidiary indebtedness by BGLS
to $50,000, and restrict certain transactions with affiliates that
exceed $2,000 in any year subject to certain exceptions which include
payments to the Company not to exceed $6,500 per year for permitted
operating expenses, payment of the Chairman's salary and bonus and
certain other expenses, fees and payments. In addition, the Indenture
contains certain restrictions on the ability of the Chairman and
certain of his affiliates to enter into certain transactions with, and
receive payments above specified levels from, New Valley. The 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.
Revolving Credit Facility - Liggett:
Liggett entered into the Facility for $40,000 with a syndicate of
commercial lenders in 1994 which is collateralized by all inventories
and receivables of Liggett. At March 31, 1999, $12,990 was available
under the Facility based on eligible collateral. Borrowings under the
Facility, whose interest is calculated at a rate equal to 1.5% above
the Philadelphia National Bank's prime rate, bore a rate of 9.25% at
March 31, 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
-19-
<PAGE> 21
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
below a deficit of $195,000 as computed in accordance with the
agreement, this computation was $146,239 at March 31, 1999) and net
working capital (not to fall below a deficit of $17,000 as computed in
accordance with the agreement, this computation was $4,466 at March
31, 1999).
Equipment Loan - Liggett:
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase from a third party. The loan, which is
collateralized by the equipment and guaranteed by BGLS and the Company,
is payable in 60 monthly installments of $56 including annual interest
of 7.67% with a final payment of $2,550.
Foreign Loans:
At March 31, 1999, Liggett-Ducat had various credit facilities under
which approximately $19,700 was outstanding. One, for $10,000, expired
in May 1999 but was extended for one year at an interest rate of 25%.
The second, for $5,000, expires in December 1999. The interest rate is
20%. The remaining facilities, denominated in rubles (approximately
$7,200 at the March 31, 1999 exchange rate), have terms of six -
twelve months with interest rates of 52% - 55%. The facilities are
collateralized by factory equipment and tobacco inventory.
Notes Payable - BOL:
In 1997, Western Tobacco entered into two contracts for the purchase
of cigarette manufacturing equipment. A portion (85%) of both
contracts is being financed with promissory notes. One contract is
financed by ten half-year promissory notes payable at the rate of
6.71% per annum interest, with the first note due in May 1999. The
outstanding balance on the contract is $13,677 at March 31, 1999. The
second contract is financed by 60 monthly promissory notes payable at
the rate of 7.5% interest. The first note was paid in December 1998.
The outstanding balance at March 31, 1999 is $8,250. The Company also
has a promissory note for $1,514 at March 31, 1999 covering deposits
for equipment being purchased for the factory. The note is due March
31, 2000.
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 note, which is due on August 1, 1999, is collateralized by
factory equipment. Payments of $50 toward principal and interest are
made monthly, with the remaining principal balance due at maturity.
8. 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 the Company or
Liggett). There has been a noteworthy increase in the number of cases
commenced against Liggett and the other cigarette manufacturers in
recent years. The cases generally fall into four categories: (i)
smoking and health cases alleging personal injury brought on behalf of
individual
-20-
<PAGE> 22
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
smokers ("Individual Actions"); (ii) smoking and health cases alleging
personal injury and purporting to be brought on behalf of a class of
individual plaintiffs ("Class Actions"); (iii) health care cost
recovery actions brought by various governmental entities
("Governmental Actions"); and (iv) health care cost recovery actions
brought by third-party payors including insurance companies, union
health and welfare trust funds, asbestos manufacturers and others
("Third-Party Payor Actions"). As new cases are commenced, defense
costs and the risks attendant to the inherent unpredictability of
litigation continue to increase. The future financial impact of the
risks and expenses of litigation and the effects of the tobacco
litigation settlements discussed below is not quantifiable at this
time. For the three months ended March 31, 1999, Liggett incurred
counsel fees and costs totaling approximately $1,568, compared to
$1,342 for the comparable prior year period.
Individual Actions. As of March 31, 1999, there were approximately 265
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,
89 were pending in Florida, 91 in New York, 29 in Massachusetts and 19
in Texas. The balance of the individual cases were pending in 21
states. There are four individual cases pending where Liggett is the
only named defendant.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by
cigarette smoking are based on various theories of recovery, including
negligence, gross negligence, special duty, voluntary undertaking,
strict liability, fraud, misrepresentation, design defect, failure to
warn, breach of express and implied warranties, conspiracy, aiding and
abetting, concert of action, unjust enrichment, common law public
nuisance, indemnity, market share liability and violations of
deceptive trade practices laws, the Federal Racketeer Influenced and
Corrupt Organization Act ("RICO") and antitrust statutes. In many of
these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including disgorgement of profits and punitive
damages. Defenses raised by defendants in these cases include lack of
proximate cause, assumption of the risk, comparative fault and/or
contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.
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 PM. 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
PM. The award includes $79,500 in punitive damages.
Class Actions. As of March 31, 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. Two of these cases, Fletcher, et al. v.
Brooke Group Ltd., et al. and Walker, et al. v. Liggett Group Inc., et
al., have been settled by the Company, subject to court approval.
These two settlements are more fully discussed below under the
"Settlements" section.
In October 1991, an action entitled Broin, et al. v. Philip Morris
Incorporated, et al., Circuit Court of the Eleventh Judicial District
in and for Dade County, Florida, was filed against Liggett and others.
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<PAGE> 23
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
This case was brought by plaintiffs on behalf of all flight attendants
that worked or are presently working for airlines based in the United
States and who never regularly smoked cigarettes but allege that they have
been damaged by involuntary exposure to ETS. In October 1997, the other
major tobacco companies settled this matter, which settlement provides for
a release of the Company and Liggett. In February 1998, the Circuit Court
approved the settlement, which settlement was affirmed by the Third
District Court of Appeals in March 1999.
In March 1994, an action entitled Castano, et al. v. The American Tobacco
Company Inc., et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action
complaint sought relief for a nationwide class of smokers based on their
alleged addiction to nicotine. In February 1995, the District Court
granted plaintiffs' motion for class certification (the "Class
Certification Order").
In May 1996, the Court of Appeals for the Fifth Circuit reversed the Class
Certification Order and instructed the District Court to dismiss the class
complaint. The Fifth Circuit ruled that the District Court erred in its
analysis of the class certification issues by failing to consider how
variations in state law affect predominance of common questions and the
superiority of the class action mechanism. The appeals panel also held
that the District Court's predominance inquiry did not include
consideration of how a trial on the merits in Castano would be conducted.
The Fifth Circuit further ruled that the "addiction-as-injury" tort is
immature and, accordingly, the District Court could not know whether
common issues would be a "significant" portion of the individual trials.
According to the Fifth Circuit's decision, any savings in judicial
resources that class certification may bring about were speculative and
would likely be overwhelmed by the procedural problems certification
brings. Finally, the Fifth Circuit held that in order to make the class
action manageable, the District Court would be forced to bifurcate issues
in violation of the Seventh Amendment.
The extent of the impact of the Castano decision on tobacco-related class
action litigation is still uncertain, although the decertification of the
Castano class by the Fifth Circuit may preclude other federal courts from
certifying a nationwide class action for trial purposes with respect to
tobacco-related claims. The Castano decision has had to date, however,
only limited effect with respect to courts' decisions regarding narrower
tobacco-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, courts in
New York, Louisiana and Maryland have certified "addiction-as-injury"
class actions that covered only citizens in those states. Two class
actions pending in state court in Florida have also been certified, one of
which, the Broin case, was settled in 1997. The Castano decision has had
no measurable impact on litigation brought by or on behalf of single
individual claimants.
Class certification motions are pending in a number of putative class
actions. Class certification has been denied or reversed in 13 actions
while classes remain certified in two cases in Florida and Maryland. A
number of class certification decisions are on appeal.
Governmental Actions. As of March 31, 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
-22-
<PAGE> 24
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud,
negligent misrepresentation, conspiracy, public nuisance, claims under
state and federal statutes governing consumer fraud, antitrust,
deceptive trade practices and false advertising, and claims under
RICO.
On January 19, 1999, at the State of the Union Address, President
Clinton announced that the Department of Justice ("DOJ") was preparing
a litigation plan to take the tobacco industry to court to recover
monies that Medicare and other programs allegedly expended to treat
smoking-related illnesses. The effects of this lawsuit cannot be
predicted at this time; however, an adverse verdict could have a
material adverse effect on the Company and Liggett.
Third-Party Payor Actions. As of March 31, 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 a Third-Party Payor
Action brought by seven Blue Cross/Blue Shield Plans against the
tobacco industry. 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.
In other Third-Party Payor Actions claimants have set forth several
additional theories of relief sought: funding of corrective public
education campaigns relating to issues of smoking and health; funding
for clinical smoking cessation programs; disgorgement of profits from
sales of cigarettes; restitution; treble damages; and attorneys' fees.
Nevertheless, no specific amounts are provided. It is understood that
requested damages against the tobacco company defendants in these
cases might be in the billions of dollars.
Settlements. In March 1996, the Company and Liggett entered into an
agreement, subject to court approval, to settle the Castano class
action tobacco litigation. Under the Castano settlement agreement,
upon final court approval of the settlement, the Castano class would
be entitled to receive up to five percent of Liggett's pretax income
(income before income taxes) each year (up to a maximum of $50,000 per
year) for the next 25 years, subject to certain reductions provided
for in the agreement and a $5,000 payment from Liggett if the Company
or Liggett fail to consummate a merger or similar transaction with
another non-settling tobacco company defendant within three years of
the date of settlement. The Company and Liggett have the right to
terminate the Castano settlement under certain circumstances. In March
1996, the Company, the Castano Plaintiffs Legal Committee and the
Castano plaintiffs entered into a letter agreement. According to the
terms of the letter agreement, for the period ending nine months from
the date of Final Approval (as defined in the letter), if granted, of
the Castano settlement or, if earlier, the completion by the Company
or Liggett of a combination with any defendant in Castano, except PM,
the Castano plaintiffs and their counsel agree not to enter into any
more favorable settlement agreement with any Castano defendant which
would reduce the terms of the Castano settlement agreement. If the
Castano plaintiffs or their
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<PAGE> 25
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
counsel enter into any such settlement during this period, they shall
pay the Company $250,000 within 30 days of the more favorable
agreement and offer the Company and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such
other settlement. The letter agreement further provides that during
the same time period, and if the Castano settlement agreement has not
been earlier terminated by the Company in accordance with its terms,
the Company and its affiliates will not enter into any business
transaction with any third party which would cause the termination of
the Castano settlement agreement. If the Company or its affiliates
enter into any such transaction, then the Castano plaintiffs will be
entitled to receive $250,000 within 30 days from the transacting
party. In May 1996, the Castano Plaintiffs Legal Committee filed a
motion with the United States District Court for the Eastern District
of Louisiana seeking preliminary approval of the Castano settlement.
In September 1996, shortly after the class was decertified, the
Castano plaintiffs withdrew the motion for approval of the Castano
settlement.
In March 1996, March 1997 and March 1998, the Company and Liggett
entered into settlements of tobacco-related litigation with the
Attorneys General of a total of 45 states and territories. The
settlements released the Company and Liggett from all tobacco-related
claims including claims for health care cost reimbursement and claims
concerning sales of cigarettes to minors.
On November 23, 1998, PM, B&W, R.J. Reynolds Tobacco Company ("RJR")
and Lorillard Tobacco Company ("Lorillard") (collectively, the
"Original Participating Manufacturers" or "OPMs") and Liggett
(together with the OPMs and any other tobacco product manufacturer
that becomes a signatory, the "Participating Manufacturers") entered
into the Master Settlement Agreement (the "MSA") with 46 states, the
District of Columbia, Puerto Rico, Guam, the United States Virgin
Islands, American Samoa and the Northern Marianas (collectively, the
"Settling States") to settle the asserted and unasserted health care
cost recovery and certain other claims of those Settling States. As
described below, the Company and Liggett had previous settlements with
a number of these Settling States and also had previously settled
similar claims brought by Florida, Mississippi, Texas and Minnesota.
The MSA is subject to final judicial approval in each of the Settling
States, which approval has been obtained, to date, in 42 states and
territories.
The MSA restricts tobacco product advertising and marketing within the
Settling States and otherwise restricts the activities of
Participating Manufacturers. Among other things, the MSA: prohibits
the targeting of youth in the advertising, promotion or marketing of
tobacco products; bans the use of cartoon characters in all tobacco
advertising and promotion; limits each Participating Manufacturer to
one tobacco brand name sponsorship during any 12-month period; bans
all outdoor advertising, with the exception of signs 14 square feet or
less in dimension at retail establishments that sell tobacco products;
prohibits payments for tobacco product placement in various media;
bans gift offers based on the purchase of tobacco products without
sufficient proof that the intended recipient is an adult; prohibits
Participating Manufacturers from licensing third parties to advertise
tobacco brand names in any manner prohibited under the MSA; prohibits
Participating Manufacturers from using as a tobacco product brand name
any nationally recognized non-tobacco brand or trade name or the names
of sports teams, entertainment groups or individual celebrities; and
prohibits Participating Manufacturers from selling packs containing
fewer than twenty cigarettes.
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.
-24-
<PAGE> 26
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Pursuant to the MSA, Liggett has no payment obligations unless its
market share exceeds 125% of its 1997 market share (the "Base Share").
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):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
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
</TABLE>
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
nations" protection for both the Company and Liggett, the payments due
these states by Liggett (with certain possible exceptions) have been
eliminated. With respect to all non-economic obligations under the
previous settlements, both the Company and Liggett are entitled to the
most favorable provisions as between the MSA and each state's
respective settlement with the other major tobacco companies.
Therefore, Liggett's non-economic obligations to all states and
territories are now defined by the MSA.
In March 1997, Liggett, the Company and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled Fletcher, et al. v. Brooke
Group Ltd., et al., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of
the class, and in May 1997, a similar mandatory class settlement
agreement was filed in an action entitled Walker, et al. v. Liggett
Group Inc., et al., United States District Court, Southern District of
West Virginia. In July 1998, Liggett, the Company and plaintiffs filed
an amended class action settlement agreement in Fletcher which
agreement was preliminarily approved by the court in December 1998. A
hearing on final approval of the settlement is scheduled for June 3,
1999; however, hearing dates are subject to change. Effectiveness of
the
-25-
<PAGE> 27
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
mandatory settlement is conditioned on final court approval of the
settlement. There can be no assurance as to whether, or when, such
court approval will be obtained. Pursuant to the amended agreement,
Liggett is required to pay to the class 7.5% of Liggett's pre-tax
income each year for 25 years, with a minimum annual payment guarantee
of $1,000 over the term of the agreement. The amended agreement does
not set forth a formula with respect to the distribution of settlement
proceeds to the class. If the court issues a final order and judgment
approving the settlement, such an order, the Company anticipates,
would preclude further prosecution by class members of tobacco-related
claims against both Liggett and the Company. Under the Full Faith and
Credit Act, a final judgment entered in a nationwide class action
pending in a state court has a preclusive effect against any class
member with respect to the claims settled and released. As the class
definition in Fletcher encompasses all persons in the United States
who could claim injury as a result of cigarette smoking or ETS and any
third-party payor claimants, it is anticipated that, upon final order
and judgment, all such persons and third-party payor claimants would
be barred from further prosecution of tobacco-related claims against
Liggett and the Company.
The Walker court also granted preliminary approval and preliminary
certification of the nationwide class; however, in August 1997, the
court vacated its preliminary certification of the settlement class,
which decision is currently on appeal. The Walker court relied on the
Supreme Court's decision in Amchem Products Inc. v. Windsor in
reaching its decision to vacate preliminary certification of the
class. In Amchem, the Supreme Court affirmed a decision of the Third
Circuit vacating the certification of a settlement class that involved
asbestos-exposure claims. The Supreme Court held that the proposed
settlement class did not meet the requirements of Rule 23 of the
Federal Rules of Civil Procedure for predominance of common issues and
adequacy of representation. The Third Circuit had held that, although
classes could be certified for settlement purposes, Rule 23's
requirements had to be satisfied as if the case were going to be
litigated. The Supreme Court agreed that the fairness and adequacy of
the settlement are not pertinent to the predominance inquiry under
Rule 23(b)(3), and thus, the proposed class must have sufficient unity
so that absent class members can fairly be bound by decisions of class
representatives.
After the Amchem opinion was issued by the Supreme Court in June 1997,
objectors to Liggett's settlement in Walker moved for decertification.
Although Liggett's settlement in the Walker action is a "limited fund"
class action settlement proceeding under Rule 23(b)(1) and Amchem was
a Rule 23 (b)(3) case, the court in the Walker action, nonetheless,
decertified the Walker class. Applying Amchem to the Walker case, the
District Court, in a decision issued in August 1997, determined that
while plaintiffs in Walker have a common interest in "maximizing the
limited fund available from the defendants," there remained
"substantial conflicts among class members relating to distribution of
the fund and other key concerns" that made class certification
inappropriate.
The Amchem decision's ultimate affect on the viability of both the
Walker and Fletcher settlements remains uncertain given the Fifth
Circuit's recent ruling reaffirming a limited fund class action
settlement in In re Asbestos Litigation ("Ahearn"). In June 1997, the
Supreme Court remanded Ahearn to the Fifth Circuit for consideration
in light of Amchem. On remand, the Fifth Circuit made two decisive
distinctions between Amchem and Ahearn. First, the Ahearn class action
proceeded under Rule 23(b)(1) while Amchem was a Rule 23(b)(3) case,
and second, in Ahearn, there was no allocation or difference in award,
according to nature or severity of injury, as there was in Amchem. The
Fifth Circuit concluded that all members of the class and all class
representatives share common interests and none of the uncommon
questions abounding in Amchem exist. In June 1998, the Supreme Court
granted certiorari to review the Fifth Circuit decision.
-26-
<PAGE> 28
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company previously accrued approximately $4,000 for the present
value of the fixed payments under the March 1996 Attorneys General
settlements and $16,902 for the present value of the fixed payments
under the March 1998 Attorneys General settlements. As a result of the
Company's treatment under the MSA, $14,928 of net charges accrued for
the prior settlements were reversed in 1998.
Copies of the various settlement agreements are filed as exhibits to
the Company's Form 10-K and the discussion herein is qualified in its
entirety by reference thereto.
Trials. In July 1998, trial commenced in the Engle, et al. v. Philip
Morris Incorporated, et al., case, a class action pending in Miami
Dade County, Florida, brought on behalf of all Florida residents
allegedly injured by smoking. Plaintiffs seek compensatory and
punitive damages ranging into the billions of dollars, as well as
equitable relief including, but not limited to, a medical fund for
future health care costs, attorneys' fees and court costs. The class
consists of all Florida residents and citizens, and their survivors,
who claim to have suffered, presently suffer or have died from
diseases and medical conditions caused by their addiction to
cigarettes that contain nicotine.
The current trial plan calls for the case to be tried in three
"Phases". Phase One, which is currently underway, involves evidence
concerning certain "common" class issues relating to the plaintiff
class' causes of action. Entitlement to punitive damages will be
decided at the end of Phase One, but no amount will be set at that
time.
If plaintiffs prevail in Phase One, the first two stages of Phase Two
will involve individual determinations of specific causation and other
individual issues regarding entitlement to compensatory damages for
the class representatives. Stage three of Phase Two will involve an
assessment of the amount of punitive damages, if any, that individual
class representatives will be awarded. Stage four of Phase Two will
involve the setting of a percentage or ratio of punitive damages for
absent class members, assuming entitlement was found at the end of
Phase One.
Phase Three of the trial will be held before separate juries to
address absent class members' claims, including issues of specific
causation and other individual issues regarding entitlement to
compensatory damages.
Additional cases are currently scheduled for trial during 1999,
including two Third-Party Payor Actions brought by unions in
Washington (September) and New York (September), and three Class
Actions in Alabama (August), Wisconsin (September) and New York
(November). Also, six Individual Actions are currently scheduled for
trial during 1999. Trial dates, however, are subject to change.
Other Related Matters. A grand jury investigation is being conducted
by the office of the United States Attorney for the Eastern District
of New York (the "Eastern District Investigation") regarding possible
violations of criminal law relating to the activities of The Council
for Tobacco Research - USA, Inc. (the "CTR"). Liggett was a sponsor of
the CTR at one time. In May 1996, Liggett received a subpoena from a
Federal grand jury sitting in the Eastern District of New York, to
which Liggett has responded.
In March 1996, and in each of March, July, October and December 1997,
the Company and/or Liggett received subpoenas from a Federal grand
jury in connection with an investigation by the
-27-
<PAGE> 29
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
United States Department of Justice (the "DOJ Investigation")
involving the industry's knowledge of: the health consequences of
smoking cigarettes; the targeting of children by the industry; and the
addictive nature of nicotine and the manipulation of nicotine by the
industry. Liggett has responded to the March 1996, March 1997 and July
1997 subpoenas and is in the process of responding to the October and
December 1997 subpoenas. The Company understands that the Eastern
District Investigation and the DOJ Investigation essentially have been
consolidated into one investigation conducted by the DOJ. The Company
and Liggett are unable, at this time, to predict the outcome of this
investigation.
