1
===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
JOINT QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
COMMISSION FILE NUMBER 1-5759 COMMISSION FILE NUMBER 33-93576
BROOKE GROUP LTD. BGLS INC.
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in its charter)
51-0255124 13-3593483
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation (State or other jurisdiction of incorporation
or organization) or organization)
100 S.E. SECOND STREET 100 S.E. SECOND STREET
MIAMI, FLORIDA 33131 MIAMI, FLORIDA 33131
(Address of principal executive offices including Zip Code) (Address of principal executive offices including Zip Code)
305/579-8000 305/579-8000
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) have been subject to such filing requirements for the past 90 days.
[ X ] Yes [ ] No
Explanatory Note: BGLS Inc. is required to file all reports required by
Section 13 or 15(d) of the Exchange Act in connection with its 15.75% Series B
Senior Secured Notes due 2001.
As of November 12, 1996, there were 18,497,096 shares of Brooke Group
Ltd.'s common stock outstanding.
As of November 12, 1996, there were 100 shares of BGLS Inc.'s common stock
outstanding, all of which were owned by Brooke Group Ltd.
================================================================================
2
BROOKE GROUP LTD.
BGLS INC.
FORM 10-Q
TABLE OF CONTENTS
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Brooke Group Ltd./BGLS Inc. Consolidated Financial Statements:
Brooke Group Ltd. Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995.................................................................... 3
BGLS Inc. Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995.................................................................... 4
Brooke Group Ltd. Consolidated Statements of Operations for the three and nine months
ended September 30, 1996 and September 30, 1995...................................... 5
BGLS Inc. Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and September 30, 1995............................................ 6
Brooke Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the nine
months ended September 30, 1996...................................................... 7
BGLS Inc. Consolidated Statement of Stockholder's Equity (Deficit) for the nine
months ended September 30, 1996...................................................... 8
Brooke Group Ltd. Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995............................................ 9
BGLS Inc. Consolidated Statements of Cash Flows for the nine months ended
September 30, 1996 and September 30, 1995............................................ 10
Notes to Consolidated Financial Statements............................................. 11
New Valley Holdings, Inc. Financial Statements:
Balance Sheets as of September 30, 1996 and December 31, 1995.......................... 27
Statements of Operations for the three and nine months ended September 30, 1996 and
September 30, 1995................................................................... 28
Statement of Stockholder's Equity for the nine months ended September 30, 1996......... 29
Statements of Cash Flows for the nine months ended September 30, 1996
and September 30, 1995............................................................... 30
Notes to Financial Statements.......................................................... 31
Item 2 . Management's Discussion and Analysis
of Financial Condition and Results of Operations............................... 35
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................... 42
Item 3. Defaults Upon Senior Securities................................................. 42
Item 4. Submission of Matters to a Vote of Security-Holders............................. 42
Item 6. Exhibits and Reports on Form 8-K................................................ 43
SIGNATURE............................................................................... 44
3
Item 1. Financial Statements
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents................................................. $ 2,103 $ 3,370
Accounts receivable - trade............................................... 18,526 23,844
Other receivables......................................................... 1,788 1,448
Receivables from affiliates............................................... 22 1,502
Inventories............................................................... 54,370 60,522
Deferred tax assets....................................................... 1,061
Other current assets...................................................... 4,624 4,868
--------- ---------
Total current assets..................................................... 81,433 96,615
Property, plant and equipment, at cost, less accumulated
depreciation of $30,229 and $27,323....................................... 68,269 48,352
Intangible assets, at cost, less accumulated amortization
of $17,008 and $15,679.................................................... 4,181 5,453
Investment in affiliate.................................................... 63,901
Other assets............................................................... 9,779 11,299
--------- ---------
Total assets............................................................. $ 163,662 $ 225,620
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt....................... $ 52,373 $ 2,387
Accounts payable.......................................................... 27,969 22,762
Cash overdraft............................................................ 4,266
Accrued promotional expenses.............................................. 28,684 25,519
Accrued taxes payable..................................................... 19,900 25,928
Accrued interest.......................................................... 10,101 16,863
Other accrued liabilities................................................. 27,196 21,452
--------- ---------
Total current liabilities................................................ 166,223 119,177
Notes payable, long-term debt and other obligations, less current portion.. 387,880 406,744
Noncurrent employee benefits............................................... 30,283 31,672
Other liabilities.......................................................... 13,367 24,131
Commitments and contingencies..............................................
Stockholders' equity (deficit):
Common stock, par value $0.10 per share, authorized 40,000,000
shares, issued 24,998,043 shares, outstanding 18,497,096 shares.......... 1,850 1,850
Additional paid-in capital................................................ 90,806 93,186
Deficit................................................................... (470,359) (428,173)
Other..................................................................... (24,049) 9,372
Less: 6,500,947 shares of common stock in treasury, at cost.............. (32,339) (32,339)
--------- ---------
Total stockholders' equity (deficit).................................... (434,091) (356,104)
--------- ---------
Total liabilities and stockholders' equity (deficit).................... $ 163,662 $ 225,620
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
- 3 -
4
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
ASSETS:
Current assets:
Cash and cash equivalents........................................................ $ 2,008 $ 3,370
Accounts receivable - trade...................................................... 18,526 23,844
Other receivables................................................................ 1,760 1,481
Receivables from affiliates...................................................... 22 1,130
Inventories...................................................................... 54,370 60,522
Deferred tax assets.............................................................. 4,861
Other current assets............................................................. 4,137 4,435
--------- ---------
Total current assets........................................................... 80,823 99,643
Property, plant and equipment, at cost, less accumulated depreciation of
$29,980 and $27,181............................................................... 67,924 47,900
Intangible assets, at cost, less accumulated amortization of $17,008 and $15,679.. 4,181 5,453
Investment in affiliate........................................................... 63,901
Other assets...................................................................... 10,874 12,345
--------- ---------
Total assets................................................................... $ 163,802 $ 229,242
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT):
Current liabilities:
Notes payable and current portion of long-term debt.............................. $ 50,902 $ 2,132
Accounts payable................................................................. 27,844 22,637
Cash overdraft................................................................... 3,761
Due to parent.................................................................... 27,707 26,054
Accrued promotional expenses..................................................... 28,684 25,519
Accrued taxes payable............................................................ 19,900 25,928
Accrued interest................................................................. 10,101 16,863
Other accrued liabilities........................................................ 26,571 19,991
--------- ---------
Total current liabilities...................................................... 191,709 142,885
Notes payable, long-term debt and other obligations, less current portion......... 387,880 420,449
Noncurrent employee benefits...................................................... 30,283 31,672
Other liabilities................................................................. 16,621 24,131
Commitments and contingencies.....................................................
Stockholder's equity (deficit):
Common stock, par value $0.01 per share; authorized 100 shares,
issued 100 shares, outstanding 100 shares.......................................
Additional paid-in capital....................................................... 39,081 23,594
Deficit.......................................................................... (478,145) (423,424)
Other............................................................................ (23,627) 9,935
--------- ---------
Total stockholder's deficit.................................................... (462,691) (389,895)
--------- ---------
Total liabilities and stockholder's equity (deficit)........................... $ 163,802 $ 229,242
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
- 4 -
5
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
------------------------ -------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
---------- --------- ----------- ----------
Revenues*................................................ $ 114,635 $ 124,100 $ 330,364 $ 341,718
Cost of goods sold*...................................... 58,361 54,626 168,931 158,766
---------- ----------- ----------- ----------
Gross profit......................................... 56,274 69,474 161,433 182,952
Operating, selling, general and administrative expenses.. 55,326 58,818 158,482 173,322
---------- ----------- ----------- ----------
Operating income..................................... 948 10,656 2,951 9,630
Other income (expenses):
Interest income......................................... 75 43 203 893
Interest expense........................................ (15,254) (13,952) (45,488) (43,369)
Equity in (loss) earnings of affiliate.................. (4,618) 1,561 (7,152) 3,598
Sale of assets.......................................... 3,047 6,745
Other, net.............................................. 3,210 962 1,846 2,039
---------- ----------- ----------- ----------
(Loss) from continuing operations before income taxes.... (12,592) (730) (40,895) (27,209)
Provision for income taxes............................... 1,145 394 1,291 464
---------- ----------- ----------- ----------
(Loss) from continuing operations........................ (13,737) (1,124) (42,186) (27,673)
---------- ----------- ----------- ----------
Discontinued operations:
Income from discontinued operations..................... 98 2,860
Gain on disposal........................................ 13,138
----------- ----------- ----------- ----------
Income from discontinued operations...................... 98 15,998
----------- ----------- ----------- ----------
Net (loss)............................................... (13,737) (1,026) (42,186) (11,675)
Proportionate share of New Valley capital transactions,
retirement of Class A Preferred Shares.................. 2,798 1,782 16,802
----------- ----------- ----------- ----------
Net (loss) income applicable to common shares......... $ (13,737) $ 1,772 $ (40,404) $ 5,127
========== =========== =========== ==========
Per common share:
(Loss) income from continuing operations................ $ (0.74) $ 0.09 $ (2.18) $ (0.60)
========== =========== =========== ==========
Income from discontinued operations..................... $ $ 0.01 $ $ 0.88
========== =========== =========== ==========
Net (loss) income applicable to common shares......... $ (0.74) $ 0.10 $ (2.18) $ 0.28
========== =========== =========== ==========
Weighted average common shares and common
share equivalents outstanding........................... 18,497,096 18,247,094 18,497,096 18,248,673
========== =========== =========== ==========
- - ----------------------
* Revenues and Cost of goods sold include federal excise taxes of $26,074
and $32,643 for the three months ended September 30, 1996 and 1995,
respectively, and $76,758 and $92,238 for the nine months ended September
30, 1996 and 1995, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
- 5 -
6
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
---------- --------- ---------- ---------
Revenues*.............................................. $114,635 $124,100 $330,364 $341,718
Cost of goods sold*.................................... 58,361 54,626 168,931 158,766
-------- -------- -------- --------
Gross profit....................................... 56,274 69,474 161,433 182,952
Operating, selling, general and administrative
expenses.............................................. 54,627 59,077 157,287 173,168
-------- -------- -------- --------
Operating income................................... 1,647 10,397 4,146 9,784
Other income (expenses):
Interest income....................................... 62 43 140 893
Interest expense...................................... (16,245) (14,764) (48,308) (45,497)
Equity in (loss) earnings of affiliate................ (4,618) 1,561 (7,152) 3,598
Sale of assets........................................ 3,047 6,745
Other, net............................................ 502 719 (1,528) 1,621
-------- -------- -------- --------
(Loss) from continuing operations before income taxes.. (15,605) (2,044) (45,957) (29,601)
Provision for income taxes............................. 4,945 389 5,143 94
-------- -------- -------- --------
(Loss) from continuing operations...................... (20,550) (2,433) (51,100) (29,695)
-------- -------- -------- --------
Discontinued operations:
Income from discontinued operations................... 98 2,860
Gain on disposal...................................... 13,138
-------- -------- -------- --------
Income from discontinued operations.................... 98 15,998
-------- -------- -------- --------
Net (loss)......................................... $(20,550) $ (2,335) $(51,100) $(13,697)
======== ======== ======== ========
- - ----------------------
* Revenues and Cost of goods sold include federal excise taxes of $26,074
and $32,643 for the three months ended September 30, 1996 and 1995,
respectively, and $76,758 and $92,238 for the nine months ended September
30, 1996 and 1995, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
- 6 -
7
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional
------------------ Paid-In Treasury
Shares Amount Capital Deficit Stock Other Total
---------- ------ ---------- ---------- --------- --------- ----------
Balance, December 31, 1995........................ 18,497,096 $1,850 $93,186 $(428,173) $(32,339) $ 9,372 $(356,104)
Net (loss)........................................ (42,186) (42,186)
Distributions on common stock
($0.225 per share)............................... (4,162) (4,162)
Amortization of deferred compensation............. 141 141
Unrealized holding loss on investment
in New Valley.................................... (31,852) (31,852)
Effect of New Valley capital transactions......... 1,782 (1,710) 72
---------- ------ --------- --------- -------- -------- ---------
Balance, September 30, 1996....................... 18,497,096 $1,850 $90,806 $(470,359) $(32,339) $(24,049) $(434,091)
========== ====== ========= ========= ======== ======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
- 7 -
8
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional
-------------- Paid-In
Shares Amount Capital Deficit Other Total
------ ------ ---------- ---------- ------------ ----------
Balance, December 31, 1995.... 100 $ $23,594 $(423,424) $ 9,935 $(389,895)
Distributions paid to parent.. (3,621) (3,621)
Net (loss).................... (51,100) (51,100)
Unrealized holding loss on
investment in New Valley.... (31,852) (31,852)
Effect of New Valley capital
transactions................ 1,782 (1,710) 72
Forgiveness of debt by parent. 13,705 13,705
---- ------ ------- --------- -------- ---------
Balance, September 30, 1996... 100 $ $39,081 $(478,145) $(23,627) $(462,691)
==== ====== ======= ========= ======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
- 8 -
9
BROOKE GROUP LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
----------------------------
September 30, September 30,
1996 1995
------------- -------------
Net cash (used in) operating activities........................ $(22,000) $(23,706)
-------- --------
Cash flows from investing activities:
Proceeds from sale of businesses and assets................... 8,031 14,149
Investments................................................... (482) (1,965)
Capital expenditures.......................................... (24,047) (5,008)
Dividends from New Valley..................................... 24,733 61,832
-------- --------
Net cash provided by investing activities...................... 8,235 69,008
-------- --------
Cash flows from financing activities:
Proceeds from debt............................................ 29,503 3,028
Repayments of debt............................................ (8,559) (28,529)
(Decrease) in cash overdraft.................................. (4,266) (2,817)
Distributions on common stock................................. (4,162) (4,107)
Treasury stock purchases...................................... (135)
Other, net.................................................... (18) (20)
-------- --------
Net cash provided by (used in) by financing activities......... 12,498 (32,580)
-------- --------
Net (decrease) increase in cash and cash equivalents........... (1,267) 12,722
Cash and cash equivalents, beginning of period................. 3,370 4,276
-------- --------
Cash and cash equivalents, end of period....................... $ 2,103 $ 16,998
======== ========
Supplemental non-cash investing and financing activities:
Exchange of Series 2 Senior Secured Notes for Series A Notes... $ 99,154
Exchange of 14.50% Subordinated Debentures for Series B Notes.. 125,495
Issuance of Series A Notes for options......................... 822
Exchange of Series A Notes for Series B Notes.................. 99,976
Issuance of promissory notes for shares of LDL................. 1,643
Distribution of MAI shares to stockholders..................... $ 27,085
The accompanying notes are an integral part
of the consolidated financial statements.
- 9 -
10
BGLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
September 30, September 30,
1996 1995
------------- -------------
Net cash (used in) operating activities.................. $(21,924) $(16,513)
-------- --------
Cash flows from investing activities:
Proceeds from sale of business and assets.............. 8,031 13,849
Investments............................................ (482) (2,765)
Capital expenditures................................... (24,047) (4,781)
Dividends from New Valley.............................. 24,733 61,832
Other, net............................................. (88)
-------- --------
Net cash provided by investing activities................ 8,235 68,047
-------- --------
Cash flows from financing activities:
Proceeds from debt..................................... 27,861 2,343
Repayments of debt..................................... (8,134) (32,934)
(Decrease) in cash overdraft........................... (3,761) (2,126)
Distributions paid to parent........................... (3,621) (5,872)
Other, net............................................. (18) (206)
-------- --------
Net cash provided by (used in) financing activities...... 12,327 (38,795)
-------- --------
Net (decrease) increase in cash and cash equivalents..... (1,362) 12,739
Cash and cash equivalents, beginning of period........... 3,370 4,259
-------- --------
Cash and cash equivalents, end of period................. $ 2,008 $ 16,998
======== ========
Supplemental non-cash investing and financing activities:
Exchange of Series 2 Senior Secured Notes for Series
A Notes ............................................... $ 99,154
Exchange of 14.50% Subordinated Debentures for Series
B Notes ............................................... 125,495
Issuance of Series A Notes for options ................. 822
Exchange of Series A Notes for Series B Notes .......... 99,976
Forgiveness of debt by parent .......................... 13,705
Issuance of promissory notes for shares of LDL ......... 1,643
Distribution of MAI to parent .......................... $24,741
The accompanying notes are an integral part
of the consolidated financial statements.
- 10 -
11
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements of Brooke Group Ltd. (the "Company")
include the consolidated statements of its wholly owned subsidiary, BGLS
Inc. ("BGLS"). The consolidated statements of BGLS include the accounts of
Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd. ("BOL"), New Valley
Holdings, Inc. ("NV Holdings") and other less significant subsidiaries.
Based on the Company's ability to assert sufficient control, the Company
consolidated the accounts of Liggett-Ducat Ltd. ("LDL") at December 31, 1995
and the results of operations for the three and nine months ended September
30, 1996.
The interim consolidated financial statements of the Company and BGLS are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the Company's
and BGLS' consolidated financial position, results of operations and cash
flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's and BGLS' Annual Reports on Form 10-K, as amended,
for the year ended December 31, 1995, as filed with the Securities and
Exchange Commission ("SEC"). The consolidated results of operations for
interim periods should not be regarded as necessarily indicative of the
results that may be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
Certain amounts in the 1995 consolidated financial statements have been
reclassified to conform to the 1996 presentation.
2. INVESTMENT IN NEW VALLEY CORPORATION
Summarized financial information for New Valley Corporation ("New Valley")
as of September 30, 1996 and December 31, 1995 and for the three and nine
months ended September 30, 1996 and 1995 follows:
September 30, December 31,
1996 1995
------------- ------------
Current assets................. $ 234,165 $333,485
Investment in real estate...... 182,125
Other non-current assets....... 37,099 52,337
Current liabilities............ 183,292 177,920
Notes payable.................. 159,494
Other long-term obligations.... 12,966 11,967
Redeemable preferred shares.... 201,318 226,396
Common shareholders' deficit... (103,681) (30,461)
- 11 -
12
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues................................... $ 24,263 $21,514 $ 92,794 $39,215
Cost and expenses.......................... 33,000 18,436 110,647 26,189
(Loss) income from continuing operations... (7,728) 2,784 (16,694) 11,699
(Loss) income from discontinued operations. (4,716) 235 (5,396) 4,315
Net (loss) applicable to common shares(A).. (27,844) (7,860) (64,319) (300)
(A) Includes all preferred accrued dividends, whether or not declared, and
the excess of carrying value of redeemable preferred shares over cost
of shares purchased.
The Company's and BGLS' investment in New Valley at September 30, 1996 is
summarized as follows:
Number of Fair Carrying
Shares Value Amount
--------- ------- ---------
Class A Preferred Shares.. 618,326 $74,199 $ 74,199
Class B Preferred Shares.. 250,885 2,509 2,509
Common Shares............. 3,989,710 15,959 (76,708)
------- --------
$92,667 $
======= ========
The Class A Preferred Shares and the Class B Preferred Shares are accounted
for as debt and equity securities, respectively, pursuant to the
requirements of Statement of Financial Accounting Standards No. 115 ("FAS"),
"Accounting for Certain Investments in Debt and Equity Securities", and are
classified as available-for-sale. Prior to January 1, 1996, the Class A
Preferred Shares' fair value had 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. In January 1996, however, New Valley became engaged in the
ownership and management of commercial real estate and, in February 1996,
acquired a controlling interest in Thinking Machines Corporation. Because
these businesses affect the composition and nature of the underlying net
assets of New Valley, the Company and BGLS have determined the fair value of
the Class A Preferred Shares based on the quoted market price commencing
with the quarter ended March 31, 1996. The New Valley common shares are
accounted for under the equity method. On July 29, 1996, New Valley
effected a one-for-twenty reverse stock split of New Valley's common shares.
After giving effect to this split, the Company holds 3,989,710 (41.7%)
common shares of New Valley.
During the quarter ended September 30, 1996, the decline in the market value
of the Class A Preferred Shares, the dividend received on the Class A
Preferred Shares and the Company's equity in losses incurred by New Valley
caused the carrying value of the Company's investments in New Valley to be
reduced to zero. As a result, the Company did not record $8,272 of its
proportionate interest in New Valley's FAS 115 unrealized holding losses.
