<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2000
----------------
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1-5759 65-0949535
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
BGLS INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 33-93576 65-0949536
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
Indicate by check mark whether the Registrants (1) have filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), during the preceding 12 months (or
for such shorter period that the Registrants were required to file such
reports), and (2) have been subject to such filing requirements for the past 90
days. [ X ] Yes [ ] No
At May 12, 2000, Brooke Group Ltd. had 21,989,782 shares of common
stock outstanding, and BGLS Inc. had 100 shares of common stock outstanding, all
of which are held by Brooke Group Ltd.
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<PAGE> 2
BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements:
Brooke Group Ltd. Consolidated Balance Sheets as of March 31, 2000 and
December 31, 1999 .................................................................... 2
BGLS Inc. Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 ........... 3
Brooke Group Ltd. Consolidated Statements of Operations for the three months ended
March 31, 2000 and March 31, 1999 .................................................... 4
BGLS Inc. Consolidated Statements of Operations for the three months ended
March 31, 2000 and March 31, 1999 .................................................... 5
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the three
months ended March 31, 2000 .......................................................... 6
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 2000 ................................................................. 7
Brooke Group Ltd. Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and March 31, 1999 .................................................... 8
BGLS Inc. Consolidated Statements of Cash Flows for the three months ended
March 31, 2000 and March 31, 1999 .................................................... 9
Notes to Consolidated Financial Statements ................................................. 10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ..................................... 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................ 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................................... 45
Item 2. Changes in Securities and Use of Proceeds ............................................. 45
Item 6. Exhibits and Reports on Form 8-K ...................................................... 45
SIGNATURES .................................................................................... 46
</TABLE>
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<PAGE> 3
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents.................................................... $ 22,810 $ 20,123
Receivables from clearing brokers............................................ 21,120 10,903
Investment securities available for sale..................................... 48,689 48,722
Trading securities owned..................................................... 11,106 15,707
Accounts receivable - trade.................................................. 19,103 19,658
Other receivables............................................................ 4,391 1,290
Inventories.................................................................. 59,562 45,205
Restricted assets............................................................ 937 3,239
Deferred income taxes........................................................ 21,457 21,374
Other current assets......................................................... 4,570 2,511
--------- ---------
Total current assets..................................................... 213,745 188,732
Property, plant and equipment, net............................................. 159,430 154,260
Investment in real estate, net................................................. 53,879 53,353
Long-term investments, net..................................................... 7,757 8,731
Investment in joint venture.................................................... 38,366 38,378
Restricted assets.............................................................. 4,295 5,195
Deferred income taxes.......................................................... 45,631 45,631
Other assets................................................................... 10,899 10,168
--------- ---------
Total assets............................................................. $534,002 $504,448
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt.......................... $156,414 $ 41,547
Margin loan payable.......................................................... 4,306 983
Accounts payable............................................................. 45,123 36,456
Securities sold, not yet purchased........................................... 3,368 7,625
Accrued promotional expenses................................................. 23,247 22,473
Accrued taxes payable........................................................ 39,385 42,408
Deferred income taxes........................................................ 2,274 2,274
Accrued interest............................................................. 3,946 8,488
Prepetition claims and restructuring accruals................................ 12,263 12,279
Other accrued liabilities.................................................... 57,499 52,121
--------- ---------
Total current liabilities................................................ 347,825 226,654
Notes payable, long-term debt and other obligations, less current portion...... 54,813 148,349
Noncurrent employee benefits................................................... 16,425 23,264
Deferred income taxes.......................................................... 118,378 117,285
Other liabilities.............................................................. 88,428 76,628
Minority interests............................................................. 43,457 45,366
Commitments and contingencies..................................................
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares.....
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 27,822,779 shares, outstanding 21,989,782................... 2,199 2,199
Additional paid-in capital................................................... 191,088 196,695
Deficit...................................................................... (300,897) (302,155)
Accumulated other comprehensive income....................................... 3,097 1,379
Other........................................................................ (3,338) (3,743)
Less: 5,832,997 shares of common stock in treasury, at cost................. (27,473) (27,473)
--------- ---------
Total stockholders' equity (deficit)..................................... (135,324) (133,098)
--------- ---------
Total liabilities and stockholders' equity (deficit)..................... $534,002 $504,448
======== ========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
<PAGE> 4
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ................................................ $ 22,243 $ 19,590
Receivables from clearing brokers ........................................ 21,120 10,903
Investment securities available for sale ................................. 48,689 48,722
Trading securities owned ................................................. 11,106 15,707
Accounts receivable - trade .............................................. 19,103 19,658
Other receivables ........................................................ 4,336 1,237
Inventories .............................................................. 59,562 45,205
Restricted assets ........................................................ 937 3,239
Deferred income taxes .................................................... 21,457 21,374
Other current assets ..................................................... 4,539 2,350
------------ ------------
Total current assets ................................................. 213,092 187,985
Property, plant and equipment, net ......................................... 159,418 154,246
Investment in real estate, net ............................................. 53,879 53,353
Long-term investments, net ................................................. 7,757 8,731
Investment in joint venture ................................................ 38,366 38,378
Restricted assets .......................................................... 4,295 5,195
Deferred income taxes ...................................................... 45,631 45,631
Other assets ............................................................... 9,589 9,002
------------ ------------
Total assets ......................................................... $ 532,027 $ 502,521
------------ ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt ...................... $ 155,865 $ 41,333
Margin loan payable ...................................................... 4,306 983
Accounts payable ......................................................... 44,998 36,236
Securities sold, not yet purchased ....................................... 3,368 7,625
Accrued promotional expenses ............................................. 23,247 22,473
Accrued taxes payable .................................................... 39,385 42,408
Deferred income taxes .................................................... 2,274 2,274
Accrued interest ......................................................... 3,946 8,488
Prepetition claims and restructuring accruals ............................ 12,263 12,279
Other accrued liabilities ................................................ 55,474 50,254
------------ ------------
Total current liabilities ............................................ 345,126 224,353
Notes payable, long-term debt and other obligations, less current portion .. 54,813 148,349
Noncurrent employee benefits ............................................... 16,425 23,264
Deferred income taxes ...................................................... 118,378 117,285
Other liabilities .......................................................... 88,265 76,360
Minority interests ......................................................... 43,457 45,366
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 ............................................... 161,683 161,800
Deficit .................................................................. (299,217) (295,635)
Accumulated other comprehensive income ................................... 3,097 1,379
------------ ------------
Total stockholder's equity (deficit) ................................. (134,437) (132,456)
------------ ------------
Total liabilities and stockholder's equity (deficit) ................. $ 532,027 $ 502,521
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
<PAGE> 5
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,
2000 1999
------------ -----------
<S> <C> <C>
Revenues:
Tobacco* ............................................................... $ 147,148 $ 108,397
Broker-dealer transactions ............................................. 30,296
Real estate leasing .................................................... 771
------------ -----------
Total revenues ....................................................... 178,215 108,397
Expenses:
Cost of goods sold* .................................................... 68,575 41,427
Operating, selling, administrative and general expenses ................ 99,503 44,722
Settlement charges ..................................................... 37 115
------------ -----------
Operating income ..................................................... 10,100 22,133
Other income (expenses):
Interest and dividend income ........................................... 1,530 60
Interest expense ....................................................... (11,756) (14,988)
Equity in loss of affiliate ............................................ (1,551) (7,629)
Recognition of deferred gain on sale of assets ......................... 7,050
Foreign currency gain .................................................. 1,223 2,270
Loss in joint venture .................................................. (226)
Gain on sale of investments, net ....................................... 4,753
Other, net ............................................................. (23) 387
------------ -----------
Income from continuing operations before provision
for income taxes and minority interests .............................. 4,050 9,283
Provision for income taxes ............................................. 823 1,729
Minority interests ..................................................... 1,739
------------ -----------
Income from continuing operations .......................................... 1,488 7,554
------------ -----------
Gain on disposal of discontinued operations ................................ 1,249
Loss on extraordinary items ................................................ (230)
------------ -----------
Net income ................................................................. $ 1,258 $ 8,803
============ ============
Per basic common share:
Income from continuing operations ...................................... $ 0.07 $ 0.34
============ ============
Gain from discontinued operations ...................................... $ 0.06
============ ============
Loss from extraordinary items .......................................... $ (0.01)
============ ============
Net income applicable to common shares ................................. $ 0.06 $ 0.40
============ ============
Basic weighted average common shares outstanding ........................... 21,989,782 21,989,782
============ ============
Per diluted common share:
Income from continuing operations ...................................... $ 0.06 $ 0.28
============ ============
Gain from discontinued operations ...................................... $ 0.05
============ ============
Loss from extraordinary items .......................................... $ (0.01)
============ ============
Net income applicable to common shares ................................. $ 0.05 $ 0.33
============ ============
Diluted weighted average common shares outstanding ......................... 26,232,353 26,851,374
============ ============
</TABLE>
- -------------------------
*Tobacco revenues and Cost of goods sold include excise taxes of $24,701 and
$14,038 for the three months ended March 31, 2000 and 1999, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
<PAGE> 6
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,
2000 1999
------------ ------------
<S> <C> <C>
Revenues:
Tobacco* ............................................................... $ 147,148 $ 108,397
Broker dealer transactions ............................................. 30,296
Real estate leasing .................................................... 771
------------ ------------
Total revenues ....................................................... 178,215 108,397
Expenses:
Cost of goods sold* .................................................... 68,575 41,427
Operating, selling, administrative and general expenses ................ 98,376 44,320
Settlement charges ..................................................... 37 115
------------ ------------
Operating income ..................................................... 11,227 22,535
Other income (expenses):
Interest and dividend income ........................................... 1,530 60
Interest expense ....................................................... (11,732) (16,244)
Equity in loss of affiliate ............................................ (1,551) (7,629)
Recognition of deferred gain on sale of assets ......................... 8,264
Foreign currency gain .................................................. 1,223 2,270
Loss in joint venture .................................................. (226)
Gain on sale of investments, net ....................................... 4,753
Other, net ............................................................. (52) 357
------------ ------------
Income from continuing operations before provision for income
taxes and minority interests ......................................... 5,172 9,613
Provision for income taxes ............................................. 823 1,729
Minority interests ..................................................... 1,739
------------ ------------
Income from continuing operations .......................................... 2,610 7,884
------------ ------------
Gain on disposal of discontinued operations ................................ 1,249
Loss on extraordinary items ................................................ (230)
------------ ------------
Net income ................................................................. $ 2,380 $ 9,133
============ ============
</TABLE>
- -------------------------
*Tobacco revenues and Cost of goods sold include excise taxes of $24,701 and
$14,038 for the three months ended March 31, 2000 and 1999, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
<PAGE> 7
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN TREASURY COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT STOCK OTHER INCOME TOTAL
------ ------ ---------- ------- --------- ------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 ........... 21,989,782 $ 2,199 $ 196,695 $(302,155) $(27,473) $(3,743) $1,379 $(133,098)
Net income ........................... 1,258 1,258
Unrealized gain on investment
securities ....................... 1,629 1,629
Other New Valley capital
transactions ..................... (117) 89 (28)
---------
Total other comprehensive
income ....................... 1,601
---------
Total comprehensive income ........... 2,859
---------
Distributions on common stock ........ (5,498) (5,498)
Amortization of deferred
compensation ....................... 8 405 413
---------- ------- --------- --------- -------- ------- ------ ---------
Balance, March 31, 2000 .............. 21,989,782 $ 2,199 $ 191,088 $(300,897) $(27,473) $(3,338) $3,097 $(135,324)
========== ======= ========= ========= ======== ======= ====== =========
</TABLE>
The accompanying notes are an integral
part of the consolidated financial statements.
-6-
<PAGE> 8
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
------ ------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999..................... 100 $ $161,800 $(295,635) $1,379 $(132,456)
Net income..................................... 2,380 2,380
Unrealized gain on investment securities..... 1,629 1,629
Other New Valley capital transactions........ (117) 89 (28)
----------
Total other comprehensive income......... 1,601
----------
Total comprehensive income..................... 3,981
----------
Distributions to parent........................ (5,962) (5,962)
--- ------ -------- -------- ------ ----------
Balance, March 31, 2000........................ 100 $ $161,683 $(299,217) $3,097 $(134,437)
=== ====== ======== ========= ====== ==========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-7-
<PAGE> 9
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,
2000 1999
------------ ------------
<S> <C> <C>
Net cash (used in) provided by operating activities ........................ $ (22,086) $ 2,571
------------ ------------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ......................... 2 36
Sale or maturity of investment securities ................................ 14,849
Purchase of investment securities ........................................ (5,503)
Purchase of long-term investments ........................................ (504)
Decrease in restricted assets ............................................ 3,202
Payment of prepetition claims ............................................ (16)
Investment in joint venture .............................................. (213)
Repurchase by New Valley of common shares................................. (166)
Capital expenditures ..................................................... (8,029) (19,617)
------------ ------------
Net cash provided by (used in) investing activities ........................ 3,622 (19,581)
------------ ------------
Cash flows from financing activities:
Proceeds from debt ....................................................... 1,500 4,500
Repayments of debt ....................................................... (8,395) (323)
Borrowings under revolvers ............................................... 120,442 83,986
Repayments on revolvers .................................................. (89,890) (71,319)
Decrease in cash overdraft ............................................... (34)
Increase in margin loans payable ......................................... 3,324
Distributions on common stock ............................................ (5,498) (1,358)
------------ ------------
Net cash provided by financing activities .................................. 21,483 15,452
------------ ------------
Effect of exchange rate changes on cash and cash equivalents ............... (332) (319)
Net increase (decrease) in cash and cash equivalents ....................... 2,687 (1,877)
Cash and cash equivalents, beginning of period ............................. 20,123 7,396
------------ ------------
Cash and cash equivalents, end of period ................................... $ 22,810 $ 5,519
============ ============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
-8-
<PAGE> 10
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,
2000 1999
------------ ------------
<S> <C> <C>
Net cash (used in) provided by operating activities ........................ $ (21,321) $ 1,019
------------ ------------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ......................... 2 36
Sale or maturity of investment securities ................................ 14,849
Purchase of investment securities ........................................ (5,503)
Purchase of long-term investments ........................................ (504)
Decrease in restricted assets ............................................ 3,202
Payment of prepetition claims ............................................ (16)
Investment in joint venture .............................................. (213)
Repurchase by New Valley of common shares................................. (166)
Capital expenditures ..................................................... (8,029) (19,617)
------------ ------------
Net cash provided by (used in) investing activities ........................ 3,622 (19,581)
------------ ------------
Cash flows from financing activities:
Proceeds from debt ....................................................... 1,000 4,500
Repayments of debt ....................................................... (8,230) (143)
Borrowings under revolvers ............................................... 120,442 83,986
Repayments on revolvers .................................................. (89,890) (71,319)
Decrease in cash overdraft ............................................... (20)
Increase in margin loans payable ......................................... 3,324
Distributions paid to parent ............................................. (5,962)
------------ ------------
Net cash provided by financing activities .................................. 20,684 17,004
------------ ------------
Effect of exchange rate changes on cash and cash equivalents ............... (332) (319)
Net increase (decrease) in cash and cash equivalents ....................... 2,653 (1,877)
Cash and cash equivalents, beginning of period ............................. 19,590 7,396
------------ ------------
Cash and cash equivalents, end of period ................................... $ 22,243 $ 5,519
============ ============
</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)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
The consolidated financial statements of Brooke Group Ltd.
(the "Company" or "Brooke") include the consolidated financial
statements of its wholly-owned subsidiary, BGLS Inc. ("BGLS").
The consolidated financial statements of BGLS include the
accounts of Liggett Group Inc. ("Liggett"), Brooke (Overseas)
Ltd. ("Brooke (Overseas)"), Liggett-Ducat Ltd.
("Liggett-Ducat") and other less significant subsidiaries. As
of June 1, 1999, New Valley Corporation ("New Valley") became
a consolidated subsidiary of the Company as a result of New
Valley's recapitalization in which the Company's interest in
New Valley's common shares increased to 55.1%. (See Note 3.)
All significant intercompany balances and transactions have
been eliminated.
Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States. Liggett-Ducat is
engaged in the manufacture and sale of cigarettes in Russia.
New Valley is engaged primarily in the investment banking and
brokerage business through its ownership of Ladenburg Thalmann
& Co. Inc., in the real estate development business in Russia
and in investment in Internet-related businesses.
Effective October 1, 1999, the Company was reorganized into a
holding company form of organizational structure. The new
corporate structure was implemented by the merger of a
wholly-owned indirect subsidiary of the former Brooke Group
Ltd., the predecessor of the current Brooke, with the
predecessor, which was the surviving corporation. As a result
of this merger, each share of the common stock of the
predecessor issued and outstanding or held in its treasury was
converted into one share of common stock of the current Brooke
(formerly known as BGL Successor Inc.). The current Brooke
became the holding company for the business and operations
previously conducted by the predecessor and its subsidiaries,
and the predecessor became an indirect wholly-owned subsidiary
of Brooke. On the effective date of the merger, the name of
the current Brooke was changed to Brooke Group Ltd. and the
name of the predecessor was changed to Brooke Group Holding
Inc. ("Brooke Group Holding"). The holding company
reorganization had no impact on these consolidated financial
statements.
At the Company's annual meeting to be held on May 24, 2000,
stockholders will be asked to approve a corporate name-change
to Vector Group Ltd. If the name-change proposal is approved,
the New York Stock Exchange symbol for the Company's common
stock will change from "BGL" to "VGR".
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 for the year ended December 31,
1999, as filed with the Securities and Exchange Commission.
The
-10-
<PAGE> 12
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
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.
(b) Liquidity:
The Company's anticipated sources of liquidity for 2000
include, among other things, additional debt and/or equity
financing, management fees, tax sharing and other payments
from Liggett and certain funds available from 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 12.) 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.
The BGLS 15.75% Series B Senior Secured Notes (the "Notes"),
together with all deferred and accrued interest, mature on
January 31, 2001. (Refer to Note 10.) Accordingly, as of March
31, 2000, the Notes and deferred interest of $101,413, net of
unamortized discount, are classified as current liabilities.
The current maturities of the Notes contribute substantially
to the working capital deficiency of $134,080. The principal
amount of the Notes currently outstanding is $82,570,
including $50,100 principal amount of the Notes which were
held by holders who have agreed to defer payment of interest.
(c) Risks and Uncertainties:
The Russian Federation continues to experience economic
difficulties following the financial crisis of August 1998.
Consequently, the country's currency continues to devalue,
there is continued volatility in the debt and equity market,
hyperinflation persists, confidence in the banking sector has
yet to be restored and there continues to be a general lack of
liquidity in the economy. In addition, laws and regulations
affecting businesses operating within the Russian Federation
continue to evolve.
The Russian Federation's return to economic stability is
dependent to a large extent on the effectiveness of the
measures taken by the government, decisions of international
lending organizations, and other actions, including regulatory
and political developments, which are beyond the Company's
control.
The Company's assets and operations could be at risk if there
are any further significant adverse changes in the political
and business environment. Management is unable to predict what
effect those uncertainties might have on the future financial
position of the Company. No adjustments related to these
uncertainties have been included in these consolidated
financial statements.
(d) 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
-11-
<PAGE> 13
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
and the reported amounts of revenues and expenses. Significant
estimates subject to material changes in the near term include
deferred tax assets, allowance for doubtful accounts,
promotional accruals, sales returns and allowances, actuarial
assumptions of pension plans and litigation and defense costs.
Actual results could differ from those estimates.
(e) Reclassifications:
Certain amounts in the 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation.
(f) Provision for Income Taxes:
The effective tax rate does not bear a customary relationship
to pre-tax accounting income principally as a consequence of
foreign taxes and the change in the valuation allowance on
deferred tax assets.
(g) Earnings Per Share:
Information concerning the Company's common stock has been
adjusted to give effect to the 5% stock dividend paid to
Company stockholders on September 30, 1999. In connection with
the 5% dividend, the Company increased the number of warrants
and stock options by 5% and reduced the exercise prices
accordingly. All share amounts have been presented as if the
stock dividend had occurred on January 1, 1999.
Basic net income (loss) per share is computed by dividing net
income (loss) 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.
Basic and diluted EPS were calculated using the following for
the three-month period ended March 31, 2000 and March 31,
1999.
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
---------- ----------
<S> <C> <C>
Weighted average shares for basic EPS......... 21,989,782 21,989,782
Plus incremental shares from conversions:
Stock options and warrants................ 4,242,571 4,861,592
---------- ----------
Weighted average shares for diluted EPS....... 26,232,353 26,851,374
---------- ----------
</TABLE>
(h) Other Comprehensive Income (Loss):
Other comprehensive income is a component of stockholders'
equity and includes such items as the Company's proportionate
interest in New Valley's capital transactions,
-12-
<PAGE> 14
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
unrealized gains and losses on investment securities and
minimum pension liability adjustments. Total other
comprehensive income was $1,601 for the three months ended
March 31, 2000 and $5,920 for the three months ended March 31,
1999.
2. PHILIP MORRIS BRAND TRANSACTION
In November 1998, the Company and Liggett granted Philip Morris
Incorporated options to purchase interests in Trademarks LLC which
holds three domestic cigarette brands, L&M, Chesterfield and Lark,
formerly held by Liggett's subsidiary, Eve Holdings Inc.
Under the terms of the Philip Morris agreements, Eve contributed the
three brands to Trademarks, a newly-formed limited liability company,
in exchange for 100% of two classes of Trademarks' interests, the Class
A Voting Interest and the Class B Redeemable Nonvoting Interest. Philip
Morris acquired two options to purchase the interests from Eve. In
December 1998, Philip Morris paid Eve a total of $150,000 for the
options, $5,000 for the option for the Class A interest and $145,000
for the option for the Class B interest.
The Class A option entitled Philip Morris to purchase the Class A
interest for $10,100. On March 19, 1999, Philip Morris exercised the
Class A option, and the closing occurred on May 24, 1999.
The Class B option entitles Philip Morris to purchase the Class B
interest for $139,900. The Class B option will be exercisable during
the 90-day period beginning on December 2, 2008, with Philip Morris
being entitled to extend the 90-day period for up to an additional six
months under certain circumstances. The Class B interest will also be
redeemable by Trademarks for $139,900 during the same period the Class
B option may be exercised.
On May 24, 1999, Trademarks borrowed $134,900 from a lending
institution. The loan is guaranteed by Eve and collateralized by a
pledge by Trademarks of the three brands and Trademarks' interest in
the trademark license agreement (discussed below) and by a pledge by
Eve of its Class B interest. In connection with the closing of the
Class A option, Trademarks distributed the loan proceeds to Eve as the
holder of the Class B interest. The cash exercise price of the Class B
option and Trademarks' redemption price were reduced by the amount
distributed to Eve. Upon Philip Morris' exercise of the Class B option
or Trademarks' exercise of its redemption right, Philip Morris or
Trademarks, as relevant, will be required to obtain Eve's release from
its guaranty. The Class B interest will be entitled to a guaranteed
payment of $500 each year with the Class A interest allocated all
remaining income or loss of Trademarks. The proceeds of the loan and
the exercise of the Class A option were used to retire a portion of
BGLS' 15.75% Senior Secured Notes. (Refer to Note 10.)
Trademarks has granted Philip Morris an exclusive license of the three
brands for an 11-year term expiring May 24, 2010 at an annual royalty
based on sales of cigarettes under the brands, subject to a minimum
annual royalty payment equal to the annual debt service obligation on
the loan plus $1,000.
-13-
<PAGE> 15
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
If Philip Morris fails to exercise the Class B option, Eve will have an
option to put its Class B interest to Philip Morris, or Philip Morris'
designees, at a put price that is $5,000 less than the exercise price
of the Class B option (and includes Philip Morris' obtaining Eve's
release from its loan guarantee). The Eve put option is exercisable at
any time during the 90-day period beginning March 2, 2010.
If the Class B option, Trademarks' redemption right and the Eve put
option expire unexercised, the holder of the Class B interest will be
entitled to convert the Class B interest, at its election, into a Class
A interest with the same rights to share in future profits and losses,
the same voting power and the same claim to capital as the entire
existing outstanding Class A interest, i.e., a 50% interest in
Trademarks.
Upon the closing of the exercise of the Class A option and the
distribution of the loan proceeds on May 24, 1999, Philip Morris
obtained control of Trademarks, and the Company recognized a pre-tax
gain of $294,078 in its consolidated financial statements to the extent
of the total cash proceeds received from the payment of the option
fees, the exercise of the Class A option and the distribution of the
loan proceeds.
3. NEW VALLEY CORPORATION
Until May 31, 1999, the Company was an equity investor in New Valley.
The Class A Senior Preferred Shares and the Class B Preferred Shares of
New Valley that the Company owned were accounted for as debt and equity
securities, respectively, pursuant to the requirements of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities", and
were classified as available for sale. The Common Shares were accounted
for pursuant to APB No. 18, "The Equity Method of Accounting for
Investments in Common Stock".
