LIGGETT GROUP INC /DE/, 10-Q, 1997-11-14

LIGGETT GROUP INC /DE/
10-Q, 1997-11-14
CIGARETTES

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<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997

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.)

100 SOUTHEAST SECOND STREET, MIAMI, FLORIDA 33131
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (305) 374-7714

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

Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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
----- -----

As of November 14, 1997 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.

<PAGE> 2

INDEX

<TABLE>
<CAPTION>
PAGE
----
PART I FINANCIAL INFORMATION

<S> <C>
Item 1. Financial Statements

Liggett Group Inc.:
-------------------

Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 .............................................. 3
Consolidated Statements of Operations for
the three and nine months
ended September 30, 1997 and 1996 .............................. 5
Consolidated Statement of Stockholder's Equity (Deficit) for
the nine months ended September 30, 1997 ....................... 6
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 .............................. 7
Notes to Consolidated Financial Statements ....................... 8

Eve Holdings Inc.:
-----------------

Balance Sheets as of September 30, 1997 and December 31, 1996 .... 20
Statements of Operations for the three and nine months ended
September 30, 1997 and 1996 .................................... 21
Statements of Cash Flows for the nine months ended September 30,
1997 and 1996 .................................................. 22
Notes to Financial Statements .................................... 23

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 25

PART II OTHER INFORMATION

Item 1. Legal Proceedings ................................................... 34

Item 6. Exhibits and Reports on Form 8-K .................................... 34

SIGNATURES .................................................................. 35

</TABLE>

2
<PAGE> 3

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

LIGGETT GROUP INC.

CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----

ASSETS

<S> <C> <C>
Current assets:
Accounts receivable:
Trade, less allowances of $1,044 and
$1,280, respectively ................................. $11,001 $19,316
Other .................................................. 788 744

Inventories .............................................. 37,793 50,122

Other current assets ..................................... 996 1,205
------- -------
Total current assets ................................. 50,578 71,387

Property, plant and equipment, at cost, less accumulated
depreciation of $28,852 and $29,511, respectively ........ 17,288 18,705

Intangible assets, at cost, less accumulated amortization
of $18,679 and $17,388, respectively ..................... 2,040 3,327

Other assets and deferred charges, at cost, less accumulated
amortization of $8,620 and $7,410, respectively .......... 3,292 4,258
------- -------
Total assets ......................................... $73,198 $97,677
======= =======
</TABLE>

(continued)

<PAGE> 4

LIGGETT GROUP INC.

CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

<S> <C> <C>
Current liabilities:
Current maturities of long-term debt .................... $37,391 $ 31,807
Cash overdraft .......................................... 1,422 6
Accounts payable:
Trade ................................................ 5,893 14,979
Affiliates ........................................... 2,482 216
Accrued expenses:
Promotional .......................................... 31,372 33,666
Compensation and related items ....................... 874 682
Taxes, principally excise taxes ...................... 1,688 7,565
Estimated allowance for sales returns ................ 5,000 5,000
Interest ............................................. 3,240 8,435
Other ................................................ 8,508 9,380
------- --------

Total current liabilities ......................... 97,870 111,736

Long-term debt, less current maturities .................... 138,542 144,698

Non-current employee benefits and other liabilities ........ 16,797 17,721

Commitments and contingencies (Notes 5 and 8)

Stockholder's equity (deficit):
Redeemable preferred stock (par value $1.00 per share;
authorized 1,000 shares; no shares issued and out-
standing)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital ................................. 47,640 49,840
Accumulated deficit ...................................... (227,651) (226,318)
------- --------

Total stockholder's deficit ....................... (180,011) (176,478)
------- --------

Total liabilities and stockholder's equity (deficit) $73,198 $ 97,677
======= ========
</TABLE>

The accompanying notes are an integral part
of these financial statements.

<PAGE> 5

LIGGETT GROUP INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1997 1996 1997 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales* .................................... $ 79,368 $ 101,125 $ 223,811 $ 292,899

Cost of sales* ................................ 35,971 45,614 102,444 134,439
-------- --------- --------- ---------

Gross profit ............................ 43,397 55,511 121,367 158,460

Selling, general and administrative expenses... 38,721 51,709 110,061 148,357

Restructuring ................................. 95 425 1,926 1,180
-------- --------- --------- ---------
Operating income ........................ 4,581 3,377 9,380 8,923

Other income (expense):
Interest income ............................ -- 23 60 23
Interest expense ........................... (5,950) (5,982) (17,920) (17,831)
Equity in income (loss) of affiliate ....... 321 (740) 506 (740)
Sale of assets ............................. (302) -- 3,692 3,698
Retirement of debt ......................... -- -- 2,963 --
Miscellaneous, net ......................... (1) -- (14) --
-------- --------- --------- ---------

Net loss before income taxes ............ (1,351) (3,322) (1,333) (5,927)

Income tax provision .......................... -- 3,800 -- 3,800
-------- --------- --------- ---------

Net loss ................................ $ (1,351) $ (7,122) $ (1,333) $ (9,727)
======== ========= ========= =========
</TABLE>

*Net sales and cost of sales include federal excise taxes of $19,250, $26,074,
$55,263, and $76,758, respectively.

The accompanying notes are an integral part
of these financial statements.

<PAGE> 6

LIGGETT GROUP INC.

CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(Unaudited)
(Dollars in thousands)

<TABLE>
<CAPTION>
Common
Stock and Total
Contributed Accumulated Stockholder's
Capital Deficit Deficit
----------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1996 ....................... $49,840 $(226,318) $(176,478)

Net loss ......................................... -- (1,333) (1,333)
Consideration for option to acquire affiliate
stock in excess of its net assets (Note 10) ..... (2,200) -- (2,200)
------- --------- ---------
Balance at September 30, 1997 ...................... $47,640 $(227,651) $(180,011)
======= ========= =========
</TABLE>

The accompanying notes are an integral part
of these financial statements.

<PAGE> 7

LIGGETT GROUP INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1997 1996
---- ----

<S> <C> <C>
Cash flows from operating activities:
Net loss ...................................................... $ (1,333) $ (9,727)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................... 5,180 6,071
Deferred income taxes ....................................... 3,800
Gain on sale of property, plant and equipment ............... (3,692) (3,698)
Gain on retirement of notes ................................. (2,963) --
Deferred finance charges and debt discount written off ...... 130 --
Equity in income of affiliate ............................... (506) 740
Changes in assets and liabilities:
Accounts receivable ......................................... 8,271 5,537
Inventories ................................................. 12,329 3,977
Accounts payable ............................................ (6,864) (261)
Accrued expenses ............................................ (13,526) (6,141)
Non-current employee benefits ............................... (434) (246)
Other, net .................................................. (1,336) (914)
--------- ---------
Net cash used in operating activities ....................... (4,744) (862)

Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ........... 4,589 4,415
Capital expenditures .......................................... (1,282) (2,983)
Purchase of an option in affiliate ............................ (2,200) (5,500)
--------- ---------
Net cash provided by (used in) investing activities ......... 1,107 (4,068)

Cash flows from financing activities:
Repayments of long-term debt .................................. (4,721) (191)
Borrowings under revolving credit facility .................... 209,822 264,473
Repayments under revolving credit facility .................... (202,880) (254,963)
Deferred finance charges -- (18)
Increase (decrease) in cash overdraft ......................... 1,416 (3,761)
--------- ---------
Net cash provided by financing activities ................... 3,637 5,540

Net increase in cash and cash equivalents ....................... 0 610
Cash and cash equivalents:
Beginning of period ........................................... 0 0
--------- ---------
End of period ................................................. $ 0 $ 610
========= =========

Supplemental cash flow information:
Cash payments during the period for:
Interest ...................................................... $ 22,616 $ 22,400
Income taxes .................................................. $ 118 $ 129
</TABLE>

The accompanying notes are an integral part
of these financial statements.

<PAGE> 8

LIGGETT GROUP INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

1. The Company

Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group Ltd.
("BGL"). Liggett is engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. Certain management and administrative
functions are performed by affiliates. (See Note 10.)

The consolidated financial statements included herein are unaudited and, in
the opinion of management, reflect all adjustments necessary (which are normal
and recurring) to present fairly the Company's consolidated financial position,
results of operations and cash flows. The December 31, 1996 balance sheet has
been derived from audited financial statements. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements included in the Company's Annual Report on Form 10-K, as amended, for
the year ended December 31, 1996, as filed with the Securities and Exchange
Commission. The results of operations for interim periods should not be regarded
as necessarily indicative of the results that may be expected for the entire
year.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $180,011 as of September 30, 1997, is highly leveraged and
has substantial near-term debt service requirements. (See Note 7). Due to the
many risks and uncertainties associated with the cigarette industry and the
impact of tobacco litigation (see Note 8), there can be no assurance that the
Company will be able to meet its future earnings or cash flow goals.
Consequently, the Company could be in violation of certain debt covenants, and
if its lenders were to exercise acceleration rights under its revolving credit
facility (the "Facility") or the indenture for its Senior Secured Notes (the
"Liggett Notes") or refuse to lend under the Facility, the Company would not be
able to satisfy such demands or its working capital requirements.