- 12 -
13
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for $10,530. As a result of this transaction, the Company
and BGLS now own 59.72% of the outstanding Class A Preferred Shares. The
Company and BGLS have recorded their 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 of $1,782 along with their share of
losses in other New Valley capital transactions of $1,710 for the nine
months ended September 30, 1996.
NV Holdings has received $24,733 ($40.00 per share) in dividend
distributions for the nine months ended September 30, 1996. At September
30, 1996, the accrued and unpaid dividends arrearage on the Class A
Preferred Shares was $103,234 or $99.70 per share. The Company's share of
such arrearage was $61,647.
At September 30, 1996, the accrued and unpaid dividends arrearage on the
Class B Preferred Shares was $110,476 or $39.59 per share.
As a result of asset dispositions pursuant to New Valley's First Amended
Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan"), New
Valley accumulated a significant amount of cash which it was required to
reinvest in operating companies by January 18, 1996 in order to avoid
potentially burdensome regulation under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Investment Company Act and
the rules and regulations thereunder require the registration of, and impose
various substantive restrictions on, companies that engage primarily in the
business of investing, reinvesting or trading in securities or engage in the
business of investing, reinvesting, owning, holding or trading in securities
and own or propose to acquire "investment securities" having a "value" in
excess of 40% of a company's "total assets" (exclusive of Government
securities and cash items) on an unconsolidated basis. Following
dispositions of its then operating businesses pursuant to the Joint Plan,
New Valley was above this threshold and relied on the one-year exemption
from registration under the Investment Company Act provided by Rule 3a-2
thereunder, which exemption expired on January 18, 1996. Prior to such
date, through New Valley's acquisition of the investment banking and
brokerage business of Ladenburg, Thalmann & Co., Inc. and its acquisition of
a portfolio of office buildings and shopping centers, New Valley was engaged
primarily in a business or businesses other than that of investing,
reinvesting, owning, holding or trading in securities, and the value of its
investment securities was below the 40% threshold. Under the Investment
Company Act, New Valley is required to determine the value of its total
assets for purposes of the 40% threshold based on "market" or "fair" values,
depending on the nature of the asset, at the end of the last preceding
fiscal quarter and based on cost for assets acquired since that date. If
New Valley were required to register in the future, under the Investment
Company Act, it would be subject to a number of severe restrictions on its
operations, capital structure and management, including without limitation,
entering into transactions with affiliates. If New Valley were required to
register under the Investment Company Act, the Company and BGLS may be in
violation of the Investment Company Act and may be adversely affected by the
restrictions of the Investment Company Act. In addition, registration under
the Investment Company Act by BGLS would constitute a violation of the
15.75% Series B Senior Secured Notes due 2001 (the "Series B Notes")
indenture to which BGLS is a party.
- 13 -
14
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
3. RJR NABISCO HOLDINGS CORP.
At September 30, 1996, New Valley held 4,947,250 shares of RJR Nabisco
Holdings Corp. ("RJR Nabisco") common stock with a market value of $129,247
(cost of $151,650) collateralizing margin loan financing of $75,863. From
the period October 1, 1996 to November 8, 1996, New Valley sold
approximately 1,780,000 shares of RJR Nabisco common stock and recognized a
loss of $3,648. At November 8, 1996, New Valley held approximately
3,170,000 shares of RJR Nabisco common stock with a market value of $96,815
(cost of $97,302), collateralizing margin loan financing of $23,158. New
Valley's unrealized loss on its investment in RJR Nabisco common stock
decreased from $22,403 at September 30, 1996 to $487 at November 8, 1996.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company relating to 1,000,000
shares of RJR Nabisco common stock. During the third quarter of 1996, the
Swap was terminated. New Valley recognized a loss on the Swap of $4,074 and
$7,305 for the three and nine months ended September 30, 1996, respectively.
For the three and nine months ended September 30, 1996, New Valley has
expensed $791 and $11,158, respectively, for costs relating to its RJR
Nabisco investment. Pursuant to a December 27, 1995 agreement, New Valley
agreed, among other things, to pay directly or reimburse the Company and its
subsidiaries for out-of-pocket expenses in connection with the Company's
solicitation of consents and proxies from the shareholders of RJR Nabisco.
New Valley has reimbursed the Company and its subsidiaries $2,361 pursuant
to this agreement of which $942 was expensed in 1996.
On November 5, 1996, the Company submitted to RJR Nabisco, in order to
comply with the requirements of RJR Nabisco's by-laws, a notice of intent to
nominate a slate of directors for election at the RJR Nabisco 1997 annual
meeting of stockholders.
4. INVENTORIES
Inventories consist of:
September 30, December 31,
1996 1995
---------------------------
Finished goods.................... $19,660 $19,129
Work-in-process................... 3,564 3,570
Raw materials..................... 26,096 29,021
Replacement parts and supplies.... 4,829 4,903
------- -------
Inventories at current costs...... 54,149 56,623
LIFO adjustments.................. 221 3,899
------- -------
$54,370 $60,522
======= =======
At September 30, 1996, the Company had leaf tobacco purchase commitments of
approximately $29,840.
- 14 -
15
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
5. INCOME TAXES
The provision for taxes for the nine months ended September 30, 1996 and
1995 does not bear the customary relationship to the pretax loss/income for
the Company and BGLS due principally to the effects of taxes provided for
foreign operations and an increase in the valuation allowance related to
deferred tax assets.
6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
September 30, December 31,
1996 1995
---------------------------
15.75% Series B Senior Secured Notes due 2001........... $232,864
13.75% Series 2 Senior Secured Notes due 1997........... $ 91,179
16.125% Senior Subordinated Reset Notes due 1997........ 5,670
14.500% Subordinated Debentures due 1998................ 800 126,295
Notes payable - Foreign................................. 22,972 11,122
Other................................................... 1,173 2,084
Liggett:
11.500% Senior Secured Series B Notes due 1993 - 1999... 119,638 119,485
Variable rate Series C Senior Secured Notes due 1999.... 32,279 32,279
Revolving credit facility............................... 30,527 21,017
-------- --------
Total notes payable and long-term debt.................. 440,253 409,131
Less:
Current maturities..................................... 52,373 2,387
-------- --------
Amount due after one year............................... $387,880 $406,744
======== ========
Offer to Exchange:
15.75% Series A Senior Secured Notes Due 2001 for 13.75% Series 2
Senior Secured Notes Due 1997, and
15.75% Series B Senior Secured Notes Due 2001 for 16.125% Senior
Subordinated Reset Notes Due 1997 and 14.500% Subordinated Debentures:
As a result of the Exchange Agreement, dated November 21, 1995 (the "1995
Exchange Agreement"), on November 27, 1995, BGLS commenced an offer to
exchange a total of $232,864 principal amount of 15.75% Senior Secured Notes
due January 31, 2001, for all its outstanding Series 2 Notes, Reset Notes
and Subordinated Debentures. The exchange ratio was $1,087.47 principal
amount of new 15.75% Series A Senior Secured Notes ("Series A Notes") for
each $1,000 principal amount of Series 2 Notes exchanged, $1,132.28
principal amount of new Series B Notes for each $1,000 principal amount of
Reset Notes exchanged and $1,000 principal amount of new Series B Notes for
each $1,000 principal amount of Subordinated Debentures exchanged. The new
Series A Notes and the new Series B Notes were identical except that the
Series B Notes were not subject to restrictions on transfer.
- 15 -
16
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The holders of in excess of 99% of the Series 2 Notes and 88% of the
Subordinated Debentures agreed, subject to certain conditions, to tender
their securities in the exchange offer. The exchange offer closed on
January 30, 1996. All $91,179 of the Series 2 Notes and $125,495 of the
Subordinated Debentures were exchanged. In addition, BGLS cancelled all of
the Subordinated Debentures ($13,705) held by the Company. Subordinated
Debentures in the amount of $800 remain outstanding (see "14.500%
Subordinated Debentures due 1998" in the table above).
Holders of Reset Notes did not exchange and, in accordance with the 1995
Exchange Agreement, BGLS issued an irrevocable notice of redemption for all
of the outstanding Reset Notes. On March 7, 1996, an additional $7,397 face
amount of Series A Notes were sold for $6,300 including accrued interest
with proceeds being used for the redemption of the Reset Notes, which were
redeemed on March, 29 1996 for a total amount of $5,785, including premium,
together with accrued interest of $452.
Pursuant to a registered exchange offer, holders of the Series A Notes
exchanged all of the $107,373 outstanding principal amount for an equal
principal amount of Series B Notes. The exchange closed March 21, 1996.
The Company has cancelled all the Series A Notes.
The new Series B Notes are collateralized by substantially all of BGLS'
assets, including a pledge of BGLS' equity interests in Liggett, BOL and NV
Holdings as well as a pledge of all of the New Valley securities held by
BGLS and NV Holdings. The Series B Notes Indenture contains certain
covenants, which among other things, limit the ability of BGLS to make
distributions to the Company, limit additional indebtedness of BGLS to
$10,000 and restrict certain transactions with affiliates. Interest is
payable at the rate of 15.75% per annum on January 31 and July 31 of each
year, except for the period ended July 31, 1996 when interest was payable at
13.75% from October 1, 1995 to January 30, 1996 and at 15.75% from January
31, 1996 through July 31, 1996.
7. CONTINGENCIES
Liggett:
Since 1954, Liggett and other United States cigarette manufacturers have
been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from cancer
and other adverse health effects alleged to have been caused by cigarette
smoking or by exposure to secondary smoke (environmental tobacco smoke,
"ETS") from cigarettes. These cases are reported hereinafter as though
having been commenced against Liggett (without regard to whether such
actually were commenced against the Company or Liggett). New cases continue
to be commenced against Liggett and other cigarette manufacturers. As new
cases are commenced, the costs associated with defending such cases and the
risks attendant to the inherent unpredictability of litigation continue to
increase. Liggett has been receiving certain financial and other 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. The future financial benefit to the Company is not
quantifiable at this time since the arrangements for assistance can be
terminated under certain circumstances and the amount received, if any,
would be a function of the level of costs incurred. Certain joint defense
arrangements, and the financial benefits incident thereto, have ended.
- 16 -
17
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
No assurances can be made that other arrangements will continue. To date a
number of such actions, including several against Liggett, have been
disposed of favorably to the defendants.
In the action entitled Cipollone v. Liggett Group Inc., et al., the United
States Supreme Court on June 24, 1992, issued an opinion regarding federal
preemption of state law damage actions. The Supreme Court in Cipollone
concluded that The Federal Cigarette Labeling and Advertising Act (the "1965
Act") did not preempt any state common law damage claims. Relying on The
Public Health Cigarette Smoking Act of 1969 (the "1969 Act"), however, the
Supreme Court concluded that the 1969 Act preempted certain, but not all,
common law damage claims. Accordingly, the decision bars plaintiffs from
asserting claims that, after the effective date of the 1969 Act, the tobacco
companies either failed to warn adequately of the claimed health risks of
cigarette smoking or sought to neutralize those claimed risks in their
advertising or promotion of cigarettes. It does permit, however, claims for
fraudulent misrepresentation (other than a claim of fraudulently
neutralizing the warning), concealment (other than in advertising and
promotion of cigarettes), conspiracy and breach of express warranty after
1969. The Court expressed no opinion as to whether any of these claims are
viable under state law, but assumed arguendo that they are viable.
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 March 27, 1987, an action entitled Yvonne Rogers v. Liggett Group Inc. et
al., Superior Court, Marion County, Indiana, was filed against Liggett and
others. The plaintiff seeks compensatory and punitive damages for cancer
alleged to have been caused by cigarette smoking. Trial commenced on
January 31, 1995. The trial ended on February 22, 1995 when the trial court
declared a mistrial due to the jury's inability to reach a verdict. The
Court directed a verdict in favor of the defendants as to the issue of
punitive damages during the trial of this action. A second trial commenced
on August 5, 1996. On August 23, 1996, the jury returned a verdict in favor
of the defendants.
On October 31, 1991, an action entitled Broin et al. v. Philip Morris
Companies, Inc., et al., Circuit Court of the 11th Judicial District in and
for Dade County, Florida, was filed against Liggett and others. This case
was the first class action commenced against the industry, and has been
brought by plaintiffs on behalf of all flight attendants that have worked or
are presently working for airlines based in the United States and who have
never regularly smoked cigarettes but allege that they have been damaged by
involuntary exposure to ETS. On December 12, 1994, plaintiffs' motion to
certify the action as a class action was granted. Defendants appealed this
ruling and on January 3, 1996, the Third District Court of Appeal in Florida
("Third DCA") affirmed the class certification order. On May 8, 1996, the
Third DCA denied defendants' rehearing request. On June 5, 1996, the Third
DCA denied defendants' petition for a stay of its order upholding class
certification, but granted defendants' motion for a stay of class notice
pending consideration by the Florida Supreme Court. On June 17, 1996, the
Florida Supreme Court denied defendants' petition for review. The suit is
scheduled to go to trial on June 2, 1997.
On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et al.,
Superior Court of the State of California, City of San Diego, was filed
against Liggett and others. In her complaint, plaintiff, purportedly on
behalf of the general public, alleges that defendants have been engaged in
unlawful, unfair and fraudulent business practices by allegedly
misrepresenting and concealing from the public
- 17 -
18
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
scientific studies pertaining to smoking and health funded by, and
misrepresenting the independence of, the Council on Tobacco Research ("CTR")
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. A similar action has been filed in the Superior Court for the State
of California, City of San Francisco.
On September 10, 1993, an action entitled Sackman v. Liggett Group Inc.,
United States District Court, Eastern District of New York, was filed
against Liggett alone alleging as injury lung cancer. Fact discovery closed
on August 31, 1995; expert discovery continues. On May 25, 1996, the
District Court granted Liggett summary judgment on plaintiffs' fraud and
breach of warranty claims on statute of limitations grounds, but allowed
plaintiffs' personal injury claims to survive. In the same order, the
District Court vacated the Magistrate's March 19, 1996 order compelling
Liggett to produce certain CTR documents with respect to which Liggett had
asserted various privilege claims, and allowed the other cigarette
manufacturers and the CTR to intervene in order to assert their interests
and privileges with respect to those same documents. The Court also ordered
the Magistrate to reconsider his March 19, 1996 order and the effect of the
District Court's summary judgment order. Oral argument concerning the
relevancy of the CTR documents in light of the District Court's summary
judgment order was conducted on August 8, 1996. The Magistrate's ruling on
this matter is pending.
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 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. The complaint also
alleges causes of action sounding in fraud, deceit, negligent
misrepresentation, breach of express and implied warranty, strict liability
and violation of consumer protection statutes. Plaintiffs seek compensatory
and punitive damages and 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 District
Court issued an order that granted in part plaintiffs' motion for class
certification. On May 23, 1996, the Court of Appeals for the Fifth Circuit
reversed the District Court's order certifying the nationwide class action
and instructed the District Court to dismiss the class complaint.
On March 12, 1996, the Company and Liggett entered into an agreement to
settle the Castano class action tobacco litigation. The settlement
undertakes to release the Company and Liggett from all current and future
addiction-based claims, including claims by a nationwide class of smokers in
the Castano class action pending in Louisiana federal court as well as
claims by a narrower statewide class in the Engle case (described below)
pending in Florida state court. The settlement is subject to and
conditioned upon the approval of the United States District Court for the
Eastern District of Louisiana. The Company is unable to determine at this
time when the Court will review the settlement, and no assurance can be
given that the settlement will be approved by the Court. Certain items of
the settlement are summarized below.
- 18 -
19
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Under the settlement, the Castano class would receive up to 5% of Liggett's
pretax income (income before income taxes) each year (up to a maximum of
$50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee. Settlement funds
received by the class would be used to pay half the cost of
smoking-cessation programs for eligible class members. While neither
consenting to Federal Drug Administration ("FDA") jurisdiction nor waiving
their objections thereto, the Company and Liggett also have agreed to phase
in compliance with certain of the proposed interim FDA regulations regarding
smoking by children and adolescents, including a prohibition on the use of
cartoon characters in tobacco advertising and limitations on the use of
promotional materials and distribution of sample packages where minors are
present.
The Company and Liggett have the right to terminate the Castano settlement
if the remaining defendants succeed on the merits or in the event of a full
and final denial of class action certification. The terms of the settlement
would still apply if the Castano plaintiffs or their lawyers were to
institute a substantially similar new class action against the tobacco
industry. The Company and Liggett may also terminate the settlement if they
conclude that too many class members have chosen to opt out of the
settlement. In the event of any such termination by the Company and
Liggett, the named plaintiffs would be at liberty to renew their prosecution
of such civil action against the Company and Liggett.
On March 14, 1996, the Company and the Castano Plaintiffs Legal Committee
and the Castano Plaintiffs entered into a letter agreement. According to
the terms of the letter agreement, for the period ending nine months from
the date of Final Approval of the Castano settlement or, if earlier, the
completion of a combination by the Company or Liggett with certain
defendants, or an affiliate thereof, in Castano, the Castano Plaintiffs
agree not to enter into any settlement agreement with any Castano defendant
which would reduce the terms of the Castano settlement agreement. If the
Castano Plaintiffs enter into any such settlement during this period, they
shall pay the Company $250,000 within thirty days of the more favorable
agreement and offer the Company and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same time
period, and if the Castano settlement agreement has not been earlier
terminated by the Company in accordance with its terms, the Company and its
affiliates will not enter into any business transaction with any third party
which would cause the termination of the Castano settlement agreement. If
the Company or its affiliates enter into any such transaction, then the
Castano Plaintiffs will be entitled to receive $250,000 within thirty days
from the transacting party.
On May 11, 1996, the Castano Plaintiffs Legal Committee filed a motion
seeking preliminary approval of the Castano settlement. That motion has not
yet been heard by the court.
On May 5, 1994, an action entitled Engle, et al. v. R. J. Reynolds Tobacco
Company, et al., Circuit Court of the 11th Judicial District in and for Dade
County, Florida, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and all persons in the United
States who allegedly have become addicted to cigarette products and
allegedly have suffered personal injury as a result thereof. Plaintiffs
seek compensatory and punitive damages together with equitable relief
including but not limited to a medical fund for future health care costs,
attorneys' fees and costs. On October 31, 1994, plaintiffs' motion to
certify the action as a class action was granted. Defendants have appealed
this ruling. On January 31, 1996, the Third DCA affirmed the ruling of the
- 19 -
20
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
trial court certifying the action as a class action, but modified the trial
court ruling to limit the class to Florida citizens and residents. On May
8, 1996, the Third DCA denied defendants' rehearing request. On June 5,
1996, the Third DCA denied defendants' petition for a stay of its order
upholding class certification but granted defendants' motion for a stay of
class notice pending consideration by the Florida Supreme Court. On October
2, 1996, the Florida Supreme Court denied defendants' petition for review.
In February 1995, an action entitled Grady Carter, et al. v. The American
Tobacco Company, et al., Superior Court for the State of Florida, Duval
County, was filed against Liggett and others. Plaintiff sought compensatory
damages, including, but not limited to, reimbursement for medical costs.
Both American Tobacco and Liggett were subsequently dismissed from this
action. On August 9, 1996, a jury returned a verdict against the remaining
defendant, Brown & Williamson Tobacco Corp., in the amount of $750,000.
Brown & Williamson has announced that it intends to appeal that verdict.
On April 11, 1996, an action entitled Harris, et al. v. The American Tobacco
Company, et al., United States District Court for the Eastern District of
Pennsylvania, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and all persons in the United
States, its territories and possessions and the Commonwealth of Puerto Rico
who allegedly have become addicted to cigarette products and have suffered
personal injury as a result thereof. Plaintiffs seek compensatory and
punitive damages together with equitable relief including, but not limited
to, a medical fund, for future health costs, attorneys' fees and costs.
On May 6, 1996, an action entitled Norton, et al. v. RJR Nabisco Holdings
Corp., et al., Madison County, Indiana Superior Court, was filed against
Liggett and others. The class action complaint was brought on behalf of
plaintiffs and all persons in the State of Indiana who allegedly have become
addicted to cigarette products and allegedly have suffered personal injury
as a result thereof. Plaintiffs seek compensatory and punitive damages
together with equitable relief including but not limited to a medical fund
for future health care costs, attorneys' fees and costs. On June 3, 1996,
the defendant tobacco companies filed a notice of removal in the United
States District Court for the Southern District of Indiana.