The Company's and BGLS' investment 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 $
======= ========
</TABLE>
Recapitalization. In connection with New Valley's recapitalization on
June 4, 1999, New Valley's preferred shares were reclassified and
changed into Common Shares and Warrants to purchase Common Shares. The
Company's ownership of the Common Shares of New Valley increased from
42.3% to 55.1%, and its total voting power increased from 42.3% to
55.1%. As a result of the increase in ownership, New Valley became a
consolidated subsidiary of the Company as of June 1, 1999.
On October 5, 1999, New Valley's Board of Directors authorized the
repurchase of up to 2,000,000 Common Shares from time to time on the
open market or in privately negotiated
-14-
<PAGE> 16
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
transactions depending on market conditions. As of May 12, 2000, New
Valley had repurchased 114,900 shares for approximately $475. At March
31, 2000, the Company owned 55.5% of New Valley's Common Shares.
BrookeMil Ltd. In connection with the sale by Brooke (Overseas) of the
common shares of BrookeMil to New Valley in 1997, a portion of the gain
was deferred in recognition of the fact that the Company retained an
interest in BrookeMil through its 42% equity ownership of New Valley
prior to recapitalization and that a portion of the property sold (the
site of the third phase of the Ducat Place real estate project being
developed by BrookeMil, 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.
4. PRO FORMA EFFECTS OF BRAND AND NEW VALLEY TRANSACTIONS
The following table presents unaudited pro forma results of operations
as if the Philip Morris brand transaction, New Valley's
recapitalization and the sale of five of New Valley's shopping centers
and the Thinking Machines assets had occurred immediately prior to
January 1, 1999. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what
would have occurred had these transactions been consummated as of such
date.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
------------------
<S> <C>
Revenues................................. $116,965
========
Operating income......................... $ 10,551
========
Income from continuing operations........ $ 9,157
========
Net income............................... $ 9,157
========
Net income per common share:
Basic................................ $ 0.42
========
Diluted.............................. $ 0.35
========
</TABLE>
5. INVESTMENT IN WESTERN REALTY
Western Realty Development LLC. In February 1998, New Valley and Apollo
Real Estate Investment Fund III, L.P. ("Apollo") organized Western
Realty Development LLC ("Western Realty Development") to make real
estate and other investments in Russia. New Valley agreed to contribute
the real estate assets of BrookeMil, including Ducat Place II and the
site
-15-
<PAGE> 17
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
for Ducat Place III, to Western Realty Development and Apollo agreed to
contribute up to $69,625, including the investment in Western Realty
Repin discussed below.
The ownership and voting interests in Western Realty Development are
held equally by Apollo and New Valley. Apollo will be entitled to a
preference on distributions of cash from Western Realty Development to
the extent of its investment commitment of $43,750, of which $40,213
had been funded through March 31, 2000, together with a 15% annual rate
of return. New Valley will then be entitled to a return of its
investment commitment of $23,750, of which $20,213 has been funded
through March 31, 2000, together with a 15% annual rate of return.
Subsequent distributions will be made 70% to New Valley and 30% to
Apollo. Western Realty Development is managed by a board of managers
consisting of an equal number of representatives chosen by Apollo and
New Valley. Material corporate transactions by Western Realty
Development generally require the unanimous consent of the board of
managers. Accordingly, New Valley accounts for its non-controlling
interest in Western Realty Development using the equity method of
accounting. New Valley recognizes losses incurred by Western Realty
Development to the extent that cumulative earnings of Western Realty
Development are not sufficient to satisfy Apollo's preferred return.
Summarized financial information as of March 31, 2000 and December 31,
1999 and for the three-month periods ended March 31, 2000 and March 31,
1999 for Western Realty Development follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
-------------- -----------------
<S> <C> <C>
Current assets....................... $ 2,950 $ 3,557
Participating loan receivable........ 39,261 37,849
Real estate, net..................... 77,579 77,988
Furniture and fixtures, net.......... 249 249
Other noncurrent assets.............. 273 320
Goodwill, net........................ 636 722
Notes payable - current.............. 6,707 6,445
Other current liabilities............ 6,391 7,067
Notes payable - long-term............ 6,436 8,211
Other long-term liabilities.......... 752 752
Members' equity...................... 100,662 98,210
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2000 MARCH 31, 1999
------------------ ------------------
<S> <C> <C>
Revenues............................. $2,390 $3,448
Costs and expenses................... 2,170 4,425
Accretion of return on
participating loan............. 1,412 1,002
Income tax provision................. 16
Net income........................... 1,632 9
</TABLE>
-16-
<PAGE> 18
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Western Realty Development has made a $30,000 participating loan to
Western Tobacco Investments LLC ("Western Tobacco Investments"), which
holds Brooke (Overseas') interests in Liggett-Ducat and its new factory.
(Refer to Note 10 for information concerning pledges of interests in
Western Tobacco Investments.) The loan bears no fixed interest and is
payable only out of 30% of distributions made by Western Tobacco
Investments to Brooke (Overseas). After prior payment of debt service on
loans to finance the construction of the new factory, 30% of distributions
from Western Tobacco Investments to Brooke (Overseas) will be applied
first to pay the principal of the loan and then as contingent
participating interest on the loan. In addition, Western Realty
Development is entitled to receive a 15% annual rate of return on amounts
advanced on the loan under certain circumstances in the event of a sale or
refinancing of Western Tobacco Investments or the new factory. Any rights
of repayment on the loan are subordinate to the rights of all other
creditors of BrookeMil. Brooke (Overseas) has recognized net interest
expense of $1,412 for the three months ended March 31, 2000 and $1,002 for
the three months ended March 31, 1999, which represents a 15% cumulative
adjustment to realizable value on the loan and 30% of any net expense
applicable to common interests in Western Tobacco Investments. The loan is
classified in other long-term liabilities on the consolidated balance
sheet at March 31, 2000.
Western Realty Repin LLC. In June 1998, New Valley and Apollo organized
Western Realty Repin to make a loan to BrookeMil. The proceeds of the loan
will be used by BrookeMil for the acquisition and preliminary development
of the Kremlin sites, two adjoining sites totaling 10.25 acres located in
Moscow across the Moscow River from the Kremlin. BrookeMil is planning the
development of a hotel, office, retail and residential complex on the
Kremlin sites. BrookeMil owned 96.8% of one site and 100% of the other
site at March 31, 2000. Apollo will be entitled to a preference on
distributions of cash from Western Realty Repin to the extent of its
investment of $25,875 together with a 20% annual rate of return, and New
Valley will then be entitled to a return of its investment of $10,525,
together with a 20% annual rate of return. Subsequent distributions will
be made 50% to New Valley and 50% to Apollo. Western Realty Repin is
managed by a board of managers consisting of an equal number of
representatives chosen by Apollo and New Valley. Material corporate
transactions by Western Realty Repin will generally require the unanimous
consent of the board of managers.
Through March 31, 2000, Western Realty Repin has advanced $36,400 to
BrookeMil, of which $25,875 was funded by Apollo under the loan and is
classified in other long-term liabilities on the consolidated balance
sheet at March 31, 2000 and December 31, 1999. The loan bears no fixed
interest and is payable only out of distributions by the entities owning
the Kremlin sites to BrookeMil. Such distributions will be applied first
to pay the principal of the loan and then as contingent participating
interest on the loan. Any rights of payment on the loan are subordinate to
the rights of all other creditors of BrookeMil. BrookeMil used a portion
of the proceeds of the loan to repay New Valley for certain expenditures
on the Kremlin sites previously incurred. The loan is due and payable upon
the dissolution of BrookeMil and is collateralized by a pledge of New
Valley's shares of BrookeMil.
As of March 31, 2000, BrookeMil had invested $32,678 in the Kremlin sites
and held $1,664 in cash and receivables from an affiliate, which were
restricted for future investment in the Kremlin sites. In connection with
the acquisition of a 34.8% interest in one of the Kremlin sites, BrookeMil
agreed with the City of Moscow to invest an additional $22,000 by May 2000
in the development of the property. In April 2000, Western Realty Repin
arranged short-term
-17-
<PAGE> 19
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
financing to fund the investment. Under the terms of the investment,
BrookeMil is required to make additional construction expenditures of
$22,000 on the site by June 2002. Failure to make the expenditures
could result in forfeiture of the 34.8% interest in the site. 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 is treated as interest cost
in the consolidated statement of operations to the extent of the
Company's net investment in the Kremlin sites. New Valley's investment
in the Kremlin sites, net of the participating loan of $33,686, was
$656 at March 31, 2000.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. New Valley is
considering potential financing alternatives on behalf of Western
Realty Development and BrookeMil. However, in light of the recent
economic turmoil in Russia, there is a risk that financing will not be
available on acceptable terms. Failure to obtain sufficient capital for
the projects would force Western Realty Development and BrookeMil to
curtail or delay the planned development of Ducat Place III and the
Kremlin sites.
6. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at
fair value, with net unrealized gains included as a component of
stockholders' equity, net of minority interest. The Company had
realized gains on sales of investment securities available for sale of
$4,753 for the three months ended March 31, 2000.
The components of investment securities available for sale at March 31,
2000 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Marketable equity securities......... $41,246 $14,230 $10,837 $44,639
Notes receivable..................... 437 437
Marketable warrants.................. 3,613 3,613
------- ------- ------- -------
Investment securities................ $41,683 $17,843 $10,837 $48,689
======= ======= ======= =======
</TABLE>
7. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Leaf tobacco ..................... $ 13,812 $ 13,599
Other raw materials .............. 8,483 6,423
Work-in-process .................. 3,197 3,542
Finished goods ................... 33,524 20,662
Replacement parts and supplies ... 5,531 4,795
------------ ------------
Inventories at current cost ...... 64,547 49,021
LIFO adjustments ................. (4,985) (3,816)
------------ ------------
$ 59,562 $ 45,205
============ ============
</TABLE>
-18-
<PAGE> 20
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
At March 31, 2000, Liggett and Liggett-Ducat had leaf tobacco purchase
commitments of approximately $2,162 and $43,907, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Land and improvements ............................ $ 442 $ 415
Buildings ........................................ 52,913 51,773
Machinery and equipment .......................... 132,626 129,693
Construction-in-progress ......................... 18,810 14,605
------------ ------------
204,791 196,486
Less accumulated depreciation .................... (45,361) (42,226)
------------ ------------
$ 159,430 $ 154,260
============ ============
</TABLE>
9. LONG-TERM INVESTMENTS
At March 31, 2000, long-term investments consisted primarily of
investments in limited partnerships of $7,757. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $5,335 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company's estimates of the fair value of its long-term investments are
subject to judgment and are not necessarily indicative of the amounts
that could be realized in the current market. The Company's investments
in limited partnerships are illiquid, and the ultimate realization of
these investments is subject to the performance of the underlying
partnership and its management by the general partners.
Also included in long-term investments are various Internet-related
businesses which are carried at $4,549 at March 31, 2000. These
investments include a 33.3% interest in AtomicPop LLC, an online music
company, and smaller interests in other Internet companies. The Company
accounts for its investment in AtomicPop LLC and its investment in one
other internet company under the equity method.
-19-
<PAGE> 21
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
10. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------ ------------
<S> <C> <C>
BGLS:
15.75% Series B Senior Secured Notes due 2001,
net of unamortized discount of $3,865 and $5,468 ............... $ 78,705 $ 82,602
Deferred interest on 15.75% Series B Senior Secured
Notes due 2001 ................................................. 22,708 25,435
New Valley:
Notes payable ........................................................ 19,743 19,813
Liggett:
Revolving credit facility ............................................ 23,166
Term loan under credit facility ...................................... 4,860 5,040
Notes payable ........................................................ 5,116 4,232
Brooke (Overseas):
Foreign credit facilities ............................................ 36,489 29,470
Notes payable ........................................................ 19,891 23,090
Other ................................................................ 549 214
------------ ------------
Total notes payable, long-term debt and other obligations ............ 211,227 189,896
Less:
Current maturities ............................................. (156,414) (41,547)
------------ ------------
Amount due after one year ............................................ $ 54,813 $ 148,349
============ ============
</TABLE>
15.75% Series B Senior Secured Notes Due 2001 - BGLS:
During 1999, BGLS repurchased $144,794 principal amount of its Notes,
together with accrued interest thereon. The purchases were funded
primarily with proceeds from the Philip Morris brand transaction which
closed on May 24, 1999. In January 2000, BGLS repurchased an additional
$5,500 principal amount of the Notes, together with accrued interest
thereon. At March 31, 2000, the principal amount of Notes outstanding was
$82,570, and $50,100 principal amount of the Notes were held by the
holders who have agreed to defer payment of interest as discussed below.
On March 2, 1998, the Company entered into an agreement with AIF II, L.P.
and an affiliated investment manager on behalf of a managed account
(together the "Apollo Holders"), who held approximately 41.8% of the
$232,864 principal amount of the Notes then outstanding. The Apollo
Holders (and any transferees) agreed to defer the payment of interest on
the Notes held by them, commencing with the interest payment that was due
July 31, 1997, which they had previously agreed to defer, through the
interest payment due July 31, 2000. The deferred interest payments are
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
-20-
<PAGE> 22
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Company pledged 50.1% of Western Tobacco Investments to collateralize the
Notes held by the Apollo Holders (and any transferees). Interest on all
of the Notes for the six-month period ended January 31, 2000 was paid in
cash.
In connection with the March 2, 1998 agreement with the Apollo Holders,
the Company issued to the Apollo Holders a five-year warrant to purchase
2,100,000 shares of the Company's common stock at a price of $4.76 per
share. The Apollo Holders were also issued a second warrant expiring
October 31, 2004 to purchase an additional 2,257,500 shares of the
Company's common stock at a price of $0.095 per share. The second warrant
became exercisable on October 31, 1999. Based on the fair value of the
equity instruments given to the holders of the debt, imputed interest of
approximately $23,000 is being accreted over the term of the modified
debt based on its recorded fair value.
The Notes outstanding are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, Brooke
(Overseas) and New Valley. The Notes Indenture contains certain covenants
which, among other things, limit the ability of BGLS to make
distributions to the Company to $12,000 per year (which amount increased
from $6,000 per year in May 1999 when more than 50% of the original
principal amount of the Notes were retired) plus any unpaid distribution
amounts from prior years. The Notes also limit additional indebtedness of
BGLS to $10,000, limit guaranties of subsidiary indebtedness by BGLS to
$50,000, and restrict certain transactions with affiliates that exceed
$2,000 in any year subject to certain exceptions which include payments
to the Company not to exceed $6,500 per year for permitted operating
expenses, payment of the Chairman's salary and bonus and certain other
expenses, fees and payments. In addition, the Indenture contains certain
restrictions on the ability of the Chairman and certain of his affiliates
to enter into certain transactions with, and receive payments above
specified levels from, New Valley. The Notes may be redeemed, in whole or
in part, at a price of 100% of the principal amount plus accrued
interest. 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 has a $35,000 credit facility, under which $23,166 was
outstanding at March 31, 2000. Availability under the credit facility was
approximately $6,974 based on eligible collateral at March 31, 2000. The
facility is collateralized by all inventories and receivables of Liggett.
Borrowings under the facility, whose interest is calculated at a rate
equal to 1.0% above Philadelphia National Bank's (the indirect parent of
Congress Financial Corporation, the lead lender) prime rate, bore a rate
of 9.75% at March 31, 2000. The facility requires Liggett's compliance
with certain financial and other covenants including a restriction on the
payment of cash dividends unless Liggett's borrowing availability under
the facility for the 30-day period prior to the payment of the dividend,
and after giving effect to the dividend, is at least $5,000. In addition,
the facility, as amended, imposes requirements with respect to Liggett's
adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of
$17,000 as computed in accordance with the agreement). At March 31, 2000,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $17,977 and net working capital was
$36,795, as
-21-
<PAGE> 23
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
computed in accordance with the agreement. The facility expires on March
8, 2003 subject to automatic renewal for an additional year unless a
notice of termination is given by the lender at least 60 days prior to
the anniversary date.
In November 1999, 100 Maple Lane LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed
$5,040 from the lender under Liggett's credit facility. The loan is
payable in 59 monthly installments of $60 including annual interest at 1%
above the prime rate with a final payment of $1,500. Liggett has
guaranteed the loan, and a first mortgage on the Mebane property
collateralizes the Maple Lane loan and Liggett's credit facility. Liggett
plans to relocate its manufacturing operations to this facility in late
2000.
Equipment Loans - Liggett:
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase. The loan, which is collateralized by the
equipment 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. In March 2000, Liggett purchased equipment for
$1,000 under a capital lease which is payable in 60 monthly installments
of $21 with an effective annual interest rate of 10.14%.
Notes Payable - New Valley:
During the third quarter 1999, New Valley refinanced its notes payable on
its two remaining shopping centers in Florida and West Virginia for
$19,743, in the aggregate. Interest rates range from 7.5% to 9.03% per
annum. The four notes are due between 2002 and 2024. Two, for $8,389 at
March 31, 2000, are subject to call in 2001 under certain conditions.
Foreign Credit Facilities - Liggett-Ducat:
At March 31, 2000, Liggett-Ducat had various credit facilities with
Russian banks under which $36,489 was outstanding. The facilities are
denominated in dollars, bear interest at rates of 13% to 20% per annum
and expire within the next twelve months. The facilities are
collateralized by the new factory building, factory equipment and tobacco
inventory.
Notes Payable - Brooke (Overseas):
Western Tobacco Investments has entered into several contracts for the
purchase of cigarette manufacturing equipment. The equipment is being
utilized at the new factory, built by Liggett-Ducat, on the outskirts of
Moscow which began production in June 1999. Approximately 85% of the
amount of the contracts were financed with promissory notes generally
payable over a period of five years. The outstanding balance on these
notes, which are denominated in various European currencies, is $15,891
at March 31, 2000. Other short-term notes for purchases of equipment are
approximately $4,000. The terms of these notes ranged from four to twelve
months and carried interest rates of up to 16%. A promissory note issued
by Brooke (Overseas) for approximately $1,290 covering deposits for
equipment purchased for the new factory was paid in full on March 31,
2000.
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<PAGE> 24
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
11. 1999 LONG-TERM INCENTIVE PLAN
On November 4, 1999, the Company adopted its 1999 Long-Term Incentive
Plan (the "1999 Plan") subject to approval by the stockholders of the
Company at the 2000 annual meeting. The 1999 Plan authorizes the granting
of up to 5,000,000 shares of common stock through awards of stock options
(which may include incentive stock options and/or nonqualified stock
options), stock appreciation rights and shares of restricted Company
common stock. All officers, employees and consultants of the Company and
its subsidiaries are eligible to receive awards under the 1999 Plan.
On November 4, 1999, the Company granted non-qualified stock options to
six executive officers of the Company or its subsidiaries pursuant to the
1999 Plan. The grant of the options to the option holders is conditioned
upon the approval of the 1999 Plan by the Company's stockholders. Under
the options, the option holders have the right to purchase an aggregate
of 2,100,000 shares of common stock at an exercise price of $15 7/16 per
share (the fair market value of a share of common stock on the date of
grant), subject to increase under certain circumstances. Common stock
dividend equivalents will be paid currently with respect to each share
underlying the unexercised portion of the options. The options have a
ten-year term and become exercisable on the fourth anniversary of the
date of grant. However, the options will earlier vest and become
immediately exercisable upon (i) the occurrence of a "Change in Control"
or (ii) the termination of the option holder's employment with the
Company due to death or disability.
12. CONTINGENCIES
SMOKING-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 alleged to have been caused by cigarette
smoking or by exposure to secondary smoke from cigarettes. These cases
are reported here as though having been commenced against Liggett
(without regard to whether such cases were actually commenced against
Brooke Group Holding, the Company's predecessor and a wholly-owned
subsidiary of BGLS, or Liggett). There has been a noteworthy increase in
the number of cases commenced against Liggett and the other cigarette
manufacturers in recent years. The cases generally fall into the
following categories: (i) smoking and health cases alleging injury
brought on behalf of individual plaintiffs ("Individual Actions"); (ii)
smoking and health cases alleging 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
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<PAGE> 25
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
quantifiable at this time. For the three months ended March 31, 2000,
Liggett incurred counsel fees and costs totaling approximately $1,969
compared to $1,568 for the comparable prior year period.
Individual Actions. As of March 31, 2000, there were approximately 310
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 secondary
smoke and seek compensatory and, in some cases, punitive damages. Of
these, 85 were pending in Florida, 94 in New York, 39 in Massachusetts, 17
in Texas and 24 in California. The balance of the individual cases were
pending in 29 states. There are five individual cases pending where
Liggett is the only named defendant.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence,
gross negligence, breach of special duty, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and
implied warranties, conspiracy, aiding and abetting, concert of action,
unjust enrichment, common law public nuisance, property damage, invasion
of privacy, mental anguish, emotional distress, disability, shock,
indemnity and violations of deceptive trade practice laws, the Federal
Racketeer Influenced and Corrupt Organization Act ("RICO"), state RICO
statutes and antitrust statutes. In many of these cases, in addition to
compensatory damages, plaintiffs also seek other forms of relief
including, treble/multiple damages, disgorgement of profits and punitive
damages. Defenses raised by defendants in these cases include lack of
proximate cause, assumption of the risk, comparative fault and/or
contributory negligence, lack of design defect, statute of limitations,
equitable defenses such as "unclean hands" and lack of benefit, failure
to state a claim and federal preemption.
In February 1999, a California jury awarded $51,500 in damages to a woman
who claimed lung cancer from smoking Marlboro cigarettes made by Philip
Morris. The award includes $1,500 in compensatory damages and $50,000 in
punitive damages. The court subsequently reduced the punitive damages
award to $25,000. In March 1999, an Oregon jury awarded $80,311 in
damages to the family of a deceased smoker who smoked Marlboro cigarettes
made by Philip Morris. The award includes $79,500 in punitive damages.
The court subsequently reduced the punitive damages award to $32,000.
Philip Morris has appealed both the verdict and damage awards in both
cases.
In March 2000, a California jury awarded $1,700 in compensatory damages
and $20,000 in punitive damages to a former smoker and her husband. The
jury found Philip Morris and R.J. Reynolds Tobacco misrepresented the
health dangers of cigarettes and that they acted with malice. The
defendants have stated that they intend to appeal both the verdict and
damage awards.
Class Actions. As of March 31, 2000, there were approximately 60 actions
pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named
defendant. Many of these actions purport to constitute statewide class
actions and were filed after May 1996 when the Fifth Circuit Court of
Appeals, in the
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<PAGE> 26
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Castano case (discussed below), reversed a Federal district court's
certification of a purported nationwide class action on behalf of persons
who were allegedly "addicted" to tobacco products.
In March 1994, an action entitled Castano, et al. v. The American Tobacco
Company Inc., et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action
complaint sought relief for a nationwide class of smokers based on their
alleged addiction to nicotine. In February 1995, the District Court
granted plaintiffs' motion for class certification.
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 smoking-related class
action litigation is still uncertain. The Castano decision has had a
limited effect with respect to courts' decisions regarding narrower
smoking-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, courts in
Louisiana (Liggett is not a defendant in this proceeding) and Maryland
have certified "addiction-as-injury" class actions that covered only
citizens in those states. Two other class actions, Broin and Engle, were
certified in state court in Florida prior to the Fifth Circuit's
decision.
In May 1994, an action entitled Engle, et al. v. R.J. Reynolds Tobacco
Company, et al., Circuit Court, Eleventh Judicial Circuit, Dade County,
Florida, was filed against Liggett and others. The class consists of all
Florida residents and citizens, and their survivors, who have suffered,
presently suffer or have died from diseases and medical conditions caused
by their addiction to cigarettes that contain nicotine. Phase I of the
trial commenced in July 1998 and in July 1999, the jury returned the
Phase I verdict. The Phase I verdict concerned certain issues determined
by the trial court to be "common" to the causes of action of the
plaintiff class. Among other things, the jury found that: smoking
cigarettes causes 20 diseases or medical conditions, cigarettes are
addictive or dependence producing, defective and unreasonably dangerous,
defendants made materially false statements with the intention of
misleading smokers, defendants concealed or omitted material information
concerning the health effects and/or the addictive nature of smoking
cigarettes and agreed to misrepresent and conceal the health effects
and/or the addictive nature of smoking cigarettes, and defendants were
negligent and engaged in extreme and outrageous conduct or acted with
reckless disregard with the intent to inflict emotional distress. The
jury also found that defendants' conduct "rose
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<PAGE> 27
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
to a level that would permit a potential award or entitlement to punitive
damages." The court decided that Phase II of the trial, which commenced
November 1999, would be a causation and damages trial for three of the
class representatives and a punitive damages trial on a class-wide basis,
before the same jury that returned the verdict in Phase I. On April 7,
2000, the jury awarded compensatory damages of $12,704 to the three
plaintiffs, to be reduced in proportion to the respective plaintiff's
fault. The jury also decided that the claim of one of the plaintiffs, who
was awarded compensatory damages of $5,831, was not timely filed. The
punitive damages portion of Phase II is scheduled to begin May 15, 2000
and is expected to last several weeks. Phase III of the trial will be
conducted before separate juries to address absent class members' claims,
including issues of specific causation and other individual issues
regarding entitlement to compensatory damages. The defendants' motion to
order the trial court to assess punitive damages on an individual basis
was denied and the petition for review was also denied, without prejudice
to raise the same issue on subsequent appeals.
