<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
(AMENDMENT NO. 1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ -------------
Commission File Number 33-75224
LIGGETT GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1702115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 WEST MAIN STREET, DURHAM, NORTH CAROLINA 27702
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (919) 683-9000
EVE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1703877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 SOUTHEAST SECOND STREET, MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 539-9460
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 12 or 15(d) of the Securities Exchange Act of
1934 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.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates: (Not
applicable; all voting stock of Liggett Group Inc. is owned by its indirect
parent Brooke Group Ltd. and all voting stock of Eve Holdings Inc. is owned by
its direct parent Liggett Group Inc.)
As of August 21, 1996, there were outstanding 1,000 shares of common stock,
par value $0.10 per share, of Liggett Group Inc. and 100 shares of common
stock, par value $1.00 per share, of Eve Holdings Inc.
Documents incorporated by reference: NONE
<PAGE> 2
Part II of the Annual Report on Form 10-K of Liggett Group Inc.
("Liggett") and Eve Holdings Inc. ("Eve") for the fiscal year ended December
31, 1995 is amended with respect to Item 8 as follows:
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements, Notes to Financial Statements and Reports of
Independent Accountants for each of Liggett and Eve are set forth on pages 4
through 35 of this report.
2
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
LIGGETT GROUP INC.:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Balance Sheets as of December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Operations for the years ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Stockholder's Equity (Deficit) for the years
ended December 31, 1995, 1994 and 1993. . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
EVE HOLDINGS INC.:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Balance Sheets as of December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . 30
Statements of Operations for the years ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Statements of Stockholder's Equity (Deficit) for the years ended
December 31, 1995, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Statements of Cash Flows for the years ended December 31, 1995,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
3
<PAGE> 4
COOPERS & LYBRAND L.L.P.
150 Fayetteville Street Mall, Suite 2300
Raleigh, NC 27601
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Liggett Group Inc.
We have audited the accompanying consolidated balance sheets of Liggett Group
Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholder's equity (deficit), and cash
flows for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Liggett Group Inc. and Subsidiaries as of December 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 2 of the consolidated financial statements, in 1993 the
Company (1) changed its method of accounting for postretirement benefits other
than pensions to conform with Statement of Financial Accounting Standards No.
106 and (2) changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standards No. 109.
COOPERS & LYBRAND L.L.P.
Raleigh, North Carolina
March 1, 1996, except as to
the information presented in
Notes 6 and 17 for which the
date is April 9, 1996 and Note 12
for which the date is March 15, 1996
4
<PAGE> 5
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
ASSETS ---- ----
<S> <C> <C>
Current assets:
Accounts receivable:
Trade less allowances of $815 and $969, respectively . . . . . . $ 22,279 $ 30,319
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,367 1,422
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,105 70
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,342 46,684
Assets under agreement for sale (Note 6) . . . . . . . . . . . . . . . 713 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 3,800 6,282
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . 990 2,907
-------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . . . 84,596 87,684
Property, plant and equipment, at cost, less accumulated
depreciation of $26,545 and $24,177, respectively . . . . . . . . . . . 18,352 21,821
Intangible assets, at cost, less accumulated amortization
of $15,661 and $13,936, respectively. . . . . . . . . . . . . . . . . . 5,036 6,728
Other assets and deferred charges, at cost, less accumulated
amortization of $5,440 and $3,434, respectively . . . . . . . . . . . . 5,330 7,812
-------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $113,314 $124,045
======== ========
</TABLE>
(continued)
5
<PAGE> 6
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . $ 50 $ 2,195
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,761 3,976
Accounts payable, principally trade . . . . . . . . . . . . . . . . . . . 18,921 11,608
Accrued expenses:
Promotional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,519 29,853
Compensation and related items . . . . . . . . . . . . . . . . . . . . 1,175 3,388
Taxes, principally excise taxes . . . . . . . . . . . . . . . . . . . . 7,006 8,326
Estimated allowance for sales returns . . . . . . . . . . . . . . . . . 5,000 5,800
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,412 8,315
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,728 9,019
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 75,572 82,480
Long-term debt, less current maturities . . . . . . . . . . . . . . . . . . 173,251 184,166
Non-current employee benefits and other long-term liabilities . . . . . . . 19,197 11,862
Commitments and contingencies (Notes 5 and 12)
Stockholder's equity (deficit):
Redeemable preferred stock (par value $1.00 per share;
authorized 1,000 shares; no shares issued and out-
standing) (Note 14)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital . . . . . . . . . . . . . . . . . . . . . . . . 53,240 53,240
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (207,946) (207,703)
-------- --------
Total stockholder's equity (deficit) . . . . . . . . . . . . . . . . . (154,706) (154,463)
-------- --------
Total liabilities and stockholder's equity (deficit) . . . . . . . . . $113,314 $124,045
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
6
<PAGE> 7
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net sales* . . . . . . . . . . . . . . . . . . . $455,666 $465,676 $473,393
Cost of sales* . . . . . . . . . . . . . . . . . 212,314 222,774 217,248
-------- -------- --------
Gross profit . . . . . . . . . . . . . . . 243,352 242,902 256,145
Selling, general and administrative expenses. . . 216,806 209,306 249,900
Restructuring expense . . . . . . . . . . . . . . 1,927 - 6,034
-------- -------- --------
Operating income . . . . . . . . . . . . . 24,619 33,596 211
Other income (expense):
Interest income . . . . . . . . . . . . . . . . 3 - 19
Interest expense . . . . . . . . . . . . . . . (23,449) (21,704) (19,388)
Miscellaneous, net . . . . . . . . . . . . . . 1,133 (458) 247
-------- -------- --------
Income (loss) before income taxes, extra-
ordinary item and accounting changes . . 2,306 11,434 (18,911)
Income tax provision (benefit) . . . . . . . . . 1,751 (5,000) 5,200
-------- -------- --------
Income (loss) before extraordinary item
and accounting changes . . . . . . . . . 555 16,434 (24,111)
Extraordinary gain (loss) from the early
extinguishment of debt . . . . . . . . . . . . - (1,028) -
-------- -------- --------
Income (loss) before cumulative effect
of accounting changes . . . . . . . . . . 555 15,406 (24,111)
Cumulative effect of accounting changes:
Income taxes . . . . . . . . . . . . . . . . - - (1,000)
Retiree health and life (net of income
taxes of $4,177) . . . . . . . . . . . . . . - - (6,272)
-------- -------- --------
Net income (loss) . . . . . . . . . . . . . $ 555 $ 15,406 $(31,383)
======== ======== ========
</TABLE>
*Net sales and cost of sales include federal excise taxes of $123,420, $131,877
and $127,341 respectively.
The accompanying notes are an integral part
of these financial statements.
7
<PAGE> 8
LIGGETT GROUP INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Retained Total
Stock and Earnings Stockholder's
Contributed (Accumulated Translation Equity
Capital Deficit) Adjustments (Deficit)
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 . . . . . . . . . . . $ 64,639 $(191,726) $ (13) $(127,100)
Net (loss) . . . . . . . . . . . . . . . . . . - (31,383) - (31,383)
Cumulative effect of modification of
postretirement medical plan . . . . . . . . . . (11,399) - - (11,399)
Translation adjustments . . . . . . . . . . . . - - 10 10
-------- --------- -------- ---------
Balance at December 31, 1993 . . . . . . . . . . . 53,240 (223,109) (3) (169,872)
Net income . . . . . . . . . . . . . . . . . . . - 15,406 - 15,406
Translation adjustments . . . . . . . . . . . . - - 3 3
-------- --------- -------- ---------
Balance at December 31, 1994 . . . . . . . . . . . 53,240 (207,703) - (154,463)
Net income . . . . . . . . . . . . . . . . . . . - 555 - 555
Excess of investment over cost basis of
net assets acquired from indirect parent . . . - (798) - (798)
-------- --------- -------- ---------
Balance at December 31, 1995 . . . . . . . . . . . $ 53,240 $(207,946) $ - $(154,706)
======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
8
<PAGE> 9
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 555 $ 15,406 $(31,383)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 7,972 8,310 8,440
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 1,259 (5,781) 4,667
(Gain) loss on sale of equipment . . . . . . . . . . . . . . . . . (375) 114 40
(Gain) on retirement of notes . . . . . . . . . . . . . . . . . . (1,273) (375) -
Deferred finance charges and debt discount
written off . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 1,404 346
Changes in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . 7,060 (3,381) 2,835
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,658) (9,712) 14,803
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 7,313 (480) 6,971
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (10,638) (10,474) 7,718
Non-current employe e benefits and other liabilities . . . . . . . 7,335 (290) 463
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,877 1,492 (349)
-------- -------- ---------
Net cash provided by (used in) operating activities . . . . . . 13,587 (3,767) 14,551
-------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of equipment . . . . . . . . . . . . . . . . . 570 78 218
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . (1,104) (1,036) (427)
Acquisition of business from indirect parent . . . . . . . . . . . (800) - -
-------- -------- ---------
Net cash used in investing activities . . . . . . . . . . . . . (1,334) (958) (209)
-------- -------- ---------
Cash flows from financing activities:
Redemptions and repayments of long-term debt . . . . . . . . . . (8,208) (1,690) (8,885)
Issuance of Senior Secured Notes . . . . . . . . . . . . . . . . . - 15,000 -
Net repayments under revolving credit facility . . . . . . . . . . (3,830) (3,589) (12,555)
Proceeds from retirement of notes . . . . . . . . . . . . . . . . - 375 -
Deferred finance charges . . . . . . . . . . . . . . . . . . . . . - (2,705) (520)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . - 3 10
Changes in advances to affiliate . . . . . . . . . . . . . . . . . - (4,000) 5,079
Increase (decrease) in cash overdraft. . . . . . . . . . . . . . . (215) 1,331 2,529
-------- -------- ---------
Net cash provided by (used in) financing activities . . . . . . (12,253) 4,725 (14,342)
-------- -------- ---------
Net change in cash and cash equivalents . . . . . . . . . . . . . . - - -
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . - - -
-------- -------- ---------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ - $ -
======== ======== =========
Supplemental cash flow information:
Cash payments during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 23,196 $ 20,287 $ 19,547
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . $ 130 $ 123 $ 1,591
</TABLE>
The accompanying notes are an integral part
of these financial statements.