On May 29, 1996, an action entitled Richardson, et al. v. Philip Morris
Inc., et al., Circuit Court for Baltimore City, was filed against Liggett
and others. The class action complaint was brought on behalf of plaintiffs
and all persons in the State of Maryland who allegedly have become addicted
to cigarette products and allegedly have suffered personal injury as a
result thereof. Plaintiffs seek compensatory and punitive damages, together
with equitable relief including but not limited to a medical fund for future
health care costs, attorney's fees and costs. On June 27, 1996, the
defendant tobacco companies filed a notice of removal in the United States
District Court for the District of Maryland.
On June 21, 1996, an action entitled Reed v. Philip Morris, et al., Superior
Court of the District of Columbia, was filed against Liggett and others.
The class action complaint was brought on behalf of plaintiff and all
persons in the District of Columbia who allegedly have become addicted to
cigarette products and have suffered personal injury as a result thereof.
Plaintiffs seek compensatory and punitive damages together with equitable
relief including, but not limited to, a medical fund, for future health
costs, attorneys' fees and costs.
- 20 -
21
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
On August 8, 1996, an action entitled Arch, et al. v. The American Tobacco
Company, et al., Philadelphia County Court of Common Pleas, was filed
against Liggett and others. The class action complaint was brought on
behalf of plaintiff and all persons in the State of Pennsylvania who
allegedly have become addicted to cigarette products and have suffered
personal injury as a result thereof. Plaintiffs seek compensatory and
punitive damages together with equitable relief including, but not limited
to, a medical fund, for future health costs, attorneys' fees and costs. On
August 27, 1996, the defendant tobacco companies filed a notice of removal
in the United States District Court for the Eastern District of
Pennsylvania. That court denied plaintiffs' Motion to Remand on October 21,
1996.
On August 20, 1996, an action entitled Chamberlain, et al. v. The American
Tobacco Company, et al., Court of Common Pleas of Cuyahoga County, State of
Ohio, was filed against Liggett and others. The class action complaint was
brought on behalf of plaintiffs and all persons in the State of Ohio who
allegedly have become addicted to cigarette products and have suffered
personal injury as a result thereof. Plaintiffs seek compensatory and
punitive damages together with equitable relief including, but not limited
to, a medical fund, for future health costs, attorneys' fees and costs. On
September 12, 1996, the defendant tobacco companies filed a notice of
removal in the United States District Court for the Northern District of
Ohio.
A number of proceedings have been filed against Liggett and others by state
and local government entities or officials seeking restitution and indemnity
for medical payments and expenses made or incurred for tobacco related
illnesses. Such actions have been filed by the States of Minnesota
(together with Minnesota Blue Cross-Blue Shield), Mississippi, West
Virginia, Louisiana, Texas, Washington, Maryland, Connecticut, Arizona,
Michigan, New Jersey, Ohio and Oklahoma. Additionally, the Commonwealth of
Massachusetts, the City and County of San Francisco, the City and County of
Los Angeles and the City and County of New York have commenced proceedings.
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.
In a subsequent ruling, the trial court adjudged the contingent fee
agreement entered into by West Virginia and its counsel to be
unconstitutional under the Constitution of the State of West Virginia. In
Mississippi, the Governor has recently commenced an action in the
Mississippi Supreme Court against the Attorney General of the state, making
application for a writ of prohibition to bar further prosecution and to seek
dismissal of the suit brought by the Attorney General of the state seeking
such restitution and indemnity, alleging that the commencement and
prosecution of such a civil action by the Attorney General of the state was
and is outside the authority of the Attorney General.
On November 28, 1995, each of the major manufacturers in the industry,
including Liggett, filed suit in both the Commonwealth of Massachusetts and
the State of Texas seeking declaratory relief to the effect that the
commencement of any such litigation seeking to recover Medicaid expenses
against the manufacturers (as had been filed by the above referenced states)
by either the Commonwealth of Massachusetts or the State of Texas would be
unlawful. On January 22, 1996, a suit seeking substantially similar
declaratory relief was filed in the State of Maryland.
The State of Florida enacted legislation, effective July 1, 1994, allowing
certain state authorities or entities to commence litigation seeking
recovery of certain Medicaid payments made on behalf of Medicaid recipients
as a result of diseases (including, but not limited to, diseases allegedly
caused by
- 21 -
22
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
cigarette smoking) allegedly caused by liable third parties (including, but
not limited to, the tobacco industry). Liggett, after initial litigation,
entered into a settlement of this controversy with the State of Florida, the
terms of which are described below.
In addition, legislation authorizing a state to sue a company or individual
to recover the costs incurred by that state to provide health care to
persons allegedly injured by the company or individual also has been
introduced in a number of other states. These bills contain some or all of
the following provisions: eliminating certain affirmative defenses,
permitting the use of statistical evidence to prove causation and damages,
adopting market share liability and allowing class action suits without
notification to class members.
On March 15, 1996, the Company and Liggett entered into a settlement of
tobacco-related litigation with the Attorneys General of the States of
Florida, Louisiana, Mississippi, West Virginia and the Commonwealth of
Massachusetts. The settlement with the Attorneys General releases the
Company and Liggett from all tobacco-related claims by these states
including claims for Medicaid reimbursement and concerning sales of
cigarettes to minors. The settlement provides that additional states which
commence similar Attorney General actions may agree to be bound by the
settlement prior to six months from the date thereof (subject to extension
of such period by the settling defendants). Certain of the terms of the
settlement are summarized below.
Under the settlement, the states would share an initial $5,000 ($1,000 of
which was paid on March 22, 1996, with the balance payable over nine years
and indexed and adjusted for inflation), provided that any unpaid amount
will be due sixty days after either a default by Liggett in its payment
obligations under the settlement or a merger or other similar transaction by
the Company or Liggett with another defendant in the lawsuits. In addition,
Liggett will be required to pay the states a percentage of Liggett's pretax
income (income before income taxes) each year from the second through the
twenty-fifth year. This annual percentage would range from 2-1/2% to 7-1/2%
of Liggett's pretax income depending on the number of additional states
joining the settlement. All of Liggett's payments are subject to certain
reductions provided for in the agreement. Liggett has also agreed to pay to
the states $5,000 if the Company or Liggett fails to consummate a merger or
other similar transaction with another defendant in the lawsuits within
three years of the date of the settlement. At December 31, 1995, Liggett
accrued approximately $4,000 for the settlement with the Attorneys General.
Settlement funds received by the Attorneys General will be used to reimburse
the states' smoking-related healthcare costs. While neither consenting to
FDA jurisdiction nor waiving their objections thereto, the Company and
Liggett also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same basis as provided in the Castano
settlement.
The Company and Liggett have the right to terminate the settlement with
respect to any state participating in the settlement if any of the remaining
defendants in the litigation succeed on the merits in that state's Attorney
General action. The Company and Liggett may also terminate the settlement
if they conclude that too many states have filed Attorney General actions
and have not resolved such cases as to the settling defendants by joining in
the settlement.
- 22 -
23
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Currently, in addition to the above, approximately 120 product liability
lawsuits are pending and active in which Liggett is a defendant. Of these,
approximately 85 are pending in the State of Florida. In most of these
lawsuits, plaintiffs seek punitive as well as compensatory damages. The
next case scheduled for trial where Liggett is a defendant is George Jay v.
R. J. Reynolds Tobacco Company, et al., which is scheduled for trial in
March 1997.
A grand jury investigation presently is being conducted by the office of the
United States Attorney for the Eastern District of New York regarding
possible violations of criminal law relating to the activities of The
Council for Tobacco Research - USA, Inc. The Company was a sponsor of The
Council for Tobacco Research - USA, Inc. at one time. The Company is unable
at this time to predict the outcome of this investigation.
Liggett has been responding to a civil investigative demand from the
Antitrust Division of the United States Department of Justice which requests
certain information from Liggett. The request appears to focus on United
States tobacco industry activities in connection with product development
efforts regarding, in particular, "fire-safe" or self-extinguishing
cigarettes. It also requests certain general information addressing
Liggett's involvement with and relationship to its competitors. The Company
is unable to predict, at this time, the outcome of this investigation.
As to each of the cases referred to above which is pending against the
Company, the Company believes, and has been advised by counsel handling the
respective cases, that the Company has a number of valid defenses to the
claim or claims asserted against the Company. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be
decided unfavorably. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation.
Recently, there have been a number of restrictive regulatory actions,
adverse political decisions and other unfavorable developments concerning
cigarette smoking and the tobacco industry, including the commencement of
the purported class actions referred to above. These developments generally
receive widespread media attention. The Company is not able to evaluate the
effect of these developing matters on pending litigation or the possible
commencement of additional litigation.
The Company is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against Liggett. It is possible that the Company's consolidated financial
position, results of operations and cash flows could be materially adversely
affected by an ultimate unfavorable outcome in any of such pending
litigation.
On August 28, 1996, the FDA filed in the Federal Register a final 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. The FDA's stated
objective and focus for its initiative is to limit access to cigarettes by
minors by measures beyond the restrictions either mandated by existing
federal, state and local laws or voluntarily implemented by major
manufacturers in the industry. Litigation has been 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. Management is unable to
predict the outcome of this litigation or the effects of regulations, if
implemented, on Liggett's operations, but such actions could have an
unfavorable impact thereon.
- 23 -
24
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The Company and Liggett, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed rule making and to phase in compliance with
certain of the proposed interim FDA regulations. See discussions of the
Castano and Attorneys General settlements above.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required each United
States cigarette manufacturer to use at least 75% domestic tobacco in the
aggregate of the cigarettes manufactured by it in the United States,
effective January 1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials between foreign and domestic
tobacco and, under certain circumstances, make purchases of domestic tobacco
from the tobacco stabilization cooperatives organized by the United States
government. OBRA was repealed retroactively (as of December 31, 1994)
coincident in time with the issuance of a Presidential proclamation,
effective September 13, 1995, imposing tariffs on imported tobacco in excess
of certain quotas.
The USDA informed Liggett that it did not satisfy the 75% domestic tobacco
usage requirement for 1994 and was subject to a marketing assessment of
approximately $5,500. At December 31, 1995, the Company accrued
approximately $4,900 representing the present value of its obligation for
the USDA marketing assessment. The charge was included as a component of
cost of sales in 1995. Liggett has agreed to pay this assessment in
quarterly installments with interest over a five year period. Under certain
circumstances, payment can be accelerated. Since the levels of domestic
tobacco inventories on hand at the tobacco stabilization organizations are
below reserve stock levels, the Company was not obligated to make purchases
of domestic tobacco from the tobacco stabilization cooperatives.
On September 13, 1995, the President of the United States, after
negotiations with the affected countries, declared a tariff rate quota
("TRQ") on certain imported tobacco, imposing extremely high tariffs on
imports of flue-cured and burley tobacco in excess of certain levels which
vary from country to country. Oriental tobacco is exempt from the quota as
well as all tobacco originating from Canada, Mexico or Israel. Management
believes that the TRQ levels are sufficiently high to allow 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 the Company. The
Company believes it is unlikely that an end-user licensing system will be
adopted, although no assurances can be given that an end-user licensing
system will not be adopted.
In September 1991, the Occupational Safety and Health Administration
("OSHA") issued a Request for Information relating to indoor air quality,
including ETS, in occupational settings. OSHA announced in March 1994 that
it would commence formal rulemaking during the year. Hearings were
completed during 1995 but it is not anticipated that any regulation will
issue prior to the end of 1996. While the Company cannot predict the
outcome, some form of federal regulation of smoking in workplaces may
result.
- 24 -
25
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In January 1993, the United State Environmental Protection Agency (the
"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.
The Company has been involved in certain environmental proceedings, none of
which, either individually or in the aggregate, rise to the level of
materiality. The Company's current operations are conducted in accordance
with all environmental laws and regulations. Management is unaware of any
material environmental conditions affecting its existing facilities.
Compliance with federal, state and local provisions regulating the discharge
of materials into the environment, or otherwise relating to the protection
of the environment, have not had a material effect on the capital
expenditures, earnings or competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending against
Liggett unrelated to 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.
The Company:
As a conclusion to the litigation commenced by a group of Contingent Value
Right ("CVR") Holders on September 20, 1993, the Delaware Court of Chancery
approved a settlement at a hearing conducted on June 4, 1996. The
settlement became final and nonappealable on or about July 8, 1996.
Distributions to the Company and to CVR Holders, pursuant to the settlement,
have been substantially completed. Under the terms of the settlement, both
the Company and the plaintiff CVR Holders may pursue claims, in certain
circumstances, against the CVR trustee. In connection with the settlement,
the Company recognized a gain of $2,263 during the third quarter 1996.
At September 30, 1996, there were several other proceedings, lawsuits and
claims pending against subsidiaries of the Company. The Company is of the
opinion that the liabilities, if any, ultimately resulting from such other
proceedings, lawsuits and claims should not materially affect its
consolidated financial position, results of operations or cash flows.
- 25 -
26
BROOKE GROUP LTD.
BGLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
8. SALE OF ASSETS
On July 15, 1996, the Company sold substantially all of the non-cash assets
and certain liabilities of COM Products, Inc. ("COM"), a subsidiary engaged
in the business of selling micrographics equipment and supplies, for
approximately $3,700 cash and a promissory note for $500. The Company
recognized a gain of approximately $3,000 on this transaction.
On April 9, 1996, Liggett executed a definitive agreement with the County of
Durham for the sale of certain surplus realty in the amount of $4,300. The
closing of the transaction occurred on May 14, 1996. Liggett recognized a
gain of approximately $3,600.
On April 29, 1996, Liggett executed a definitive agreement (as amended
September 11, 1996) with Blue Devil Ventures, a North Carolina limited
liability partnership, for the sale of additional surplus realty in the
amount of $2,200. While the agreement provides for the closing to occur on
or before March 11, 1997, Blue Devil Ventures has the option to forfeit its
deposit of $550 and not close if it determines that its development project
is not feasible. Such net assets ($315) have been reclassified from
long-term to other current assets as of September 30, 1996.
9. ACQUISITION OF MINORITY INTERESTS AND AFFILIATE TRANSACTIONS
During the second quarter of 1996, BOL entered into stock purchase
agreements with the chairman of LDL and the former Director of LDL's tobacco
operations (the "Sellers"). Under the stock purchase agreements, the
Company acquired 142,558 shares held by the Sellers for $2,143. The
purchase price is payable in installments during 1996 and certain shares of
LDL collateralize BOL's obligation under both the purchase agreements and
the consulting agreements (described below). These transactions increased
BOL's ownership percentage in LDL from 68% to 89%.
Concurrently, the Company entered into consulting agreements with the
Sellers. Under the terms of the consulting agreements, the Company will pay
the Sellers a total of approximately $8,357 over five years.
On July 5, 1996, Liggett purchased from BOL 140,000 shares (approximately
20%) of LDL's tobacco operations for $2,100. Liggett also acquired a
ten-year option to purchase up to 292,407 additional shares of LDL stock at
the same per share price ($15.00) for $3,400, thereby entitling Liggett to
increase its interest in LDL to approximately 62%. The option fee is to be
credited against the purchase price. In addition, Liggett has the right on
or before June 30, 1997 to acquire another ten-year option from BOL for
$2,200 on the same terms to purchase the remaining 27% of the shares of LDL
owned by BOL. These transactions have no impact on the consolidated
financial position or results of operations of the Company or BGLS.
10. RESTRUCTURING
During the first nine months of 1995, Liggett, in an effort to reduce
costs, offered voluntary retirement programs, among other things, to
eligible employees and reduced its headcount by 117 positions. Liggett
recorded a restructuring charge of $2,407 to operations ($621 of which was
included in cost of sales) for severance programs, primarily salary
continuation and related benefits for terminated employees.
During the first nine months of 1996, Liggett continued its efforts to
reduce costs and further reduced its headcount by 7 additional positions.
Ligget recorded a restructuring charge of $1,180 to operations for
severance programs, primarily salary continuation and related benefits
for terminated employees.
- 26 -
27
NEW VALLEY HOLDINGS, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Cash and cash equivalents...................................... $ 1 $ 738
Investment in New Valley Corporation:
Redeemable preferred stock................................... 74,199 109,386
Common stock................................................. (74,199) (52,045)
------- --------
Total investment in New Valley Corporation................... 57,341
------- --------
Total assets............................................... $ 1 $ 58,079
======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current income taxes payable to parent......................... $ 6,217 $ 4,472
Deferred income taxes.......................................... 4,918
------- --------
Total liabilities.......................................... 6,217 9,390
------- --------
Commitments and contingencies..................................
Common stock, $0.01 par value,
100 shares authorized, issued and outstanding................
Additional paid-in capital..................................... 18,732 11,020
Retained (deficit) earnings.................................... (6,908) 32,128
Unrealized holding (loss) gain, net of income tax benefit of $0
and income taxes of $2,983................................... (18,040) 5,541
------- --------
Total stockholder's (deficit) equity....................... (6,216) 48,689
------- --------
Total liabilities and stockholder's equity (deficit)....... $ 1 $ 58,079
======= ========
The accompanying notes are an integral part
of the financial statements.
- 27 -
28
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
-------------------- --------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
Equity in (loss) earnings of affiliate.......... $ (4,836) $ 1,538 $ (7,818) $ 3,532
Interest income................................. 7 55 391
General and administrative expenses............. (13) (9) (17) (17)
-------- ------- -------- --------
(Loss) income from continuing operations before
income taxes.................................. (4,842) 1,529 (7,780) 3,906
-------- ------- -------- --------
Provision (benefit) for income taxes:
Current........................................ 1,297 1,620 1,745 4,460
Deferred....................................... 7,212 (7,579) 4,004 (11,750)
-------- ------- -------- --------
Income tax provision (benefit)................ 8,509 (5,959) 5,749 (7,290)
-------- ------- -------- --------
(Loss) income from continuing operations........ (13,351) 7,488 (13,529) 11,196
--------
Income from discontinued operations of
affiliate, net of income taxes................. 64 1,170
-------- ------- -------- --------
Net (loss) income............................... $(13,351) $ 7,552 $(13,529) $ 12,366
======== ======= ======== ========
The accompanying notes are an integral part
of the financial statements.
- 28 -
29
NEW VALLEY HOLDINGS, INC.
STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional Retained Unrealized
-------------- Paid-In Earnings Holding
Shares Amount Capital (Deficit) Gain (Loss) Total
------ ------ -------- -------- ----------- -----
Balance, December 31, 1995.... 100 $11,020 $32,128 $ 5,541 $ 48,689
Increase in capital from
New Valley's repurchase
of Class A Shares and
other capital transactions,
net of tax................... 1,152 1,152
Proportionate share of
New Valley's unrealized
depreciation in investments,
net of tax................... (716) (716)
Increase in unrealized holding
loss on investment in
New Valley, net of tax....... (16,550) (16,550)
Net (loss).................... (13,529) (13,529)
Increase in valuation allowance
on deferred tax assets....... 6,560 (6,315) 245
Dividends..................... (25,507) (25,507)
---- ----- ------- ------- -------- --------
Balance, September 30, 1996.. 100 $ $18,732 $(6,908) $(18,040) $ (6,216)
==== ===== ======= ======= ======== ========
The accompanying notes are an integral part
of the financial statements.
- 29 -
30
NEW VALLEY HOLDINGS, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
----------------------------
September 30, September 30,
1996 1995
------------- -------------
Net cash provided by operating activities......... $ 49 $ 374
-------- --------
Cash flows from investing activities:
Dividends received from New Valley Corporation.. 24,733 61,832
-------- --------
Net cash provided by investing activities....... 24,733 61,832
-------- --------
Cash flows from financing activities:
Payment of dividends............................ (25,507) (48,167)
-------- --------
Net cash used for financing activities.......... (25,507) (48,167)
-------- --------
Net (decrease) increase in cash................... (725) 14,039
Cash and cash equivalents at beginning of period.. 726
-------- --------
Cash and cash equivalents at end of period........ $ 1 $ 14,039
======== ========
The accompanying notes are an integral part
of the financial statements.