As of September 30, 1997, the current maturities of the Liggett Notes of
$37,391 (net of unamortized discount) contribute substantially to the working
capital deficit of approximately $47,292. Further, the Liggett Notes require a
mandatory principal redemption of $37,500 on February 1, 1998 and a payment at
maturity on February 1, 1999 of $107,400. In November 1997, the Facility was
extended for an additional year until March 8, 1999.

While the Company has engaged in negotiations with its note holders to
restructure the terms of the Liggett Notes, there are no commitments to
restructure the Liggett Notes, and no assurances can be given in this regard.
Based on the Company's net loss for 1996 and anticipated 1997 operating results,
the Company does not anticipate it will be able to generate sufficient cash from
operations to make such payments. During such negotiations, the Company
postponed making the interest payment of approximately $9,700 due on August 1,
1997 on the Liggett Notes. On August 29, 1997, the Facility was amended to
permit the Company to borrow an additional $6,000 which was used on that date in
making the interest payment of $9,700 due on August 1, 1997 to the Liggett note
holders. BGLS guaranteed the additional $6,000 advance under the Facility and
collateralized the guarantee with $6,000 in cash, deposited with Liggett's
lenders.

If the Company is unable to restructure the terms of the Liggett Notes, or
otherwise make all payments thereon, substantially all of its long-term debt and
the Facility would be in default and holders of such debt could accelerate the
maturity of such debt. In such event, the Company may be forced to seek
protection from creditors under applicable laws. These matters raise substantial
doubt about the Company

<PAGE> 9

meeting its liquidity needs and its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

2. Estimates and Assumptions

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant estimates subject to material changes in the
near term include allowance for doubtful accounts, sales returns and allowances,
actuarial assumptions of pension plans and litigation and defense costs. Actual
results could differ from those estimates.

3. 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.

4. Sale of Assets

On April 29, 1996, Liggett executed a definitive agreement (as amended)
with Blue Devil Ventures, a North Carolina limited liability partnership, for
the sale by Liggett to Blue Devil Ventures of certain surplus realty in Durham,
North Carolina, for a sale price of $2,200. The net book value of those assets
($309) for which the agreement was signed was classified as current assets on
the Company's Consolidated Balance Sheet as of December 31, 1996. The
transaction closed on March 11, 1997. A gain of $1,147 was recognized, net of
costs required to prepare the properties for sale and selling costs. (See Note
10 for sales to affiliates.)

5. Inventories

Inventories consist of the following:

<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
Finished goods ......................... $ 13,103 $ 15,304
Work-in-process ........................ 3,951 4,382
Raw materials .......................... 23,543 31,338
Replacement parts and supplies ......... 3,605 3,554
-------- --------

Inventories at current cost ............ 44,202 54,578

LIFO adjustment ........................ (6,409) (4,456)
-------- --------

Inventories at LIFO cost ............... $ 37,793 $ 50,122
======== ========
</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

9
<PAGE> 10

date of the commitment. Liggett had leaf tobacco purchase commitments of
approximately $12,207 at September 30, 1997.

6. Property, Plant and Equipment

Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----

<S> <C> <C>
Land and improvements ............ $ 455 $ 455
Buildings ........................ 6,150 5,848
Machinery and equipment .......... 39,535 41,913
-------- --------

Property, plant and equipment .... 46,140 48,216

Less accumulated depreciation .... (28,852) (29,511)
-------- --------

Property, plant and equipment, net $ 17,288 $ 18,705
======== ========
</TABLE>

7. Long-Term Debt

Long-term debt consists of the following:

<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
11.5% Senior Secured Notes due
February 1, 1999, net of unamortized
discount of $254 and $424, respectively .... $ 112,358 $ 119,688
Variable Rate Series C Senior Secured
Notes due February 1, 1999 ................. 32,279 32,279
Borrowings outstanding under revolving credit
facility .................................. 31,214 24,272
Other ....................................... 82 266
--------- ---------
175,933 176,505

Current portion ............................. (37,500) (31,807)
Unamortized discount, current portion ....... 109 0
--------- ---------
Amount due after one year ................... $ 138,542 $ 144,698
========= =========
</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 "Liggett Notes") required
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
Liggett Notes due on February 1, 1999. In February 1997, $7,500 of the Series B
Notes were purchased using revolver availability and credited against the
mandatory redemption requirements. The transaction resulted in a net gain of
$2,963. The Liggett Notes are collateralized by substantially all of the assets
of the Company, excluding inventories and

10
<PAGE> 11

receivables. Eve is a guarantor for the Notes. The Liggett Notes may be
redeemed, in whole or in part, at a price equal to 102% and 100% of the
principal amount in the years 1997 and 1998, respectively, at the option of the
Company. The Liggett 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.

Revolving Credit Facility

On March 8, 1994, Liggett entered into the Facility under which it can borrow up
to $40,000 (depending on the amount of eligible inventory and receivables as
determined by the lenders) from a syndicate of commercial lenders. Availability
under the Facility was approximately $2,809 based upon eligible collateral at
September 30, 1997. The Facility is collateralized by all inventories and
receivables of the Company. Borrowings under the Facility are charged interest
calculated at a rate equal to 1.5% above Philadelphia National Bank's (the
indirect parent of Congress Financial Corporation, the lead lender) prime rate.
Liggett's interest rate is currently 10.0%. The Facility contains certain
financial covenants similar to those contained in the Liggett Notes indenture,
including 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. In addition, the Facility currently imposes
requirements with respect to the Company's adjusted net worth (not to fall below
a deficit of $180,000 as computed in accordance with the agreement, this
computation is currently $173,602) and working capital (not to fall below a
deficit of $12,000 as computed in accordance with the agreement, this
computation is currently $3,492). The Company is currently in compliance with
these covenants.

During the first quarter of 1997, the Company violated the working capital
covenant contained in the Facility as a result of the 1998 mandatory redemption
payment on the Liggett Notes becoming due within one year. On March 19, 1997,
the lead lender agreed to waive this covenant default, and the Facility was
amended as follows: (i) the working capital definition was changed to exclude
the current portion of the Liggett Notes; (ii) the maximum permitted working
capital deficit, as defined, was reduced to $12,000; (iii) the maximum permitted
adjusted net worth deficit was increased to $180,000; and (iv) the permitted
advance rates under the Facility for eligible inventory were reduced by five
percent.

The Company has engaged in negotiations with a committee composed of a
majority of its note holders to restructure the terms of the Liggett Notes.
During such negotiations, the Company postponed making the interest payment of
approximately $9,700 due on August 1, 1997 on the Liggett Notes. On August 29,
1997, the Facility was amended to permit the Company to borrow an additional
$6,000 which was used on that date in making the interest payment of $9,700 due
on August 1, 1997 to the Liggett note holders. BGLS guaranteed the additional
$6,000 advance under the Facility and collateralized the guarantee with $6,000
in cash, deposited with Liggett's lenders. In November 1997, the Facility was
extended until March 8, 1999. The balance on the Facility, $31,214, was
reclassified from current to long-term debt as of September 30, 1997. For
information concerning Liggett's substantial near-term debt service requirements
and other related matters, see Note 1.

11
<PAGE> 12

8. Contingencies

Tobacco-Related Litigation

OVERVIEW. 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 cases were
actually commenced against Liggett or BGL). There has been a noteworthy increase
in the number of cases pending against both Liggett and the other tobacco
companies. The cases generally fall into three categories: (i) smoking and
health cases alleging personal injury brought on behalf of individual smokers
("Individual Actions"), (ii) smoking and health cases alleging personal injury
and purporting to be brought on behalf of a class of plaintiffs ("Class
Actions") and (iii) health care cost recovery actions brought by state and local
governments, although recently several health care cost recovery actions have
been commenced on behalf of other third-party payors including asbestos
manufacturers, unions and taxpayers ("Attorneys General Actions"). 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.
Liggett had been receiving assistance from others in the industry in defraying
the costs and other burdens incurred in the defense of smoking and health
litigation and related proceedings, but these benefits have ended. The future
financial impact on Liggett of the termination of this assistance and the
effects of the tobacco litigation settlements discussed below is not
quantifiable at this time.

On June 24, 1992, in an action entitled Cipollone v. Liggett Group Inc., et
al., the United States Supreme Court issued an opinion concluding that The
Federal Cigarette Labeling and Advertising Act did not preempt state common law
damage claims but that The Public Health Cigarette Smoking Act of 1969 (the
"1969 Act") did preempt certain, but not all, state common law damage claims.
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. 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.

INDIVIDUAL ACTIONS. As of September 30, 1997, there were 218 cases pending
against Liggett, and in most cases the other tobacco companies, where individual
plaintiffs allege injury resulting from cigarette smoking, addiction to
cigarette smoking or exposure to ETS and seek compensatory and, in some cases,
punitive damages. Of these, 103 are pending in the State of Florida, 62 are
pending in the State of New York and 19 are pending in the State of Texas. The
balance of individual cases are pending in 15 states. Of the 218 individual
cases, there are five cases pending where Liggett is the only named
defendant.

