1
================================================================================
United States
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 JUNE 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to________
Commission file number 1-5759
________________________________
BROOKE GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0255124
____________________________________________ __________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 S.E. 2ND STREET, MIAMI, FLORIDA 33131
____________________________________________ __________________________________________
(Address of principal executive offices) (Zip Code)
(305) 579-8000
______________________________________________
(Registrant's telephone number, including area
code)
_______________________________
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
____ ____
As of August 9, 1995 there were outstanding 18,247,096 shares of common
stock, par value $0.10 per share.
================================================================================
2
BROOKE GROUP LTD.
FORM 10-Q
T A B L E O F C O N T E N T S
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 1995 and December 31, 1994....................... 3
Consolidated Statements of Operations for the three and six months ended June 30, 1995
and 1994................................................................................ 5
Consolidated Statement of Stockholders' Equity (Deficit) for the six months ended June 30,
1995..................................................................................... 6
Consolidated Statements of Cash Flows for the six months ended June 30, 1995 and 1994....... 7
Notes to Consolidated Financial Statements.................................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 23
Item 3. Defaults Upon Senior Securities....................................................... 23
Item 4. Submission of Matters to a Vote of Security-Holders................................... 23
Item 6. Exhibits and Reports on Form 8-K...................................................... 24
SIGNATURE..................................................................................... 25
- 2 -
3
PART 1 - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
1995 1994
------------------------
ASSETS:
Current Assets:
Cash and cash equivalents $ 8,584 $ 4,276
Accounts receivable - trade 17,527 31,325
Other receivables 868 1,558
Inventories 47,157 47,098
Other current assets 3,358 3,247
-------- --------
Total current assets 77,494 87,504
Property, plant and equipment, at cost, less accumulated depreciation
of $25,837 and $24,460 26,529 25,806
Intangible assets, at cost, less accumulated amortization of $14,798
and $13,936 5,879 6,728
Investment in affiliate 92,148 97,520
Other Assets 9,808 11,867
-------- --------
Total assets $211,858 $229,425
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
- 3 -
4
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
1995 1994
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt $ 13,764 $ 31,351
Accounts payable 12,238 12,415
Accrued promotional expenses 24,343 29,853
Unearned revenue 701 2,056
Net current liabilities of business held for disposition 4,974
Other accrued liabilities 56,821 63,702
-------- --------
Total current liabilities 107,867 144,351
Notes payable, long-term debt and other obligations, less current
portion 398,557 405,798
Noncurrent employee benefits 32,109 31,119
Net long-term liabilities of business held for disposition 23,009
Other 9,364
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, authorized 10,000,000
shares;
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,247,096 and
18,260,844 shares, respectively 1,825 1,826
Additional paid-in capital 78,692 66,245
Deficit (403,924) (420,746)
Other 20,951 11,365
Less: 6,750,947 and 6,737,199 shares of common stock in
treasury, at cost (33,583) (33,542)
-------- --------
Total stockholders' equity (deficit) (336,039) (374,852)
------- --------
Total liabilities and stockholders' equity (deficit) $211,858 $229,425
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
- 4 -
5
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
-----------------------------------------------------------
June 30, June 30, June 30, June 30,
1995 1994 1995 1994
-----------------------------------------------------------
Revenues* $ 122,328 $ 119,077 $217,618 $233,182
Cost of goods sold* 57,762 57,948 104,140 115,244
----------- ---------- ----------- -----------
Gross profit 64,566 61,129 113,478 117,938
Selling, general and administrative expenses 65,196 54,127 114,504 104,656
----------- ---------- ----------- -----------
Operating (loss) income (630) 7,002 (1,026) 13,282
Other income (expenses):
Interest income 461 21 850 70
Interest expense (14,702) (14,007) (29,417) (27,346)
Equity in earnings of affiliate 354 2,037
Other, net 962 320 1,077 557
----------- ---------- ----------- -----------
(Loss) from continuing operations before income
taxes (13,555) (6,664) (26,479) (13,437)
Provision (benefit) for income taxes 84 (287) 70 (340)
----------- ---------- ----------- -----------
(Loss) from continuing operations (13,639) (6,377) (26,549) (13,097)
Discontinued operations:
Income from discontinued operations, net of
income taxes of $126 and $556 for the three and
six months ended June 30, 1995, respectively,
and $274 and $3,342 for the three and six
months ended June 30, 1994, respectively 1,114 1,579 2,762 2,598
Gain on disposal 3,381 13,138 7,676
----------- ---------- ----------- -----------
Income from discontinued operations 1,114 4,960 15,900 10,274
----------- ---------- ----------- -----------
(Loss) before extraordinary item (12,525) (1,417) (10,649) (2,823)
Extraordinary (loss) from the early
extinguishment of debt (1,118)
----------- ---------- ----------- -----------
Net (loss) (12,525) (1,417) (10,649) (3,941)
Proportionate share of New Valley capital
transaction, retirement of Class A
Preferred Shares 10,954 14,023
----------- ---------- ----------- -----------
Net (loss) income applicable to common shares $ (1,571) $ (1,417) $ 3,374 $ (3,941)
=========== =========== =========== ===========
Per common share:
(Loss) from continuing operations $ (0.15) $ (0.37) $ (0.68) $ (0.75)
=========== =========== =========== ===========
Income from discontinued operations $ 0.06 $ 0.29 $ 0.87 $ 0.59
=========== =========== =========== ===========
Extraordinary item $ -- $ -- $ -- $ (0.06)
=========== =========== =========== ===========
Net (loss) income applicable to common shares $ (0.09) $ (0.08) $ 0.18 $ (0.22)
=========== =========== =========== ===========
Weighted average common shares and common
stock equivalents outstanding 18,247,094 17,402,955 18,249,489 17,413,082
=========== =========== =========== ===========
_____________________________
* Revenues and Cost of goods sold include federal excise taxes of $33,203 and
$33,703 for the three months ended June 30, 1995 and 1994, respectively, and
$59,595 and $65,518 for the six months ended June 30, 1995 and 1994,
respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
- 5 -
6
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT) (DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional
----------------------- Paid-In
Shares Amount Capital Deficit
----------------------------------------------------------
Balance, December 31, 1994 18,260,844 $1,826 $66,245 $(420,746)
Net income (loss) (10,649)
Distributions on common stock of BGL ($0.075 per share,
per quarter) (2,737)
Stock grant to directors 20,000 2 (2)
Stock grant to consultant 939
MAI spin-off 27,286
Net unrealized holding gain on investment in New Valley
Effect of New Valley capital transactions 14,245
Other, net (1) 185
Treasury stock, at cost (33,748) (3) 3
---------- ------ ------- -------
Balance, June 30, 1995 18,247,096 $1,825 $78,692 $(403,924)
========== ====== ======= =======
Treasury
Stock Other Total
----------------------------------
Balance, December 31, 1994 $(33,542) $11,365 $(374,852)
Net income (loss) (10,649)
Distributions on common stock of BGL ($0.075 per share,
per quarter) (2,737)
Stock grant to directors 94 94
Stock grant to consultant (656) 283
Mai spin-off 27,286
Net unrealized holding gain on investment in New Valley 7,870 7,870
Effect of New Valley capital transactions 2,372 16,617
Other, net 184
Treasury stock, at cost (135) (135)
------ ------ -------
Balance, June 30, 1995 $(33,583) $20,951 $(336,039)
====== ====== =======
The accompanying notes are an integral part
of the consolidated financial statements.
