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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File Number 33-75224
LIGGETT GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1702115
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Southeast Second Street, Miami, Florida 33131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 374-7714
700 West Main Street, Durham, North Carolina 27702
(Former Address) (Zip Code)
EVE HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 56-1703877
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Southeast Second Street, Miami, Florida 33131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (305) 539-9460
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
---- -----
As of May 14, 1997 there were outstanding 1,000 shares of common stock, par
value $0.10 per share, of Liggett Group Inc. and 100 shares of common stock,
par value $1.00 per share, of Eve Holdings Inc.
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INDEX
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Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Liggett Group Inc.:
-------------------
Consolidated Balance Sheets as of March 31, 1997 and
December 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996 . . . . . . . . . . . . . . . 5
Consolidated Statement of Stockholders' Equity (Deficit) for
the three months ended March 31, 1997 . . . . . . . . . . . 6
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . 7
Notes to Consolidated Financial Statements . . . . . . . . . . . 8
Eve Holdings Inc.:
------------------
Balance Sheets as of March 31, 1997 and December 31, 1996 . . . 21
Statements of Operations for the three months ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 22
Statements of Cash Flows for the three months ended March 31,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . 23
Notes to Financial Statements . . . . . . . . . . . . . . . . . 24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 26
PART II OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . 34
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 34
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Current assets:
Cash .............................................................. $ 477 $ --
Accounts receivable:
Trade, less allowances of $930 and $1,280, respectively ....... 9,117 19,316
Other ......................................................... 864 744
Inventories ....................................................... 49,261 50,122
Other current assets .............................................. 610 1,205
------- -------
Total current assets ...................................... 60,329 71,387
Property, plant and equipment, at cost, less accumulated
depreciation of $29,981 and $29,511, respectively ................. 18,662 18,705
Intangible assets, at cost, less accumulated amortization
of $17,817 and $17,388, respectively .............................. 2,898 3,327
Other assets and deferred charges, at cost, less accumulated
amortization of $7,860 and $7,410, respectively ................... 3,618 4,258
------- -------
Total assets .............................................. $85,507 $97,677
======= =======
(continued)
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LIGGETT GROUP INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1997 1996
--------- ------------
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ...................................... $ 73,838 $ 31,807
Cash overdraft ............................................................ -- 6
Accounts payable, principally trade ....................................... 14,618 18,949
Accrued expenses:
Promotional ........................................................... 31,850 30,257
Compensation and related items ........................................ 502 682
Taxes, principally excise taxes ....................................... 2,698 7,565
Estimated allowance for sales returns ................................. 5,000 5,000
Interest .............................................................. 3,243 8,435
Other ................................................................. 9,750 9,380
--------- ---------
Total current liabilities ......................................... 141,499 112,081
Long-term debt, less current maturities ........................................ 107,245 144,698
Non-current employee benefits and other liabilities ............................ 16,545 17,376
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 outstanding)
Common stock (par value $0.10 per share; authorized
2,000 shares; issued and outstanding 1,000 shares)
and contributed capital ................................................. 47,640 49,840
Accumulated deficit ....................................................... (227,422) (226,318)
--------- ---------
Total stockholder's deficit ....................................... (179,782) (176,478)
--------- ---------
Total liabilities and stockholder's equity (deficit) ............. $ 85,507 $ 97,677
========= =========
The accompanying notes are an integral part
of these financial statements.
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LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
------------------------
1997 1996
---- ----
Net sales*......................................... $66,301 $78,488
Cost of sales*..................................... 30,259 36,292
------- -------
Gross profit ............................ 36,042 42,196
Selling, general and administrative expenses....... 33,910 42,118
Restructuring...................................... 1,761 --
------- -------
Operating income ........................ 371 78
Other income (expense):
Interest income ............................... 57 --
Interest expense .............................. (6,040) (5,856)
Equity in loss of affiliate ................... (33) --
Sale of assets ................................ 1,592 --
Retirement of debt ............................ 2,963 --
Miscellaneous, net ............................ (14) (12)
------- -------
Net loss................................. $(1,104) $(5,790)
======= =======
*Net sales and cost of sales include federal excise taxes of $16,860
and $21,197, respectively.
The accompanying notes are an integral part
of these financial statements.