It is unclear how the trial court's order will be implemented. The order
provides that the punitive damage amount, if any, should be standard as
to each class member and acknowledges that the actual size of any class
will not be known until the last case has withstood appeal. The order
does not address whether defendants would be required to pay the punitive
damage award, if any, prior to a determination of claims of all class
members, a process that could take years to conclude. Recently,
legislation has been enacted in Florida that limits the size of any bond
required, pending appeal, to stay execution of a punitive damages verdict
to the lesser of the punitive award, $100 million plus twice the statutory
rate of interest, or 10% of the net worth of the defendant, but the
limitation on the bond does not affect the amount of the underlying
verdict. Although the legislation is intended to apply to the ENGLE case,
management cannot predict the outcome of any possible challenges to its
application. Similar legislation has been enacted in Georgia, Kentucky,
North Carolina and Virginia.
Class certification motions are pending in a number of putative class
actions. Classes remain certified against Liggett in Florida (Engle) and
Maryland (Richardson). A number of class certification denials are on
appeal.
Approximately 30 purported state class action complaints have been filed
on behalf of various consumers of cigarette products against the tobacco
manufacturers. The complaints allege that cigarette manufacturers engaged
in illegal and unethical activities since the 1940's, many conspiratorial
in nature, designed to increase profits at the financial and physical
expense of customers. These alleged activities include knowingly
increasing the addictiveness of cigarettes through crop manipulation;
downplaying the detrimental health effects of cigarette smoking;
conspiring to refrain from researching and introducing "safer"
cigarettes; creating false and misleading scientific research design to
combat the growing scientific consensus about the lethal health effects
associated with cigarettes; aggressively marketing products to children
and minors in an effort to addict them to cigarettes at a young age; and
systematically covering up activities to avoid regulation of products by
governmental agencies. The purported class actions are brought pursuant
to various state laws.
In February 2000, Liggett and plaintiffs sent correspondence to the
court, in Simon v. Philip Morris' et al., a putative nationwide smokers
class action, indicating that Liggett and the plaintiffs are engaged in
preliminary settlement discussions. There are no assurances that any
settlement will be reached or that the class will ultimately be
certified.
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<PAGE> 28
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Governmental Actions. As of March 31, 2000, there were approximately 20
Governmental Actions pending against Liggett. In these proceedings, both
foreign and domestic governmental entities seek reimbursement for
Medicaid and other health care expenditures. The claims asserted in these
health care cost recovery actions vary. In most of these cases,
plaintiffs assert the equitable claim that the tobacco industry was
"unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other
claims made by some but not all plaintiffs include the equitable claim of
indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, breach of special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and
federal statutes governing consumer fraud, antitrust, deceptive trade
practices and false advertising, and claims under RICO.
Third-Party Payor Actions. As of March 31, 2000, 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. Five United States Circuit Courts of
Appeal have ruled that Third-Party Payors did not have standing to bring
lawsuits against the tobacco companies. The United States Supreme Court
recently denied petitions for certiorari filed by several of the union
health and welfare trust funds. However, a number of Third-Party Payor
Actions, including an action brought by 24 Blue Cross/Blue Shield Plans,
remain pending.
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.
Federal Government Action. In September 1999, the United States
government commenced litigation against Liggett and the other tobacco
companies in the United States District Court for the District of
Columbia. The action seeks to recover an unspecified amount of healthcare
costs paid for and furnished, and to be paid for and furnished, by the
Federal Government for lung cancer, heart disease, emphysema and other
smoking-related illnesses allegedly caused by the fraudulent and tortious
conduct of defendants, and to restrain defendants and co-conspirators
from engaging in fraud and other unlawful conduct in the future, and to
compel defendants to disgorge the proceeds of their unlawful conduct. The
complaint alleges that such costs total more than $20,000,000 annually.
The action asserts claims under three federal statutes, the Medical Care
Recovery Act, the Medicare Secondary Payer provisions of the Social
Security Act and RICO. In December 1999, Liggett filed a motion to
dismiss the lawsuit on numerous grounds, including that the statutes
invoked by the government do not provide the basis for the relief sought.
Oral argument on the motion is currently scheduled for June 2000.
Settlements. In March 1996, Brooke Group Holding and Liggett entered into
an agreement, subject to court approval, to settle the Castano class
action tobacco litigation. The Castano class was subsequently decertified
by the court.
-27-
<PAGE> 29
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In March 1996, March 1997 and March 1998, Brooke Group Holding and
Liggett entered into settlements of smoking-related litigation with the
Attorneys General of 45 states and territories. The settlements released
both Brooke Group Holding and Liggett from all smoking-related claims,
including claims for health care cost reimbursement and claims concerning
sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
R.J. Reynolds Tobacco Company and Lorillard Tobacco Company
(collectively, the "Original Participating Manufacturers" or "OPMs") and
Liggett (together with the OPMs and any other tobacco product
manufacturer that becomes a signatory, the "Participating Manufacturers")
entered into the Master Settlement Agreement (the "MSA") with 46 states,
the District of Columbia, Puerto Rico, Guam, the United States Virgin
Islands, American Samoa and the Northern Marianas (collectively, the
"Settling States") to settle the asserted and unasserted health care cost
recovery and certain other claims of those Settling States.
The MSA has been initially approved by trial courts in all Settling
States. The MSA is subject to final judicial approval in each of the
Settling States, which approval has been obtained, as of March 31, 2000,
in 47 jurisdictions. If final judicial approval is not obtained in a
jurisdiction by December 31, 2001, then, unless the settling defendants
and the relevant jurisdiction agree otherwise, the MSA will be terminated
with respect to such jurisdiction.
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.
Liggett has no payment obligations under the MSA unless its market share
exceeds a base share of 125% of its 1997 market share, or approximately
1.65% of total cigarettes sold in the United States. Liggett believes,
based on published industry sources, that its domestic shipments
accounted for 1.2% of the total cigarettes shipped in the United States
during 1999. 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
-28-
<PAGE> 30
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
such following year by the OPMs under the annual and strategic
contribution payment provisions of the MSA, subject to applicable
adjustments, offsets and reductions. Under 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 nation"
protection for both Brooke Group Holding and Liggett, the payments due
these states by Liggett (with certain possible exceptions) have been
eliminated. With respect to all non-economic obligations under the
previous settlements, both Brooke Group Holding and Liggett are entitled
to the most favorable provisions as between the MSA and each state's
respective settlement with the other major tobacco companies. Therefore,
Liggett's non-economic obligations to all states and territories are now
defined by the MSA.
In April 1999, a putative class action was filed on behalf of all firms
that directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in
part on the MSA. Plaintiffs seek treble damages computed as three times
the difference between current prices and the price plaintiffs would have
paid for cigarettes in the absence of an alleged conspiracy to restrain
and monopolize trade in the domestic cigarette market, together with
attorneys' fees. Plaintiffs also seek injunctive relief against certain
aspects of the MSA.
In March 1997, Liggett, Brooke Group Holding and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled Fletcher, et al. v. Brooke
Group Ltd., et al., Circuit Court of Mobile County, Alabama, where the
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<PAGE> 31
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
court granted preliminary approval and preliminary certification of the
class. In July 1998, Liggett, Brooke Group Holding and plaintiffs filed
an amended class action settlement agreement in Fletcher which agreement
was preliminarily approved by the court in December 1998. In July 1999,
the court denied approval of the Fletcher class action settlement. The
parties' motion for reconsideration is still pending.
The Company accrued $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 and $1,051 were reversed in 1999.
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 addition to the ENGLE case, cases currently scheduled for trial
in 2000 include Third-Party Payor Actions brought by several Blue
Cross/Blue Shield plans in federal court in New York (September), asbestos
companies in Mississippi (September) and New York (July) and certain
unions in New York (November). Also, one Individual Action, ANDERSON, is
currently being tried in State court in New York and two other Individual
Actions are scheduled to be tried later this year. Trial dates, however,
are subject to change.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict has been returned in the first phase
of the ENGLE smoking and health class action trial pending in Florida and
the jury will now consider the award of lump sum punitive damages, if any,
for the entire class. It is possible that additional cases could be
decided unfavorably and that there could be further adverse developments
in the ENGLE case. Management cannot predict the cash requirements related
to any future settlements and judgments, including cash required to bond
any appeals, if necessary, and there is a risk that those requirements
will not be able to be met. An unfavorable outcome of a pending smoking
and health case could encourage the commencement of additional similar
litigation. Management is unable to make a meaningful estimate with
respect to the amount of loss that could result from an unfavorable
outcome of many of the cases pending against Brooke Group Holding or
Liggett, because the complaints filed in these cases rarely detail alleged
damages. Typically, the claims set forth in an individual's complaint
against the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage claims
are typically stated as being for the minimum necessary to invoke the
jurisdiction of the court.
It is possible that the Company's consolidated financial position,
results of operations or cash flows could be materially adversely
affected by an unfavorable outcome in any such smoking-related
litigation.
Liggett's management is unaware of any material environmental conditions
affecting its existing facilities. Liggett's management believes that
current operations are conducted in material compliance with all
environmental laws and regulations and other laws and regulations
governing cigarette manufacturers. 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.
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<PAGE> 32
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
There are several other proceedings, lawsuits and claims pending against
the Company and certain of its consolidated subsidiaries unrelated to
smoking or tobacco product liability. Management is of the opinion that
the liabilities, if any, ultimately resulting from such other
proceedings, lawsuits and claims should not materially affect the
Company's financial position, results of operations or cash flows.
LEGISLATION AND REGULATION:
In 1993, the Environmental Protection Agency ("EPA") released a report on
the respiratory effect of secondary smoke which concludes that secondary
smoke 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 secondary smoke, 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
secondary smoke 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, a federal district court vacated
those sections of the report relating to lung cancer, finding that the
EPA may have reached different conclusions had it complied with relevant
statutory requirements. The federal government has appealed the court's
ruling.
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 Food and Drug Administration (the "FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of
tobacco products and imposing restrictions on the sale, advertising and
promotion of tobacco products. Litigation was commenced challenging the
legal authority of the FDA to assert such jurisdiction, as well as
challenging the constitutionality of the rules. On March 21, 2000, the
United States Supreme Court ruled that the FDA does not have the power to
regulate tobacco. Liggett supported the FDA Rule and began to phase in
compliance with certain of the proposed FDA regulations.
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 on the grounds that it is
preempted by federal law. In November 1999, the First Circuit affirmed
this ruling. Notwithstanding the foregoing, in
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<PAGE> 33
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 34 cents, were
increased at the beginning of 2000 and will rise 5 cents more in the year
2002. In general, excise taxes and other taxes on cigarettes have been
increasing. These taxes vary considerably and, when combined with sales
taxes and the current federal excise tax, may be as high as $1.66 per
pack in a given locality in the United States. Congress has been
considering significant increases in the federal excise tax or other
payments from tobacco manufacturers, and the Clinton Administration's
fiscal year 2001 budget proposal includes an additional increase of $.25
per pack in the federal excise tax, as well as a contingent special
assessment related to youth smoking rates. Increases in other
cigarette-related taxes have been proposed at the state and local level.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning cigarette smoking
and the tobacco industry, the effects of which, at this time, management
is not able to evaluate. These developments may negatively affect the
perception of potential triers of fact with respect to the tobacco
industry, possibly to the detriment of certain pending litigation, and
may prompt the commencement of additional similar litigation.
OTHER MATTERS:
In March 1997, a stockholder derivative suit was filed in Delaware
Chancery Court against New Valley, as a nominal defendant, its directors
and Brooke Group Holding by a stockholder of New Valley. The suit alleges
that New Valley's purchase of the BrookeMil shares from Brooke (Overseas)
in January 1997 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, Brooke Group Holding aided and abetted such breaches and such
parties are therefore liable to New Valley, and (ii) unspecified damages
to be awarded to New Valley. In December 1999, another stockholder of New
Valley commenced an action in Delaware Chancery Court substantially
similar to the March 1997 action. This stockholder alleges, among other
things, that the consideration paid by New Valley for the BrookeMil
shares was excessive, unfair and wasteful, that the special committee of
New Valley's board lacked independence, and that the appraisal by the
independent appraisal firm and the fairness opinion by the independent
investment bank were flawed. Brooke Group Holding and New Valley believe
that the allegations in both cases are without merit. By order of the
court, both actions were consolidated. Brooke Group Holding and New
Valley recently filed a motion to dismiss the consolidated action.
Although there can be no assurances, Brooke Group Holding and New Valley
believe, after consultation with counsel, that the ultimate resolution of
this matter will not have a material adverse effect on the Company's or
New Valley's consolidated financial position, results of operations or
cash flows.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
Group Holding and certain directors and
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<PAGE> 34
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
officers of New Valley in Delaware Chancery Court. The complaint alleges
that the recapitalization, approved by a majority of each class of New
Valley's stockholders in May 1999, was fundamentally unfair to the Class
B preferred shareholders, the proxy statement relating to the
recapitalization was materially deficient and the defendants breached
their fiduciary duties to the Class B preferred shareholders in approving
the transaction. The plaintiffs seek class certification of the action
and an award of unspecified compensatory damages as well as all costs and
fees. Brooke Group Holding and New Valley believe that the allegations
are without merit. Brooke Group Holding and New Valley recently filed a
motion to dismiss the action. Although there can be no assurances, Brooke
Group Holding and New Valley believe, after consultation with counsel,
that the ultimate resolution of this matter will not have a material
adverse effect on the Company's or New Valley's consolidated financial
position, results of operations or cash flows.
On October 18, 1999, an action was commenced against a subsidiary of
Brooke Group Holding in the Supreme Court of the State of New York,
County of New York. The complaint alleges that under the terms of a 1993
Put Agreement, Brooke Group Holding's subsidiary was obligated to
purchase certain shares of plaintiff's stock for $7,500. In addition, the
complaint seeks prejudgment interest in the amount of approximately
$3,000. Brooke Group Holding believes, and has been so advised by
counsel, that it has a number of valid defenses to this matter.
As of March 31, 2000, New Valley had $12,263 of prepetition claims and
restructuring accruals. The remaining prepetition claims may be subject
to future adjustments depending on pending discussions with the various
parties and the decisions of the bankruptcy court.
New Valley is a defendant in various lawsuits and may be subject to
unasserted claims primarily concerning its activities as a securities
broker-dealer and its 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 or New Valley's
consolidated financial position, results of operations or cash flows.
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<PAGE> 35
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
13. SEGMENT INFORMATION
Financial information for the Company's continuing operations before
taxes and minority interest for the three months ended March 31, 2000 and
1999 follows:
<TABLE>
<CAPTION>
United
States Russia Broker- Real Corporate
Tobacco Tobacco Dealer Estate and Other Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
2000
Revenues ......................................... $ 106,902 $ 40,246 $ 30,296 $ 771 $ $ 178,215
Operating income ................................. 9,089 498 4,883 (1,983) (2,387) 10,100
Identifiable assets .............................. 125,900 157,827 50,039 57,826 142,410 534,002
Depreciation and amortization .................... 998 2,022 220 149 9 3,398
Capital expenditures ............................. 4,514 2,775 66 674 8,029
1999
Revenues ......................................... $ 86,047 $ 22,350 $ $ 108,397
Operating income ................................. 20,069 1,290 774 22,133
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
</TABLE>
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<PAGE> 36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
INTRODUCTION
The following discussion provides an assessment of the consolidated
results of operations, capital resources and liquidity of Brooke Group Ltd.
(the "Company") and its subsidiaries and should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company and BGLS
Inc. ("BGLS") included elsewhere in this document. BGLS is a wholly owned
subsidiary of the Company. The consolidated financial statements include the
accounts of BGLS, Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd.
("BOL"), Liggett-Ducat Ltd. ("Liggett-Ducat") and other less significant
subsidiaries. As of June 1, 1999, New Valley Corporation ("New Valley") became
a consolidated subsidiary of the Company as a result of New Valley's
recapitalization in which the Company's interest in New Valley's common shares
increased to 55.1%. New Valley's stock repurchase program, which began in late
1999, increased the Company's interest to 55.5% at March 31, 2000.
The Company is a holding company for a number of businesses which it
holds through its wholly-owned subsidiary BGLS. Accordingly, a separate
Management's Discussion and Analysis of Financial Condition and Results of
Operations for BGLS is not presented herein as it would not differ materially
from the discussion of the Company's consolidated results of operations,
capital resources and liquidity. The Company is principally engaged in the
manufacture and sale of cigarettes in the United States through its subsidiary
Liggett; in the manufacture and sale of cigarettes in Russia through its
subsidiary Liggett-Ducat; and in the investment banking and brokerage business
in the United States, real estate operations in Russia and investment in
Internet-related businesses through its majority-owned subsidiary New Valley.
At the Company's annual meeting to be held on May 24, 2000,
stockholders will be asked to approve a corporate name-change to Vector Group
Ltd. If the name-change proposal is approved, the New York Stock Exchange
symbol for the Company's common stock will change from "BGL" to "VGR".
RECENT DEVELOPMENTS IN LEGISLATION, REGULATION AND LITIGATION
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of March 31, 2000, there were approximately 310 individual
suits, 60 purported class actions and 90 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. Additionally, approximately 30 purported class
action complaints have been filed on behalf of consumers alleging illegal and
unethical business activities by the tobacco manufacturers. As new cases are
commenced, the costs associated with defending such cases and the risks
attendant to the inherent unpredictability of litigation continue to increase.
An unfavorable verdict has been returned in the first phase of the Engle smoking
and health class action trial pending in Florida and the jury will now consider
the award of lump sum punitive damages, if any, for the entire class. It is
possible that additional cases could be decided unfavorably and that there could
be further adverse developments in the Engle case. Management cannot predict the
cash requirements related to any future settlements and judgments, including
cash required to bond any appeals, if necessary, and there is a risk that those
requirements will not be able to be met. In recent years, there have been a
number of restrictive regulatory actions from various Federal administrative
bodies, including the United States Environmental Protection Agency and the Food
and Drug Administration. There have also been adverse political decisions and
other unfavorable developments concerning cigarette smoking and the tobacco
industry, including the commencement and certification of class actions and the
commencement of third-party payor actions. These developments generally receive
widespread media attention. The Company is not able to evaluate the effect of
these developing
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<PAGE> 37
matters on pending litigation or the possible commencement of additional
litigation, but the Company's consolidated financial position, results of
operations or cash flows could be materially adversely affected by an
unfavorable outcome in any of such tobacco-related litigation. See Part II,
Item 1, "Legal Proceedings" and Note 12 to the Company's Consolidated Financial
Statements for a description of legislation, regulation and litigation.
In March 1996, March 1997 and March 1998, the Company and Liggett
entered into settlements of tobacco-related litigation with the Attorneys
General of 45 states and territories. The settlements released the Company and
Liggett from all tobacco claims including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors. See the
discussions of the tobacco litigation settlements appearing in Note 12 to the
Company's Consolidated Financial Statements.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
-----------------------
March 31,
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Liggett...................... $ 106,902 $ 86,047
Liggett-Ducat................ 40,246 22,350
-------- --------
Total tobacco............. 147,148 108,397
*Broker-dealer.................. 30,296
*Real estate.................... 771
--------- ---------
Total revenues............ 178,215 108,397
Operating income:
Liggett...................... 9,089 20,069
Liggett-Ducat................ 498 1,290
--------- ---------
Total tobacco............. 9,587 21,359
*Broker-dealer.................. 4,883
*Real estate.................... (1,983)
Corporate and other........... (2,387) 774
--------- ---------
Total operating income.... $ 10,100 $ 22,133
======== ========
</TABLE>
*New Valley became a consolidated subsidiary on June 1, 1999.
Accordingly, results of operations for New Valley are not included for
the three months ended March 31, 1999.
Three Months Ended March 31, 2000 Compared to Three Months Ended March 31, 1999
Revenues. Total revenues were $178,215 for the three months ended
March 31, 2000 compared to $108,397 for the three months ended March 31, 1999.
This 64.4% increase in revenues was due to a $20,855 or 24.2% increase in
revenues at Liggett, an increase of $17,896 or 80.1% in revenues at
Liggett-Ducat and the addition of three months' revenues from New Valley of
$31,067.
Tobacco Revenues. In August 1999, the major cigarette manufacturers,
including Liggett, announced a list price increase of $1.50 per carton. In
January 2000, an additional list price increase of $1.30 per carton was
announced.
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<PAGE> 38
Total tobacco revenues were $147,148 for the three months ended March
31, 2000 compared to $108,397 for the three months ended March 31, 1999. This
35.7% increase in revenues was due to an increase in tobacco revenues at
Liggett and at Liggett-Ducat discussed above. Revenues at Liggett increased by
24.2% ($20,855) for both the premium and discount segments due to price
increases of $17,848 and a 13.9% increase in unit sales volume (approximately
149.2 million units), accounting for $11,973 in volume variance, partially
offset by an unfavorable sales mix of $8,966.
Premium sales at Liggett for the first quarter of 2000 amounted to
$15,692 and represented 14.7% of Liggett's total sales, compared to $25,366 and
29.5% of total sales in the first quarter of 1999. In the premium segment,
revenues declined by 38.1% ($9,674) for the three months ended March 31, 2000,
compared to the prior year first quarter, due to the contribution of three of
Liggett's premium brands, Lark, Chesterfield and L & M, in the Philip Morris
brand transaction which closed on May 24, 1999. The contribution of the brands
accounted for an unfavorable volume variance in the first quarter of 2000 of
$11,704, reflecting a 46.1% decline in unit sales volume (approximately 124.3
million units). This was partially offset by price increases of $2,030. As
adjusted for the contribution of the three brands in the Philip Morris brand
transaction, Liggett's premium segment increased from the prior year period by
7.6% (approximately 10.2 million units). This compares to an overall industry
increase in the premium segment of 4.6%, or approximately 3.3 billion units, in
the first quarter of 2000 from the prior year period.
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the three months ended March 31, 2000 amounted to $91,210
and represented 85.3% of Liggett's total sales, compared to $60,681 and 70.5%
of total sales for the three months ended March 31, 1999. In the discount
segment, revenues grew by 50.3% ($30,529) for the three months ended March 31,
2000 compared to the prior year period, due to price increases of $15,818,
along with a 34.1% increase in unit sales volume (approximately 273.5 million
units), accounting for $20,670 in volume variance, partially offset by an
unfavorable product mix among the discount brand categories of $5,959.
For the three months ended March 31, 2000, fixed manufacturing costs
at Liggett on a basis comparable to 1999 were $368 lower than in the same
period in 1998, with a decrease in costs per thousand units of $2.29 per
thousand declining 20.8% ($0.60) from $2.89 in the prior period, due to the
14.1% increase in production volume.
Net tobacco revenues at Liggett-Ducat for the three months ended March
31, 2000 increased 80.1% over the same period in 1999 due to a 102.3% increase
in unit sales volume ($22,860) (approximately 5,125 million units) and a
favorable product mix of $2,873 offset by a 43.8% decrease in prices ($7,838).
Tobacco Gross Profit. Tobacco consolidated gross profit was $78,423
for the three months ended March 31, 2000 compared to $66,820 for the three
months ended March 31, 1999, an increase of $11,603 or 17.1% when compared to
the same period last year, reflecting an increase in gross profit at Liggett of
$10,377 and at Liggett-Ducat of $1,226 for the three months ended March 31,
2000 compared to the same period in the prior year. For the three months ended
March 31, 2000, Liggett's premium brands contributed 14.5% and discount brands
contributed 78.9% to the Company's gross tobacco profit. Liggett-Ducat
contributed 6.6%. Over the same period in 1999, Liggett's premium brands
contributed 28.6%, Liggett's discount brands contributed 65.3% and
Liggett-Ducat contributed 6.1% to the Company's gross profit.
Gross profit at Liggett of $73,259 for the three months ended March
31, 2000 increased $10,377 from gross profit of $62,882 for the first quarter
of 1999, due primarily to the price increases discussed above. As a percent of
revenues (excluding federal excise taxes), gross profit at Liggett decreased to
84.3% for the three months ended March 31, 2000 compared to
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<PAGE> 39
85.6% for the same period in 1999, with gross profit for the premium segment at
85.8% in the 2000 period compared to 86.6% in the 1999 period. Gross profit for
the discount segment was 84.1% for the three months ended March 31, 2000 and
85.1% for the three months ended March 31, 1999. These decreases are primarily
the result of increased indirect costs in distribution over the prior year.
As a percent of revenues (excluding Russian excise taxes), gross
profit at Liggett-Ducat decreased 6.0% to 14.5% for the three months ended
March 31, 2000 compared to 20.5% in the same period in 1999, primarily due to
lower prices offset in part by higher sales volumes.
Broker-Dealer and Real Estate Revenues. For the three months ended
March 31, 2000, Ladenburg's revenues were $30,296 and real estate revenues were
$771.
Expenses. Operating, selling, general and administrative expenses were
$99,503 for the three months ended March 31, 2000 compared to $44,722 for the
same period last year, an increase of $54,781 primarily due to increased
expenses at Liggett of $21,435, increased expenses at Liggett-Ducat of $2,108
and an increase of $30,602 caused by consolidation of New Valley, which was not
a consolidated subsidiary during the three months ended March 31, 1999. The
increase in operating expenses at Liggett was due primarily to higher spending
for promotional and marketing programs, factory relocation costs and increased
administrative expenses partially offset by a reduction in the Company's
obligation under non-current employee benefits. At Liggett-Ducat, depreciation
expense increased over the prior year period due to the opening of the new
factory in June 1999 and marketing and advertising expense increased due
primarily to the introduction of western style cigarettes.