- 6 -
7
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BROOKE GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
June 30, June 30,
--------------------------
1995 1994
--------------------------
Net cash (used in) operating activities $(15,093) $(24,713)
-------- --------
Cash flows from investing activities:
Dividends from New Valley 38,645
Investment in New Valley (1,965)
Redemption of Skybox preferred stock 4,000 7,402
Sale of Skybox common stock 9,282
Skybox dividend payment 1,385
Capital expenditures (2,752) (191)
Proceeds from sale of assets/equipment 417 82
Impact of discontinued operations (866)
-------- --------
Net cash provided by investing activities 47,627 7,812
-------- --------
Cash flows from financing activities:
Proceeds from debt 3,028 16,348
Payment of financing costs (2,392)
Repayment under revolver (2,318)
Repayments of debt (24,434) (3,387)
Decrease in overdraft (1,582) (14,303)
Dividends paid on Series G preferred stock (4,055)
CVR settlement, net (2,125)
Distributions on common stock (2,737)
Treasury stock purchases (135) (82)
Stockholder loan and interest repayments 17,774
Impact of discontinued operations (160)
Other, net (48)
-------- --------
Net cash (used in) privided by financing activities (28,226) (7,618)
-------- --------
Net increase (decrease) in cash and cash equivalents 4,308 (9,283)
Cash and cash equivalents, beginning of period 4,276 15,773
-------- --------
Cash and cash equivalents, end of period $ 8,584 $ 6,490
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
- 7 -
8
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Amounts)
(Unaudited)
1. GENERAL
The consolidated financial statements included herein prepared by Brooke
Group Ltd. (the "Company") are unaudited and, in the opinion of
management, reflect all adjustments necessary (which are normal and
recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and the notes thereto for the years ended December
31, 1994, 1993 and 1992, included in the Company's Annual Report on Form
10-K for the year ended December 31, 1994, as filed with the Securities
and Exchange Commission on April 17, 1995. The consolidated results of
operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
Certain amounts in the 1994 consolidated financial statements have been
reclassified to conform to the 1995 presentation.
2. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Liggett
Group Inc. ("Liggett"), New Valley Holdings, Inc. ("NV Holdings") and
other less significant subsidiaries.
As a result of the spin off of the Company's equity interest in MAI
Systems Corporation ("MAI") in February 1995 and the sale/redemption of
the Company's common and preferred stock of SkyBox International, Inc.
("SkyBox"), both entities are reported as discontinued operations for the
periods prior to their disposal by the Company. Results of discontinued
operations for the three and six months ended June 30, 1995 also reflect
the Company's proportionate interest in the discontinued operations of New
Valley Corporation ("New Valley"). See Note 3. Revenues for MAI were
$6,652 for the period January 1, 1995 to February 6, 1995 and $17,188 for
the three months ended March 31, 1994.
3. INVESTMENT IN NEW VALLEY CORPORATION
The Company's investment in New Valley at June 30, 1995 is summarized as
follows:
Number of Shares Carrying Value
---------------- --------------
Common shares 79,794,229 $ (38,609)
Class A Preferred shares 618,326 128,903
Class B Preferred shares 250,885 1,854
---------
$ 92,148
========
The $15.00 Class A Increasing Rate Cumulative Senior Preferred Shares
($100 Liquidation Value), $.01 par value (the "Class A Preferred Shares")
are accounted for as debt securities pursuant to the requirements of SFAS
No. 115, "Accounting for
-8-
9
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Certain Investments in Debt and Equity Securities", and are classified as
available-for-sale. Because the preferred shares are thinly traded, their
fair value has been estimated with reference to the securities' preference
features, including dividend and liquidation preferences, and the
composition and nature of the underlying net assets of New Valley. The
net unrealized holding gain on these securities, in the amount of $19,034
is accounted for as a separate component of stockholders' equity. At
June 30, 1995 the Company's shares of New Valley common stock, which are
accounted for under the equity method pursuant to APB 18, had a quoted
market value of $21,500.
Summarized income statement information for New Valley for the three and
six month periods ended June 30, 1995 are as follows:
3 Months Ended 6 Months Ended
June 30, 1995 June 30, 1995
------------- -------------
Revenues $ 10,032 $ 17,701
======= =======
Cost and expenses $ 7,455 $ 9,797
======= =======
Income from continuing operations $ 2,284 $ 8,915
======= =======
Net income $ 4,966 $ 12,995
======= =======
In February 1995, New Valley repurchased 54,445 Class A Preferred Shares
pursuant to a tender offer made as part of the New Valley First Amended
Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan").
During the second quarter 1995, New Valley repurchased an additional
200,000 Class A Preferred Shares on the open market as authorized by its
Board of Directors (the "Board") on April 6, 1995. The Company has
recorded its proportionate interest in the excess of the carrying value of
the shares over the cost of the shares repurchased as a credit to
additional paid-in capital in the amount of $14,023, along with other New
Valley capital transactions of $222 for the six months ended June 30, 1995.
Subsequent Event: On June 21, 1995, New Valley's Board authorized the
repurchase of an additional 300,000 Class A Preferred Shares. On July 26,
1995, the Company repurchased 33,000 such shares on the open market.
4. INVENTORIES
Inventories consist of:
June 30, December 31,
1995 1994
-------------------------
Finished goods $18,300 $18,374
Work in process 2,860 2,952
Raw materials 20,142 20,609
Replacement parts and supplies 3,684 3,754
------- -------
44,986 45,689
LIFO adjustments 2,171 1,409
------- -------
$47,157 $47,098
====== ======
At June 30, 1995, the Company had leaf tobacco purchase commitments of
approximately $26,500.
-9-
10
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
5. CONTINGENCIES
Since 1954, the Company 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 exposures to secondary smoke (environmental
tobacco smoke, "ETS") from cigarettes. These cases are generally
described hereinafter as though having been commenced against Liggett
(without regard to whether such actually were commenced against Liggett or
the Company in its former name or in its present name), since all involve
the tobacco manufacturing and marketing activities currently performed by
Liggett. New cases continue to be commenced against Liggett and other
cigarette manufacturers. As new cases are commenced, the costs associated
with defending such cases and the risks attendant to the inherent
unpredictability of litigation continue. To date a number of such
actions, including several against Liggett, have been disposed of
favorably to the defendants; no plaintiff has ultimately prevailed on the
merits of any such action; and no payment in settlement of any such claim
has been made by Liggett or, to Liggett's knowledge, any other cigarette
manufacturer.
In the action entitled Cipollone v. Liggett Group Inc., et al., the United
States Supreme Court, on June 24, 1992, issued an opinion regarding
federal preemption of state law damage actions. The Supreme Court in
Cipollone concluded that The Federal Cigarette Labeling and Advertising
Act (the "1965 Act") did not preempt any state common law damage claims.