In April 1998, the Company announced that Liggett had reached an
agreement with the DOJ to cooperate in both the Eastern District
Investigation and the DOJ Investigation. The agreement does not
constitute an admission of any wrongful behavior by Liggett. The DOJ
has not provided immunity to Liggett and has full discretion to act or
refrain from acting with respect to Liggett in the investigation.
In September 1998, Liggett received a subpoena from a federal grand
jury in the Eastern District of Philadelphia investigating possible
antitrust violations in connection with the purchase of tobacco by and
for tobacco companies. Liggett has responded to this subpoena. Liggett
and the Company are unable, at this time, to predict the outcome of
this investigation.
Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably
against the Company or Liggett. An unfavorable outcome of a pending
smoking and health case could encourage the commencement of additional
similar litigation. The Company is unable to make a meaningful
estimate with respect to the amount of loss that could result from an
unfavorable outcome of many of the cases pending against the Company,
because the complaints filed in these cases rarely detail alleged
damages. Typically, the claims set forth in an individual's complaint
against the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage
claims are typically stated as being for the minimum necessary to
invoke the jurisdiction of the court.
It is possible that the Company's consolidated financial position,
results of operations or cash flow could be materially adversely
affected by an unfavorable outcome in any such tobacco-related
litigation.
Liggett has been involved in certain environmental proceedings, none
of which, either individually or in the aggregate, rises to the level
of materiality. Liggett's management believes that current operations
are conducted in material compliance with all environmental laws and
regulations. Management is unaware of any material environmental
conditions affecting its existing facilities. Compliance with federal,
state and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital
expenditures, earnings or competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending
against the Company 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.
-28-
<PAGE> 30
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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.
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. 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. See also "Subsequent Events" below.
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.
-29-
<PAGE> 31
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
As part of the 1997 budget agreement approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents,
would rise 10 cents in the year 2000 and 5 cents more in the year
2002. Additionally, in November 1998, the citizens of California voted
in favor of a 50 cents per pack tax on cigarettes sold in that state.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco
industry, the effects of which, at this time, the Company is not able
to evaluate.
Subsequent Events: 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.
OTHER MATTERS:
In March 1997, a shareholder derivative suit was filed against New
Valley, as a nominal defendant, its directors and the Company in the
Delaware Chancery Court, by a shareholder of New Valley. The suit
alleges that New Valley's purchase in January 1997 of the BML shares
from BOL constituted a self-dealing transaction which involved the
payment of excessive consideration by New Valley. The plaintiff seeks
(i) a declaration that New Valley's directors breached their fiduciary
duties, the Company aided and abetted such breaches and such parties
are therefore liable to New Valley, and (ii) unspecified damages to be
awarded to New Valley. The Company's time to respond to the complaint
has not yet expired. The Company believes that the allegations are
without merit. Although there can be no assurances, management is of
the opinion, after consultation with counsel, that the ultimate
resolution of this matter will not have a material adverse effect on
the Company's consolidated financial position, results of operations
or cash flows.
In September 1998, a lawsuit was commenced against the Company, New
Valley, certain officers, directors and shareholders and others in the
United States District Court, Southern District of Texas, Houston
Division. The defendants have moved to dismiss the case. The court, in
the interim, has stayed all discovery.
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<PAGE> 32
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
9. SEGMENT INFORMATION
The Company's business segment is tobacco with reportable segments
being geographic, i.e., the United States and Russia. Information for
the three months ended March 31, 1999 and 1998 follows:
<TABLE>
<CAPTION>
United
States Russia Corporate
Tobacco Tobacco and Other Total
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
1999
Net sales ....................... $ 86,047 $ 22,350 $ 12 $ 108,409
Operating income ................ 20,069 1,302 774 22,145
Identifiable assets ............. 77,000 121,812 49,533 248,345
Depreciation and amortization ... 855 798 3 1,656
Capital expenditures ............ 6,369 13,248 19,617
1998
Net sales ....................... $ 65,626 $ 19,154 $ 23 $ 84,803
Operating income (loss) ......... 6,251 1,397 (105) 7,543
Identifiable assets ............. 69,241 50,048 15,144 134,433
Depreciation and amortization ... 1,585 235 82 1,902
Capital expenditures ............ 353 42 395
</TABLE>
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<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"), New Valley Holdings, Inc. ("NV Holdings"), Liggett-Ducat Ltd.
("Liggett-Ducat") and other less significant subsidiaries. The Company holds an
equity interest in New Valley Corporation ("New Valley") through NV Holdings.
(See "Recent Developments - New Valley", below.)
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.
For purposes of this discussion and other consolidated financial
reporting, the Company's significant business segment is tobacco sold in the
United States and Russia for the three months ended March 31, 1999 and March
31, 1998.
RECENT DEVELOPMENTS
THE COMPANY AND LIGGETT
Philip Morris Brand Transaction. On November 20, 1998, the Company and
Liggett entered into a definitive agreement with PM which provided for PM to
purchase options in an entity which will hold three cigarette brands, L&M,
Chesterfield and Lark, held by Liggett's subsidiary, Eve. As contemplated by
the agreement, Liggett and PM entered into the PM Agreements on January 12,
1999 to effectuate the transactions. (See Note 2 to the Company's Consolidated
Financial Statements.)
Under the terms of the PM Agreements, Eve will contribute the Marks to
Brands LLC, a newly-formed limited liability company, in exchange for 100% of
two classes of LLC interests, the Class A Interest and the Class B Interest. PM
acquired two options to purchase such interests, the Class A Option and the
Class B Option. On December 2, 1998, PM paid Eve a total of $150,000 for such
options, $5,000 for the Class A Option and $145,000 for the Class B Option. The
payments were used to fund the redemption of Liggett's 11.50% Series B Senior
Secured Notes and Series C Variable Rate Notes (the "Liggett Notes"), together
with accrued interest, on December 28, 1998.
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<PAGE> 34
BOL
Liggett-Ducat. Liggett-Ducat is currently completing construction of a
new cigarette factory on the outskirts of Moscow. Production at Liggett-Ducat's
existing factory ceased in March 1999, with production scheduled to start at
the new factory in mid-1999.
NEW VALLEY
Western Realty Ducat. In February 1998, New Valley and Apollo
organized Western Realty Ducat to make real estate and other investments in
Russia. In connection with the formation of Western Realty Ducat, New Valley
agreed, among other things, to contribute the real estate assets of BML to
Western Realty Ducat and Apollo agreed to contribute up to $58,750, including
the investment in Western Realty Repin. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in Western
Tobacco which was organized by BOL to hold BOL's interests in Liggett-Ducat.
Proposed Recapitalization Plan. New Valley intends to submit a
proposed recapitalization plan to its stockholders at its 1999 annual meeting
of stockholders. The recapitalization plan, if implemented, will have a
significant effect on New Valley's and the Company's financial position and
results of operations. (See Note 3 to the Company's Consolidated Financial
Statements.)
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 BOL. The Company, New Valley and BOL 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 BOL believe they are Year 2000 compliant.
Liggett. Liggett utilizes management information systems and software
technology that may be affected by Year 2000 issues throughout its operations.
Liggett has evaluated the costs to implement century date change compliant
systems conversions and is in the process of executing a planned conversion of
its systems prior to the Year 2000. To date, the focus of Year 2000 compliance
and verification efforts has been directed at the implementation of new
customer service, inventory control and financial reporting systems at each of
the three regional Strategic Business Units formed as part of Liggett's
reorganization which began in January 1997. Liggett estimates that
approximately $138 of the expenditures for this reengineering effort related to
Year 2000 compliance, validation and testing. In January of 1998, Liggett
initiated a major conversion of factory accounting, materials management and
information systems at its Durham production facility with upgrades that have
been successfully tested for Year 2000 compliance. This conversion was
completed in November 1998. Program upgrades to Liggett's human resources and
payroll systems are scheduled for completion in July 1999. Enhancements to
Liggett's finished goods inventory system are expected to be completed in
September 1999. It is anticipated that all factory, corporate, field sales and
physical distribution systems will be completed in sufficient time to support
Year 2000 compliance and verification.
Although such costs may be a factor in describing changes in operating
profit in any given reporting period, Liggett currently does not believe that
the anticipated costs of Year 2000
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<PAGE> 35
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.
External Service Providers. While modifications for Year 2000
compliance by the Company, its subsidiaries and New Valley 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 the clearing agent for Ladenburg, a
broker-dealer subsidiary of New Valley. Ladenburg has been informed by its
clearing agent that it has initiated an extensive effort to ensure that it is
Year 2000 compliant and that the clearing agent will conduct system-wide
testing of its Year 2000 software throughout 1999.
It is unclear whether the Russian government and other organizations
who provide significant infrastructure services in Russia have addressed the
Year 2000 problem sufficiently to mitigate potential substantial disruption to
these infrastructure services. The substantial disruption to these services
would have an adverse affect on the operations of Liggett-Ducat. Furthermore,
the current financial crises in Russia could affect the ability of the
government and other organizations to fund Year 2000 compliance programs.
Although the Company and its subsidiaries are in the process of
confirming that their service providers are adequately addressing Year 2000
issues, there can be no complete assurance of success, or that interaction with
other service providers will not impair the Company's or its subsidiaries'
services.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Pricing Activity. List price increases initiated by the industry
during 1998 amounted to $6.35 per carton. In 1998, Liggett announced list price
increases of $.25 per carton in January, $.50 per carton in April, $.50 per
carton in May, $.60 per carton in August and $4.50 per carton in December.
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 March 31,
1999, there were approximately 270 individual suits, 50 purported class actions
and 85 governmental and other third-party payor health care reimbursement
actions pending in the United States in which Liggett was a named defendant. As
new cases are commenced, the costs associated with defending such cases and the
risks attendant to the inherent unpredictability of litigation continue to
increase. Recently, there have been a number of restrictive regulatory actions
from various Federal administrative bodies, including the United States
Environmental Protection Agency ("EPA") and the Food and Drug Administration
("FDA"), adverse political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of
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 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 of such tobacco-related
litigation. (See Part II, Item 1, "Legal Proceedings" and Note 8 to the
Company's Consolidated Financial Statements for a description of legislation,
regulation and litigation.)
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<PAGE> 36
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and
implied warranties, conspiracy, aiding and abetting concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, RICO and antitrust statutes. In
many of these cases, in addition to compensatory damages, plaintiffs also seek
other forms of relief including disgorgement of profits and punitive damages.
Defenses raised by defendants in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence, lack
of design defect, statutes of limitations or repose, equitable defenses such as
"unclean hands" and lack of benefit, failure to state a claim and federal
preemption.
The claims asserted in the third-party payor actions vary. In most of
these cases, plaintiffs assert the equitable claim that the tobacco industry
was "unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other claims
made by some but not all plaintiffs include the equitable claim of indemnity,
common law claims of negligence, strict liability, breach of express and
implied warranty, violation of a voluntary undertaking or special duty, fraud,
negligent misrepresentation, conspiracy, public nuisance, claims under state
and federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under the RICO.
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.
On November 23, 1998, PM, B&W, RJR and Lorillard (collectively, the
"Original Participating Manufacturers" or "OPMs") and Liggett (together with
the OPMs and any other tobacco product manufacturer that becomes a signatory,
the "Participating Manufacturers") entered into the Master Settlement Agreement
(the "MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas
(collectively, the "Settling States") to settle the asserted and unasserted
health care cost recovery and certain other claims of those Settling States. As
described below, the Company and Liggett had previous settlements with a number
of these Settling States and also had previously settled similar claims brought
by Florida, Mississippi, Texas and Minnesota.
The MSA is subject to final judicial approval in each of the Settling
States, which approval has been obtained, to date, in 42 states and
territories.
Pursuant to the MSA, Liggett has no payment obligations unless its
market share exceeds 125% of its 1997 market share (the "Base Share"). 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):
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<PAGE> 37
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
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
</TABLE>
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 agreements 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 nations" protection for both the
Company and Liggett, the payments due these states by Liggett (with certain
possible exceptions) have been eliminated.
In March 1997, Liggett, the Company and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled Fletcher, et al. v. Brooke Group
Ltd., et al., Circuit Court of Mobile County, Alabama, where the court granted
preliminary approval and preliminary certification of the class. On July 2,
1998, Liggett, the Company and plaintiffs filed an amended class action
settlement agreement which was preliminarily approved by the court on December
8, 1998. A hearing on final approval of the settlement is scheduled for June 3,
1999; however, hearing dates are subject to change. Effectiveness of the
mandatory settlement is conditioned on final court approval of the settlement.
There can be no assurance as to whether, or when, such court approval will be
obtained. Pursuant to the amended agreement, Liggett is required to pay to the
class 7.5% of Liggett's pre-tax income each year for 25 years, with a minimum
annual payment guarantee of $1,000 over the term of the agreement. The amended
agreement does not set forth a formula with respect to the distribution of
settlement proceeds to the class. If the court issues a final order and
judgment approving the settlement, such an order, the Company anticipates,
would preclude further prosecution by class members of tobacco-related claims
against both Liggett and the Company. Under the Full Faith and Credit Act, a
final judgment entered in a nationwide class action pending in a state court
has a preclusive effect against any class member with respect to the claims
settled and released. As the class definition in Fletcher encompasses all
persons in the United States who could claim injury as a result of cigarette
smoking or ETS and any third-party payor claimants, it is anticipated that,
upon final order and judgment, all such persons and third-party payor claimants
would be barred from further prosecution tobacco-related claims against Liggett
and the Company.
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 MSA,
$14,928 of net charges accrued for the prior settlements were reversed
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<PAGE> 38
in 1998. (See the discussions of the tobacco litigation settlements appearing
in Note 8 to the Company's Consolidated Financial Statements.)
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Revenues Operating Income
----------------------- ----------------------
Three Months Ended Three Months Ended
March 31, March 31,
----------------------- ----------------------
1999 1998 1999 1998
--------- -------- -------- -------
<S> <C> <C> <C> <C>
Liggett $ 86,047 $ 65,626 $ 20,069 $ 6,251
Liggett-Ducat 22,350 19,154 1,302 1,710
Other 12 23 774 (418)
--------- -------- -------- -------
Total $ 108,409 $ 84,803 $ 22,145 $ 7,543
========= ======== ======== =======
</TABLE>
Three months ended March 31, 1999 compared to three months ended March 31,
1998.
Revenues. Total revenues were $108,409 for the three months ended
March 31, 1999 compared to $84,803 for the three months ended March 31, 1998.
This 27.8% increase in revenues was primarily due to an increase in tobacco
revenues at Liggett of $20,421 and at Liggett-Ducat of $3,196. Revenues at
Liggett increased in both the premium and discount segments by 31.1% ($20,421)
due to price increases of $30,497 (see "Recent Developments in the Cigarette
Industry - Pricing Activity"), partially offset by an 14.2% decline in unit
sales volume (approximately 178 million units), accounting for $9,337 in volume
variance and an unfavorable product mix of $739. The decline in Liggett's sales
volume was due to an overall decline in industry volume, certain competitors'
continuing leveraged rebate programs tied to their products and increased
promotional activity by certain other manufacturers.
Premium sales at Liggett for the first quarter of 1999 amounted to
$25,366 and represented 29.5% of total revenues, compared to $22,958 and 35.0%
of total sales in the prior year period. In the premium segment, revenues grew
by 10.5% ($2,408) for the three months ended March 31, 1999, compared to the
prior year period, due to price increases of $8,202, which were partially
offset by a 25.2% decline in unit sales volume (approximately 91 million
units), accounting for $5,794 in volume variance.
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the first three months of 1999 amounted to $60,681 and
represented 70.5% of total revenues, compared to $42,668 and 65.0% of total
sales for the year-ago first quarter. In the discount segment, revenues grew by
42.2% ($18,013) for the three months ended March 31, 1999 compared to the prior
year period, due to price increases of $22,295, which were partially offset by
a 9.8% decline in unit sales volume (approximately 87 million units),
accounting for $4,169 in volume variance and an unfavorable product mix among
the discount brand categories of $113.
For the three months ended March 31, 1999, fixed manufacturing costs
on a basis comparable to 1998 was $1,149 lower, although costs per thousand
units increased by $0.09 per thousand.
Net sales at Liggett-Ducat for the three months ended March 31, 1999
increased 14.9% ($3,196) to $22,350 over the same period in 1998 due primarily
to an increase in unit sales
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<PAGE> 39
volume of 38.8% (1,400 million units) accounting for a $7,425 volume variance
and favorable product mix of $745 offset by unfavorable price effect of $4,974.
Gross Profit. Consolidated gross profit was $66,982 for the three
months ended March 31, 1999 compared to $43,147 for the three months ended
March 31, 1998, an increase of $23,835 or 55.2% when compared to the same
period last year, reflecting an increase in gross profit at Liggett of $23,477
and an increase at Liggett-Ducat of $348 for the three months ended March 31,
1999 compared to the same period in the prior year.
Gross profit at Liggett of $62,882 for the three months ended March
31, 1999 increased $23,477 from gross profit of $39,405 for the first quarter
of 1998, due primarily to the price increases discussed above. (See "Recent
Developments in the Cigarette Industry - Pricing Activity".) In 1999, Liggett's
premium and discount brands contributed 28.62% and 65.26%, respectively, to the
Company's overall gross profit. Over the same period in 1998, Liggett's premium
and discount brands contributed 36.1% and 63.9%, respectively, to total gross
profit. As a percent of revenues (excluding federal excise taxes), gross profit
at Liggett increased to 85.6% for the three months ended March 31, 1999
compared to 77.5% for the same period in 1998, with gross profit for the
premium segment at 86.6% and 79.2%, respectively, in the first quarter of 1999
and 1998, respectively, and gross profit for the discount segment at 85.1% and
76.6% in 1999 and 1998, respectively. This increase is the result of the 1998
list price increases, a total of 63.5 cents per pack, and improved production
variances. These increases were partially offset by increased tobacco costs at
Liggett due to a reduction in the average discount available to the Company
from leaf tobacco dealers on tobacco purchased under prior years' purchase
commitments.
As a percent of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased to 20.5% for the three months ended March 31,
1999 compared to 22.0% in the same period in 1998, primarily due to the
devaluation of the ruble.
Expenses. Selling, general and administrative expenses were $44,837
for the three months ended March 31, 1999 compared to $35,604 for the same
period last year due to an increase in expenses at Liggett of $9,659 and an
increase of $507 at Liggett-Ducat offset by lower corporate expense primarily
due to lower pension expense. Operating, selling, general and administrative
expenses at Liggett increased to $42,813 for the three months ended March 31,
1999 compared to $33,154 for the same period for the prior year. This increase
in operating expenses was due primarily to higher spending for promotional and
marketing programs of approximately $11,011, partially offset by a reduction in
amortization of approximately $867 and the absence of system development costs
in the current year quarter of $485. The increase at Liggett-Ducat of $507 was
primarily due to increased marketing and depreciation expense.
Other Income (Expense). Interest expense was $14,988 for the three
months ended March 31, 1999 compared to $20,786 for the same period last year,
a decrease of $5,798 primarily due to the redemption by Liggett of the Liggett
Senior Secured Notes on December 28, 1998 and lower interest expense of
approximately $800 at corporate. Net interest expense at Liggett decreased by
$6,376 for the three months ended March 31, 1999 compared to the three months
ended March 31, 1998. This was offset by higher interest expense at BOL of
$1,390 primarily due to increased interest rates on credit facilities in
Russia.
Equity in earnings of affiliate was a loss of $7,629 for the three
months ended March 31, 1999 compared to a loss of $4,187 for the three months
ended March 31, 1998 and relates in both periods to New Valley's net loss
applicable to common shares of $23,801 and $18,675, respectively.
For the three months ended March 31, 1999, interest expense and loss
in equity of affiliate were offset by foreign currency gain of $2,270 and the
recognition of deferred gain of
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<PAGE> 40
$7,050 relating to the expiration of the put obligation on Ducat III (the site
of the old cigarette factory in Russia) in connection with the sale of the
BrookeMil Ltd. common shares in 1997. The factory ceased operations in March
1999.
Provision for Income Taxes. Income tax for the first quarter of 1999
was $1,729 compared to $931 for the first quarter of 1998. The effective tax
rate does not bear a customary relationship with pre-tax accounting income
principally as a consequence of the change in the valuation allowance relating
to deferred tax assets and foreign taxes.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents decreased $1,877 and $172 for the three
months ended March 31, 1999 and March 31, 1998, respectively. Net cash provided
by operations for the three months ended March 31, 1999 was $2,571 compared to
net cash used in operations of $25,984 for the comparable period of 1998. The
increase of $28,555 in net cash provided by operating activities in 1999 over
the prior year was primarily due to an increase in operating income at Liggett
and a reduction in debt service, resulting from Liggett's bond redemption on
December 28, 1998. In the 1998 period, cash was used in operations at BGLS and
Liggett to make interest payments of approximately $29,600. In addition, there
were also reductions in promotional expenses, taxes payable and other accrued
liabilities, in total amount of $6,366, and an increase in inventories of
$8,385. These items were partially offset by an increase in accounts payable of
$4,842.