Other Income (Expenses). For the three months ended March 31, 2000,
other expense was $6,050 compared to expense of $12,862 for the period ended
March 31, 1999.
Interest expense was $11,756 for the three months ended March 31, 2000
compared to $14,988 for the same period last year. This decrease of $3,232 was
primarily due to a savings of $6,939 at corporate because of the purchase by
BGLS of $150,294 principal amount of its 15.75% Series B Senior Secured Notes
(the "Notes") beginning in May 1999. This was offset by the addition of $2,167
in interest expense of New Valley and higher interest expense at Western Tobacco
Investment LLC ("Western Tobacco Investments") primarily due to non-cash
interest expense under the participating loan agreement.
New Valley contributed gains on sale of investment securities of
$4,753 and interest and dividend income of $1,494 offset by a loss in equity of
its affiliate of $1,551.
For the three months ended March 31, 1999, equity in earnings of
affiliate was a loss of $7,629 and related to New Valley's net loss applicable
to common shares of $23,801 for the period. This loss in the 1999 period was
offset by recognition of deferred gain of $7,050 relating to the expiration of
the put obligation on Ducat Place III (the site of the old cigarette factory in
Russia) in connection with the sale of the BrookeMil Ltd. common shares in
1997. The factory ceased operations in March 1999.
Income from Continuing Operations. The income from continuing
operations for the three months ended March 31, 2000 was $1,488 compared to
income of $7,554 for the three months ended March 31, 1999. Income tax expense
for the first quarter of 2000 was $823 compared to $1,729 for the for the first
quarter of 1999. The effective tax rates for the three months ended March 31,
2000 and March 31, 1999 do not bear a customary relationship to pre-tax
accounting income principally as a consequence of foreign taxes and the change
in the valuation allowance on deferred tax assets.
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<PAGE> 40
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents increased $2,687 for the three months
ended March 31, 2000 and decreased $1,877 for the three months ended March 31,
1999. Net cash used in operations for the three months ended March 31, 2000 was
$22,086 compared to net cash provided by operations of $2,571 for the comparable
period of 1999. Cash used in the 2000 period for operating activities resulted
principally from lower net income at Liggett, an increase in inventories of
$14,357, an increase in receivables from clearing brokers of $10,217 and a
decrease in net deferred taxes of $4,126 offset by an increase in accounts
payable and accrued expenses of $10,320. Cash provided in the 1999 period was
due to higher net income at Liggett and a reduction in debt service due to the
December 1998 bond redemption at Liggett.
Cash provided by investing activities of $3,622 compares to cash used
of $19,581 for the periods ended March 31, 2000 and 1999, respectively. For the
three months ended March 31, 2000, proceeds are primarily attributable to net
sales of marketable securities and long-term investments in 2000 of $8,842 and
the decrease in restricted assets of $3,202 offset primarily by capital
expenditures of $8,029. Cash used in investment activities for the three months
ended March 31, 1999 was due to capital expenditures of $6,369 at Liggett for
machinery and equipment and $13,248 at Liggett-Ducat for factory construction
and equipment costs.
Cash provided by financing activities was $21,483 for the three months
ended March 31, 2000 as compared with cash provided of $15,452 for the three
months ended March 31, 1999. Cash was provided in the 2000 period through net
borrowings under credit facilities of $30,552 and an increase in margin loans
payable. These amounts were offset by net repayments on debt of $6,895 and
distributions on common stock of $5,498. During the three months ended March
31, 1999, cash was provided by net borrowings under credit facilities of
$12,667 and net proceeds on a promissory note of $4,177. These were offset
principally by distributions on common stock of $1,358.
Liggett. Liggett has a $35,000 credit facility under which $23,166 was
outstanding at March 31, 2000. Availability under the facility was
approximately $6,974 based on eligible collateral at March 31, 2000. The
facility is collateralized by all inventories and receivables of Liggett.
Borrowings under the facility, whose interest is calculated at a rate equal to
1.0% above Philadelphia National Bank's (the indirect parent of Congress
Financial Corporation, the lead lender) prime rate, bore a rate of 9.75% at
March 31, 2000. The facility requires Liggett's compliance with certain
financial and other covenants including a restriction on the payment of cash
dividends unless Liggett's borrowing availability under the facility for the
30-day period prior to the payment of the dividend, and after giving effect to
the dividend, is at least $5,000. In addition, the facility, as amended,
imposes requirements with respect to Liggett's adjusted net worth (not to fall
below $8,000 as computed in accordance with the agreement) and working capital
(not to fall below a deficit of $17,000 as computed in accordance with the
agreement). At March 31, 2000, Liggett was in compliance with all covenants
under the credit facility; Liggett's adjusted net worth was $17,977 and net
working capital was $36,795, as computed in accordance with the agreement. The
facility expires on March 8, 2003 subject to automatic renewal for an
additional year unless a notice of termination is given by the lender at least
60 days prior to the anniversary date.
In November 1999, 100 Maple Lane LLC, a new company formed by Liggett
to purchase an industrial facility in Mebane, North Carolina, borrowed $5,040
from the lender under Liggett's credit facility. The loan is payable in 59
monthly installments of $60 including annual interest at 1% above the prime
rate with a final payment of $1,500. Liggett has guaranteed the loan, and a
first mortgage on the Mebane property collateralizes the Maple Lane loan and
Liggett's credit facility. Liggett plans to relocate its manufacturing
operations to this facility in late 2000.
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<PAGE> 41
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase. The loan, which is collateralized by the
equipment, is payable in 60 monthly installments of $56 including annual
interest of 7.67% with a final payment of $2,550. In March 2000, Liggett
purchased equipment for $1,000 under a capital lease which is payable in 60
monthly installments of $21 with an effective annual interest rate of 10.14%.
Liggett (and, in certain cases, Brooke Group Holding, the Company's
predecessor and a wholly-owned subsidiary of BGLS) 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 from cigarettes. The Company believes, and has been so advised
by counsel handling the respective cases, that Brooke Group Holding and Liggett
have a number of valid defenses to claims asserted against them. Litigation is
subject to many uncertainties. An unfavorable verdict has been returned in the
first phase of the Engle smoking and health class action trial pending in
Florida and the jury will now consider the award of lump sum punitive damages,
if any, for the entire class. It is possible that additional cases could be
decided unfavorably and that there could be further adverse developments in the
Engle case. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Management cannot
predict the cash requirements related to any future settlements and judgments,
including cash required to bond any appeals, if necessary, and there is a risk
that those requirements will not be able to be met. In recent years, there have
been a number of adverse regulatory, political and other developments concerning
cigarette smoking and the tobacco industry. These developments generally receive
widespread media attention. Neither the Company nor Liggett is able to evaluate
the effect of these developing matters on pending litigation or the possible
commencement of additional litigation or regulation. See Note 12 to the
Company's Consolidated Financial Statements.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases
pending against Brooke Group Holding or Liggett or the costs of defending such
cases. 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.
Brooke (Overseas). Liggett-Ducat completed construction of a new
cigarette factory on the outskirts of Moscow which became operational in June
1999. The new factory, which utilizes Western cigarette making technology and
has a capacity in excess of 40 billion units per year, produces American and
international blend cigarettes, as well as traditional Russian cigarettes.
Western Realty Development has made a $30,000 participating loan to Western
Tobacco Investments, which holds Brooke (Overseas)'s interest in Liggett-Ducat
and the new factory. In addition, Western Tobacco Investments has entered into
note agreements for equipment purchases which have a liability of approximately
$19,891 at March 31, 2000. The remaining costs for construction and equipment
for the new factory and working capital requirements have been financed by loans
and credit facilities from Russian banks of $36,489.
BGLS. On January 20, 2000, BGLS repurchased an additional $5,500
principal amount of the Notes, together with accrued interest, for a purchase
price of $8,456. Through March 31, 2000, BGLS has repurchased $150,294
principal amount of the Notes, together with accrued interest thereon. The
purchases have been made using primarily the proceeds of the Philip Morris
brand transaction which closed on May 24, 1999.
At March 31, 2000, BGLS had outstanding $82,570 principal amount of
the Notes which mature on January 31, 2001. Of this amount, $50,100 of the
Notes carry deferred interest. On March 2, 1998, BGLS entered into a standstill
agreement with the holders of $97,239 principal amount of its notes, who were
affiliated with Apollo, under which the Apollo holders (and any transferees)
agreed to the deferral of interest payments, commencing with the interest
payment
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<PAGE> 42
due July 31, 1997 through the interest payment due July 31, 2000. BGLS had total
deferred interest of $22,708 as of March 31, 2000. Interest on all of the Notes
for the six month period ended January 31, 2000 was paid in cash.
Consolidated. Brooke has substantial near-term consolidated debt
service requirements, with aggregate required principal payments of
approximately $156,500 due within the next twelve months. Brooke believes that
it will continue to meet its liquidity requirements through 2000, 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, 2000, the
remaining amount available through December 31, 2000 in the restricted payment
basket related to BGLS' payment of dividends to the Company (as defined by the
BGLS Notes Indenture) is $18,357. Brooke expenditures (exclusive of Liggett,
Liggett-Ducat and New Valley) over the next twelve months for current
operations include cash interest expense of approximately $14,089, dividends on
Brooke's shares (currently at an annual rate of approximately $21,990) and
corporate expenses. Brooke anticipates funding its expenditures for current
operations with public and/or private debt and equity financing, management
fees from subsidiaries and tax sharing and other payments from Liggett or New
Valley. New Valley may acquire or seek to acquire additional operating
businesses through merger, purchase of assets, stock acquisition or other
means, or to make other investments, which may limit its ability to make such
distributions.
MARKET RISK
Brooke is exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity prices. The Company
seeks to minimize these risks through its regular operating and financing
activities and its long-term investment strategy.
Foreign Market Risk
Europe. Brooke has foreign currency exchange risk relating to its
outstanding obligations under foreign currency denominated construction and
equipment contracts with various European companies where costs are affected by
fluctuations in the United States dollar as compared to certain European
currencies. Management believes that currencies in which it presently has such
exposure are relatively stable.
Russia. Liggett-Ducat's, Western Tobacco Investment's, BrookeMil's and
Western Realty Development's operations are conducted in Russia. The Russian
Federation continues to experience economic difficulties following the
financial crisis of August 1998. Consequently, the country's currency continues
to devalue, there is continued volatility in the debt and equity markets,
hyperinflation persists, confidence in the banking sector has yet to be
restored and there continues to be a general lack of liquidity in the economy.
In addition, laws and regulations affecting businesses operating within the
Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to
a large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond Brooke's control.
Brooke's Russian operations may be significantly affected by these factors for
the foreseeable future.
Domestic Market Risk
New Valley's market risk management procedures cover all market risk
sensitive financial instruments.
Current and proposed underwriting, corporate finance, merchant banking
and other commitments at Ladenburg are subject to due diligence reviews by
Ladenburg's senior
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<PAGE> 43
management, as well as professionals in the appropriate business and support
units involved. Credit risk related to various financing activities is reduced
by the industry practice of obtaining and maintaining collateral. Ladenburg
monitors its exposure to counterparty risk through the use of credit exposure
information, the monitoring of collateral values and the establishment of
credit limits.
Equity Price Risk. Ladenburg maintained inventories of trading
securities at March 31, 2000 with fair values of $11,106 in long positions and
$3,368 in short positions. Ladenburg performed an entity-wide analysis of its
financial instruments and assessed the related risk and materiality. Based on
this analysis, in the opinion of management, the market risk associated with
the Ladenburg's financial instruments at March 31, 2000 will not have a
material adverse effect on the consolidated financial position or results of
operations of Brooke.
New Valley held investment securities available for sale totaling
$48,689 at March 31, 2000. Approximately 24% of these securities represent an
investment in RJ Reynolds Tobacco Holdings, Inc. and Nabisco Group Holdings
Corp., which are defendants in numerous tobacco products-related litigation,
claims and proceedings. An adverse outcome in any of these proceedings could
have a significant effect on the value of New Valley's investment.
New Valley also holds long-term investments in limited partnerships
and limited liability companies. These investments are illiquid, and their
ultimate realization is subject to the performance of the investee entities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." 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.
Originally, the statement had been effective for all quarters of fiscal years
beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities", which postponed
the adoption of SFAS No. 133 until fiscal years beginning after June 15, 2000.
Brooke has not yet determined the impact that the adoption of SFAS 133 will
have on its earnings or statement of financial position.
YEAR 2000 COSTS
The "Year 2000 issue" is the result of computer programs that were
written using two digits rather than four digits to define the applicable year.
If Brooke'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.
Brooke, New Valley and Liggett-Ducat. Brooke, New Valley and
Liggett-Ducat use personal computers for all transactions. All such computers
and related systems and software are less than three years old and are Year
2000 compliant. As a result, Brooke, New Valley and Liggett-Ducat are Year 2000
compliant.
Liggett. Liggett is Year 2000 compliant. The focus of Liggett's Year
2000 compliance and verification efforts were 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 November 1998, Liggett
completed a major conversion of
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<PAGE> 44
factory accounting, materials management and information systems at its Durham
production facility with upgrades that were successfully tested for Year 2000
compliance. Program upgrades to Liggett's payroll system were completed in July
1999 with parallel upgrades to the human resources system software completed in
August 1999. Enhancements to Liggett's warehouse management finished goods
inventory tracking systems were completed in October 1999.
Ladenburg. Ladenburg is Year 2000 compliant. Ladenburg's plan
addressed external interfaces with third party computer systems necessary in
the broker-dealer industry. It also addressed internal operations software
necessary to continue operations on a daily basis. Ladenburg's Year 2000 plan
cost approximately $650. The cost was inclusive of hardware and software
upgrades and replacements as well as consulting.
External Service Providers. The modifications for Year 2000 compliance
by Brooke and its subsidiaries were completed in 1999. However, the failure of
Brooke's service providers, including Ladenburg's clearing agent, to resolve
their own processing issues in a timely manner could result in a material
financial risk. Published reports have stated that Year 2000 miscalculations
could occur throughout 2000. To date, neither Brooke nor its subsidiaries have
experienced any material disruption to their business operations.
It is unclear whether the Russian government and other organizations
that 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 effect on Brooke's operations. Furthermore, the current
financial crises in Russia could affect the ability of the government and other
organizations to fund Year 2000 compliance programs. To date, Brooke is not
aware of any Year 2000 related issues reported in Russia.
Although Brooke and its subsidiaries have confirmed that their service
providers adequately addressed Year 2000 issues, there can be no complete
assurance of success, or that interaction with other service providers will not
impair Brooke's or its subsidiaries' services.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, including any statements that may be contained
in the foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", in this report and in other
filings with the Securities and Exchange Commission and in its reports to
stockholders, which reflect management's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Private Securities Reform Act, the Company has identified
under "Risk Factors" in Item 1 of the Company's Form 10-K for the year ended
December 31, 1999 filed with the Securities and Exchange Commission 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.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. 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.
-43-
<PAGE> 45
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.
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<PAGE> 46
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Note 12, incorporated herein by reference, to the
Consolidated Financial Statements of Brooke Group Ltd. and BGLS Inc.
included elsewhere in this Report on Form 10-Q which contains a
general description of certain legal proceedings to which Brooke Group
Holdings, BGLS, New Valley or their subsidiaries are a party and
certain related matters. Reference is also made to Exhibit 99.1 for
additional information regarding the pending smoking-related material
legal proceedings to which Brooke Group Holding, BGLS and/or Liggett
are party. A copy of Exhibit 99.1 will be furnished to security holders
of the Company and its subsidiaries without charge upon written request
to the Company at its principal executive offices, 100 S.E. Second St.,
Miami, Florida 33131, Attn. Investor Relations.
Item 2. Changes in Securities and Use of Proceeds
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by the
Company during the three months ended March 31, 2000.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<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, 2000 and 1999.
* 99.3 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly periods
ended March 31, 2000 and 1999 (incorporated by
reference to New Valley's Quarterly Report on Form
10-Q for the quarterly period ended March 31,
2000, Commission File No. 1-2493).
99.4 Brooke (Overseas) Ltd.'s Interim Consolidated
Financial Statements for the quarterly periods
ended March 31, 2000 and 1999.
</TABLE>
- ---------------
*Incorporated by reference
(b) Reports on Form 8-K
None.
-45-
<PAGE> 47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
BROOKE GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
---------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: May 15, 2000
BGLS INC.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
---------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: May 15, 2000
-46-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000059440
<NAME> BROOKE GROUP LTD.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 22,810
<SECURITIES> 59,795
<RECEIVABLES> 44,614
<ALLOWANCES> 0
<INVENTORY> 59,562
<CURRENT-ASSETS> 213,745
<PP&E> 204,791
<DEPRECIATION> (45,361)
<TOTAL-ASSETS> 534,002
<CURRENT-LIABILITIES> 347,825
<BONDS> 54,813
0
0
<COMMON> 2,199
<OTHER-SE> (137,523)
<TOTAL-LIABILITY-AND-EQUITY> 534,002
<SALES> 178,215
<TOTAL-REVENUES> 178,215
<CGS> 68,575
<TOTAL-COSTS> 68,575
<OTHER-EXPENSES> 93,834
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,756)
<INCOME-PRETAX> 4,050
<INCOME-TAX> 823
<INCOME-CONTINUING> 1,488
<DISCONTINUED> 0
<EXTRAORDINARY> (230)
<CHANGES> 0
<NET-INCOME> 1,258
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.05
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000927388
<NAME> BGLS INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 22,243
<SECURITIES> 59,795
<RECEIVABLES> 44,559
<ALLOWANCES> 0
<INVENTORY> 59,562
<CURRENT-ASSETS> 213,092
<PP&E> 204,763
<DEPRECIATION> (45,345)
<TOTAL-ASSETS> 532,027
<CURRENT-LIABILITIES> 345,126
<BONDS> 54,813
0
0
<COMMON> 0
<OTHER-SE> (134,437)
<TOTAL-LIABILITY-AND-EQUITY> 532,027
<SALES> 178,215
<TOTAL-REVENUES> 178,215
<CGS> 68,575
<TOTAL-COSTS> 68,575
<OTHER-EXPENSES> 92,736
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (11,732)
<INCOME-PRETAX> 5,172
<INCOME-TAX> 823
<INCOME-CONTINUING> 2,610
<DISCONTINUED> 0
<EXTRAORDINARY> (230)
<CHANGES> 0
<NET-INCOME> 2,380
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
EXHIBIT 99.1
I. GOVERNMENTAL HEALTH CARE RECOVERY ACTIONS
People of the State of California, et al. v. Philip Morris
Incorporated, et al., Case No. BC194217, Superior Court of California,
County of Los Angeles (case filed 7/14/98). People seek injunctive
relief and economic reimbursement with respect to damages allegedly
caused by environmental tobacco smoke (ETS).
People of the State of California, et al. v. Philip Morris
Incorporated, et al., Case No. 980-864, Superior Court of California,
County of San Francisco (case filed 8/5/98). People seek injunctive
relief and economic reimbursement with respect to damages allegedly
caused by environmental tobacco smoke (ETS).
United States of America v. Philip Morris, Inc., et al., Case No.
1:99CVO2496, USDC, District of Columbia (case filed 9/22/99). The
United States of America seeks to recover health care costs paid for
and furnished, and to be paid for and furnished, by the federal
government through Medicare and otherwise, for lung cancer, heart
disease, emphysema and other tobacco-related illnesses.
Republic of Ecuador v. Philip Morris Companies, Inc., et al., Case No.
00-1951-CA-27, Circuit Court of the 11th Judicial Circuit, State of
Florida, Miami-Dade County (case filed 1/21/00). The Republic of
Ecuador seeks reimbursement of the funds expended on behalf of those
injured by and addicted to tobacco products.
Republic of Venezuela v. Philip Morris Companies, Inc., et al., Case
No. 99-01943-CA-01, Circuit Court of the 11th Judicial Circuit, State
of Florida, Miami-Dade County (case filed 1/27/99). The Republic of
Venezuela seeks compensatory and injunctive relief for damages
incurred by the Republic in paying for the medicaid expenses of
indigent smokers.
The State of Espirito Santo, Brazil v. Brooke Group Ltd., et al., Case
No. 00-07472-CA-03, Circuit Court of the 11th Judicial Circuit, State
of Florida, Miami-Dade County. The State of Espirito Santo, Brazil
seeks reimbursement for all costs and damages incurred by the State.
The State of Goias, Brazil v. Philip Morris Companies, Inc., et al.,
Case No. 99-24202-CA 02, Circuit Court of the 11th Judicial Circuit,
State of Florida-Dade County (case filed 10/19/99). The State of
Goias, Brazil seeks compensatory and injunctive relief for damages for
personal injuries and misrepresentation of risk regarding the use of
tobacco products manufactured by defendants.
County of Cook v. Philip Morris, et al., Case No. 97L04550, Circuit
Court, State of Illinois, Cook County (case filed 7/21/97). County of
Cook seeks to obtain declaratory and equitable relief and restitution
as well as to recover money damages resulting from payment by the
County for tobacco-related medical treatment for its citizens and
health insurance for its employees.
County of Wayne v. Philip Morris Incorporated, et al., USDC, Eastern
District, Michigan. County of Wayne seeks to obtain damages,
remediation through tobacco education and anti-addiction programs,
injunctive relief, attorneys' fees and costs.
City of St. Louis, et al. v. American Tobacco Company, Inc., et al.,
Case No. CV-982-09652, Circuit Court, State of Missouri, City of St.
Louis, (case filed 12/4/98). City of St. Louis and area hospitals seek
to recover past and future costs expended to provide healthcare to
Medicaid, medically indigent, and non-paying patients suffering from
tobacco-related illnesses.
1
<PAGE> 2
County of St. Louis, Missouri v. American Tobacco Company, Inc., et
al., Case No. 982-09705, Circuit Court, State of Missouri, City of St.
Louis, (case filed 12/10/98). County seeks to recover costs from
providing healthcare services to Medicaid and indigent patients, as
part of the State of Missouri's terms as a party to the Master
Settlement Agreement.
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, USDC, Western District of Pennsylvania (case filed 3/12/99).
County seeks equitable relief and economic reimbursement for moneys
expended on payments for healthcare for smokers resident in the
County.
The Crow Creek Sioux Tribe v. The American Tobacco Company, et al.,
Case No. CV 97-09-082, Tribal Court of The Crow Creek Sioux Tribe,
State of South Dakota (case filed 9/26/97). Indian tribe seeks
equitable and injunctive relief for damages incurred by the tribe in
paying for the expenses of indigent smokers.
The Sisseton-Wahpeton Sioux Tribe v. The American Tobacco Company, et
al., Case No. 030399, Tribal Court of the Sisseton-Wahpeton Sioux
Tribe, State of North Dakota (case filed 2/3/99). Indian tribe seeks
equitable and injunctive relief for damages incurred by the tribe in
paying for the expenses of indigent smokers.
Republic of Bolivia v. Philip Morris Companies, Inc., et al., Case No.
6949*JG99, District Court, State of Texas, Brazoria County, State of
Texas (case filed 1/20/99). The Republic of Bolivia seeks compensatory
and injunctive relief for damages incurred by the Republic in paying
for the medicaid expenses of indigent smokers.
Republic of Guatemala v. The Tobacco Institute, Inc., et al., Case No.
1:98CV01185, USDC, District of Columbia (case filed 5/18/98). The
Republic of Guatemala seeks compensatory and injunctive relief for
damages incurred by the Republic in paying for the medicaid expenses
of indigent smokers.
Republic of Nicaragua v. Liggett Group Inc., et al., Case No. 98-2380
RLA, USDC, District of Puerto Rico (case filed 12/10/98). The Republic
of Nicaragua seeks compensatory and injunctive relief for damages
incurred by the Republic in paying for the medicaid expenses of
indigent smokers.
Republic of Panama v. The American Tobacco Company, Inc., et al., Case
No. 98-17752, Civil District Court, State of Louisiana, Orleans Parish
(case filed 10/20/98). The Republic of Panama seeks compensatory and
injunctive relief for damages incurred by the Republic in paying for
the medicaid expenses of indigent smokers.
The Kingdom of Thailand v. The Tobacco Institute, Inc., et al, Case
No. H-99-0320, USDC, Southern District Texas (case filed 3/11/99). The
Kingdom of Thailand seeks compensatory and injunctive relief for
damages incurred by the Kingdom in paying for the medicaid expenses of
indigent smokers.
The State of Rio de Janerio of The Federated Republic of Brazil v.
Philip Morris Companies, Inc., et al., Case No. CV-32198, District of
Angelina County , State of Texas (case filed 7/12/99). The State of
Rio de Janerio of The Federated Republic of Brazil seeks compensatory
and injunctive relief for damages incurred by the Republic in paying
for the medicaid expenses of indigent smokers.