Relying on The Public Health Cigarette Smoking Act of 1969 (the "1969
Act"), however, the Supreme Court concluded that the 1969 Act preempted
certain, but not all, common law damage claims. Accordingly, the decision
bars plaintiffs from asserting claims that, after the effective date of
the 1969 Act, the tobacco companies either failed to warn adequately of
the claimed health risks of cigarette smoking or sought to neutralize
those claimed risks in their advertising or promotion of cigarettes. It
does permit, however, claims for fraudulent misrepresentation (other than
a claim of fraudulently neutralizing the warning), concealment (other than
in advertising and promotion of cigarettes), conspiracy and breach of
express warranty after 1969. The Court expressed no opinion on whether
any of these claims are viable under state law, but assumed arguendo that
they are viable.
In addition, bills have been introduced in Congress on occasion to
eliminate the federal preemption defense. Enactment of any federal
legislation with such an effect could result in a significant increase in
claims, liabilities and litigation costs.
On May 11, 1993, in the case entitled Wilks v. The American Tobacco
Company, No. 91-12,355, Circuit Court of Washington County, State of
Mississippi (a case in which Liggett was not a defendant), the trial court
granted plaintiffs' motion to impose absolute liability on defendants for
the manufacture and sale of cigarettes and struck defendants' affirmative
defenses of assumption of risk and comparative fault/contributory
negligence. The trial court ruled that the only issue to be tried in the
case were causation and damages. No other court has ever imposed absolute
liability on a manufacturer of cigarettes. After trial, the jury returned
a verdict for defendants, finding no liability. The Company is a defendant
in other cases in Mississippi and it cannot be stated that other courts
will not apply the Wilks ruling as to absolute liability.
On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et al.,
Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on
behalf of the general public, alleges that defendants have been engaged in
unlawful,
-10-
11
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
unfair and fraudulent business practices by allegedly misrepresenting and
concealing from the public scientific studies pertaining to smoking and
health funded by, and misrepresenting the independence of, the Council for
Tobacco Research and its predecessor. The Complaint seeks equitable
relief against the defendants, including the imposition of a corrective
advertising campaign, restitution of funds, disgorgement of revenues and
profits, and the imposition of a constructive trust. The case is
presently in the discovery phase.
On October 31, 1991 an action entitled Broin et al. v. Philip Morris
Companies, Inc., et al., Circuit Court of the 11th Judicial District in
and for Dade County, Florida, was filed against Liggett and others. This
case was the first class action commenced against the industry, and has
been brought by plaintiffs on behalf of all flight attendants that have
worked or are presently working for airlines based in the United States
and who have never regularly smoked cigarettes but allege that have been
damaged by an involuntary exposure to ETS. On December 12, 1994,
plaintiffs' motion to certify the action as a class action was granted.
Defendants have appealed this ruling.
On March 25, 1994, an action entitled Castano, et al v. The American
Tobacco Company, et al., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and residents of the United
States who claim to be addicted to tobacco products, and survivors who
claim their decedents were also addicted. The complaint is based upon the
claim that defendants manipulated the nicotine levels in their tobacco
products with the intent to addict plaintiffs and the class members and,
inter alia, fraud, deceit, negligent misrepresentation, breach of express
and implied warranty, strict liability and violation of consumer
protection statutes. Plaintiffs seek compensatory and punitive damages,
equitable relief including disgorgement of profits from the sale of
cigarettes and creation of a fund to monitor the health of class members
and to pay for medical expenses allegedly caused by defendants, attorneys'
fees and costs. On February 17, 1995, the Court issued an Order that
granted in part Plaintiffs' motion for class certification for certain
claims together with punitive damages to the end of establishing a
multiplier to compute punitive damage awards. Defendants made application
for discretionary appeal to the Court of Appeals for the Fifth Circuit,
which appeal has been recently granted.
On May 5, 1994, an action entitled Engle, et al v. R. J. Reynolds Tobacco
Company, et al., Circuit Court of the 11th Judicial District in and for
Dade County, Florida, was filed against Liggett and others. The class
action complaint was brought on behalf of plaintiffs and all persons in
the United States who allegedly have become addicted to cigarette products
and allegedly have suffered personal injury as a result thereof.
Plaintiff seeks compensatory and punitive damages, equitable relief
including but not limited to establishing a medical fund for future health
care costs. On October 31, 1994, plaintiffs' motion to certify the action
as a class action was granted. Defendants have appealed this ruling.
On May 23, 1994, an action entitled Mike Moore, Attorney General, ex rel
State of Mississippi vs. The American Tobacco Company, et al., Chancery
Court for the County of Jackson, State of Mississippi, was filed against
Liggett and others. The State of Mississippi seeks restitution and
indemnity for medical payments and expenses made or incurred by it on
behalf of welfare patients for tobacco related illnesses. Similar actions
(although not identical) have been filed recently by the State of
Minnesota (together with Minnesota Blue Cross-Blue Shield) and by the
State of West Virginia. In West Virginia, the trial Court, in a ruling
issued on May 3, 1995, dismissed eight of the ten counts of the complaint
filed therein, leaving only two counts of an alleged conspiracy to control
the market and the market price of tobacco products and an alleged
consumer protection claim.
-11-
12
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The State of Florida enacted legislation effective July 1, 1994 allowing
certain state authorities or entities to commence litigation seeking
recovery of Medicaid payments made on behalf of Medicaid recipients as a
result of diseases allegedly caused by liable third parties. Though not
limited to the tobacco industry, the statutory scheme imposes ultimate
liability, if the issue of liability is adjudged against the defendant
cigarette manufacturers, based upon market share and would include
diseases allegedly caused by the smoking of cigarettes. The statute
purportedly abrogates certain defenses normally available to defendants.
A suit was commenced to challenge the constitutionality of the
legislation, and although the trial Court upheld portions of this
legislation, it adjudged the Agency For Health Care Administration to have
been unconstitutionally organized. All parties have taken an appeal from
the trial Court's ruling. On May 6, 1995, the Florida legislature voted
in favor of a bill to repeal this legislation, but the Governor of Florida
vetoed this repealer bill. It is uncertain at this time whether or not
and at what time the Florida legislature can or will take action to
override the Governor's veto. On February 22, 1995, suit was commenced
by the State of Florida acting through the Agency For Health Care
Administration, together with others, against the five domestic cigarette
manufacturers and their respective parent companies, as well as others,
seeking restitution of monies expended in the past and which may be
expended in the future by the State of Florida to provide health care to
Medicaid recipients for injuries and ailments allegedly caused by the use
of cigarettes and other tobacco products. Plaintiffs also seek a variety
of other forms of relief including a disgorgement of all profits from the
sales of cigarettes in Florida.
The Commonwealth of Massachusetts has enacted legislation authorizing
lawsuits similar to the suits filed by the States of Mississippi,
Minnesota and West Virginia. Aside from the Florida and Massachusetts
statutes, legislation authorizing the state to sue a company or individual
to recover costs incurred by the state to provide health care to persons
injured by the company or individual also has been introduced in at least
nine other states. These bills contain some or all of the following
provisions: eliminating all affirmative defenses, permitting the use of
statistical evidence to prove causation and damages, adopting market share
liability and allowing class action suits without notification to class
members.
Currently in addition to Cordova, approximately 33 product liability
lawsuits in various jurisdictions are pending and active in which Liggett
is a defendant. In most of these lawsuits, plaintiffs seek punitive as
well as compensatory damages.