- 30 -
31
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
Organization. New Valley Holdings, Inc. (the "Company") was formed on
September 9, 1994 by BGLS Inc. ("BGLS") to act as a holding company for
certain stock investments in New Valley Corporation ("New Valley"). BGLS
owns 100% of the authorized, issued and outstanding common stock of the
Company. BGLS is a wholly-owned subsidiary of Brooke Group Ltd. ("Brooke").
The interim financial statements of the Company are unaudited and, in the
opinion of management, reflect all adjustments necessary (which are normal
and recurring) to present fairly the Company's financial position, results
of operations and cash flows. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in
BGLS' Annual Report on Form 10-K, as amended, for the year ended December
31, 1995, 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 preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities and the reported amounts of
revenues and expenses. Actual results could differ from those estimates.
2. INVESTMENT IN NEW VALLEY CORPORATION
Summarized financial information for New Valley as of September 30, 1996 and
December 31, 1995 and for the three and nine month periods ended September
30, 1996 and 1995 follows:
September 30, December 31,
1996 1995
----------------- ---------------
Current assets........................ $ 234,165 $333,485
Investment in real estate............. 182,125
Other non-current assets.............. 37,099 52,337
Current liabilities................... 183,292 177,920
Notes payable ........................ 159,494
Other long-term obligations .......... 12,966 11,967
Redeemable preferred shares .......... 201,318 226,396
Common shareholders' deficit ......... (103,681) (30,461)
Three Months Ended Nine Months Ended
----------------------------- ---------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
------------- -------------- ------------ -------------
Revenues.................................... $ 24,263 $ 21,514 $ 92,794 $ 39,215
Cost and expenses........................... 33,000 18,436 110,647 26,189
(Loss) income from continuing operations.... (7,728) 2,784 (16,694) 11,699
(Loss) income from discontinued operations.. (4,716) 235 (5,396) 4,315
Net (loss) applicable to common shares(A)... (27,844) (7,860) (64,319) (300)
(A) Includes all preferred accrued dividends, whether or not declared, and
the excess of carrying value of redeemable preferred shares over cost
of shares purchased.
- 31 -
32
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The Company's investment in New Valley at September 30, 1996 is summarized
as follows:
Number of Fair Carrying
Shares Value Value
--------- ------- ---------
Class A Preferred Shares 618,326 $74,199 $ 74,199
Common Shares........... 3,969,962 15,880 (74,199)
------- --------
$90,079 $
======= ========
The Class A Preferred Shares are accounted for as debt securities pursuant
to the requirements of Statement of Financial Accounting Standards ("FAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities",
and are classified as available-for-sale. Prior to January 1, 1996, the
Class A Preferred Shares' fair value had 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. In January 1996, however, New Valley became engaged in the
ownership and management of commercial real estate and, in February 1996,
acquired a controlling interest in Thinking Machines Corporation. Because
these businesses affect the composition and nature of the underlying net
assets of New Valley, the Company has determined the fair value of the Class
A Preferred Shares based on the quoted market price commencing with the
quarter ended March 31, 1996. The New Valley common shares are accounted
for under the equity method. On July 29, 1996, New Valley effected a
one-for-twenty reverse stock split of New Valley's common shares. After
giving effect to this split, the Company holds 3,969,962 shares of New
Valley common stock.
During the quarter ended September 30, 1996, the decline in the market value
of the Class A Preferred Shares, the dividend received on the Class A
Preferred Shares and the Company's equity in losses incurred by New Valley
caused the carrying value of the Company's investments in New Valley to be
reduced to zero. As a result, the Company did not record $5,558 of
unrealized holding losses on its investment in the New Valley Class A
Preferred Shares. The Company also did not record its proportionate share of
New Valley's FAS 115 unrealized holding losses which at September 30, 1996
were $8,957.
In the first quarter of 1996, New Valley repurchased 72,104 Class A
Preferred Shares for $10,530. As a result of this transaction, the Company
now owns 59.72% of the outstanding Class A Preferred Shares. 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 of $1,773 along with its share of other New
Valley capital transactions of $10,055 for the nine months ended September
30, 1996.
For the nine months ended September 30, 1996, the Company has received a
total of $24,733 ($40.00 per share) in dividend distributions on the Class A
Preferred Shares. At September 30, 1996, the accrued and unpaid dividends
arrearage on the Class A Preferred Shares was $103,234 or $99.70 per share.
The Company's share of such arrearage was $61,647.
At September 30, 1996, the accrued and unpaid dividends arrearage on the New
Valley Class B Preferred Shares (none of which are held by the Company) was
$110,076 or $39.58 per share.
As a result of asset dispositions pursuant to New Valley's First Amended
Joint Chapter 11 Plan of Reorganization, as amended (the "Joint Plan"), New
Valley accumulated a significant amount of cash which it was required to
reinvest in operating companies by January 18, 1996 in order to avoid
potentially burdensome regulation under the Investment Company Act of 1940,
as amended (the "Investment Company Act"). The Investment Company Act and
the rules and regulations thereunder
- 32 -
33
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
require the registration of, and impose various substantive restrictions on,
companies that engage primarily in the business of investing, reinvesting or
trading in securities or engage in the business of investing, reinvesting,
owning, holding or trading in securities and own or propose to acquire
"investment securities" having a "value" in excess of 40% of a company's
"total assets" (exclusive of Government securities and cash items) on an
unconsolidated basis. Following dispositions of its then operating
businesses pursuant to the Joint Plan, New Valley was above this threshold
and relied on the one-year exemption from registration under the Investment
Company Act provided by Rule 3a-2 thereunder, which exemption expired on
January 18, 1996. Prior to such date, through New Valley's acquisition of
the investment banking and brokerage business of Ladenburg, Thalmann & Co.,
Inc. and its acquisition of a portfolio of office buildings and shopping
centers, New Valley was engaged primarily in a business or businesses other
than that of investing, reinvesting, owning, holding or trading in
securities, and the value of its investment securities was below the 40%
threshold. Under the Investment Company Act, New Valley is required to
determine the value of its total assets for purposes of the 40% threshold
based on "market" or "fair" values, depending on the nature of the asset, at
the end of the last preceding fiscal quarter and based on cost for assets
acquired since that date. If New Valley were required to register in the
future, under the Investment Company Act, it would be subject to a number of
severe restrictions on its operations, capital structure and management,
including without limitation, entering into transactions with affiliates.
If New Valley were required to register under the Investment Company Act,
the Company, as well as BGLS and Brooke, may be in violation of the
Investment Company Act and may be adversely affected by the restrictions of
the Investment Company Act. In addition, registration under the Investment
Company Act by BGLS would constitute a violation of the 15.75% Series B
Senior Secured Notes due 2001 (the "Series B Notes") indenture to which BGLS
is a party.
3. RJR NABISCO HOLDINGS CORP.
At September 30, 1996, New Valley held 4,947,250 shares of RJR Nabisco
Holdings Corp. ("RJR Nabisco") common stock with a market value of $129,247
(cost of $151,650) collateralizing margin loan financing of $75,863. From
the period October 1, 1996 to November 8, 1996, New Valley sold approximately
1,780,000 shares of RJR Nabisco common stock and recognized a loss of
$3,648. At November 8, 1996, New Valley held approximately 3,170,000 shares
of RJR Nabisco common stock with a market value of $96,815 (cost of $97,302),
collateralizing margin loan financing of $23,158. New Valley's unrealized
loss on its investment in RJR Nabisco common stock decreased from $22,403 at
September 30, 1996 to $487 at November 8, 1996.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company relating to 1,000,000
shares of RJR Nabisco common stock. During the third quarter of 1996, the
Swap was terminated. New Valley recognized a loss on the Swap of $4,074 and
$7,305 for the three and nine months ended September 30, 1996, respectively.
For the three and nine months ended September 30, 1996, New Valley has
expensed $791 and $11,158 for costs relating to its RJR Nabisco investment.
Pursuant to a December 27, 1995 agreement, New Valley agreed, among other
things, to pay directly or reimburse Brooke and its subsidiaries for
out-of-pocket expenses in connection with Brooke's solicitation of consents
and proxies from the shareholders of RJR Nabisco. New Valley has reimbursed
Brooke and its subsidiaries $2,361 pursuant to this agreement of which $942
was expensed in 1996.
- 33 -
34
NEW VALLEY HOLDINGS, INC.
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
On November 5, 1996, Brooke submitted to RJR Nabisco, in order to comply
with the requirements of RJR Nabisco's by-laws, a notice of intent to
nominate a slate of directors for election at the RJR Nabisco 1997 annual
meeting of stockholders.
4. FEDERAL INCOME TAX
At September 30, 1996, the Company has provided a valuation allowance based
on the determination that it is more likely than not that the deferred tax
asset will not be realized through the future taxable earnings or
alternative tax strategies. The provision for taxes for the nine month
periods ended September 30, 1996 and 1995 does not bear a customary
relationship to the pretax income for the Company due principally to the
effects of the 80% dividends received deduction for Federal taxes.
5. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's common stock and
the Company's investments in the New Valley securities as collateral in
connection with the issuance of BGLS' Series B Notes.
- 34 -
35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
INTRODUCTION
The following discussion provides an assessment of the consolidated results of
operations, capital resources and liquidity of Brooke Group Ltd. (the
"Company") and its subsidiaries and should be read in conjunction with the
Consolidated Financial Statements and notes thereto of the Company and BGLS
Inc. ("BGLS") included elsewhere in this document. BGLS is a wholly owned
subsidiary of the Company. The consolidated financial statements of the
Company include the accounts of BGLS, Liggett Group Inc. ("Liggett"), Brooke
(Overseas) Ltd. ("BOL"), New Valley Holdings, Inc. ("NV Holdings"), other less
significant subsidiaries, and as of December 31, 1995 and for the three and
nine months ended September 30, 1996, Liggett-Ducat Ltd. ("LDL").
For purposes of this discussion and other consolidated financial reporting, the
Company's significant business segments are tobacco and real estate.
RECENT DEVELOPMENTS
Certain Matters Relating to RJR Nabisco Holdings Corp.
As of November 8, 1996, New Valley Corporation ("New Valley") held
approximately 3,170,000 shares of RJR Nabisco Holdings Corp. ("RJR Nabisco")
common stock with a market value of $96,815 (cost of $97,302) with an
unrealized loss of $487. For the three and nine months ended September 30,
1996, New Valley had expensed $791 and $11,158, respectively, for costs
relating to the investment in RJR Nabisco common stock. Pursuant to a December
27, 1995 agreement, New Valley agreed, among other things, to pay directly or
reimburse the Company and its subsidiaries for out-of-pocket expenses in
connection with the Company's solicitation of consents and proxies from the
shareholders of RJR Nabisco. For the nine months ended September 30, 1996, New
Valley reimbursed the Company and its subsidiaries $2,321 pursuant to this
agreement, of which $942 was expensed in 1996.
On February 29, 1996, New Valley entered into a total return equity swap
transaction (the "Swap") with an unaffiliated company relating to an additional
1,000,000 shares of RJR Nabisco common. The Swap was terminated during the
third quarter of 1996. New Valley realized a loss of $4,074 and $7,305 on the
Swap for the three and nine months ended September 30, 1996, respectively.
On November 5, 1996, the Company submitted to RJR Nabisco, in order to comply
with the requirements of RJR Nabisco's by-laws, a notice of intent to nominate
a slate of directors for election at the RJR Nabisco 1997 annual meeting of
stockholders.
New Valley
On July 29, 1996, New Valley completed its reincorporation from the State of
New York to the State of Delaware and effected a one-for-twenty reverse stock
split of New Valley's common shares. After giving effect to this reverse stock
split, the Company now holds 3,989,710 (41.7%) common shares of New Valley.
On January 11, 1996, a subsidiary of New Valley made a $10,600 convertible
bridge loan to finance Thinking Machines Corporation ("TMC"), a developer and
marketer of parallel software for high-end and networked computer systems. In
February 1996, the loan was converted into a controlling interest in a
partnership which holds approximately 61% of the outstanding common stock of
Thinking Machines. In October 1996, TMC adopted a plan to dispose of its
parallel processing computer segment. New Valley does not anticipate a
material gain or loss in the disposal as any proceeds from the sale of the
segment would offset the expected operating losses during the phase-out period.
- 35 -
36
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Pricing Activity.
On April 8, 1996, Philip Morris announced a list price increase on all brands
of $.40 per carton. The other manufacturers, including Liggett, matched the
price increase.
Legislation and Litigation.
The cigarette industry continues to be challenged on numerous fronts. Several
federal administrative bodies, including the United States Environmental
Protection Agency and the Food and Drug Administration have issued reports or
commenced regulatory proceedings which have had or could have an adverse effect
on Liggett and the cigarette industry as a whole. The rate of filings of
individual product liability cases has increased and Liggett's risk attendant
thereto has correspondingly increased. Several purported class actions have
been commenced against Liggett and other companies in the industry, one of
which actions Liggett has settled. A number of states' Attorneys General have
commenced litigation against the industry asserting numerous different
theories of liability, five of which actions Liggett has settled. The various
companies in the industry are actively engaged in defending against and
responding to these initiatives. The Company is not able to evaluate the
effect of these developing matters but it is possible that the Company's
financial position, results of operations and cash flows could be materially
adversely affected by an ultimate unfavorable outcome in any of such pending
litigation and regulatory proceedings. For a description of pending litigation
and regulatory proceedings see Note 7 to the Company's consolidated financial
statements.
On March 12, 1996, Liggett, together with the Company, entered into an
agreement to settle the Castano class action tobacco litigation, and on March
15, 1996, Liggett, together with the Company, entered into an agreement with
the Attorneys General of the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts and the State of Louisiana to settle
certain actions brought against Liggett by such states.
Under the Castano settlement, the Castano class would receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee.
Under the Attorneys General Settlement, the states would share an initial
$5,000 ($1,000 of which was paid on March 22, 1996, with the balance payable
over nine years and indexed and adjusted for inflation). In addition, Liggett
will be required to pay the states a percentage of Liggett's pretax income
(income before income taxes) each year from the second through the twenty-fifth
year. This annual percentage would range from 2-1/2% to 7-1/2% of Liggett's
pretax income, depending on the number of additional states joining the
settlement. All of Liggett's payments are subject to certain reductions
provided for in the agreement. Liggett has also agreed to pay to the states
$5,000 if the Company or Liggett fails to consummate a merger or other similar
transaction with another defendant in the lawsuits within three years of the
date of the settlement.
- 36 -
37
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY (continued)
At December 31, 1995, the Company had recorded a charge of approximately $4,000
for the present value of the fixed payments under the Attorneys General
settlement. 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, will be expensed when known.
RESULTS OF OPERATIONS
Three months ended September 30, 1996 compared to three months ended September
30, 1995
Consolidated revenues were $114,635 for the three months ended September 30,
1996 compared to $124,100 for the three months ended September 30, 1995. This
7.6% decrease in revenues primarily resulted from a decrease of $21,523 in
revenues at Liggett offset by the addition of tobacco revenues of LDL in Russia
of $12,712 (which results were not included in the consolidated group in 1995).
The 17.5% decrease in Liggett revenues was due primarily to a 20.5% decline in
domestic unit sales volume, partially offset by the effects of the recent list
price increase (see "- Recent Developments in the Cigarette Industry - Pricing
Activity"). The decline in unit sales volume was comprised of declines within
the premium segment of 15.3% and discount segment (which includes generic,
control label and branded discount products) of 22.1%. The decline in premium
and discount unit sales volume was due to certain competitors continuing
leveraging rebate programs tied to their products and increased promotional
activity by certain other manufacturers.
Consolidated gross profit was $56,274 for the three months ended September 30,
1996 compared to $69,474 for the three months ended September 30, 1995, a
decrease of $13,200 when compared to the same period last year, due primarily
to the decline in unit sales volume at Liggett discussed above. Overall, the
Company's gross profit as a percent of revenues decreased to 49.1% in the
current period from 56.0% in the same period in the prior year because of
decreased margins at Liggett and the inclusion of LDL which had break-even
tobacco margins due to increased tobacco and labor costs as well as intense
price competition in the Russian market. Gross profit at Liggett was $55,511
for the three months ended September 30, 1996, a decrease of $13,507 from
$69,018 for the same period in 1995, due primarily to the decline in unit sales
volume discussed above. As a percent of revenues (excluding federal excise
taxes), Liggett's gross profit decreased to 74.0% for the three months ended
September 30, 1996 compared to 76.7% for the same period in 1995. This
decrease is the result of increased tobacco costs due to reduced worldwide
supply of tobacco and 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 recent list price increase.
Consolidated operating, selling, general and administrative expenses were
$55,326 for the three months ended September 30, 1996 compared to $58,818 for
the same period last year. The decrease of $3,492 considers the effects of
lower sales volume disclosed above and the prior year's restructuring at
Liggett ($2,548 for the year ended December 31, 1995) which reduced payroll and
benefits. Liggett, in addition, has reduced spending on promotional programs
when compared to the prior period. The effects of this reduction were somewhat
offset by additional restructuring charges during the three months ended
September 30, 1996. Further, the Company's operating expenses were reduced
due to lower pension expense and lower professional fees at the corporate level
in the three months ended September 30, 1996.
Consolidated interest expense was $15,254 for the three months ended September
30, 1996 compared to $13,952 for the same period last year due to a greater
amount of debt outstanding in the current period.
- 37 -
38
RESULTS OF OPERATIONS (continued)
Equity in earnings of affiliate was a loss of $4,618 for the three months ended
September 30, 1996 compared to income of $1,561 for the three months ended
September 30, 1995 and relates to New Valley's net loss of $12,444 in 1996
compared to net income of $3,019 in 1995, and a decrease in the market value of
the New Valley Class A Preferred Shares.
The gain on sale of assets relates to the sale of substantially all the
non-cash assets of COM Products Inc. ("COM") by the Company in July 1996.
Other, net income for the nine months ended September 30, 1996 includes a gain
upon settlement of the Contingent Value Rights ("CVR") litigation of $2,300.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30,1995
Consolidated revenues were $330,364 for the nine months ended September 30,
1996 compared to $341,718 for the nine months ended September 30, 1995, a
decrease of $11,354 primarily due to a decline in sales at Liggett offset by
tobacco revenues in Russia from LDL which was not part of the consolidated
group in 1995. Net sales at Liggett were $292,899 for the nine months ended
September 30, 1996 versus $337,217 for the same period last year. This 13.1%
decrease in revenues was primarily due to an 17.2% decline in domestic unit
sales volume, partially offset by the effects of recent list price increases.
The decline in unit sales volume was comprised of declines within the premium
segment of 11.8% and the discount segment of 18.8%. The decline in premium and
discount unit sales volume was due to aggressive trade programs offered by
Liggett at year end 1995 and certain competitors' continuing leveraging rebate
programs tied to their products and increased promotional activity by certain
other manufacturers.
Consolidated gross profit of $161,433 for the nine months ended September 30,
1996 decreased $21,519 from gross profit of $182,952 for the same period in
1995. The decrease in gross profit coincides with the decrease in sales
revenue at Liggett. Liggett's gross profit as a percent of revenues (excluding
federal excise taxes) for the period decreased to 73.3% compared to 74.0% last
year. This decrease is a result of increased tobacco costs discussed above,
partially offset by recent list price increases and restructuring changes
incurred in 1995 with no similar changes in 1996. Tobacco margins at LDL for
the nine months ended September 30, 1996 were 0.3% for the reasons indicated
above.
Consolidated operating, selling, general and administrative expenses were
$158,482 for the nine months ended September 30, 1996 compared to $173,322 for
the same period last year, a decrease of $14,840. The decrease resulted from
lower expenses recognized relating to LDL in 1996, reduced professional fees at
the corporate level, lower pension expense and reduced administrative expenses
at Liggett resulting from the 1995 restructuring as well as reduced spending on
promotional programs discussed above. Restructuring charges for the nine months
ended September 30, 1996 at Liggett were $1,180.
Consolidated interest expense was $45,488 for the nine months ended September
30, 1996 compared to $43,369 for the same period last year. The increase of
$2,119 is primarily due to additional debt issued by the Company and interest
accrued on the USDA marketing assessment and Attorneys General settlement at
Liggett, partially offset by the redemption of $7,000 Liggett Series B Notes in
December 1995. (See Note 7 to the Company's consolidated financial
statements).
Sale of assets in the amount of $6,745, reflects gains of approximately $3,000
on the sale of assets at COM discussed above and $3,700 on the sale of surplus
realty by Liggett to the County of Durham.