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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, 1996. . . . . . . . . . . . . . . $49,840 $(226,318) $(176,478)
Net loss . . . . . . . . . . . . . . . . . . . . . . . -- (1,104) (1,104)
Consideration for option to acquire affiliate
stock in excess of its net assets (Note 9) . . . . (2,200) -- (2,200)
------- --------- ---------
Balance at March 31, 1997. . . . . . . . . . . . .. . . . $47,640 $(227,422) $(179,782)
======= ========= =========
The accompanying notes are an integral part
of these financial statements.
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LIGGETT GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
----------------------
1997 1996
---- ----
Cash flows from operating activities:
Net loss .................................................................... $ (1,104) $ (5,790)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............................................ 1,764 1,990
Deferred income taxes .................................................... -- (57)
(Gain) loss on sale of property, plant and equipment ..................... (1,592) 16
Gain on retirement of notes .............................................. (2,963) --
Deferred finance charges and debt discount written off ................... 130 --
Equity in loss of affiliate .............................................. 33 --
Changes in assets and liabilities:
Accounts receivable ..................................................... 10,079 10,151
Inventories ............................................................. 861 (2,115)
Accounts payable ........................................................ (922) (2,335)
Accrued expenses ........................................................ (11,685) (10,982)
Non-current employee benefits ........................................... (206) (348)
Other, net .............................................................. (433) (187)
-------- --------
Net cash used in operating activities .............................. (6,038) (9,657)
-------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment ......................... 1,904 --
Capital expenditures ........................................................ (649) (1,350)
Purchase of an option in affiliate .......................................... (2,200) --
-------- --------
Net cash used in investing activities ............................... (945) (1,350)
-------- --------
Cash flows from financing activities:
Repayments of long-term debt ................................................ (4,601) (64)
Borrowings under revolving credit facility .................................. 81,291 87,644
Repayments under revolving credit facility .................................. (69,224) (76,629)
Increase (decrease) in cash overdraft ....................................... (6) 56
-------- --------
Net cash provided by financing activities ........................... 7,460 11,007
-------- --------
Net change in cash and cash equivalents ......................................... 477 --
Cash and cash equivalents:
Beginning of period ......................................................... -- --
-------- --------
End of period ............................................................... $ 477 $ --
======== ========
Supplemental cash flow information:
Cash payments (refunds) during the period for:
Interest ................................................................ $ 11,022 $ 10,793
Income taxes ............................................................ $ 93 $ 15
The accompanying notes are an integral part
of these financial statements.
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LIGGETT GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. THE COMPANY
Liggett Group Inc. ("Liggett" or the "Company") is a wholly-owned
subsidiary of BGLS Inc. ("BGLS"), a wholly-owned subsidiary of Brooke Group
Ltd. ("BGL"). Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States. Certain management and
administrative functions are performed by affiliates (see Note 9).
The consolidated financial statements included herein are unaudited
and, in the opinion of management, reflect all adjustments necessary (which are
normal and recurring) to present fairly the Company's consolidated financial
position, results of operations and cash flows. The December 31, 1996 balance
sheet has been derived from audited financial statements. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K, as
amended, for the year ended December 31, 1996, as filed with the Securities and
Exchange Commission. The results of operations for interim periods should not be
regarded as necessarily indicative of the results that may be expected for the
entire year.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $179,782 as of March 31, 1997, is highly leveraged and
has substantial near-term debt service requirements. Due to the many risks and
uncertainties associated with the cigarette industry and the impact of tobacco
litigation (see Note 8), there can be no assurance that the Company will be
able to meet its future earnings and/or cash flow goals. Consequently, the
Company could be in violation of certain debt covenants, and if its lenders
were to exercise acceleration rights under the revolving credit facility or
Senior Secured Notes indentures or refuse to lend under the revolving credit
facility, the Company would not be able to satisfy such demands or its working
capital requirements.
Further, the Company's Senior Secured Notes require a mandatory
principal redemption of $37,500 on February 1, 1998 and a payment at maturity
on February 1, 1999 of $107,400 and its revolving credit facility expires on
March 8, 1998 unless extended by its lenders. Current maturities of both the
Senior Secured Notes and revolving credit facility of approximately $74,000
contribute substantially to the working capital deficit of approximately
$81,170 as of March 31, 1997.