A Grand Jury investigation presently is being conducted by the office of
the United States Attorney for the Eastern District of New York regarding
possible violations of criminal law relating to the activities of The
Council for Tobacco Research - USA, Inc. The Company was a sponsor of The
Council for Tobacco Research - USA, Inc. at one time. The Company is
unable, at this time, to predict the outcome of the investigation.
Liggett has been responding to a Civil Investigative Demand from the
Antitrust Division of the United States Department of Justice, which
requests certain information from Liggett. The request appears to focus
on United States tobacco industry activities in connection with product
development efforts regarding, in particular, "fire- safe" or
self-extinguishing cigarettes. It also requests certain general
information addressing Liggett's involvement with, and relationship to,
its competitors. Liggett is unable to predict the outcome of this
investigation.
In March and April 1994, the Health and the Environmental Subcommittee of
the Energy and Commerce Committee of the House of Representatives held
hearings regarding nicotine in
-12-
13
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
cigarettes. On March 25, 1994, Commissioner David A. Kessler of the Food
and Drug Administration (the "FDA") gave testimony as to the potential
regulation of nicotine under the Food, Drug and Cosmetic Act, and the
potential for jurisdiction over the regulation of cigarettes to be
accorded to the FDA. In response to Commissioner Kessler's allegations
about manipulation of nicotine by cigarette manufacturers, including
Liggett, the chief executive of each of the major cigarette manufacturers,
including Liggett, testified before the subcommittee on April 14, 1994,
denying Commissioner Kessler's claims. Recent media reports are to the
effect that the Department of Justice is considering initiating criminal
investigations which target the testimony given during April of 1994 by
each of the chief executives and the possibility that one or more of the
manufacturers in the industry have concealed evidence about the use and
addictiveness of nicotine. The Food and Drug Administration ("FDA") has
announced that it is considering classifying tobacco as a drug, and an FDA
advisory panel has stated that it believes nicotine is addictive. On
August 10, 1995, the FDA, acting by and through Commissioner Kessler,
filed in the Federal Register a Notice of Proposed Rule-Making, the
essence of which is to assert jurisdiction by the FDA over the manufacture
and marketing of tobacco products. Liggett and the other major
manufacturers in the industry responded immediately thereafter by the
filing of a civil action in the United States District Court for the
Middle District of North Carolina wherein the industry challenges the
legal authority of the FDA to so assert such jurisdiction. Management is
unable to predict the effects of such a classification or such
regulations, if adopted, but such a classification or such regulations, if
adopted, could have an unfavorable impact on Liggett's operations.
The Omnibus Budget Reconciliation Act of 1993 (the "Act") requires United
States cigarette manufacturers to use at least 75% domestic tobacco in the
aggregate of the cigarettes manufactured in the United States, effective
January 1, 1994, on an annualized basis or pay a "marketing assessment"
based upon price differentials between foreign and domestic tobacco and
under certain circumstances make purchases of domestic tobacco from the
stabilization cooperatives, being companies organized by the United States
government. Liggett uses both domestic and foreign tobacco in its
cigarettes. As part of an inventory management program, Liggett has
entered into tobacco purchase agreements under which Liggett's commitments
amounted to approximately $27 million at June 30, 1995, of which
approximately 90% is foreign tobacco. The foreign tobacco used in
manufacturing Liggett's cigarettes costs approximately 10-15% less than
its comparable domestic tobacco. In response to this situation, Liggett
implemented certain changes in its product composition and modified its
existing agreements with tobacco vendors to minimize the effect of the Act
on Liggett's financial position. However, no assurance can be given that
Liggett's efforts have been successful.
A General Agreement on Tariffs and Trade ("GATT") tribunal ruled that the
Act violates GATT. Legislation has been enacted which will repeal
retroactively the Act as of the end of 1994 upon the declaration of
tariffs on imported tobacco in excess of certain quotas to be set forth in
a Presidential proclamation. The Act will be in effect until such time as
a proclamation is issued. Liggett believes that such a proclamation will
be issued during 1995. On February 14, 1995, Liggett filed with the
Department of Agriculture its certification as to usage of domestic and
imported tobaccos during 1994, and an audit has been scheduled to commence
on August 15, 1995 to verify this certification. Liggett is exploring
avenues which might be available to it to realize relief from any
"marketing assessment" (penalty) or purchase requirement sanctions that
may be imposed under the Act. While Liggett is of the opinion that there
would be a realistic potential to achieve such relief if sanctions were
imposed, no assurance can be given that Liggett would be successful in
doing so, either in whole or in part. No amount has been accrued.
-13-
14
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Further, the tariff structure, when established, may have the effect of
limiting Liggett's access to imported tobacco, possibly driving Liggett's
costs of goods higher. Due to existing inventories of foreign tobacco,
management believes the tariff structure would have no short-term effect
on Liggett, but is unable to state at this time what long-term effects, if
any, the tariff structure would have on Liggett.
With regard to each of the above cases pending against Liggett, Liggett
believes, and has been so advised by counsel handling the respective
cases, that Liggett has a number of valid defenses to the claim or claims
asserted against Liggett. All cases are, and will continue to be,
vigorously defended. Litigation is subject to many uncertainties, and it
is possible that some of these actions could be decided unfavorably. An
unfavorable outcome of a pending smoking and health case could encourage
the commencement of additional similar litigation. Recently, there have
been a number of restrictive regulatory actions, adverse political
decisions and other unfavorable developments concerning cigarette smoking
and the tobacco industry, including the commencement of the purported
class actions referred to above. These developments generally receive
widespread media attention. Liggett is not able to evaluate the effect of
these developing matters on pending litigation or the possible
commencement of additional litigation.
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 or cash flows could be materially affected by an
ultimate unfavorable outcome in any of such pending litigation.
There are several other proceedings, lawsuits and claims pending against
Liggett unrelated to product liability. Management is of the opinion that
the liabilities, if any, ultimately resulting from such proceedings,
lawsuits and claims should not materially affect Liggett's financial
position and results of operations.
On September 20, 1993, a group of Contingent Value Rights ("CVR") holders
and the CVR trustee filed an action in the Delaware Chancery court, New
Castle County, against the Company and certain of its present and former
directors, challenging and seeking to enjoin or rescind the Distribution.
Pursuant to notice given on October 15, 1993, the Company redeemed its
CVRs on December 9, 1993 for a payment of $.36 per CVR. On June 2, 1994,
the Company entered into a Stipulation and Agreement of Compromise and
Settlement (the "Stipulation") pursuant to which a class of CVR holders,
which includes all persons who held CVRs at any time between September 20,
1993 and June 2, 1994, were to receive a total of $4,000 plus an award of
attorneys' and experts' fees and expenses not to exceed $900. The $4,000
settlement fund has been deposited into an escrow account for eventual
disbursement to all eligible CVR holders.
By order dated June 10, 1994, the Court of Chancery scheduled a settlement
hearing to be held on August 16, 1994 to determine, inter alia, whether
the Stipulation is fair, reasonable and adequate. That settlement hearing
was adjourned at the named plaintiff CVR holders' request because of
issues arising from filing of a motion for leave to amend the Company's
complaint in a separate lawsuit pending against the CVR trustee. The
named plaintiff CVR holders subsequently asked the court to rescind the
Stipulation, stating, in substance, that they had mistakenly entered into
it in the erroneous belief that the Company would be unable to assert
claims against the trustee which those CVR holders might have to
indemnify. On December 28, 1994, the court rescinded the Stipulation,
finding that such a mistake had been made; however, the named plaintiff
CVR holders and the defendants continued settlement discussions, seeking
to address the named plaintiff CVR holders'
-14-
15
Item 1. Consolidated Financial Statements - (Continued)
BROOKE GROUP LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
concerns over their obligation to indemnify the trustee. On March 3,
1995, these parties advised the court that they had reached an agreement
in principle to settle the case on a class basis, subject to the final
resolution of certain remaining issues.