2
<PAGE> 3
The State of Sao Paulo v. The American Tobacco Company, et al., Case
No. 20 00-02058, Civil District Court, Louisiana, Parish of Orleans
(case filed 2/9/00). The State of Sao Paulo seeks reimbursement of the
funds expanded on behalf of those injured by and addicted to
Defendants's tobacco products.
Ukraine v. American Brands, et al., Case No. 1:99CV03080, USDC,
District of Columbia (case filed 11/19/99). Ukraine seeks compensatory
and injunctive relief for damages incurred by the country in paying
for the healthcare expenses of resident smokers.
II. THIRD-PARTY PAYOR ACTIONS
United Food and Commercial Workers Unions, et al. v. Philip Morris, et
al., Case No. CV-97-1340, Circuit Court of Tuscaloosa, Alabama (case
filed 11/13/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
Laborers' and Operating Engineers Utility Agreement v. Philip Morris,
et al., Case No. CIV97-1406 PHX, USDC, District of Arizona (case filed
7/29/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and beneficiaries suffering from
smoking-related illnesses.
Arkansas Carpenters Health & Welfare Fund v. Philip Morris, et al.,
Case No. LR-C-97-0754, USDC, Eastern District of Arkansas (case filed
9/4/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and beneficiaries suffering from
smoking-related illnesses.
Bay Area Automotive Group Welfare Fund, et al. v. Philip Morris, Inc.
et al., Case No. 994380, Superior Court of California, County of San
Francisco (case filed 4/16/98). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Fibreboard Corporation, et al. v. The American Tobacco Company, et
al., Case No. 791919-8, Superior Court of California, County of
Alameda (case filed 11/10/97). 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.
3
<PAGE> 4
Operating Engineers Local 12 Health and Welfare Trust v. The American
Tobacco Company, et al., Case No. CV-97-7620 TJH, USDC, Central
District of California (case filed 11/6/97). Health and Welfare Trust
Fund seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
Pipe Trades District Council No. 36 Health and Welfare Trust Fund v.
Philip Morris, Inc., et al., Case No. 797130-1, Superior Court of
California, County of Alameda (case filed 4/16/98). Health and Welfare
Trust Fund seeks injunctive relief and economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
San Francisco Newspaper Publishers and Northern California Newspaper
Guild Health & Welfare Trust v. Philip Morris, Inc., et al., Case No
.994409, Superior Court of California, County of San Francisco (case
filed 4/17/98). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
Screen Actors Guild - Producers Health Plan, et al. v. Philip Morris,
et al., Case No. DC181603, Superior Court of California, County of Los
Angeles (case filed 11/20/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
The Seibels Bruce Group, Inc. v. R.J. Reynolds, et al, Case No.
300235, Superior Court of California, County of San Francisco (case
filed 12/30/98). Insurance company seeks to recover equitable
contribution from the tobacco industry defendants for the amount that
has been, and will be paid by plaintiff for past and future defense
and indemnification costs.
Sign, Pictorial and Display Industry Welfare Fund v. Philip Morris,
Inc., et al., Case No. 994403, Superior Court of California, County of
San Francisco (case filed 4/16/98). Health and Welfare Trust Fund
seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
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 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.
4
<PAGE> 5
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 reimbursement to recover
moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
Sheet Metal Workers Trust Fund, et al. v. Philip Morris, Inc., et al.,
Case No. 1:99CVO2326, USDC, District of Columbia (case filed 8/31/99).
Sheet Metal Workers Trust Fund seeks to obtain injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide
medical treatment to their 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
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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 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 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
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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.
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.
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Laborers' Local 17 Health Benefit Fund, et al. v. Philip Morris, et
al., Case No. 98-7944, 2nd Circuit Court of Appeals, State of New York
(case filed 7/17/97). Health and Welfare Trust Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund
to provide medical treatment to its participants and benefactors
suffering from smoking-related illnesses.
Local 1199 Home Care Industry Benefit Fund v. Philip Morris, et al.,
Case No. 606249/97, Supreme Court of New York, New York County (case
filed 12/4/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
Local 1199 National Benefit Fund for Health & Human Services Employees
v. Philip Morris, et al., Case No. 606241/97, Supreme Court of New
York, New York County (case filed 12/4/97). Health and Welfare Trust
Fund seeks injunctive relief and economic reimbursement to recover
moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
Local 138, 138A & 138B International Union of Operating Engineers
Welfare Fund v. Philip Morris, et al., Case No. 122257/97, Supreme
Court of New York, New York County (case filed 11/25/97). Health and
Welfare Trust Fund seeks injunctive relief and economic reimbursement
to recover moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
Local 840 International Brotherhood of Teamsters Health & Insurance
Fund v. Philip Morris, et al., Case No. 122256/97, Supreme Court of
New York, New York County (case filed 11/25/97). Health and Welfare
Trust Fund seeks injunctive relief and economic reimbursement to
recover moneys expended by Fund to provide medical treatment to its
participants and beneficiaries suffering from smoking-related
illnesses.
Long Island Regional Council of Carpenters Welfare Local 840
International Brotherhood of Teamsters Health & Insurance Fund v.
Philip Morris, et al., Case No. 122258/97, Supreme Court of New York,
New York County (case filed 11/25/97). Health and Welfare Trust Fund
seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
National Asbestos Workers Medical Fund, et al. v. Philip Morris
Incorporated, et al., Case No. 98-1492, USDC, Eastern District of New
York (case filed 3/23/98). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys
expended by fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Puerto Rican ILGWU Health & Welfare Fund v. Philip Morris, et al.,
Case No. 604785-97, Supreme Court of New York, New York County (case
filed 11/25/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
Raymark Industries, Inc. v. Brown & Williamson, et al., Case No.
98-CV-675, USDC, Eastern District of New York (case filed 5/21/98).
Asbestos company seeks reimbursement for damages paid to asbestos
victims for medical and other relief, which damages allegedly are
attributable to the tobacco companies.
United Federation of Teachers Welfare Fund, et al. v. Philip Morris,
et al., Case No. 97-CIV-4676, USDC, Southern District of New York
(case filed 7/17/97). Health and Welfare Trust Fund seeks injunctive
relief and economic reimbursement to recover moneys expended by Fund
to provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
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UNR Asbestos-Disease Claims Trust v. Brown & Williamson, et al., Case
No. 105152/99, Supreme Court of the State of New York, New York County
(case filed 3/15/99). The Trust brings this action to recover
contribution, indemnity and/or reimbursement from the tobacco
defendants.
Steamfitters Local Union No. 420 Welfare Fund, et al. v. Philip
Morris, Inc, et al., Case No. 97-CV-5344, USDC, Eastern District of
Pennsylvania (case filed 10/7/97). Health and Welfare Trust Fund seeks
injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Rhode Island Laborers' Health & Welfare Fund v. The American Tobacco
Company, et al., Case No. 97-500L, USDC, District of Rhode Island (case
filed 10/24/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
Steamfitters Local Union No. 614 Health and Welfare Fund v. Philip
Morris, et al., Case No. 92260-2, Circuit Court for the 30th Judicial
District at Memphis, State of Tennessee (case filed 1/7/98). Health
and Welfare Trust Fund seeks injunctive relief and economic
reimbursement to recover moneys expended by Fund to provide medical
treatment to its participants and beneficiaries suffering from
smoking-related illnesses.
Texas Carpenters Health Benefit Fund, et al. v. Philip Morris, et al.,
Case No. 1:97C0625, USDC, Eastern District of Texas (case filed
11/7/97). Health and Welfare Trust Fund seeks injunctive relief and
economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and beneficiaries suffering from
smoking-related illnesses.
Utah Laborers' Health and Welfare Trust Fund, et al. v. Philip Morris
Incorporated, et al., Case No. 2:98CV403C, USDC, District of Utah,
Central Division (case filed 6/11/98). Health and Welfare Trust Fund
seeks injunctive relief and economic reimbursement to recover moneys
expended by Fund to provide medical treatment to its participants and
beneficiaries suffering from smoking-related illnesses.
Association of Washington Public Hospital Districts, et al v. Philip
Morris Incorporated, et al, Case No. C98-1675, USDC, Western District
of Washington (case filed 3/17/99). Public Hospital Districts seek
injunctive relief and economic reimbursement to recover moneys
expended in providing medical treatment to its patients suffering from
smoking-related illnesses.
Northwest Laborers-Employers Health & Security Trust Fund, et al. v.
Philip Morris, et al., Case No. C97-849-WD, USDC, Western District of
Washington (case filed 6/26/97). Health and Welfare Trust Fund seeks
economic reimbursement to recover moneys expended by Fund to provide
medical treatment to its participants and beneficiaries suffering from
smoking-related illnesses.
Regence Blueshield, et al. v. Philip Morris Incorporated, et al., Case
No. C98-559R, USDC, Western District of Washington (case filed
4/29/98). Blue Cross/Blue Shield plans seek injunctive relief and
economic reimbursement to recover moneys expended by healthcare plans
to provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
West Virginia Laborers' Pension Trust Fund v. Philip Morris, et al.,
Case No. 397-0708, USDC, Southern District of West Virginia (case
filed 8/27/97). Health and Welfare Trust Fund seeks injunctive relief
and economic reimbursement to recover moneys expended by Fund to
provide medical treatment to its participants and beneficiaries
suffering from smoking-related illnesses.
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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
The Navajo Nation v. Philip Morris, Incorporated, et al., Case No.
WR-CV-449-99, District Court of the Navajo Nation, Judicial District
of Window Rock, Arizona (case filed 8/11/99). The Navajo nation seeks
civil penalties, damages, remediation through tobacco education and
anti-addiction programs, injunctive relief, attorney's fees and cost.
Hansen, et al. v. The American Tobacco Company, et al., Case No.
LR-C-96-881, USDC, Eastern District of Arkansas (case filed 4/4/97).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in Arkansas.
Brown, et al. v. The American Tobacco Company, et al., Case No.
711400, Superior Court of California, County of San Diego (case filed
10/1/97). This personal injury class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in California.
Daniels, et al. v. Philip Morris Companies, Inc., et al., Case No.
719446, Superior Court of California, County of San Diego (case filed
8/13/98). This personal injury class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in California.
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.
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Engle, et al. v. R.J. Reynolds, et al., Case No. 94-08273 CA 20,
Circuit Court, State of Florida, Dade County (case filed 5/5/94). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers resident in Florida. The
case was certified as a class action on October 31, 1994. Trial
commenced in July 1998. See Note 12 - Contingencies, for a more
detailed discussion of this case.
Peterson, et al. v. The American Tobacco Company, et al., Case No.
97-0490-02, First Circuit Court of the First Circuit, State of Hawaii
(case filed 2/6/97). This "addiction-as-injury" putative class action
is brought on behalf of plaintiff and all similarly situated allegedly
addicted smokers resident in Hawaii.
Clay, et al. v. The American Tobacco Company, et al., Case No.
97-4167-JPG, USDC, Southern District of Illinois (case filed 5/22/97).
This "addiction-as-injury" putative class action is brought on behalf
of plaintiff and all similarly situated allegedly addicted smokers
resident in 34 states.
Cleary, et al. v. Philip Morris, Inc., et al., Case No. 98 L06427,
Circuit Court of the State of Illinois, Cook County (case filed
6/11/98). This personal injury class action is brought on behalf of
plaintiff and all similarly situated smokers resident in Illinois.
Norton, et al. v. R.J. Reynolds, et al., Case No. 48-D01-9605-CP-0271,
Superior Court of Indiana, Madison County (case filed 5/3/96). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated injured smokers resident in Indiana.
Brammer, et al. v. R.J. Reynolds, et al., Case No. 4-97-CV-10461,
USDC, Southern District of Iowa (case filed 6/30/97). This
"addiction-as-injury" putative class action is brought on behalf of
plaintiffs and all similarly situated allegedly addicted smokers
resident in Iowa.
Castano, et al. v. The American Tobacco Company, et al., Case No.
95-30725, USDC, Eastern District of Louisiana (case filed 3/29/94).
This case was settled by Liggett and Brooke on March 12, 1996.
Nationwide "addiction-as-injury" class action was decertified by the
Fifth Circuit in May 1996.
Granier, et al. v. The American Tobacco Company, et al., USDC, Eastern
District of Louisiana (case filed 9/29/94). This case currently is
stayed pursuant to a decision in Castano.
Young, et al. v. The American Tobacco Company, et al., Case No.
2:97-CV-03851, Civil District Court, State of Louisiana, Orleans
Parish (case filed 11/12/97). This personal injury class action is
brought on behalf of plaintiff and all similarly situated allegedly
injured smokers resident in Louisiana.
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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.
National Tobacco Consumers' Group Number 1 v. Philip Morris
Incorporated, et al., Demand letter and draft complaint, Superior
Court, Massachusetts, Middlesex County.
National Tobacco Consumers' Group Number 3 v. Philip Morris
Incorporated, et al., Demand letter and draft complaint, Superior
Court, Massachusetts, Middlesex County.
Poirier, et al. v. R. J. Reynolds Tobacco Company, et al., Demand
letter and draft complain, Superior Court, Massachusetts, Middlesex
County.
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.
Jackson, et al. v. R. J. Reynolds, et al., Case No., Circuit Court,
State of Mississippi, Jefferson County. This action seeks judgement
from both the Tobacco Defendants and the Asbestos Defendants for joint
and several liability.
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.
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Cosentino, et al. v. Philip Morris, et al., Case No. L-5135-97,
Superior Court of New Jersey, Law Division, Middlesex County (case
filed 5/21/97). This "addiction-as-injury" putative class action is
brought on behalf of plaintiff and all similarly situated allegedly
addicted smokers resident in New Jersey.
Piscitello, et al. v. Philip Morris Inc., et al., Case No.
98-CIV-4613, Superior Court of New Jersey, Middlesex County (case
filed 3/6/98). This "addiction-as-injury" class action is brought on
behalf of plaintiff and all similarly situated allegedly addicted
smokers resident in New Jersey.
Tepper and Watkins, et al. v. Philip Morris Inc., et al., Case No.
BER-L-4983-97-E, Superior Court of New Jersey, Middlesex County (case
filed 5/28/97). This personal injury putative class action is brought
on behalf of plaintiff and all similarly situated allegedly injured
smokers resident in New Jersey.
Bergeron, et al. v. Philip Morris Inc., et al., Case No. CV 99 6142,
USDC, State of New York, Eastern District (case filed 10/8/99). This
action seeks is brought on behalf of the trustees and fiduciaries of
the Massachusetts State Carpenters Health and Benefits Funds on behalf
of themselves and other similarly situated trustees of Taft_hartley
Health & Welfare funds.
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.
Simon, et al. v. Philip Morris Inc, et al., Case No CV 99 1998,
USDC, Eastern District of New York (case filed 4/9/99), This personal
injury action is brought on behalf of plaintiffs seeking certification
of a nation wide class under the applicable provisions of Rule 23 of
the Federal Rules of Civil Procedure, on behalf of persons who have
smoked defendant's cigarettes and who presently have a claim for
personal injuries or damages, or wrongful death, arising from the
smoking of defendants' cigarettes.
Creekmore, Estate of, et al. v. Brown & Williamson Tobacco
Corporation, et al., Case No. 98 CV 03403, Superior Court of North
Carolina, Buncombe County (case filed 11/19/98). This personal injury
class action is brought on behalf of plaintiffs and all similarly
situated allegedly injured smokers resident in North Carolina.
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Brown, Rev. Jesse, et al. v. Philip Morris, Inc., et al., Case No.
98-CV-5518, USDC, Eastern District of Pennsylvania (case filed
10/22/98). This civil rights putative class action is brought by
several national African-American organizations, on behalf of all
African-Americans resident in the United States who have smoked
menthol cigarettes.
Sweeney, et al. v. American Tobacco Company, et al., Case No.
GD98-16226, Court of Common Pleas, State of Pennsylvania, Allegheny
County (case filed 10/15/98). This putative class action is brought on
behalf of all current smokers who began smoking prior to the age of
eighteen resident in the State of Pennsylvania.
Aksamit, et al. v. Brown & Williamson, et al., Case No. 6:97-3636-21,
USDC, District of South Carolina, Greenville Division (case filed
11/24/97). This personal injury putative class action is brought on
behalf of plaintiff and all similarly situated allegedly injured
smokers resident in South Carolina.
Newborn, et al. v. Brown & Williamson, et al., Case No. 97-2938 GV,
USDC, Western District of Tennessee (case filed 10/1/97). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers resident in Tennessee.
Mason, et al. v. The American Tobacco Company, et al., Case No.
7-97CV-293-X, USDC, Northern District of Texas (case filed 12/23/97).
This nationwide taxpayer putative class action seeks reimbursement of
Medicare expenses made by the United States government.
Herrera, et al. v. The American Tobacco Company, et al., Case No.
2:98-CV-00126, USDC, District of Utah (case filed 1/28/98). This
personal injury class action is brought on behalf of plaintiff and all
similarly situated allegedly injured smokers under the age of nineteen
[at time of original filing] resident in Utah.
Jackson, et al. v. Philip Morris, Inc., et al., Case No. 980901634PI,
3rd Judicial Court of Utah, Salt Lake County (case filed 3/10/98).
This "addiction-as-injury" class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in Utah.
Ingle, et al. v. Philip Morris, et al., Case No. 97-C-21-S, Circuit
Court, State of West Virginia, McDowell County (case filed 2/4/97).
This personal injury putative class action is brought on behalf of
plaintiff and all similarly situated allegedly injured smokers
resident in West Virginia.
McCune v. The American Tobacco Company, et al., Case No. 97-C-204,
Circuit Court, State of West Virginia, Kanawha County (case filed
1/31/97). This "addiction-as-injury" putative class action is brought
on behalf of plaintiff and all similarly situated allegedly addicted
smokers resident in West Virginia.
Parsons, et al. v. Liggett Group Inc., et al., Case No. 98-C-388,
Circuit Court, State of West Virginia, Kanawha County (case filed
4/9/98). This personal injury class action is brought on behalf of
plaintiff's decedent and all West Virginia residents having claims for
personal injury arising from exposure to both cigarette smoke and
asbestos fibers.
Walker, et al. v. Liggett Group Inc., et al., Case No. 2:97-0102,
USDC, Southern District of West Virginia (case filed 2/12/97).
Nationwide class certified and limited fund class action settlement
preliminarily
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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.
Bowden, et al. v. R.J. Reynolds Tobacco Company, et al., Case No.
98-0068-L, USDC, Western District of Virginia (case filed 1/6/99).
This personal injury class action is brought on behalf of plaintiff
and all similarly situated injured smokers resident in Virginia.
Fletcher, et al. v. Brooke Group Ltd., Civil Action No. 97-913,
Circuit Court of Mobile County, Alabama (Case filed 3/19/97).
Nationwide class of individuals alleging smoking-related claims. The
limited fund settlement was preliminarily approved by the court in
December 1998. Final approval of the limited fund settlement was
denied on July 22, 1999. A motion for reconsideration of that order
presently is pending.
IV. INDIVIDUAL SMOKER CASES
Springer v. Liggett Group Inc. and Liggett & Myers, Inc., Case No.
LR-C-98-428, USDC, Eastern District of Arkansas (case filed 7/19/98).
Two individuals suing. Liggett only defendant.
Baker, et al v. Safeway, Inc., et al., Case No. 304532, Superior Court
of California, County of San Francisco (case filed 6/28/99). Two
individuals suing.
Chandler v. Philip Morris Incorporated, et al., Case No. BC226097,
Superior Court of California, Los Angeles County (case filed 3/7/00).
One individual suing.
Colfield, et al. v. The American Tobacco Company, et al., Case No. CIV
S-98-1695, USDC, Eastern District of California (case filed 9/3/98).
Eleven individuals suing.
Coner v. Philip Morris Incorporated, et al., Case No. BC227929,
Superior Court, California, Los Angeles (case filed 3/7/00). One
individual 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.
Cooper v. Philip Morris Incorporated, et al., Case No. BC227929,
Superior Court, California, Los Angeles County (case filed 4/7/00).
One individual suing.
Crayton v. Safeway, Inc., et al., Case No. RDC 820871-0, Superior
Court, Alameda County, California (case filed 1/18/00). One individual
suing.
Donaldson, et al. v. Raybestos Manhattan, Inc., et al., Case
No. 998147, Superior Court of California, County of San Francisco (case
filed 9/25/98). Two individuals suing.
Ellis v. The American Tobacco Co., et al., Case No. 804002, Superior
Court of California, County of Orange (case filed 1/13/99). One
individual suing.
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Guzman, et al. v. Philip Morris Tobacco Company, et al., Case No.
300200, Superior Court of California, County of San Francisco (case
filed 12/29/98). Four individuals suing.
Helt, et al. v. The American Tobacco Company, et al., Case No. CIV
S-98-1697, USDC, Eastern District of California (case filed 9/3/98).
Eight individuals suing.
Jones v. Philip Morris Incorporated, et al., Case No. 812307, Superior
Court, State of California, County of Orange (case filed 7/26/99). One
individual suing.
Maggard, et al. v. Philip Morris, Inc., et al., Case No. CV779940,
Superior Court, State of California, Santa Clara County (case filed
2/16/99). Two individuals suing.
Rein v. Philip Morris Incorporated, et al., Case No. 807453-1,
Superior Court of California, County of Alameda (case filed 5/5/99).
One individual suing.
Reynolds, et al. v. Philip Morris Incorporated, et al., Case No.
SC024107, Superior Court of California, County of Ventura (case filed
10/04/99). Two 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.
Shaffer v. The American Tobacco Company, Inc., et al., Case No.
99AD06057, Superior Court, Sacramento County, California (case filed
10/29/99). One individual 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.
Williams v. Philip Morris Incorporated, et al., Case No. BC227930,
Superior Court, California, Los Angeles County (case filed 4/7/00).
One individual 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.
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Atkins v. R. J. Reynolds, et al., Case No. CI97-6597, Circuit Court of
the 9th Judicial Circuit, State of Florida, Orange County (case filed
9/16/97). One individual suing.
Bailey, et al. v. Liggett Group Inc., et al., Case No. 97-18056 CA15,
Circuit Court of the 11th Judicial Circuit, State of Florida, Duval
County (case filed 8/18/97). Two individuals suing.
Bartley, et al. v. Brown & Williamson, et al., Case No. 97-11153,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/21/97). Two individuals suing.
Blair v. R. J. Reynolds, et al., Case No. 97-31177, Circuit Court of
the 7th Judicial Circuit, State of Florida, Volusia County (case filed
7/29/97). One individual suing.
Blank v. Philip Morris, et al., Case No. 97-05443, Circuit Court of
the 17th Judicial Circuit, State of Florida, Broward County (case
filed 4/10/97). Two individuals suing.
Bouchard v. Philip Morris, et al., Case No. 97-31347, Circuit Court of
the 7th Judicial Circuit, State of Florida, Volusia County (case filed
6/2/97). Two individuals suing.
Bronstein, et al. v. Brown & Williamson, et al., Case No. 97-008769,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
Brown v. Brown & Williamson, et al., Case No. CI-97-5050, Circuit
Court of the 9th Judicial Circuit, State of Florida, Orange County
(case filed 9/16/97). Two individuals suing.
Burns, et al. v. Liggett Group Inc., et al., Case No. 97-11175-27,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 4/3/98). One individual suing.
Clark v. Liggett Group Inc., Case No. 95-3333-CA, Circuit Court of the
4th Judicial Circuit, State of Florida, Dade County (case filed
8/18/95). One individual suing. Liggett only defendant.
Cowart v. Liggett Group Inc, et al., Case No.98-01483CA, Circuit Court
of the 11th Judicial Circuit, State of Florida, Duval County (case
filed 3/16/98). One individual suing.
Davis, et al. v. Liggett Group Inc., et al., Case No. 97-11145,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). One individual suing.
Davison, et al. v. Brown & Williamson, et al., Case No. 97008776,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97). Two individuals suing.
De La Torre, et al. v. Brown & Williamson, et al., Case No. 97-11161,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). One individual suing.
Dell v. Philip Morris, et al., Case No.97 1023-CA-10-A, Circuit Court
of the 18th Judicial Circuit, State of Florida, Seminole County (case
filed 7/29/97). One individual suing.
Dick v. Liggett Group Inc., et al., Case No. CI 97-4544, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 8/21/97). Two individuals suing.
Dill v. Philip Morris, et al., Case No. 97-05446, Circuit Court of the
17th Judicial Circuit, State of Florida, Broward County (case filed
4/10/97). One individual suing.
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Dougherty v. Philip Morris Inc., et al., Case No. 1999 32074 CICI,
Circuit Court, State of Florida, Volusia County (case filed 11/17/99).
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 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.
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Hitchens, et al. v. Brown & Williamson, et al., Case No.97008783,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/10/97).
Humpal, et al. v. R.J. Reynolds, et al., Case No. 97-10456 CIDL,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 6/30/97). Two individuals suing.
Katz v. Brown & Williamson, et al., Case No. 95-15307-CA-01, USDC,
Southern District of Florida (case filed 8/3/95). One individual
suing. Plaintiff has dismissed all defendants except Liggett Group
Inc.