Cash used in investing activities of $19,581 compares to cash provided
of $822 for the periods ended March 31, 1999 and 1998, respectively. In 1999,
capital expenditures for machinery and equipment at Liggett amounted to $6,369
while equipment and construction costs for the new factory amounted to $13,248
at Liggett-Ducat. In 1998, proceeds from sales of equipment and an investment
of $1,295 were partially offset by capital expenditures of $395 at Liggett and
BOL.
Cash provided by financing activities was $15,452 and $24,911 for the
three months ended March 31, 1999 and 1998, respectively. Proceeds in the 1999
period included net borrowings under revolving credit facilities at both Liggett
and Liggett-Ducat of $12,667 and proceeds from equipment financing of $4,500.
These proceeds were offset primarily by distributions on common stock of
$1,358. Proceeds in the 1998 period included cash received from the sale of
common stock and exercise of stock options, in total $9,796, proceeds from the
participating loan made by Western Realty Ducat, and net borrowings under
Liggett's revolving credit facility (the "Facility") of $5,162 partially offset
by distributions on common stock of $900.
Liggett. On December 28, 1998, Liggett redeemed the $144,891 principal
amount of the Liggett Notes at 100% of the principal amount together with
accrued interest. Proceeds of $150,000 from the purchase by PM of two options
to purchase the Class A Interest and the Class B Interest in the LLC were used
to fund the redemption.
The closing of the exercise by PM of the Class A Option is scheduled
for no later than June 10, 1999 (currently scheduled for May 24, 1999). Upon
closing, Liggett will receive approximately $145,000 from the purchase of the
Class A Interest and the distribution of the Loan proceeds by the LLC.
Liggett has a $40,000 Facility expiring March 8, 2000, under which
$6,793 was outstanding at March 31, 1999. Availability under the Facility was
approximately $12,990 based on eligible collateral at March 31, 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, bear a rate of 9.25% at
March 31, 1999. The Facility required Liggett's compliance with certain
financial and other covenants including restrictions on the payment of cash
dividends and distributions by Liggett. In addition, the Facility, as amended,
imposes requirements with respect to Liggett's adjusted net worth (not to fall
below a deficit of $195,000 as computed in accordance with the agreement) and
working capital (not to fall below a deficit of $17,000 as
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<PAGE> 41
computed in accordance with the agreement). At March 31, 1999, Liggett was in
compliance with all covenants under the Facility; Liggett's adjusted net worth
deficiency and net working capital, as computed in accordance with the
agreement, were $146,239 and $4,466, respectively.
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase from a third party. The loan, which is
collateralized by the equipment, is payable in 60 monthly installments of $56
including annual interest of 7.6% with a final payment of $2,550.
Liggett (and, in certain cases, the Company) and other United States
cigarette manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke (environmental tobacco smoke) from cigarettes.
The Company believes, and has been so advised by counsel handling the
respective cases, that the Company and Liggett have a number of valid defenses
to the claim or claims asserted against them. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Recently, there
have been a number of adverse regulatory, political and other developments
concerning cigarette smoking and the tobacco industry. 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 "Recent Developments in the Cigarette Industry - Legislation, Regulation
and Litigation" above and Note 8 to the Company's Consolidated Financial
Statements.)
The Company is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases
pending against the Company and Liggett. It is possible that the Company's
consolidated financial position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any such
tobacco-related litigation.
BGLS. At March 31, 1999, BGLS had outstanding $232,864 principal
amount of the BGLS Notes which mature on January 31, 2001. On March 5, 1998,
BGLS entered into the Standstill Agreement whereby 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 has deferred a total of $34,602 of interest as of March 31, 1999.
On February 17, 1999, BGLS entered into an agreement with a third
party to purchase, during the second quarter of 1999, approximately $31,139
principal amount of the BGLS Notes, originally held by the Apollo Holders and
subject to the Standstill Agreement. The purchase price is 95% of the principal
amount of the notes and the accrued interest thereon. The purchase is
contingent upon receipt by the Company of approximately an additional $145,000
(in addition to the $150,000 option fee paid in December 1998) on terms
substantially consistent with the transactions contemplated by the PM
Agreements.
In April 1999, the Company agreed with a third party to purchase during
the second quarter 1999, approximately $3,697 of the BGLS Notes. The purchase
price is 98% of the principal amount of the notes and the accrued interest
thereon. BGLS will fund both purchases with tax sharing payments from Liggett.
BOL. Liggett-Ducat is currently completing construction of a new
cigarette factory on the outskirts of Moscow which is currently scheduled to be
operational in June 1999. The new factory, which will utilize Western cigarette
making technology and have a capacity of in excess of 30 billion units per
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<PAGE> 42
year, will produce American and international blend cigarettes, as well as
traditional Russian cigarettes. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in, a company
organized by BOL which, among other things, holds BOL's interest in
Liggett-Ducat and the new factory. In addition, BOL has entered into promissory
notes for equipment purchases which have a liability of approximately $23,500
at March 31, 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 $12,000 of loans from BOL made during the first
half of 1999.
The Company. The Company has substantial near-term consolidated debt
service requirements, with aggregate required principal payments of
approximately $297,000 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 March 31, 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 $15,472. Company expenditures (exclusive of
Liggett and Liggett-Ducat) in 1999 for current operations include cash interest
expense of approximately $21,350 (excluding accrued interest due on the BGLS
Notes discussed above that BGLS has contingently agreed to repurchase),
dividends on the Company's shares (currently at an annual rate of approximately
$6,300) and corporate expenses. The Company anticipates funding its 1999
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 principally exposed to market risks 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.
Equity Price Risk. The Company holds investment securities available
for sale with a fair market value of $54,407 at March 31, 1999. These
securities represent an investment in New Valley Class A Preferred Shares,
Class B Preferred Shares and Common Shares which the Company carries on its
balance sheet at zero.
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 and Western Tobacco's operations are conducted
in Russia. During 1998 and continuing into 1999, the economy of the Russian
Federation entered a period of economic instability. 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
-41-
<PAGE> 43
the fiscal measures taken by government and other actions beyond the control of
companies operating in the Russian Federation. The operations of Liggett-Ducat
and Western Tobacco may be significantly affected by these factors for the
foreseeable future.
Russian taxation is subject to varying interpretations and constant
changes. Furthermore, the interpretation of tax legislation by tax authorities
as applied to the transactions and activity of Liggett-Ducat and Western
Tobacco may not coincide with that of management. As a result, transactions may
be challenged by tax authorities and Liggett-Ducat and Western Tobacco may be
assessed additional taxes, penalties and interest, which can be significant.
Management regularly reviews the Company's taxation compliance with applicable
legislation, laws and decrees and current interpretations and from time to time
potential exposures are identified. At any point in time, a number of open
matters may exist; however, management believes that adequate provision has
been made for all material liabilities. Tax years remain open to review by the
authorities for six years.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", in this report and
in other filings with the Securities and Exchange Commission and in its reports
to shareholders, which reflect management's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties and, in connection with the
"safe-harbor" provisions of the Reform Act, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company. Liggett continues to be subject to risk factors endemic to the
domestic tobacco industry including, without limitation, health concerns
relating to the use of tobacco products and exposure to ETS, legislation,
including tax increases, governmental regulation, privately imposed smoking
restrictions, governmental and grand jury investigations and litigation. Each
of the Company's operating subsidiaries, namely Liggett and Liggett-Ducat, are
subject to intense competition, changes in consumer preferences, the effects of
changing prices for its raw materials and local economic conditions.
Furthermore, the performance of Liggett-Ducat's 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 BGLS' Series B Notes provides for, among other things, the
restriction of certain affiliated transactions between the Company and its
affiliates, as well as for certain restrictions on the use of future
distributions received from New Valley. The failure of the Company or its
significant suppliers and customers 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.
-42-
<PAGE> 44
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 8, incorporated herein by reference, to
the Consolidated Financial Statements of Brooke Group Ltd. and
BGLS Inc. (collectively, the "Companies") included elsewhere in
this report on Form 10-Q which contains a general description of
certain legal proceedings to which the Company and/or BGLS or
their subsidiaries are a party and certain related matters.
Reference is also made to Exhibit 99.1 for additional information
regarding the pending material legal proceedings to which the
Company, BGLS and/or Liggett are party. A copy of Exhibit 99.1
will be furnished to security holders of the Company and its
subsidiaries without charge upon written request to the Company
at its principal executive offices, 100 S.E. Second St., Miami,
Florida 33131, Attn. Investor Relations.
Item 2. Changes in Securities and Use of Proceeds
No securities of the Company which were not registered under the
Securities Act of 1933, as amended (the "Securities Act"), have
been issued or sold by the Company during the three months ended
March 31, 1999.
Item 3. Defaults Upon Senior Securities
As of March 31, 1999, New Valley Corporation, the Companies'
affiliate, had the following respective accrued and unpaid
dividend arrearages on its 1,071,462 outstanding shares of $15.00
Class A Increasing Rate Cumulative Senior Preferred Shares ($100
Liquidation Value), $.01 par value per share (the "Class A
Shares") and 2,790,776 outstanding shares of $3.00 Class B
Cumulative Convertible Preferred Shares ($25 Liquidation Value),
$.10 par value per share (the "Class B Shares): (1) $234.6
million or $218.94 per Class A Share; and (2) $172.9 million or
$61.96 per Class B Share.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
--------
<S> <C>
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 March 31,
1999 and 1998.
99.3 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly periods ended
March 31, 1999 and 1998.
</TABLE>
-43-
<PAGE> 45
<TABLE>
<S> <C>
99.4 Brooke (Overseas) Ltd.'s Interim Consolidated
Financial Statements for the quarterly periods ended
March 31, 1999 and 1998.
99.5 New Valley Holdings, Inc.'s Interim Consolidated
Financial Statements for the quarterly periods ended
March 31, 1999 and 1998.
(b) Reports on Form 8-K
None.
</TABLE>
-44-
<PAGE> 46
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: May 14, 1999
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
------------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: May 14, 1999
-45-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOKE GROUP LTD
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,519
<SECURITIES> 0
<RECEIVABLES> 17,920
<ALLOWANCES> 0
<INVENTORY> 42,740
<CURRENT-ASSETS> 126,242
<PP&E> 108,919
<DEPRECIATION> 35,427
<TOTAL-ASSETS> 248,345
<CURRENT-LIABILITIES> 267,242
<BONDS> 280,410
0
0
<COMMON> 2,094
<OTHER-SE> 382,145
<TOTAL-LIABILITY-AND-EQUITY> 248,345
<SALES> 108,409
<TOTAL-REVENUES> 108,409
<CGS> 41,427
<TOTAL-COSTS> 41,427
<OTHER-EXPENSES> 2,126
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (14,988)
<INCOME-PRETAX> 9,283
<INCOME-TAX> 1,729
<INCOME-CONTINUING> 7,554
<DISCONTINUED> 1,249
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,803
<EPS-PRIMARY> 0.42
<EPS-DILUTED> 0.34
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927388
<NAME> BGLS INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 5,519
<SECURITIES> 0
<RECEIVABLES> 17,920
<ALLOWANCES> 0
<INVENTORY> 42,740
<CURRENT-ASSETS> 126,012
<PP&E> 108,899
<DEPRECIATION> 35,421
<TOTAL-ASSETS> 246,956
<CURRENT-LIABILITIES> 298,552
<BONDS> 280,410
0
0
<COMMON> 0
<OTHER-SE> (415,157)
<TOTAL-LIABILITY-AND-EQUITY> 246,956
<SALES> 108,409
<TOTAL-REVENUES> 108,409
<CGS> 41,427
<TOTAL-COSTS> 41,427
<OTHER-EXPENSES> 3,310
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (16,244)
<INCOME-PRETAX> 9,613
<INCOME-TAX> 1,729
<INCOME-CONTINUING> 7,884
<DISCONTINUED> 1,249
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,133
<EPS-PRIMARY> 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).
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.
1
<PAGE> 2
City of New York, et al. v. The Tobacco Institute, et al., Case No.
97-CIV-0904, Supreme Court of New York, New York County (case filed
10/17/96). City of New York seeks to obtain declaratory and equitable
relief and restitution as well as to recover money damages resulting
from payment by the City for tobacco-related medical treatment for its
citizens and health insurance for its employees.
County of Erie v. The Tobacco Institute, Inc., et al., Case No. I
1997/359, Supreme Court of New York, Erie County (case filed 1/14/97).
County seeks equitable relief and economic reimbursement for moneys
expended on payments for healthcare for Medicaid recipients and
non-Medicaid care for indigent smokers.
Allegheny General Hospital, et al. v. Philip Morris, et al., Case No.
98-18956, Court of Common Pleas, State of Pennsylvania, Allegheny
County (case filed 10/10/98). Hospitals seek to recover past and future
costs expended to provide healthcare to Medicaid, medically indigent,
and non-paying patients suffering from tobacco-related illnesses.
County of Allegheny v. The American Tobacco Company, et al; Case No.
99-365, U.S.D.C, Western District of Pennsylvania (case filed 3/12/99).
County seeks equitable relief and economic reimbursement for moneys
expended on payments for healthcare for smokers resident in the County.
The Crow Creek Sioux Tribe v. The American Tobacco Company, et al.,
Case No. CV 97-09-082, Tribal Court of The Crow Creek Sioux Tribe,
State of South Dakota (case filed 9/26/97). Indian tribe seeks
equitable and injunctive relief for damages incurred by the tribe in
paying for the expenses of indigent smokers.
The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et
al., Case No. 030399, Tribal Court of the Sisseton-Wahpeton Sioux
Tribe, State of North Dakota (case filed 2/3/99). Indian tribe seeks
equitable and injunctive relief for damages incurred by the tribe in
paying for the expenses of indigent smokers.
Republic of Bolivia v. Philip Morris Companies, Inc., et al., Case No.
6949*JG99, District Court, State of Texas, Brazoria County, State of
Texas (case filed 1/20/99). The Republic of Bolivia seeks compensatory
and injunctive relief for damages incurred by the Republic in paying
for the medicaid expenses of indigent smokers.
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.
2
<PAGE> 3
Republic of Nicaragua v. Liggett Group Inc., et al., Case No. 98-2380
RLA, USDC, District of Puerto Rico (case filed 12/10/98). The Republic
of Nicaragua seeks compensatory and injunctive relief for damages
incurred by the Republic in paying for the medicaid expenses of
indigent smokers.
Republic of Panama v. The American Tobacco Company, Inc., et al., Case
No. 98-17752, Civil District Court, State of Louisiana, Orleans Parish
(case filed 10/20/98). The Republic of Panama seeks compensatory and
injunctive relief for damages incurred by the Republic in paying for
the medicaid expenses of indigent smokers.
The Kingdom of Thailand v. The Tobacco Institute, Inc., et al, Case No.
H-99-0320, USDC, Southern District Texas (case filed 3/11/99). The
Kingdom of Thailand seeks compensatory and injunctive relief for
damages incurred by the Kingdom in paying for the medicaid expenses of
indigent smokers.
Republic of Venezuela v. Philip Morris Companies, Inc., et al., Case
No. 99-01943-CA-01, Circuit Court of the 11th Judicial Circuit, State
of Florida, Miami-Dade County (case filed 1/27/99). The Republic of
Venezuela seeks compensatory and injunctive relief for damages incurred
by the Republic in paying for the medicaid expenses of indigent
smokers.
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.
3
<PAGE> 4
Bay Area Automotive Group Welfare Fund, et al. v. Philip Morris, Inc.
et al., Case No. 994380, Superior Court of California, County of San
Francisco (case filed 4/16/98). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended
by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Fibreboard Corporation, et al. v. The American Tobacco Company, et al.,
Case No. 791919-8, Superior Court of California, County of Alameda
(case filed 11/10/97). Asbestos company seeks reimbursement for damages
paid to asbestos victims for medical and other relief, which damages
allegedly are attributable to the tobacco companies.
Newspaper Periodical Drivers Local 921 San Francisco Newspaper Agency
Health & Welfare Trust Fund v. Philip Morris, et al., Case No. 404469,
Superior Court of California, County of San Mateo, (case filed
4/15/98). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and beneficiaries suffering from
smoking-related illnesses.
Northern California General Teamsters Security Fund, et al. v. Philip
Morris, Inc., et al., Case No. 798492-9, Superior Court of California,
County of Alameda (case filed 5/22/98). Health and Welfare Trust Fund
seeks injunctive relief and economic reimbursement to recover moneys
expended by fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Northern California Tile Industry Health & Welfare Trust Fund v. Philip
Morris, Inc., et al., Case No. 996822, Superior Court of California,
County of San Francisco (case filed 5/98). Health and Welfare Trust
Fund seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
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
4
<PAGE> 5
participants and beneficiaries suffering from smoking-related
illnesses.
San Francisco Newspaper Publishers and Northern California Newspaper
Guild Health & Welfare Trust v. Philip Morris, Inc., et al., Case No
.994409, Superior Court of California, County of San Francisco (case
filed 4/17/98). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
Screen Actors Guild - Producers Health Plan, et al. v. Philip Morris,
et al., Case No. DC181603, Superior Court of California, County of Los
Angeles (case filed 11/20/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended
by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
The Seibels Bruce Group, Inc. v. R.J. Reynolds, et al, Case No. 300235,
Superior Court of California, County of San Francisco (case filed
12/30/98). Insurance company seeks to recover equitable contribution
from the tobacco industry defendants for the amount that has been, and
will be paid by plaintiff for past and future defense and
indemnification costs.
Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris,
Inc., et al., Case No. 994403, Superior Court of California, County of
San Francisco (case filed 4/16/98). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended
by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
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
5
<PAGE> 6
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.
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
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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 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
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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.
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
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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.
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.
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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.
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.
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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.
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
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moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip Morris,
Inc, et al., Case No. 97-CV-5344, USDC, Eastern District of
Pennsylvania (case filed 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.
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).
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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.
West Virginia - Ohio Valley Area I.B.E.W., et al. v. Liggett Group
Inc., et al., Case No. 97-C-2135, USDC, Southern District of West
Virginia (case filed 9/19/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys expended
by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Milwaukee Carpenters= District Council Health Fund, et al. v. Philip
Morris, et al., Case No. 98CV002394, Circuit Court of Wisconsin,
Milwaukee County (case filed 3/30/98). Health and Welfare Trust Fund
seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
III. CLASS ACTION CASES
Crozier, et al. v. American Tobacco Company, et al., Case No. CV
96-1508 PR, Circuit Court of Montgomery County, Alabama (case filed
8/2/96). This taxpayer putative class action seeks reimbursement of
Medicaid expenses made by the government of the State of Alabama for
smokers resident in Alabama allegedly injured by tobacco products.
Hansen, et al. v. The American Tobacco Company, et al., Case No.
LR-C-96-881, USDC, Eastern District of Arkansas (case filed 4/4/97).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in Arkansas.
Brown, et al. v. The American Tobacco Company, et al., Case No. 711400,
Superior
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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.
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.
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. An appeal is
currently pending.
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 and is
currently on trial.
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
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allegedly addicted smokers resident in Hawaii.
Clay, et al. v. The American Tobacco Company, et al., Case No.
97-4167-JPG, USDC, Southern District of Illinois (case filed 5/22/97).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in 34 states.
Cleary, et al. v. Philip Morris, Inc., et al., Case No. 98 L06427,
Circuit Court of the State of Illinois, Cook County (case filed
6/11/98). This personal injury class action is brought on behalf of
plaintiff and all similarly situated smokers resident in Illinois.
Norton, et al. v. R.J. Reynolds, et al., Case No. 48-D01-9605-CP-0271,
Superior Court of Indiana, Madison County (case filed 5/3/96). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated injured smokers resident in Indiana.
Brammer, et al. v. R.J. Reynolds, et al., Case No. 4-97-CV-10461, USDC,
Southern District of Iowa (case filed 6/30/97). This
"addiction-as-injury" putative class action is brought on behalf of
plaintiffs and all similarly situated allegedly addicted smokers
resident in Iowa.
Castano, et al. v. The American Tobacco Company, et al., Case No.
95-30725, USDC, Eastern District of Louisiana (case filed 3/29/94).
This case was settled by Liggett and Brooke on March 12, 1996.
Nationwide "addiction-as-injury" class action was decertified by the
Fifth Circuit in May 1996.
Granier, et al. v. The American Tobacco Company, et al., USDC, Eastern
District of Louisiana (case filed 9/29/94). This case currently is
stayed pursuant to a decision in Castano.
Young, et al. v. The American Tobacco Company, et al., Case No.