At June 30, 1995, there were several other proceedings, lawsuits and
claims pending against the Company and its subsidiaries. The Company is
of the opinion that the liabilities, if any, ultimately resulting from the
CVR action and other proceedings, lawsuits and claims should not
materially affect its consolidated financial position, results of
operations or cash flows.
6. LONG-TERM DEBT
On June 12, 1995 the Company redeemed all of the Series 1 Senior Secured
Notes due 1995 in the amount of $23,594 plus accrued interest of $670. In
addition, the Company is currently in the process of filing a registration
statement with the Securities and Exchange Commission ("SEC") for certain
of its Series 2 Senior Secured Notes due 1997. If the registration
statement has not been declared effective by the SEC on or before October
2, 1995, the Series 2 Senior Secured Notes due 1997 will be subject to
repayment at the option of each holder thereof within 75 days of such
date.
7. RESTRUCTURING
Liggett reduced its field sales force on January 10, 1994 by 150 permanent
positions and added approximately 300 part-time positions. This
restructuring has significantly reduced operating costs and enabled
Liggett to expand its retail base coverage.
During the six months ended June 30, 1995, Liggett completed a severance
and benefit program to reduce personnel costs on an ongoing basis. The
effect of this program resulted in a charge to operations of the Company
amounting to $2,562 in the second quarter.
-15-
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Introduction
The Company's Consolidated Financial Statements include the accounts of
Liggett, NV Holdings, and other less significant subsidiaries.
The Company believes it will have sufficient liquidity for 1995. This is based
on, among other things, the redemption/sale of the SkyBox preferred and common
stock and certain funds available from New Valley as described in the Company's
indenture agreements and New Valley's Joint Plan. Forecasts of cash flow for
the principal operating companies indicate that they will be self-sufficient;
however, due to Liggett's leverage, if Liggett were to experience significant
losses due to further adverse change in conditions in the tobacco industry or
otherwise, it is possible that Liggett could be in violation of certain debt
covenants. If its lenders were to exercise acceleration rights or refuse to
advance under the revolving credit facility, Liggett may not be able to satisfy
such demands.
For purposes of this discussion and other consolidated financial reporting, the
Company's significant business segment is Tobacco.
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Price Increase. On May 5, 1995, R.J. Reynolds Tobacco Company ("RJR")
initiated a list price increase on all brands of $.30/carton. Philip Morris
and Brown & Williamson Tobacco Company ("B&W"), which together with RJR
comprise 90% of the market, matched the price increase on the same day.
Liggett followed on May 9, 1995. However, distributors were able to buy
product at the old prices for most of the second quarter.
Competitive Activity. In April 1994, BAT Industries, the parent of B&W,
acquired American Brands' American Tobacco Company subsidiary for $1 billion
cash. Management is unable to state what effect this acquisition might have,
if any, on the Company or the industry.
Recent Legislation. The Omnibus Budget Reconciliation Act of 1993 ("OBRA")
requires United States cigarette manufacturers to use at least 75% domestic
tobacco in the aggregate of the cigarettes manufactured in the United States,
effective January 1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials between foreign and domestic tobacco
and under certain circumstances make purchases of domestic tobacco from the
stabilization cooperatives, being companies organized by the United States
government. Liggett uses both domestic and foreign tobacco in its cigarettes.
A General Agreement on Tariffs and Trade ("GATT") tribunal ruled that OBRA
violates GATT. Legislation has been enacted which will repeal retroactively
OBRA as of the end of 1994 upon the declaration of tariffs on imported tobacco
in excess of certain quotas to be set forth in a Presidential proclamation.
OBRA will be in effect until such time as a proclamation is issued. Liggett
believes that such a proclamation will be issued during 1995. No amount has
been accrued.
-16-
17
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
The State of Florida enacted legislation effective July 1, 1994 allowing
certain state authorities or entities to commence litigation seeking recovery
of Medicaid payments made on behalf of Medicaid recipients as a result of
diseases allegedly caused by liable third parties. Though not limited to the
tobacco industry, the statutory scheme imposes ultimate liability, if the issue
of liability is adjudged against the manufacturers, based upon market share
and would include diseases allegedly caused by the smoking of cigarettes. The
statute purportedly abrogates certain defenses normally available to
defendants. A suit was commenced to challenge the constitutionality of the
legislation and although the trial court upheld portions of this legislation,
it adjudged the Agency For Health Care Administration to have been
unconstitutionally organized. All parties to this suit have taken appeal from
the trial court's rulings. On May 6, 1995, the Florida legislature voted in
favor of a bill to repeal this legislation, but the Governor of Florida vetoed
this repealer bill. It is uncertain at this time whether or not and at what
time the Florida legislature can or will take action to override the Governor's
veto. On February 22, 1995, suit was commenced pursuant to the above-
referenced enabling statute by the State of Florida, acting through the Agency
For Health Care Administration against Liggett and others, seeking restitution
of monies expended in the past and which may be expended in the future by the
State of Florida to provide health care to Medicaid recipients for injuries and
ailments allegedly caused by the use of cigarettes and other tobacco products.
Plaintiffs also seek a variety of other forms of relief including a
disgorgement of all profits from the sales of cigarettes in Florida.
Massachusetts has also recently enacted legislation authorizing lawsuits by the
Attorney General of Massachusetts to recover certain medical assistance
payments.
Recent Litigation. In 1994, four class action lawsuits were brought against
Liggett and other cigarette manufacturers, representing the first time class
actions were brought against the cigarette industry. In the three of these
cases which remain pending, plaintiffs' motions for class certification were
granted in whole or in part, and the defendants have appealed or will appeal
each of these rulings. In addition, the states of Mississippi, Minnesota and
West Virginia brought actions against Liggett and other cigarette manufacturers
seeking restitution and indemnity for certain Medicaid costs allegedly incurred
as a result of tobacco-related illnesses, and in 1995 Florida commenced a
similar action. In West Virginia, the trial court, in a ruling issued on May
3, 1995, dismissed eight to the ten counts of the complaint filed therein,
leaving only two counts of an alleged conspiracy to control the market and the
market price of tobacco products and an alleged consumer protection claim.
While Liggett is vigorously contesting this litigation, litigation is subject
to a number of uncertainties, and accordingly there can be no assurance that
this litigation will be decided favorably to Liggett and the industry in each
instance.
Possible FDA Action. The Food and Drug Administration ("FDA") has announced
that it is considering classifying tobacco as a drug, and an FDA advisory panel
has stated that it believes nicotine is addictive. On August 10, 1995, the FDA
announced that it intended to propose regulations under which the FDA would
assert jurisdiction over the manufacture and marketing of tobacco products.