The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, special duty, voluntary undertaking, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust
enrichment, common law public nuisance, indemnity, market share liability, and
violations of deceptive trade practices laws, the Federal Racketeer Influenced
and Corrupt Organization Act ("RICO") and antitrust statutes. In many of these
cases, in addition to compensatory damages, plaintiffs also seek other forms of
relief including disgorgement of profits and punitive damages. Defenses raised
by defendants in these cases include lack of proximate cause, assumption of the
risk, comparative fault and/or contributory negligence, lack of design defect,
statute of limitations, equitable defenses such as "unclean hands" and lack of
benefit, failure to state a claim and federal preemption.

12
<PAGE> 13
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 alleging as injury lung cancer. On October 6, 1997, the parties settled
this matter.

CLASS ACTIONS. As of September 30, 1997, there were 39 actions pending, for
which either a class has been certified or plaintiffs are seeking class
certification, where Liggett, among others, was a named defendant. Two of these
cases, Fletcher, et al. v. Brooke Group Ltd., et al. and Walker, et al. v.
Liggett Group Inc., et al. have been settled, subject to court approval. These
two settlements are more fully discussed below under the "Settlements" section.

On October 31, 1991, an action entitled Broin, et al. v. Philip Morris
Incorporated, et al., Circuit Court of the Eleventh Judicial District in and for
Dade County, Florida, was filed against Liggett and others. This case 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 October 10, 1997, the other major tobacco
companies settled this matter, subject to a fairness hearing, which settlement
would provide for a full release on behalf of Liggett and BGL.

On March 25, 1994, an action entitled Castano, et al. v. The American
Tobacco Company Inc., et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged addiction
to nicotine. On February 17, 1995, the District Court granted plaintiffs' motion
for class certification. On May 23, 1996, the Court of Appeals for the Fifth
Circuit reversed the February 17, 1995, order of the District Court certifying
the Castano suit as a nationwide class action and instructed the District Court
to dismiss the class complaint.

ATTORNEYS GENERAL ACTIONS. As of September 30, 1997, 38 state Attorneys
General actions were filed and served on Liggett and BGL. As more fully
discussed below, Liggett has reached settlements in 26 of these actions. As of
September 30, 1997, there were 18 additional third-party payor actions pending.
In certain of the pending proceedings, state and local government entities and
others seek reimbursement for Medicaid and other health care expenditures
allegedly caused by use of tobacco products. The claims asserted in these health
care cost recovery actions vary. In most of these cases, plaintiffs assert the
equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs'
payment of health care costs allegedly attributable to smoking and seek
reimbursement of those costs. Other claims made by some but not all plaintiffs
include the equitable claim of indemnity, common law claims of negligence,
strict liability, breach of express and implied warranty, violation of a
voluntary undertaking or special duty, fraud, negligent misrepresentation,
conspiracy, public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false advertising, and
claims under RICO.

SETTLEMENTS. On March 12, 1996, Liggett and BGL entered into an agreement,
subject to court approval, to settle the Castano class action tobacco
litigation. Under the Castano settlement agreement, upon final court approval of
the settlement, the Castano class would be entitled to receive up to five
percent of Liggett's pretax income (income before income taxes) each year (up to
a maximum of $50,000 per year) for the next 25 years, subject to certain
reductions provided for in the agreement. Liggett and BGL have the right to
terminate the Castano settlement under certain circumstances. On March 14, 1996,
BGL, the Castano Plaintiffs legal Committee and the Castano plaintiffs entered
into a letter agreement. According to the terms of the letter agreement, for the
period ending nine months from the date of Final Approval (as defined in the
letter), if granted, of the Castano settlement or, if earlier, the completion by
Liggett or BGL of a combination with any defendant in Castano, except Philip
Morris, the Castano plaintiffs and their counsel agree not to enter into any
more favorable settlement agreement with

13
<PAGE> 14

any Castano defendant which would reduce the terms of the Castano settlement
agreement. If the Castano plaintiffs or their counsel enter into any such
settlement during this period, they shall pay BGL $250,000 within 30 days of the
more favorable agreement and offer Liggett and BGL the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the Castano settlement agreement has not been earlier terminated
by 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 or its affiliates enter into any
such transaction, then the Castano plaintiffs will be entitled to receive
$250,000 within 30 days from the transacting party. On May 11, 1996, the Castano
Plaintiffs Legal Committee filed a motion with the United States District Court
for the Eastern District of Louisiana seeking preliminary approval of the
Castano settlement. On September 6, 1996, shortly after the class was
decertified, the Castano plaintiffs withdrew the motion for approval of the
Castano settlement.

On March 15, 1996, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida, Louisiana,
Mississippi, West Virginia and Massachusetts (the "March 1996 Settlement"). The
March 1996 Settlement releases Liggett and BGL from all tobacco-related claims
including claims for health case cost reimbursement and claims concerning sales
of cigarettes to minors. The March 1996 Settlement provides that additional
states which commence similar 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 March 1996 Settlement
are summarized below.

Under the March 1996 Settlement, the five settling states would share an
initial payment by Liggett of $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 60 days after either a
default by Liggett in its payment obligations under the settlement or a merger
or other similar transaction by Liggett or BGL with another defendant in the
lawsuits. In addition, Liggett will be required to pay the settling 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 is 2-1/2%
of Liggett's pretax income, subject to increase to 7-1/2% depending on the
number of additional states joining the settlement. No additional states have
joined this settlement to date. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to the
settling states $5,000 if Liggett or BGL fails to consummate a merger or other
similar transaction with another defendant in the lawsuits within three years of
the date of the March 1996 Settlement.

Settlement funds received by the Attorneys General will be used to
reimburse the states for smoking-related health care costs. Liggett and BGL 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. Liggett and
BGL have the right to terminate the March 1996 Settlement with respect to any
settling state if any of the remaining defendants in the litigation succeed on
the merits in that state's respective Attorney General action. Liggett and BGL
may also terminate the March 1996 Settlement if they conclude that too many
states have filed Attorney General actions and have not settled such cases with
Liggett and BGL.

At December 31, 1995, Liggett had accrued approximately $4,000 for the
present value of the fixed payments under the March 1996 Settlement. No
additional amounts have been accrued with respect to the recent settlements
discussed below. BGL cannot quantify the future costs of the settlements at this
time as the amount Liggett must pay is based, in part, on future operating
results. Possible future payments based on a percentage of pretax income, and
other contingent payments based on the occurrence of a business combination,
will be expensed when considered probable.

On March 20, 1997, Liggett, together with BGL, entered into a comprehensive
settlement of tobacco litigation through parallel agreements with the Attorneys
General of 17 additional states (the "March 1997 Settlement") and with a
nationwide class of individuals and entities that allege smoking-related claims.
The settlements cover all smoking-related claims, including both addiction-based
and

<PAGE> 15

tobacco injury claims against Liggett and BGL, brought by the Attorneys General
and, upon court approval, the nationwide class.

As of September 30, 1997, settlements with a total of 26 Attorneys General
were reached, including the Attorneys General of Alaska, Arizona, California,
Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan,
Minnesota, Nevada, New Jersey, New York, Oklahoma, Oregon, Texas, Utah,
Washington and Wisconsin. The March 1996 Settlement remains in full force and
effect. Other states have either recently filed health care cost recovery
actions or indicated intentions to do so. Both Liggett and BGL will endeavor to
resolve those actions on substantially the same terms and conditions as the
March 1997 Settlement; however, there can be no assurance that any such
settlements will be completed.

As mentioned above, on March 20, 1997, Liggett, BGL and plaintiffs filed
the mandatory class settlement agreement in an action entitled Fletcher, et al.
v. Brooke Group Ltd., et al., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the class,
and on May 15, 1997 a similar mandatory class settlement agreement was filed in
an action entitled Walker, et al. v. Liggett Group Inc., et al., United States
District Court, Southern District of West Virginia. The Walker court also
granted preliminary approval and preliminary certification of the nationwide
class; however, on August 5, 1997, the court vacated its preliminary
certification of the settlement class, which decision is currently on appeal.

In the Fletcher action, it is anticipated that class members will be
notified of the settlement and will have an opportunity to appear at a later
court hearing. Effectiveness of the mandatory settlement is conditioned on final
court approval of the settlement after a fairness hearing. There can be no
assurance as to whether, or when, such court approval will be obtained.