2:97-CV-03851, Civil District Court, State of Louisiana, Orleans Parish
(case filed 11/12/97). This personal injury class action is brought on
behalf of plaintiff and all similarly situated allegedly injured
smokers resident in Louisiana.
Richardson, et al. v. Philip Morris, et al., Case No.
96145050/CL212596, Circuit Court, Baltimore City, Maryland (case filed
on 5/29/96). This "addiction-as-injury" putative class action is
brought on behalf of plaintiff and all similarly situated allegedly
addicted smokers resident in Maryland.
Baker, et al. v. The American Tobacco Company, et al., Case
No.97-703444-NP, Circuit
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Court of Michigan, Wayne County (case filed 2/4/97). This personal
injury putative class action is brought on behalf of plaintiff and all
similarly situated allegedly injured adult smokers resident in
Michigan.
Taylor, Terry, et al. v. The American Tobacco Company, et al., Case No.
97-715975, Circuit Court of Michigan, Wayne County (case filed
7/28/97). This personal injury class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers resident
in Michigan.
Collier, et al. v. Philip Morris, et al., Case No. 1:98 ov 246RG, USDC,
Southern District of Mississippi (case filed 6/5/98). This putative
class action is brought on behalf of all non-smoking policemen and
seamen employed in the United States who allegedly have been injured by
exposure to second hand smoke.
White, Henry Lee, et al. v. Philip Morris, et al., Case No.
5:97-CV-91BRS, Chancery Court of Mississippi, Jefferson County (case
filed 4/24/97). This personal injury class action is brought on behalf
of plaintiff and all similarly situated allegedly injured smokers
resident in Mississippi.
Badillo, et al. v. The American Tobacco Company, et al., Case No.
CV-N-97-573-HDM (RAM), USDC, District of Nevada (case filed 11/4/97).
This action is brought on behalf of all Nevada casino workers that
allegedly have been injured by exposure to environmental tobacco smoke.
DiEnno, Vito and Martin N. Hallnan, et al. v. Liggett Group Inc., et
al., Case No. CV-S-98-489-DWH (RLH), District Court, Clark County,
Nevada (case filed 12/22/97). This action is brought on behalf of all
Nevada casino workers that allegedly have been injured by exposure to
environmental tobacco smoke.
Selcer, et al. v. R.J. Reynolds, et al., Case No. CV-S-97-00334-PMP
(RLH), USDC, District of Nevada (case filed 9/3/97). This personal
injury class action is brought on behalf of plaintiff and all similarly
situated allegedly injured smokers resident in Nevada.
Avallone, et al. v. The American Tobacco Company, et al., Case No.
MID-L-4883-98, Superior Court of New Jersey, Middlesex County (case
filed 5/5/98). This personal injury class action is brought on behalf
of plaintiff and all similarly situated non-smokers allegedly injured
from exposure to second hand smoke resident in New Jersey.
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.
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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.
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 Pennsyvania (case filed
10/22/98). This civil rights putative class action is brought by
several national African-American organizations, on behalf of all
African-Americans resident in the United States who have smoked menthol
cigarettes.
Sweeney, et al. v. American Tobacco Company, et al., Case No.
GD98-16226, Court of
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Common Pleas, State of Pennsylvania, Allegheny County (case filed
10/15/98). This putative class action is brought on behalf of all
current smokers who began smoking prior to the age of eighteen resident
in the State of Pennsylvania.
Aksamit, et al. v. Brown & Williamson, et al., Case No. 6:97-3636-21,
USDC, District of South Carolina, Greenville Division (case filed
11/24/97). This personal injury putative class action is brought on
behalf of plaintiff and all similarly situated allegedly injured
smokers resident in South Carolina.
Newborn, et al. v. Brown & Williamson, et al., Case No. 97-2938 GV,
USDC, Western District of Tennessee (case filed 10/1/97). This personal
injury class action is brought on behalf of plaintiff and all similarly
situated allegedly injured smokers resident in Tennessee.
Mason, et al. v. The American Tobacco Company, et al., Case No.
7-97CV-293-X, USDC, Northern District of Texas (case filed 12/23/97).
This nationwide taxpayer putative class action seeks reimbursement of
Medicaire expenses made by the United States government.
Herrera, et al. v. The American Tobacco Company, et al., Case No.
2:98-CV-00126, USDC, District of Utah (case filed 1/28/98). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers under the age of nineteen
[at time of original filing] resident in Utah.
Jackson, et al. v. Philip Morris, Inc., et al., Case No. 980901634PI,
3rd Judicial Court of Utah, Salt Lake County (case filed 3/10/98). This
"addiction-as-injury" class action is brought on behalf of plaintiff
and all similarly situated allegedly injured smokers resident in Utah.
Ingle, et al. v. Philip Morris, et al., Case No. 97-C-21-S, Circuit
Court, State of West Virginia, McDowell County (case filed 2/4/97).
This personal injury putative class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers resident
in West Virginia.
McCune v. The American Tobacco Company, et al., Case No. 97-C-204,
Circuit Court, State of West Virginia, Kanawha County (case filed
1/31/97). This "addiction-as-injury" putative class action is brought
on behalf of plaintiff and all similarly situated allegedly addicted
smokers resident in West Virginia.
Parsons, et al. v. Liggett Group Inc., et al., Case No. 98-C-388,
Circuit Court, State of
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West Virginia, Kanawha County (case filed 4/9/98). This personal injury
class action is brought on behalf of plaintiff's decedent and all West
Virginia residents having claims for personal injury arising from
exposure to both cigarette smoke and asbestos fibers.
Walker, et al. v. Liggett Group Inc., et al., Case No. 2:97-0102, USDC,
Southern District of West Virginia (case filed 2/12/97). Nationwide
class certified and limited fund class action settlement preliminarily
approved with respect to Liggett and Brooke Group on May 15, 1997.
Class decertified and preliminary approval of settlement withdrawn by
order of district court on August 5, 1997, which order currently is on
appeal to the Fourth Circuit.
Insolia, et al. v. Philip Morris, et al., Case No. 97-CV-230-J, Circuit
Court of Wisconsin, Rock County (case filed 4/4/97). This personal
injury class action is brought on behalf of plaintiff and all similarly
situated allegedly injured smokers resident in Wisconsin.
Bowden, et al. v. R.J. Reynolds Tobacco Company, et al., Case No.
98-0068-L, USDC, Western District of Virginia (case filed 1/6/99). This
personal injury class action is brought on behalf of plaintiff and
all similarly situated injured smokers resident in Virginia.
Fletcher, et al. v. Brooke Group Ltd., Civil Action No. 97-913, Circuit
Court of Mobile County, Alabama (Case filed 3/19/97). Nationwide class
of individuals alleging smoking-related claims. The limited fund
settlement was preliminarily approved by the court in December 1998. A
hearing on final approval is scheduled for June 3, 1999.
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.
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.
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Ellis v. The American Tobacco Co., et al., Case No. 804002, Superior
Court of California, County of Orange (case filed 1/13/99). One
individual suing.
Guzman, et al. v. Philip Morris Tobacco Company, et al., Case No.
300200, Superior Court of California, County of San Francisco (case
filed 12/29/98). Four individuals suing.
Helt, et al. v. The American Tobacco Company, et al., Case No. CIV
S-98-1697, USDC, Eastern District of California (case filed 9/3/98).
Eight individuals suing.
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.
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
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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.
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.
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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.
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 & Williamson, 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
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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.
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.
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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.
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.
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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.
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.
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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.
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.
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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.
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
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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.
Badon, et ux. v. RJR Nabisco Inc., et al., Case No. 10-13653, USDC,
Western District of Louisiana (case filed 5/24/94). Six individuals
suing.
Bird, et al. v. The American Tobacco Co., et al., Case No. 507-532,
24th Judicial District Court, State of Louisiana, Jefferson Parish
(case filed 4/10/97). Four individuals suing.
Brakel, et al. v. The American Tobacco Co., et al., Case No.
96-13672-D, USDC, Eastern District of Louisiana (case filed 8/30/96).
Seven individuals suing.
Hebert, et al. v. United States Tobacco, et al., Case No. 96-2281, 14th
Judicial District Court, State of Louisiana, Calcasieu Parish (case
filed 5/8/96). Two individuals suing.
Higgins, et al. v. Liggett Group Inc., et al., Case No. 96-2205, USDC,
Eastern District of Louisiana (case filed 6/1/96). One individual
suing.
Jackson v. Brown & Williamson Tobacco Corp., et al., Case No.
97-441-C-MI, USDC, Middle District of Louisiana (case filed 7/3/97).
One individual suing.
Kennon v. Brown & Williamson, et al., Case No. 98-586, USDC, Middle
District of Louisiana (case filed 12/5/97). One individual suing.
Oser v. The American Tobacco Co., et al., Case No. 97-9293, Civil
District of the Judicial District Court, State of Louisiana, Orleans
Parish (case filed 5/27/97). One individual suing.
Pitre, et al. v. R.J. Reynolds , et al., Case No. 97 CA 0059, 19th
Judicial District Court, State of Louisiana, East Baton Rouge Parish
(case filed 8/7/92). Five individuals suing.
Racca, et al. v. R.H. Reynolds, et al., Case No. 10-14999, 38th
Judicial District Court, State of Louisiana, Cameron Parish (case filed
7/16/98). Eleven individuals suing.
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.
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Brandano v. The Tobacco Institute, Inc., et al., Superior Court of
Massachusetts, Middlesex County (case filed 8/25/98). One individual
suing.
Cameron v. The Tobacco Institute, Inc., et al., Case No. 98-4960,
Superior Court of Massachusetts, Middlesex County (case filed 8/3/98).
One individual suing.
Carmichael-Foley v. Lowney, et al., Case No. 98-3694, Superior Court of
Massachusetts, Middlesex County (case filed 7/17/98). One individual
suing.
Curtis v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4488, Superior
Court of Massachusetts, Middlesex County (case filed 8/27/98). One
individual suing.
Feeney v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4241, Superior
Court of Massachusetts, Middlesex County (case filed 7/15/98). One
individual suing.
Francis, Estate of Ralph v. The Tobacco Institute, Inc., et al., Case
No. 98-4963, Superior Court of Massachusetts, Middlesex County (case
filed 8/25/98). One individual suing.
Gordon v. R.J. Reynolds Tobacco Co., et al., Case No. 98-5417, Superior
Court of Massachusetts, Middlesex County (case filed 8/10/98). One
individual suing.
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.
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.
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Semprucci v. R.J. Reynolds Tobacco Co., et al., Case No. 98-6268,
Superior Court of Massachusetts, Middlesex County (case filed
12/21/98). One individual suing.
Tenerillo v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4214,
Superior Court of Massachusetts, Middlesex County (case filed 7/14/98).
One individual suing.
Varghesse v. R.J. Reynolds Tobacco Co., et al., Case No. 98-6124,
Superior Court of Massachusetts, Middlesex County (case filed
12/17/98). One individual suing.
Varney v. R.J. Reynolds Tobacco Co., et al., Case No. 98-5835, Superior
Court of Massachusetts, Middlesex County (case filed 10/27/98). One
individual suing.
Wajda v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4959, Superior
Court of Massachusetts, Middlesex County (case filed 7/17/98). One
individual suing.
Watt v. Liggett Group Inc., et al., Case No. 98-5499, USDC, District of
Massachusetts (case filed 8/18/98). One individual suing.
Whiting v. Liggett Group, Inc., et al., Case No. 98-5026, Superior
Court of Massachusetts, Middlesex County (case filed 9/4/98). One
individual suing.
Woods, Estate of Helen v. The Tobacco Institute, Inc., et al., Case No.
98-5721, Superior Court of Massachusetts, Middlesex County (case filed
11/18/98). One individual suing.
Woods, Joseph v. The Tobacco Institute, Inc., et al., Case No. 98-5723,
Superior Court of Massachusetts, Middlesex County (case filed
11/18/98). One individual suing.
Blythe v. Rapid American Corporation, et al., Case No. CI 96-0080-AS,
Circuit Court, State of Mississippi, Jackson County (case filed
9/23/96). One individual suing.
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
30
<PAGE> 31
Missouri, City of St. Louis (case filed 1/19/99). One individual suing.
Murphy v. The American Tobacco Co., et al., Case No. CV-S-98-00021-HDM
(RJJ), USDC, Southern District of Nevada (case filed 1/6/98). Liggett
has not yet been served. One individual suing.
Haines (etc.) V. Liggett Group Inc., et al., Case No. C 6568-96B, USDC,
District of New Jersey (case filed 2/2/94). One individual suing.
Altman, et al. v. Fortune Brands, Inc., et al., Case No. 97-123521,
Supreme Court of New York, New York County (case filed 12/16/97). Seven
individuals suing.
Anderson, et al. v. Fortune Brands, Inc., et al., Case No. 42821-97,
Supreme Court of New York, Kings County (case filed 11/13/97). Six
individuals suing.
Arnett, et al. v. The American Tobacco Co., et al., Case No. 109416/98,
Supreme Court of New York, New York County (case filed 5/29/98). Nine
individuals suing.
Bellows, et al. v. The American Tobacco Co., et al., Case No.
122518/97, Supreme Court of New York, New York County (case filed
11/26/97). Five individuals suing.
Brand, et al. v. Philip Morris Inc., et al., Case No. 29017/98, Supreme
Court of New York, Kings County (case filed 12/21/98). Two individuals
suing.
Caiazzo, et al. v. The American Tobacco Co., et al., Case No. 13213/97,
Supreme Court of New York, Richmond County (case filed 10/27/97). Six
individuals suing.
Cameron v. The American Tobacco Co., et al., Case No. 019125/97,
Supreme Court of New York, Nassau County (case filed 7/18/97). Five
individuals suing.
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.
31
<PAGE> 32
Condon, et al. v. The American Tobacco Co., et al., Case No. 108902/97,
Supreme Court of New York, New York County (case filed 2/4/97). Seven
individuals suing.
Crane, et al. v. The American Tobacco Co., et al., Case No. 106202-97,
USDC, Southern District of New York (case filed 4/4/97). Four
individuals suing.
Creech, et al. v. The American Tobacco Co., et al., Case No. 106202-97,
Supreme Court of New York, Richmond County (case filed 1/14/97). Four
individuals suing.
Cresser, et al. v. The American Tobacco Co., et al., Case No. 36009/96,
Supreme Court of New York, Kings County (case filed 10/4/96). Two
individuals suing.
Da Silva, et al. v. The American Tobacco Co., et al., Case
No. 106095/97, Supreme Court of New York, New York County (case filed
1/14/97). Six individuals suing.
Domeracki v. Philip Morris, et al., Case No. 98/6859, Supreme Court of
New York, Erie County (case filed 8/3/98). One individual suing.
Dougherty, et al. v. The American Tobacco Co., et al., Case No.
97-09768, Supreme Court of New York, Suffolk County (case filed
4/18/97). Two individuals suing.
Dzak, et al. v. The American Tobacco Co., et al., Case No. 26283/96,
Supreme Court of New York, Queens County (case filed 12/2/96). Five
individuals suing.
Evans, et al. v. The American Tobacco Co., et al., Case No. 28926/96,
Supreme Court of New York, Kings County (case filed 8/23/96). Two
individuals suing.
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.
32
<PAGE> 33
Hansen, et al. v. the American Tobacco Co., et al., Case No. 97-26291,
Supreme Court of New York, Suffolk County (case filed 4/12/97). Six
individuals suing.
Hellen, et al. v. The American Tobacco Co., et al., Case No. 28927/96,
Supreme Court of New York, Kings County (case filed 8/23/96). Two
individuals suing.
Inzerilla, et al. v. The American Tobacco Co., et al., Case No.
11754/96, Supreme Court of New York, Queens County (case filed
7/16/96). Two individuals suing.
Jaust, et al. v. The American Tobacco Co., et al., Case No. 116249/97,
Supreme Court of New York, New York County (case filed 10/14/97). Ten
individuals suing.
Juliano, et al. v. The American Tobacco Co., et al., Case No. 12470/97,
Supreme Court of New York, Richmond County (case filed 8/12/96). Four
individuals suing.
Keenan, et al. v. The American Tobacco Co., et al., Case No. 116545-97,
Supreme Court of New York, New York County (case filed 10/6/97). Eight
individuals suing.
Kestenbaum, et al. v. The American Tobacco Co., et al., Case No.
109350/97, Supreme Court of New York, New York County (case filed
6/4/97). Eight individuals suing.
Knutsen, et al. v. The American Tobacco Co., et al., Case No. 36860/96,
Supreme Court of New York, Kings County (case filed 4/25/97). Two
individuals suing.
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
33
<PAGE> 34
Court of New York, Nassau County (case filed 7/25/97). Six individuals
suing.
Leiderman, et al. v. The American Tobacco Co., et al., Case No.
22691/97, Supreme Court of New York, Kings County (case filed 7/23/97).
Three individuals suing.
Lennon, et al. v. The American Tobacco Co., et al., Case No. 120503/97,
Supreme Court of New York, New York County (case filed 11/19/97). Seven
individuals suing.
Le Paw v. B.A.T. Industries, et al., Case No. 17695-96, USDC, Southern
District of New York (case filed 8/14/96). Four individuals suing.
Levinson, et al. v. The American Tobacco Co., et al., Case No.
13162/97, Supreme Court of New York, Kings County (case filed 4/17/97).
Seven individuals suing.
Lien, et al. v. The American Tobacco Co., et al., Case No. 97-9309,
Supreme Court of New York, Suffolk County (case filed 4/28/97). Two
individuals suing.
Litke, et al. v. The American Tobacco Co., et al., Case No. 15739/97,
Supreme Court of New York, Kings County (case filed 5/1/97). Five
individuals suing.
Lohn v. Liggett Group Inc., et al., Case No. 105249/98, Supreme Court
of New York, New York County (case filed 3/26/98). One individual
suing.
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.
34
<PAGE> 35
Maisonet, et al. v. The American Tobacco Co., et al., Case No.
17289/97, Supreme Court of New York, Kings County (case filed 5/20/97).
Three individuals suing.
Margolin, et al. v. The American Tobacco Co., et al., Case No.
120762/96, Supreme Court of New York, New York County (case filed
11/22/96). One individual suing.
Martin, et al. v. The American Tobacco Co., et al., Case No. 15982-97,
Supreme Court of New York, Queens County (case filed 7/18/97). Three
individuals suing.
McGuinness, et al. v. The American Tobacco Co., et al., Case No.
112447/97, Supreme Court of New York, New York County (case filed
7/28/97). Six individuals suing.
McLane, et al. v. The American Tobacco Co., et al., Case No. 11620/97,
Supreme Court of New York, Richmond County (case filed 5/13/97). Four
individuals suing.
Mednick, et al. v. The American Tobacco Co., et al., Case No.
29140/1997, Supreme Court of New York, Kings County (case filed
9/19/97). Eight individuals suing.
Mishk, et al. v. The American Tobacco Co., et al., Case No. 108036/97,
Supreme Court of New York, New York County (case filed 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.
35
<PAGE> 36
Piccione, et al. v. The American Tobacco Co., et al., Case No.
34371/97, Supreme Court of New York, Kings County (case filed
10/27/97). Five individuals suing.
Portnoy, et al. v. The American Tobacco Co., et al., Case No. 16323/96,
Supreme Court of New York, Suffolk County (case filed 7/16/96). Two
individuals suing.
Reitano, et al. v. The American Tobacco Co., et al., Case No. 28930/96,
Supreme Court of New York, Kings County (case filed 8/22/96). One
individual suing.
Rico, et al. v. The American Tobacco CompaState of New York, et al.,
Case No. 120693/98, Supreme Court of New York, New York County (case
filed 11/16/98). Nine individuals suing.
Rinaldi, et al. v. The American Tobacco Co., et al., Case No. 48021/96,
Supreme Court of New York, Kings County (case filed 12/11/96). Five
individuals suing.
Rose, et al. v. The American Tobacco Co., et al., Case No. 122131/96,
Supreme Court of New York, New York County (case filed 12/18/96). Eight
individuals suing.
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
36
<PAGE> 37
New York, Kings County (case filed 10/8/96). Two individuals suing.
Smith, et al. v. The American Tobacco Co., et al., Case No. 020525/97,
Supreme Court of New York, Queens County (case filed 9/19/97). Eight
individuals suing.
Sola, et al. v. The American Tobacco Co., et al., Case No. 18205/96,
Supreme Court of New York, Bronx County (case filed 7/16/96). Two
individuals suing.
Sprung, et al. v. The American Tobacco Co., et al., Case No. 16654/97,
Supreme Court of New York, Kings County (case filed 5/14/97). Ten
individuals suing.
Standish, et al. v. The American Tobacco Co., et al., Case No.
18418-97, Supreme Court of New York, Bronx County (case filed 7/28/97).
Five individuals suing.
Valentin, et al. v. Fortune Brands, Inc., et al., Case No. 019539/97,
Supreme Court of New York, Queens County (case filed 9/16/97). Seven
individuals suing.
Walgreen, et al. v. The American Tobacco, et al., Case No. 109351/97,
Supreme Court of New York, New York County (case filed 5/23/97). Eight
individuals suing.