While management currently intends to seek to refinance and/or
restructure with the Company's note holders the redemption and maturity
requirements on the Senior Secured Notes and to extend the revolving credit
facility, there are no refinancing or restructuring arrangements for the notes
or commitments to extend the facility at this time, and no assurances can be
given in this regard. Based on the Company's net loss for 1996 and anticipated
1997 operating results, the Company does not anticipate it will be able to
generate sufficient cash from operations to make such payments. If the Company
is unable to refinance or restructure such obligations, renegotiate the payment
terms of the Senior Secured Notes, extend the revolving credit facility, or
otherwise make such payments, substantially all of its long-term debt and
revolving credit facility would be in default and holders of such debt could
accelerate the maturity of such debt. In such event, the Company may be forced
to seek protection from creditors under applicable laws. These matters raise
substantial doubt about the Company meeting its liquidity needs and its ability
to continue as a going concern.
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The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
2. ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant estimates subject to material changes in the
near term include deferred tax assets, allowance for doubtful accounts, sales
returns and allowances, actuarial assumptions of pension plans and litigation
and defense costs. Actual results could differ from those estimates.
3. PER SHARE DATA
All of the Company's common shares (1,000 shares, issued and
outstanding for all periods presented herein) are owned by BGLS. Accordingly,
earnings and dividends per share data are not presented in these consolidated
financial statements.
4. ASSETS UNDER AGREEMENTS FOR SALE
On April 29, 1996, Liggett executed a definitive agreement (as
amended) with Blue Devil Ventures, a North Carolina limited liability
partnership, for the sale by Liggett to Blue Devil Ventures of certain surplus
realty in Durham, North Carolina, for a sale price of $2,200. The transaction
closed on March 11, 1997. A gain of $1,531 was recognized, net of costs
required to prepare the properties for sale and selling costs.
5. INVENTORIES
Inventories consist of the following:
March 31, December 31,
1997 1996
--------- ------------
Finished goods .......................................................... $ 15,320 $ 15,304
Work-in-process ......................................................... 4,812 4,382
Raw materials ........................................................... 30,349 31,338
Replacement parts and supplies .......................................... 3,641 3,554
-------- --------
Inventories at current cost ............................................. 54,122 54,578
LIFO adjustment ......................................................... (4,861) (4,456)
-------- --------
Inventories at LIFO cost ................................................ $ 49,261 $ 50,122
======== ========
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 $21,217 at March 31, 1997.
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6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
March 31, December 31,
1997 1996
--------- ------------
Land and improvements ............................................ $ 455 $ 455
Buildings ........................................................ 6,150 5,848
Machinery and equipment .......................................... 42,038 41,913
--------- --------
Property, plant and equipment .................................... 48,643 48,216
Less accumulated depreciation .................................... (29,981) (29,511)
--------- --------
Property, plant and equipment, net ............................... $ 18,662 $ 18,705
======== ========
7 LONG-TERM DEBT
Long-term debt consists of the following:
March 31, December 31,
1997 1996
--------- -----------
11.5% Senior Secured Notes due February 1, 1999,
net of unamortized discount of $349 and $424,
respectively .................................................. $112,263 $119,688
Variable Rate Series C Senior Secured Notes due
February 1, 1999 .............................................. 32,279 32,279
Borrowings outstanding under revolving credit
facility ...................................................... 36,339 24,272
Other ............................................................ 202 266
-------- --------
181,083 176,505
Current portion .................................................. (73,838) (31,807)
-------- --------
Amount due after one year ........................................ $107,245 $144,698
======== ========
Senior Secured Notes
--------------------
On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes"). Interest on the Series B Notes is payable semiannually
on February 1 and August 1 at an annual rate of 11.5%. The Series B Notes and
Series C Notes referred to below (collectively, the "Notes") require mandatory
principal redemptions of $7,500 on February 1 in each of the years 1993 through
1997 and $37,500 on February 1, 1998 with the balance of the Notes due on
February 1, 1999. In February 1997, $7,500 of the Series B Notes were purchased
using revolver availability and credited against the mandatory redemption
requirements. The transaction resulted in a net gain of $2,963. The 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 102% and 100% of the
principal amount in the years 1997 and 1998, respectively, at the option of the
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Company. The Notes contain restrictions on Liggett's ability to declare or pay
cash dividends, incur additional debt, grant liens and enter into any new
agreements with affiliates, among others.