9
<PAGE> 10
LIGGETT GROUP INC.
Notes to Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
1. Basis of Presentation
Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL"). Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States. Certain management and
administrative functions are performed by affiliates (see Note 13).
2. Summary of Significant Accounting Policies
a. Principles of Consolidation
The consolidated financial statements include the accounts of Liggett and
its wholly-owned subsidiaries, Eve Holdings Inc. ("Eve"), Cigarette Exporting
Company of America Ltd. ("CECOA") and Carolina Tobacco Express Company
("CTEC"). Intercompany accounts and transactions have been eliminated.
b. Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at December 31, 1995 and 1994
and the reported amounts of revenues and expenses during the three year period
ended December 31, 1995. Actual results could differ from those estimates.
c. Per Share Data
All of the Company's common shares (1,000 shares, issued and outstanding
for all periods presented herein) are owned by BGLS. Accordingly, earnings and
dividends per share data are not presented in these consolidated financial
statements.
d. Liquidity
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $154,706 as of December 31, 1995 and is highly leveraged.
Due to the many risks and uncertainties associated with the cigarette
industry, impact of recent tobacco litigation settlements (see Note 12) and
anticipated increased tobacco costs, there can be no assurance that the
Company will be able to meet its future earnings goals. Consequently, the
Company could be in violation of certain debt covenants and if the lenders were
to exercise acceleration rights under the revolving credit facility or senior
secured notes indentures or refuse to lend under the revolving credit facility,
the Company would not be able to satisfy such demands or its working capital
requirements.
e. Inventories
Inventories are valued at the lower of cost (LIFO) or market. Although
portions of leaf tobacco inventories may not be used or sold within one year
because of the time required for aging, they are
10
<PAGE> 11
included in current assets, which is common practice in the industry. It is
not practicable to determine the amount that will not be used or sold within
one year.
f. Property, Plant and Equipment
Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets which are
twenty years for buildings and four to ten years for machinery and equipment.
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are capitalized. The
cost and related accumulated depreciation of property, plant and equipment are
removed from the accounts upon retirement or other disposition and any
resulting gain or loss is reflected in operations. Management periodically
reviews the carrying value of property, plant and equipment to determine
whether asset values are impaired.
For fiscal years beginning after December 15, 1995, the Company will be
required to review long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable, in accordance with the provisions of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). The Company
does not anticipate a significant effect on its results of operations or its
financial position from the adoption of SFAS 121.
g. Trademarks
Trademarks are amortized using the straight-line method over twelve years.
Amortization expense for the years ended December 31, 1995, 1994 and 1993
amounted to $1,725, $1,722 and $1,971, respectively. Management periodically
reviews the carrying value of trademarks to determine whether asset values are
impaired.
h. Sales and Sales Returns
Revenue from sales is recognized upon the shipment of finished goods to
customers. The Company provides for expected sales returns, net of related
inventory cost recoveries. As Liggett does not have any other lines of
business, the Company's financial position and its results of operations could
be materially adversely affected by significant unit sales volume declines,
increased tobacco costs or reductions in the selling price of cigarettes in the
near term.
i. Employee Benefits
The Company sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such benefits
involves an estimate of unpaid claims as of December 31, 1995 and 1994 which
are subject to significant fluctuations in the near term.
BGLS maintains defined benefit retirement plans for substantially all of
the Company's employees. The Company records as an expense the portion of
BGLS' annual funding requirements applicable to the Company.
The Company sponsors a postretirement benefit plan and records an
actuarially determined liability and charges operations for the estimated cost
of postretirement benefits for current employees and retirees.
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 106, "Employers Accounting for
Postretirement Benefits Other than Pensions"
11
<PAGE> 12
("SFAS 106"). Under SFAS 106, the cost of providing retiree health care and
life insurance benefits is actuarially determined and accrued over the service
period of the active employee group.
j. Income Taxes
Effective January 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109") and recorded a one-time charge of $1,000. Prior to the adoption
of SFAS 109, the Company had accounted for income taxes under the deferral
method under the provisions of Accounting Principles Board Opinion No. 11,
"Accounting for Income Taxes" ("APB 11"). Under SFAS 109 a valuation allowance
is provided for deferred tax assets when it is deemed more likely than not that
future taxable income will be insufficient to realize the deferred tax assets.
k. Legal Costs
The Company's accounting policy is to accrue legal and other costs related
to contingencies as services are performed.
l. Fair Value of Financial Instruments
The following methods and assumptions were used by the Company's
management in estimating fair values for financial instruments as required by
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments" ("SFAS 107"). The estimates presented herein
are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair
values.
Long-Term Debt - The fair values of the Company's Senior Secured Notes
have been based upon market quotations. The carrying amount of borrowings
outstanding under the revolving credit facility and other long-term debt is a
reasonable estimate of fair value.
m. Reclassifications
Certain amounts in the 1994 and 1993 financial statements have been
reclassified to conform with the 1995 presentation with no effect on previously
reported net income (loss) or stockholder's equity (deficit).
3. Changes in Accounting Estimates
In June 1993, the Company reversed the liability for its Long-Term
Incentive Plan. The effect of the change in accounting estimate was an increase
in the Company's operating income by approximately $2,450 for the year ended
December 31, 1993.
In September 1995, the Company adjusted an accrual estimate recorded in
prior years which had the effect of increasing operating income by
approximately $1,214 for the year ended December 31, 1995.
As a consequence of certain litigation settlements and marketing
assessment contingencies (see Note 12), Liggett charged approximately $8,846 to
operations in the fourth quarter of 1995. Based on the Company's historical
operating performance, possible future payments under the litigation
settlements which are based on a percentage of Liggett's pretax income, if
any, cannot be reasonably estimated at this time. Accordingly, accruals for
any such future payments will be charged to operations in the period that the
Company's operating results are known.
12
<PAGE> 13
Liggett increased its valuation allowance for deferred tax assets by $443
in the fourth quarter of 1995.
4. Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. One customer
accounted for approximately 11.6% of net sales for the year ended December 31,
1995. No single customer accounted for more than 10% of the Company's net
sales in 1994 and 1993. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
remainder of the Company's customer base. Ongoing credit evaluations of
customers' financial condition are performed and, generally, no collateral is
required. The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have not exceeded management's estimates.
5. Inventories
<TABLE>
<CAPTION>
Inventories consist of:
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Finished goods . . . . . . . . . . . . . . . . . . . . $18,240 $17,958
Work-in-process . . . . . . . . . . . . . . . . . . . . 3,331 2,952
Raw materials . . . . . . . . . . . . . . . . . . . . . 24,946 20,609
Replacement parts and supplies . . . . . . . . . . . . 3,926 3,756
------- -------
Inventories at current cost . . . . . . . . . . . . . 50,443 45,275
LIFO adjustment . . . . . . . . . . . . . . . . . . 3,899 1,409
------- -------
Inventories at LIFO cost . . . . . . . . . . . . . . $54,342 $46,684
======= =======
</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 normally purchases all of its tobacco
requirements from domestic and foreign leaf tobacco dealers, much of it under
long-term purchase commitments which expire principally in December 1996. At
December 31, 1995, Liggett had leaf tobacco purchase commitments of
approximately $25,500.