Werner, et al. v. Fortune Brands, Inc., et al., Case No. 029071-97,
Supreme Court of New York, Queens County (case filed 12/12/97). Four
individuals suing.
Zarudsky, et al. v. The American Tobacco Co., et al., Case No.
15773-97, Supreme Court of New York, New York County (case filed
5/28/97). Six individuals suing.
Zimmerman, et al. v. The American Tobacco Co., et al., Supreme Court of
New York, Queens County (case filed 1997).
Zuzalski, et al. v. Brown & Williamson, et al., Case No. 001378/97,
Supreme Court of New York, Queens County (case filed 4/3/97). Seven
individuals suing.
Tompkin, et al. v. American Brands, et al., Case No. 5:94 CV 1302,
USDC, Northern District of Ohio (case filed 7/25/94). One individual
suing.
Hise, et al. v. Philip Morris, et al., Case No. 98 cv 947 C (E), USDC,
Northern District of Oklahoma (case filed 12/15/98). Two individuals
suing. Price-fixing action concerning price increases resulting from
the M.S.A.
Hall v. R.J. Reynolds Tobacco Co., et al., Case No. 4:97-cv-01723,
USDC, Middle District of Pennsylvania (case filed 2/18/98). One
individual suing.
37
<PAGE> 38
Tantum v. American Tobacco Co., et al., Case No. 3762, Court of Common
Pleas, State of Pennsylvania, Philadelphia County (case filed 1/26/99).
Two individuals suing.
Brown v. Brown & Williamson Tobacco Corp., et al., Case No. 98-5447,
Superior Court of Rhode Island (case filed 10/30/98). One individual
suing.
Nicolo v. Philip Morris, et al., Case No. 96-528 B, USDC, District of
Rhode Island (case filed 9/24/96). One individual suing.
Labelle v. Brown & Williamson Tobacco Corp., et al., Case No.
2-98-1879-23, USDC, District of South Carolina (case filed 11/4/98).
One individual suing.
Little v. Brown & Williamson, et al., Case No. 98-CD-10-2156, USDC,
District of South Carolina (case filed 6/26/98). Two individuals suing.
Perry, et al. v. Brown & Williamson, et al., Case No. 2-473-95, Circuit
Court, State of Tennessee, Knox County (case filed 7/20/95). One
individual suing.
Adams v. Brown & Williamson, et al., Case No. 96-17502, District Court
of the 164th Judicial District, State of Texas, Harris County (case
filed 4/30/96). One individual suing.
Bush, et al. v. Philip Morris, et al., Case No. 597CV180, USDC, Eastern
District of Texas (case filed 9/22/97). Two individuals suing. 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.
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
38
<PAGE> 39
Texas (case filed 2/26/97). Five 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.
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
39
<PAGE> 40
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.
40
<PAGE> 1
EXHIBIT 99.2
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE> 2
LIGGETT GROUP INC.
Index to
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998................... 2
Consolidated Statements of Operations for the three months ended March 31, 1999
and 1998............................................................................ 4
Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 1999................................................................ 5
Consolidated Statements of Cash Flows for the three months ended March 31, 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>
March 31, December 31,
1999 1998
--------- ------------
ASSETS
<S> <C> <C>
Current assets:
Accounts receivable:
Trade, less allowances of $1,685 and $1,686,
respectively ............................................ $ 14,940 $ 14,510
Other ................................................... 824 821
Inventories ................................................. 27,963 25,974
Other current assets ........................................ 4,514 10,561
--------- ----------
Total current assets ................................ 48,241 51,866
Property, plant and equipment, at cost, less accumulated
depreciation of $31,663 and $30,893, respectively ............ 21,707 16,195
Intangible assets, at cost, less accumulated amortization
of $20,554 and $20,550, respectively ......................... 167 171
Other assets ..................................................... 6,885 6,491
--------- ----------
Total assets ....................................... $ 77,000 $ 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>
March 31, December 31,
1999 1998
--------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Current maturity of note payable ....................................... $ 329 $ --
Cash overdraft ......................................................... 43 63
Accounts payable, principally trade .................................... 2,870 3,206
Accrued expenses:
Promotional ......................................................... 22,117 23,760
Income taxes ........................................................ 1,062 115
Other taxes, principally excise taxes ............................... 3,352 3,397
Estimated allowance for sales returns ............................... 7,100 7,100
Interest ............................................................ 11 12
Settlement accruals ................................................. 1,235 1,120
Proceeds received for options ....................................... 150,000 150,000
Other ............................................................... 9,459 10,697
--------- ---------
Total current liabilities ....................................... 197,578 199,470
Credit facility and note payable, less current maturities ................... 10,939 2,538
Non-current employee benefits ............................................... 10,755 10,902
Other long-term liabilities ................................................. 7,441 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 .............................................. 57,870 57,380
Accumulated deficit .................................................... (207,583) (202,566)
--------- ---------
Total stockholder's equity (deficit) .......................... (149,713) (145,186)
--------- ---------
Total liabilities and stockholder's equity (deficit) .......... $ 77,000 $ 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
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Net sales* ............................................................. $ 86,047 $ 65,626
Cost of sales* .......................................................... 23,165 26,221
-------- --------
Gross profit .................................................. 62,882 39,405
Selling, general and administrative expenses ............................ 42,813 33,154
-------- --------
Operating income .............................................. 20,069 6,251
Other income (expense):
Interest expense ................................................... (707) (7,083)
Other, net ......................................................... (47) 368
-------- --------
Income (loss) before income taxes ............................ 19,315 (464)
Income tax provision .................................................... 7,632 --
-------- --------
Net income (loss) ............................................. $ 11,683 $ (464)
======== ========
</TABLE>
*Net sales and cost of sales include federal excise taxes of $12,553 and
$14,809, respectively.
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Total
Stock and Stockholder's
Contributed Equity
Capital Deficit (Deficit)
------- ------- ---------
<S> <C> <C> <C>
Balance at December 31, 1998 ...................... $57,380 $(202,566) $(145,186)
Net income ..................................... -- 11,683 11,683
Accretion of capital contribution .............. 490 -- 490
Distributions and other payments ............... -- (16,700) (16,700)
------- --------- ---------
Balance at March 31, 1999 ........................ $57,870 $(207,583) $(149,713)
======= ========= =========
</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>
Three Months Ended
March 31,
---------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities .................................... $ 14,346 $ (5,579)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ................. 13 702
Capital expenditures ................................................ (6,369) (353)
-------- --------
Net cash (used in) provided by investing activities ......... (6,356) 349
-------- --------
Cash flows from financing activities:
Repayments of note .................................................. (25) 21
Issuance of note .................................................... 4,500 --
Borrowings under revolving credit facility .......................... 75,574 62,692
Repayments under revolving credit facility .......................... (71,319) (57,492)
Deferred finance charges ............................................ -- (38)
Distributions and other payments to affiliates ...................... (16,700) --
(Decrease) increase in cash overdraft ............................... (20) 47
-------- --------
Net cash (used in) provided by financing activities ......... (7,990) 5,230
-------- --------
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
BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group Ltd. ("BGL").
Liggett is engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. Certain management and administrative
functions are performed by affiliates. (See Note 8.)
The interim consolidated financial statements included herein are unaudited and,
in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1998 balance
sheet has been derived from audited financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto included as Exhibit 99.2 in Brooke's
and BGLS' Annual Report on Form 10-K, as amended, for the year ended December
31, 1998, as filed with the Securities and Exchange Commission. The consolidated
results of operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
All of the Company's common shares (1,000 shares, issued and outstanding for all
periods presented herein) are owned by BGLS. Accordingly, earnings and dividends
per share data are not presented in these consolidated financial statements.
2. ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Significant estimates subject to material changes in the near term
include allowance for doubtful accounts, sales returns and allowances, actuarial
assumptions of pension plans and litigation and defense costs. Actual results
could differ from those estimates.
3. PHILIP MORRIS BRAND TRANSACTIONS
On November 20, 1998, Liggett and BGL entered into a definitive
agreement with Philip Morris Incorporated ("PM") which provided for PM to
purchase options in an entity which will hold three cigarette brands, L&M,
Chesterfield and Lark (the "Marks"), held by Liggett's subsidiary Eve. As
contemplated by the agreement, Liggett and PM entered into additional agreements
(collectively, the "PM Agreements") on January 12, 1999 to effectuate the
transactions.
Under the terms of the PM Agreements, Eve will contribute the Marks to
Brands LLC ("LLC"), a newly-formed limited liability company, in exchange for
100% of two classes of LLC interests, the Class A Voting Interest (the "Class A
Interest") and the Class B Redeemable Nonvoting Interest (the "Class B
Interest"). PM acquired two options to purchase such interests (the "Class A
Option" and the "Class B Option"). On December 2, 1998, PM paid Eve a total of
$150,000 for such options, $5,000 for the Class A Option and $145,000 for the
Class B Option. The payments were used to fund the redemption of the
7
<PAGE> 9
11.5% Senior Secured Notes due February 1, 1999 and the Variable Rate Series C
Senior Secured Notes due February 1, 1999 (together, the "Liggett Notes")
together with accrued interest on December 28, 1998.
The Class A Option entitles PM to purchase the Class A Interest for $10,100. The
statutory waiting period under the Hart-Scott-Rodino Act regarding the exercise
by PM of the Class A Option expired on February 12, 1999. On March 19, 1999, PM
exercised the Class A Option with the closing scheduled for no later than June
10, 1999 (currently scheduled to close May 24, 1999), subject to customary
closing conditions.
The Class B Option will entitle PM 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 PM 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 the LLC for $139,900 during the same
period the Class B Option may be exercised.
The LLC will seek to borrow $134,900 (the "Loan") from a lending institution.
The Loan will be guaranteed by Eve and collateralized by a pledge by the LLC of
the Marks and of the LLC's 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, the LLC will distribute the Loan
proceeds to Eve with respect to its Class B Interest. The cash exercise price of
the Class B Option and the LLC's redemption price will be reduced by the amount
distributed to Eve. Upon PM's exercise of the Class B Option or the LLC's
exercise of its redemption right, PM or the LLC, as relevant, will be required
to procure 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 LLC income or loss.
The LLC will grant PM an exclusive license of the Marks for an 11-year term at
an annual royalty based on sales of cigarettes under the Marks, subject to a
minimum annual royalty payment equal to the annual debt service obligation on
the Loan plus $1,000.
If PM fails to exercise the Class B Option, Eve will have an option to put its
Class B Interest to PM, or PM's designees (the "Eve Put Option"), at a put price
that is $5,000 less than the exercise price of the Class B Option (and includes
PM's procuring 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, the LLC's 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% LLC
interest.
The $150,000 in proceeds received from the sale of the Class A and B Options is
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
which is scheduled to occur during the second quarter of 1999. Upon such
closing, PM will obtain control of the LLC, and the Company anticipates, based
on the expected structure of the transactions, to recognize a gain in its
consolidated financial statements to the extent of the total cash proceeds
received from the payment of the option fees, the exercise of the Class A Option
and the distribution of the Loan proceeds.
8
<PAGE> 10
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
Leaf tobacco ........................................ $ 9,891 $ 10,796
Other raw materials ................................. 1,763 1,741
Work-in-process ..................................... 2,392 1,828
Finished goods ...................................... 14,235 12,231
Replacement parts and supplies ...................... 3,156 3,150
-------- --------
Inventories at current cost ......................... 31,437 29,746
LIFO adjustment ..................................... (3,474) (3,772)
-------- --------
Inventories at LIFO cost ............................ $ 27,963 $ 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 $4,754 at March
31, 1999.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Land and improvements ............................... $ 412 $ 412
Buildings ........................................... 5,823 5,823
Machinery and equipment ............................. 47,135 40,853
-------- --------
Property, plant and equipment ....................... 53,370 47,088
Less accumulated depreciation ....................... (31,663) (30,893)
-------- --------
Property, plant and equipment, net .................. $ 21,707 $ 16,195
======== ========
</TABLE>
9
<PAGE> 11
6. CREDIT FACILITY AND NOTE PAYABLE
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Borrowings outstanding under revolving credit
facility ......................................... $ 6,793 $2,538
Note payable ........................................ 4,475 --
-------- ------
11,268 2,538
Current portion ..................................... (329) --
-------- ------
Amount due after one year ........................... $ 10,939 $2,538
======== ======
</TABLE>
Revolving Credit Facility:
On March 8, 1994, Liggett entered into the Facility under which it can borrow up
to $40,000 (depending on the amount of eligible inventory and receivables as
determined by the lenders) from a syndicate of commercial lenders. The Facility,
which expires March 8, 2000, is collateralized by all inventories and
receivables of the Company. Availability under the Facility was approximately
$12,990 based upon eligible collateral at March 31, 1999. Borrowings under the
Facility whose interest is calculated at a rate equal to 1.5% above Philadelphia
National Bank's prime rate bore a rate of 9.25% at March 31, 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 $146,239 at March 31, 1999) and net working
capital (not to fall below a deficit of $17,000 as computed in accordance with
the agreement, this computation was $4,466 at March 31, 1999).
Note Payable:
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 BGL, is payable in 60 monthly installments
of $56 including annual interest of 7.67% with a final payment of $2,550.
7. COMMITMENTS AND CONTINGENCIES
TOBACCO-RELATED LITIGATION:
OVERVIEW. Since 1954, Liggett and other United States cigarette manufacturers
have been named as defendants in numerous direct and third-party actions
predicated on the theory that cigarette manufacturers should be liable for
damages from cancer and other adverse health effects alleged to have been caused
by cigarette smoking or by exposure to secondary smoke (environmental tobacco
smoke, "ETS") from cigarettes. These cases are reported hereinafter as though
having been commenced against Liggett (without regard to whether such cases were
actually commenced against Liggett or BGL). There has been a noteworthy increase
in the number of cases commenced against Liggett and the other cigarette
manufacturers in recent years. The cases generally fall into four categories:
(i) smoking and health cases alleging personal injury brought on behalf of
individual smokers ("Individual Actions"); (ii) smoking and health cases
alleging personal injury and purporting to be brought on behalf of a 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
10
<PAGE> 12
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
three months ended March 31, 1999, Liggett incurred counsel fees and costs
totaling approximately $1,568, compared to $1,342 for the comparable prior year
period.
INDIVIDUAL ACTIONS. As of March 31, 1999, there were approximately 265 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, 89 were pending in Florida, 91 in New York,
29 in Massachusetts and 19 in Texas. The balance of the individual cases were
pending in 21 states. There are four individual cases pending where Liggett is
the only named defendant.
The plaintiffs' allegations of liability in those cases in which individuals
seek recovery for personal injuries allegedly caused by cigarette smoking are
based on various theories of recovery, including negligence, gross negligence,
special duty, voluntary undertaking, strict liability, fraud, misrepresentation,
design defect, failure to warn, breach of express and implied warranties,
conspiracy, aiding and abetting, concert of action, unjust enrichment, common
law public nuisance, indemnity, market share liability and violations of
deceptive trade practices laws, the Federal Racketeer Influenced and Corrupt
Organization Act ("RICO") and antitrust statutes. In many of these cases, in
addition to compensatory damages, plaintiffs also seek other forms of relief
including disgorgement of profits and punitive damages. Defenses raised by
defendants in these cases include lack of proximate cause, assumption of the
risk, comparative fault and/or contributory negligence, lack of design defect,
statute of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.
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 PM.
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 PM. The award includes
$79,500 in punitive damages.
CLASS ACTIONS. As of March 31, 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. Two of
these cases, Fletcher, et al. v. Brooke Group Ltd., et al. and Walker, et al. v.
Liggett Group Inc., et al., have been settled by the Company, subject to court
approval. These two settlements are more fully discussed below under the
"Settlements" section.
In October 1991, an action entitled Broin, et al. v. Philip Morris Incorporated,
et al., Circuit Court of the Eleventh Judicial District in and for Dade County,
Florida, was filed against Liggett and others. This case was brought by
plaintiffs on behalf of all flight attendants that worked or are presently
working for airlines based in the United States and who never regularly smoked
cigarettes but allege that they have been damaged by involuntary exposure to
ETS. In October 1997, the other major tobacco companies settled this matter,
which settlement provides for a release of Liggett and BGL. In February 1998,
the Circuit Court approved the settlement, which settlement was affirmed by the
Third District Court of Appeals in March 1999.
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").
11
<PAGE> 13
In May 1996, the Court of Appeals for the Fifth Circuit reversed the Class
Certification Order and instructed the District Court to dismiss the class
complaint. The Fifth Circuit ruled that the District Court erred in its analysis
of the class certification issues by failing to consider how variations in state
law affect predominance of common questions and the superiority of the class
action mechanism. The appeals panel also held that the District Court's
predominance inquiry did not include consideration of how a trial on the merits
in Castano would be conducted. The Fifth Circuit further ruled that the
"addiction-as-injury" tort is immature and, accordingly, the District Court
could not know whether common issues would be a "significant" portion of the
individual trials. According to the Fifth Circuit's decision, any savings in
judicial resources that class certification may bring about were speculative and
would likely be overwhelmed by the procedural problems certification brings.
Finally, the Fifth Circuit held that in order to make the class action
manageable, the District Court would be forced to bifurcate issues in violation
of the Seventh Amendment.
The extent of the impact of the Castano decision on tobacco-related class action
litigation is still uncertain, although the decertification of the Castano class
by the Fifth Circuit may preclude other federal courts from certifying a
nationwide class action for trial purposes with respect to tobacco-related
claims. The Castano decision has had to date, however, only limited effect with
respect to courts' decisions regarding narrower tobacco-related classes or class
actions brought in state rather than federal court. For example, since the Fifth
Circuit's ruling, courts in New York, Louisiana and Maryland have certified
"addiction-as-injury" class actions that covered only citizens in those states.
Two class actions pending in state court in Florida have also been certified,
one of which, the Broin case, was settled in 1997. The Castano decision has had
no measurable impact on litigation brought by or on behalf of single individual
claimants.
Class certification motions are pending in a number of putative class actions.
Class certification has been denied or reversed in 13 actions while classes
remain certified in two cases in Florida and Maryland. A number of class
certification decisions are on appeal.
GOVERNMENTAL ACTIONS. As of March 31, 1999, there were approximately 20
Governmental Actions pending against Liggett. In these proceedings, the
governmental entities seek reimbursement for Medicaid and other health care
expenditures allegedly caused by use of tobacco products. The claims asserted in
these health care cost recovery actions vary. In most of these cases, plaintiffs
assert the equitable claim that the tobacco industry was "unjustly enriched" by
plaintiffs' payment of health care costs allegedly attributable to smoking and
seek reimbursement of those costs. Other claims made by some but not all
plaintiffs include the equitable claim of indemnity, common law claims of
negligence, strict liability, breach of express and implied warranty, violation
of a voluntary undertaking or special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false advertising, and
claims under RICO.
On January 19, 1999, at the State of the Union Address, President Clinton
announced that the Department of Justice ("DOJ") was preparing a litigation plan
to take the tobacco industry to court to recover monies that Medicare and other
programs allegedly expended to treat smoking-related illnesses. The effects of
this lawsuit cannot be predicted at this time; however, an adverse verdict could
have a material adverse effect on the Company and Liggett.
THIRD-PARTY PAYOR ACTIONS. As of March 31, 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
12
<PAGE> 14
dismissed a Third-Party Payor Action brought by seven Blue Cross/Blue Shield
Plans against the tobacco industry. 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.
In other Third-Party Payor Actions, claimants have set forth several additional
theories of relief sought: funding of corrective public education campaigns
relating to issues of smoking and health; funding for clinical smoking cessation
programs; disgorgement of profits from sales of cigarettes; restitution; treble
damages; and attorneys' fees. Nevertheless, no specific amounts are provided. It
is understood that requested damages against the tobacco company defendants in
these cases might be in the billions of dollars.
SETTLEMENTS. In March 1996, Liggett and BGL entered into an agreement, subject
to court approval, to settle the Castano class action tobacco litigation. Under
the Castano settlement agreement, upon final court approval of the settlement,
the Castano class would be entitled to receive up to five percent of Liggett's
pretax income (income before income taxes) each year (up to a maximum of $50,000
per year) for the next 25 years, subject to certain reductions provided for in
the agreement and a $5,000 payment from Liggett if Liggett or BGL fail to
consummate a merger or similar transaction with another non-settling tobacco
company defendant within three years of the date of settlement. Liggett and BGL
have the right to terminate the Castano settlement under certain circumstances.