Kaloustian v. Liggett Group Inc., et al., Case No. 95-5498, Circuit
Court for the 13th Judicial Circuit, State of Florida, Hillsborough
County (case filed 8/28/95). Two individuals suing.
Krueger, et al. v. Brown & Williamson, et al., Case No.
96-1692-CIV-T-24A, USDC, Middle District of Florida (case filed
8/30/96). Two individuals suing.
Lappin v. R.J. Reynolds, et al., Case No. 97-31371 CICI, Circuit Court
of the 7th Judicial Circuit, State of Florida, Volusia County (case
filed 6/2/97). One individual suing.
Laschke, et al. v. R.J. Reynolds, et al., Case No. 96-8131-CI-008,
Circuit Court of the 6th Judicial Circuit, State of Florida, Pinellas
County (case filed 12/20/96). Two individuals suing.
Lass v. R.J. Reynolds, et al., Case No. 96-04469, Circuit Court of the
4th Judicial Circuit, State of Florida, Duval County (case filed
12/23/96). Two individuals suing.
Leombruno, et al. v. Philip Morris, et al., Case No. CI 97-4540,
Circuit Court of the 9th Judicial Circuit, State of Florida, Orange
County (case filed 9/16/97). Two individuals suing.
Levine v. R.J. Reynolds, et al., Case No. CL 95-98769 (AH), Circuit
Court of the 15th Judicial Circuit, State of Florida, Palm Beach
County (case filed 7/24/96). One individual suing.
Lobley v. Philip Morris, et al., Case No. 97-1033-CA-10-L, Circuit
Court of the 18th Judicial Circuit, State of Florida, Seminole County
(case filed 7/29/97). Two individuals suing.
Lustig, et al. v. Brown & Williamson Tobacco Co., et al., Case No. 97
11168, Circuit Court of the 17th Judicial Circuit, State of Florida,
Broward County (case filed 7/21/97). One individual suing.
Magliarisi, et al. v. Brown & Williamson, et al., Case No. 97008895,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 6/11/97). One individual suing.
Manley, et al. v. Liggett Group Inc., et al., Case No. 97-11173-27,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 4/3/98). Two individuals suing.
McMahon v. R.J. Reynolds, et al., Case No. G-97-1391, Circuit Court of
the 10th Judicial Circuit, State of Florida, Polk County (case filed
4/29/97). Two individuals suing.
Meagher v. Philip Morris, et al., Case No. CI 97-4543, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 5/22/97). Two individuals suing.
Meckler, et al. v. Brown & Williamson, et al., Case No. 97-03949-CA,
Circuit Court of the 4th Judicial Circuit, State of Florida, Duval
County (case filed 7/10/97). One individual suing.
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Mullin v. Philip Morris, et al., Case No. 95-15287 CA 15, Circuit
Court of the 11th Judicial Circuit, State of Florida, Dade County
(case filed 11/7/95). One individual suing.
Mullins v. Philip Morris, et al., Case No. 97-4749-37, Circuit Court
of the 9th Judicial Circuit, State of Florida, Orange County (case
filed 9/16/97). Two individuals suing.
O'Rourke v. Liggett Group Inc., et al., Case No. 97-31345-CICI,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 6/2/97). One individual suing.
Perez, et al. v. Brown & Williamson, et al., Case No.
96-1721-CIV-T-24B, USDC, Middle District of Florida (case filed
8/20/96). One individual suing.
Phillips v. R.J. Reynolds, et al., Case No. 97-31278, Circuit Court of
the 7th Judicial Circuit, State of Florida, Volusia County (case filed
5/27/97). One individual suing.
Pipolo v. Philip Morris, et al., Case No. 97-05448, Circuit Court of
the 17th Judicial Circuit, State of Florida, Broward County (case
filed 4/10/97). Two individuals suing.
Poythress v. R.J. Reynolds, et al., Case No. 97-30844, Circuit Court
of the 7th Judicial Circuit, State of Florida, Volusia County (case
filed 5/5/97). One individual suing.
Rauch, et al. v. Brown & Williamson, et al., Case No. 97-11144,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 7/21/97). Two individuals suing.
Rawls, et al. v. Liggett Group Inc., et al., Case No. 97-01354 CA,
Circuit Court of the 4th Judicial Circuit, State of Florida, Duval
County (case filed 3/6/97). One individual suing.
Rebane, et al. v, Brown & Williamson, et al., Case No. CIO-00-0000750,
Circuit Court, Orange County, Florida (case filed 2/1/00). Two
individuals 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.
Schultz v. Philip Morris Incorporated, et al., Case No. 99019898,
Circuit Court of the 17th Judicial Circuit, State of Florida, Broward
County (case filed 11/24/99). 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.
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Stewart v. R.J. Reynolds, et al., Case No. 97 2025 CA, Circuit Court
of the 5th Judicial Circuit, State of Florida, Lake County (case filed
9/16/97). Two individuals suing.
Strickland, et al. v. The American Tobacco Company, et al., Case No.
98-00764, Circuit Court of the 11th Judicial Circuit, State of
Florida, Dade County (case filed 1/8/98). Two individuals suing.
Strohmetz v. Philip Morris, et al., Case No. 98-03787 CA, Circuit
Court of the 4th Judicial Circuit, State of Florida, Duval County
(case filed 7/16/98). One individual suing.
Swank-Reich v. Brown & Williamson, et al., Case No. 97008782, Circuit
Court of the 17th Judicial Circuit, State of Florida, Broward County
(case filed 6/10/97). One individual suing.
Thomson, Barry, v. R.J. Reynolds, et al., Case No. 97-400-CA, Circuit
Court of the 7th Judicial Circuit, State of Florida, Flagler County
(case filed 9/2/97). One individual suing.
Thomson, Eileen, et al. v. Brown & Williamson, et al., Case No.
97-11170, Circuit Court of the 17th Judicial Circuit, State of
Florida, Broward County (case filed 7/21/97). One individual suing.
Uffner v. Philip Morris, et al., Case No. 18142, Circuit Court of the
17th Judicial Circuit, State of Florida, Broward County (case filed
12/31/96). Two individuals suing.
Ventura v. R.J. Reynolds Tobacco Co., et al., Case No. 97-27024 CA
(09), Circuit Court of the 11th Judicial Circuit, State of Florida,
Dade County (case filed 11/26/97). One individual suing.
Washington, et al. v. Philip Morris, et al., Case No. 97-10575 CIDL,
Circuit Court of the 7th Judicial Circuit, State of Florida, Volusia
County (case filed 9/16/97). Two individuals suing.
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.
Polston, et al. v. Philip Morris, Inc., et al., Case No. 1:99-CV-2958,
USDC, Northern District, State of Georgia (case filed 11/15/99). Two
individuals suing.
Denberg, et al. v. American Brands, Inc., et al., Case No.97L07963,
USDC, Northern District of Illinois (case filed 8/13/97). Four
individuals suing. (Formerly Daley).
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.
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Gronberg, et al. v. Liggett & Myers, et al., Case No. LA-CV-080487,
District Court, State of Iowa, Black Hawk County (case filed 3/30/98).
Two individuals suing.
Kobold, et al. v. BAT Industries, et al., Case No. CL-77551, District
Court, State of Iowa, Polk County (case filed 9/15/98). Two
individuals suing.
Mason v. American Brands, Inc., et al., Case No. CL7922, District
Court, State of Iowa, Polk County (case filed 4/13/99). One individual
suing.
Estate of Loren H. Mitchell, et al. v. Liggett & Myers, et al., Case
No. C00-3026, USDC, State of Iowa, Northern District (case filed
4/19/00). Two individuals suing.
Wright, et al. v. Brooke Group Limited, et al., Case No. LA CV 05867,
District Court, State of Iowa, Cerro Gordo County (case filed
11/10/99). Two individuals suing.
Alexander, et ux v. Philip Morris Companies, Inc., et al., Case No.
99-C-3975-A, 27th Judicial District Court, St. Landry Parish (case
filed 9/27/99). 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.
Potts , et al. v. R. J. Reynolds Tobacco Company, et al., Case No.
41844, 40th Judicial District, State of Louisiana, St. John the
Baptist Parish (case filed 4/6/00). Seven individuals suing.
Racca, et al. v. R. J. Reynolds, et al., Case No. 10-14999, 38th
Judicial District Court, State of Louisiana, Cameron Parish (case
filed 7/16/98). Eleven individuals suing.
Adams v. The Tobacco Institute, Inc., et al., Massachusetts, Demand
Letter. One individual suing.
22
<PAGE> 23
Anderson v. R. J. Reynolds Tobacco Company, Case No. 99-2915, Superior
Court of Massachusetts, Middlesex County (case filed 6/8/99). One
individual suing.
Estate of Fred G. Arnold v. R. J. Reynolds Tobacco Company, Demand
Letter. Two 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.
Bistany v. Michael T. Shannon, D.M.D., et al., Case No. 00-1557,
Superior Court of Massachusetts, Middlesex County. One individual
suing.
Bohl v. R. J. Reynolds Tobacco Co., et al., Case No. 98-6195, Superior
Court of Massachusetts, Middlesex County (case filed 12/18/98). One
individual suing.
Brandano v. The Tobacco Institute, Inc., et al., Superior Court of
Massachusetts, Middlesex County (case filed 8/25/98). One individual
suing.
Cameron v. The Tobacco Institute, Inc., et al., Case No. 98-4960,
Superior Court of Massachusetts, Middlesex County (case filed 8/3/98).
One individual suing.
Carmichael-Foley v. Lowney, et al., Case No. 98-3694, Superior Court
of Massachusetts, Middlesex County (case filed 7/17/98). One
individual suing.
Curtis v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4488,
Superior Court of Massachusetts, Middlesex County (case filed
8/27/98). One individual suing.
Feeney v. R.J. Reynolds Tobacco Co., et al., Case No. 98-4241,
Superior Court of Massachusetts, Middlesex County (case filed
7/15/98). One individual suing.
Francis, Estate of Ralph v. The Tobacco Institute, Inc., et al., Case
No. 98-4963, Superior Court of Massachusetts, Middlesex County (case
filed 8/25/98). One individual suing.
Gordon v. R. J. Reynolds Tobacco Co., et al., Case No. 98-5417,
Superior Court of Massachusetts, Middlesex County (case filed
8/10/98). One individual suing.
Grebauski v. R. J. Reynolds Tobacco Company, et al., Case No.
99-1063B, Superior Court of Massachusetts, Middlesex County (case
filed 1/25/99). One individual suing.
Harb v. The Tobacco Institute, Inc., et al., Case No. 98-597, Superior
Court of Massachusetts, Middlesex County (case filed 9/10/98). One
individual suing.
Hiscock v. R. J. Reynolds Tobacco Co., et al., Case No.98-446,
Superior Court of Massachusetts, Middlesex County (case filed
7/15/98). One individual suing.
Estate of John C. Johnson, et al v. R. J. Reynolds Tobacco Company, et
al., Demand Letter, Superior Court of Massachusetts, Middlesex,
County. Four individuals 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.
23
<PAGE> 24
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.
Monty v. Harvard Pilgrim Health Care, et al., Demand Letter. Superior
Court, Massachusetts.
Mulcahy v. The Tobacco Institute, Inc., et al., Case No. 98-5208,
Superior Court of Massachusetts, Middlesex County (case filed 9/5/98).
One individual suing.
Estate of Etta Nysko, et al. v. R. J. Reynolds Tobacco Company, et
al., Demand letter and draft complaint, Superior Court of
Massachusetts, Middlesex County. Three individuals suing.
Paige v. Marilyn Kovant, M.D., et al., Demand letter and draft
complaint, Superior Court of Massachusetts, Middlesex County. One
individual suing.
Piscione V. R. J. Reynolds Tobacco Company, et al., Demand letter and
draft complaint, Superior Court of Massachusetts, Middlesex County.
One individual suing.
Reedy, Estate of Marie, et al. v. R. J. Reynolds Tobacco Co., et al.,
Case No. 98-5056, Superior Court of Massachusetts, Middlesex County
(case filed 8/13/98). One individual suing.
Satchell v. The Tobacco Institute, Inc., et al., Demand Letter.
Superior Court, Massachusetts.
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.
West v. The Tobacco Institute, Inc., et al., Massachusetts. Demand
letter. One individual suing.
Wolf v. Philip Morris Incorporated, et al., Case No. 99-01260,
Superior Court of Massachusetts, Norfolk County (case filed 9/1/99).
One individual suing.
Varghesse v. R. J. Reynolds Tobacco Co., et al., Case No. 98-6124,
Superior Court of Massachusetts, Middlesex County (case filed
12/17/98). One individual suing.
Varney v. R. J. Reynolds Tobacco Co., et al., Case No. 98-5835,
Superior Court of Massachusetts, Middlesex County (case filed
10/27/98). One individual suing.
Wajda v. R. J. Reynolds Tobacco Co., et al., Case No. 98-4959,
Superior Court of Massachusetts, Middlesex County (case filed
7/17/98). One individual suing.
Walecki v. R. J. Reynolds, et al., Case No. 00-081, Superior Court of
Massachusetts, Middlesex County. 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.
24
<PAGE> 25
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.
Estate of Ed Doss, et al. v. R. J. Reynolds, et al., Case No. 99-0108,
Circuit Court, State of Mississippi, Jefferson County (case filed
8/17/99). Nine individuals suing. Liggett has not been served.
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.
Mumin v, Philip Morris, et al., Case No. 4:99CV-03005, USDC, District
Court of Nebraska (case filed 7/5/99). Eleven individuals suing.
Murphy v. The American Tobacco Co., et al., Case No. CV-S-98-00021-HDM
(RJJ), USDC, Southern District of Nevada (case filed 1/6/98). Liggett
has not yet been served. One individual suing.
Joan Howard, et al. v. Philip Morris, Inc., et al., Superior Court,
New Hampshire, Merrimack County. Two individuals 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.
25
<PAGE> 26
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.
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.
26
<PAGE> 27
Golden, et al. v. The American Tobacco Co., et al., Case No.
112445/97, Supreme Court of New York, New York County (case filed
8/11/97). Six individuals suing.
Greco, et al. v. The American Tobacco Co., et al., Case No. 15514-97,
Supreme Court of New York, Queens County (case filed 7/18/97). Three
individuals suing.
Gruder , et al. v. Fortune Brands, Inc., et al., Case No.48487/97,
Supreme Court of New York, New York County (case filed 12/8/97). Four
individuals.
Guilloteau, et al. v. The American Tobacco Co., et al., Case No.
46398/97, Supreme Court of New York, Kings County (case filed
11/26/97). Four individuals suing.
Hansen, et al. v. the American Tobacco Co., et al., Case No.97-26291,
Supreme Court of New York, Suffolk County (case filed 4/12/97). Six
individuals suing.
Hellen, et al. v. The American Tobacco Co., et al., Case No. 28927/96,
Supreme Court of New York, Kings County (case filed 8/23/96). Two
individuals suing.
Inzerilla, et al. v. The American Tobacco Co., et al., Case No.
11754/96, Supreme Court of New York, Queens County (case filed
7/16/96). Two individuals suing.
Jaust, et al. v. The American Tobacco Co., et al., Case No. 116249/97,
Supreme Court of New York, New York County (case filed 10/14/97). Ten
individuals suing.
Juliano, et al. v. The American Tobacco Co., et al., Case No.
12470/97, Supreme Court of New York, Richmond County (case filed
8/12/96). Four individuals suing.
Keenan, et al. v. The American Tobacco Co., et al., Case No.
116545-97, Supreme Court of New York, New York County (case filed
10/6/97). Eight individuals suing.
Kestenbaum, et al. v. The American Tobacco Co., et al., Case No.
109350/97, Supreme Court of New York, New York County (case filed
6/4/97). Eight individuals suing.
Knutsen, et al. v. The American Tobacco Co., et al., Case No.
36860/96, Supreme Court of New York, Kings County (case filed
4/25/97). Two individuals suing.
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.
27
<PAGE> 28
Leibstein, et al. v. The American Tobacco Co., et al., Case No.
97-019145, Supreme Court of New York, Nassau County (case filed
7/25/97). Six individuals suing.
Leiderman, et al. v. The American Tobacco Co., et al., Case No.
22691/97, Supreme Court of New York, Kings County (case filed
7/23/97). Three individuals suing.
Lennon, et al. v. The American Tobacco Co., et al., Case No.
120503/97, Supreme Court of New York, New York County (case filed
11/19/97). Seven individuals suing.
Le Paw v. B.A.T. Industries, et al., Case No. 17695-96, USDC, Southern
District of New York (case filed 8/14/96). Four individuals suing.
Levinson, et al. v. The American Tobacco Co., et al., Case No.
13162/97, Supreme Court of New York, Kings County (case filed
4/17/97). Seven individuals suing.
Lien, et al. v. The American Tobacco Co., et al., Case No. 97-9309,
Supreme Court of New York, Suffolk County (case filed 4/28/97). Two
individuals suing.
Litke, et al. v. The American Tobacco Co., et al., Case No. 15739/97,
Supreme Court of New York, Kings County (case filed 5/1/97). Five
individuals suing.
Lohn v. Liggett Group Inc., et al., Case No. 105249/98, Supreme Court
of New York, New York County (case filed 3/26/98). One individual
suing.
Lombardo, et al. v. The American Tobacco Co., et al., Case No.
16765/97, Supreme Court of New York, Nassau County (case filed
6/6/97). Five individuals suing.
Long, et al. v. The American Tobacco Co., et al., Case No. 22574-97,
Supreme Court of New York, Bronx County (case filed 10/22/97). Four
individuals suing.
Lopardo, et al. v. The American Tobacco Co., et al., Case No.
027182/97, Supreme Court of New York, Nassau County (case filed
10/27/97). Six individuals suing.
Lucca, et al. v. The American Tobacco Co., et al., Case No. 3583/97,
Supreme Court of New York, Kings County (case filed 1/27/97). Two
individuals suing.
Lynch, et al. V. The American Tobacco Co., et al., Case No. 117244/97,
Supreme Court of New York, New York County (case filed 10/22/97). Five
individuals suing.
Magnus v. Fortune Brands, Inc., et al., Case No. CV-98-3441, USDC,
Eastern District of New York (case filed 5/6/98). Three individuals
suing.
Maisonet, et al. v. The American Tobacco Co., et al., Case No.
17289/97, Supreme Court of New York, Kings County (case filed
5/20/97). Three individuals suing.
Margolin, et al. v. The American Tobacco Co., et al., Case No.
120762/96, Supreme Court of New York, New York County (case filed
11/22/96). One individual suing.
Martin, et al. v. The American Tobacco Co., et al., Case No. 15982-97,
Supreme Court of New York, Queens County (case filed 7/18/97). Three
individuals suing.
28
<PAGE> 29
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.
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.
29
<PAGE> 30
Roseff v. The American Tobacco Co., et al., Case No. 123143/97,
Supreme Court of New York, New York County (case filed 12/10/97). One
individual suing.
Rubinobitz, et al. v. The American Tobacco Co., et al., Case No.
15717/97, Supreme Court of New York, Nassau County (case filed
5/28/97). Five individuals suing.
Schulhoff, et al. v. The American Tobacco Co., et al., Case No.
23737-97, Supreme Court of New York, Queens County (case filed
11/21/97). Six individuals suing.
Schwartz, Irwin v. The American Tobacco Co., et al., Case No.14841/97,
Supreme Court of New York, Nassau County (case filed 5/19/97). One
individual suing.
Schwartz, Pearl v. The American Tobacco Co., et al., Case No.47239/96,
Supreme Court of New York, Kings County (case filed 12/2/96). One
individual suing.
Senzer, et al. v. The American Tobacco Co., et al., Case No. 11609/97,
Supreme Court of New York, Queens County (case filed 5/13/97). Eight
individuals suing.
Shapiro, et al. v. The American Tobacco Co., et al., Case No.
111179/97, Supreme Court of New York, New York County (case filed
7/21/96). Four individuals suing.
Siegel, et al. v. The American Tobacco Co., et al., Case No.36857/96,
Supreme Court of New York, Kings County (case filed 10/8/96). Two
individuals suing.
Silverman, et al. v. Lorillard Tobacco Company., et al., Case No.
11328/99, Supreme Court of New York, Kings County (case filed 7/9/99)
Five individuals suing.
Smith, et al. v. The American Tobacco Co., et al., Case No. 020525/97,
Supreme Court of New York, Queens County (case filed 9/19/97). Eight
individuals suing.
Sola, et al. v. The American Tobacco Co., et al., Case No. 18205/96,
Supreme Court of New York, Bronx County (case filed 7/16/96). Two
individuals suing.
Sprung, et al. v. The American Tobacco Co., et al., Case No. 16654/97,
Supreme Court of New York, Kings County (case filed 5/14/97). Ten
individuals suing.
Standish, et al. v. The American Tobacco Co., et al., Case No.
18418-97, Supreme Court of New York, Bronx County (case filed
7/28/97). Five individuals suing.
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.
30
<PAGE> 31
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.
Wilson, et al. v. Liggett & Myers, et al., USDC, Middle District
Court, North Carolina. One individual suing.
Tompkin, et al. v. American Brands, et al., Case No. 5:94 CV 1302,
USDC, Northern District of Ohio (case filed 7/25/94). One individual
suing.
Hise, et al. v. Philip Morris, et al., Case No. 98 CV 947 C (E), USDC,
Northern District of Oklahoma (case filed 12/15/98). Two individuals
suing. Price-fixing action concerning price increases resulting from
the M.S.A.
Buscemi v. Brown & Williamson, et al., Case No. 002007, Court of
Common Pleas, Philadelphia County (case filed 9/21/99). Two
individuals suing.
Campanella, et al. v. Lorillard Tobacco Company, et al., Cane No.
003575, Court of Common Pleas, Philadelphia County, PA (case filed
1/31/00). Two individuals suing.
Hall v. R. J. Reynolds Tobacco Co., et al., Case No. 4:97-CV-01723,
USDC, Middle District of Pennsylvania (case filed 2/18/98). One
individual suing.
Tantum v. American Tobacco Co., et al., Case No. 3762, Court of Common
Pleas, Philadelphia County (case filed 1/26/99). Two individuals
suing.
Taylor v. Brown & Williamson Tobacco Corporation, et al., Case No.
004378, Court of Common Pleas, Philadelphia County (case filed
12/13/99). One individual suing.
Brown v. Brown & Williamson Tobacco Corp., et al., Case No. 98-5447,
Superior Court of Rhode Island (case filed 10/30/98). One individual
suing.
Nicolo v. Philip Morris, et al., Case No. 96-528 B, USDC, District of
Rhode Island (case filed 9/24/96). One individual suing.
Labelle v. Brown & Williamson Tobacco Corp., et al., Case No.
2-98-1879-23, USDC, District of South Carolina (case filed 11/4/98).
One individual suing.
Little v. Brown & Williamson, et al., Case No. 98-CD-10-2156, USDC,
District of South Carolina (case filed 6/26/98). Two individuals
suing.
Perry, et al. v. Brown & Williamson, et al., Case No. 2-473-95,
Circuit Court, State of Tennessee, Knox County (case filed 7/20/95).
One individual suing.
Adams v. Brown & Williamson, et al., Case No. 96-17502, District Court
of the 164th Judicial District, State of Texas, Harris County (case
filed 4/30/96). One individual suing.
Burleson et al. v. Liggett Group, Inc., et al., Case No. 9:99CV233,
USDC, Eastern District (case filed 9/10/99). Two individuals suing.
31
<PAGE> 32
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 Texas (case filed 2/26/97). Five individuals
suing.
Harris, et al. v. Koch Refining Co., et al., Case No. 98-03426-00-0-G,
District Court of Texas, 319th Judicial District (case Filed 6/10/99).
Three individuals suing.
Hodges, et vir v. Liggett Group, Inc., et al., Case No. 8000*JG99,
District Court of Texas, Brazoria County, Texas 239th Judicial
District (case filed 5/5/99). Two individuals suing.
Luna v. American Brands, et al., Case No. 96-5654-H, USDC, Southern
District of Texas (case filed 2/18/97). One individual suing.
McLean, et al. v. Philip Morris, et al., Case No. 2-96-CV-167, USDC,
Eastern District of Texas (case filed 8/30/96). Three individuals
suing.
Mireles v. American Brands, Inc., et al., Case No. 966143A, District
Court of the 28th Judicial District, State of Texas, Nueces County
(case filed 2/14/97). One individual suing.
Misell, et al. v. American Brands, et al., Case No. 96-6287-H,
District Court of the 347th Judicial District, State of Texas, Nueces
County (case filed 1/3/97). Four individuals suing.
Ramirez v. American Brands, Inc., et al., Case No. M-97-050, USDC,
Southern District of Texas (case filed 12/23/96). One individual
suing.
Sanchez v. American Brands, et al., Case No. 97-04-35562, USDC,
Southern District of Texas (case filed 7/22/97). Two individuals
suing.
Thompson, et al. v. Brown & Williamson, et al., Case No. 97-2981-D,
District Court of the 105th Judicial District, State of Texas, Nueces
County (case filed 12/15/97). Two individuals suing.
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.
32
<PAGE> 33
Allen, et al. v. Philip Morris Inc., et al., Case No. 98-C-2337
through 2401, Circuit Court, State of West Virginia, Kanawha County
(case filed 10/1/98). 118 individuals suing.