Liggett and the other major manufacturers in the industry responded immediately
thereafter by the filing of a civil action in United States District Court for
the Middle District of North Carolina challenging the legal authority of the
FDA to so assert such jurisdiction. Management is unable to predict the
effects of such a classification or such regulations, if adopted, but such a
classification or such regulations, if adopted, could have an unfavorable
impact on Liggett's operations.
-17-
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 VS. THREE MONTHS ENDED JUNE 30, 1994
Consolidated total revenues were $122,328 for the three months ended June 30,
1995 versus $119,077 for the same period last year. This 2.7% increase in
revenues was primarily due to increases in the selling price of some of
Liggett's control label products, partially offset by a 0.6% decline in
Liggett's unit sales volume. The decline in unit sales volume was comprised
primarily of declines in the military category due to base closings and
increased competition, partially offset by increases in the price/value
category, which includes generic, control label and branded discount products.
Despite the decline in unit sales volume, Liggett was able to maintain market
share for the quarter according to the preliminary Maxwell Consumer Report
("Maxwell") for the quarter ended June 30, 1995.
Consolidated gross profit was $64,566 for the three months ended June 30, 1995,
an increase of $3,437 from $61,129 for the same period last year. Gross profit
as a percent of revenues (excluding federal excise taxes) for the period
increased to 72.4% compared to 71.6% last year, due primarily to the May 1995
price increase and lower per unit cost of sales. In addition, Liggett recorded
a $134 charge to manufacturing operations as part of its continuing effort
to reduce costs.
Consolidated selling, general and administrative expenses were $65,196 for the
three months ended June 30, 1995 compared to $54,127 for the same period last
year. The increase of $11,069 includes a $4,700 increase in marketing expenses
at Liggett compared with the same period in the prior year as well as increased
charges for litigation and severance costs and increased expenses relating to
the Company's Russian ventures.
Consolidated interest expense was $14,702 for the three months ended June 30,
1995 compared to $14,007 for the same period last year. This increase of $695
relates both to additional borrowings by the Company under the Series 1 Notes
and to additional borrowing under the Series C Notes by Liggett in November
1994 as well as an increase in the interest rate on the Series 2 Notes from
14.25% to 14.50% on May 1, 1995 and an increase in the interest rate on the
Series C Notes which were reset from 16.50% to 19.75% on February 1, 1995.
The equity in earnings of affiliate of $354 and the income from discontinued
operations of $1,114 for the three months ended June 30, 1995 relates to the
Company's investment in New Valley.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30,1994
Consolidated revenues were $217,618 for the six months ended June 30, 1995
compared to $233,182 for the six months ended June 30, 1994, a decrease of
$15,564 primarily due to a decline in sales at Liggett and other less
significant subsidiaries. Net sales at Liggett were $214,569 for the six
months ended June 30, 1995 versus $226,500 for the same period last year. This
5.3% decrease in revenue was primarily due to a 10.2% decline in unit sales
volume, somewhat offset by the effects of the May 9, 1995 list price increase
and the change in sales mix. The decline in unit sales volume was comprised
primarily of declines in full-price branded, price/value (which includes
generic, control label and branded discount products) and military. The
decrease in full-price branded unit sales volume was due to trade programs
offered by Liggett during the first quarter of 1994 with no comparable programs
offered during 1995. The reduction in price/value unit sales volume was due to
an overall decline in the discount segment of the industry for the first half
of 1995, according to Maxwell, caused by certain competitors' continuing
leveraging rebate programs tied to their full-price products, and due to trade
programs offered by Liggett on branded discount
-18-
19
RESULTS OF OPERATIONS (continued)
products during the first quarter of 1994 with no comparable programs offered
during 1995. The decline in sales to the military was due to base closings and
increased competition.
Consolidated gross profit of $113,478 for the six months ended June 30, 1995
decreased $4,460 from gross profit of $117,938 for the same period in 1994.
The decrease in gross profit coincides with the decrease in sales revenue.
Gross profit as a percent of revenues (excluding federal excise taxes) for the
period increased to 71.8% compared to 70.3% last year, due primarily to the May
9, 1995 list price increase and lower per unit cost of sales. The reduction in
cost of sales is a result of the effects of cost reduction programs begun in
1993. Liggett expects to continue its cost reduction programs through 1995,
and in connection therewith, recorded a $621 charge to manufacturing operations
in the first half of 1995.
Consolidated selling, general and administrative expenses were $114,504 for the
six months ended June 30, 1995 compared to $104,656 for the same period last
year, an increase of $9,848. The increase resulted from increased legal fees
due to the increasing number of suits pending against Liggett, severance
charges recorded in connection with the 1995 cost reduction programs at Liggett
and increased expenses relating to the Company's Russian ventures.
Consolidated interest expense was $29,417 for the six months ended June 30,
1995 compared to $27,346 for the same period last year. The increase of $2,071
is primarily due to additional debt issued by Liggett and the Company and an
increase in interest rates discussed above.
The gain on disposal of discontinued operations of $13,138 for the six months
ended June 30, 1995 and $7,676 for the same period in the prior year primarily
reflects the redemption/sale of SkyBox preferred and common stock.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents increased $4,308 for the six months ended June
30, 1995 as compared with a decrease of $9,283 for the six months ended June
30, 1994.
Net cash used in operations for the six months ended June 30, 1995 was $15,093
compared to net cash used in operations of $24,713 for the comparable period of
1994. Cash used in operations for the six months ended June 30, 1995 includes
interest payments of approximately $26,782 compared to $25,648 for the similar
period in 1994. The net loss from operations for the six months ended June 30,
1995 was offset by improved receivables collections at Liggett due to the
implementation of Electronic Funds Transfer ("EFT") programs with some of
Liggett's largest customers and a prepayment of a lease by a third party for
space in an office building in Russia.
Net cash provided by investing activities was $47,627 for the six-month period
ended June 30, 1995 compared to cash provided in investing activities of $7,812
for the same period in 1994. Through the six-month period ending June 30,
1995, cash was provided through a special $50.00 per share dividend in January
1995 and a $12.50 per share dividend in June 1995 on New Valley's Class A
Preferred Shares for a total of $38,645, redemption of SkyBox preferred stock
for $4,000 and sale of the SkyBox common stock for $9,282.
Cash used in financing activities for the six months ended June 30, 1995 was
$28,226 reflecting the redemption of the Series 1 Notes on June 12, 1995 in the
amount of $23,594, repayments under Liggett's revolver of $2,318 and dividends
paid on common stock of $2,737 partially offset by proceeds from debt of
$3,028. Cash provided for the same period in the prior year was $7,618
-19-
20
CAPITAL RESOURCES AND LIQUIDITY (continued)
consisting of proceeds from debt issuance at Liggett and stockholder loan and
interest repayments offset by a decrease in overdraft, dividends paid on Series
G preferred stock, payments of financing costs and repayments of debt.