In March, 1996, Liggett, the Castano Plaintiffs Legal Committee and the Castano
plaintiffs entered into a letter agreement. According to the terms of the letter
agreement, for the period ending nine months from the date of Final Approval (as
defined in the letter), if granted, of the Castano settlement or, if earlier,
the completion by Liggett or BGL of a combination with any defendant in Castano,
except PM, the Castano plaintiffs and their counsel agree not to enter into any
more favorable settlement agreement with any Castano defendant which would
reduce the terms of the Castano settlement agreement. If the Castano plaintiffs
or their counsel enter into any such settlement during this period, they shall
pay Liggett $250,000 within 30 days of the more favorable agreement and offer
Liggett and BGL the option to enter into a settlement on terms at least as
favorable as those included in such other settlement. The letter agreement
further provides that during the same time period, and if the Castano settlement
agreement has not been earlier terminated by Liggett in accordance with its
terms, Liggett and its affiliates will not enter into any business transaction
with any third party which would cause the termination of the Castano settlement
agreement. If Liggett or its affiliates enter into any such transaction, then
the Castano plaintiffs will be entitled to receive $250,000 within 30 days from
the transacting party. In May 1996, the Castano Plaintiffs Legal Committee filed
a motion with the United States District Court for the Eastern District of
Louisiana seeking preliminary approval of the Castano settlement. In September
1996, shortly after the class was decertified, the Castano plaintiffs withdrew
the motion for approval of the Castano settlement.
In March 1996, March 1997 and March 1998, Liggett and BGL entered into
settlements of tobacco-related litigation with the Attorneys General of a total
of 45 states and territories. The settlements released Liggett and BGL from all
tobacco-related claims including claims for health care cost reimbursement and
claims concerning sales of cigarettes to minors.
On November 23, 1998, PM, B&W, R.J. Reynolds Tobacco Company ("RJR") and
Lorillard Tobacco Company ("Lorillard") (collectively, the "Original
Participating Manufacturers" or "OPMs") and Liggett (together with the OPMs and
any other tobacco product manufacturer that becomes a signatory, the
"Participating Manufacturers") entered into the Master Settlement Agreement (the
"MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the United
States Virgin Islands, American Samoa and the Northern Marianas (collectively,
the "Settling States") to settle the asserted and unasserted health care cost
recovery and certain other claims of those Settling States. As described below,
Liggett and BGL had previous settlements with a number of these Settling States
and also had previously settled similar claims brought by Florida, Mississippi,
Texas and Minnesota.
13
<PAGE> 15
The MSA is subject to final judicial approval in each of the Settling States,
which approval has been obtained, to date, in 42 states and territories.
The MSA restricts tobacco product advertising and marketing within the Settling
States and otherwise restricts the activities of Participating Manufacturers.
Among other things, the MSA: prohibits the targeting of youth in the
advertising, promotion or marketing of tobacco products; bans the use of cartoon
characters in all tobacco advertising and promotion; limits each Participating
Manufacturer to one tobacco brand name sponsorship during any 12-month period;
bans all outdoor advertising, with the exception of signs 14 square feet or less
in dimension at retail establishments that sell tobacco products; prohibits
payments for tobacco product placement in various media; bans gift offers based
on the purchase of tobacco products without sufficient proof that the intended
recipient is an adult; prohibits Participating Manufacturers from licensing
third parties to advertise tobacco brand names in any manner prohibited under
the MSA; prohibits Participating Manufacturers from using as a tobacco product
brand name any nationally recognized non-tobacco brand or trade name or the
names of sports teams, entertainment groups or individual celebrities; and
prohibits Participating Manufacturers from selling packs containing fewer than
twenty cigarettes.
The MSA also requires Participating Manufacturers to affirm corporate principles
to comply with the MSA and to reduce underage usage of tobacco products and
imposes requirements applicable to lobbying activities conducted on behalf of
Participating Manufacturers.
Pursuant to the MSA, Liggett has no payment obligations unless its market share
exceeds 125% of its 1997 market share (the "Base Share"). 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):
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
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
</TABLE>
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 nations" protection for both Liggett and BGL, the payments due
these states by Liggett (with certain possible exceptions) have been eliminated.
With respect to all non-economic
14
<PAGE> 16
obligations under the previous settlements, both Liggett and BGL are entitled to
the most favorable provisions as between the MSA and each state's respective
settlement with the other major tobacco companies. Therefore, Liggett's
non-economic obligations to all states and territories are now defined by the
MSA.
In March 1997, Liggett, BGL and a nationwide class of individuals that allege
smoking-related claims filed a mandatory class settlement agreement in an action
entitled Fletcher, et al. v. Brooke Group Ltd., et al., Circuit Court of Mobile
County, Alabama, where the court granted preliminary approval and preliminary
certification of the class, and in May 1997, a similar mandatory class
settlement agreement was filed in an action entitled Walker, et al. v. Liggett
Group Inc., et al., United States District Court, Southern District of West
Virginia. In July, 1998, Liggett, BGL and plaintiffs filed an amended class
action settlement agreement in Fletcher which agreement was preliminarily
approved by the court in December, 1998. A hearing on final approval of the
settlement is scheduled for June 3, 1999; however, hearing dates are subject to
change. Effectiveness of the mandatory settlement is conditioned on final court
approval of the settlement. There can be no assurance as to whether, or when,
such court approval will be obtained. Pursuant to the amended agreement, Liggett
is required to pay to the class 7.5% of Liggett's pre-tax income each year for
25 years, with a minimum annual payment guarantee of $1,000 over the term of the
agreement. The amended agreement does not set forth a formula with respect to
the distribution of settlement proceeds to the class. If the court issues a
final order and judgment approving the settlement, such an order, Liggett
anticipates, would preclude further prosecution by class members of
tobacco-related claims against both Liggett and BGL. Under the Full Faith and
Credit Act, a final judgment entered in a nationwide class action pending in a
state court has a preclusive effect against any class member with respect to the
claims settled and released. As the class definition in Fletcher encompasses all
persons in the United States who could claim injury as a result of cigarette
smoking or ETS and any third-party payor claimants, it is anticipated that, upon
final order and judgment, all such persons and third-party payor claimants would
be barred from further prosecution of tobacco-related claims against Liggett and
BGL.
The Walker court also granted preliminary approval and preliminary certification
of the nationwide class; however, in August 1997, the court vacated its
preliminary certification of the settlement class, which decision is currently
on appeal. The Walker court relied on the Supreme Court's decision in Amchem
Products Inc. v. Windsor in reaching its decision to vacate preliminary
certification of the class. In Amchem, the Supreme Court affirmed a decision of
the Third Circuit vacating the certification of a settlement class that involved
asbestos-exposure claims. The Supreme Court held that the proposed settlement
class did not meet the requirements of Rule 23 of the Federal Rules of Civil
Procedure for predominance of common issues and adequacy of representation. The
Third Circuit had held that, although classes could be certified for settlement
purposes, Rule 23's requirements had to be satisfied as if the case were going
to be litigated. The Supreme Court agreed that the fairness and adequacy of the
settlement are not pertinent to the predominance inquiry under Rule 23(b)(3),
and thus, the proposed class must have sufficient unity so that absent class
members can fairly be bound by decisions of class representatives.
After the Amchem opinion was issued by the Supreme Court in June 1997, objectors
to Liggett's settlement in Walker moved for decertification. Although Liggett's
settlement in the Walker action is a "limited fund" class action settlement
proceeding under Rule 23(b)(1) and Amchem was a Rule 23 (b)(3) case, the court
in the Walker action, nonetheless, decertified the Walker class. Applying Amchem
to the Walker case, the District Court, in a decision issued in August 1997,
determined that while plaintiffs in Walker have a common interest in "maximizing
the limited fund available from the defendants," there remained "substantial
conflicts among class members relating to distribution of the fund and other key
concerns" that made class certification inappropriate.
The Amchem decision's ultimate affect on the viability of both the Walker and
Fletcher settlements remains uncertain given the Fifth Circuit's recent ruling
reaffirming a limited fund class action settlement in In re Asbestos Litigation
("Ahearn"). In June 1997, the Supreme Court remanded Ahearn to the Fifth Circuit
for consideration in light of Amchem. On remand, the Fifth Circuit made two
decisive distinctions
15
<PAGE> 17
between Amchem and Ahearn. First, the Ahearn class action proceeded under Rule
23(b)(1) while Amchem was a Rule 23(b)(3) case, and second, in Ahearn, there was
no allocation or difference in award, according to nature or severity of injury,
as there was in Amchem. The Fifth Circuit concluded that all members of the
class and all class representatives share common interests and none of the
uncommon questions abounding in Amchem exist. In June, 1998, the Supreme Court
granted certiorari to review the Fifth Circuit decision.
Liggett previously accrued approximately $4,000 for the present value of the
fixed payments under the March 1996 Attorneys General settlements and $16,902
for the present value of the fixed payments under the March 1998 Attorneys
General settlements. As a result of Liggett's treatment under the MSA, $14,928
of net charges accrued for the prior settlements were reversed in 1998.
Copies of the various settlement agreements are filed as exhibits to BGL's Form
10-K and the discussion herein is qualified in its entirety by reference
thereto.
TRIALS. In July 1998, trial commenced in the Engle, et al. v. Philip Morris
Incorporated, et al., case, a class action pending in Miami Dade County,
Florida, brought on behalf of all Florida residents allegedly injured by
smoking. Plaintiffs seek compensatory and punitive damages ranging into the
billions of dollars, as well as equitable relief including, but not limited to,
a medical fund for future health care costs, attorneys' fees and court costs.
The class consists of all Florida residents and citizens, and their survivors,
who claim to have suffered, presently suffer or have died from diseases and
medical conditions caused by their addiction to cigarettes that contain
nicotine.
The current trial plan calls for the case to be tried in three "Phases". Phase
One, which is currently underway, involves evidence concerning certain "common"
class issues relating to the plaintiff class' causes of action. Entitlement to
punitive damages will be decided at the end of Phase One, but no amount will be
set at that time.
If plaintiffs prevail in Phase One, the first two stages of Phase Two will
involve individual determinations of specific causation and other individual
issues regarding entitlement to compensatory damages for the class
representatives. Stage three of Phase Two will involve an assessment of the
amount of punitive damages, if any, that individual class representatives will
be awarded. Stage four of Phase Two will involve the setting of a percentage or
ratio of punitive damages for absent class members, assuming entitlement was
found at the end of Phase One.
Phase Three of the trial will be held before separate juries to address absent
class members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages.
Additional cases are currently scheduled for trial during 1999, including two
Third-Party Payor Actions brought by unions in Washington (September) and New
York (September), and three Class Actions in Alabama (August), Wisconsin
(September) and New York (November). Also, six Individual Actions are currently
scheduled for trial during 1999. Trial dates, however, are subject to change.
OTHER RELATED MATTERS. A grand jury investigation is being conducted by the
office of the United States Attorney for the Eastern District of New York (the
"Eastern District Investigation") regarding possible violations of criminal law
relating to the activities of The Council for Tobacco Research - USA, Inc. (the
"CTR"). Liggett was a sponsor of the CTR at one time. In May 1996, Liggett
received a subpoena from a Federal grand jury sitting in the Eastern District of
New York, to which Liggett has responded.
In March 1996, and in each of March, July, October and December 1997, Liggett
and/or BGL received subpoenas from a Federal grand jury in connection with an
investigation by the United States Department of Justice (the "DOJ
Investigation") involving the industry's knowledge of: the health consequences
of
16
<PAGE> 18
smoking cigarettes; the targeting of children by the industry; and the
addictive nature of nicotine and the manipulation of nicotine by the industry.
Liggett has responded to the March 1996, March 1997 and July 1997 subpoenas and
is in the process of responding to the October and December 1997 subpoenas The
Company understands that the Eastern District Investigation and the DOJ
Investigation essentially have been consolidated into one investigation
conducted by the DOJ. Liggett and BGL are unable, at this time, to predict the
outcome of this investigation.
In April 1998, BGL announced that Liggett had reached an agreement with the DOJ
to cooperate in both the Eastern District Investigation and the DOJ
Investigation. The agreement does not constitute an admission of any wrongful
behavior by Liggett. The DOJ has not provided immunity to Liggett and has full
discretion to act or refrain from acting with respect to Liggett in the
investigation.
In September 1998, Liggett received a subpoena from a federal grand jury in the
Eastern District of Philadelphia investigating possible antitrust violations in
connection with the purchase of tobacco by and for tobacco companies. Liggett
has responded to this subpoena. Liggett and BGL are unable, at this time, to
predict the outcome of this investigation.
Litigation is subject to many uncertainties, and it is possible that some of the
aforementioned actions could be decided unfavorably against Liggett or BGL. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Liggett is unable to make a
meaningful estimate with respect to the amount of loss that could result from an
unfavorable outcome of many of the cases pending against the Company, because
the complaints filed in these cases rarely detail alleged damages. Typically,
the claims set forth in an individual's complaint against the tobacco industry
pray for money damages in an amount to be determined by a jury, plus punitive
damages and costs. These damage claims are typically stated as being for the
minimum necessary to invoke the jurisdiction of the court.
It is possible that Liggett's consolidated financial position, results of
operations or cash flow could be materially adversely affected by an unfavorable
outcome in any such tobacco-related litigation.
Liggett has been involved in certain environmental proceedings, none of which,
either individually or in the aggregate, rises to the level of materiality.
Liggett's management believes that current operations are conducted in material
compliance with all environmental laws and regulations. Management is unaware of
any material environmental conditions affecting its existing facilities.
Compliance with federal, state and local provisions regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital expenditures, earnings
or competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending against Liggett
unrelated to smoking or tobacco product liability. Management is of the opinion
that the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect Liggett's financial position,
results of operations or cash flows.
LEGISLATION AND REGULATION:
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
17
<PAGE> 19
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.
In February 1996, the United States Trade representative issued an "advance
notice of rule making" concerning how tobaccos imported under a previously
established tobacco rate quota ("TRQ") should be allocated. Currently, tobacco
imported under the TRQ is allocated on a "first-come, first-served" basis,
meaning that entry is allowed on an open basis to those first requesting entry
in the quota year. Others in the cigarette industry have suggested an "end-user
licensing" system under which the right to import tobacco under the quota would
be initially assigned based on domestic market share. Such an approach, if
adopted, could have a material adverse effect on Liggett and BGL.
In August 1996, the FDA filed in the Federal Register a Final Rule (the "FDA
Rule") classifying tobacco as a drug, asserting jurisdiction by the FDA over the
manufacture and marketing of tobacco products and imposing restrictions on the
sale, advertising and promotion of tobacco products. Litigation was commenced in
the United States District Court for the Middle District of North Carolina
challenging the legal authority of the FDA to assert such jurisdiction, as well
as challenging the constitutionality of the rules. The court, after argument,
granted plaintiffs' motion for summary judgment prohibiting the FDA from
regulating or restricting the promotion and advertising of tobacco products and
denied plaintiffs' motion for summary judgment on the issue of whether the FDA
has the authority to regulate access to, and labeling of, tobacco products. The
Fourth Circuit reversed the district court on appeal and in August 1998 held
that the FDA cannot regulate tobacco products because Congress had not given
them the authority to do so. Liggett and BGL support the FDA Rule and have begun
to phase in compliance with certain of the proposed interim FDA regulations. See
discussions of the Castano and Governmental Actions settlements above. See also
"Subsequent Events" below.
In August 1996, Massachusetts enacted legislation requiring tobacco companies to
publish information regarding the ingredients in cigarettes and other tobacco
products sold in that state. In December 1997, the United States District Court
for the District of Massachusetts enjoined this legislation from going into
effect; however, in December 1997, Liggett began complying with this legislation
by providing ingredient information to the Massachusetts Department of Public
Health. Several other states have enacted, or are considering, legislation
similar to that enacted in Massachusetts.
As part of the 1997 budget agreement approved by Congress, federal excise taxes
on a pack of cigarettes, which are currently 24 cents, would rise 10 cents in
the year 2000 and 5 cents more in the year 2002. Additionally, in November 1998,
the citizens of California voted in favor of a 50 cents per pack tax on
cigarettes sold in that state.
In addition to the foregoing, there have been a number of other restrictive
regulatory actions, adverse political decisions and other unfavorable
developments concerning cigarette smoking and the tobacco industry, the effects
of which, at this time, Liggett is not able to evaluate.
SUBSEQUENT EVENTS: 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.
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
18
<PAGE> 20
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 human
resources and payroll systems, budgeted at $160, are scheduled for completion in
July of 1999. Enhancements to the Company's finished goods inventory system are
expected to be completed in September 1999. It is anticipated that all factory,
corporate, field sales and physical distribution systems will be completed in
sufficient time to support Year 2000 compliance and verification.
Although such costs may be a factor in describing changes in operating profit in
any given reporting period, the Company currently does not believe that the
anticipated costs of Year 2000 systems conversions will have a material impact
on its future consolidated results of operations. Based on the progress Liggett
has made in addressing Year 2000 issues and its strategy and timetable to
complete its compliance program, the Company does not foresee significant risks
associated with its Year 2000 initiatives at this time. Although the Company is
in the process of confirming that service providers are adequately addressing
Year 2000 issues, there can be no complete assurance of success, or that
interaction with other service providers will not impair the Company's service.
8. RELATED PARTY TRANSACTIONS
Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with BGL and
certain other entities pursuant to which Liggett has paid taxes to BGL as if it
were filing a separate company tax return, except that the agreement effectively
limits the ability of Liggett to carry back losses for refunds. Liggett is
entitled to recoup overpayments in a given year out of future payments due under
the agreement.
Liggett is a party to an agreement dated February 26, 1991, as amended October
1, 1995, with BGL to provide various management and administrative services to
the Company in consideration for an annual management fee of $900 paid in
monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments.
In addition, Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee paid in monthly installments. Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to $915
in the first quarter of 1999 and $1,020 in the first quarter of 1998.
The Company leases equipment from a subsidiary of BGLS for $50 per month.
19
<PAGE> 1
Exhibit 99.3
NEW VALLEY CORPORATION
FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE> 2
NEW VALLEY CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 1999
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31,
1999 and December 31, 1998.................................... 3
Condensed Consolidated Statements of Operations for
the three months ended March 31, 1999 and 1998................ 4
Condensed Consolidated Statement of Changes in
Stockholders' Deficiency for the three months
ended March 31, 1999.......................................... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended March 31, 1999 and 1998................ 6
Notes to the Condensed Consolidated Financial
Statements .................................................. 7
</TABLE>
<PAGE> 3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
--------------- -----------------
March 31, December 31,
--------------- -----------------
1999 1998
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................. $ 10,312 $ 16,444
Investment securities available for sale.............................. 36,563 37,567
Trading securities owned.............................................. 6,562 8,984
Restricted assets..................................................... 1,192 1,220
Receivable from clearing brokers...................................... 12,575 22,561
Other current assets.................................................. 3,647 4,675
--------- ----------
Total current assets.............................................. 70,851 91,451
--------- ----------
Investment in real estate, net............................................. 83,049 82,875
Furniture and equipment, net............................................... 10,393 10,444
Restricted assets.......................................................... 8,909 6,082
Long-term investments, net................................................. 11,726 9,226
Investment in joint venture................................................ 63,690 65,193
Other assets............................................................... 6,020 7,451
--------- ----------
Total assets...................................................... $ 254,638 $ 272,722
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Margin loan payable................................................... $ 4,044 $ 13,088
Current portion of notes payable and long-term obligations............ 2,708 2,745
Accounts payable and accrued liabilities.............................. 26,863 32,047
Prepetition claims and restructuring accruals......................... 12,340 12,364
Income taxes.......................................................... 18,361 18,702
Securities sold, not yet purchased.................................... 2,659 4,635
--------- ----------
Total current liabilities......................................... 66,975 83,581
--------- ----------
Notes payable.............................................................. 54,801 54,801
Other long-term liabilities................................................ 28,200 23,450
Commitments and contingencies.............................................. -- --
Redeemable preferred shares................................................ 332,198 316,202
Stockholders' deficiency:
Cumulative preferred shares; liquidation preference of $69,769,
dividends in arrears: $172,905 and $165,856......................... 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 shares outstanding............................ 96 96
Additional paid-in capital............................................ 534,568 550,119
Accumulated deficit................................................... (759,598) (758,016)
Unearned compensation on stock options................................ (148) (475)
Accumulated other comprehensive income................................ (2,733) 2,685
--------- ----------
Total stockholders' deficiency.................................... (227,536) (205,312)
--------- ----------
Total liabilities and stockholders'deficiency..................... $ 254,638 $ 272,722
========= ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Stctements.