Pursuant to the above-mentioned settlements, Liggett and BGL agreed to
cooperate fully with the Attorneys General and the nationwide class in their
respective lawsuits against the tobacco industry. Liggett and BGL agreed to
provide to these parties all relevant tobacco documents in their possession,
other than those subject to claims of joint defense privilege, and to waive,
subject to court order, certain attorney-client privileges and work product
protections regarding Liggett's smoking-related documents to the extent Liggett
and BGL can so waive these privileges and protections. The Attorneys General and
the nationwide class agreed to keep Liggett's documents under protective order
and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may be
subject to a joint defense privilege with other tobacco companies will not be
produced to the Attorneys General or the nationwide class, but will be, pursuant
to court order, submitted to the appropriate court and placed under seal for
possible in camera review. Additionally, under similar protective conditions,
Liggett and BGL agreed to offer their employees for witness interviews and
testimony at deposition and trial. Pursuant to both settlement agreements,
Liggett also agreed to place an additional warning on its cigarette packaging
stating that "smoking is addictive" and to issue a public statement, as
requested by the Attorneys General. Liggett has commenced distribution of
cigarette packaging which displays the new warning label.

Under the terms of the new settlement agreements, Liggett will pay on an
annual basis 25% of its pretax income for the next 25 years into a settlement
fund, commencing with the first full fiscal year starting after the date of the
agreements. Monies collected in the settlement fund will be overseen by a
court-appointed committee and utilized to compensate state health care programs
and settlement class members and to provide counter-market advertising. Liggett
also agreed to phase-in compliance with certain proposed 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.

15
<PAGE> 16

engaged in domestic tobacco operations and a waiver of any obligation to post a
bond to appeal any future adverse judgment. In addition, within 120 days
following any such combination, Liggett would be required to pay the settlement
fund $25,000. The settling Attorneys General and the nationwide class have
agreed not to seek an injunction preventing a defendant tobacco company
combining with Liggett or BGL from spinning off any affiliate which is not
engaged in the domestic tobacco business.

Liggett and BGL are also entitled to most favored nation treatment in the
event any settling Attorney General reaches a settlement with any other
defendant tobacco company. In addition, in the event of a "global" tobacco
settlement enacted through Federal legislation or otherwise, the settling
Attorneys General and tobacco plaintiffs agreed to use their "best efforts" to
ensure that Liggett's and BGL's liability under such a plan should be no more
onerous than under these new settlements.

IMMINENT TRIALS. Although trial schedules are subject to change, the next
case scheduled for trial, where Liggett is a defendant, is State of Minnesota
by Hubert H. Humphrey, III, its Attorney General and Blue Cross and Blue Shield
of Minnesota v. Philip Morris Incorporated, et al., District Court of the
Second Judicial District, Ramsey County, Minnesota, which is scheduled for
trial in January, 1998. Liggett settled the claims of the State of Minnesota
on March 20, 1997, but still remains a defendant in the case with respect to
the State's co-plaintiff, Blue Cross and Blue Shield of Minnesota. In
addition, there is one class action, Engle, et al. v. R.J. Reynolds Tobacco
Company, et al., Circuit Court, 11th Judicial Circuit, Dade County, Florida and
one individual ETS case, Dunn and Wiley v. RJR Nabisco Holdings Corp., et al.,
Superior Court, Delaware County, Indiana, scheduled for trial in February 1998.

OTHER MATTERS. On June 20, 1997, Philip Morris Incorporated ("Philip
Morris"), R. J. Reynolds Tobacco Company ("RJR"), B&W, Lorillard Tobacco Company
("Lorillard") and the United States Tobacco Company, along with the Attorneys
General for the States of Arizona, Connecticut, Florida, Mississippi, New York
and Washington and the Castano Plaintiffs' Litigation Committee executed a
Memorandum of Understanding to support the adoption of federal legislation and
necessary ancillary undertakings, incorporating the features described in a
proposed resolution. The proposed resolution mandates a total reformation and
restructuring of how tobacco products are manufactured, marketed and distributed
in the United States. The proposals are currently being reviewed by the White
House, Congress and various public interest groups. Separately, the other
tobacco companies negotiated settlements with the Attorneys General for health
care cost recovery actions in Mississippi and Florida. Management is unable to
predict the ultimate effect, if any, of the enactment of legislation adopting
the proposed resolution. Management is also unable to predict the ultimate
content of any such legislation; however, adoption of any such legislation could
have a material adverse effect on the business of Liggett.

On March 20, 1997, RJR, Philip Morris, B&W, and Lorillard obtained a
temporary restraining order from a North Carolina state court preventing Liggett
and BGL and their agents, employees, directors, officers and lawyers from
turning over documents allegedly subject to the joint defense privilege in
connection with the settlements, which restraining order was converted to a
preliminary injunction by the court on April 9, 1997. This ruling is currently
on appeal by Liggett and BGL. On June 5, 1997, the North Carolina Supreme Court
denied Liggett's Motion to Stay the case pending appeal. On March 24, 1997, the
United States District Court for the Eastern District of Texas and state courts
in Mississippi and Illinois each issued orders enjoining the other tobacco
companies from interfering with Liggett's filing with the courts, under seal,
those documents.

Liggett understands that a grand jury investigation 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 "CTR"). Liggett was a sponsor of
the CTR at one time. In May 1996, Liggett received a subpoena from a Federal
grand jury sitting in the Eastern District of New York, to which Liggett has
responded. Liggett is unable, at this time, to predict the outcome of this
investigation.

In March 1996, March 1997, July 1997 and October 1997 Liggett and/or BGL
received subpoenas from a Federal grand jury in connection with an investigation
by the United States Department of Justice, relating to issues raised in
testimony provided by tobacco industry executives before Congress and other
related matters. Liggett has responded to the March 1996 and March 1997
subpoenas and is in the process of responding to the July and October 1997
subpoenas. Liggett and BGL are unable, at this time, to predict the outcome of
this investigation.

Liggett has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. Liggett's current operations are conducted in material compliance
with all environmental laws and regulations. Management is unaware of any
material environmental conditions affecting its existing facilities. Compliance
with federal, state and local provisions regulating the discharge of materials
into the environment, or otherwise relating to the

16
<PAGE> 17

protection of the environment, has not had a material effect on the capital
expenditures, earnings or competitive position of Liggett.

Litigation is subject to many uncertainties, and it is possible that some
of the aforementioned actions could be decided unfavorably against Liggett. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Liggett is unable to evaluate the
effect of these developing matters on pending litigation or the possible
commencement of additional litigation.

There are several other proceedings, lawsuits and claims pending against
Liggett unrelated to smoking or tobacco product liability. Management is of the
opinion that the liabilities, if any, ultimately resulting from such other
proceedings, lawsuits and claims should not materially affect Liggett's
financial position, results of operations or cash flows.

Liggett 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
Liggett. It is possible that Liggett'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.

Legislation and Regulation

On August 28, 1996, the FDA filed in the Federal Register a Final Rule (the
"FDA Rule") classifying tobacco as a drug, asserting jurisdiction by the FDA
over the manufacture and marketing of tobacco products and imposing restrictions
on the sale, advertising and promotion of tobacco products. Litigation was
commenced in the United States District Court for the Middle District of North
Carolina challenging the legal authority of the FDA to assert such jurisdiction,
as well as challenging the constitutionality of the rules. The court, after
argument, granted plaintiffs' motion for summary judgment prohibiting the FDA
from regulating or restricting the promotion and advertising of tobacco products
and denied plaintiffs' motion for summary judgment on the issue of whether the
FDA has the authority to regulate access to, and labeling of, tobacco products.
The four major cigarette manufacturers and the FDA have filed notices of appeal.
Liggett and BGL support the FDA Rule and have begun to phase in compliance with
certain of the proposed interim FDA regulations. See discussions of the Castano
and Attorneys General settlements above.

In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. On February 7, 1997,
the United States District Court for the District of Massachusetts denied an
attempt to block the new legislation on the ground that it is preempted by
federal law. Liggett and BGL support this proposed legislation.

On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota ("TRQ") on
certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain specified levels, which
levels vary by country. Management believes that the TRQ levels are sufficiently
high to allow Liggett 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 material
adverse effect on Liggett.

In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban smoking
in the workplace. Hearings were completed during

<PAGE> 18
1995. OSHA has not yet issued a final rule or a proposed revised rule. While
Liggett cannot predict the outcome, some form of federal regulation of smoking
in workplaces may result.

In January 1993, the United States Environmental Protection Agency ("EPA")
released a report on the respiratory effect of ETS which concludes that ETS is a
known human lung carcinogen in adults, and in children causes increased
respiratory tract disease and middle ear disorders and increases the severity
and frequency of asthma. In June 1993, the two largest of the major domestic
cigarette manufacturers, together with other segments of the tobacco and
distribution industries, commenced a lawsuit against the EPA seeking a
determination that the EPA did not have the statutory authority to regulate ETS,
and that given the current body of scientific evidence and the EPA's failure to
follow its own guidelines in making the determination, the EPA's classification
of ETS was arbitrary and capricious. Whatever the outcome of this litigation,
issuance of the report may encourage efforts to limit smoking in public areas.

As part of the budget agreement recently approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 24 cents, would rise
10 cents in the year 2000 and 5 cents more in the year 2002.