The gain on disposal of discontinued operations of $13,138 for the nine months
ended September 30, 1995 primarily reflects the redemption/sale of SkyBox
preferred and common stock. No comparable transaction occurred in the nine
months ended September 30, 1996.
- 38 -
39
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents decreased $1,267 for the nine months ended
September 30, 1996 compared with an increase of $12,722 for the nine months
ended September 30, 1995.
Net cash used in operations for the nine months ended September 30, 1996 was
$22,000 compared to net cash used in operations of $23,706 for the comparable
period of 1995. Cash used in operations for the period ended September 30,
1996 included interest payments of $53,000 as compared to interest payments
made in the same period in 1995 of $45,497. Interest payments in 1996 include
interest for a ten-month period (October 1, 1995 to July 31, 1996) on the
Company's debt. The interest payment for this ten-month period was in
accordance with the 1995 Exchange Offer and the terms of the 15.75% Series B
Senior Secured Notes due 2001 (the "Series B Notes").
Liggett believes that cash flows from operations and its revolving credit
facility ("the Facility") will continue to meet its liquidity requirements for
the twelve months ending September 30, 1997. Management believes that the
positive effects on cash flow from operations resulting from the April 1996
price increase, estimated at approximately $7,100 on an annual basis, and the
estimated savings resulting from Liggett's restructurings, estimated at
approximately $7,350 on an annual basis, will enable Liggett to meet its
estimated interest expense of $22,700 annually, the sinking fund requirement to
redeem $7,500 principal amount of Ligget's senior secured notes on or before
February 1, 1997, budgeted capital expenditures of $2,500 and payments of
$1,400 on the USDA marketing assessment. However, there can be no assurance
that such anticipated increases in cash flow will materialize as there are a
number of factors including increased tobacco costs, litigation expenses and
payments based on future income to which Liggett is committed under the
Castano and Attorneys General settlement agreements, the amounts of which are
unknown. Further, the Facility was reclassified to short-term debt because
the Facility becomes due on March 8, 1997 thereby creating a working capital
deficiency at Liggett of approximately $32,300 at September 30, 1996. Liggett
is currently negotiating with its lenders for an extension of the maturity and
a modification of other terms under the Facility. While management currently
believes the Facility will be extended and modified on satisfactory terms and
funds will be available to meet the requirement to redeem $7,500 principal
amount of Ligget's senior secured notes, no assurances can be given in this
regard.
Liggett has been receiving certain financial and other 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. The future
financial benefit to Liggett is not quantifiable at this time since the
arrangements for assistance can be terminated under certain circumstances and
the amount of assistance received, if any, would be a function of the level of
costs incurred. Certain joint defense arrangements, and the financial benefits
incident thereto, have ended. No assurances can be given that other
arrangements will continue.
Cash used in investing activities was $8,325 for the period ended September 30,
1996 compared to cash provided of $69,008 for the same period in 1995. Cash
used in 1996 includes capital expenditures of approximately $21,000 for real
estate development at BOL and $3,600 for equipment modernization at Liggett.
Liggett is forecasting further capital expenditures of approximately $500 for
equipment modernization in 1996. Capital expenditures were offset by dividends
from New Valley to NV Holdings of $24,733 or $40.00 per share on the Class A
Preferred Shares for the nine months ended September 30, 1996, cash proceeds
from the sale of surplus realty by Liggett and the sale of assets of COM by
BGLS. In the same period in 1995, capital expenditures of $5,000 were offset
by dividends from New Valley to NV Holdings of $61,832 and proceeds from the
redemption of SkyBox International Inc. ("SkyBox") preferred stock for $4,000
plus accrued dividends and the sale of SkyBox common stock for $9,282.
On April 29, 1996, Liggett executed a definitive agreement as amended September
11, 1996 with Blue Devil Ventures, a North Carolina limited liability
partnership, for the sale by Liggett to Blue Devil Ventures of certain surplus
realty for a sale price of $2,200. While the agreement provides for the
closing to occur on or before March 11, 1997, Blue Devil Ventures has the
option, if it determines that its development project is not feasible, to
forfeit its deposit of $550 and not close.
- 39 -
40
CAPITAL RESOURCES AND LIQUIDITY (continued)
On July 5, 1996, Liggett purchased from BOL 140,000 shares (approximately 20%)
of LDL's tobacco operations for $2,100. Liggett also acquired a ten-year
option, exercisable by Liggett in whole or in part for $3,400, to purchase from
BOL at the same per-share price ($15.00) up to 292,407 additional shares of
LDL, thereby entitling Liggett to increase its interest in LDL to approximately
62%. The option fee is to be credited against the purchase price.
Cash provided by financing activities for the nine months ended September 30,
1996 was $12,498 while cash used in financing activities for the nine months
ended September 30, 1995 was $32,580.
Proceeds from debt in the 1996 period include the private placement of the
Series A Notes (later exchanged for Series B Notes) for cash proceeds of
$6,300 including accrued interest, borrowings by BOL for real estate
development of $12,400 and net borrowings of approximately $9,500 by Liggett
and BOL under their revolving credit facilities. These transactions were
primarily offset by the redemption for $6,237 of the 16.125% Senior
Subordinated Reset Notes, including premium and accrued interest thereon, and
distributions to the Company's shareholders of $4,162. In the 1995 period,
proceeds from debt were $3,028, offset primarily by redemption of the Series
1 Notes of $23,594 plus accrued interest of $670 on June 12, 1995, repayments
under the Liggett facility of $3,449 and distributions of $4,107 to the
Company's shareholders.
Availability under Liggett's Facility was approximately $1,550 based on
eligible collateral at September 30, 1996. The Facility is collateralized by
all accounts receivable and inventories of Liggett. Borrowings under the
Facility bear interest at a rate equal to 1.5% above Philadelphia National
Bank's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate, which was 8.25% at September 30, 1996. The Facility contains
certain financial covenants similar to those contained in the 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 imposes requirements with
respect to Liggett's adjusted net worth (not to fall below a deficit of
$175,000) and working capital (not to fall below a deficit of $35,000). At
September 30, 1996, Liggett was in compliance with all covenants under the
Facility. The Facility was reclassified to short-term debt because it becomes
due on March 8, 1997. While management currently anticipates the maturity of
the Facility will be extended and other terms of the Facility will be modified
on satisfactory terms, no assurances can be given in this regard.
In December 1995, purchases by Liggett of $7,000 of 11.500% Senior Secured
Series B Notes due 1993 - 1999 using availability under the Facility
were credited against the mandatory redemption requirement for
February 1, 1996. The remaining $500 mandatory redemption requirement for
February 1, 1996 was met by retiring the $500 of Variable Rate Series C Senior
Secured Notes due 1999 held in Liggett's treasury. While Liggett's management
currently believes that funds will be available from cash flows from operations
and borrowings under the Facility to meet the 1997 mandatory redemption
requirement, no assurances can be given in this regard. There are no definite
plans for funding Liggett's 1998 mandatory redemption requirement of $37,500
at this time.
At September 30, 1996, Liggett had a net capital deficiency of $167,833 and is
highly leveraged. Due to the many risks and uncertainties associated with the
cigarette industry, impact of recent tobacco litigation settlements and
increased tobacco costs, there can be no assurance that Liggett will be able to
meet its future earnings goals. Consequently, Liggett could be in violation of
certain debt covenants and if its lenders were to exercise acceleration rights
under the Facility or the Liggett senior secured notes indentures or refuse to
lend under the Facility, Liggett would not be able to satisfy such demands or
its working capital requirements.
Prior to completion of the 1995 Exchange Offer on January 30, 1996, the Company
had substantial near-term debt service requirements, with aggregate required
principal payments of $318,106 due in the years 1995 through 1998. Redemption
of the remaining Reset Notes was effectuated on March 29, 1996 through
- 40 -
41
CAPITAL RESOURCES AND LIQUIDITY (continued)
use of proceeds from the sale of the additional $7,397 of Series A Notes on
March 4, 1996 discussed above. As a result of the 1995 Exchange Offer and the
redemption of the Reset Notes pursuant to the terms of the Reset Note Indenture
on March 29, 1996, BGLS decreased its scheduled debt maturities to $81,942 due
in the years 1996-1998; approximately $79,000 of this debt relates to Liggett
and LDL. In addition, BGLS cancelled all of the subordinated debentures
($13,705) held by the Company.
The Company believes that it will continue to meet its liquidity requirements
through the twelve months ending September 30, 1997, although the BGLS Series B
Notes Indenture limits the amount of restricted payments BGLS is permitted to
make to the Company during the calendar year. At September 30, 1996, the
remaining amount available through December 31, 1996 in the Restricted Payment
Basket related to BGLS' payment of dividends to the Company (as defined by
BGLS' Series B Notes Indenture) is $3,225. In September 1996, the Company
provided for its quarterly dividend of $1,387 with proceeds from the CVR
distribution received in July 1996. Company expenditures (exclusive of Liggett
and LDL) in 1996 include the $29,000 interest payment on the Series B Notes on
July 31, 1996. In March and July 1996, New Valley declared and paid dividends
on its Class A Preferred Shares in which NV Holdings received $6,183 and
$18,550, respectively. The Company expects to finance its long-term growth,
working capital requirements, capital expenditures and debt service
requirements through a combination of cash provided from operations, proceeds
from the sale of certain assets, additional public or private debt and/or
equity financing and distributions from New Valley. New Valley may acquire
additional operating businesses through merger, purchase of assets, stock
acquisition or other means, or seek to acquire control of operating companies
through one of such means.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities
Reform Act of 1995 (the "Reform Act"), including any statements that may be
contained in the foregoing discussion in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", in this report and in other
filings with the Securities and Exchange Commission and in its reports to
shareholders, which reflect management's current views with respect to future
events and financial performance. These forward-looking statements are subject
to certain risks and uncertainties and, in connection with the "safe-harbor"
provisions of the Reform Act, the Company is hereby identifying important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of the Company.
Liggett continues to be subject to risk factors endemic to the domestic
tobacco industry including, without limitation, health concerns relating to
the use of tobacco products and exposure to ETS, legislation, including tax
increases, governmental regulation, privately imposed smoking restrictions,
governmental and grand jury investigations and litigation. Each of the
Company's operating subsidiaries, namely Liggett and LDL, are subject to
intense competition, changes in consumer preferences, the effects of changing
prices for its raw materials and local economic conditions. Furthermore, the
performance of LDL's cigarette and real estate development operations in Russia
are each affected by uncertainties in Russia which include, among others,
political or diplomatic developments, regional tensions, currency repatriation
restrictions, foreign exchange fluctuations, inflation, and an undeveloped
system of commercial laws and legislative reform relating to foreign ownership
in Russia. In addition, the Company has a high degree of leverage and
substantial near-term debt service requirements, as well as a net worth
deficiency and recent losses from continuing operations. The Indenture for
BGLS' Series B Notes provides for, among other things, the restriction of
certain affiliated transactions between the Company and its affiliates, as
well as for certain restrictions on the use of future distributions received
from New Valley. Due to such uncertainties and risks, readers are cautioned
not to place undue reliance on such forward-looking statements, which speak
only as of the date on which such statements are made. The Company does not
undertake to update any forward-looking statement that may be made from time to
time by or on behalf of the Company.
- 41 -
42
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to information entitled "Contingencies" in Note 7 to
the Consolidated Financial Statements of Brooke Group Ltd. and BGLS
Inc. (collectively, the "Companies") included elsewhere in this report
on Form 10-Q.
Item 3. Defaults Upon Senior Securities
As of September 30, 1996, New Valley Corporation, the Companies'
affiliate, had the following respective accrued and unpaid dividend
arrearages on its 1,035,462 outstanding shares of $15.00 Class A
Increasing Rate Cumulative Senior Preferred Shares ($100 Liquidation
Value), $.01 par value per share (the "Class A Shares") and 2,790,776
outstanding shares of $3.00 Class B Cumulative Convertible Preferred
Shares ($25 Liquidation Value), $.10 par value per share (the "Class B
Shares"): (1) $103.23 million or $99.70 per Class A Share; and (2)
$110.47 million or $39.58 per Class B Share.
Item 4. Submission of Matters to a Vote of Security-Holders
During the third quarter of 1996, the Company submitted certain matters
to a vote of security-holders at its Annual Meeting of Stockholders
held on July 18, 1996 (the "Annual Meeting"). Proxies for the Annual
Meeting were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
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 June 17, 1996 (the
record date) - 18,496,096
Total shares of Common Stock voted in person or by proxy - 17,765,298
1. Election of Directors:
For Withhold
---------- --------
Bennett S. LeBow 17,727,829 37,469
Robert J. Eide 17,727,829 37,469
Jeffrey S. Podell 17,727,829 37,469
2. To ratify the appointment of Coopers & Lybrand L.L.P. as
independent auditors for the Company for the year ending December
31, 1996:
For Against Abstain
--- ------- -------
17,740,166 15,001 10,131
- 42 -
43
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10 Agreement of Termination made as of June 5, 1996, by and
among Brooke Group Ltd., High River Limited the Schedule 13D
Inc. with the as amended, with Corp.) BGLS Inc., New
Partnership filed by, among Securities and respect to the
Valley Corporation, (incorporated by others, Brooke Exchange
Commission common stock of RJR ALKI Corp. and reference to
Group Ltd. and BGLS on March 11, 1996, as amended, with
respect to the common stock of RJR Nabisco Holdings Corp.)
27.1 Brooke Group Ltd.'s Financial Data Schedule (for SEC use
only)
27.2 BGLS Inc.'s Financial Data Schedule (for SEC use only)
99.1 Liggett Group Inc.'s Interim Consolidated Financial
Statements for the quarterly period ended September 30, 1996.
99.2 New Valley Corporation's Interim Consolidated Financial
Statements for the quarterly period ended September 30, 1996.
(b) Reports on Form 8-K
No current reports on Form 8-K were filed by either Company during
the third quarter of 1996.
- 43 -
44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned thereunto duly authorized.
BROOKE GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
-----------------------------------
Joselynn D. Van Siclen
Vice President, Treasurer and Chief
Financial Officer
Date: November 14, 1996
-----------------------------
- 44 -
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
BGLS Inc.
(Registrant)
By: /s/ Joselynn D. Van Siclen
-------------------------------------
Joselynn D. Van Siclen
Vice President, Treasurer and Chief
Financial Officer
Date: November 14, 1996
-----------------
45
5
0000059440
BROOKE GROUP LTD
1,000
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
2,103
0
18,526
0
54,370
81,433
68,269
0
163,662
166,223
387,880
0
0
1,850
(435,941)
163,662
330,364
330,364
168,931
168,931
7,152
0
45,488
(40,895)
1,291
(42,186)
0
0
0
(42,186)
(2.18)
(2.18)
5
0000927388
BGLS INC
1,000
US DOLLARS
9-MOS
DEC-31-1996
JAN-01-1996
SEP-30-1996
1
2,008
0
18,526
0
54,370
80,823
67,924
0
163,802
191,709
387,880
0
0
0
(462,691)
163,802
330,364
330,364
168,931
168,931
8,680
0
(48,308)
(45,957)
5,143
(51,100)
0
0
0
(51,100)
0
0
1
EXHIBIT 99.1
TABLE OF CONTENTS
PAGE
----
FINANCIAL STATEMENTS - LIGGETT GROUP INC.
Consolidated Balance Sheets as of September 30, 1996 and December 31, 1995 . . . . . 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholder's Equity (Deficit) for the nine months
September 30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the nine months ended September 30,
1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS - EVE HOLDINGS INC.
------------------
Balance Sheets as of September 30, 1996 and December 31, 1995 . . . . . . . . . . . 21
Statements of Operations for the three and nine months ended September 30, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Statements of Cash Flows for the nine months ended September 30, 1996 and 1995 . . . 23
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 610 $ -
Accounts Receivable:
Trade less allowances of $665 and $815, respectively . . . . . 18,052 22,279
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,062 1,367
Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . 100 1,105
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 50,365 54,342
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . - 3,800
Other current assets (Note 4). . . . . . . . . . . . . . . . . . 946 1,703
------- --------
Total current assets . . . . . . . . . . . . . . . . . . . . 71,135 84,596
Property, plant and equipment, at cost, less accumulated
depreciation of $28,831 and $26,545, respectively. . . . . . . . 18,174 18,352
Intangible assets, at cost, less accumulated amortization
of $16,956 and $15,661, respectively . . . . . . . . . . . . . . 3,754 5,036
Other assets and deferred charges, at cost, less accumulated
amortization of $6,917 and $5,440, respectively . . . . . . . . 5,179 5,330
------- --------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $98,242 $113,314
======= ========
(continued)
3
3
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)
September 30, December 31,
1996 1995
------------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt. . . . . . . . . . . . $ 38,071 $ 50
Cash overdraft . . . . . . . . . . . . . . . . . . . . . . - 3,761
Accounts payable, principally trade . . . . . . . . . . . . 18,659 18,921
Accrued expenses:
Promotional . . . . . . . . . . . . . . . . . . . . . . . 28,684 25,519
Compensation and related items . . . . . . . . . . . . . 267 1,175
Taxes, principally excise taxes . . . . . . . . . . . . . 2,102 7,006
Estimated allowance for sales returns . . . . . . . . . . 5,000 5,000
Interest . . . . . . . . . . . . . . . . . . . . . . . . 3,389 8,412
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,257 5,728
-------- --------
Total current liabilities . . . . . . . . . . . . . . . 103,429 75,572
Long-term debt, less current maturities . . . . . . . . . . . 144,702 173,251
Non-current employee benefits and other liabilities . . . . . 17,944 19,197
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 . . . . . . . . . . . . . . . . . 49,840 53,240
Accumulated deficit . . . . . . . . . . . . . . . . . . . . (217,673) (207,946)
-------- --------
Total stockholder's deficit . . . . . . . . . . . . . . (167,833) (154,706)
-------- --------
Total liabilities and stockholder's equity (deficit). . $ 98,242 $113,314
======== ========
The accompanying notes are an integral part
of these financial statements.
4
4
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
-------- ------- -------- ---------
Net sales* . . . . . . . . . . . . . . . . . . . . $101,125 $122,648 $292,899 $337,217
Cost of sales* . . . . . . . . . . . . . . . . . . 45,614 53,630 134,439 155,713
-------- -------- -------- --------
Gross profit . . . . . . . . . . . . . . . . 55,511 69,018 158,460 181,504
Selling, general and administrative expenses . . . 51,709 56,008 148,357 156,647
Restructuring. . . . . . . . . . . . . . . . . . . 425 745 1,180 1,786
-------- -------- -------- --------
Operating income . . . . . . . . . . . . . . 3,377 12,265 8,923 23,071
Other income (expense):
Interest income. . . . . . . . . . . . . . . . . 23 - 23 -
Interest expense . . . . . . . . . . . . . . . . (5,982) (5,836) (17,831) (17,638)
Equity in loss of affiliate . . . . . . . . . . (740) - (740) -
Sale of assets . . . . . . . . . . . . . . . . . - 131 3,698 416
Miscellaneous, net . . . . . . . . . . . . . . . - - - (327)
-------- -------- -------- --------
Income (loss) before income taxes. . . . . . (3,322) 6,560 (5,927) 5,522
Income tax provision . . . . . . . . . . . . . . . 3,800 388 3,800 109
-------- -------- -------- --------
Net income (loss). . . . . . . . . . . . . . $ (7,122) $ 6,172 $ (9,727) $ 5,413
======== ======== ======== ========
*Net sales and cost of sales include federal excise taxes of $26,074, $32,643,
$76,758 and $92,238, respectively.
The accompanying notes are an integral part
of these financial statements.
5
5
LIGGETT GROUP INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(Unaudited)
(Dollars in thousands)
Common
Stock and Total
Contributed Accumulated Stockholder's
Capital Deficit Deficit
----------- ----------- -------------
Balance at December 31, 1995 . . . . . . . . . . . . $53,240 $(207,946) $(154,706)
Net loss . . . . . . . . . . . . . . . . . . . . . - (9,727) (9,727)
Consideration for option to acquire affiliate
stock in excess of its net assets (Note 10) . . . (3,400) - (3,400)
------- --------- ---------
Balance at September 30, 1996 . . . . . . . . . . . . $49,840 $(217,673) $(167,833)
======= ========= =========
The accompanying notes are an integral part
of these financial statements.