Anderson, et al. v. Philip Morris, et al., Case No.98-C-1773 through
1799, Circuit Court, State of West Virginia, Kanawha County (case
filed 7/31/98). 50 individuals suing.
Ball v. Liggett & Myers Inc., et al., Case No. 2:97-0867, USDC,
Southern District of West Virginia (case filed 5/1/98). One individual
suing.
Bishop, et al. v. Liggett Group Inc., et al., Case No. 97-C-2696
through 2713, Circuit Court, State of West Virginia, Kanawha County
(case filed 10/28/98). One individual suing.
Hissom, et al. v. the American Tobacco Co., et al., Case No.
97-C-1479, Circuit Court, State of West Virginia, Kanawha County (case
filed 9/13/97). Two individuals suing.
Huffman v. The American Tobacco Co., et al., Case No. 98-C-276,
Circuit Court, State of West Virginia, Kanawha County (case filed
2/13/98). Two individuals suing.
Jividen v. The American Tobacco Co., et al., Case No. 98-C-278,
Circuit Court, State of West Virginia, Mason County (case filed
1/19/99). Two individuals suing.
Newkirk, et al. v. Liggett Group Inc., et al., Case No. 98-C-1699,
Circuit Court, State of West Virginia, Kanawha County (case filed
7/22/98). One individual suing.
Floyd v. State of Wisconsin, et al., Case No. 99 CV 001125, Circuit
Court, State of Wisconsin, Milwaukee County (case filed 2/10/99). One
individual suing.
V. ACTIONS CHALLENGING MSA
PTI, Inc., et al. v. Philip Morris Incorporated, et al., Case No.
99-08235 NM, USDC, Central District of California (case filed
8/13/99). Plaintiffs seek damages, declaratory, equitable, injunctive
relief and to invalidate the Master Settlement Agreement between the
largest manufacturers of cigarettes in the United States and the
Attorneys General of forty-six states and the settlement entered into
by the State of Texas settlement.
Herek, et al. v. State of Wisconsin, et al., Case No. 99CV2644,
Circuit Court, State of Wisconsin, Dane County (case filed 11/5/99).
VI. PRICE FIXING CASES
Gray, et al. v. Philip Morris Companies, Inc., et al., Case No. C2000
0781, Superior Court, Pima County, Arizona (case filed 2/11/00). In
this class action plaintiffs allege that defendants conspired to fix,
raise, stabilize, or maintain prices for cigarettes in the State of
Arizona.
Greer, et al. v. R. J. Reynolds Tobacco Company, et al., Case No.
309826, Superior Court, San Francisco (case filed 3/9/00). In this
class action plaintiffs allege that defendants conspired to fix,
raise, stabilize, or maintain prices for cigarettes in the State of
California.
33
<PAGE> 34
Middlekauff, et al. v. British American Tobacco Industries, et al.,
Case No. 307006, Superior Court of California, San Francisco County
(case filed 10/13/99).In this class action plaintiffs allege that
defendants conspired to fix, raise, stabilize, or maintain prices for
cigarettes in the State of California.
Morse v. R. J. Reynolds Tobacco Company, et al., Case No. 822825-9,
Superior Court of California, Alameda County (case filed 2/14/00). In
this class action plaintiffs allege that defendants conspired to fix,
raise, stabilize, or maintain prices for cigarettes in the State of
California.
Munoz, et al. v. R. J. Reynolds Tobacco Company, et al., Case No.
309834, Superior Court, San Francisco City and County, California
(case filed 2/9/00). In this class action plaintiffs allege that
defendants conspired to fix, raise, stabilize, or maintain prices for
cigarettes in the State of California.
Peirona, et al. v. Philip Morris Companies, Inc., et al., Case No.
310283, Superior Court, San Francisco City and County, California
(case filed 2/28/00). In this class action plaintiffs allege that
defendants conspired to fix, raise, stabilize, or maintain prices for
cigarettes in the State of California.
Teitler v. R. J. Reynolds Tobacco Company, et al., Case No. 823161-9,
Superior Court, County of Alameda, State of California. In this class
action plaintiffs allege that defendants conspired to fix, raise,
stabilize, or maintain prices for cigarettes in the State of
California.
Amsterdam Tobacco Corp., et al. v. Philip Morris Companies, Inc., et
al., Case No.1: 00CV0460, USDC, District of Columbia (case filed
3/6/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the United States and elsewhere in the world.
Barnes, et al. v. Philip Morris Companies, Inc., et al., Case No.
00-0000954, Superior Court, District of Columbia (case filed 2/10/00).
In this class action plaintiffs allege that defendants conspired to
fix, raise, stabilize, or maintain prices for cigarettes in the
District of Columbia.
Buffalo Tobacco Products, Inc., et al. v. Philip Morris Companies,
Inc., et al., Case No. 1:00CV00224, USDC, District of Columbia (case
filed 2/8/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the United States.
Williamson Oil Company, Inc. v. Philip Morris Companies, Inc., et al.,
Case No. 00-CV- 0447, USDC, Georgia, Northern District (case filed
2/18/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the United States.
Smith, et al. v. Philip Morris Companies, Inc., et al., Case No.
00-CV-26, District Court, Kansas, Seward County. In this class action
plaintiffs allege that defendants conspired to fix, raise, stabilize,
or maintain prices for cigarettes in the State of Kansas.
Faherty, et al. v. Philip Morris Companies, Inc., et al., n/k/a
Taylor, et al. v. Philip Morris Companies, Inc., et al. Superior
Court, Maine (case filed 2/16/00). In this class action plaintiffs
allege that defendants conspired to fix, raise, stabilize, or maintain
prices for cigarettes in the State of Maine.
Del Serrone, et al. v. Philip Morris Companies, Inc., Case No.
00-004035 CZ, Circuit Court, Wayne County, Michigan (case filed
2/8/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the State of Michigan.
Ludke, et al. v. Philip Morris Companies, Inc., et al., Case No. MC
00-001954 District Court, Hennepin County, Minnesota (case filed
2/15/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the State of Minnesota.
34
<PAGE> 35
Rowlen, et al. v. Philip Morris Companies, Inc., et al., Case No.
3:00CV119WS, USDC, Southern District, Mississippi. In this class
action plaintiffs allege that defendants conspired to fix, raise,
stabilize, or maintain prices for cigarettes in the State of
Mississippi.
Romero, et al. v. Philip Morris Companies, Inc. et al., Case No. D0117
CV-00000462 District Court, Rio Arriba County, New Mexico (case filed
2/11/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the State of New Mexico.
Lennon, et al. v. Philip Morris Companies, Inc., et al., Index No.
102396, Supreme Court of New York, New York County, New York (case
filed 2/9/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the State of New York.
ROG-GLO, LTD., et al. v. R. J. Reynolds Tobacco Company, et al., Index
No. 00CIV 1255, USDC, Southern District, New York (case filed
2/22/00). In this class action plaintiff alleges that the defendants
conspired to fix, raise, stabilize or maintain prices for cigarettes
in the United States and elsewhere in the world.
Sylvester, et al. v. Philip Morris Companies, Inc., et al., Index No.
00/601008 Supreme Court of New York, New York County, New York (case
filed 2/9/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the State of New York.
Shafer, et al. v. Philip Morris Companies, Inc., et al., Case No.
00-C-1107, District Court, Morton County, North Dakota (case filed
2/16/00). In this class action plaintiffs allege that defendants
conspired to fix, raise, stabilize, or maintain prices for cigarettes
in the State of North Dakota.
I. Goldshlack Company v. Philip Morris Companies, Inc., et al., Case
No. 00-CV-1286, USDC, Eastern District of Pennsylvania. In this class
action plaintiff allege that defendants conspired to fix, raise,
stabilize, or maintain prices for cigarettes in the State of
California.
Brenda Vetter, et al. v. Philip Morris Companies, Inc., et al.,
Circuit Court, Hughes County, South Dakota (case filed 2/16/00). In
this class action plaintiffs allege that defendants conspired to fix,
raise, stabilize, or maintain prices for cigarettes in the State of
South Dakota.
Withers, et al. v. Philip Morris Companies, Inc., et al., Case No. 17,
194-I, Circuit Court, Jefferson County, Tennessee (case filed 2/9/00).
In this class action plaintiffs allege that defendants conspired to
fix, raise, stabilize, or maintain prices for cigarettes in the State
of Tennessee.
Quickle, et, al. v. Philip Morris, et al., Case No. 90-C-28-RI,
Circuit Court, State of West Virginia, Brooke County. In this class
action plaintiffs allege that defendants conspired to fix, raise,
stabilize, or maintain prices for cigarettes in the State of West
Virginia.
Cusatis v, Philip Morris Companies, Inc., et al., Case No. 00CV001359,
Circuit Court, Milwaukee County, Wisconsin (case filed 2/28/00). In
this class action plaintiffs allege that defendants conspired to fix,
raise, stabilize, or maintain prices for cigarettes in the State of
Wisconsin.
35
<PAGE> 1
EXHIBIT 99.2
LIGGETT GROUP INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
<PAGE> 2
LIGGETT GROUP INC.
Index to
Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 .............. 2
Consolidated Statements of Operations for the three months ended March 31, 2000
and 1999 ....................................................................... 4
Consolidated Statement of Stockholder's Equity for the three months
ended March 31, 2000 ........................................................... 5
Consolidated Statements of Cash Flows for the three months ended March 31, 2000
and 1999 ....................................................................... 6
Notes to Consolidated Financial Statements .......................................... 7
</TABLE>
<PAGE> 3
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 906 $ 2,959
Accounts receivable:
Trade, less allowances of $1,100 and $1,002, respectively ..... 8,959 7,228
Other ......................................................... 4,029 1,568
Inventories ....................................................... 37,818 27,119
Other current assets .............................................. 39,905 42,656
-------- --------
Total current assets ..................................... 91,617 81,530
Property, plant and equipment, at cost, less accumulated
depreciation of $34,814 and $33,924, respectively .................. 33,205 29,668
Other assets ........................................................... 1,673 1,702
-------- --------
Total assets ............................................. $126,495 $112,900
======== ========
</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)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current maturities of long-term debt ........................................ $ 1,246 $ 1,074
Accounts payable, principally trade ......................................... 7,150 2,575
Accrued expenses:
Promotional .............................................................. 23,247 22,473
Other taxes, principally excise taxes .................................... 6,168 225
Estimated allowance for sales returns .................................... 4,190 4,190
Settlement accruals ...................................................... 2,042 2,005
Other .................................................................... 15,792 16,675
--------- ---------
Total current liabilities ........................................... 59,835 49,217
Long-term debt, less current maturities .......................................... 31,896 8,198
Non-current employee benefits .................................................... 11,960 11,966
Other long-term liabilities ...................................................... 9,812 9,738
Commitments and contingencies (Note 8)
Stockholder's equity:
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 ................................................... 60,106 60,002
Accumulated deficit ......................................................... (47,114) (26,221)
--------- ---------
Total stockholder's equity .......................................... 12,992 33,781
--------- ---------
Total liabilities and stockholder's equity .......................... $ 126,495 $ 112,900
========= =========
</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)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net sales* ............................................................. $ 106,902 $ 86,047
Cost of sales* .......................................................... 33,643 23,165
--------- ---------
Gross profit .................................................. 73,259 62,882
Selling, general and administrative expenses excluding
non-cash stock-based expense ......................................... 64,133 42,210
Settlement charges ...................................................... 37 115
Non-cash stock-based expense ............................................ 488
--------- ---------
Operating income .............................................. 9,089 20,069
Other income (expense):
Interest expense ................................................... (606) (707)
Other, net ......................................................... (42) (47)
--------- ---------
Income before income taxes .................................... 8,441 19,315
Income tax provision .................................................... 3,334 7,632
--------- ---------
Net income .................................................... $ 5,107 $ 11,683
========= =========
</TABLE>
*Net sales and cost of sales include federal excise taxes of $20,042 and
$12,553, respectively.
The accompanying notes are an integral part
of these financial statements.
4
<PAGE> 6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Common
Stock and Total
Contributed Accumulated Stockholder's
Capital Deficit Equity
----------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1999 ........................... $ 60,002 $(26,221) $ 33,781
Net income .......................................... 5,107 5,107
Amortization of deferred compensation ............... 104 104
Distributions and other payments .................... (26,000) (26,000)
-------- -------- --------
Balance at March 31, 2000 ............................. $ 60,106 $(47,114) $ 12,992
======== ======== ========
</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)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
2000 1999
--------- ---------
<S> <C> <C>
Net cash provided by operating activities .................................... $ 4,590 $ 14,346
--------- ---------
Cash flows from investing activities:
Capital expenditures ..................................................... (4,514) (6,356)
--------- ---------
Net cash used in investing activities ............................ (4,514) (6,356)
--------- ---------
Cash flows from financing activities:
Repayments of notes payable .............................................. (295) (25)
Issuance of equipment loan payable ....................................... 1,000 4,500
Borrowings under revolving credit facility ............................... 103,442 75,574
Repayments under revolving credit facility ............................... (80,276) (71,319)
Distributions and other payments ......................................... (26,000) (16,700)
Decrease in cash overdraft ............................................... (20)
--------- ---------
Net cash used in financing activities ............................ (2,129) (7,990)
--------- ---------
Net increase in cash and cash equivalents .................................... (2,053)
Cash and cash equivalents:
Beginning of period ...................................................... 2,959
--------- ---------
End of period ............................................................ $ 906 $
========= =========
</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)
(Unaudited)
1. THE COMPANY
Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned subsidiary of
Brooke Group Holding Inc. ("Brooke Group Holding"). Brooke Group Holding is a
wholly-owned subsidiary of BGLS Inc. ("BGLS"), all of whose capital stock is
owned by Brooke Group Ltd. ("Brooke"). 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, 1999 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, for the year ended December 31, 1999, as
filed with the Securities and Exchange Commission. The consolidated results of
operations for interim periods should not be regarded as necessarily indicative
of the results that may be expected for the entire year.
All of the Company's common shares (1,000 shares, issued and outstanding for all
periods presented herein) are owned by Brooke Group Holding. Accordingly,
earnings and dividends per share data are not presented in these consolidated
financial statements.
2. ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses. Significant estimates subject to material changes in the near term
include allowance for doubtful accounts, sales returns and allowances, actuarial
assumptions of pension plans and litigation and defense costs. Actual results
could differ from those estimates.
3. PHILIP MORRIS BRAND TRANSACTION
In November 1998, Liggett and Brooke granted Philip Morris Incorporated options
to purchase interests in Trademarks LLC which holds three cigarette brands, L&M,
CHESTERFIELD and LARK, formerly held by Liggett's subsidiary, Eve.
Under the terms of the Philip Morris agreements, Eve contributed the three
brands to Trademarks, a newly-formed limited liability company, in exchange for
100% of two classes of Trademarks' interests, the Class A Voting Interest and
the Class B Redeemable Nonvoting Interest. Philip Morris acquired two options to
purchase the interests from Eve. In December 1998, Philip Morris paid Eve a
total of $150,000 for the options, $5,000 for the option for the Class A
interest and $145,000 for the option for the Class B interest. The Class A
option entitled Philip Morris to purchase the Class A interest for $10,100. On
March 19, 1999, Philip Morris exercised the Class A option, and the closing
occurred on May 24, 1999.
7
<PAGE> 9
The Class B option entitles Philip Morris to purchase the Class B interest for
$139,900. The Class B option will be exercisable during the 90-day period
beginning on December 2, 2008, with Philip Morris being entitled to extend the
90-day period for up to an additional six months under certain circumstances.
The Class B interest will also be redeemable by Trademarks for $139,900 during
the same period the Class B option may be exercised.
On May 24, 1999, Trademarks borrowed $134,900 from a lending institution. The
loan is guaranteed by Eve and collateralized by a pledge by Trademarks of the
three brands and Trademarks' interest in the trademark license agreement
(discussed below) and by a pledge by Eve of its Class B interest. In connection
with the closing of the Class A option, Trademarks distributed the loan proceeds
to Eve as the holder of the Class B interest. The cash exercise price of the
Class B option and Trademarks' redemption price were reduced by the amount
distributed to Eve. Upon Philip Morris' exercise of the Class B option or
Trademarks' exercise of its redemption right, Philip Morris or Trademarks, as
relevant, will be required to obtain Eve's release from its guaranty. The Class
B interest will be entitled to a guaranteed payment of $500 each year with the
Class A interest allocated all remaining income or loss of Trademarks.
Trademarks has granted Philip Morris an exclusive license of the three brands
for an 11-year term expiring May 24, 2010 at an annual royalty based on sales of
cigarettes under the brands, subject to a minimum annual royalty payment equal
to the annual debt service obligation on the loan plus $1,000.
If Philip Morris fails to exercise the Class B option, Eve will have an option
to put its Class B interest to Philip Morris, or Philip Morris' designees, at a
put price that is $5,000 less than the exercise price of the Class B option (and
includes Philip Morris' obtaining Eve's release from its loan guarantee). The
Eve put option is exercisable at any time during the 90-day period beginning
March 2, 2010.
If the Class B option, Trademarks' redemption right and the Eve put option
expire unexercised, the holder of the Class B interest will be entitled to
convert the Class B interest, at its election, into a Class A interest with the
same rights to share in future profits and losses, the same voting power and the
same claim to capital as the entire existing outstanding Class A interest, i.e.,
a 50% interest in Trademarks.
Upon the closing of the exercise of the Class A option and the distribution of
the loan proceeds on May 24, 1999, Philip Morris obtained control of Trademarks
and the Company recognized a gain of $294,078 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.
4. PRO FORMA EFFECTS OF BRAND TRANSACTION
The following table presents unaudited pro forma results of operations as if the
Philip Morris brand transaction had occurred immediately prior to January 1,
1999. These pro forma results are presented for comparative purposes only and do
not purport to be indicative of what would have occurred had these transactions
been consummated as of such date.
For the three months ended
March 31, 1999
--------------------------
Revenues $73,355
=======
Operating income $12,059
=======
Income from continuing operations $11,305
=======
Net income $ 6,833
=======
8
<PAGE> 10
5. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Leaf tobacco ............................................... $ 8,018 $ 6,871
Other raw materials ........................................ 1,857 1,841
Work-in-process ............................................ 2,514 2,583
Finished goods ............................................. 28,186 17,461
Replacement parts and supplies ............................. 2,228 2,179
--------- ---------
Inventories at current cost ................................ 42,803 30,935
LIFO adjustment ............................................ (4,985) (3,816)
--------- ---------
Inventories at LIFO cost ................................... $ 37,818 $ 27,119
========= =========
</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 $2,162 at March
31, 2000.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Land and improvements ...................................... $ 442 $ 415
Buildings .................................................. 5,852 5,852
Construction-in-progress ................................... 14,391 10,342
Machinery and equipment .................................... 47,334 46,983
--------- ---------
Property, plant and equipment .............................. 68,019 63,592
Less accumulated depreciation .............................. (34,814) (33,924)
--------- ---------
Property, plant and equipment, net ......................... $ 33,205 $ 29,668
========= =========
</TABLE>
As of March 31, 2000, the company has capitalized into construction-in-progress
approximately $2,791 of the contracted $4,924 construction costs related to the
new manufacturing facility.
9
<PAGE> 11
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------- ------------
<S> <C> <C>
Borrowings outstanding under revolving credit
facility .............................................. $ 23,166 $ --
Other .................................................... 9,976 9,272
-------- --------
33,142 9,272
Current portion .......................................... (1,246) (1,074)
-------- --------
Amount due after one year ................................ $ 31,896 $ 8,198
======== ========
</TABLE>
REVOLVING CREDIT FACILITY:
Liggett has a $35,000 revolving credit facility under which $23,166 was
outstanding at March 31, 2000. The facility is collateralized by all inventories
and receivables of the Company. Availability under the facility was
approximately $6,974 based upon eligible collateral at March 31, 2000.
Borrowings under the facility bear interest equal to 1.0% above Philadelphia
National Bank's (the indirect parent of Congress Financial Corporation, the lead
lender) prime rate. At March 31, 2000, Liggett's interest rate was 9.75%. The
facility requires Liggett's compliance with certain financial and other
covenants including a restriction on the payment of cash dividends unless
Liggett's borrowing availability under the facility for the 30-day period prior
to the payment of the dividend, and after giving effect to the dividend, is at
least $5,000. In addition, the facility, as amended, imposes requirements with
respect to Liggett's adjusted net worth (not to fall below $8,000 as computed in
accordance with the agreement) and working capital (not to fall below a deficit
of $17,000 as computed in accordance with the agreement). At March 31, 2000,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $17,977 and net working capital was $36,795 as
computed in accordance with the agreement. The facility expires on March 8, 2003
subject to automatic renewal for an additional year unless a notice of
termination is given by the lender at least 60 days prior to the anniversary
date.
In November 1999, 100 Maple Lane, LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed $5,040 from
the lender under Liggett's credit facility. The loan is payable in 59 monthly
installments of $60 with a final payment of $1,500. Interest is charged at the
same rate as applicable to the facility. Liggett has guaranteed the loan, and a
first mortgage on the Mebane property collateralizes the Maple Lane loan and
Liggett's credit facility.
EQUIPMENT LOANS:
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 Brooke, is payable in 60 monthly
installments of $56 including annual interest of 7.67% with a final payment of
$2,550.
In March 2000, Liggett purchased equipment for $1,000 through a capital lease
arrangement payable in 60 monthly installments of $21 with an effective annual
interest rate of 10.14%.
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8. COMMITMENTS AND CONTINGENCIES
SMOKING-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 alleged to have been caused by cigarette smoking or by exposure to
secondary smoke from cigarettes. These cases are reported here as though having
been commenced against Liggett (without regard to whether such cases were
actually commenced against Brooke Group Holding, the Company's parent or
Liggett). There has been a noteworthy increase in the number of cases commenced
against Liggett and the other cigarette manufacturers in recent years. The cases
generally fall into the following categories: (i) smoking and health cases
alleging injury brought on behalf of individual plaintiffs ("Individual
Actions"); (ii) smoking and health cases alleging 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, 2000, Liggett incurred counsel fees and costs
totaling approximately $1,969, compared to $1,568 for the comparable prior year
period.
INDIVIDUAL ACTIONS. As of March 31, 2000, there were approximately 310 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 secondary smoke and seek compensatory and,
in some cases, punitive damages. Of these, 85 were pending in Florida, 94 in New
York, 39 in Massachusetts, 17 in Texas and 24 in California. The balance of the
individual cases were pending in 29 states. There are five individual cases
pending where Liggett is the only named defendant.
The plaintiffs' allegations of liability in those cases in which individuals
seek recovery for injuries allegedly caused by cigarette smoking are based on
various theories of recovery, including negligence, gross negligence, breach of
special duty, strict liability, fraud, misrepresentation, design defect, failure
to warn, breach of express and implied warranties, conspiracy, aiding and
abetting, concert of action, unjust enrichment, common law public nuisance,
property damage, invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade practice laws,
the Federal Racketeer Influenced and Corrupt Organization Act ("RICO"), state
RICO statutes and antitrust statutes. In many of these cases, in addition to
compensatory damages, plaintiffs also seek other forms of relief including,
treble/multiple damages, disgorgement of profits and punitive damages. Defenses
raised by defendants in these cases include lack of proximate cause, assumption
of the risk, comparative fault and/or contributory negligence, lack of design
defect, statute of limitations, equitable defenses such as "unclean hands" and
lack of benefit, failure to state a claim and federal preemption.
In February 1999, a California jury awarded $51,500 in damages to a woman who
claimed lung cancer from smoking Marlboro cigarettes made by Philip Morris. The
award includes $1,500 in compensatory damages and $50,000 in punitive damages.
The court subsequently reduced the punitive damages award to $25,000. In March
1999, an Oregon jury awarded $80,311 in damages to the family of a deceased
smoker who smoked Marlboro cigarettes made by Philip Morris. The award includes
$79,500 in punitive damages. The court subsequently reduced the punitive damages
award to $32,000. Philip Morris has appealed both the verdict and damage awards
in both cases.
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In March 2000, a California jury awarded $1,700 in compensatory damages and
$20,000 in punitive damages to a former smoker and her husband. The jury found
Philip Morris and R.J. Reynolds Tobacco misrepresented the health dangers of
cigarettes and that they acted with malice. The defendants have stated that they
intend to appeal both the verdict and damage awards.
CLASS ACTIONS. As of March 31, 2000, there were approximately 60 actions
pending, for which either a class has been certified or plaintiffs are seeking
class certification, where Liggett, among others, was a named defendant. Many of
these actions purport to constitute statewide class actions and were filed after
May 1996 when the Fifth Circuit Court of Appeals, in the CASTANO case (discussed
below), reversed a Federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
In March 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN TOBACCO
COMPANY INC., ET AL., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged addiction
to nicotine. In February 1995, the District Court granted plaintiffs' motion for
class certification.
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 smoking-related class action
litigation is still uncertain. The Castano decision has had a limited effect
with respect to courts' decisions regarding narrower smoking-related classes or
class actions brought in state rather than federal court. For example, since the
Fifth Circuit's ruling, courts in Louisiana (Liggett is not a defendant in this
proceeding) and Maryland have certified "addiction-as-injury" class actions that
covered only citizens in those states. Two other class actions, Broin and Engle,
were certified in state court in Florida prior to the Fifth Circuit's decision.