In a speech on September 17, 1997, President Clinton called for federal
legislation that, among other things, would raise cigarette prices by up to
$1.50 per pack. In November 1997, several bills were introduced in the Senate
that purport to propose legislation along these lines. Management is unable to
predict the ultimate content of any such legislation; however, adoption of any
such legislation could have a material adverse effect on the business of
Liggett and BGL.

In addition to the foregoing, there have been a number of other restrictive
regulatory actions, adverse political decisions and other unfavorable
developments concerning cigarette smoking and the tobacco industry, the effects
of which, at this time, Liggett is not able to evaluate.

9. Income Taxes

During the quarter ended September 30, 1996, Liggett increased its
valuation allowance for its deferred tax assets by $3,800 based on its current
determination that it is more likely than not that such future tax benefits may
not be realized.

10. Related Party Transactions

On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of Liggett-Ducat
Ltd.'s ("Liggett-Ducat") tobacco operations from Brooke (Overseas) Ltd. ("BOL"),
an indirect subsidiary of BGL, for $2,100. Liggett-Ducat produces and markets
cigarettes in Russia. Liggett also acquired on that date for $3,400 a ten-year
option, exercisable by Liggett in whole or in part, to purchase from BOL at the
same per share price up to 292,407 additional shares of Liggett-Ducat, thereby
entitling Liggett to increase its interest in Liggett-Ducat to approximately
62%. On March 13, 1997, Liggett acquired a second ten-year option to purchase
BOL's remaining shares in Liggett-Ducat (an additional 33%) for $2,200 of which
$2,049 was paid in cash. Liggett accounted for its investment in Liggett-Ducat
under the equity method of accounting. Liggett's equity in the net income of
Liggett-Ducat amounted to $506 for the nine months ended September 30, 1997. The
excess of the cost of the option over carrying amount of net assets to be
acquired under the option has been charged to stockholder's deficit.

On April 28, 1997, BOL purchased excess production equipment from Liggett
for $3,000, for a gain of $2,578.

Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with BGL
and certain other entities pursuant to which Liggett has paid taxes to BGL as if
it were filing a separate company tax return,

18
<PAGE> 19
except that the agreement effectively limits the ability of Liggett to carry
back losses for refunds. Liggett is entitled to recoup overpayments in a given
year out of future payments due under the agreement.

Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements paid in
quarterly installments.

Liggett has entered into an annually renewable Corporate Services Agreement
with BGLS wherein BGLS agreed to provide corporate services to the Company at an
annual fee paid in monthly installments. Corporate services provided by BGLS
under this agreement include the provision of administrative services related to
Liggett's participation in its parent company's multi-employer benefit plan,
external publication of financial results, preparation of consolidated financial
statements and tax returns and such other administrative and managerial services
as may be reasonably requested by Liggett. The charges for services rendered
under the agreement amounted to $830, $790, $2,489 and $2,370 for the three and
nine months ended September 30, 1997 and 1996, respectively. Since April 1994,
the Company has leased equipment from BGLS for $50 per month.

11. Restructuring Charges

In the first nine months of 1997, the Company reduced its headcount by 123
full-time positions and recorded a $1,926 restructuring charge to operations for
severance programs, primarily salary continuation and related benefits for
terminated employees. Approximately $285 in restructuring charges will be funded
in subsequent years. The Company expects to continue its cost reduction
programs.

<PAGE> 20

EVE HOLDINGS INC.

BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----

ASSETS

<S> <C> <C>
Cash .......................................................... $ 6 $ --

Office equipment .............................................. 1 2

Trademarks, at cost, less accumulated amortization of
$18,569 and $17,294, respectively ........................... 1,844 3,119
-------- --------

Total assets .......................................... $ 1,851 $ 3,121
======== ========

LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)

Federal income taxes currently payable to parent .............. $ 59 $ --

Dividends payable ............................................. 1,178 4,623

Cash overdraft ................................................ -- 92

Other current liabilities ..................................... -- 19

Deferred income taxes ......................................... 645 1,092
-------- --------
Total liabilities ..................................... 1,882 5,826
-------- --------
Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital ................................................... 50,448 46,548

Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 ..................................... (44,520) (44,520)
Other ......................................................... (5,959) (4,733)
-------- --------

Total stockholder's equity (deficit) .................. (31) (2,705)
-------- --------

Total liabilities and stockholder's equity (deficit) .. $ 1,851 $ 3,121
======== ========
</TABLE>

The accompanying notes are an integral part
of these financial statements.

<PAGE> 21

EVE HOLDINGS INC.

STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)

<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ------------------------
1997 1996 1997 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Royalties - parent .............. $1,830 $2,233 $ 5,137 $ 6,383
Interest - parent ............... 1,576 1,576 4,729 4,729
------ ------ ------- -------
3,406 3,809 9,866 11,112
Expenses:
Amortization of trademarks ...... 425 425 1,276 1,275
Miscellaneous, net .............. 18 227 82 286
------ ------ ------- -------
Income before income taxes .... 2,963 3,157 8,508 9,551

Income tax provision .............. 486 1,105 1,323 3,343
------ ------ ------- -------
Net income .................... $2,477 $2,052 $ 7,185 $ 6,208
====== ====== ======= =======
</TABLE>

The accompanying notes are an integral part
of these financial statements.

<PAGE> 22

EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------
1997 1996
---- ----

<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 7,185 $ 6,208
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ............................... 1,276 1,275
Deferred income taxes ....................................... (447) (446)
Changes in assets and liabilities:
Federal income taxes currently payable to parent ............ 59 (160)
Other current liabilities ................................... (19) 200
------- -------

Net cash provided by operating activities ................. 8,054 7,077
------- -------
Cash flows from financing activities:
Dividends/capital distributions ............................... (6,730) (7,521)
Decrease (increase) in due from parent ........................ (1,226) 442
Decrease in cash overdraft .................................... (92) --
------- -------

Net cash used in financing activities ..................... (8,048) (7,079)
------- -------

Net increase in cash ............................................ 6 (2)

Cash:
Beginning of period ........................................... -- 8
------- -------

End of period ................................................. $ 6 $ 6
======= =======
Supplemental cash flow information:
Payments of income taxes through receivable from parent ....... $ 1,710 $ 3,949
Income taxes .................................................. 32 --
Dividends/capital distributions declared but not paid ......... 1,178 2,052
</TABLE>

The accompanying notes are an integral part
of these financial statements.

<PAGE> 23

EVE HOLDINGS INC.

NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(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, 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. The Trademarks are pledged as collateral for
Liggett's borrowings under the notes indentures (see Note 3).

2. Summary of Significant Accounting Policies

a. Going Concern

The accompanying financial statements have been prepared assuming that Eve
will continue as a going concern. Eve's revenues are comprised solely of
royalties and interest income from Liggett. In addition, Eve holds a note
receivable from Liggett for $44,520 due no sooner than February 1, 1999. Liggett
had a working capital deficiency of $47,292 and a net capital deficiency of
$180,011 as of September 30, 1997, is highly leveraged and has substantial
near-term debt service requirements. These matters raise substantial doubt about
Eve and Liggett meeting their liquidity needs and their ability to continue as
going concerns.

The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.

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.

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.

<PAGE> 24

4. Income Taxes

Eve qualifies as a company conducting operations exempt from income
taxation under Delaware General Statute Section 1903(b). In recent years, some
states have been aggressively pursuing companies exempt under this statute.
Eve's management believes that certain state income tax rulings supporting these
states' arguments will be ultimately reversed and that Eve's status as a company
not conducting business in these states will be respected. Consequently,
management has not provided a reserve for additional state income taxes. No
assurance can be given with regard to future state income tax rulings and audit
activity with respect to Eve.

<PAGE> 25

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT SELLING PRICES)

INTRODUCTION

Liggett Group Inc. ("Liggett" or the "Company") is the operating successor
to the Liggett & Myers Tobacco Company formed in 1873. Liggett is the fifth
largest manufacturer of cigarettes in the United States in terms of unit sales.

The following discussion provides an assessment of Liggett's consolidated
results of operations and capital resources and liquidity and should be read in
conjunction with the consolidated financial statements of Liggett and notes
thereto included elsewhere in this Report on Form 10-Q. The operating results of
the periods presented were not significantly affected by inflation.

Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett. Eve's
sole business is to hold certain federal trademark registrations used by, and to
license them on an exclusive basis to, Liggett and to hold a certain note
receivable from Liggett. Accordingly, Management's Discussion and Analysis of
Financial Condition and Results of Operations of Eve are not presented herein
because they are not material to Liggett's operations.

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 $180,011 and a working capital deficiency of $47,292 as of
September 30, 1997, is highly leveraged and has substantial near-term debt
service requirements. Due to the many risks and uncertainties associated with
the cigarette industry and the impact of tobacco litigation, there can be no
assurance that the Company will be able to meet its future earnings or cash flow
goals. Consequently, the Company could be in violation of certain debt
covenants, and if the lenders were to exercise acceleration rights under its
revolving credit facility (the "Facility") or the indenture for its Senior
Secured Notes (the "Liggett Notes") or refuse to lend under the Facility, the
Company would not be able to satisfy such demands or its working capital
requirements.