6
6
LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
-----------------------
1996 1995
------- --------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $(9,727) $ 5,413
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 6,071 6,024
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . 3,800 -
Gain on sale of property, plant and equipment . . . . . . . . . . . (3,698) (416)
Equity in loss of affiliate . . . . . . . . . . . . . . . . . . . . 740 -
Changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . 5,537 11,327
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,977 1,382
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . (261) (696)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . (6,141) (15,829)
Non-current employee benefits . . . . . . . . . . . . . . . . . . . (246) (320)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (914) 460
------- --------
Net cash provided by (used in) operating activities . . . . . . . (862) 7,345
------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment . . . . . . . . . 4,415 567
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . (2,983) (781)
Investments in affiliates. . . . . . . . . . . . . . . . . . . . . . . (5,500) (800)
------- --------
Net cash used in investing activities . . . . . . . . . . . . . . (4,068) (1,014)
------- --------
Cash flows from financing activities:
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . (191) (756)
Net borrowings (repayments) under revolving credit facility. . . . . . 9,510 (3,449)
Deferred finance charges . . . . . . . . . . . . . . . . . . . . . . . (18) -
Decrease in cash overdraft . . . . . . . . . . . . . . . . . . . . . . (3,761) (2,126)
------- --------
Net cash provided by (used in) financing activities . . . . . . . 5,540 (6,331)
------- --------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . 610 -
Cash and cash equivalents:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . - -
------- --------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 610 $ -
======= ========
Supplemental cash flow information:
Cash payments (refunds) during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $22,400 $ 22,364
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 129 $ (16)
The accompanying notes are an integral part
of these financial statements.
7
7
LIGGETT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
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.
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, 1995 balance
sheet has been derived from audited financial statements. Certain amounts in
the 1995 financial statements have been reclassified to conform with the 1996
presentation with no effect on previously reported net income (loss) or
stockholder's equity (deficit). 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, 1995, 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 $167,833 as of September 30, 1996 and is highly
leveraged. Due to the many risks and uncertainties associated with the
cigarette industry, impact of recent tobacco litigation settlements and
increased tobacco costs, there can be no assurance that the Company will be
able to meet its future earnings goals. Consequently, the Company could be in
violation of certain debt covenants and, if the lenders were to exercise
acceleration rights under the revolving credit facility or senior secured note
indenture or refuse to lend under the revolving credit facility, the Company
would not be able to satisfy such demands or its working capital requirements.
Liggett is currently negotiating with its lenders for an extension of the
maturity and a modification of other terms under its revolving credit facility
which expires on March 8, 1997. In addition, $7,500 principal amount of its
senior secured notes are required to be redeemed on or before February 1,
1997. While management currently believes that its revolving credit facility
will be extended and modified on satisfactory terms and funds will be available
to meet the 1997 redemption requirement, no assurances can be made in this
regard.
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,
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. 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.
8
8
4. Assets Under Agreements for Sale
On April 29, 1996, Liggett executed a definitive agreement (as amended on
September 11, 1996) 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, NC, for a sale price of $2,200. While the
agreement provides for the closing to occur on or before March 11, 1997, Blue
Devil Ventures has the option, if it determines that its development project is
not feasible, to forfeit its deposit of $550 and not close. The net book value
of those assets ($315) for which the agreement was signed have been classified
as current assets on the Company's Consolidated Balance Sheet as of September
30, 1996.
On April 9, 1996, Liggett executed a definitive agreement with the County
of Durham for the sale by Liggett to the County of Durham of certain surplus
realty in Durham, NC, for a sale price of $4,300. The net book value of those
assets ($713) for which the agreement was signed have been classified as
current assets on the Company's Consolidated Balance Sheet as of December 31,
1995. The transaction closed on May 14, 1996, at which time a gain of
approximately $3,600 was recognized.
5. Inventories
Inventories consist of the following:
September 30, December 31,
1996 1995
------------- ------------
Finished goods . . . . . . . . . . . . . . . $19,608 $18,240
Work-in-process . . . . . . . . . . . . . . . 3,415 3,331
Raw materials . . . . . . . . . . . . . . . . 23,292 24,946
Replacement parts and supplies. . . . . . . . 3,829 3,926
------- -------
Inventories at current cost . . . . . . . . . 50,144 50,443
LIFO adjustment . . . . . . . . . . . . . . . 221 3,899
------- -------
Inventories at LIFO cost . . . . . . . . . . $50,365 $54,342
======= =======
The Company has a leaf inventory management program whereby, among other
things, it is committed to purchase certain quantities of leaf tobacco. The
purchase commitments are for quantities not in excess of anticipated
requirements and are at prices, including carrying costs, established at the
date of the commitment. Liggett had leaf tobacco purchase commitments of
approximately $29,840 at September 30, 1996.
9
9
6. Property, Plant and Equipment
Property, plant and equipment consist of the following:
September 30, December 31,
1996 1995
------------ ------------
Land and improvements . . . . . . . . . . . . . . . . . . $ 455 $ 542
Buildings . . . . . . . . . . . . . . . . . . . . . . . . 5,848 6,011
Machinery and equipment . . . . . . . . . . . . . . . . . 40,702 38,344
------- -------
Property, plant and equipment . . . . . . . . . . . . . . 47,005 44,897
Less accumulated depreciation . . . . . . . . . . . . . . (28,831) (26,545)
------- -------
Property, plant and equipment, net. . . . . . . . . . . . $18,174 $18,352
======= =======
7. Long-Term Debt
Long-term debt consists of the following:
September 30, December 31,
1996 1995
------------- ------------
11.5% Senior Secured Notes due February 1, 1999, net
of unamortized discount of $474 and $627,
respectively. . . . . . . . . . . . . . . . . . . . . . $119,638 $119,485
Variable Rate Series C Senior Secured Notes due
February 1, 1999 . . . . . . . . . . . . . . . . . . . 32,279 32,279
Borrowings outstanding under revolving credit facility. . 30,527 21,017
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 329 520
-------- --------
182,773 173,301
Current portion . . . . . . . . . . . . . . . . . . . . . (38,071) (50)
-------- --------
Amount due after one year . . . . . . . . . . . . . . . . $144,702 $173,251
======== ========
Senior Secured Notes
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes (the
"Series B Notes"). Interest on the Series B Notes is payable semiannually on
February 1 and August 1 at an annual rate of 11.5%. The Series B Notes and
Series C Notes referred to below (collectively, the "Notes") require mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Notes due on
February 1, 1999. The Notes are collateralized by substantially all of the
assets of the Company, excluding inventories and receivables. Eve is a
guarantor for the Notes. The Notes may be redeemed, in whole or in part, at a
price equal to 104%, 102% and 100% of the principal amount in the years 1996,
1997 and 1998, respectively, at the option of the Company at any time on or
after February 1, 1996. The Notes contain restrictions on Liggett's ability to
declare or pay cash dividends, incur additional debt, grant liens and enter
into any new agreements with affiliates, among others.
10
10
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 initially 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 Note 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
requirement for February 1, 1995.
BGLS purchased $4,500 of the Series C Notes which were subsequently sold.
Revolving Credit Facility
On March 8, 1994, Liggett entered into a revolving credit facility ("the
Facility") under which it can borrow up to $40,000 (depending on the amount of
eligible inventory and receivables as determined by the lenders) from a
syndicate of commercial lenders. Availability under the Facility was
approximately $1,550 based upon eligible collateral at September 30, 1996. The
Facility is collateralized by all inventories and receivables of the Company.
Borrowings under the Facility bear interest at a rate equal to 1.5% above
Philadelphia National Bank's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate, which was 8.25% at September 30, 1996.
The Facility contains certain financial covenants similar to those contained in
the Note 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 imposes
requirements with respect to the Company's adjusted net worth (not to fall below
a deficit of $175,000) and working capital (not to fall below a deficit of
$35,000). The Facility was reclassified to short-term debt because it becomes
due on March 8, 1997.
8. Commitments and Contingencies
Since 1954, Liggett and other United States cigarette manufacturers have
been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from cancer and
other adverse health effects alleged to have been caused by cigarette smoking or
by exposure to secondary smoke (environmental tobacco smoke, "ETS") from
cigarettes. These cases are reported hereinafter as though having been
commenced against Liggett (without regard to whether such actually were
commenced against BGL or Liggett). New cases continue to be commenced against
Liggett and other cigarette manufacturers. As new cases are commenced, the
costs associated with defending such cases and the risks attendant to the
inherent unpredictability of litigation continue to increase. Liggett has been
receiving certain financial and other 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. The future financial benefit to the
Company is not quantifiable at this time since the arrangements for assistance
can be terminated under certain circumstances and the amount received, if any,
would be a function of the level of costs incurred. Certain joint defense
arrangements, and the financial benefits incident thereto, have ended. No
assurances can be made that other arrangements will continue. To date a number
of such actions, including several against Liggett, have been disposed of
favorably to the defendants.
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
11
11
certain, but not all, common law damage claims. Accordingly, the decision bars
plaintiffs from asserting claims that, after the effective date of the 1969 Act,
the tobacco companies either failed to warn adequately of the claimed health
risks of cigarette smoking or sought to neutralize those claimed risks in their
advertising or promotion of cigarettes. It does permit, however, claims for
fraudulent misrepresentation (other than a claim of fraudulently neutralizing
the warning), concealment (other than in advertising and promotion of
cigarettes), conspiracy and breach of express warranty after 1969. The Court
expressed no opinion as to whether any of these claims are viable under state
law, but assumed arguendo that they are viable.
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 March 27, 1987, an action entitled Yvonne Rogers v. Liggett Group Inc.
et al., Superior Court, Marion County, Indiana, was filed against Liggett and
others. The plaintiff seeks compensatory and punitive damages for cancer
alleged to have been caused by cigarette smoking. Trial commenced on January
31, 1995. The trial ended on February 22, 1995 when the trial court declared a
mistrial due to the jury's inability to reach a verdict. The Court directed a
verdict in favor of the defendants as to the issue of punitive damages during
the trial of this action. A second trial commenced on August 5, 1996. On
August 23, 1996, the jury returned a verdict in favor of the defendants.
On October 31, 1991, an action entitled Broin et al. v. Philip Morris
Companies, Inc., et al., Circuit Court of the 11th Judicial District in and for
Dade County, Florida, was filed against Liggett and others. This case was the
first class action commenced against the industry, and has been brought by
plaintiffs on behalf of all flight attendants that have worked or are presently
working for airlines based in the United States and who have never regularly
smoked cigarettes but allege that they have been damaged by involuntary
exposure to ETS. On December 12, 1994, plaintiffs' motion to certify the
action as a class action was granted. Defendants appealed this ruling and on
January 3, 1996, the Third District Court of Appeal in Florida ("Third DCA")
affirmed the class certification order. On May 8, 1996, the Third DCA denied
defendants' rehearing request. On June 5, 1996, the Third DCA denied
defendants' petition for a stay of its order upholding class certification, but
granted defendants' motion for a stay of class notice pending consideration by
the Florida Supreme Court. On June 17, 1996, the Florida Supreme Court denied
defendants' petition for review. The suit is scheduled to go to trial on June
2, 1997.
On May 12, 1992, an action entitled Cordova v. Liggett Group Inc., et al.,
Superior Court of the State of California, City of San Diego, was filed against
Liggett and others. In her complaint, plaintiff, purportedly on behalf of the
general public, alleges that defendants have been engaged in unlawful, unfair
and fraudulent business practices by allegedly misrepresenting and concealing
from the public scientific studies pertaining to smoking and health funded by,
and misrepresenting the independence of, the Council for Tobacco Research
("CTR") 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. A
similar action has been filed in the Superior Court for the State of
California, City of San Francisco.
On September 10, 1993, an action entitled Sackman v. Liggett Group Inc.,
United States District Court, Eastern District of New York, was filed against
Liggett alone alleging as injury lung cancer. Fact discovery closed on August
31, 1995; expert discovery continues. On May 25, 1996, the District Court
granted Liggett summary judgment on plaintiffs' fraud and breach of warranty
claims on statute of limitations grounds, but allowed plaintiffs' personal
injury claims to survive. In the same order, the District Court vacated the
Magistrate's March 19, 1996 order compelling Liggett to produce certain CTR
documents with respect to which Liggett had asserted various privilege claims,
and allowed the other cigarette manufacturers and the CTR to intervene in order
to assert their interests and privileges with respect to those same documents.
The Court also ordered the Magistrate to reconsider his March 19, 1996
12
12
order and the effect of the District Court's summary judgment order. Oral
argument concerning the relevancy of the CTR documents in light of the District
Court's summary judgment order was conducted on August 8, 1996. The
Magistrate's ruling on this matter is pending.
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 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. The complaint also alleges causes of
action sounding in fraud, deceit, negligent misrepresentation, breach of
express and implied warranty, strict liability and violation of consumer
protection statutes. Plaintiffs seek compensatory and punitive damages and
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 District Court issued an order that granted in part
plaintiffs' motion for class certification. On May 23, 1996, the Court of
Appeals for the Fifth Circuit reversed the District Court's order certifying
the nationwide class action and instructed the District Court to dismiss the
class complaint.
On March 12, 1996, BGL and Liggett entered into an agreement to settle the
Castano class action tobacco litigation. The settlement undertakes to release
BGL and Liggett from all current and future addiction-based claims, including
claims by a nationwide class of smokers in the Castano class action pending in
Louisiana federal court as well as claims by a narrower statewide class in the
Engle case (described below) pending in Florida state court. The settlement
is subject to and conditioned upon the approval of the United States District
Court for the Eastern District of Louisiana. The Company is unable to
determine at this time when the Court will review the settlement, and no
assurance can be given that the settlement will be approved by the Court.
Certain of the terms of the settlement are summarized below.
Under the settlement, the Castano class would receive up to 5% of
Liggett's pretax income (income before income taxes) each year (up to a maximum
of $50,000 per year) for the next twenty-five years, subject to certain
reductions provided for in the agreement, together with reasonable fees and
expenses of the Castano Plaintiffs Legal Committee. Settlement funds received
by the class would be used to pay half the cost of smoking-cessation programs
for eligible class members. While neither consenting to Food and Drug
Administration ("FDA") jurisdiction nor waiving their objections thereto, BGL
and Liggett also have agreed to phase in compliance with certain of the
proposed interim FDA regulations regarding smoking by children and adolescents,
including a prohibition on the use of cartoon characters in tobacco advertising
and limitations on the use of promotional materials and distribution of sample
packages where minors are present.
BGL and Liggett have the right to terminate the Castano settlement if the
remaining defendants succeed on the merits or in the event of a full and final
denial of class action certification. The terms of the settlement would still
apply if the Castano plaintiffs or their lawyers were to institute a
substantially similar new class action against the tobacco industry. BGL and
Liggett may also terminate the settlement if they conclude that too many class
members have chosen to opt out of the settlement. In the event of any such
termination by BGL and Liggett, the named plaintiffs would be at liberty to
renew their prosecution of such civil action against BGL and Liggett.
On March 14, 1996, BGL and the Castano Plaintiffs Legal Committee and the
Castano Plaintiffs entered into a letter agreement. According to the terms of
the letter agreement, for the period ending nine months from the date of Final
Approval of the Castano settlement or, if earlier, the completion of a
13
13
combination by BGL or Liggett with certain defendants, or an affiliate thereof,
in Castano, the Castano Plaintiffs agree not to enter into any settlement
agreement with any Castano defendant which would reduce the terms of the Castano
settlement agreement. If the Castano Plaintiffs enter into any such settlement
during this period, they shall pay BGL $250,000 within thirty days of the more
favorable agreement and offer BGL and Liggett the option to enter into a
settlement on terms at least as favorable as those included in such other
settlement. The letter agreement further provides that during the same 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 thirty days from the transacting party.
On May 11, 1996, the Castano Plaintiffs Legal Committee filed a motion
seeking preliminary approval of the Castano settlement. That motion has not
yet been heard by the court.
On May 5, 1994, an action entitled Engle, et al. v. R. J. Reynolds Tobacco
Company, et al., Circuit Court of the 11th Judicial District in and for Dade
County, Florida, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and all persons in the United
States who allegedly have become addicted to cigarette products and allegedly
have suffered personal injury as a result thereof. Plaintiffs seek
compensatory and punitive damages together with equitable relief including but
not limited to a medical fund for future health care costs, attorneys' fees and
costs. On October 31, 1994, plaintiffs' motion to certify the action as a
class action was granted. Defendants have appealed this ruling. On January
31, 1996, the Third DCA affirmed the ruling of the trial court certifying the
action as a class action, but modified the trial court ruling to limit the
class to Florida citizens and residents. On May 8, 1996, the Third DCA denied
defendants' rehearing request. On June 5, 1996, the Third DCA denied
defendants' petition for a stay of its order upholding class certification but
granted defendants' motion for a stay of class notice pending consideration by
the Florida Supreme Court. On October 2, 1996, the Florida Supreme Court
denied defendants' petition for review.
In February 1995, an action entitled Grady Carter, et al. v. The American
Tobacco Company, et al., Superior Court for the State of Florida, Duval County,
was filed against Liggett and others. Plaintiff sought compensatory damages,
including, but not limited to, reimbursement for medical costs. Both American
Tobacco and Liggett were subsequently dismissed from this action. On August 9,
1996, a jury returned a verdict against the remaining defendant, Brown &
Williamson Tobacco Corp., in the amount of $750,000. Brown & Williamson has
announced that it intends to appeal that verdict.
On April 11, 1996, an action entitled Harris, et al. v. The American
Tobacco Company, et al., United States District Court for the Eastern District
of Pennsylvania, was filed against Liggett and others. The class action
complaint was brought on behalf of plaintiffs and all persons in the United
States, its territories and possessions and the Commonwealth of Puerto Rico who
allegedly have become addicted to cigarette products and have suffered personal
injury as a result thereof. Plaintiffs seek compensatory and punitive damages
together with equitable relief including, but not limited to, a medical fund
for future health costs, attorneys' fees and costs.
On May 6, 1996, an action entitled Norton, et al. v. RJR Nabisco Holdings
Corp., et al., Madison County, Indiana Superior Court, was filed against
Liggett and others. The class action complaint was brought on behalf of
plaintiffs and all persons in the State of Indiana who allegedly have become
addicted to cigarette products and allegedly have suffered personal injury as a
result thereof. Plaintiffs seek compensatory and punitive damages together
with equitable relief including, but not limited to, a medical fund for future
health care costs, attorneys' fees and costs. On June 3, 1996, the defendant
tobacco companies filed a notice of removal in the United States District Court
for the Southern District of Indiana.
On May 29, 1996, an action entitled Richardson, et al. v. Philip Morris
Inc., et al., Circuit Court for Baltimore City, was filed against Liggett and
others. The class action complaint was brought on behalf of plaintiffs and all
persons in the State of Maryland who allegedly have become addicted to
cigarette products and allegedly have suffered personal injury as a result
thereof. Plaintiffs seek
14
14
compensatory and punitive damages, together with equitable relief including, but
not limited to, a medical fund for future health care costs, attorneys' fees and
costs. On June 27, 1996, the defendant tobacco companies filed a notice of
removal in the United States District Court for the District of Maryland.
On June 21, 1996, an action entitled Reed v. Philip Morris, et al.,
Superior Court of the District of Columbia, was filed against Liggett and
others. The class action complaint was brought on behalf of plaintiff and all
persons in the District of Columbia who allegedly have become addicted to
cigarette products and have suffered personal injury as a result thereof.
Plaintiffs seek compensatory and punitive damages together with equitable
relief including, but not limited to, a medical fund for future health costs,
attorneys' fees and costs.
On August 8, 1996, an action entitled Arch, et al. v. The American Tobacco
Company, et al., Philadelphia County Court of Common Pleas, was filed against
Liggett and others. The class action complaint was brought on behalf of
plaintiff and all persons in the State of Pennsylvania who allegedly have
become addicted to cigarette products and have suffered personal injury as a
result thereof. Plaintiffs seek compensatory and punitive damages together
with equitable relief including, but not limited to, a medical fund for future
health costs, attorneys' fees and costs. On August 27, 1996, the defendant
tobacco companies filed a notice of removal in the United States District Court
for the Eastern District of Pennsylvania. That court denied plaintiffs' Motion
to Remand on October 21, 1996.