-3-
<PAGE> 4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
-----------------------------------------
Three Months Ended March 31,
-----------------------------------------
1999 1998
-------------------- --------------------
<S> <C> <C>
Revenues:
Principal transactions, net................................ $ 4,776 $ 5,893
Commissions................................................ 11,126 6,676
Corporate finance fees..................................... 1,438 3,238
Gain on sale of investments, net........................... 499 5,596
Loss from joint venture.................................... (1,503) (329)
Real estate leasing........................................ 2,230 7,776
Computer sales and service................................. 251 413
Interest and dividends..................................... 1,261 2,849
Other income............................................... 2,692 1,728
---------- ----------
Total revenues......................................... 22,770 33,840
---------- ----------
Cost and expenses:
Selling, general and administrative........................ 26,592 30,100
Interest................................................... 2,325 4,160
---------- ----------
Total costs and expenses............................... 28,917 34,260
---------- ----------
Loss from continuing operations before income taxes
and minority interests..................................... (6,147) (420)
Income tax provision............................................ 15 6
Minority interest in loss of consolidated subsidiaries.......... 480 583
---------- ----------
(Loss) income from continuing operations........................ (5,682) 157
Discontinued operations:
Gain on disposal of discontinued operations................ 4,100 --
---------- ----------
Income from discontinued operations........................ 4,100 --
---------- ----------
Net (loss) income...................................... (1,582) 157
Dividend requirements on preferred shares....................... (22,219) (18,832)
---------- ----------
Net loss applicable to Common Shares............................ $ (23,801) $ (18,675)
========== ==========
Loss per Common Share (basic and diluted):
Continuing operations...................................... $ (2.92) $ (1.95)
Discontinued operations.................................... .43 --
---------- ----------
Net loss per Common Share.................................. $ (2.49) $ (1.95)
========== ==========
Number of shares used in computation............................ 9,577,624 9,577,624
========== ==========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
-4-
<PAGE> 5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIENCY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Unearned Accumulated
Class B Compensation Other
Preferred Common Paid-In Accumulated on Stock Comprehensive
Shares Shares Capital Deficit Options Income
--------- ------ ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998............ $279 $96 $550,119 $(758,016) $ (475) $ 2,685
Net income......................... (1,582)
Undeclared dividends and accretion
on redeemable preferred shares... (15,171)
Unrealized loss on investment
securities....................... (5,418)
Adjustment to unearned compensation
on stock options................. (327) 327
Compensation expense on stock
option grants....................
(53)
--- -- ------- -------- ------ -------
Balance, March 31, 1999............... $279 $96 $534,568 $(759,598) $ (148) $ (2,733)
=== == ======= ======== ====== =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Stctements.
-5-
<PAGE> 6
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
----------------------------------
Three Months Ended
March 31,
----------------------------------
1999 1998
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income....................................................... $ (1,582) $ 157
Adjustments to reconcile net (loss) income to net cash provided from
(used for) operating activities:
Income from discontinued operations................................... (4,100) --
Loss from joint venture............................................... 1,503 329
Depreciation and amortization......................................... 898 2,344
Stock based compensation expense...................................... 774 828
Changes in assets and liabilities, net of effects from acquisitions:
Decrease (increase) in receivables and other assets................ 14,375 (9,586)
(Decrease) increase in income taxes................................ (340) 440
(Decrease) increase in accounts payable and accrued liabilities.... (6,884) 2,766
--------- --------
Net cash provided from (used for) continuing operations............... 4,644 (2,722)
Net cash provided from discontinued operations........................ 4,100 --
--------- --------
Net cash provided from (used for) operating activities..................... 8,744 (2,722)
--------- --------
Cash flows from investing activities:
Sale or maturity of investment securities............................. 2,947 8,129
Purchase of investment securities..................................... (6,858) (913)
Sale or liquidation of long-term investments.......................... -- 1,901
Purchase of long-term investments..................................... (2,500) (1,951)
Sale of real estate................................................... 920 --
Purchase of real estate............................................... (1,615) (1,419)
Purchase of furniture and fixtures.................................... (312) (197)
Payment of prepetition claims......................................... (24) (847)
Increase in restricted assets......................................... (2,827) (68)
Net cash transferred to joint venture................................. -- (487)
--------- --------
Net cash (used for) provided from investing activities..................... (10,269) 4,148
--------- --------
Cash flows from financing activities:
Decrease in margin loan payable....................................... (9,044) (2,842)
Proceeds from participating loan...................................... 4,473 --
Prepayment of notes payable........................................... (36) (291)
--------- --------
Net cash used for financing activities..................................... (4,607) (3,133)
--------- --------
Net decrease in cash and cash equivalents.................................. (6,132) (1,707)
Cash and cash equivalents, beginning of period............................. 16,444 11,606
--------- --------
Cash and cash equivalents, end of period................................... $ 10,312 $ 9,899
========= ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Stctements.
-6-
<PAGE> 7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and its majority-owned subsidiaries (the "Company"). The
consolidated financial statements as of March 31, 1999 presented herein
have been prepared by the Company and are unaudited. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position as of
March 31, 1999 and the results of operations and cash flows for all
periods presented have been made. Results for the interim periods are not
necessarily indicative of the results for an entire year.
These financial statements should be read in conjunction with the
consolidated financial statements in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 as filed with the Securities and
Exchange Commission (Commission File Number 1-2493).
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 at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior interim period financial
information to conform with current year presentation.
PROPOSED RECAPITALIZATION PLAN
The Company has submitted for approval of its stockholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed
recapitalization of its capital stock (the "Recapitalization Plan"). Under
the Recapitalization Plan, each of the Company's outstanding Class A
Senior Preferred Shares would be reclassified and changed into 20 Common
Shares and one Warrant to purchase Common Shares (the "Warrants"). Each of
the Class B Preferred Shares would be reclassified and changed into
one-third of a Common Share and five Warrants. The existing Common Shares
would be reclassified and changed into one-tenth of a Common Share and
three-tenths of a Warrant. The authorized number of Common Shares would be
reduced from 850,000,000 to 100,000,000. The Warrants to be issued as part
of the Recapitalization Plan would have an exercise price of $12.50 per
share subject to adjustment in certain circumstances and be exercisable
for five years following the effective date of the Company's Registration
Statement covering the underlying Common Shares. The Warrants would not be
callable by the Company for a three-year period. Upon completion of the
Recapitalization Plan, the Company will apply for listing of the Common
Shares and Warrants on NASDAQ.
Completion of the Recapitalization Plan would be subject to, among other
things, approval by the required holders of the various classes of the
Company's shares. Brooke Group Ltd. ("Brooke"), the Company's principal
stockholder, has agreed to vote all of its shares in the Company in favor
of the Recapitalization Plan. As a result of the Recapitalization Plan and
assuming no warrant holder
-7-
<PAGE> 8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
exercises its Warrants, Brooke will increase its ownership of the
outstanding Common Shares of the Company from 42.3% to 55.1% and its total
voting power from 42% to 55.1%.
The Company believes the proposed Recapitalization Plan will simplify the
current capital structure of the Company by replacing it with a single
class of equity securities. The exchange of the Preferred Shares for
Common Shares will eliminate dividend arrearages, thus increasing the net
worth of the Company by approximately $332,198 on a pro forma basis as of
March 31, 1999. It will also remove the need to redeem the Class A Senior
Preferred Shares in 2003. The resulting improvement in the net worth of
the Company, along with a hoped for increase in the price of the Common
Shares, should increase the likelihood of having the Common Shares quoted
on NASDAQ. This, along with a more transparent capital structure, should
increase the liquidity of the Company's securities, improve the valuation
of the Common Shares and provide a currency for acquisitions and
financings. Finally, the recapitalization will allow the voting rights of
stockholders to properly reflect the economic interest of such
stockholders.
NEW ACCOUNTING PRONOUNCEMENTS.
In June, 1998, FASB issued Statement of Accounting Standards ("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, 1999. 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.
2. INVESTMENT IN WESTERN REALTY
WESTERN REALTY DEVELOPMENT LLC
In February 1998, the Company 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. In connection
with the formation of Western Realty Ducat, the Company agreed, among
other things, to contribute the real estate assets of BML, including Ducat
Place II and the site for Ducat Place III, to Western Realty Ducat and
Apollo agreed to contribute up to $58,750, including the investment in
Western Realty Repin discussed below. Through March 31, 1999, Apollo had
funded $36,529 of its investment in Western Realty Ducat.
The ownership and voting interests in Western Realty Ducat are held
equally by Apollo and the Company. Apollo will be entitled to a preference
on distributions of cash from Western Realty Ducat to the extent of its
investment ($40,000), together with a 15% annual rate of return, and the
Company will then be entitled to a return of $20,000 of BML-related
expenses incurred and cash invested by the Company since March 1, 1997,
together with a 15% annual rate of return; subsequent distributions will
be made 70% to the Company and 30% to Apollo. Western Realty Ducat will be
managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and the Company. All material corporate
transactions by Western Realty Ducat will generally require the unanimous
consent of the Board of Managers. Accordingly, the Company has accounted
for its non-controlling interest in Western Realty Ducat using the equity
method of accounting.
-8-
<PAGE> 9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
The Company recorded its basis in the investment in the joint venture 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 the Company's proportionate interest in the
underlying value of net assets of the joint venture. The Company
recognizes losses incurred by Western Realty Ducat to the extent that
cumulative earnings of Western Realty Ducat are not sufficient to satisfy
Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in
Western Tobacco Investments LLC ("WTI"), a company organized by Brooke
(Overseas) Ltd., a subsidiary of Brooke, which, among other things, holds
the interests of Brooke (Overseas) Ltd. in Liggett-Ducat Ltd. and the new
factory being constructed by Liggett-Ducat Ltd. on the outskirts of
Moscow. Western Realty Ducat has recognized as other income $1,002, which
represents 30% of WTI's net income for the three months ended March 31,
1999.
Summarized financial information as of March 31, 1999 and December 31,
1998 and for the three month period ended March 31, 1999 and for the
period from February 20, 1998 (date of inception) to March 31, 1998 for
Western Realty Ducat follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Current assets................................ $ 2,939 $ 857
Participating loan receivable................. 32,993 31,991
Real estate, net.............................. 86,307 85,761
Furniture and fixtures, net................... 230 179
Noncurrent assets............................. 538 631
Goodwill, net................................. 7,016 7,636
Notes payable - current....................... 5,703 4,999
Current liabilities........................... 5,445 5,802
Notes payable................................. 13,143 14,656
Long-term liabilities......................... 756 756
Members' equity............................... 104,976 100,842
</TABLE>
<TABLE>
<CAPTION>
February 20, 1998
Three months ended (date of inception)
March 31, 1999 to March 31, 1998
-------------- -----------------
<S> <C> <C>
Revenues...................................... $ 3,448 $ 927
Costs and expenses............................ 4,425 1,256
Other income.................................. 1,002 --
Income tax provision.......................... 16 --
Net loss...................................... 9 (329)
</TABLE>
WESTERN REALTY REPIN LLC
In June 1998, the Company and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the "Repin
Loan") to BML. The proceeds of the loan will be used by BML for the
acquisition and preliminary development of two adjoining sites
-9-
<PAGE> 10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
totaling 10.25 acres (the "Kremlin Sites") located in Moscow across the
Moscow River from the Kremlin. BML, which is planning the development of a
1.1 million sq. ft. hotel, office, retail and residential complex on the
Kremlin Sites, owned 95.2% of one site and 52% of the other site at March
31, 1999. Apollo will be entitled to a preference on distributions of cash
from Western Realty Repin to the extent of its investment ($18,750),
together with a 20% annual rate of return, and the Company will then be
entitled to a return of its investment ($6,250), together with a 20%
annual rate of return; subsequent distributions will be made 50% to the
Company and 50% to Apollo. Western Realty Repin will be managed by a Board
of Managers consisting of an equal number of representatives chosen by
Apollo and the Company. All material corporate transactions by Western
Realty Repin will generally require the unanimous consent of the Board of
Managers.
Through March 31, 1999, Western Realty Repin has advanced $25,000 under
the Repin Loan to BML, of which $18,773 was funded by Apollo and is
classified in other long-term obligations on the consolidated balance
sheet at March 31, 1999. The Repin Loan, which bears no fixed interest, is
payable only out of 100% of the distributions, if made, by the entities
owning the Kremlin Sites to BML. Such distributions shall be applied first
to pay the principal of the Repin Loan and then as contingent
participating interest on the Repin Loan. Any rights of payment on the
Repin Loan are subordinate to the rights of all other creditors of BML.
BML used a portion of the proceeds of the Repin Loan to repay the Company
for certain expenditures on the Kremlin Sites previously incurred. The
Repin Loan is due and payable upon the dissolution of BML and is
collateralized by a pledge of the Company's shares of BML.
As of March 31, 1999, BML had invested $19,621 in the Kremlin Sites and
held $3,525, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin
Sites, BML has agreed with the City of Moscow to invest an additional
$6,000 (which has been funded) in 1999 and $22,000 in 2000 in the
development of the property.
The Company has accounted for the formation of Western Realty Repin as a
financing by Apollo and a contribution of assets into a consolidated
subsidiary by New Valley which is eliminated in consolidation. Based on
the distribution terms contained in the Western Realty Repin LLC
agreement, the 20% annual rate of return preference to be received by
Apollo on funds advanced to Western Realty Repin is treated as interest
cost in the consolidated statement of operations.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. The Company is actively
pursuing various 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.
-10-
<PAGE> 11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
3. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of accumulated
other comprehensive income. The Company had realized gains on sales of
investment securities available for sale of $499 for the three months
ended March 31, 1999.
The components of investment securities available for sale at March 31,
1999 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
<S> <C> <C> <C> <C>
Marketable equity securities................. $39,297 $ 254 $ 6,444 $33,107
Marketable warrants.......................... -- 3,456 -- 3,456
------- ------- -------- -------
Investment securities........................ $39,297 $ 3,710 $ 6,444 $36,563
======= ======= ======== =======
</TABLE>
4. LONG-TERM INVESTMENTS
At March 31, 1999, long-term investments consisted primarily of
investments in limited partnerships of $11,726. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $2,600 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.
5. REDEEMABLE PREFERRED SHARES
At March 31, 1999, the Company had authorized and outstanding 2,000,000
and 1,071,462, respectively, of its Class A Senior Preferred Shares. At
March 31, 1999 and December 31, 1998, respectively, the carrying value of
such shares amounted to $332,198 and $316,202, including undeclared
dividends of $234,581 and $219,068 or $218.94 and $204.46 per share. As of
March 31, 1999, the unamortized discount on the Class A Senior Preferred
Shares was $6,586.
For the three months ended March 31, 1999 and 1998, the Company recorded
$774 and $828 in compensation expense related to certain Class A Senior
Preferred Shares awarded to an officer of the Company in 1996. At March
31, 1999 and December 31, 1998, the balance of the deferred compensation
and the unamortized discount related to these award shares was $5,416 and
$5,721, respectively.
6. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $172,905 and $165,856
at March 31, 1999 and December 31, 1998, respectively. These undeclared
dividends represent $61.96 and $59.43 per share as of the end of each
period. No accrual was recorded for such undeclared dividends as the Class
B Preferred Shares are not mandatorily redeemable.
-11-
<PAGE> 12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
7. CONTINGENCIES
LAWSUITS
On or about March 13, 1997, a shareholder derivative suit was filed
against the Company, as a nominal defendant, its directors and Brooke in
the Delaware Chancery Court, by a stockholder of the Company. The suit
alleges that the Company's purchase in January 1997 of the shares of BML
from Brooke (Overseas) Ltd. constituted a self-dealing transaction which
involved the payment of excessive consideration by the Company. The
plaintiff seeks (i) a declaration that the Company's directors breached
their fiduciary duties, Brooke aided and abetted such breaches and such
parties are therefore liable to the Company, and (ii) unspecified damages
to be awarded to the Company. The Company's time to respond to the
complaint has not yet expired. The Company believes that the allegations
were without merit. Although there can be no assurances, management is of
the opinion, after consultation with counsel, that the ultimate resolution
of this matter will not have a material adverse effect on the Company's
consolidated financial position, results of operations or cash flows.
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are
in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
RUSSIAN OPERATIONS
During 1998, the economy of the Russian Federation entered a period of
economic instability. 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 operations of BML and Western Realty Ducat may
be significantly affected by these factors for the foreseeable future.
Russian Taxation: Russian taxation is subject to varying interpretations
and constant changes. Furthermore, the interpretation of tax legislation
by tax authorities as applied to the transactions and activity of BML and
Western Realty Ducat may not coincide with that of management. As a
result, transactions may be challenged by tax authorities and BML and
Western Realty Ducat may be assessed additional taxes, penalties and
interest, which can be significant.
Management regularly reviews the Company's taxation compliance with
applicable legislation, laws and decrees and current interpretations and
from time to time potential exposures are identified. At any point in time
a number of open matters may exist, however, management believes that
adequate provision has been made for all material liabilities. Tax years
remain open to review by the authorities for six years.
-12-
<PAGE> 13
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(Unaudited)
Year 2000: It is unclear whether the Russian government and other
organizations who provide significant infrastructure services have
addressed the Year 2000 Problem sufficiently to mitigate potential
substantial disruption to these infrastructure services. The substantial
disruption of these services would have an adverse affect on the
operations of BML and Western Realty Ducat. Furthermore, the current
financial crisis could affect the ability of the government and other
organizations to fund Year 2000 compliance programs.
8. BUSINESS SEGMENT INFORMATION
The following table presents certain financial information of the
Company's continuing operations before taxes and minority interests as of
and for the three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
BROKER- COMPUTER CORPORATE
DEALER REAL ESTATE SOFTWARE AND OTHER TOTAL
------ ----------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
1999
----
Revenues.................... $19,030 $ 2,323 $ 251 $ 1,166 $ 22,770
Operating (loss) income..... 25 (1,225) (1,601) (3,346) (6,147)
Identifiable assets......... 38,957 91,091 985 123,605 254,638
Depreciation and
amortization............. 198 532 120 48 898
Capital expenditures........ -- 1,615 26 286 1,927
1998
----
Revenues.................... $19,425 $ 7,776 $ 413 $ 6,226 $ 33,840
Operating (loss) income..... (1,224) (20) (1,249) 2,073 (420)
Depreciation and
amortization............. 304 1,746 236 58 2,344
Capital expenditures........ 112 1,419 27 58 1,616
</TABLE>
9. INCOME FROM DISCONTINUED OPERATIONS
The Company recorded a gain on disposal of discontinued operations of
$4,100 for the three months ended March 31, 1999 related to the settlement
of a lawsuit originally initiated by the Company's former Western Union
telegraph business.
10. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 establishes standards for the
reporting and disclosure of comprehensive income and its components.
Comprehensive income is a measure that reflects all changes in
stockholders' equity, except those resulting from transactions with
stockholders. For the Company, comprehensive income includes net income
and changes in the value of equity securities that have not been included
in net income. For the three months ended March 31, 1999 and 1998,
comprehensive loss applicable to Common Shares was $29,219 and $21,493,
respectively.
-13-
<PAGE> 1
Exhibit 99.4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE> 2
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998.............................. 2
Consolidated Statements of Operations for the three months ended March 31,
1999 and March 31, 1998....................................................................... 3
Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 1999.......................................................................... 4
Consolidated Statements of Cash Flows for the three months ended March 31,
1999 and March 31, 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>
March 31, December 31,
1999 1998
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 4,134 $ 2,722
Accounts receivable - trade .................................... 2,980 650
Inventories .................................................... 14,777 10,342
Other current assets ........................................... 2,730 2,928
--------- --------
Total current assets ........................................ 24,621 16,642
Property, plant and equipment, at cost, less
accumulated depreciation of $3,758 and $2,959 .............. 87,192 77,286
Other ............................................................ 4,739 5,782
--------- --------
Total assets ................................................ $ 116,552 $ 99,710
========= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Credit facilities and current portion of notes payable.......... $ 27,758 $ 20,005
Accounts payable - trade ....................................... 10,432 10,415
Due to affiliates .............................................. 62,368 51,533
Accrued taxes .................................................. 4,713 7,658
Accrued interest ............................................... 665 228
Other accrued liabilities ...................................... 4,320 3,628
--------- --------
Total current liabilities ................................... 110,256 93,467
Long-term portion of notes payable ............................... 17,454 19,652
Deferred gain .................................................... 14,574 20,392
Participating loan ............................................... 32,984 30,000
Other liabilities ................................................ 1,450 6,243
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, par value $1 per share, 701,000 shares authorized,
authorized, issued and outstanding .......................... 701 701
Additional paid-in-capital ..................................... 17,104 17,104
Deficit ........................................................ (77,971) (87,849)
--------- --------
Total stockholder's equity (deficit) ........................ (60,166) (70,044)
--------- --------
Total liabilities and stockholder's equity (deficit) ........ $ 116,552 $ 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
------------------------------------
March 31, March 31,
1999 1998
------------ ----------
<S> <C> <C>
Net sales* ....................................................... $ 22,362 $ 19,177
Cost of sales* ................................................... 18,412 15,584
--------- --------
Gross profit ..................................................... 3,950 3,593
Operating, selling, administrative and
general expenses ............................................ 2,648 2,141
--------- --------
Operating income ................................................. 1,302 1,452
Other income (expense):
Interest income ............................................... 33
Interest expense .............................................. (3,973) (3,510)
Recognition of deferred gain on sale of assets ................ 8,478
Gain on foreign currency exchange ............................. 2,270 79
Other, net .................................................... 51 (1)
--------- --------
Income (loss) before income taxes ................................ 8,161 (1,980)
Benefit for income taxes ......................................... (1,717) (234)
--------- --------
Net income (loss) ................................................ $ 9,878 $ (1,746)
========= ========
</TABLE>
- --------------------
* Revenues and Cost of goods sold include federal excise taxes of $1,485 and
$3,109 for the three months ended March 31, 1999 and 1998, 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.................................... 9,878 9,878
--------- ----- ------- -------- --------
Balance, March 31, 1999....................... 701,000 $ 701 $17,104 $(77,971) $(60,166)
========= ===== ======= ======== ========
</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>
Three Months Ended
------------------------------------
March 31, March 31,
1999 1998
---------- ---------
<S> <C> <C>
Net cash provided by (used in) operating activities .............. $ 6,646 $ (8,273)
--------- --------
Cash flows from investing activities:
Capital expenditures ....................................... (13,248) (42)
--------- --------
Net cash used in investing activities ............................ (13,248) (42)
--------- --------
Cash flows from financing activities:
Proceeds from participating loan ........................... 11,000
Repayments of debt ......................................... (79)
Borrowings under credit facility ........................... 8,412
Repayment of intercompany debt ............................. (11,000)
Distributions paid to parent ............................... (1,275)
Capital contributions ...................................... 9,000
--------- --------
Net cash provided by financing activities ........................ 8,333 7,725
--------- --------
Effect of exchange rate changes on cash
and cash equivalents ..................................... (319) 79
--------- --------
Net increase (decrease) in cash and cash equivalents ............. 1,412 (511)
Cash and cash equivalents, beginning of period ................... 2,722 968
--------- --------
Cash and cash equivalents, end of period ......................... $ 4,134 $ 457
========= ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 7
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
Brooke (Overseas) Ltd. ("the Company"), a Delaware corporation, is a
wholly-owned subsidiary of BGLS Inc. ("BGLS") and an indirect
subsidiary of Brooke Group Ltd. ("Brooke"). The consolidated financial
statements of the Company include 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 engaged in the
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.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
Certain amounts in the 1998 consolidated financial statements have been
reclassified to conform to the 1999 presentation.