Pursuant to the Exchange and Termination Agreement dated as of September 30,
1994, as amended (the "Exchange Agreement"), certain prior agreements (the
"Prior Agreements") among the Company and certain holders (the "Selling
Security Holders") were terminated. In related transactions with the Selling
Security Holders, the Company issued (i) an aggregate of $18,958 of the Series
1 Notes in consideration of the transfer of certain notes of the Company issued
in connection with the Prior Agreements, (ii) an aggregate of $2,936 of Series
1 Notes to certain of the Selling Security Holders in respect of interest
payable on October 3, 1994 on the 14 1/2% Subordinated Debentures held by such
Selling Security Holders, and (iii) an aggregate of $7,536 of Series 2 Notes in
satisfaction of certain other obligations to the Selling Security Holders
relating to the transactions contemplated by the Exchange Agreement and in
respect of certain accrued interest. In addition, pursuant to the Exchange
Agreement, certain expenses of certain of the Selling Security Holders relating
to the Prior Agreements, the Exchange Agreement and the New Valley bankruptcy
proceeding were reimbursed to them by the Company through the payment of $500
cash and the issuance of an aggregate $1,700 of Series 1 Notes. Expense to
the Company resulting from these transactions was approximately $10,000.
Pursuant to the Exchange Agreement, the Selling Security Holders have to date
reimbursed BGLS in the amount of $242.
On June 12, 1995, the Company redeemed the Series 1 Notes in the amount of
$23,594 plus accrued interest of $670. Accordingly, the Company's pledged
equity interests in Liggett were released and the Series 2 Notes now have a
senior and exclusive lien on the Pledged Collateral (as such term is defined in
the Indenture).
The interest rate on the Series 2 Notes ("Notes") is 13.75% per annum, payable
April 1 and October 1. Pursuant to the Indenture and the terms of the Notes,
the interest rate has increased until such time as the Registration Statement
is declared effective by the SEC. As a result, interest on the Notes during
the interest period ending on October 1, 1995 (the first interest payment date
following the effectiveness of the Registration Statement) will reflect a
blended rate. If the Registration Statement has not been declared effective by
the SEC on or before October 2, 1995, the Notes will be subject to repayment at
the option of each holder thereof within 75 days of such date.
The Indenture places certain restrictions on the application of any payment
from NV Holdings. So long as any Notes remain outstanding, the Company must
apply the amount received on account of any payment paid out of current
earnings of NV Holdings as follows: (a) the first $5,000 in the aggregate of
such amounts may be retained by the Company for its own account free of any
restriction not expressly set forth in the Indenture; (b) 50% of any payments
in excess of the amount set forth in the foregoing clause (a) may be retained
by the Company for its own account free of any restriction not expressly set
forth in the Indenture, and the remaining 50% must be applied as follows: (i)
first, to the payment of any accrued and unpaid interest then due on the Notes;
(ii) second, to the payment of any accrued and unpaid interest then due on any
other outstanding indebtedness of the Company; and (iii) third, to the
mandatory redemption of the Notes until no Notes are outstanding. So long as
any Notes remain outstanding, the Company shall apply
-20-
21
CAPITAL RESOURCES AND LIQUIDITY (continued)
100% of the amount received on account of any payment which is paid other than
out of current earnings of NV Holdings solely in accordance with clauses (i),
(ii) and (iii) of the preceding sentence.
On January 18, 1995, certain amendments to the Subordinated Debt Indentures
(the "Indenture Amendments") were effected. Generally, the Indenture
Amendments require the Company to apply any amounts distributed to it (directly
or through NV Holdings) from New Valley (i) by dividend or other distribution
(other than equity securities of New Valley), (ii) through loans, advances or
other payments or (iii) in connection with the repurchase or redemption of New
Valley common stock or Class A Preferred Shares (collectively, "New Valley
Distributions") in excess of $10,000, subject to the terms of the Indenture,
first to the payment of interest on, and then to principal of, the Notes, the
16 1/8% Reset Notes and 14 1/2% Subordinated Debentures. The $10,000 threshold
is increased on a dollar-for-dollar basis in the amount of payments made in
respect of principal or interest on the Notes or the Subordinated Indebtedness
from sources other than New Valley Distributions. At June 15, 1995, the
$10,000 threshold had been increased to approximately $29,800.
Pursuant to the Indenture Amendments, the Company may direct BGLS to make
distributions of up to $38,000 between September 2, 1994 and January 18, 1996
(the "Initial Period"). Any portion not distributed during the initial period
may be carried over to the subsequent periods discussed below. As of June 30,
1995, $17,956 had been distributed of which $9,608 were non-cash transactions.
Following the Initial Period, the Company may distribute the sum of $3,000 per
month with any unpaid portion of the monthly amount carried over to succeeding
months. Additional distributions will be made from time to time as directed by
the Company based on the Company's current quarterly dividend distribution of
$1,369 (or $.075 per share) and corporate expense requirements. Commencing on
January 1, 1995, any additional distributions in excess of he above-described
distributions are computed on the basis of 50% of the Company's Modified
Consolidated Net Income (as defined in the Subordinated Indentures). No
distributions have been made on this basis.
As contemplated by the Exchange Agreement, on October 3, 1994, the Company
exchanged an aggregate of $49,900 of Notes for an equal principal amount of 16
1/8% Reset Notes. The Company also agreed, subject to applicable securities
laws, to offer to other holders of the 16 1/8% Reset Notes the opportunity to
exchange the 16 1/8% Reset Notes for Notes (the "Exchange Offer"). That offer
commenced October 21, 1994 and closed on December 12, 1994. An additional
$33,675 of 16 1/8% Reset Notes were exchanged for Notes. Only $5,670 of 16
1/8% Reset Notes now remain. In addition, a net amount of $183 of Notes were
issued for interest accrued to December 12, 1994 to those participating in the
Exchange Offer.
The Company believes that it will have sufficient liquidity for 1995. Company
expenditures in 1995 (excluding Liggett) include debt service estimated at
$32,500 and redemption of all outstanding Series 1 Notes in the amount of
$23,594 plus accrued interest on June 12, 1995. Current operations and debt
service are being financed through funds received from the redemption/sale of
SkyBox preferred and common stock in the amount of $13,284 and management fees
and other charges to subsidiaries of approximately $5,000. In addition, the
Company, through its subsidiary, NV Holdings, has received approximately
$39,000 in distributions from New Valley since January 1995. Such
distributions are required by the Subordinated Debt Indentures to be applied as
described above. (See discussion of Indenture Amendments above).
-21-
22
CAPITAL RESOURCES AND LIQUIDITY (continued)
If Liggett were to experience significant losses due to further adverse changes
in conditions in the tobacco industry or otherwise, it is possible that Liggett
could be in violation of certain debt covenants. If as a result of any such
violations Liggett creditors were to exercise acceleration rights or refuse to
advance funds under the Liggett Facility, Liggett may not be able to satisfy
its obligations. Liggett's ability to satisfy its debt service obligations
will depend on Liggett's liquidity, its ability to improve its operating
performance as well as on prevailing economic conditions and on financial,
business, industry and other factors which may be largely beyond Liggett's
control.
The Company and its subsidiaries have substantial near-term debt service
requirements with aggregate required principal payments of $318,106 due in the
years 1995 through 1998, they expect to finance their long-term growth, working
capital requirements, capital expenditures and debt service requirements
through a combination of cash provided from operations, negotiation of secured
bank credit lines, additional public or private debt financing and
distributions from New Valley and possible renegotiation of existing debt
agreements. New Valley plans to use the cash from the sale of its money
transfer business to acquire operating businesses through merger, purchase of
assets, stock acquisition or other means, or to acquire control of operating
companies through one of such means, with the purpose of being primarily
engaged in a business or businesses other than that of investing, reinvesting,
owning, holding or trading in securities.