On January 31, 1994, the Company issued $22,500 of Variable Rate
Series C Senior Secured Notes (the "Series C Notes"). The Series C Notes have
the same terms (other than interest rate) and stated maturity as the Series B
Notes. The Series C Notes bore a 16.5% interest rate, which was reset on
February 1, 1995 to 19.75%. The Company had received the necessary consents
from the required percentage of holders of its Series B Notes allowing for an
aggregate principal amount up to but not exceeding $32,850 of Series C Notes to
be issued under the Series C Notes indenture. In connection with the consents,
holders of Series B Notes received Series C Notes totaling two percent of their
current Series B Notes holdings. The total principal amount of such Series C
Notes issued was $2,842. On November 20, 1994, the Company issued the remaining
$7,508 of Series C Notes in exchange for an equal amount of Series B Notes and
cash of $375. The Series B Notes so exchanged were credited against the
mandatory redemption requirements for February 1, 1995.
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 $461 based upon eligible collateral at March 31, 1997. The
Facility is collateralized by all inventories and receivables of the Company.
Borrowings under the Facility, whose interest is calculated at a rate equal to
1.5% above Philadelphia National Bank's (the indirect parent of Congress
Financial Corporation, the lead lender) prime rate of 8.25%, bore a rate of
9.75% on March 31, 1997. On April 1, 1997, Philadelphia National Bank raised
its prime rate to 8.5%, thereby increasing Liggett's interest rate to 10.0%.
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 currently
imposes requirements with respect to the Company's adjusted net worth (not to
fall below a deficit of $180,000 as computed in accordance with the agreement)
and working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement). The Facility is classified as short-term debt
as of March 31, 1997, as it becomes due on March 8, 1998, unless extended by
the lenders.
During the first quarter of 1997, the Company violated the working
capital covenant contained in the Facility as a result of the 1998 mandatory
redemption payment on the Senior Secured Notes becoming due within one year. On
March 19, 1997, the lead lender agreed to waive this covenant default, and the
Facility was amended as follows: (i) the working capital definition was changed
to exclude the current portion of the Senior Secured Notes; (ii) the maximum
permitted working capital deficit, as defined, was reduced to $12,000; (iii)
the maximum permitted adjusted net worth deficit was increased to $180,000; and
(iv) the permitted advance rates under the Facility for eligible inventory were
reduced by five percent.
For information concerning Liggett's substantial near-term debt
service requirements and other related matters, see Note 1.
8. COMMITMENTS AND CONTINGENCIES
Litigation
----------
Since 1954, Liggett and other United States cigarette manufacturers
have been named as defendants in a number of direct and third-party actions
predicated on the theory that they should be liable for damages from cancer and
other adverse health effects alleged to have been caused by cigarette smoking
or by exposure to secondary smoke (environmental tobacco smoke, "ETS") from
cigarettes. These cases are reported hereinafter as though having been
commenced against Liggett (without regard to whether such cases were actually
commenced against BGL or Liggett). New cases continue to be commenced against
Liggett and other
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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 had 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, but these benefits have recently ended.
Certain joint defense arrangements, and the financial benefits incident
thereto, have also ended. The future financial impact on the Company of the
termination of this assistance and the effects of the tobacco litigation
settlements discussed below is not quantifiable at this time.
As of March 31, 1997, there were 107 cases pending against Liggett
where individual plaintiffs allege injury resulting from cigarette smoking,
addiction to cigarette smoking or exposure to ETS and seek compensatory and, in
some cases, punitive damages. Of these, 53 are pending in the State of Florida
and 20 are pending in the State of New York. The balance of individual cases
are pending in 14 different states. The next individual case scheduled for
trial where Liggett is a defendant is CHUTZ-REYMERS V. LIGGETT GROUP INC., ET
AL. United States District Court, Middle District of Florida, Tampa Division,
which is scheduled for trial in June 1997. In light of the settlements
discussed below, this case will not proceed against Liggett on that date. In
addition to the foregoing, there are four individual cases scheduled for trial
in 1997 where Liggett is a defendant, although trial dates are subject to
change.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect, failure
to warn, breach of express and implied warranties, conspiracy, concert of
action, unjust enrichment, common law public nuisance, indemnity, market share
liability, and violations of deceptive trade practices laws and antitrust
statutes. Plaintiffs also seek punitive damages in many of these cases.