6. Assets Under Agreement for Sale
On April 9, 1996 Liggett executed a definitive agreement with the County
of Durham for the sale by Liggett to the County of Durham of certain surplus
realty for a sale price of $4,300. It is anticipated that closing will occur
on or before May 31, 1996. At December 31, 1995, the net book value of those
assets for which the agreement was signed have been classified as current
assets on the Company's Consolidated Balance Sheet.
13
<PAGE> 14
<TABLE>
<CAPTION>
7. Property, Plant and Equipment
Property, plant and equipment consists of:
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Land and improvements . . . . . . . . . . . . . . . . $ 542 $ 716
Buildings . . . . . . . . . . . . . . . . . . . . . . 6,011 6,877
Machinery and equipment . . . . . . . . . . . . . . 38,344 34,944
Leased asset under capital lease . . . . . . . . . . - 3,461
------- -------
Property, plant and equipment . . . . . . . . . . . 44,897 45,998
Less accumulated depreciation . . . . . . . . . . . . (26,545) (24,177)
------- -------
Property, plant and equipment, net . . . . . . . . . $18,352 $21,821
======= =======
</TABLE>
8. Employee Benefits Plans
Defined Benefit Retirement Plans
Prior to 1994, substantially all of Liggett's employees participated in
two noncontributory defined benefit retirement plans sponsored by BGLS. The
Company records as an expense the portion of BGLS' annual funding requirements
applicable to the Company. There was no pension expense recorded in 1995 and
1994. Pension income for the year ended December 31, 1993 amounted to $317.
On November 11, 1993, the Company announced a restructuring of its defined
benefit retirement plans. BGLS froze its plan obligation related to Liggett's
salaried employees effective December 31, 1993.
Future Pension Benefits to be Funded by BGLS
Actuarial estimates of the total future minimum pension benefits to be
funded by BGLS, prior to the effect of unamortized purchase accounting
adjustments, are as follows:
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . $ 1,300
1997 . . . . . . . . . . . . . . . . . . . . . . 500
1998 . . . . . . . . . . . . . . . . . . . . . . 500
1999 . . . . . . . . . . . . . . . . . . . . . . 500
2000 . . . . . . . . . . . . . . . . . . . . . . 500
Thereafter . . . . . . . . . . . . . . . . . . . 9,000
--------
Total . . . . . . . . . . . . . . . . . . . . . $ 12,300
========
</TABLE>
Postretirement Medical and Life Insurance Plans
Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Prior to 1994, the Company's plan had reimbursed 80% of retirees'
medical claims. However, the Company announced on November 11, 1993 that
retirees would be required to fund 60% of participant medical premiums in 1994
and 100% of the premiums on a going-forward basis, effective January 1, 1995.
BGLS had also sponsored a Postretirement Medical and Life Insurance Plan for
Liggett employees who had retired or were eligible to retire on June 29, 1990.
BGLS terminated its plan effective December 31, 1993 and Liggett subsequently
modified its plan to
14
<PAGE> 15
include the revised funding responsibility for persons previously covered under
the BGLS plan. As a result, Liggett recorded an obligation of approximately
$11,400 as a reduction of contributed capital in 1993. The net effect of these
modifications was an increase of the plan's Accumulated Postretirement Benefit
Obligation from $10,589 at January 1, 1993 to $15,137 at December 31, 1993.
The components of net periodic postretirement benefit cost are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<C> <C> <C> <C>
Service cost, benefits attributed to employee
service during the year. . . . . . . . . . . . . . . . . $ 68 $ 63 $ 571
Interest cost on accumulated postretirement
benefit obligation . . . . . . . . . . . . . . . . . . 970 1,037 847
Curtailment (credit) related to restructuring expense. . . - - (623)
Immediate recognition of transition obligation . . . . . . - - 10,449
Curtailment (credit) related to modification of
medical plans . . . . . . . . . . . . . . . . . . . . . - - (9,931)
Charge for special termination benefits. . . . . . . . . . 489 - -
Amortization of net (gain) loss . . . . . . . . . . . . . (26) 33 -
------ ------- -------
Net periodic postretirement benefit expense. . . . . . . . $1,501 $ 1,133 $ 1,313
====== ======= =======
</TABLE>
The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") applicable to each employee group
for benefits:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
<S> <C> <C>
Retired Employees. . . . . . . . . . . . . . . . . . . . . $ 8,673 $ 9,292
Active employees - fully eligible . . . . . . . . . . . . . 1,707 1,170
Active employees - not fully eligible . . . . . . . . . . . 1,078 1,143
------- -------
APBO . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,458 11,605
Unrecognized net gain (loss) . . . . . . . . . . . . . . . 1,339 1,277
Purchase accounting valuation adjustment
related to income taxes . . . . . . . . . . . . . . . . . (1,181) (1,291)
------- -------
Postretirement liability . . . . . . . . . . . . . . . . . $11,616 $11,591
======= =======
</TABLE>
The APBO at December 31, 1995 was determined using a discount rate of 7.5%
and health care cost trend rates of 10% in the near term then declining to 4%
in the third and subsequent years. A 1% increase in the trend rate for
health care costs would have increased the APBO and net periodic postretirement
benefit cost by $420 and $50, respectively, for the year ended December 31,
1995. The Company does not hold any assets reserved for use in the plan.
Prior to December 31, 1993, BGLS was liable for pension and postretirement
benefits liabilities which relate to employee service to BGLS through June 29,
1990.
15
<PAGE> 16
Profit Sharing Plans
Liggett's 401(k) plans originally called for Company contributions
matching up to a 3% employee contribution, plus additional Company
contributions of up to 6% of salary based on the achievement of Company profit
objectives. Effective January 1, 1994, the Company suspended the 3% match for
the salaried employees' 401(k) Plan which was reinstated April 1, 1996. The
Company contributed $900, $420 and $1,787 to the 401(k) plans for the years
ended December 31, 1995, 1994 and 1993, respectively.
9. Income Taxes
Liggett's operations are included in the consolidated federal income tax
return of its indirect parent, BGL. Pursuant to a tax allocation agreement,
the Company's federal income tax provision is calculated as if the Company
filed a separate federal income tax return except that the tax sharing
agreement with BGL effectively limits the ability of the Company to carryback
losses for refunds.
The amounts provided for income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<C> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . $ (233) $ 341 $ -
State . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 227 -
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,768 (5,568) 3,929
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 1,271
------ ------- -------
Total tax provision (benefit) . . . . . . . . . . . . . . . . . $1,751 $(5,000) $5,200
====== ======= =======
</TABLE>
Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities are as follows:
<TABLE>
<Capton>
1995 1994
---- ----
Deferred Tax Deferred Tax
Asset Liability Asset Liability
----- --------- ----- ---------
<C> <C> <C> <C> <C>
Sales and product allowances . . . . . . . . $ 2,293 $ - $ 2,670 $ -
Inventory . . . . . . . . . . . . . . . . . . 816 1,256 540 2,352
Coupon accruals . . . . . . . . . . . . . . . 3,138 - 4,557 -
Property, plant and equipment . . . . . . . . - 5,778 - 6,048
Employee benefit plan accruals . . . . . . . . 4,886 - 5,424 -
USDA marketing assessment. . . . . . . . . . . 1,920 - - -
Tobacco litigation settlements . . . . . . . . 1,568 - - -
Net operating loss carryforward . . . . . . . 5,022 - 9,143 -
Valuation allowance . . . . . . . . . . . . . (8,809) - (8,366) -
Reclassifications . . . . . . . . . . . . . (7,034) (7,034) (7,686) (7,686)
------- ------- ------- -------
Total deferred taxes . . . . . . . . . . . . $ 3,800 $ - $ 6,282 $ 714
======= ======= ======= =======
</TABLE>
16
<PAGE> 17
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rates are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<C> <C> <C> <C>
Income before taxes . . . . . . . . . . . . . . . . . . . . $2,306 $11,434 $(18,911)
====== ======= ========
Federal income tax at statutory rates . . . . . . . . . . . . $ 807 $ 4,002 $ (6,600)
Increases (decreases) resulting from:
State income taxes, net of federal
income tax benefits . . . . . . . . . . . . . . . . . . 216 743 827
Limitation of net operating losses . . . . . . . . . . . . - - 11,373
Other, net . . . . . . . . . . . . . . . . . . . . . . . . 285 516 (400)
Change in valuation allowance . . . . . . . . . . . . . . . 443 (10,261) -
------ -------- --------
Total tax provision (benefit) . . . . . . . . . . . . . . . . $1,751 $ (5,000) $ 5,200
====== ======== ========
</TABLE>
As of December 31, 1995, the Company's net operating loss ("NOL")
carryforward pursuant to its tax sharing agreement with BGL is approximately
$12,000 which expires in 2008. However, if the Company was deconsolidated from
BGL its allocable share of NOL could be significantly different. In 1993 a
valuation allowance was established for the net deferred tax assets because of
the lack of recoverability of NOLs against prior years' taxable income and the
Company's 1993 loss. The Company has adjusted its valuation allowance in
subsequent years based upon its assessment of whether it is more likely than
not that taxable income will be sufficient to realize the deferred tax assets.
10. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
-------------------------- ----
Estimated Carrying Carrying
Fair Value Value Value
---------- ----- -----
<S> <C> <C> <C>
11.5% Senior Secured Notes due February 1, 1999
net of unamortized discount of $0, $627 and $878,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . $ 99,693 $119,485 $126,234
Variable Rate Series C Senior Secured Notes due
February 1, 1999 . . . . . . . . . . . . . . . . . . . . . . . 30,665 32,279 32,350
Borrowings outstanding under revolving credit
facility . . . . . . . . . . . . . . . . . . . . . . . . . . 21,017 21,017 24,847
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520 520 2,930
-------- -------- --------
151,895 173,301 186,361
Current portion . . . . . . . . . . . . . . . . . . . . . . . . (50) (50) (2,195)
-------- -------- --------
Amount due after one year . . . . . . . . . . . . . . . . . . . $151,845 $173,251 $184,166
======== ======== ========
</TABLE>
17
<PAGE> 18
Maturities of long-term debt, net of discount, at December 31, 1995 are as
follows:
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . $ 50
1997 . . . . . . . . . . . . . . . . . . . . . . 28,552
1998 . . . . . . . . . . . . . . . . . . . . . . 37,324
1999 . . . . . . . . . . . . . . . . . . . . . . 107,375
--------
Total. . . . . . . . . . . . . . . . . . . . . $173,301
========
</TABLE>
Senior Secured Notes
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Series B Notes"). Interest on the Series B Notes is payable semiannually on
February 1 and August 1 at an annual rate of 11.5%. The Series B Notes and
Series C Notes referred to below (collectively, the "Notes") require mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Notes due on
February 1, 1999. In December 1995, $7,000 of Series B Notes were purchased
using revolver availability and credited against the mandatory redemption
requirement for February 1, 1996. This transaction resulted in a net gain of
$1,114, recorded in other income in 1995. The Notes are collateralized by
substantially all of the assets of the Company, excluding accounts receivable
and inventory. Eve is a guarantor for the Notes. The Notes may be redeemed, in
whole or in part, at a price equal to 104%, 102% and 100% of the principal
amount in the years 1996, 1997 and 1998, respectively, at the option of the
Company at any time on or after February 1, 1996. The Notes contain
restrictions on Liggett's ability to declare or pay cash dividends, incur
additional debt, grant liens and enter into any new agreements with affiliates,
among others.
On January 31, 1994, the Company issued $22,500 of Variable Rate Series C
Senior Secured Notes (the "Series C Notes"). The Series C Notes have the same
terms (other than interest rate) and stated maturity as the Series B Notes.
The Series C Notes bore a 16.5% interest rate, which was reset on February 1,
1995 to 19.75%. The Company had received the necessary consents from the
required percentage of holders of its Series B Notes allowing for an aggregate
principal amount up to but not exceeding $32,850 of Series C Notes to be issued
under the Series C Notes indenture. In connection with the consents, holders
of Series B Notes received Series C Notes totaling two percent of their
current Series B Notes holdings. The total principal amount of such Series C
Notes issued was $2,842. On November 20, 1994, the Company issued the
remaining $7,508 of Series C Notes in exchange for an equal amount of Series B
Notes and cash of $375. The Series B Notes so exchanged were credited against
the mandatory redemption requirements for February 1, 1995.
BGLS purchased $4,500 of the Series C Notes which were subsequently sold.
Revolving Credit Facility
On March 8, 1994, Liggett entered into a revolving credit facility ("the
facility") under which it can borrow up to $40,000 (depending on the amount of
eligible inventory and receivables as determined by the lenders) from a
syndicate of commercial lenders. Availability under the facility was
approximately $13,340 based upon eligible collateral at December 31, 1995. The
facility expires on March 8, 1997 and is collateralized by all inventories and
receivables of the Company. Borrowings under the facility bear interest at a
rate equal to 1.5% above Philadelphia National Bank's (the indirect parent of
Congress Financial Corporation, the lead lender) prime rate, which was 8.75% at
December 31, 1995. The facility requires Liggett's compliance with certain
financial and other covenants and limits the amount of cash dividends and
payments which can be made by Liggett.
18
<PAGE> 19
11. Operating Leases
At December 31, 1995, the Company has operating leases for building space
and computer equipment. The future minimum lease payments are as follows:
<TABLE>
<S> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . $1,322
1997 . . . . . . . . . . . . . . . . . . . . . . 1,400
1998 . . . . . . . . . . . . . . . . . . . . . . 1,146
1999 . . . . . . . . . . . . . . . . . . . . . . 302
------
Total . . . . . . . . . . . . . . . . . . . . $4,170
======
</TABLE>
Rental expense for the years ended December 31, 1995, 1994 and 1993
amounted to approximately $3,112, $2,854 and $4,529, respectively.
12. Commitments and Contingencies
Since 1954, Liggett and other United States cigarette manufacturers have
been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from cancer and
other adverse health effects alleged to have been caused by cigarette smoking
or by exposure to secondary smoke (environmental tobacco smoke, "ETS") from
cigarettes. These cases are reported hereinafter as though having been
commenced against Liggett (without regard to whether such actually were
commenced against Brooke Group Ltd. in its former name or in its present name
or against Liggett), since all involve the tobacco manufacturing and marketing
activities currently performed by Liggett. New cases continue to be commenced
against Liggett and other cigarette 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. The Company has
been receiving certain financial assistance from others in the industry in
defraying the costs incurred in the defense of smoking and health litigation
and related proceedings. The future financial benefit to the Company is not
quantifiable at this time since the arrangements for assistance can be
terminated on limited notice, or under certain circumstances, without notice,
and the amount of assistance received is a function of the level of costs
incurred. Certain joint defense arrangements, and the financial benefits
incident thereto, have ended. No assurances can be made that other
arrangements will continue. To date a number of such actions, including
several against Liggett, have been disposed of favorably to the defendants, and
no plaintiff has ultimately prevailed in trial for recovery of damages in any
such action.
In the action entitled Cipollone v. Liggett Group Inc., et al., the United
States Supreme Court, on June 24, 1992, issued an opinion regarding federal
preemption of state law damage actions. The Supreme Court in Cipollone
concluded that The Federal Cigarette Labeling and Advertising Act (the "1965
Act") did not preempt any state common law damage claims. Relying on The
Public Health Cigarette Smoking Act of 1969 (the "1969 Act"), however, the
Supreme Court concluded that the 1969 Act preempted certain, but not all,
common law damage claims. Accordingly, the decision bars plaintiffs from
asserting claims that, after the effective date of the 1969 Act, the tobacco
companies either failed to warn adequately of the claimed health risks of
cigarette smoking or sought to neutralize those claimed risks in their
advertising or promotion of cigarettes. It does permit, however, claims for
fraudulent misrepresentation (other than a claim of fraudulently neutralizing
the warning), concealment (other than in advertising and promotion of
cigarettes), conspiracy and breach of express warranty after 1969. The Court
expressed no opinion as to whether any of these claims are viable under state
law but assumed arguendo that they are viable.
19
<PAGE> 20
In addition, bills have been introduced in Congress on occasion to
eliminate the federal preemption defense. Enactment of any federal legislation
with such an effect could result in a significant increase in claims,
liabilities and litigation costs.
On September 10, 1993, an action entitled Sackman v. Liggett Group Inc.,
United States District Court, Eastern District of New York, was filed against
Liggett alone alleging as injury lung cancer. Fact discovery closed on August
31, 1995 and expert discovery is scheduled to close on July 3, 1996. It is
possible that the case will be scheduled for trial during late 1996. On March
19, 1996, the Magistrate Judge assigned to the case ordered Liggett to produce
certain of its documents with respect to which Liggett has asserted various
claims of privilege. Liggett intends to appeal the decision and order. Upon
Liggett's motion, the Court has enlarged the time to and including May 1, 1996
for Liggett to file its appeal. The other major cigarette manufacturers and
The Council for Tobacco Research-U.S.A., Inc. have moved to intervene.
On May 11, 1993, in the case entitled Wilks v. The American Tobacco
Company, No. 91-12, 355, Circuit Court of Washington County, State of
Mississippi (a case in which Liggett was not a defendant), the trial court
granted plaintiffs' motion to impose absolute liability on defendants for the
manufacture and sale of cigarettes and struck defendants' affirmative defenses
of assumption of risk and comparative fault/contributory negligence. The trial
court ruled that the only issues to be tried in the case were causation and
damages. No other court has ever imposed absolute liability on a manufacturer
of cigarettes. After trial, the jury returned a verdict for defendants,
finding no liability. The Company is or has been a defendant in other cases in
Mississippi and it cannot be stated that other courts will not apply the Wilks
ruling as to absolute liability.