In May 1994, an action entitled Engle, et al. v. R.J. Reynolds Tobacco Company,
et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, was
filed against Liggett and others. The class consists of all Florida residents
and citizens, and their survivors, who have suffered, presently suffer or have
died from diseases and medical conditions caused by their addiction to
cigarettes that contain nicotine. Phase I of the trial commenced in July 1998
and in July 1999, the jury returned the Phase I verdict. The Phase I verdict
concerned certain issues determined by the trial court to be "common" to the
causes of action of the plaintiff class. Among other things, the jury found
that: smoking cigarettes causes 20 diseases or medical conditions, cigarettes
are addictive or dependence producing, defective and unreasonably dangerous,
defendants made materially false statements with the intention of misleading
smokers, defendants concealed or omitted material information concerning the
health effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of
smoking cigarettes, and defendants were negligent and engaged in extreme and
outrageous conduct or acted with reckless disregard with the intent to inflict
emotional distress. The jury also found that defendants' conduct "rose to a
level that would permit a potential award or entitlement to punitive damages."
The court decided that Phase II of the trial, which commenced November 1999,
would be a causation and damages trial for three of the class representatives
and a punitive damages trial on a class-
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wide basis, before the same jury that returned the verdict in Phase I. On
April 7, 2000, the jury awarded compensatory damages of $12,704 to the three
plaintiffs, to be reduced in proportion to the respective plaintiff's fault. The
jury also decided that the claim of one of the plaintiffs, who was awarded
compensatory damages of $5,831, was not timely filed. The punitive damages
portion Phase II is scheduled to begin May 15, 2000 and is expected to last
several weeks. Phase III of the trial will be conducted before separate juries
to address absent class members' claims, including issues of specific causation
and other individual issues regarding entitlement to compensatory damages. The
defendants' motion to order the trial court to assess punitive damages on an
individual basis was denied and the petition for review was also denied, without
prejudice to raise the same issue on subsequent appeals.
It is unclear how the trial court's order will be implemented. The order
provides that the punitive damage amount, if any, should be standard as to each
class member and acknowledges that the actual size of the class will not be
known until the last case has withstood appeal. The order does not address
whether defendants would be required to pay the punitive damage award, if any,
prior to a determination of claims of all class members, a process that could
take years to conclude. Recently, legislation has been enacted in Florida that
limits the size of any bond required, pending appeal, to stay execution of a
punitive damages verdict to the lesser of the punitive award, $100 million plus
twice the statutory rate of interest, or 10% of the net worth of the defendant,
but the limitation on the bond does not affect the amount of the underlying
verdict. Although the legislation is intended to apply to the ENGLE case,
management cannot predict the outcome of any possible challenges to its
application. Similar legislation has been enacted in Georgia, Kentucky, North
Carolina and Virginia.
Class certification motions are pending in a number of putative class actions.
Classes remain certified against Liggett in Florida (ENGLE) and Maryland
(RICHARDSON). A number of class certification denials are on appeal.
Approximately 30 purported state class action complaints have been filed on
behalf of various consumers of cigarette products against the tobacco
manufacturers. The complaints allege that cigarette manufacturers engaged in
illegal and unethical activities since the 1940's, many conspiratorial in
nature, designed to increase profits at the financial and physical expense of
customers. These alleged activities include knowingly increasing the
addictiveness of cigarettes through crop manipulation; downplaying the
detrimental health effects of cigarette smoking; conspiring to refrain from
researching and introducing "safer" cigarettes; creating false and misleading
scientific research design to combat the growing scientific consensus about the
lethal health effects associated with cigarettes; aggressively marketing
products to children and minors in an effort to addict them to cigarettes at a
young age; and systematically covering up activities to avoid regulation of
products by governmental agencies. The purported class actions are brought
pursuant to various state laws.
In February 2000, Liggett and plaintiffs sent correspondence to the court, in
SIMON V. PHILIP MORRIS ET AL., a putative nationwide smokers class action,
indicating that Liggett and the plaintiffs are engaged in preliminary settlement
discussions. There are no assurances that any settlement will be reached or that
the class will ultimately be certified.
GOVERNMENTAL ACTIONS. As of March 31, 2000, there were approximately 20
Governmental Actions pending against Liggett. In these proceedings, both foreign
and domestic governmental entities seek reimbursement for Medicaid and other
health care expenditures. The claims asserted in these health care cost recovery
actions vary. In most of these cases, plaintiffs assert the equitable claim that
the tobacco industry was "unjustly enriched" by plaintiffs' payment of health
care costs allegedly attributable to smoking and seek reimbursement of those
costs. Other claims made by some but not all plaintiffs include the equitable
claim of indemnity, common law claims of negligence, strict liability, breach of
express and implied warranty, breach of special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and federal
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under RICO.
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THIRD-PARTY PAYOR ACTIONS. As of March 31, 2000, 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. Five United States Circuit Courts of Appeal have ruled
that Third-Party Payors did not have standing to bring lawsuits against the
tobacco companies. The United States Supreme Court recently denied petitions for
certiorari filed by several of the union health and welfare trust funds.
However, a number of Third-Party Payor Actions, including an action brought by
24 Blue Cross/Blue Shield Plans, remain pending.
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.
FEDERAL GOVERNMENT ACTION. In September 1999, the United States government
commenced litigation against Liggett and the other tobacco companies in the
United States District Court for the District of Columbia. The action seeks to
recover an unspecified amount of healthcare costs paid for and furnished, and to
be paid for and furnished, by the Federal Government for lung cancer, heart
disease, emphysema and other smoking-related illnesses allegedly caused by the
fraudulent and tortious conduct of defendants, and to restrain defendants and
co-conspirators from engaging in fraud and other unlawful conduct in the future,
and to compel defendants to disgorge the proceeds of their unlawful conduct. The
complaint alleges that such costs total more than $20,000,000 annually. The
action asserts claims under three federal statutes, the Medical Care Recovery
Act, the Medicare Secondary Payer provisions of the Social Security Act and
RICO. In December 1999, Liggett filed a motion to dismiss the lawsuit on
numerous grounds, including that the statutes invoked by the government do not
provide the basis for the relief sought. Oral argument on the motion is
currently scheduled for June 2000.
SETTLEMENTS. In March 1996, Brooke Group Holding and Liggett entered into an
agreement, subject to court approval, to settle the CASTANO class action tobacco
litigation. The CASTANO class was subsequently decertified by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and Liggett
entered into settlements of smoking-related litigation with the Attorneys
General of 45 states and territories. The settlements released both Brooke Group
Holding and Liggett from all smoking-related claims, including claims for health
care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation, R.J.
Reynolds Tobacco Company and Lorillard Tobacco Company (collectively, the
"Original Participating Manufacturers" or "OPMs") and Liggett (together with the
OPMs and any other tobacco product manufacturer that becomes a signatory, the
"Participating Manufacturers") entered into the Master Settlement Agreement (the
"MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the United
States Virgin Islands, American Samoa and the Northern Marianas (collectively,
the "Settling States") to settle the asserted and unasserted health care cost
recovery and certain other claims of those Settling States.
The MSA has been initially approved by trial courts in all Settling States. The
MSA is subject to final judicial approval in each of the Settling States, which
approval has been obtained, as of March 31, 2000, in 47 jurisdictions. If final
judicial approval is not obtained in a jurisdiction by December 31, 2001, then,
unless the settling defendants and the relevant jurisdiction agree otherwise,
the MSA will be terminated with respect to such jurisdiction.
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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.
Liggett has no payment obligations under the MSA unless its market share exceeds
a base share of 125% of its 1997 market share, or approximately 1.65% of total
cigarettes sold in the United States. Liggett believes, based on published
industry sources, that its domestic shipments accounted for 1.2% of the total
cigarettes shipped in the United States during 1999. 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 under the annual and strategic
contribution payment provisions of the MSA, subject to applicable adjustments,
offsets and reductions. Under the annual and strategic contribution payment
provisions of the MSA, the OPMs (and Liggett to the extent its market share
exceeds the base share) will pay the following annual amounts (subject to
certain adjustments):
Year Amount
---- ------
2000 $4,500,000
2001 $5,000,000
2002 - 2003 $6,500,000
2004 - 2007 $8,000,000
2008 - 2017 $8,139,000
2018 and each $9,000,000
year thereafter
These annual payments will be allocated based on relative unit volume of
domestic cigarette shipments. The payment obligations under the MSA are the
several, and not joint, obligations of each Participating Manufacturer and are
not the responsibility of any parent or affiliate of a Participating
Manufacturer.
The MSA replaces Liggett's prior settlements with all states and territories
except for Florida, Mississippi, Texas and Minnesota. In the event the MSA does
not receive final judicial approval in any state or territory, Liggett's prior
settlement with that state or territory, if any, will be revived.
The states of Florida, Mississippi, Texas and Minnesota, prior to the effective
date of the MSA, negotiated and executed settlement agreements with each of the
other major tobacco companies separate from those settlements reached previously
with Liggett. Because these states' settlement agreements with Liggett provided
for "most favored nation" protection for both Brooke Group Holding and Liggett,
the payments due these states by Liggett (with certain possible exceptions) have
been eliminated. With respect to all
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non-economic obligations under the previous settlements, both Brooke Group
Holding and Liggett are entitled to the most favorable provisions as between the
MSA and each state's respective settlement with the other major tobacco
companies. Therefore, Liggett's non-economic obligations to all states and
territories are now defined by the MSA.
In April 1999, a putative class action was filed on behalf of all firms that
directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in part
on the MSA. Plaintiffs seek treble damages computed as three times the
difference between current prices and the price plaintiffs would have paid for
cigarettes in the absence of an alleged conspiracy to restrain and monopolize
trade in the domestic cigarette market, together with attorneys' fees.
Plaintiffs also seek injunctive relief against certain aspects of the MSA.
In March 1997, Liggett, Brooke Group Holding and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE GROUP
LTD., ET AL., Circuit Court of Mobile County, Alabama, where the court granted
preliminary approval and preliminary certification of the class. In July 1998,
Liggett, Brooke Group Holding and plaintiffs filed an amended class action
settlement agreement in FLETCHER which agreement was preliminarily approved by
the court in December 1998. In July 1999, the court denied approval of the
FLETCHER class action settlement. The parties' motion for reconsideration is
still pending.
The Company accrued $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 and $1,051 were reversed in 1999.
Copies of the various settlement agreements are filed as exhibits to Brooke's
Form 10-K and the discussion herein is qualified in its entirety by reference
thereto.
TRIALS. In addition to the ENGLE case, cases currently scheduled for trial in
2000 include Third-Party Payor Actions brought by several Blue Cross/Blue Shield
plans in federal court in New York (September), asbestos companies in
Mississippi (September) and New York (July) and certain unions in New York
(November). Also, one Individual Action, ANDERSON, is currently being tried in
State Court in New York and two other Individual Actions are scheduled to be
tried later this year. Trial dates, however, are subject to change.
Management is not able to predict the outcome of the litigation pending against
Liggett. Litigation is subject to many uncertainties. An unfavorable verdict has
been returned in the first phase of the ENGLE smoking and health class action
trial pending in Florida and the jury will now consider the award of lump sum
punitive damages, if any, for the entire class. It is possible that additional
cases could be decided unfavorably and that there could be further adverse
developments in the ENGLE case. Management cannot predict the cash requirements
related to any future settlements and judgments, including cash required to
bond any appeals, if necessary, and there is a risk that those requirements will
not be able to be met. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation.
Management 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 Liggett, because the complaints filed in these cases rarely detail
alleged damages. Typically, the claims set forth in an individual's complaint
against the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage claims are
typically stated as being for the minimum necessary to invoke the jurisdiction
of the court.
It is possible that Liggett's consolidated financial position, results of
operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such smoking-related litigation.
Management is unaware of any material environmental conditions affecting its
existing facilities. Management believes that current operations are conducted
in material compliance with all environmental laws and regulations and other
laws and regulations governing cigarette manufacturers. Compliance with federal,
state and local provisions regulating the discharge of materials into the
environment, or otherwise
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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 Environmental Protection Agency ("EPA") released a report on the
respiratory effect of secondary smoke which concludes that secondary smoke 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
secondary smoke, 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 secondary smoke 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, a federal district court vacated
those sections of the report relating to lung cancer, finding that the EPA may
have reached different conclusions had it complied with relevant statutory
requirements. The federal government has appealed the court's ruling.
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.
In August 1996, the Food and Drug Administration (the "FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of tobacco
products and imposing restrictions on the sale, advertising and promotion of
tobacco products. Litigation was commenced challenging the legal authority of
the FDA to assert such jurisdiction, as well as challenging the
constitutionality of the rules. On March 21, 2000, the United States Supreme
Court ruled that the FDA does not have the power to regulate tobacco. Liggett
supported the FDA Rule and began to phase in compliance with certain of the
proposed FDA regulations.
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 on the grounds that it is preempted by federal law. In November 1999, the
First Circuit affirmed this ruling. Notwithstanding the foregoing, 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 34 cents, were increased at the
beginning of 2000 and will rise 5 cents more in the year 2002. In general,
excise taxes and other taxes on cigarettes have been increasing. These taxes
vary considerably and, when combined with sales taxes and the current federal
excise tax, may be as high as
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$1.66 per pack in a given locality in the United States. Congress has been
considering significant increases in the federal excise tax or other payments
from tobacco manufacturers, and the Clinton Administration's fiscal year 2001
budget proposal includes an additional increase of $.25 per pack in the federal
excise tax, as well as a contingent special assessment related to youth smoking
rates. Increases in other cigarette-related taxes have been proposed at the
state and local level.
In addition to the foregoing, there have been a number of other restrictive
regulatory actions, adverse legislative and political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
the effects of which, at this time, management is not able to evaluate. These
developments may negatively affect the perception of potential triers of fact
with respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional similar
litigation.
8. RELATED PARTY TRANSACTIONS
Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with Brooke and
certain other entities pursuant to which Liggett has paid taxes to Brooke 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 Brooke 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 $960
in the first three months of 2000 and $915 in the first three months of 1999.
The Company leases equipment from a subsidiary of BGLS for $50 per month.
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EXHIBIT 99.4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
<PAGE> 2
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
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Page
<S> <C>
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999.............................. 2
Consolidated Statements of Operations for the three months ended March 31,
2000 and March 31, 1999....................................................................... 3
Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 2000.......................................................................... 4
Consolidated Statements of Cash Flows for the three months ended March 31,
2000 and March 31, 1999....................................................................... 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,
2000 1999
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 1,838 $ 3,078
Accounts receivable - trade .................................... 10,144 11,648
Inventories .................................................... 21,744 18,086
Other current assets ........................................... 2,507 1,066
--------- ---------
Total current assets ........................................ 36,233 33,878
Property, plant and equipment, at cost, less
accumulated depreciation of $7,395 and $5,376 .............. 117,962 116,169
Other ............................................................ 3,605 3,272
--------- ---------
Total assets ................................................ $ 157,800 $ 153,319
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Credit facilities and current portion of notes payable ......... $ 44,735 $ 39,982
Accounts payable - trade ....................................... 36,166 32,412
Due to affiliates .............................................. 686 394
Accrued taxes .................................................. 8,106 9,483
Accrued interest ............................................... 315 474
Other accrued liabilities ...................................... 2,211 3,401
--------- ---------
Total current liabilities ................................... 92,219 86,146
Long-term portion of notes payable ............................... 11,645 12,578
Participating loan ............................................... 39,261 37,849
Other liabilities ................................................ 4,295 5,436
Commitments and contingencies
Stockholder's equity:
Common stock, par value $1 per share, 701,000 shares authorized,
authorized, issued and outstanding .......................... 701 701
Additional paid-in-capital ..................................... 103,115 103,115
Deficit ........................................................ (93,436) (92,506)
--------- ---------
Total stockholder's equity .................................. 10,380 11,310
--------- ---------
Total liabilities and stockholder's equity .................. $ 157,800 $ 153,319
========= =========
</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,
2000 1999
--------- ---------
<S> <C> <C>
Net sales* ....................................... $ 40,261 $ 22,362
Cost of sales* ................................... 35,082 18,412
-------- --------
Gross profit ..................................... 5,179 3,950
Operating, selling, administrative and
general expenses ............................ 4,808 2,648
-------- --------
Operating income ................................. 371 1,302
Other income (expense):
Interest expense .............................. (3,537) (3,940)
Gain on sale of assets ........................ 8,478
Gain on foreign currency exchange ............. 1,223 2,270
Other, net .................................... (29) 51
-------- --------
(Loss) income before income taxes ................ (1,972) 8,161
Benefit for income taxes ......................... (1,042) (1,717)
-------- --------
Net (loss) income ................................ $ (930) $ 9,878
======== ========
</TABLE>
- --------------
* Net sales and Cost of goods sold include excise taxes of $4,659 and
$1,485 for the three months ended March 31, 2000 and 1999,
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, 1999.................... 701,000 $ 701 $103,115 $(92,506) $ 11,310
Net loss...................................... (930) (930)
------- ----- -------- -------- --------
Balance, March 31, 2000....................... 701,000 $ 701 $103,115 $(93,436) $ 10,380
======= ===== ======== ======== ========
</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,
2000 1999
---- ----
<S> <C> <C>
Net cash (used in) provided by operating activities ........ $ (4,292) $ 6,646
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (2,775) (13,248)
-------- --------
Net cash used in investing activities ...................... (2,775) (13,248)
-------- --------
Cash flows from financing activities:
Repayments of debt ................................... (1,241) (79)
Borrowings under credit facilities ................... 17,000 8,412
Repayment under credit facilities .................... (9,600)
-------- --------
Net cash provided by financing activities .................. 6,159 8,333
-------- --------
Effect of currency rate translation on cash ................ (332) (319)
-------- --------
Net (decrease) increase in cash and cash equivalents ....... (1,240) 1,412
Cash and cash equivalents, beginning of period ............. 3,078 2,722
-------- --------
Cash and cash equivalents, end of period ................... $ 1,838 $ 4,134
======== ========
</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 Investments"), a Delaware limited liability company.
Western Tobacco Investments holds the Company's 99.9% 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 Ltd., a wholly-owned subsidiary of
Liggett-Ducat which recently completed construction of a new cigarette
factory.
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements and
the notes thereto included as Exhibit 99.4 in Brooke's and BGLS'
Annual Report on Form 10-K for the year ended December 31, 1999, 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 1999 consolidated financial statements have
been reclassified to conform to the 2000 presentation.
2. LIQUIDITY
At March 31, 2000, the Company had a net working capital deficiency of
$55,986 which included $44,735 of payments due over the next twelve
months to third parties under credit facilities and notes payable. The
Company plans to use cash flows from operating activities to fund
ongoing working capital needs in 2000 and is in the process of
negotiating with a number of Russian banks for revolving credit
facilities that would be used to repay existing credit lines.
Furthermore, the Company may request additional funding from its
parent in order to meet its liquidity needs.
3. SALE OF BROOKEMIL
In connection with the sale by the Company of its 99.1% of the
outstanding shares of BrookeMil Ltd. ("BrookeMil") to New Valley
Corporation ("New Valley") in 1997, a portion
-6-
<PAGE> 8
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
of the gain was deferred in recognition of the fact that the Company's
parent, BGLS, retained an interest in BrookeMil through its then 42%
equity ownership of New Valley and that a portion of the property sold
(the site of the third phase of the Ducat Place real estate project
being developed by BrookeMil) 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,
2000 1999
--------- ------------
<S> <C> <C>
Leaf tobacco ...................... $ 5,794 $ 6,727
Other raw materials ............... 6,626 4,582
Work-in-process ................... 683 959
Finished goods .................... 5,338 3,201
Replacement parts and supplies .... 3,303 2,617
------- -------
$21,744 $18,086
======= =======
</TABLE>
At March 31, 2000, the Company had leaf tobacco purchase commitments
of approximately $43,907.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ------------
<S> <C> <C>
Buildings .......................... $ 47,061 $ 46,510
Factory machinery and equipment .... 66,961 64,385
Computers and software ............. 1,347 1,343
Office furniture and equipment ..... 1,449 1,205
Vehicles ........................... 4,120 3,839
Construction-in-progress ........... 4,419 4,263
--------- ---------
125,357 121,545
Less accumulated depreciation ...... (7,395) (5,376)
--------- ---------
$ 117,962 $ 116,169
========= =========
</TABLE>
-7-
<PAGE> 9
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
6. CREDIT FACILITIES AND NOTES PAYABLE
Credit facilities and notes payable consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------------------
<S> <C> <C>
Notes payable .................................... $ 19,891 $ 23,090
Credit facilities ................................ 36,489 29,470
-------- --------
Total notes payable and credit facilities ........ 56,380 52,560
Less current portion ............................. (44,735) (39,982)
-------- --------
Amount due after one year ........................ $ 11,645 $ 12,578
======== ========
</TABLE>
At March 31, 2000, Liggett-Ducat had various credit facilities under
which $36,489 was outstanding. The facilities bear interest at rates
of 13% to 20% per annum and expire within the next twelve months. The
facilities are collateralized by the new factory building, factory
equipment and tobacco inventory.
Western Tobacco Investments has entered into several contracts for the
purchase of cigarette manufacturing equipment. Approximately 85% of
the amount of the contracts were financed with promissory notes
generally payable over a period of five years. The outstanding balance
on these notes, which are denominated in various European currencies,
is $15,891 at March 31, 2000. In addition, at March 31, 2000, the
Company had several short-term notes payable totaling approximately
$4,000 for additional equipment purchases. The terms of these notes
ranged from four to twelve months and carried interest rates of up to
16%.
The Company paid in full a promissory note for approximately $1,290
due March 31, 2000.
7. PARTICIPATING LOAN
In February 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. ("Apollo") organized Western Realty Development LLC
("Western Realty Development") to make real estate and other
investments in Russia. Western Realty Development had made a $30,000
participating loan to Western Tobacco Investments with the proceeds
used by the Company to reduce intercompany debt to BGLS and for
payments on the new factory construction contracts. The loan bears no
fixed interest and is payable only out of 30% of distributions made by
Western Tobacco Investments 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 Investments to the Company
will be applied first to pay the principal of the loan and then as
contingent participating interest on the loan. In addition, Western
Realty Development is entitled to receive a 15% annual rate of return
on amounts advanced under the participating loan agreement under
certain circumstances in the event of a sale or refinancing of Western
Tobacco Investments or the new factory. 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, 2000 and March
-8-
<PAGE> 10
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
31, 1999, the net effect of these preference requirements is recorded
as interest expense of $1,412 and $1,002, respectively.
8. INCOME TAXES
For the three months ended March 31, 2000, the tax benefit consists of
U.S. income tax benefit of $1,042 in accordance with the Company's tax
sharing agreement with Brooke. In connection with the construction of
Liggett-Ducat's new cigarette factory, Liggett-Ducat has received an
exemption from Russian taxes on income from certain production lines
for the 2000 tax year. Such exemption may be also available in 2001 and
2002 and resulted in no provision for Russian taxes being recorded.
For the three months ended March 31, 1999, the tax benefit of $1,717
consists of income tax benefit pursuant to Russian statutory
requirements of $485 and U.S. income tax benefit of $1,232 in
accordance with the Company's tax sharing agreement with Brooke.
9. CONTINGENCIES
BGLS Notes. 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").
In March 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 then held approximately 41.8% of
the BGLS Notes, in which the Apollo Holders (and any transferees)
agreed to defer the payment of interest on the BGLS Notes held by
them, commencing with the interest payment that was due July 31, 1997,
which they had previously agreed to defer, through the interest
payment due July 31, 2000. The deferred interest payments will be
payable at final maturity of the BGLS Notes on January 31, 2001 or
upon an event of default under the Indenture for the BGLS Notes. In
connection with the agreement, the Company pledged 50.1% of Western
Tobacco Investments to collateralize the BGLS Notes held by the Apollo
Holders (and any transferees).
Operating environment. The Russian Federation continues to experience
economic difficulties following the financial crisis of August 1998.
Consequently, the country's currency continues to devalue, there is
continued volatility in the debt and equity markets, hyperinflation
persists, confidence in the banking sector has yet to be restored and
there continues to be a general lack of liquidity in the economy. In
addition, laws and regulations affecting businesses operating within
the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to
a large extent on the effectiveness of the measures taken by the
government, decisions of international lending organizations, and
other actions, including regulatory and political developments, which
are beyond the Company's control.
-9-
<PAGE> 11
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
The Company's assets and operations could be at risk if there are any
further significant adverse changes in the political and business
environment. Management is unable to predict what effect those
uncertainties might have on the future financial position of the
Company. No adjustments related to these uncertainties have been
included in these consolidated financial statements.
Taxation. Russian tax legislation is subject to varying
interpretations and changes occurring frequently. Further, the
interpretation of tax legislation by tax authorities as applied to the
transactions and activity of the Company may not coincide with that of
management. As a result, transactions may be challenged by tax
authorities and the Company 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. The periods remain open to review by the tax and customs
authorities with respect to tax payments for three years.
-10-