Further, the Liggett Notes require a mandatory principal redemption of
$37,500 on February 1, 1998 and a payment at maturity on February 1, 1999 of
$107,400. Based on Liggett's net loss for 1996 and anticipated 1997 operating
results, Liggett does not anticipate it will be able to generate sufficient cash
from operations to make such payments. While Liggett has engaged in negotiations
with its note holders to restructure the terms of the Liggett Notes, there are
no commitments to restructure the Liggett Notes, and no assurances can be given
in this regard. During such negotiations, Liggett postponed making the interest
payment of approximately $9,700 for the Liggett Notes due on August 1, 1997. On
August 29, 1997, the Facility was amended to permit the Company to borrow an
additional $6,000 which was used on that date in making the interest payment of
$9,700 due on August 1, 1997 to the Liggett note holders. BGLS guaranteed the
additional $6,000 advance under the Facility and collateralized the guarantee
with $6,000 in cash, deposited with Liggett's lenders. If Liggett is unable to
restructure the terms of the Liggett Notes, or otherwise make all payments
thereon, substantially all of its long-term debt and the Facility would be in
default and holders of such debt could accelerate the maturity of such debt. In
such event, Liggett may be forced to seek protection from creditors under
applicable laws. These matters raise substantial doubt about Liggett meeting its
liquidity needs and its ability to continue as a going concern. (See "Capital
Resources and Liquidity" below.)

In November 1997, the Facility was extended until March 8, 1999. The
balance on the Facility, $31,214, was reclassified from current to long-term
debt as of September 30, 1997.

<PAGE> 26

RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY

PRICING ACTIVITY. On March 7, 1997, R. J. Reynolds Tobacco Company ("RJR")
initiated a list price increase on all brands of $.40 per carton (approximately
4%). Brown & Williamson Tobacco Corporation ("B&W"), Lorillard Tobacco Company
("Lorillard") and Liggett matched this increase, and, on March 21, 1997, Philip
Morris Incorporated. ("Philip Morris") announced a price increase of $.50 per
carton. Subsequently, Liggett and the other manufacturers matched Philip Morris'
price increase. On August 29, 1997, Philip Morris announced a second price
increase of $.70 per carton. During the first week of September, all other major
United States cigarette makers, including Liggett, matched this increase.

LEGISLATION, REGULATION AND LITIGATION. The cigarette industry continues to
be challenged on numerous fronts. New cases continue to be commenced against
Liggett and other cigarette manufacturers. As of September 30, 1997, there were
218 individual suits, 39 class actions or actions where class certification has
been sought and 38 state (and numerous municipality and other third-party payor)
health care cost reimbursement actions pending in the United States in which
Liggett is a named defendant and has been served. As new cases are commenced,
the costs associated with defending such cases and the risks attendant to the
inherent unpredictability of litigation continue to increase. Recently, there
have been a number of restrictive regulatory actions from various Federal
administrative bodies, including the United States Environmental Protection
Agency ("EPA") and the Food and Drug Administration ("FDA"), adverse political
and legal decisions and other unfavorable developments concerning cigarette
smoking and the tobacco industry, including the commencement and certification
of class actions and the commencement of Medicaid reimbursement suits by various
states' Attorneys General. These developments generally receive widespread media
attention. Liggett is not able to evaluate the effect of these developing
matters on pending litigation or the possible commencement of additional
litigation, but it is possible that Liggett'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. See Note 8 to Liggett's
consolidated financial statements for a description of legislation, regulation
and litigation.

The claims asserted in the health care cost recovery actions vary. In most
of these cases, plaintiffs assert the equitable claim that the tobacco industry
was "unjustly enriched" by plaintiffs' payment of health care costs allegedly
attributable to smoking and seek reimbursement of those costs. Other claims made
by some but not all plaintiffs include the equitable claim of indemnity, common
law claims of negligence, strict liability, breach of express and implied
warranty, violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and federal
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under RICO.

<PAGE> 27
SETTLEMENTS. 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 West Virginia, Florida, Mississippi, Massachusetts and
Louisiana to settle certain actions brought against Liggett and BGL by such
states. Liggett and BGL, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed FDA regulations and to phase in compliance with
certain of the proposed interim FDA regulations.

Under the Castano settlement agreement, upon final court approval of the
settlement, the Castano class would be entitled to receive up to five percent of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next 25 years, subject to certain reductions
provided for in the agreement. BGL and Liggett have the right to terminate the
Castano settlement under certain circumstances. On May 11, 1996, the Castano
Plaintiffs Legal Committee filed a motion with the United States District Court
for the Eastern District of Louisiana seeking preliminary approval of the
Castano settlement. On May 23, 1996, the Court of Appeals for the Fifth Circuit
reversed the February 17, 1995 order of the District Court certifying the
Castano suit as a nationwide class action and instructed the District Court to
dismiss the class complaint. On September 6, 1996, the Castano plaintiffs
withdrew the motion for approval of the Castano settlement.

On March 14, 1996, Liggett, the Castano Plaintiffs Legal Committee and the
Castano plaintiffs entered into a letter agreement. According to the terms of
the letter agreement, for the period ending nine months from the date of Final
Approval (if granted) of the Castano settlement or, if earlier, the completion
by BGL or Liggett of a combination with any defendant in Castano, except Philip
Morris, the Castano plaintiffs and their counsel agree not to enter into any
more favorable settlement agreement with any Castano defendant which would
reduce the terms of the Castano settlement agreement. If the Castano plaintiffs
or their counsel enter into any such settlement during this period, they shall
pay Liggett $250,000 within 30 days of the more favorable agreement and offer
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 time period, and if the Castano settlement
agreement has not been earlier terminated by Liggett in accordance with its
terms, Liggett and its affiliates will not enter into any business transaction
with any third party which would cause the termination of the Castano settlement
agreement. If Liggett or its affiliates enter into any such transaction, then
the Castano plaintiffs will be entitled to receive $250,000 within 30 days from
the transacting party.

Under the Attorneys General settlement, the states would share an initial
payment by Liggett of $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
similar transaction by Liggett or BGL 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 is 2-1/2% of Liggett's pretax income,
subject to increase to 7-1/2% depending on the number of additional states
joining the settlement. No additional states have joined this settlement to
date. 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 Liggett
or BGL fails to consummate a merger or other similar transaction with another
defendant in the lawsuits within three years of the date of the settlement.

On March 20, 1997, Liggett, together with BGL, entered into a comprehensive
settlement of tobacco litigation through parallel agreements with the Attorneys
General of 17 states and with a nationwide class of individuals and entities
that allege smoking-related claims. The settlements cover all smoking-related
claims, including both addiction-based and tobacco injury claims against Liggett
and BGL, and upon court approval, the nationwide class.

27
<PAGE> 28
Attorneys General of Florida, Louisiana, Massachusetts, Mississippi and West
Virginia remains in full force and effect. Other states have either recently
filed health care cost recovery actions or indicated intentions to do so. Both
Liggett and the Company will endeavor to resolve those matters on substantially
the same terms and conditions as the prior settlements; however, there can be no
assurance that any such settlements will be completed.

As mentioned above, on March 20, 1997, Liggett, BGL and plaintiffs filed
the mandatory class settlement agreement in an action entitled Fletcher, et al.
v Brooke Group Ltd., et al., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the class,
and on May 15, 1997, a similar mandatory class settlement agreement was filed in
an action entitled Walker, et al. v. Liggett Group Inc., et al., United States
District Court, Southern District of West Virginia. The Walker court also
granted preliminary approval and preliminary certification of the nationwide
class; however, on August 5, 1997, the court vacated its preliminary
certification of the settlement class, which decision is currently on appeal.

Pursuant to the above-mentioned settlements, Liggett and BGL agreed to
cooperate fully with the Attorneys General and the nationwide class in their
respective lawsuits against the tobacco industry. Liggett and BGL agreed to
provide to these parties all relevant tobacco documents in their possession,
other than those subject to claims of joint defense privilege, and to waive,
subject to court order, certain attorney-client privileges and work product
protections regarding Liggett's smoking-related documents to the extent Liggett
and BGL can so waive these privileges and protections. The Attorneys General and
the nationwide class have agreed to keep Liggett's documents under protective
order and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may be
subject to a joint defense privilege with other tobacco companies will not be
produced to the Attorneys General or the nationwide class, but will be, pursuant
to court order, submitted to the appropriate court and placed under seal for
possible in camera review. Additionally, under similar protective conditions,
Liggett and BGL agreed to offer their employees for witness interviews and
testimony at deposition and trial. Pursuant to both settlement agreements,
Liggett also agreed to place an additional warning on its cigarette packaging
stating that "smoking is addictive" and to issue a public statement, as
requested by the Attorneys General. Liggett has commenced distribution of
cigarette packaging which displays the new warning label.