Liggett (and, in certain cases, the Company) and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke (environmental tobacco smoke) from cigarettes. As new cases
are commenced, the costs associated with defending such cases and the risk
attendant on the inherent unpredictability of litigation continue. To date, a
number of such actions, including several against Liggett, have been disposed
of favorably to the defendants; no plaintiff has ultimately prevailed on the
merits of any such action; and no payment in settlement of any such claim has
been made by Liggett nor, to the Company's knowledge, any other cigarette
manufacturer.
Liggett believes, and has been so advised by counsel handling the respective
cases, that Liggett has a number of valid defenses to the claim or claims
asserted against it. All cases are, and will continue to be vigorously
defended. Litigation is subject to many uncertainties, and it is possible that
some of these actions could be decided unfavorably. An unfavorable outcome of
a pending smoking and health case could encourage the commencement of
additional similar litigation. Recently, there have been a number of adverse
regulatory, political and other developments concerning cigarette smoking and
the tobacco industry, including the commencement of the purported class actions
referred to above. These developments generally receive widespread media
attention. Neither the Company nor Liggett is able to evaluate the effect of
these developing matters on pending litigation or the possible commencement of
additional litigation.
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 or cash flows could be materially affected by an ultimate
unfavorable outcome in any of such pending litigation. Liggett's legal costs
in respect of these litigations are not considered significant and its
accounting policy is to accrue legal and other costs related to contingencies
as services are performed.
-22-
23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information entitled "Contingencies" in Note 5 to
the Company's Consolidated Financial Statements included elsewhere in
this report on Form 10-Q.
Item 3. Defaults Upon Senior Securities
As of June 30, 1995, New Valley Corporation, the Company's
affiliate, had the following respective accrued and unpaid
dividend arrearages on its 1,246,966 outstanding shares of $15.00
Class A Increasing Rate Cumulative Senior Preferred Shares ($100
Liquidation Value), $.01 par value per share (the "Class A Shares")
and 2,790,776 outstanding shares of $3.00 Class B Cumulative
Convertible Preferred Shares ($25 Liquidation Value), $.10 par value
per share (the "Class B Shares"): (1) $158.3 million or $126.97 per
Class A Share and (2) $85.6 million or $30.66 per Class B Share.
Item 4. Submission of Matters to a Vote of Security-Holders
During the second quarter of fiscal 1995, the Company submitted
certain matters to a vote of security-holders at its Annual Meeting of
Stockholders held on June 5, 1995 (the "Annual Meeting"), as proxies
for said meeting were solicited pursuant to Regulation 14A under the
Securities Exchange Act of 1934.
The following constitutes a brief description of the matters voted
upon at the Annual Meeting and a tabulation of the results:
Total shares of Common Stock outstanding
as of April 24, 1955 (the record date) - 18,247,096
Total shares of Common Stock voted in person or by proxy - 17,183,918
1. Election of Directors:
For Withhold
--- --------
Bennett S. Lebow 17,092,680 91,238
Robert J. Eide 17,092,680 91,238
Jeffrey S. Podell 17,092,680 91,238
2. To approve the appointment of Coopers & Lybrand L.L.P. as
independent accountants for the Company for the year ending
December 31, 1995:
For Against Abstain
--- ------- -------
17,163,944 8,814 11,160
- 23 -
24
PART II. OTHER INFORMATION (CONTINUED)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Modification to Consulting Agreement, dated as of
January 25, 1995, by and between Brooke Group LTD. and
Howard M. Lorber.
27 Financial Data Schedule (for SEC use only)
99(a) BGLS Inc. Registration Statement on Form S-1, Commission
File No. 33-93576.*
99(b) BGLS Inc. Amendment No. 1 to Registration Statement on
Form S-1, Commission File No. 33-93576.*
(b) Reports on Form 8-K
No current reports on Form 8-K were filed during the second
quarter of 1995.
* Incorporated herein by reference thereto.
-24 -
25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROOKE GROUP LTD.
(Registrant)
Date: August 14, 1995 By: /s/ Gerald E. Sauter
---------------------------- ------------------------------------
Gerald E. Sauter
Vice President and Chief Financial
Officer
-25 -
1
Exhibit 10
MODIFICATION TO CONSULTING AGREEMENT
THIS MODIFICATION TO CONSULTING AGREEMENT (the "Modification Agreement"),
dated as of January 25, 1995, by and between Brooke Group Ltd., a Delaware
corporation with its principal office at 100 S.E. 2nd Street, Miami, Florida
33131 ("BGL") and Howard M. Lorber, an individual with an address at 70 East
Sunrise Highway, Suite 411, Valley Stream, New York 11581 ("Consultant").
W I T N E S S E T H:
WHEREAS, the parties entered into a Consulting Agreement dated as of
January 1, 1994 ("the Consulting Agreement"); and
WHEREAS, the Consulting Agreement provides, among other things, the grant
of 500,000 shares of BGL common stock, $.10 par value per share (the "Grant"),
to Consultant in consideration for services to be rendered by Consultant; and
WHEREAS, the Consultant has been devoting a substantial amount of his time
to the operations and affairs of New Valley Corporation ("New Valley"), an
affiliate of BGL; and
WHEREAS, in light of the substantial time commitments being made by
Consultant on behalf of New Valley, the parties desire to modify the terms of
the Consulting Agreement relating to the vesting of the Grant; and
WHEREAS, the parties desire to clarify, retroactively to January 1, 1994,
the terms of the Consulting Agreement governing the rights attendant to the
Grant.
NOW THEREFORE, in consideration of the foregoing and mutual agreements
hereinafter set forth, BGL and Consultant agree as follows:
1. Paragraph 4 of the Consulting Agreement shall be amended by deleting
the third sentence thereof in its entirety, and replacing it as follows:
"The shares which the Consultant shall receive pursuant to the Grant
shall vest as follows: 250,000 shares shall vest on the date the
Grant is made; and 250,000 shares shall vest on the third anniversary
of such date. Notwithstanding anything embodied in this Agreement to
2
the contrary, BGL shall pay to the Consultant within ten (10)
calendar days of the payment of a dividend or other distribution in
respect of its Common Stock, an amount equal to the product of (x) the
amount of such dividend expressed on a per share of Common Stock
basis and (y) the amount of the shares of Common Stock subject to the
Grant on the date such dividend is declared, which amount may be paid
in cash or other property. Any amount of a dividend or other
distribution pertaining to the unvested portion of the Grant shall be
deposited into escrow until such time as such portion of the Grant
has vested."
2. All other provisions of the Consulting Agreement shall remain in full
force and effect, as if fully set forth herein.
3. This Modification Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without
reference to the choice of law doctrine of such state.
IN WITNESS WHEREOF, the parties, intending to be legally bound hereby,
have duly executed this Modification Agreement as of the date above first
written.
BROOKE GROUP LTD.
BY:___________________________
Bennett S. LeBow,
Chairman of the Board &
President
______________________________
Howard M. Lorber
5
1,000
6-MOS
DEC-31-1995
JAN-01-1995
JUN-30-1995
8,584
0
17,527
0
47,157
77,494
26,529
0
211,858
107,867
398,557
1,825
0
0
(337,864)
211,858
217,618
217,618
104,140
218,644
(3,964)
0
29,417
(26,479)
70
(26,549)
15,900
0
0
(10,649)
0.18
0