2. LIQUIDITY
At March 31, 1999, the Company had net capital and working capital
deficiencies of $60,166 and $85,635, respectively. Factory management
is currently using credit facilities totaling $19,700. Availability
under these facilities is $2,500. In addition, BOL has obtained funding
from BGLS of approximately $12,000 to complete the factory. In
connection with the move to the new factory in the second quarter of
1999, the Company plans to begin the manufacture and marketing of
western style cigarettes. Management believes that such activities will
result in improved operations and cash flow, but there can be no
assurances in this regard.
In 1998, the Russian Federation entered a period of economic
instability. 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
-6-
<PAGE> 8
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
--------------
the effectiveness of the fiscal measures taken by government and other
actions beyond the control of companies operating in the Russian
Federation. The operations of Liggett-Ducat may be significantly
affected by these factors for the foreseeable future.
3. SALE OF BROOKEMIL
In connection with the sale by the Company of the common shares of 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, retains an interest in BML through its 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.
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Leaf tobacco ...................... $ 993 $ 3,086
Other raw materials ............... 3,682 2,888
Work-in-process ................... 89 173
Finished goods .................... 8,974 3,215
Replacement parts and supplies .... 1,039 980
------- -------
$14,777 $10,342
======= =======
</TABLE>
Replacement parts and supplies are shown net of a provision for
obsolescence of $645 and $545 at March 31, 1999 and December 31, 1998,
respectively.
During the three months ended March 31, 1999, Liggett-Ducat exchanged
$0 of cigarettes for the equivalent value in tobacco, other materials
and services as compared to $1,086 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 March 31, 1999, the Company had leaf tobacco purchase commitments of
approximately $11,560.
-7-
<PAGE> 9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
--------------
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Factory machinery and equipment ... $ 10,573 $ 10,589
Computers and software ............ 649 466
Office furniture and equipment .... 516 470
Vehicles .......................... 1,833 1,767
Construction-in-progress .......... 77,379 66,953
-------- --------
90,950 80,245
Less accumulated depreciation ..... (3,758) (2,959)
-------- --------
$ 87,192 $ 77,286
======== ========
</TABLE>
Liggett-Ducat is in the process of constructing a new cigarette factory
on the outskirts of Moscow which is currently scheduled to be
operational in the June 1999. Liggett-Ducat's remaining liability under
the construction contract, as amended, at March 31, 1999 is
approximately $2,500.
In addition to the liability under promissory notes for equipment
purchase agreements discussed in Note 6, in place at March 31, 1999
there were equipment purchase commitments of $3,011.
6. NOTES PAYABLE, CREDIT FACILITIES AND PARTICIPATING LOAN
Notes payable and credit facilities consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Notes payable ..................... $25,475 $28,057
Credit facilities ................. 19,737 11,600
------- -------
Total notes payable and credit
facilities ...................... 45,212 39,657
Less:
Current maturities ................ 27,758 20,005
------- -------
Amount due after one year ......... $17,454 $19,652
======= =======
</TABLE>
At March 31, 1999, Liggett-Ducat had various credit facilities under
which $19,737 was outstanding. One, for $10,000, expired in May 1999
but was extended for one year at an interest rate of 25%. The second,
for $5,000, expires in December 1999. The interest rate is 20%. The
remaining facilities, denominated in rubles (approximately $7,200 at
the March 31, 1999 exchange rate), have terms of six - twelve months
with interest rates of 52% - 55%. The facilities are collateralized by
factory equipment and tobacco inventory.
-8-
<PAGE> 10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)-(Continued)
(Unaudited)
-------------------
In 1997, Western Tobacco entered into two contracts for the purchase of
cigarette manufacturing equipment. A portion (85%) of both contracts is
being financed with promissory notes. One contract is financed by ten
half-year promissory notes payable at the rate of 6.71% per annum
interest, with the first note due in May 1999. The outstanding balance
on the contract is $13,677 at March 31, 1999. The second contract is
financed by 60 monthly promissory notes payable at the rate of 7.5%
interest. The first note was paid in December 1998. The outstanding
balance at March 31, 1999 is $8,250. The Company also has a promissory
note for $1,514 at March 31, 1999 covering deposits for equipment being
purchased for the factory. The note is due March 31, 2000.
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 note, which is due on August 1, 1999, is collateralized by
factory equipment. Payments of $50 toward principal and interest are
made monthly, with the remaining principal balance due at maturity.
In February 1998, New Valley and Apollo organized Western Realty
Development LLC ("Western Realty Ducat") to make real estate and other
investments in Russia. Through March 31, 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, which
bears no fixed interest, is payable out of 30% of distributions, if
any, made by Western Tobacco to the Company. After the prior payment of
debt service on loans to finance the construction of the new factory,
30% of distributions from Western Tobacco to the Company will be
applied first to pay the principal of the loan and then as contingent
participating interest on the loan. Any rights of payment on the loan
are subordinate to the rights of all other creditors of the Company.
For the three months ended March 31, 1999, a preference requirement
equal to 30% of Western Tobacco's net income, $1,002, has been charged
to interest expense.
7. INCOME TAXES
For the three months ended March 31, 1999 and 1998, the tax benefit of
$1,717 and $931, respectively, consists of income tax (benefit) expense
pursuant to Russian statutory requirements of $485 and $931,
respectively, and U.S. income tax benefit of $1,232 and $1,165 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
-9-
<PAGE> 11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)-(Continued)
(Unaudited)
-------------------
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-
<PAGE> 1
Exhibit 99.5
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
MARCH 31, 1999
<PAGE> 2
NEW VALLEY HOLDINGS, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Balance Sheets as of March 31, 1999 and December 31, 1998......................................... 2
Statements of Operations for the three months ended March 31, 1999 and
March 31, 1998.............................................................................. 3
Statements of Stockholder's Equity (Deficit) for the three months ended
March 31, 1999.............................................................................. 4
Statements of Cash Flows for the three months ended March 31, 1999 and
March 31, 1998.............................................................................. 5
Notes to Financial Statements..................................................................... 6
</TABLE>
-1-
<PAGE> 3
NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
==============================================================================
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................................. $ 20 $ 21
Investment in New Valley:
Redeemable preferred stock ............................... 51,939 61,833
Common stock ............................................. (51,939) (61,833)
-------- --------
Total investment in New Valley -- --
-------- --------
Total assets ............................................... $ 20 $ 21
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current income taxes payable to parent ..................... $ 6,324 $ 6,324
-------- --------
Total liabilities .......................................... 6,324 6,324
-------- --------
Commitments and contingencies
Common stock, $0.01 par value, 100 shares authorized, issued
and outstanding
Additional paid-in capital ................................. 7,633 7,633
Deficit .................................................... (57,048) (51,155)
Other comprehensive income ................................. 43,111 37,219
-------- --------
Total stockholder's equity (deficit) ....................... $ (6,304) $ (6,303)
-------- --------
Total liabilities and stockholder's equity (deficit) ....... $ 20 $ 21
======== ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
2
<PAGE> 4
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1999 1998
-------- --------
<S> <C> <C>
Equity in loss of New Valley ..................... $(7,599) $(4,166)
Interest income .................................. 9
General and administrative expenses .............. (2) (7)
------- -------
Loss from continuing operations before
income taxes ................................ (7,601) (4,164)
------- -------
Benefit for income taxes:
Deferred ...................................... (598) --
------- -------
Income tax benefit ............................... (598) --
-------- -------
Loss from continuing operations .................. (7,003) (4,164)
------- -------
Income from discontinued operations of New Valley,
net of taxes of $598 in 1998 ................ 1,110 --
------- -------
Net loss ......................................... $(5,893) $(4,164)
======= =======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
- 3 -
<PAGE> 5
NEW VALLEY HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
Additional Other
Common Stock Paid-In Comprehensive
Shares Amount Capital Deficit Income Total
------ ------ ---------- ------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998.............................. 100 $7,633 $(51,155) $37,219 $ (6,303)
Net loss................................................ (5,893) (5,893)
Unrealized holding gain on investment in New Valley... 5,892 5,892
--------
Total other comprehensive income.................... 5,892
--------
Total comprehensive loss.............................. (1)
----- ------ ------ -------- ------- --------
Balance, December 31, 1998.............................. 100 $7,633 $(57,048) $43,111 $ (6,304)
===== ====== ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
4
<PAGE> 6
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
==============================================================================
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 31, March 31,
1999 1998
---------- ---------
<S> <C> <C>
Net cash (used in) provided by operating activities............. $ (1) $1,025
---- ------
Net (decrease) increase in cash and cash equivalents............ (1) 1,025
Cash and cash equivalents at beginning of period................ 21 6
---- ------
Cash and cash equivalents at end of period...................... $ 20 $1,031
==== ======
</TABLE>
The accompanying notes are an integral
part of the financial statements.
5
<PAGE> 7
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Organization. New Valley Holdings, Inc. (the "Company") was formed on
September 9, 1994, pursuant to the laws of Delaware, by BGLS Inc. ("BGLS")
to act as a holding company for certain stock investments in New Valley
Corporation ("New Valley"). BGLS, which owns 100% of the authorized,
issued and outstanding common stock of the Company, is a wholly-owned
subsidiary of Brooke Group Ltd. ("Brooke"), a Delaware corporation whose
stock is traded on the New York Stock Exchange.
Estimates and Assumptions. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Actual
results could differ from those estimates.
Cash and Cash Equivalents. For purposes of statements of cash flows, cash
includes cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or less.
Interest on short-term investments is recognized when earned.
Comprehensive Income. Comprehensive income is a component of stockholders'
equity and includes the Company's net income and other comprehensive
income such as the proportionate interest in New Valley's capital
transactions, unrealized gains and losses on investment securities and
minimum pension liability adjustments. For the three months ended March
31, 1999, total comprehensive loss was $1; for the three months ended
March 31, 1998, total comprehensive income was $6.
2. INVESTMENT IN NEW VALLEY CORPORATION
At March 31, 1999, the Company's investment in New Valley consisted of a
41.5% voting interest. At March 31, 1999 and 1998, the Company owned 57.7%
of the outstanding $15.00 Class A Increasing Rate Cumulative Senior
Preferred Shares ($100 Liquidation Value), $.01 par value ("Class A
Preferred Shares"), and 41.5% of New Valley's common shares, $.01 par
value (the "Common Shares").
The Class A Preferred Shares are accounted for as debt and equity
securities pursuant to the requirements of SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and are classified as
available-for-sale. The Common Shares are accounted for pursuant to
Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock".
The Company determines the fair value of the Class A Preferred Shares
based on the quoted market price. Through September 1996, earnings on the
Class A Preferred Shares were comprised of dividends accrued during the
period and the accretion of the difference between the Company's basis and
their mandatory redemption price. During the quarter ended September 30,
1996, the decline in the market value of the Class A Preferred Shares, the
dividend received on the Class A Preferred Shares and the Company's equity
in losses incurred by New Valley caused the carrying value of the
Company's investment in New Valley to be reduced to zero. Beginning in the
fourth quarter of 1996, the Company suspended the recording of its
earnings on the dividends accrued and the accretion of the difference
between the Company's basis in the Class A Preferred Shares and their
mandatory redemption price.
-6-
<PAGE> 8
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company's investment in New Valley at March 31, 1999 is summarized
below:
<TABLE>
<CAPTION>
Number of Fair Carrying
1998 Shares Value Amount
- ---- --------- --------- --------
<S> <C> <C> <C>
Class A Preferred Shares....... 618,326 $51,939 $ 51,939
Common Shares.................. 3,969,962 1,613 (51,939)
------- --------
$53,552 $ 0
======= ========
</TABLE>
In November 1994, New Valley's First Amended Joint Chapter 11 Plan of
Reorganization, as amended ("Joint Plan"), was confirmed by order of the
United States Bankruptcy Court for the District of New Jersey and on
January 18, 1995, New Valley emerged from bankruptcy reorganization
proceedings and completed substantially all distributions to creditors
under the Joint Plan. Pursuant to the Joint Plan, among other things, the
Class A Preferred Shares, the Class B Preferred Shares, the Common Shares
and other equity interests were reinstated and retained all of their
legal, equitable and contractual rights.
The Class A Preferred Shares of New Valley are required to be redeemed on
January 1, 2003 for $100.00 per share plus dividends accrued to the
redemption date. The shares are redeemable, at any time, at the option of
New Valley, at $100.00 per share plus accrued dividends. The holders of
Class A Preferred Shares are entitled to receive a quarterly dividend, as
declared by the Board of Directors, payable at the rate of $19.00 per
annum. At March 31, 1999, the accrued and unpaid dividends arrearage was
$234,581($218.94 per share).
3. NEW VALLEY CORPORATION
Summarized financial information for New Valley as of March 31, 1999 and
December 31, 1998 and for the three months ended March 31, 1999 and 1998
follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Current assets, primarily cash and marketable
securities................................... $ 70,851 $ 91,451
Non-current assets.............................. 183,787 181,271
Current liabilities............................. 66,975 83,581
Non-current liabilities......................... 83,001 78,251
Redeemable preferred stock...................... 332,198 316,202
Shareholders' deficit........................... (227,536) (205,312)
<CAPTION>
Three Months Ended
-----------------------------------
March 31, March 31,
1999 1998
-------------- -----------
<S> <C> <C>
Revenues .................................... $ 22,770 $ 33,840
Costs and expenses.............................. 28,917 34,260
(Loss) income from continuing operations........ (5,682) 157
Gain from discontinued operations............... 4,100
Net loss applicable to common shares(A)......... (23,801) (18,675)
</TABLE>
- ------------------
(A) Considers all preferred accrued dividends, whether or not declared.
-7-
<PAGE> 9
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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. In connection
with the formation of Western Realty Ducat, New Valley agreed, among other
things, to contribute the real estate assets of BML, including Ducat Place
II and the site for Ducat Place III, to Western Realty Ducat and Apollo
agreed to contribute up to $58,750 including the investment in Western
Realty Repin discussed below. Through March 31, 1999, Apollo had funded
$36,529 of its investment in Western Realty Ducat.
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 ($40,000), together with a 15% annual rate of return, and 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 will be
managed by a Board of Managers consisting of an equal number of
representatives chosen by Apollo and New Valley. All material corporate
transactions by Western Realty Ducat generally require the unanimous
consent of the Board of Managers. Accordingly, New Valley has accounted
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 incurred by Western Realty Ducat to the extent that
cumulative earnings of Western Realty Ducat are not sufficient to satisfy
Apollo's preferred return.
Western Realty Ducat will seek to make additional real estate and other
investments in Russia. Western Realty Ducat has made a $30,000
participating loan to, and payable out of a 30% profits interest in, a
company organized by BOL which, among other things, holds BOL's interest
in Liggett-Ducat Ltd. and the new factory being constructed by
Liggett-Ducat on the outskirts of Moscow.
In June 1998, New Valley and Apollo organized Western Realty Repin LLC
("Western Realty Repin") to make a $25,000 participating loan (the "Repin
Loan") to BML. The proceeds of the loan will be used by BML for the
acquisition and preliminary development of two adjoining sites totaling
10.25 acres (the "Kremlin Sites") located in Moscow across the Moscow
River from the Kremlin. BML, which is planning the development of a 1.1
million sq. ft. hotel, office, retail and residential complex on the
Kremlin Sites, owned 95.29% of one site and 52% of the other site at March
31, 1999. Apollo will be entitled to a preference on distributions of cash
from Western Realty Repin to the extent of its investment ($18,750)
together with a 20% annual rate of return, and New Valley will then be
entitled to a return of its investment ($6,250), together with a 20%
annual rate of return; subsequent distributions will be made 50% to New
Valley and 50% to Apollo. Western Realty Repin will be managed by a Board
of Managers consisting of an equal number of representatives chosen by
Apollo and New Valley. All material corporate transactions by Western
Realty Repin will generally require the unanimous consent of the Board of
Managers.
Through March 31, 1999, Western Realty Repin has advanced $25,000 (of
which $18,773 was funded by Apollo) under the Repin Loan to BML. The Repin
Loan, which bears no fixed interest, is payable only out of 100% of the
distributions, if made, by the entities owning the Kremlin Sites to BML.
Such distributions shall be applied first to pay the principal of the
Repin Loan and then as contingent participating interest on the Repin
Loan. Any rights of payment on the Repin Loan are
-8-
<PAGE> 10
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
subordinate to the rights of all other creditors of BML. BML used a
portion of the proceeds to repay New Valley for certain expenditures on
the Kremlin Sites previously incurred. The Repin 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 March 31, 1999, BML had invested $19,621 in the Kremlin sites and
held $3,525, in cash, which was restricted for future investment. In
connection with the acquisition of its interest in one of the Kremlin
Sites, BML agreed with the City of Moscow to invest an additional $6,000
in 1999 (which has been funded) and $22,000 in 2000 in the development of
the property.
The development of Ducat Place III and the Kremlin Sites will require
significant amounts of debt and other financing. New Valley is actively
pursuing various 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.
Subsequent Event - Recapitalization Plan:
New Valley has submitted for approval of its shareholders at its 1999
annual meeting, which will be held on May 21, 1999, a proposed
recapitalization of its capital stock (the "Recapitalization Plan"). Under
the Recapitalization Plan, each of New Valley's outstanding Class A
Preferred Shares would be reclassified and changed into 20 Common Shares
and one Warrant to purchase Common Shares (the "Warrants"). Each of the
Class B Preferred Shares would be reclassified and changed into one-third
of a Common Share and five Warrants. The existing Common Shares would be
reclassified and changed into one-tenth of a Common Share and three-tenths
of a Warrant. The number of authorized Common Shares would be reduced from
850,000,000 to 100,000,000. The Warrants to be issued as part of the
Recapitalization Plan would have an exercise price of $12.50 per share
subject to adjustment in certain circumstances and be exercisable for five
years following the effective date of New Valley's Registration Statement
covering the underlying Common Shares. The Warrants would not be callable
by New Valley for a three-year period. Upon completion of the
Recapitalization Plan, New Valley will apply for listing of the Common
Shares and Warrants on NASDAQ. Completion of the Recapitalization Plan
would be subject to, among other things, approval by the required holders
of the various classes of New Valley's shares.
Brooke has agreed to vote all of its shares in New Valley in favor of the
Recapitalization Plan. As a result of the Recapitalization Plan and
assuming no warrant holder exercises its warrants, Brooke will increase
its ownership of the outstanding Common Shares of New Valley from 42.3% to
55.1% and its total voting power from 42.3% to 55.1%.
4. FEDERAL INCOME TAX
At March 31, 1999, the Company had $8,400 of unrecognized net deferred tax
assets, comprised primarily of future deductible temporary differences. A
valuation allowance has been provided against this deferred tax asset as
it is presently deemed more likely than not that the benefit of the tax
asset will not be utilized. The Company continues to evaluate the
realizability of its deferred tax assets and its estimate is subject to
change.
-9-
<PAGE> 11
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
5. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's common stock and
the Company's investments in the New Valley securities as collateral in
connection with the issuance of BGLS' 15.75% Senior Secured Notes ("BGLS
Notes") due 2001.
-10-