Under the recent settlement agreements, any other tobacco company
defendant, except Philip Morris, merging or combining with Liggett or BGL, prior
to the fourth anniversary of the settlements, would receive certain settlement
benefits, including limitations on potential liability for affiliates not
engaged in domestic tobacco operations and a waiver of any obligation to post a
bond to appeal any future adverse judgment. In addition, within 120 days
following any such combination, Liggett would be required to pay the settlement
fund $25,000. The settling Attorneys General and the nationwide class

28
<PAGE> 29
have agreed not to seek an injunction preventing a defendant tobacco company
combining with Liggett or BGL from spinning-off any of its affiliates which are
not engaged in the domestic tobacco business.

Liggett and BGL are also entitled to certain most favored nation treatment
in the event any settling Attorney General reaches a settlement with any other
defendant tobacco company. In addition, in the event of a "global" tobacco
settlement enacted through Federal legislation or otherwise, the settling
Attorneys General and tobacco plaintiffs agreed to use their "best efforts" to
ensure that Liggett's and BGL's liability under such a plan should be no more
onerous than under these new settlements.

At December 31, 1995, the Company had accrued approximately $4,000 for the
present value of the fixed payments under the initial Attorneys General
settlement and no additional amounts have been accrued with respect to the
recent settlements discussed above. The Company cannot quantify the future costs
of the settlements at this time as the amount Liggett must pay is based, in
part, on future operating results. Possible future payments based on a
percentage of pretax income, and other contingent payments based on the
occurrence of a business combination, will be expensed when considered probable.
See the discussions of the tobacco litigation settlements appearing in Note 8 to
Liggett's consolidated financial statements.

OTHER MATTERS. On June 20, 1997, Philip Morris, RJR, B&W, Lorillard and the
United States Tobacco Company, along with the Attorneys General for the States
of Arizona, Connecticut, Florida, Mississippi, New York and Washington and the
Castano Plaintiffs' Litigation Committee executed a Memorandum of Understanding
to support the adoption of federal legislation and necessary ancillary
undertakings, incorporating the features described in a proposed resolution. The
proposed resolution mandates a total reformation and restructuring of how
tobacco products are manufactured, marketed and distributed in the United
States. The proposals are currently being reviewed by the White House, congress
and various public interest groups. Separately, the other tobacco companies
negotiated settlements with the Attorneys General for health care cost recovery
actions in Mississippi and Florida. Management is unable to predict the ultimate
effect, if any, of the enactment of legislation adopting the proposed
resolution. Management is also unable to predict the ultimate content of any
such legislation. However, adoption of any such legislation could have a
material adverse effect on the business of Liggett.

In a speech on September 17, 1997, President Clinton called for federal
legislation that, among other thins, would raise cigarette prices by up to
$1.50 per pack. In November 1997, several bills were introduced in the Senate
that purport to propose legislation along these lines. Management is unable to
predict the ultimate content of any such legislation; however, adoption of any
such legislation could have a material adverse effect on the business of
Liggett and BGL.

RESULTS OF OPERATIONS

1997 Restructuring

In January 1997, Liggett underwent a major restructuring from a centralized
organization to a decentralized enterprise with four Strategic Business Units,
each a profit center, and a corporate headquarters. This restructuring is
intended to more closely align sales and marketing strategies with the unique
requirements of regional markets as well as reduce working capital by improved
production planning and inventory control.

During the first nine months of 1997, the Company reduced its headcount by
approximately 123 full-time positions and recorded a $1,926 restructuring charge
to operations for severance programs, primarily salary continuation and related
benefits for terminated employees. The anticipated savings of the restructuring
relate primarily to reduced payroll and benefits expenses in future periods.

Three Months Ended September 30, 1997 Compared to Three Months Ended September
30, 1996

Net sales were $79,368 for the three months ended September 30, 1997
compared to $101,125 for the same period in 1996. This 21.5% decrease in
revenues was due primarily to a 29.6% decrease in overall unit sales volume,
partially offset by the effects of the March 7, 1997 and September 3, 1997 list
price increases (see "Recent Developments in the Cigarette Industry - Pricing
Activity"). The decline in unit sales volume was comprised of declines within
the premium segment of 18.6% and discount segment (which includes generic,
control label and branded discount products) of 28.8%. The decline in premium

<PAGE> 30
and discount unit sales volume was due to certain competitors continuing
leveraged rebate programs tied to their products and increased promotional
activity by certain other manufacturers.

Gross profit was $43,397 for the three months ended September 30, 1997, a
decrease of $12,114 from $55,511 for the same period in 1996 due primarily to
the decline in unit sales volume discussed above. As a percent of revenues
(excluding federal excise taxes), gross profit decreased to 72.2% for the three
months ended September 30, 1997 compared to 74.0% for the same period in 1996.
This decrease is the result of increased tobacco costs due to a reduction in the
average discount available to Liggett from leaf tobacco dealers on tobacco
purchased under prior years' purchase commitments, partially offset by the March
1997 and September 1997 list price increases.

Operating income increased to $4,581 for the three months ended September
30, 1997 from $3,377 for the same period in 1996 due primarily to lower
promotion and marketing expenses, and reduced administrative charges resulting
from the 1997 restructuring discussed above, partially offset by the decline in
unit sales volume discussed above.

Interest expense was $5,950 for the three months ended September 30, 1997
compared to $5,982 for the same period in 1996.

Net loss amounted to $1,351 for the three months ended September 30, 1997
compared to a net loss of $7,122 for the same period in 1996. This reduction in
net loss was primarily the result of the factors discussed above which resulted
in higher operating income, the absence of an income tax provision and change in
equity in income from an affiliate.

Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996

Net sales were $223,811 for the nine months ended September 30, 1997
compared to $292,899 for the same period in 1996. This 23.6% decrease in
revenues was due primarily to a 30.8% decrease in overall unit sales volume,
partially offset by the effects of the March 7, 1997 and September 3, 1997 list
price increases (see "- Recent Developments in the Cigarette Industry - Pricing
Activity"). The decline in unit sales volume was comprised of declines within
the premium segment of 22.7% and discount segment (which includes generic,
control label and branded discount products) of 30.0%. The decline in premium
and discount unit sales volume was due to certain competitors continuing
leveraged rebate programs tied to their products and increased promotional
activity by certain other manufacturers.

Gross profit was $121,367 for the nine months ended September 30, 1997, a
decrease of $37,093 from $158,460 for the same period in 1996 due primarily to
the decline in unit sales volume discussed above. As a percent of revenues
(excluding federal excise taxes), gross profit decreased to 72.0% for the nine
months ended September 30, 1997 compared to 73.3% for the same period in 1996.
This decrease is the result of increased tobacco costs due to a reduction in the
average discount available to Liggett from leaf tobacco dealers on tobacco
purchased under prior years' purchase commitments, partially offset by the March
1997 and September 1997 list price increases.

Operating income increased to $9,380 for the nine months ended September
30, 1997 from $8,923 for the same period in 1996 due primarily to lower
promotion and marketing expenses, partially offset by the decline in unit sales
volume discussed above and restructuring charges, as well as higher legal
expenses.

Interest expense was $17,920 for the nine months ended September 30, 1997
compared to $17,831 for the same period in 1996. This increase in interest
expense was due to higher average outstanding balances under the revolving
credit facility, partially offset by the redemption of $7,500 Series B Notes in
February 1997.

<PAGE> 31
Net loss amounted to $1,333 for the nine months ended September 30, 1997
compared to a net loss of $9,727 for the same period in 1996. This reduction in
net loss was primarily the result of the factors discussed above which resulted
in higher operating income, the absence of an income tax provision, the gain on
sale of assets, a gain of $2,963 on the retirement of debt and a change in
equity in income from an affiliate.

CAPITAL RESOURCES AND LIQUIDITY

Cash used in operations was $4,744 for the nine months ended September 30,
1997 compared to $862 for the same period in 1996 due primarily to a decrease in
trade payables and a reduction in accrued promotional spending.

Liggett had been receiving assistance from others in the industry in
defraying the costs and other burdens incurred in the defense of smoking and
health litigation and related proceedings, but these benefits have ended. The
future financial impact on Liggett of the termination of this assistance and the
effects of the tobacco litigation settlements discussed below is not
quantifiable at this time.

Cash provided by investing activities amounted to $1,107 for the nine
months ended September 30, 1997, primarily due to the proceeds from asset sales
of approximately $4,589. This compares to cash used in investing activities of
$4,068 for the same period in 1996, resulting primarily from investments in
affiliates of approximately $5,500. For the first nine months of 1997, capital
expenditures totaled approximately $1,282, primarily for production facilities
and further equipment modernization, and anticipated spending for the remainder
of the year is projected at $500. These expenditures are expected to be funded
with cash flow from operations, borrowings under the Facility and proceeds from
the sale of assets.

Cash provided by financing activities for the nine months ended September
30, 1997 and 1996 of $3,637 and $5,540, respectively, resulted primarily from
net borrowings under the Facility, somewhat offset in 1997 by repayment of
long-term debt.