On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et al.,
Superior Court of the State of California, City of San Diego, was filed against
Liggett and others. In her complaint, plaintiff, purportedly on behalf of the
general public, alleges that defendants have been engaged in unlawful, unfair
and fraudulent business practices by allegedly misrepresenting and concealing
from the public scientific studies pertaining to smoking and health funded by,
and misrepresenting the independence of, the Council for Tobacco Research and
its predecessor. The Complaint seeks equitable relief against the defendants,
including the imposition of a corrective advertising campaign, restitution of
funds, disgorgement of revenues and profits and the imposition of a
constructive trust. The case is presently in the discovery phase.
On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Companies, Inc., et al., Circuit Court of the 11th Judicial District in and
for Dade County, Florida, was filed against Liggett and others. This case was
the first class action commenced against the industry, and has been brought by
plaintiffs on behalf of all flight attendants that have worked or are presently
working for airlines based in the United States and who have never regularly
smoked cigarettes but allege that they have been damaged by involuntary
exposure to ETS. On December 12, 1994, plaintiffs' motion to certify the
action as a class action was granted. Defendants appealed this ruling and on
January 3, 1996, the Third District of the Florida Court of Appeals affirmed
the ruling of the trial court. On January 18, 1996, defendants filed a
petition for rehearing, for rehearing en banc and for certification to the
Florida Supreme Court. Defendants' petition has not been ruled upon as yet.
On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint was
brought on behalf of plaintiffs and residents of the United States who claim to
be addicted to tobacco products and survivors who claim their decedents were
also so addicted. The complaint is based upon the claim that defendants
manipulated the nicotine levels in their tobacco products with the intent to
addict plaintiffs and the class members and, inter alia, fraud, deceit,
negligent misrepresentation, breach of express and implied warranty, strict
liability and violation of consumer protection statutes. Plaintiffs seek
compensatory and punitive damages, equitable relief including disgorgement of
profits from the sale of cigarettes and creation of a fund to monitor the
health of class
20
<PAGE> 21
members and to pay for medical expenses allegedly caused by defendants,
attorneys' fees and costs. On February 17, 1995, the Court issued an Order that
granted in part plaintiffs' motion for class certification for certain claims,
together with punitive damages to the end of establishing a multiplier to
compute punitive damage awards. Defendants' application for discretionary
appeal to the Court of Appeals for the Fifth Circuit was granted. Oral
argument was held on April 2, 1996.
On May 5, 1994, an action entitled Engle, et al. v. R. J. Reynolds Tobacco
Company, et al., Circuit Court of the 11th Judicial District in and for Dade
County, Florida, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and all persons in the United
States who allegedly have become addicted to cigarette products and allegedly
have suffered personal injury as a result thereof. Plaintiffs seeks
compensatory and punitive damages, together with equitable relief including but
not limited to a medical fund for future health care costs, attorney's fees and
costs. On October 31, 1994, plaintiffs' motion to certify the action as a
class action was granted. Defendants appealed this ruling. On January 31,
1996, the Third District of the Florida Court of Appeals affirmed the ruling of
the trial court certifying the action as a class action, but modified the trial
court ruling to limit the class to Florida citizens and residents. Defendants
have filed a petition for rehearing, for rehearing en banc and for
certification to the Florida Supreme Court.
On March 12, 1996, BGL and Liggett entered into an agreement to settle the
Castano class action tobacco litigation. The settlement undertakes to release
BGL and Liggett from all current and future addiction-based claims, including
claims by a nationwide class of smokers in the Castano class action pending in
Louisiana federal court as well as claims by a narrower statewide class in the
Engle class action pending in Florida state court. The settlement is subject
to and conditioned upon the approval of United States District Court for the
Eastern District of Louisiana. The Company is unable to determine at this time
when the Court will review the settlement, and no assurance can be given that
the settlement will be approved by the Court. Certain items of the settlement
are summarized below.
Under the settlement, the Castano class would receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a
maximum of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee. Settlement funds received
by the class would be used to pay half the cost of smoking-cessation programs
for eligible class members. While neither consenting to FDA jurisdiction nor
waiving their objections thereto, BGL and Liggett also have agreed to phase in
compliance with certain of the proposed interim FDA regulations regarding
smoking by children and adolescents, including a prohibition on the use of
cartoon characters in tobacco advertising and limitations on the use of
promotional materials and distribution of sample packages where minors are
present.
BGL and Liggett have the right to terminate the Castano settlement if the
remaining defendants succeed on the merits or in the event of a full and final
denial of class action certification. The terms of the settlement would still
apply if the Castano plaintiffs or their lawyers were to institute a
substantially similar new class action against the tobacco industry. BGL and
Liggett may also terminate the settlement if they conclude that too many class
members have chosen to opt out of the settlement. In the event of any such
termination by BGL and Liggett, the named plaintiffs would be at liberty to
renew the prosecution of such civil action against BGL and Liggett.
On March 14, 1996, BGL and the Castano Plaintiffs Legal Committee and the
Castano plaintiffs entered into a letter agreement. According to the terms
of the letter agreement, for the period ending nine months from the date of
Final Approval of the Castano settlement or, if earlier, the completion of a
combination by BGL or Liggett with certain defendants or an affiliate thereof
in Castano, the Castano plaintiffs agree not to enter into any settlement
agreement with any Castano defendant which would reduce the terms of the
Castano settlement agreement. If the Castano plaintiffs enter into any such
settlement during this period, they shall pay BGL $250,000 within thirty days
of the more favorable agreement and offer BGL and Liggett the option to enter
into a settlement on terms at least as favorable as those included in such
other settlement. The letter agreement further provides that during the same
21
<PAGE> 22
time period, and if the Castano settlement agreement has not been earlier
terminated by BGL in accordance with its terms, BGL and its affiliates will not
enter into any business transaction with any third party which would cause the
termination of the Castano settlement agreement. If BGL enters into any such
transaction, then the Castano plaintiffs will be entitled to receive $250,000
within thirty days from the transacting party.
An action entitled Yvonne Rogers v. Liggett Group Inc., et al., Superior
Court, Marion County, Indiana, was filed by the plaintiff on March 27, 1987
against Liggett and others. The plaintiff seeks compensatory and punitive
damages for cancer alleged to have been caused by cigarette smoking. Trial
commenced on January 31, 1995. The trial ended on February 22, 1995 when the
trial court declared a mistrial due to the jury's inability to reach a verdict.
The Court directed a verdict in favor of the defendants as to the issue of
punitive damages during the trial of this action. A second trial has been
scheduled to commence August 5, 1996.
On May 23, 1994, an action entitled Mike Moore, Attorney General, ex rel
State of Mississippi v. The American Tobacco Company, et al., Chancery Court
for the County of Jackson, State of Mississippi, was filed against Liggett and
others. The State of Mississippi seeks restitution and indemnity for medical
payments and expenses made or incurred by it on behalf of welfare patients for
tobacco related illnesses. Similar actions (although not identical) have been
filed by the State of Minnesota (together with Minnesota Blue Cross-Blue
Shield), by the State of West Virginia and more recently by the Commonwealth
of Massachusetts, the State of Louisiana and the State of Texas. In West
Virginia, the trial court, in a ruling issued on May 3, 1995, dismissed eight
of the ten counts of the complaint filed therein, leaving only two counts of an
alleged conspiracy to control the market and market price of tobacco products
and an alleged consumer protection claim. In a subsequent ruling, the trial
court adjudged the contingent fee agreement entered into by the State of West
Virginia and its counsel to be unconstitutional under the Constitution of the
State of West Virginia. In Mississippi, the Governor has recently commenced an
action in the Mississippi Supreme Court against the Attorney General of the
state, making application for a writ of prohibition to bar further prosecution
and to seek dismissal of the suit brought by the Attorney General of the state
for such restitution and indemnity, alleging that the commencement and
prosecution of such a civil action by the Attorney General of the state was
and is outside the authority of the Attorney General.
On November 28, 1995, each of the major manufacturers in the industry,
including Liggett, filed suit in both the Commonwealth of Massachusetts and in
the State of Texas seeking declaratory relief to the effect that the
commencement of any such litigation (as had been filed by Mississippi, West
Virginia and Minnesota and now by Massachusetts, Louisiana and Texas) seeking
to recover Medicaid expenses against the manufacturers by either the
Commonwealth of Massachusetts or the State of Texas would be unlawful. On
January 22, 1996, a suit seeking substantially similar declaratory relief was
filed in the State of Maryland.