On August 20, 1996, an action entitled Chamberlain, et al. v. The American
Tobacco Company, et al., Court of Common Pleas of Cuyahoga County, State of
Ohio, was filed against Liggett and others. The class action complaint was
brought on behalf of plaintiffs and all persons in the State of Ohio who
allegedly have become addicted to cigarette products and have suffered personal
injury as a result thereof. Plaintiffs seek compensatory and punitive damages
together with equitable relief including, but not limited to, a medical fund
for future health costs, attorneys' fees and costs. On September 12, 1996, the
defendant tobacco companies filed a notice of removal in the United States
District Court for the Northern District of Ohio.
A number of proceedings have been filed against Liggett and others by
state and local government entities or officials seeking restitution and
indemnity for medical payments and expenses made or incurred for tobacco
related illnesses. Such actions have been filed by the States of Minnesota
(together with Minnesota Blue Cross-Blue Shield), Mississippi, West Virginia,
Massachusetts, Louisiana, Texas, Washington, Maryland, Connecticut, Arizona,
Michigan, New Jersey, Ohio and Oklahoma. Additionally, the City and County of
San Francisco, the City and County of Los Angeles and the City and County of
New York have commended proceedings. 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. In a subsequent ruling, the trial court adjudged
the contingent fee agreement entered into by West Virginia and its counsel to
be unconstitutional under the Constitution of the State of West Virginia. In
Mississippi, the Governor has recently commenced an action in the Mississippi
Supreme Court against the Attorney General of the state, making application for
a writ of prohibition to bar further prosecution and to seek dismissal of the
suit brought by the Attorney General of the state seeking such restitution and
indemnity, alleging that the commencement and prosecution of such a civil
action by the Attorney General of the state was and is outside the authority of
the Attorney General.
On November 28, 1995, each of the major manufacturers in the industry,
including Liggett, filed suit in both the Commonwealth of Massachusetts and
the State of Texas seeking declaratory relief to the effect that the
commencement of any such litigation seeking to recover Medicaid expenses
against the manufacturers (as had been filed by the above referenced states) by
either the Commonwealth of Massachusetts or the State of Texas would be
unlawful. On January 22, 1996, a suit seeking substantially similar
declaratory relief was filed in the State of Maryland.
15
15
The State of Florida enacted legislation, effective July 1, 1994, allowing
certain state authorities or entities to commence litigation seeking recovery of
certain Medicaid payments made on behalf of Medicaid recipients as a result of
diseases (including, but not limited to, diseases allegedly caused by cigarette
smoking) allegedly caused by liable third parties (including, but not limited
to, the tobacco industry). Liggett, after initial litigation, entered into a
settlement of this controversy with the State of Florida, the terms of which are
described below.
In addition, legislation authorizing a state to sue a company or individual
to recover the costs incurred by that state to provide health care to persons
allegedly injured by the company or individual also has been introduced in a
number of other states. These bills contain some or all of the following
provisions: eliminating certain affirmative defenses, permitting the use of
statistical evidence to prove causation and damages, adopting market share
liability and allowing class action suits without notification to class
members.
On March 15, 1996, BGL and Liggett entered into a settlement of tobacco
litigation with the Attorneys General of the States of Florida, Louisiana,
Mississippi, West Virginia and the Commonwealth of Massachusetts. The
settlement with the Attorneys General releases BGL and Liggett from all
tobacco-related claims by these states including claims for Medicaid
reimbursement and concerning sales of cigarettes to minors. The settlement
provides that additional states which commence similar Attorney General actions
may agree to be bound by the settlement prior to six months from the date
thereof (subject to extension of such period by the settling defendants).
Certain of the terms of the settlement are summarized below.
Under the settlement, the states would share an initial $5,000 ($1,000 of
which was paid on March 22, 1996, with the balance payable over nine years and
indexed and adjusted for inflation), provided that any unpaid amount will be
due sixty days after either a default by Liggett in its payment obligations
under the settlement or a merger or other similar transaction by BGL or Liggett
with another defendant in the lawsuits. In addition, Liggett will be required
to pay the states a percentage of Liggett's pretax income (income before income
taxes) each year from the second through the twenty-fifth year. This annual
percentage would range from 2-1/2% to 7-1/2% of Liggett's pretax income
depending on the number of additional states joining the settlement. All of
Liggett's payments are subject to certain reductions provided for in the
agreement. Liggett has also agreed to pay to the states $5,000 if BGL or
Liggett fails to consummate a merger or other similar transaction with another
defendant in the lawsuits within three years of the date of the settlement. At
December 31, 1995, Liggett accrued approximately $4,000 for the settlement with
the Attorneys General.
Settlement funds received by the Attorneys General will be used to
reimburse the states' smoking-related healthcare costs. While neither
consenting to FDA jurisdiction nor waiving their objections thereto, BGL and
Liggett also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same basis as provided in the Castano
settlement.
BGL and Liggett have the right to terminate the settlement with respect to
any state participating in the settlement if any of the remaining defendants in
the litigation succeed on the merits in that state's Attorney General action.
BGL and Liggett may also terminate the settlement if they conclude that too
many states have filed Attorney General actions and have not resolved such
cases as to the settling defendants by joining in the settlement.
Currently, in addition to the above, approximately 120 product liability
lawsuits are pending and active in which Liggett is a defendant. Of these,
approximately 85 are pending in the State of Florida. In most of these
lawsuits, plaintiffs seek punitive as well as compensatory damages. The next
case scheduled for trial where Liggett is a defendant is George Jay v. R.J.
Reynolds Tobacco Company, et al., which is scheduled for trial in
March 1997.
16
16
A grand jury investigation presently is being conducted by the office of
the United States Attorney for the Eastern District of New York regarding
possible violations of criminal law relating to the activities of The Council
for Tobacco Research - USA, Inc. The Company was a sponsor of The Council for
Tobacco Research - USA, Inc. at one time. The Company is unable at this time
to predict the outcome of this investigation.
Liggett has been responding to a civil investigative demand from the
Antitrust Division of the United States Department of Justice which requests
certain information from Liggett. The request appears to focus on United
States tobacco industry activities in connection with product development
efforts regarding, in particular, "fire-safe" or self-extinguishing cigarettes.
It also requests certain general information addressing Liggett's involvement
with and relationship to its competitors. The Company is unable to predict, at
this time, the outcome of this investigation.
As to each of the cases referred to above which is pending against
Liggett, the Company believes, and has been advised by counsel handling the
respective cases, that the Company has a number of valid defenses to the claim
or claims asserted against the Company. Litigation is subject to many
uncertainties, and it is possible that some of these actions could be decided
unfavorably. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. Recently, there
have been a number of restrictive regulatory actions, adverse political
decisions and other unfavorable developments concerning cigarette smoking and
the tobacco industry, including the commencement of the purported class actions
referred to above. These developments generally receive widespread media
attention. The Company is not able to evaluate the effect of these developing
matters on pending litigation or the possible commencement of additional
litigation.
The Company is unable to make a meaningful estimate of the amount or range
of loss that could result from an unfavorable outcome of the cases pending
against Liggett. It is possible that the Company's consolidated financial
position, results of operations and cash flows could be materially adversely
affected by an ultimate unfavorable outcome in any of such pending litigation.
On August 28, 1996, the FDA filed in the Federal Register a final 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. The FDA's stated
objective and focus for its initiative is to limit access to cigarettes by
minors by measures beyond the restrictions either mandated by existing federal,
state and local laws or voluntarily implemented by major manufacturers in the
industry. Litigation has been 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. Management is unable to predict the outcome of this litigation or
the effects of regulations, if implemented, on Liggett's operations, but such
actions could have an unfavorable impact thereon.
BGL and Liggett, while neither consenting to FDA jurisdiction nor waiving
their objections thereto, agreed to withdraw their objections and opposition to
the proposed rule making and to phase in compliance with certain of the proposed
interim FDA regulations. See discussions of the Castano and Attorneys General
settlements above.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA") required each
United States cigarette manufacturer to use at least 75% domestic tobacco in
the aggregate of the cigarettes manufactured by it in the United States,
effective January 1, 1994, on an annualized basis or pay a "marketing
assessment" based upon price differentials between foreign and domestic tobacco
and, under certain circumstances, make purchases of domestic tobacco from the
tobacco stabilization cooperatives organized by the United
17
17
States government. OBRA was repealed retroactively (as of December 31, 1994)
coincident in time with the issuance of a Presidential proclamation, effective
September 13, 1995, imposing tariffs on imported tobacco in excess of certain
quotas.
The United States Department of Agriculture ("USDA") informed Liggett that
it did not satisfy the 75% domestic tobacco usage requirement for 1994 and was
subject to a marketing assessment of approximately $5,500. At December 31,
1995, the Company accrued approximately $4,900 representing the present value
of its obligation for the USDA marketing assessment. The charge was included
as a component of cost of sales in 1995. Liggett has agreed to pay this
assessment in quarterly installments with interest over a five year period.
Under certain circumstances, payment can be accelerated. Since the levels of
domestic tobacco inventories on hand at the tobacco stabilization organizations
are below reserve stock levels, the Company was not obligated to make purchases
of domestic tobacco from the tobacco stabilization cooperatives.
On September 13, 1995, the President of the United States, after
negotiations with the affected countries, declared a tariff rate quota ("TRQ")
on certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain levels which vary from
country to country. Oriental tobacco is exempt from the quota as well as all
tobacco originating from Canada, Mexico or Israel. Management believes that
the TRQ levels are sufficiently high to allow 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 the Company. The Company believes it is unlikely
that an end-user licensing system will be adopted, although no assurances can
be given that an end-user licensing system will not be adopted.
In September 1991, the Occupational Safety and Health Administration
("OSHA") issued a Request for Information relating to indoor air quality,
including ETS, in occupational settings. OSHA announced in March 1994 that it
would commence formal rulemaking during the year. Hearings were completed
during 1995 but it is not anticipated that any regulation will issue prior to
the end of 1996. While the Company 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.
The Company has been involved in certain environmental proceedings, none
of which, either individually or in the aggregate, rise to the level of
materiality. The Company's current operations are conducted in accordance 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
18
18
protection of the environment, have not had a material effect on the capital
expenditures, earnings or competitive position of Liggett.
On March 15, 1996, an action entitled Spencer J. Volk v. Liggett Group
Inc. was filed in the United States District Court for the Southern District of
New York, Case No. 96-CIV-1921, wherein the plaintiff, who was formerly employed
as Liggett's President and Chief Executive Officer, seeks recovery of certain
monies allegedly owing by Liggett to him for long-term incentive compensation.
At a September 19, 1996 hearing, the Court dismissed the plaintiff's alternate
claim for recovery under a fraud theory and reserved judgment on an additional
ground of Liggett's motion to dismiss the balance of the complaint, which
decision is still pending. Preliminary discovery has recently commenced.
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 other proceedings, lawsuits
and claims should not materially affect Liggett's financial position, results
of operations or cash flows.
9. Income Taxes
Liggett increased its valuation allowance for its deferred tax assets by
$3,800 in the three months ended September 30, 1996 based on its current
determination that it is more likely than not that such future tax benefits may
not be realized. The provision for income taxes for the three and nine months
ended September 30, 1995, which represented the effects of the Alternative
Minimum Tax and state income taxes, does not bear a customary relationship with
pre-tax accounting income (loss) principally as a consequence of the changes in
the valuation allowance relating to deferred tax assets.
10. Related Party Transactions
On July 5, 1996, Liggett purchased from Brooke (Overseas) Ltd. ("BOL"), an
indirect subsidiary of BGL, 140,000 shares (approximately 20%) of Liggett-Ducat
Ltd.'s ("LDL") tobacco operations for $2,100. LDL, which produces cigarettes
in Russia, manufactured and marketed 10.4 billion cigarettes in 1995. 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 LDL, thereby entitling Liggett to increase its
interest in LDL to approximately 62%. The option fee would be credited against
the purchase price. In addition, Liggett has the right on or before June 30,
1997 to acquire from BOL for $2,200 another ten-year option on the same terms
to purchase the remaining 27% of the shares of LDL owned by BOL. Liggett
accounts for its investment in LDL under the equity method of accounting.
Liggett's equity in the net loss of LDL amounted to $740 for the three months
ended September 30, 1996. 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.
Since October 1990, Liggett has provided certain administrative and
technical support to LDL in exchange for which LDL provides assistance to
Liggett in its pursuit of selling cigarettes in the Russian Republic. The
expenses associated with Liggett's activities amounted to $5, $30, $9 and $138
for the three and nine months ended September 30, 1996 and 1995, respectively.
Liggett is a party to a Tax-Sharing Agreement dated June 29, 1990 with BGL
and certain other entities pursuant to which Liggett has paid taxes to BGL as
if it were filing a separate company tax return, except that the agreement
effectively limits the ability of Liggett to carry back losses for refunds.
Liggett is entitled to recoup overpayments in a given year out of future
payments due under the agreement.
19
19
Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments. The expenses associated with Liggett's activities
amounted to $441, $441, $1,323 and $1,323 for the three and nine months ended
September 30, 1996 and 1995, respectively.
Liggett has entered into an annually renewable Corporate Services Agreement
with BGLS wherein BGLS provides 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 $790, $752, $2,370 and $2,257 for the three and
nine months ended September 30, 1996 and 1995, respectively. This fee is in
addition to the management fee and overhead reimbursements described above.
Since April 1994, the Company has leased equipment from BGLS for $50 per
month.
Accounts receivable from affiliates relate principally to advances for
expenses paid by Liggett on behalf of its affiliates.
The Company acquired Carolina Tobacco Express Company ("CTEC") from its
indirect parent during 1995 for $800. The excess of cost over carrying amount
of net assets acquired has been charged to stockholder's deficit. The effect
of the accounting treatment presents the investment in CTEC at carryover basis.
11. Restructuring Charges
During the first nine months of 1995, Liggett, in an effort to reduce
costs, offered voluntary retirement programs to eligible employees, among other
things, and reduced the Company's headcount by 117 positions. In connection
therewith, the Company recorded a $2,407 restructuring charge to operations
($621 of which was included in cost of sales) for severance programs, primarily
salary continuation and related benefits for terminated employees.
During the first nine months of 1996, Liggett continued its efforts to
reduce costs and reduced the Company's headcount by 7 additional positions. A
restructuring charge of $1,180 for severance programs, primarily salary
continuation and related benefits for terminated employees was recorded in
connection therewith.
20
20
EVE HOLDINGS INC.
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 8
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2
Trademarks, at cost, less accumulated amortization of
$16,868 and $15,593, respectively . . . . . . . . . . . . . . . . 3,545 4,820
------- -------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . $ 3,553 $ 4,830
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Federal income taxes currently payable to parent . . . . . . . . . . $ 4 $ 164
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . 2,052 2,536
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . 200 -
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . 1,241 1,687
------- -------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . 3,497 4,387
------- -------
Stockholder's equity:
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,824 47,653
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 . . . . . . . . . . . . . . . . . . . . . (44,520) (44,520)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,248) (2,690)
------- -------
Total stockholder's equity. . . . . . . . . . . . . . . . . . 56 443
------- -------
Total liabilities and stockholder's equity. . . . . . . . . . $ 3,553 $ 4,830
======= =======
The accompanying notes are an integral part
of these financial statements.
21
21
EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenues:
Royalties - parent . . . . . . . . . . $2,233 $3,176 $ 6,383 $ 8,115
Interest - parent . . . . . . . . . . 1,576 1,576 4,729 4,729
------ ------ ------- -------
3,809 4,752 11,112 12,844
Expenses:
Amortization of trademarks . . . . . . 425 425 1,275 1,276
Miscellaneous, net . . . . . . . . . . 227 25 286 82
------ ------ ------- -------
Income before income taxes . . . . . 3,157 4,302 9,551 11,486
Income tax provision . . . . . . . . . . 1,105 1,506 3,343 4,020
------ ------- ------- -------
Net income . . . . . . . . . . . . . $2,052 $2,796 $ 6,208 $ 7,466
====== ======= ======= =======
The accompanying notes are an integral part
of these financial statements.
22
22
EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
September 30,
----------------------
1996 1995
--------- -----------
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,208 $ 7,466
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 1,275 1,276
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (446) (447)
Changes in assets and liabilities:
Federal income taxes currently payable. . . . . . . . . . . . . . (160) 192
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . - 323
Other current liabilities . . . . . . . . . . . . . . . . . . . . 200 -
------- -------
Net cash provided by operating activities . . . . . . . . . . . 7,077 8,810
------- -------
Cash flows from financing activities:
Dividends/capital distributions . . . . . . . . . . . . . . . . . . . (7,521) (8,295)
(Increase) decrease in due from parent. . . . . . . . . . . . . . . . 442 (507)
------- -------
Net cash used in financing activities . . . . . . . . . . . . . (7,079) (8,802)
------- -------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . (2) 8
Cash:
Beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . 8 2
------- -------
End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6 $ 10
======= =======
Supplemental cash flow information:
Payments of income taxes through receivable from parent . . . . . $ 3,949 $ 4,275
Dividends/capital distributions declared but not paid . . . . . . . . $ 2,052 $ -
The accompanying notes are an integral part
of these financial statements.
23
23
EVE HOLDINGS INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
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. 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.