On March 8, 1994, Liggett entered into the Facility under which it can
borrow up to $40,000 (depending on the amount of eligible inventory and
receivables as determined by the lenders) from a syndicate of commercial
lenders. Availability under the Facility was approximately $2,809 based upon
eligible collateral at September 30, 1997. The Facility is collateralized by all
inventories and receivables of the Company. Borrowings under the Facility are
charged interest calculated at a rate equal to 1.5% above Philadelphia National
Bank's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate. Liggett's interest rate is currently 10.0%. The Facility contains
certain financial covenants similar to those contained in the Liggett Notes
indenture, including 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. In addition, the Facility currently imposes
requirements with respect to the Company's adjusted net worth (not to fall below
a deficit of $180,000 as computed in accordance with the agreement, this
computation is currently $173,602) and working capital (not to fall below a
deficit of $12,000 as computed in accordance with the agreement, this
computation is currently $3,492). The Company is currently in compliance with
these covenants.

On August 29, 1997, the Facility was amended to permit the Company to
borrow an additional $6,000 which was used on that date in making the interest
payment of $9,700 due on August 1, 1997 to the Liggett note holders. BGLS
guaranteed the additional $6,000 advance under the Facility and

<PAGE> 32
collateralized the guarantee with $6,000 in cash, deposited with Liggett's
lenders.

In November 1997, the Facility was extended until March 8, 1999. The
balance on the Facility, $31,214, was reclassified from current to long-term
debt as of September 30, 1997.

On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Series B Notes"). From the proceeds of $148,244, net of an original issue
discount, $144,054 was dividended to BGLS (which reduced stockholder's equity)
and $4,190 was paid as financing fees. 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 "Liggett 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
Liggett Notes due on February 1, 1999. The Liggett Notes are collateralized by
substantially all of the assets of the Company, excluding accounts receivable
and inventory. Eve is a guarantor for the Liggett Notes. The Liggett Notes may
be redeemed, in whole or in part, at a price equal to 102% and 100% of the
principal amount in the years 1997 and 1998, respectively, at the option of the
Company. The Liggett 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. At September 30, 1997, the Company was
in compliance with all covenants under the Liggett Notes indenture. BGLS Inc. or
its affiliates may from time to time, based on current market conditions,
purchase Liggett Notes in the open market or in privately negotiated
transactions.

On January 31, 1994, the Company issued $22,500 of Variable Rate Series C
Senior Secured Notes (the "Series C Notes"). Liggett received $15,000 from the
issuance in cash and received $7,500 in Series B Notes which were credited
against the mandatory redemption requirements for February 1, 1994. 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 indenture. In connection with the consents, holders of
Series B Notes received Series C Notes totaling two percent of their current
Series B Note holdings. The total principal amount of such Series C Notes issued
for this purpose 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.

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 $180,011 as of September 30, 1997, is highly leveraged and
has substantial near-term debt service requirements. Due to the many risks and
uncertainties associated with the cigarette industry and the impact of tobacco
litigation (see Note 8 to the Company's consolidated financial statements),
there can be no assurance that the Company will be able to meet its future
earnings or cash flow goals. Consequently, the Company could be in violation of
certain debt covenants, and if its lenders were to exercise acceleration rights
under the Facility or the indenture for the Liggett Notes or refuse to lend
under the Facility, the Company would not be able to satisfy such demands or its
working capital requirements.

As discussed above, the Liggett Notes require a mandatory principal
redemption of $37,500 on February 1, 1998 and a payment at maturity on February
1, 1999 of $107,400. Based on Liggett's net loss for 1996 and anticipated 1997
operating results, Liggett does not anticipate it will be able to generate
sufficient cash from operations to make such payments. While Liggett has engaged
in negotiations with its note holders to restructure the terms of the Liggett
Notes, there are no commitments to restructure the

<PAGE> 33

Liggett Notes at this time, and no assurances can be given in this regard.
During such negotiations, Liggett postponed making the interest payment of
approximately $9,700 for the Liggett Notes due on August 1, 1997. As discussed
above, the Company made the interest payment on August 29, 1997.

If Liggett is unable to restructure the terms of the Liggett Notes, or
otherwise make all payments thereon, substantially all of its long-term debt and
the Facility would be in default and holders of such debt could accelerate the
maturity of such debt. In such event, the Company may be forced to seek
protection from creditors under applicable laws. The Company's independent
accountants have issued a report covering the Company's December 31, 1996
consolidated financial statements containing an explanatory paragraph that
states that these facts raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
of the Company do not include any adjustments that might arise from the outcome
of this uncertainty. See Note 1 of the Company's consolidated financial
statements.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and elsewhere in
this report and in other filings with the Securities and Exchange Commission and
in its reports to securityholders which reflect management's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties and, in connection
with the "safe-harbor" provisions of the Reform Act, the Company is hereby
identifying important factors that could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. The Company continues to be subject to risk factors
endemic to the domestic tobacco industry including, without limitation, health
concerns relating to the use of tobacco products and exposure to environmental
tobacco smoke, legislation, including tax increases, governmental regulation,
privately imposed smoking restrictions, decline in consumption, governmental and
grand jury investigations and litigation. Furthermore, the Company is subject to
intense competition, changes in consumer preferences, the effects of changing
prices for its raw materials and local economic conditions. In addition, the
Company has a high degree of leverage and substantial near-term debt service
requirements, a mandatory principal redemption of $37,500 on the Liggett Notes
due February 1, 1998 and a payment at maturity of the Liggett Notes of $107,400
on February 1, 1999, as well as a significant net worth deficiency and working
capital deficiency and recent net losses, and is highly dependent upon its
revolving credit facility which currently expires in March 1999. See "Capital
Resources and Liquidity" for a discussion of certain matters which raise
substantial doubt about Liggett meeting its liquidity needs and its ability to
continue as a going concern. The Liggett Notes and the Facility contain
restrictions on the Company's ability to incur additional debt, grant liens,
enter into any new agreements with affiliates and declare or pay cash dividends,
among others. Due to such uncertainties and risks, investors are cautioned not
to place undue reliance on such forward-looking statements, which speak only as
of the date such statements are made. The Company does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.

33
<PAGE> 34
PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to information entitled "Contingencies" in Note 8 to the
Company's consolidated financial statements included elsewhere in this Report on
Form 10-Q.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a). Exhibits
--------
<S> <C> <C>
10.1 Settlement Agreement, dated September 5, 1997, by and among the
State of Nevada and Brooke Group Ltd. and Liggett Group Inc.
(incorporated by reference to exhibit 10.1 in BGL's Form 10-Q
for the quarterly period ended September 30, 1997).

10.2 Settlement Agreement, dated June 9, 1997, by and among the State
of Oregon and Brooke Group Ltd. and Liggett Group Inc.
(incorporated by reference to exhibit 10.2 in BGL's Form 10-Q for
the quarterly period ended September 30, 1997).

27.1 Liggett Group Inc.'s Financial Data Schedule (for SEC use only)

27.2 Eve Holdings Inc.'s Financial Data Schedule (for SEC use only)

(b). Reports on Form 8-K
-------------------
</TABLE>

During the third quarter of 1997, the Company filed a current report
on Form 8-K, dated June 31, 1997, concerning items 5 and 7 (no financial
statements were included therewith).

- ------------

34
<PAGE> 35

SIGNATURES

Pursuant to the requirements 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 November 14, 1997.

LIGGETT GROUP INC.

By: /s/ Samuel M. Veasey
--------------------
Samuel M. Veasey
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)

EVE HOLDINGS INC.

By: /s/ Joselynn D. Van Siclen
--------------------------
Joselynn D. Van Siclen
Vice President, Treasurer and
Assistant Secretary
(Principal Financial and Principal
Accounting Officer)

<ARTICLE> 5
<CIK> 0000887021
<NAME> LIGGETT GROUP INC.
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,045
<ALLOWANCES> 1,044
<INVENTORY> 37,793
<CURRENT-ASSETS> 50,578
<PP&E> 46,140
<DEPRECIATION> 28,852
<TOTAL-ASSETS> 73,198
<CURRENT-LIABILITIES> 97,870
<BONDS> 138,542
0
0
<COMMON> 0
<OTHER-SE> (180,011)
<TOTAL-LIABILITY-AND-EQUITY> 73,198
<SALES> 223,811
<TOTAL-REVENUES> 223,811
<CGS> 102,444
<TOTAL-COSTS> 102,444
<OTHER-EXPENSES> (3,692)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,920
<INCOME-PRETAX> (1,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,333)
<EPS-PRIMARY> 0
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<ARTICLE> 5
<CIK> 0000887022
<NAME> EVE HOLDINGS INC.
<MULTIPLIER> 1,000
<CURRENCY> DOLLARS

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 1,851
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<TOTAL-REVENUES> 9,866
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<OTHER-EXPENSES> 1,358
<LOSS-PROVISION> 0
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<NET-INCOME> 7,185
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>