The State of Florida enacted legislation effective July 1, 1994 allowing
certain state authorities or entities to commence litigation seeking recovery
of certain Medicaid payments made on behalf of Medicaid recipients as a result
of diseases (including, but no limited to, diseases allegedly caused by
cigarette smoking) allegedly caused by liable third parties (including, but not
limited to, the tobacco industry). This statute purportedly abrogates certain
defenses typically available to defendants. This legislation would impose on
the tobacco industry, if ultimate liability of the industry is established in
litigation, liability based upon market share for such payments made as a
result of such smoking-related diseases. Although a suit has been commenced
to challenge the constitutionality of the Florida legislation, no assurance can
be given that it will be successful. On May 6, 1995, the Florida legislature
voted in favor of a bill to repeal this legislation, but the Governor of
Florida vetoed this repealer bill. On March 13, 1996, the Florida legislature
considered taking certain action to override the veto of the repealer bill if
the requisite vote could be attained, but decided not to take formal action
when it was determined that it could not attain the requisite vote. On
February 22, 1995, suit was commenced pursuant to the above-referenced enabling
statute by the State of Florida acting through the Agency for
22
<PAGE> 23
Health Care Administration against Liggett and others, seeking restitution of
monies expended in the past and which may be expended in the future by the
State of Florida to provide health care to Medicaid recipients for injuries and
ailments allegedly caused by the use of cigarettes and other tobacco products.
Plaintiffs also seek a variety of other forms of relief including a
disgorgement of all profits from the sale of cigarettes in Florida.
The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the States of Mississippi, Minnesota,
West Virginia, Louisiana and Texas. Aside from the Florida and Massachusetts
statutes, legislation authorizing the state to sue a company or individual to
recover the costs incurred by the state to provide health care to persons
allegedly injured by the company or individual also has been introduced in a
number of other states. These bills contain some or all of the following
provisions: eliminating certain affirmative defenses, permitting the use of
statistical evidence to prove causation and damages, adopting market share
liability and allowing class action suits without notification to class
members.
On March 15, 1996, BGL and Liggett entered into a settlement of tobacco
litigation with the Attorneys General of the states of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia. The settlement with the
Attorneys General releases BGL and Liggett from all tobacco-related claims by
these states including claims for Medicaid reimbursement and concerning sales
of cigarettes to minors. The settlement provides that additional states which
commence similar Attorney General actions may agree to be bound by the
settlement prior to six months from the date thereof (subject to extension of
such period by the settling defendants). Certain of the terms of the
settlement are summarized below.
Under the settlement, the states would share an initial $5,000 ($1,000 of
which was paid on March 22, 1996, with the balance payable over nine years and
indexed and adjusted for inflation), provided that any unpaid amount will be
due sixty days after either a default by Liggett in its payment obligations
under the settlement or a merger or other transaction by Liggett with another
defendant in the lawsuits. In addition, Liggett will be required to pay the
states a percentage of Liggett's pretax income (income before income taxes)
each year from the second through the twenty-fifth year. This annual
percentage would range from 2-1/2% to 7-1/2% of Liggett's pretax income,
depending on the number of additional states joining the settlement. All of
Liggett's payments are subject to certain reductions provided for in the
agreement. Liggett has also agreed to pay to the states $5,000 if BGL or
Liggett fails to consummate a merger or other transaction with another
defendant in the lawsuits within three years of the date of the settlement.
At December 31, 1995, the Company has accrued $3,976, net of $1,024 of imputed
interest, for the settlement with the Attorneys General.
Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. While neither
consenting to FDA jurisdiction nor waiving their objections thereto, BGL and
Liggett also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same basis as provided in the Castano
settlement.
BGL and Liggett have the right to terminate the settlement with respect to
any state participating in the settlement if any of the remaining defendants in
the litigation succeed on the merits in that state's Attorney General action.
BGL and Liggett may also terminate the settlement if they conclude that too
many states have filed Attorney General actions and have not resolved such
cases as to the settling defendants by joining in the settlement.
Currently in addition to Cordova, approximately 90 product liability
lawsuits, which have been filed in various jurisdictions, are pending and
active in which Liggett is a defendant. Of these, 68 are pending in the State
of Florida. In most of these lawsuits, plaintiffs seek punitive as well as
compensatory damages. In the product liability lawsuits presently pending in
Florida against Liggett and others, three of such which are pending in the
Circuit Court of DuVal County (Jacksonville), Florida are scheduled for trial
during 1996, these being: Clark, August, 1996; Thompson, October, 1996; and
Walters, November,
23
<PAGE> 24
1996, and another, Weisholtz, which is pending in the United States District
Court for the Southern District of Florida, is scheduled for trial commencing
November 12, 1996.
A grand jury investigation presently is being conducted by the office of
the United States Attorney for the Eastern District of New York regarding
possible violations of criminal law relating to the activities of The Council
for Tobacco Research - USA, Inc. The Company was a sponsor of The Council for
Tobacco Research - USA, Inc. at one time. The Company is unable at this time
to predict the outcome of this investigation.
Liggett has been responding to a civil investigative demand from the
Antitrust Division of the United States Department of Justice which requests
certain information from Liggett. The request appears to focus on United
States tobacco industry activities in connection with product development
efforts regarding, in particular, "fire-safe" or self-extinguishing
cigarettes. It also requests certain general information addressing Liggett's
involvement with and relationship to its competitors. Liggett is unable at this
time to predict the outcome of this investigation.
In March and April 1994, the Health and the Environmental Subcommittee of
the Energy and Commerce Committee of the House of Representatives held hearings
regarding nicotine in cigarettes. On March 25, 1994, Commissioner David A.
Kessler of the Food and Drug Administration (the "FDA") gave testimony as to
the potential regulation of nicotine under the Food, Drug and Cosmetic Act, and
the potential for jurisdiction over the regulation of cigarettes to be accorded
to the FDA. In response to Commissioner Kessler's allegations about
manipulation of nicotine by cigarette manufacturers, the chief executive of
each of the major cigarette manufacturers, including Liggett, testified before
the subcommittee on April 14, 1994, denying Commissioner Kessler's claims. An
FDA advisory panel has stated that it believes nicotine is addictive. On
August 10, 1995, the FDA filed in the Federal Register a Notice of Proposed
Rule-Making (the "Proposed Rule-Making") which would classify tobacco as a
drug, assert jurisdiction by the FDA over the manufacture and marketing of
tobacco products and impose restrictions on the sale, advertising and promotion
of tobacco products. The FDA's stated objective and focus for its initiative
is to limit access to cigarettes by minors by measures beyond the restrictions
either mandated by existing federal, state and local laws or voluntarily
implemented by major manufacturers in the industry. Liggett and the other
major manufacturers in the industry responded by filing a civil action in the
United States District Court for the Middle District of North Carolina
challenging the legal authority of the FDA to assert such jurisdiction. In
addition thereto, Liggett and the other four major cigarette manufacturers, as
well as others, have filed comments in opposition to the Proposed Rule-Making.
Management is unable to predict whether such a classification will be made.
Management is also unable to predict the effects of such a classification, were
it to occur, or of such regulations, if implemented, on Liggett's operations,
but such actions could have an unfavorable impact thereon.
On March 12, 1996, Liggett, together with BGL, entered into an agreement
to settle the Castano class action tobacco litigation, and on March 15, 1996,
Liggett, together with BGL, entered into an agreement with the Attorneys
General of the State of West Virginia, State of Florida, State of Mississippi,
Commonwealth of Massachusetts and the State of Louisiana to settle certain
actions brought against Liggett by such states. In these two settlements,
Liggett and BGL, while neither consenting to FDA jurisdiction nor waiving their
objections thereto, agreed to withdraw their objections and opposition to the
Proposed Rule-Making and to phase in compliance with certain of the proposed
interim FDA regulations. See discussions of the Castano Settlement Agreement
and the Attorneys General Settlement Agreement appearing hereinabove and
hereinafter.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required each
United States cigarette manufacturer to use at least 75% domestic tobacco in
the aggregate of the cigarettes manufactured by it in the United States,
effective January 1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials between foreign and domestic tobacco
and, under certain circumstances, make purchases of domestic tobacco from the
stabilization cooperatives organized by the United States government. OBRA
was repealed retroactively (as of December 31, 1994) coincident in time with
the
24
<PAGE> 25
issuance of a Presidential proclamation, effective September 13, 1995, imposing
tariffs on imported tobacco in excess of certain quotas.