24
1
EXHIBIT 99.2
TABLE OF CONTENTS
FINANCIAL STATEMENTS - NEW VALLEY CORPORATION
Page
----
Consolidated Balance Sheets as of September 30, 1996 and
December 31, 1995......................................... 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1996 and 1995......... 4
Consolidated Statement of Changes in Non-Redeemable
Preferred Shares, Common Shares and Other Capital
(Deficit) for the nine months ended September 30, 1996.... 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995......................... 6
Notes to the Quarterly Consolidated Financial Statements..... 7
2
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
1996 1995
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 38,559 $ 51,742
Investment securities 164,592 241,526
Restricted assets 1,469 22,919
Receivable from clearing brokers 22,671 13,752
Other current assets 6,874 3,546
--------- ---------
Total current assets 234,165 333,485
--------- ---------
Investment in real estate 182,125
Investment securities 517 517
Restricted assets 7,525 15,086
Long-term investments 12,876 29,512
Other assets 16,181 7,222
--------- ---------
Total assets $ 453,389 $ 385,822
========= =========
LIABILITIES AND CAPITAL (DEFICIT)
Current liabilities:
Margin loan payable $ 75,863 $ 75,119
Accounts payable and accrued liabilities 37,278 27,712
Prepetition claims and restructuring accruals 26,669 33,392
Income taxes 17,254 20,283
Securities sold, not yet purchased 22,804 13,047
Current portion of long-term liabilities 3,424 8,367
---------- ---------
Total current liabilities 183,292 177,920
---------- ---------
Notes payable 159,494
Other long-term liabilities 12,966 11,967
Redeemable preferred shares 201,318 226,396
Non-redeemable preferred shares, Common Shares and
capital (deficit):
Cumulative preferred shares; liquidation preference of
$69,769; dividends in arrears: $110,476 and $95,118 279 279
Common Shares, $.01 par value; 850,000,000 shares
authorized; 9,577,624 and 191,551,586 shares
outstanding 96 1,916
Additional paid-in capital 654,007 679,058
Accumulated deficit (736,454) (714,364)
Unrealized gain (loss) on investment
securities, net of taxes (21,609) 2,650
--------- ---------
Total non-redeemable preferred shares, Common
Shares and other capital (deficit) (103,681) (30,461)
--------- ---------
Total liabilities and capital (deficit) $ 453,389 $ 385,822
========= =========
See accompanying Notes to Quarterly Consolidated Financial Statements
-3-
3
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
--------------------- ----------------------
September 30, September 30,
--------------------- ----------------------
1996 1995 1996 1995
---------- --------- ---------- ----------
Revenues:
Principal transactions, net $ 3,926 $ 7,864 $ 18,836 $ 10,465
Commissions 4,700 4,161 13,383 5,899
Real estate leasing 5,941 17,605
Computer sales and service 2,987 9,084
Interest and dividends 4,230 3,947 14,056 14,516
Other income 2,479 5,542 19,830 8,335
-------- -------- -------- --------
Total revenues 24,263 21,514 92,794 39,215
-------- -------- -------- --------
Cost and expenses:
Operating, general and administrative 28,373 18,194 96,757 27,864
Interest 4,627 242 13,890 369
Reversal of restructuring accruals (2,044)
-------- -------- -------- --------
Total costs and expenses 33,000 18,436 110,647 26,189
-------- -------- -------- --------
Income (loss) from continuing operations before income taxes
and minority interest (8,737) 3,078 (17,853) 13,026
Income tax benefit (expense) 233 (294) (67) (1,327)
-------- -------- -------- --------
Income (loss) from continuing operations
before minority interest (8,504) 2,784 (17,920) 11,699
Minority interest benefit 776 1,226
-------- -------- -------- --------
Income (loss) from continuing operations (7,728) 2,784 (16,694) 11,699
Discontinued operations:
Income (loss) from discontinued operations,
net of income taxes and minority interest (4,716) 235 (5,396) 4,315
-------- -------- -------- --------
Net income (loss) (12,444) 3,019 (22,090) 16,014
Dividends on preferred shares - undeclared (15,400) (17,597) (46,508) (56,656)
Excess of carrying value of redeemable preferred
shares over cost of shares purchased 6,718 4,279 40,342
-------- -------- -------- --------
Net loss applicable to Common Shares $(27,844) $ (7,860) $(64,319) $ (300)
======== ======== ======== ========
Income (loss) per common and equivalent share:
Continuing operations $ (2.42) $ (.84) $ (6.16) $ (.48)
Discontinued operations (.49) .02 (.56) .45
-------- -------- -------- --------
Net loss per Common Share $ (2.91) $ (.82) $ (6.72) $ (.03)
======== ======== ======== ========
Number of shares used in computation 9,578 9,578 9,578 9,543
======== ======== ======== ========
Supplemental information:
Additional interest absent Chapter 11 filing $ 2,314
========
See accompanying Notes to Quarterly Consolidated Financial Statements
- 4 -
4
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN NON-REDEEMABLE PREFERRED
SHARES, COMMON SHARES AND OTHER CAPITAL (DEFICIT)
(IN THOUSANDS)
(UNAUDITED)
$3.00 Class B
Preferred Shares Common Shares Additional
----------------- ------------- Paid-In Acumulated Unrealized
Shares Amount Shares Amount Capital Deficit Gain (Loss)
------ ------ --------- ------ ---------- ------- -----------
Balance, December 31, 1995 2,791 $279 191,551 $1,916 $679,058 $(714,364) $ 2,650
Net loss (22,090)
Undeclared dividends and accretion
on redeemable preferred shares (31,150)
Purchase of redeemable preferred
shares 4,279
Unrealized loss in marketable
securities (24,259)
Effect of 1-for-20 reverse stock split (181,974) (1,820) 1,820
Conversion of preferred shares 1
----- ---- --------- ------- -------- ---------- --------
Balance, September 30, 1996 2,791 $279 9,578 $96 $654,007 $(736,454) $(21,609)
===== ==== ========= ======= ======== ========== ========
See accompanying Notes to Quarterly Consolidated Financial Statements
- 5 -
5
NEW VALLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
September 30,
1996 1995
---------- -----------
Cash flows from operating activities:
Net income (loss) $(22,090) $ 16,014
Adjustments to reconcile net income to net
cash used for operating activities:
(Income) loss from discontinued operations 5,396 (4,315)
Depreciation and amortization 3,507
Reversal of restructuring accruals (2,044)
Changes in assets and liabilities, net of effects from
acquisition:
Decrease (increase) in receivables and other assets (5,963) 1,925
Decrease in income taxes (3,029) (30,996)
Increase in accounts payable and accrued liabilities 8,786 8,197
-------- --------
Net cash used for operating activities (13,393) (11,219)
-------- --------
Cash flows from investing activities:
Purchase of real estate and related improvements (24,882)
Payment of prepetition claims (6,723) (571,841)
Collection of contract receivable 300,000
Decrease in restricted assets 29,011 325,718
Sale or maturity of investment securities 70,319 95,796
Purchase of investment securities (17,644) (293,518)
Sale or liquidation of long-term investments 14,500
Purchase of long-term investments (2,639) (65,550)
Payment for acquisition, net of cash acquired 1,915 (25,853)
-------- --------
Net cash provided from (used for) investing activities 63,857 (235,248)
-------- --------
Cash flows from financing activities:
Payment of preferred dividends (41,419) (132,162)
Purchase of redeemable preferred shares (10,530) (47,761)
Increase in margin loans payable 744 54,945
Repayment of long-term liabilities (8,888) (7,561)
Exercise of stock options 565
--------- --------
Net cash used for financing activities (60,093) (131,974)
-------- --------
Net cash (used for) provided from discontinued operations (3,554) 7,002
-------- --------
Net decrease in cash and cash equivalents (13,183) (371,439)
Cash and cash equivalents, beginning of period 51,742 376,170
-------- --------
Cash and cash equivalents, end of period $ 38,559 $ 4,731
======== ========
Supplemental Cash Flow Information:
Cash payments for income taxes $ 4,171 $ 33,025
======== ========
See accompanying Notes to Quarterly Consolidated Financial Statements
- 6-
6
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. PRINCIPLES OF REPORTING
The consolidated financial statements include the accounts of New Valley
Corporation and Subsidiaries (the "Company"). The consolidated financial
statements as of September 30, 1996 presented herein have been prepared by
the Company without an audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly
the financial position as of September 30, 1996 and the results of operations
and cash flows for all periods presented have been made. Results for the
interim periods are not necessarily indicative of the results for the entire
year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
These financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, as
filed with the Securities and Exchange Commission.
Reincorporation and Reverse Stock Split. On July 29, 1996, the Company
completed its reincorporation from the State of New York to the State of
Delaware and effected a one-for-twenty reverse stock split of the Company's
Common Shares. These changes were approved by the Company's shareholders at
the annual shareholders' meeting held on June 25, 1996. In connection with
the reverse stock split, all per share data have been restated to reflect
retroactively the reverse stock split and a total of $1,820 was reclassified
from the Company's Common Shares account to the Company's additional paid-in
capital account.
Real Estate Leasing Revenues. The real estate properties are being leased
to tenants under operating leases. Base rental revenue is generally
recognized on a straight-line basis over the term of the lease. The lease
agreements for certain properties generally contain provisions which provide
for reimbursement of real estate taxes and operating expenses over base year
amounts, and in certain cases as fixed increases in rent. In addition, the
lease agreements for certain tenants provide additional rentals based upon
revenues in excess of base amounts.
Revenue Recognition of Computer Sales and Services. Product revenues are
recognized when the equipment is shipped or, in certain circumstances, upon
product acceptance by the customer if it occurs prior to shipment. Contract
revenues are recognized as the related costs are incurred. Service revenues
are recognized over the period in which the services are provided.
2. ACQUISITIONS
On January 10 and January 11, 1996, the Company acquired four commercial
office buildings (the "Office Buildings") and eight shopping centers (the
"Shopping Centers") for an aggregate purchase price of $183,900, consisting
of $23,900 in cash and $160,000 in
-7-
7
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
non-recourse mortgage financing. In addition, the Company has capitalized
approximately $800 in costs related to the acquisitions. The Company paid
$11,400 in cash and executed four promissory notes aggregating $100,000 for
the Office Buildings. The Office Building notes bear interest at 7.5% and
have terms of ten to fifteen years. The Shopping Centers were acquired for
an aggregate purchase price of $72,500, consisting of $12,500 in cash and
$60,000 in eight promissory notes. Each Shopping Center note has a term of
five years, and bears interest at the rate of 8% for the first two and
one-half years and at the rate of 9% for the remainder of the term.
The components of the Company's investment in real estate at September 30,
1996 are as follows:
Land $ 38,921
Buildings 145,789
Construction-in-progress 114
--------
Total 184,824
Less: accumulated depreciation (2,699)
--------
Net investment in real estate $182,125
========
On January 11, 1996, the Company provided a $10,600 convertible bridge loan
to finance Thinking Machines Corporation ("TMC"), a developer and marketer
of software for high-end and networked computer systems. In February 1996,
the bridge loan was converted into a controlling interest in a partnership
which holds 3.3 million common shares of TMC which represent 61.4% of the
outstanding shares. The acquisition of TMC through the conversion of the
bridge loan was accounted for as a purchase for financial reporting
purposes, and accordingly, the operations of TMC subsequent to January 31,
1996 are included in the operations of the Company. The fair value of assets
acquired, including goodwill of $1,726, was $27,301 and liabilities assumed
totaled $7,613. In addition, minority interests in the amount of $9,088 was
recognized at the time of acquisition.
The following table presents unaudited pro forma and actual results of
continuing operations as if the acquisitions of Ladenburg, Thalmann & Co.,
Inc., TMC, and the Office Buildings and Shopping Centers, had occurred on
January 1, 1995. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had each of these acquisitions been consummated as of such date.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1996 1995 1996 1995
----------- ----------- ----------- ------------
Actual Pro Forma
----------- -------------------------------------
Revenues $ 24,263 $31,674 $ 93,922 $95,202
======== ======= ======== =======
Net (loss) income $ (7,728) $ 2,822 $(16,942) $12,214
======== ======= ======== =======
Net (loss) income applicable to
common shares $(23,128) $(8,057) $(59,171) $(4,100)
======== ======= ======== =======
Net (loss) income per common share $ (2.42) $ (.84) $ (6.18) $ (.43)
======== ======= ======== =======
-8-
8
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
3. DISCONTINUED OPERATIONS
In October 1996, TMC adopted a plan to terminate its parallel processing
computer segment. Consequently, the operating results of this segment have
been classified as discontinued operations. In September 1996, TMC
wrote-down certain assets, principally inventory, related to these
operations to their net realizable value by $6,100, which is included in the
loss on discontinued operations. No material gain or loss in the disposal
of the segment is anticipated as any gain from the sale of the segment would
offset the operating losses expected during the phase-out period.
Effective October 1, 1995, the Company sold its messaging services business.
Accordingly, the financial statements reflect the financial position and
the results of operations of the messaging services business as discontinued
operations for the periods prior to the sale.
Operating results of the discontinued operations are as follows:
Three Months Ended Nine Months Ended
---------------------- -------------------------
September 30, September 30,
---------------------- -------------------------
1996 1995 1996 1995
---------- ---------- --------- --------------
Parallel Processing Computer Business:
Revenues $ 331 $ 3,031
======= =======
Operating loss $(7,687) $(8,795)
Minority interest benefit 2,971 3,399
------- -------
Loss from discontinued operations $(4,716) $(5,396)
======= =======
Messaging Service Business:
Revenues $11,109 $37,771
======= =======
Operating income $ 260 $ 4,795
Income tax expense (25) (480)
------- -------
Income from discontinued operations $ 235 $ 4,315
======= =======
4. INCOME TAXES
At September 30, 1996, the Company had net operating loss carryforwards of
approximately $190,000 which expire at various dates through 2007. A
valuation allowance has been provided against the amount as it is deemed
more likely than not that the benefit of the tax asset will not be utilized.
The Company continues to evaluate the realizability of the deferred tax
assets. The income tax expense or benefit, which represented the effects of
state income taxes, for the three and nine months ended September 30, 1996
and 1995, does not bear a customary relationship with pre-tax accounting
income principally as a consequence of the change in the valuation allowance
relating to deferred tax assets.
5. INVESTMENT SECURITIES
Investment securities classified as available for sale are carried at fair
value, with a net unrealized loss of $21,609 ($22,839 of unrealized losses
and $1,230 of unrealized gains) as of September 30, 1996, included as a
separate component of stockholders' equity (deficit).
-9-
9
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
The Company had net realized losses on sales of investment securities
available for sale of $1,078 for the three months ended September 30, 1996
and net realized gains on sales of investment securities available for sale
of $2,114 for the nine months ended September 30, 1996.
As of September 30, 1996, the Company, through a wholly-owned subsidiary,
held approximately 4.95 million shares of RJR Nabisco Holdings Corp. ("RJR
Nabisco") common stock, par value $.01 per share (the "RJR Nabisco Common
Stock"), with a market value of $129,247 (cost of $151,650). The Company's
investment in RJR Nabisco collateralizes margin loan financing of $75,863 at
September 30, 1996. This margin loan bears interest at .25% below the
broker's call rate (6.0% at September 30, 1996). From the period October 1,
1996 to November 8, 1996, the Company sold approximately 1.78 million shares
of RJR Nabisco Common Stocks and recognized a loss of $3,648. As of
November 8, 1996, the Company held approximately 3.17 million shares of RJR
Nabisco Common Stock with a market value of $96,815 (cost of $97,302),
collateralizing margin loan financing of $23,158. The Company's unrealized
loss in its investment in RJR Nabisco Common Stock decreased from $22,403 at
September 30, 1996 to $487 at November 8, 1996.
For the three months and nine months ended September 30, 1996, the Company
expensed $791 and $11,158, respectively, for costs relating to the RJR
Nabisco investment. The Company has paid $2,361 to Brooke Group Ltd.
("Brooke"), an affiliate of the Company, pursuant to the December 27, 1995
agreement with Brooke in which the Company agreed, among other things, to pay
directly or reimburse Brooke and its subsidiaries for out-of-pocket expenses
in connection with Brooke's solicitation of consents and proxies from the
shareholders of RJR Nabisco, of which $942 was expensed during the nine
months ended September 30, 1996.
The details of the investment categories by type of security at September 30,
1996 are as follows:
Fair
Cost Value
--------- ---------
Available for sale:
Marketable equity securities:
RJR Nabisco Common Stock $151,650 $129,247
Other marketable securities 2,463 3,257
-------- --------
Total marketable securities 154,113 132,504
Marketable debt securities (long-term) 517 517
-------- --------
Total securities available for sale 154,630 133,021
-------- --------
Trading securities (Ladenburg):
Marketable equity securities 19,611 20,492
Equity and index options 7,803 8,548
Other securities 3,647 3,048
-------- --------
Total trading securities 31,061 32,088
-------- --------
Total investment securities 185,691 165,109
Less long-term portion of investment securities (517) (517)
-------- --------
Investment securities - current portion $185,174 $164,592
======== ========
The long-term portion of investment securities at cost consists of
marketable debt securities which mature in three years.
-10-
10
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Long-Term Investments. At September 30, 1996, long-term investments
included investments in limited partnerships of $6,688, equity in a joint
venture of $3,796, an equity investment in a foreign corporation of $2,000,
and other investments of $392. During the first quarter of 1996, the
Company liquidated its position in two limited partnerships with an
aggregate carrying amount of $14,500 and recognized a gain on such
liquidations of $4,086. In July 1996, the Company sold its investment in a
Brazilian airplane manufacturer (the "Brazilian Investment") for $8,285 in
cash, which included $1,300 as reimbursement of the Company's expenses
related to this investment. The Company, after writing down this investment
by $8,698 in 1995, recognized a gain on the sale of the Brazilian Investment
of $4,285 in July 1996 representing a partial recovery of the impaired
carrying value. In June 1996, the Company determined that an other than
temporary impairment in the value of its minority equity interest in a
computer software company had occurred and, accordingly, $1,001 was provided
as an impairment charge.
The fair value of the Company's long-term investments approximates its
carrying amount. The Company's estimate of the fair value of its long-term
investments are subject to judgment and are not necessarily indicative of
the amounts that could be realized in the current market.
RJR Nabisco Equity Swap. On February 29, 1996, the Company entered into a
total return equity swap transaction (the "Swap") with an unaffiliated
company relating to 1,000,000 shares of RJR Nabisco Common Stock. During
the third quarter of 1996, the Company terminated the Swap and recognized a
loss on the Swap of $4,074 and $7,305 for the three months and nine months
ended September 30, 1996, respectively.
6. REDEEMABLE PREFERRED SHARES
At September 30, 1996, the Company had authorized and outstanding 2,000,000
and 1,035,462, respectively, of its Class A Senior Preferred Shares. At
September 30, 1996 and December 31, 1995, respectively, the carrying value
of such shares amounted to $201,318 and $226,396, including undeclared
dividends of $103,234 and $121,893, or $99.70 and $110.06 per share.
In January and February, 1996, the Company repurchased 72,104 of such shares
for $10,530. The repurchase of the Class A Senior Preferred Shares
increased the Company's additional paid-in capital by $4,279.
As of September 30, 1996, the unamortized discount on the Class A Senior
Preferred Shares was $5,462.
In March 1996 and July 1996, the Company declared and paid dividends on the
Class A Senior Preferred Shares of $10.00 and $30.00 per share,
respectively.
7. PREFERRED SHARES NOT SUBJECT TO REDEMPTION REQUIREMENTS
The undeclared dividends, as adjusted for conversions of Class B Preferred
Shares into Common Shares, cumulatively amounted to $110,476 and $95,118 at
September 30, 1996 and December 31, 1995, respectively. These undeclared
dividends represent $39.58 and $34.08 per share as of the end of each
period. No accrual was recorded for such undeclared dividends as the Class
B Preferred Shares are not mandatorily redeemable.
-11-
11
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
8. RESTRICTED ASSETS
Restricted assets at September 30, 1996 consisted primarily of $5,223
pledged as security for a long-term lease of commercial office space and
$3,300 pledged as collateral for a letter of credit.
In May 1996, the Company reached an agreement with First Financial
Management Corporation ("FFMC") whereby FFMC released all of the remaining
$28,742 held in escrow pursuant to the Asset Purchase Agreement, dated as of
October 20, 1994, between the Company and FFMC, relating to the sale of the
Company's money transfer business. In addition, the agreement required the
Company to pay FFMC $7,000 in connection with the termination of the various
service agreements the Company had with FFMC. The Company recognized a gain
on the termination of these service agreements of $1,317.
9. PREPETITION CLAIMS UNDER CHAPTER 11 AND RESTRUCTURING ACCRUALS
Those liabilities that are expected to be resolved as part of the Company's
First Amended Joint Chapter 11 Plan of Reorganization, as amended (the
"Joint Plan") are classified in the Consolidated Balance Sheets as
prepetition claims and restructuring accruals. On January 18, 1995,
approximately $550 million of prepetition claims were paid pursuant to the
Joint Plan. As of September 30, 1996 and December 31, 1995, the Company had
$26,669 and $33,392, respectively, of prepetition claims and restructuring
accruals. The prepetition claims remaining as of September 30, 1996 may be
subject to future adjustments depending on pending discussions with the
various parties and the decisions of the Bankruptcy Court.
10. CONTINGENCIES
Litigation
The Company is a defendant in various lawsuits and may be subject to
unasserted claims primarily in connection with its activities as a
securities broker-dealer and participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are in
varying stages of legal proceedings. In the opinion of management, after
consultation with counsel, the ultimate resolution of these matters will not
have a material adverse effect on the Company's consolidated financial
position, results of operations, or cash flow.
Investment Company Act
The Investment Company Act of 1940, as amended (the "Investment Company
Act"), and the rules and regulations thereunder require the registration of,
and impose various substantive restrictions on, companies that engage
primarily in the business of investing, reinvesting or trading in securities
or engage in the business of investing, reinvesting, owning, holding or
trading in securities and own or propose to acquire "investment securities"
having a "value" in excess of 40% of a company's "total assets" (exclusive
of Government securities and cash items) on an unconsolidated basis.
Following dispositions of its then operating businesses pursuant to the
Joint Plan, the Company was above this threshold and relied on the one-year
exemption from registration under the Investment Company Act provided by
Rule 3a-2 thereunder, which exemption expired on January 18, 1996. Prior to
such date, through the Company's acquisition of the investment banking and
brokerage
-12-
12
NEW VALLEY CORPORATION AND SUBSIDIARIES
NOTES TO QUARTERLY CONSOLIDATED FINANCIAL STATEMENTS -(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
business of Ladenburg and its acquisition of the Office Buildings and
Shopping Centers (see Note 2), the Company was engaged primarily in a
business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities, and the value of its investment securities
was below the 40% threshold. Under the Investment Company Act, the Company
is required to determine the value of its total assets for purposes of the
40% threshold based on "market" or "fair" values, depending on the nature of
the asset, at the end of the last preceding fiscal quarter and based on cost
for assets acquired since that date. If the Company were required to
register under the Investment Company Act, it would be subject to a number
of material restrictions on its operations, capital structure and
management, including without limitation its ability to enter into
transactions with affiliates.
-13-