On February 14, 1995, Liggett filed with the United States Department of
Agriculture (the "USDA") its certification as to usage of domestic and imported
tobaccos during 1994, and an audit was conducted by the USDA to verify this
certification. Liggett has received from the USDA the results of the audit,
which states that Liggett did not satisfy the 75% domestic tobacco usage
requirement for 1994 and therefore may be subject to a marketing assessment
estimated at approximately $5,500, which amount is disputed by the Company. It
is the understanding of the Company that the levels of domestic tobacco
inventories currently on hand at the tobacco stabilization organizations are
below reserve stock levels, and for such reason, the Company is of the opinion
that it will not be obligated to make such purchases of domestic tobacco from
the tobacco stabilization cooperatives. The Company is currently engaged in
negotiations with the USDA in an effort to resolve this matter on satisfactory
terms. At December 31, 1995, the Company has accrued approximately $4,900
representing its best estimate for the USDA marketing assessment. The charge
is included as a component of cost of sales in 1995.
On September 13, 1995, the President of the United States, after
negotiations with the affected countries, declared a tariff rate quota ("TRQ")
on certain imported tobacco, imposing prohibitive tariffs on imports of
flue-cured and burley tobaccos in excess of certain levels which levels vary
from country to country. Oriental tobacco is exempt from the quota, as well as
all tobacco originating from Canada, Mexico or Israel. Management believes
that the TRQ levels are sufficiently high to allow the Company to operate
without material disruption to its business.
On February 20, 1996, the United States Trade Representative issued an
"advance notice of rule making" concerning how tobaccos imported under the TRQ
should be allocated. Currently, tobacco imported under the TRQ is allocated on
a "first-come, first-served" basis, meaning that entry is allowed on an open
basis to those first requesting entry in the quota year. Others in the
cigarette industry have suggested an "end-user licensing" system under which
the right to import tobacco under the quota would be initially assigned on the
basis of domestic market share. Such an approach, if adopted, could have a
materially adverse effect on the Company. The Company believes it is unlikely
that an end-user licensing system will be adopted because it would likely lead
to another GATT proceeding. The end-user licensing system has not been
authorized by legislation and it could create significant problems for United
States exports in other product markets. However, no assurances can be made
that an end-user licensing system will not be adopted.
On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Inc. was
filed in the United States District Court for the Southern District of New
York, Case No. 96-CIV-1921, wherein the plaintiff, who was formerly employed as
Liggett's President and Chief Executive officer, seeks recovery of certain
monies allegedly owing by Liggett to him for long-term incentive compensation.
The action presently is in the pleading stage and discovery has not as yet
commenced.
As to each of the cases referred to above which is pending against the
Company, the Company believes, and has been so advised by counsel handling the
respective cases, that the Company has a number of valid defenses to the claim
or claims asserted against the Company. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case
could encourage the commencement of additional similar litigation. Recently,
there have been a number of restrictive regulatory actions, adverse political
decisions and other unfavorable developments concerning cigarette smoking and
the tobacco industry, including the commencement of the purported class actions
referred to above. These developments generally receive widespread media
attention. The Company is not able to evaluate the effect of these developing
matters on pending litigation or the possible commencement of additional
litigation.
25
<PAGE> 26
The Company is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against the Company. It is possible that the Company's financial position,
results of operations and cash flows could be materially adversely affected by
an ultimate unfavorable outcome in any of such pending litigation.
There are several other proceedings, lawsuits and claims pending against
Liggett unrelated to product liability. Management is of the opinion that the
liabilities, if any, ultimately resulting from such proceedings, lawsuits and
claims should not materially affect Liggett's financial position, results of
operations or cash flows.
13. Related Party Transactions
Liggett provides certain administrative and technical support to
Liggett-Ducat Ltd., a Russian joint stock company, which is majority owned by
an affiliate, in exchange for which such company provides assistance to Liggett
in its pursuit of selling cigarettes in the Russian Republic. The expenses
associated with Liggett's activities amounted to $229, $230 and $390 for the
years ended December 31, 1995, 1994 and 1993, respectively.
Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with entities related through common control, 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.
Effective January 1, 1992, Liggett entered into a Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee of $2,600 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 agreement had an initial term of one year, with
annual renewals thereafter subject to a 5% fee increase. The Company paid
$3,010 in 1995, $2,866 in 1994 and $2,730 in 1993. This fee is in addition to
the management fee and overhead reimbursements described above.
In prior years, BGLS assumed specified Liggett liabilities from time to
time and Liggett repaid these amounts from time to time. During 1994, Liggett
satisfied all amounts due ($8,000) in full.
In April 1994, the Company transferred equipment with a net book value of
$2,161 to BGLS in return for assumption of Liggett's note payable of $1,988.
The Company now leases this equipment from BGLS for $50 per month.
The Company acquired CTEC from its indirect parent during 1995 for $800.
The excess of cost over the carrying amount of the net assets acquired has
been charged to stockholder's equity (deficit). The effect of the accounting
treatment presents the investment in CTEC at carryover basis.
Accounts receivable from affiliates relate principally to advances for
expenses paid by the Company on behalf of its affiliates. The Company expects
to be reimbursed in the near term.
26
<PAGE> 27
14. Stockholder's Equity
Preferred Stock
On July 15, 1992, Liggett issued one share of Series A Participating
Preferred Stock, par value $1.00 (the "Preferred Stock") to BGLS. BGLS then
pledged this Preferred Stock as additional collateral which ultimately
supported a liability of BGL under the Contingent Value Rights ("CVRs") issued
by BGL to its public shareholders in 1990. The collateral was returned to BGLS
and thereafter, BGLS canceled its share of Liggett Preferred Stock on February
3, 1994.
15. Supplemental Disclosure of Non-Cash Financing and Investing Activities
Pursuant to the Company's modification of its postretirement medical and
life insurance plans in 1993 (see Note 8), an obligation of approximately
$11,400 was recorded with a corresponding reduction in capital.
The Company financed equipment purchases of approximately $3,500 in 1993.
During 1994, the Company issued $17,850 in Series C Notes in exchange for
Series B Notes and in connection with indenture consent of which $15,008 were
credited against the mandatory redemption of Series B Notes for February 1,
1994 and 1995, and $2,842 were recorded as deferred finance charges.
During 1994, the Company transferred equipment with a net book value of
$2,161 to BGLS in return for assumption of Liggett's note payable of $1,988.
16. Restructuring Charges
In 1993, Liggett restructured its headquarters and manufacturing
operations to reduce costs. Approximately 235 manufacturing and administrative
positions were eliminated due to the restructuring. In connection
therewith, the Company recorded charges to operating income of
approximately $5,565 in 1993 ($2,531 is included in cost of sales and $3,034 is
included in selling, general and administrative expenses). The charges relate
to $6,188 in employee severance programs, partially offset by postretirement
curtailment income of approximately $623.
The Company reduced its field sales force in January 1994 by 150 permanent
positions and added approximately 300 part-time positions. Liggett recorded a
charge of $3,000 against operating income in 1993 in anticipation of this
reduction.
During 1995, Liggett continued its efforts towards reducing costs by,
among other things, offering voluntary retirement programs to eligible
employees. The Company's 1995 cost reduction programs reduced the Company's
headcount by approximately 120 positions. In connection therewith, the Company
recorded charges totaling $2,548 to operating income including $621 relating to
manufacturing operations which has been charged to cost of sales. The Company
expects to continue its cost reduction programs.
17. Subsequent Events
On April 8, 1996 Philip Morris announced a list price increase on all
brands of 40 cents per carton. The other manufacturers, including Liggett
matched the price increase.
27
<PAGE> 28
On April 9, 1996 Liggett executed a definitive agreement with the County
of Durham for the sale by Liggett to the County of Durham of certain surplus
realty for a sale price of $4,300. It is anticipated that closing will occur
on or before May 31, 1996.
On March 12, 1996, BGL and Liggett entered into an agreement to settle the
Castano class action tobacco litigation. For a description of the Castano
settlement, see Note 12.
On March 15, 1996, BGL and Liggett entered into a settlement of tobacco
litigation with the Attorneys General of the States of Florida, Louisiana,
Massachusetts, Mississippi and West Virginia. For a description of the
Attorneys General settlement, see Note 12.
28
<PAGE> 29
COOPERS & LYBRAND L.L.P.
200 South Biscayne Blvd., Suite 1900
Miami, FL 33131
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Eve Holdings, Inc.
We have audited the accompanying balance sheets of Eve Holdings Inc. as of
December 31, 1995 and 1994, and the related statements of operations,
stockholder's equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Eve Holdings Inc. as of
December 31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
As discussed in Note 4 of Notes to Financial Statements, the Company changed
its method of accounting for income taxes in 1993.
COOPERS & LYBRAND L.L.P.
Miami, Florida
March 1, 1996
29
<PAGE> 30
EVE HOLDINGS INC.
BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------
1995 1994
---- ----
ASSETS
<S> <C> <C>
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 2
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . 2 3
Trademarks, at cost, less accumulated amortization of
$15,593 and $13,891, respectively . . . . . . . . . . . . . . . . 4,820 6,522
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $ 4,830 $ 6,527
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Federal income taxes currently payable to parent. . . . . . . . . . $ 164 $ 7
Dividends payable. . . . . . . . . . . . . . . . . . . . . . . . . 2,536 2,750
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . 1,687 2,283
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 4,387 5,040
-------- --------
Stockholder's equity:
Common stock (par value $1 per share; authorized,
issued and outstanding 100 shares) and contributed
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,653 48,759
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 . . . . . . . . . . . . . . . . . . . . (44,520) (44,520)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,690) (2,752)
-------- --------
Total stockholder's equity . . . . . . . . . . . . . . . . . . 443 1,487
-------- --------
Total liabilities and stockholder's equity . . . . . . . . . . $ 4,830 $ 6,527
======== ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
30
<PAGE> 31
EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Revenues:
Royalties - parent . . . . . . . . . . . . . . . . . $ 10,452 $ 10,647 $ 11,585
Interest - parent . . . . . . . . . . . . . . . . . 6,306 6,306 6,306
--------- --------- ---------
16,758 16,953 17,891
Expenses:
Amortization of trademarks . . . . . . . . . . . . . 1,702 1,701 1,701
Miscellaneous . . . . . . . . . . . . . . . . . . . 93 70 163
--------- --------- ---------
Income before income taxes . . . . . . . . . . . . . 14,963 15,182 16,027
Income tax provision . . . . . . . . . . . . . . . . 5,237 5,314 5,708
--------- --------- ---------
Income before cumulative effect of
accounting change. . . . . . . . . . . . . . . . . 9,726 9,868 10,319
Cumulative effect of accounting change
for income taxes . . . . . . . . . . . . . . . . . . - - 3,374
--------- --------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . $ 9,726 $ 9,868 $ 6,945
========= ========= =========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
31
<PAGE> 32
EVE HOLDINGS INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common
Stock and Receivables Total
Capital in Retained From Stockholder's
Excess of Par Earnings Parent Equity
------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1992 . . . . . . . . . . . . $54,443 $ - $ (46,997) $ 7,446
Net income . . . . . . . . . . . . . . . . . . . . - 6,945 - 6,945
Dividends/capital distributions. . . . . . . . . . (4,577) (6,945) - (11,522)
Net change in receivable from Parent . . . . . . . - - 1,778 1,778
------- --------- --------- --------
Balance at December 31, 1993 . . . . . . . . . . . . 49,866 - (45,219) 4,647
Net income . . . . . . . . . . . . . . . . . . . . - 9,868 - 9,868
Dividends/capital distributions. . . . . . . . . . (1,107) (9,868) - (10,975)
Net change in receivable from Parent . . . . . . . - - (2,053) (2,053)
------- --------- --------- --------
Balance at December 31, 1994 . . . . . . . . . . . . 48,759 - (47,272) 1,487
Net income . . . . . . . . . . . . . . . . . . . - 9,726 - 9,726
Dividends/capital distributions. . . . . . . . . . (1,106) (9,726) - (10,832)
Net change in receivable from Parent . . . . . . . - - 62 62
------- --------- --------- --------
Balance at December 31, 1995 . . . . . . . . . . . . $47,653 $ - $ (47,210) $ 443
======= ========= ========= ========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
32
<PAGE> 33
EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,726 $ 9,868 $ 6,945
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . 1,703 1,701 1,701
Deferred income taxes . . . . . . . . . . . . . . . . . . . . (596) (595) 2,878
Changes in assets and liabilities:
Federal income taxes currently payable. . . . . . . . . . . . 157 (691) (1,787)
------- ------- -------
Net cash provided by operating activities . . . . . . . . . 10,990 10,283 9,737
------- ------- -------
Cash flows from investing activities:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . - (3) -
------- ------- -------
Net cash used in investing activities . . . . . . . . . . . - (3) -
------- ------- -------
Cash flows from financing activities:
Dividends/capital distributions . . . . . . . . . . . . . . . . (11,046) (8,225) (11,522)
Decrease (increase) in due from parent. . . . . . . . . . . . . 62 (2,053) 1,778
------- ------- -------
Net cash used in financing activities . . . . . . . . . . . (10,984) (10,278) (9,744)
------- ------- -------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . 6 2 (7)
Cash:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . 2 - 7
------- ------- -------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . $ 8 $ 2 $ -
======= ======= =======
Supplemental cash flow information:
Payments of income taxes through receivable from parent . . . . $ 5,676 $ 6,600 $ 6,600
======= ======= =======
Dividends/capital distributions declared but not paid . . . . . $ 2,536 $ 2,750 $ -
======= ======= =======
</TABLE>
The accompanying notes are an integral part
of these financial statements.
33
<PAGE> 34
EVE HOLDINGS INC.
Notes to Financial Statements
(Dollars in thousands, except per share amounts)
1. The Company
Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett Group
Inc. ("Liggett"). Eve's predecessor, Chesterfield Assets Inc., was organized
in March 1987. Eve, formed in June 1990, is the proprietor of, and has all
right, title and interest in, certain federal trademark registrations (the
"Trademarks"). Eve has entered into an exclusive licensing agreement with
Liggett (effective until 2010) whereby Eve grants the use of the Trademarks to
Liggett in exchange for royalties, computed based upon Liggett's annual net
sales, excluding excise taxes of $332,246, $333,799 and $346,052 for the years
ended December 31, 1995, 1994 and 1993, respectively. Generally, royalties are
earned based on a rate of either 2% of sales for generic product trademarks and
5% of sales for branded product trademarks. In recent fiscal years, Liggett
has experienced greater growth in the sales of generic rather than branded
products resulting in a lower overall royalty rate. The Trademarks are pledged
as collateral for borrowings under the notes (see Note 3).
2. Summary of Significant Accounting Policies
a. Basis of Presentation
On February 11, 1992, Eve consummated an Agreement and Plan of Merger (the
"Merger Agreement") with LGC Corp. (a wholly-owned subsidiary of Liggett)
whereby the operations of LGC Corp., consisting primarily of holding an
unsecured $44,250 note receivable (bearing interest at 14%, due November 2,
1996) from Liggett and related interest thereon, were merged into those of
Eve. The merger was accounted for at historical cost similar to that in
pooling of interests accounting. On March 7, 1994, Liggett and Eve agreed to
extend the due date of the note to no sooner than February 1, 1999 from
November 2, 1996. All other terms of the note remained the same.
b. Per Share Data
All of Eve's common shares (100 shares authorized, issued and outstanding
for all periods presented herein) are owned by Liggett. Accordingly, earnings
and dividends per share data are not presented in these financial statements.
c. Trademarks
Trademarks are amortized using the straight-line method over 12 years.
3. Guarantee of Liggett Notes
On February 14, 1992, Liggett issued $150,000 of Senior Secured Notes (the
"Series B Notes"). In connection with the issuance of the Series B Notes, the
Trademarks were pledged as collateral. In addition, Eve is a guarantor for
the Series B Notes.
During 1994, Liggett issued $32,850 of Series C Senior Secured Notes (the
"Series C Notes"). Eve is a guarantor for the Series C Notes.
34
<PAGE> 35
4. Income Taxes
Eve's operations are included in the consolidated federal income tax
return of its indirect parent, Brooke Group Ltd. Eve's federal income tax
provisions are calculated as if it filed a separate federal income tax return.
Effective January 1, 1993, Eve adopted the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109") which
requires that deferred taxes be recorded under the liability method, which
resulted in a one-time $3,374 charge to operations. Prior to the adoption of
SFAS 109, Eve had accounted for income taxes under the deferral method. Eve's
deferred tax liability relates entirely to the difference in the basis of the
Trademarks for book and tax purposes. Eve's 1995 income tax provision of
$5,237 consists of current federal income tax expense of $4,641 plus deferred
federal income tax expense of $596. Eve's 1994 income tax provision of $5,314
consists of current federal income tax expense of $5,909 less deferred federal
income tax benefit of $595. Eve's 1993 income tax provision of $5,708 consists
of current federal income tax expense of $6,204 less deferred federal income
tax benefit of $496. As permitted in SFAS 109, Eve had not adjusted the basis
of the Trademarks that were previously adjusted to net of tax amounts to be
consistent with the accounting treatment adopted by Liggett.
35
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be signed
on their behalf by the undersigned thereunto duly authorized on August 22,
1996.
LIGGETT GROUP INC.
(Registrant)
By: /s/ Samuel M. Veasey
--------------------
Samuel M. Veasey
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial and
Principal Accounting Officer)
EVE HOLDINGS INC.
(Registrant)
By: /s/ Joselynn D. Van Siclen
--------------------------
Joselynn D. Van Siclen
Director, Vice President and
Treasurer
(Principal Financial and
Principal Accounting Officer)
36