Defenses raised by defendants in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence, lack
of design defect, statutes of limitations, equitable defenses such as "unclean
hands" and lack of benefit, failure to state a claim and federal preemption.
Several representative cases are described below.
On June 24, 1992, in the action entitled CIPOLLONE V. LIGGETT GROUP
INC., ET AL., the United States Supreme Court issued an opinion concluding that
The Federal Cigarette Labeling and Advertising Act did not preempt state common
law damage claims but that The Public Health Cigarette Smoking Act of 1969 (the
"1969 Act"), did preempt certain, but not all, state common law damage claims.
The decision bars plaintiffs from asserting claims that, after the effective
date of the 1969 Act, the tobacco companies either failed to warn adequately of
the claimed health risks of cigarette smoking or sought to neutralize those
claimed risks in their advertising or promotion of cigarettes. Bills have been
introduced in Congress on occasion to eliminate the federal preemption defense.
Enactment of any federal legislation with such an effect could result in a
significant increase in claims, liabilities and litigation costs.
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 sought 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 and, on
August 23, 1996, the jury returned a verdict in favor of the defendants. A
Notice of Appeal has been filed by the plaintiff.
On October 31, 1991, an action entitled BROIN ET AL. V. PHILIP MORRIS
INCORPORATED, ET AL., Circuit Court of the Eleventh Judicial District in and
for Dade County, Florida, was filed against Liggett and others. This case 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
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the United States and who have never regularly smoked cigarettes but allege
that they have been damaged by involuntary exposure to ETS. Plaintiffs' motion
to certify the action as a class action was granted. The suit is scheduled to
go to trial on June 2, 1997. In addition to Broin, as of March 31, 1997 there
were 16 other actions which have either been certified as a class or are
seeking class certification. One of these actions, ENGLE, ET AL. V. R. J.
REYNOLDS TOBACCO COMPANY, ET AL., Circuit Court of the Eleventh Judicial
Circuit in and for Dade County, Florida, involving a certified class of smokers
in the State of Florida, is scheduled to commence trial on September 8, 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 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. This action is scheduled for trial on December 12, 1997. 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 alleging as injury lung cancer. On May 25, 1996, the District
Court granted Liggett summary judgment on plaintiff's fraud and breach of
warranty claims. In addition, 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 Magistrate
Judge is presently reconsidering plaintiffs' motion to compel production of
documents. No trial date has been set.
On March 25, 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN
TOBACCO COMPANY INC., ET AL., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action complaint
sought relief for a nationwide class of smokers based on their alleged
addiction to nicotine. The District Court granted plaintiffs' motion for class
certification. On May 23, 1996, the Fifth Circuit Court of Appeals decertified
the class and instructed the District Court to dismiss the class complaint. On
March 12, 1996, Liggett and BGL entered into an agreement, subject to court
approval, to settle the CASTANO class action tobacco litigation.
Under the CASTANO settlement agreement, upon final court approval of
the settlement, the CASTANO class would be entitled to receive up to 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, and a $5,000 payment from Liggett if
BGL or Liggett fails to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of the
settlement. BGL and Liggett have the right to terminate the CASTANO settlement
under certain circumstances. On May 11, 1996, the CASTANO Plaintiffs Legal
Committee filed a motion with the District Court seeking preliminary approval
of the CASTANO settlement. On September 6, 1996, the CASTANO plaintiffs
withdrew the motion for approval of the CASTANO settlement.
On March 14, 1996, BGL, the CASTANO Plaintiffs Legal Committee and the
CASTANO plaintiffs entered into a letter agreement. According to the terms of
the letter agreement, for the period ending nine months from the date of Final
Approval (as defined in the letter), if granted, of the CASTANO settlement or,
if earlier, the completion by BGL or Liggett of a combination with any
defendant in CASTANO, except Philip Morris, the CASTANO plaintiffs and their
counsel agree not to enter into any more favorable settlement agreement with
any CASTANO defendant which would reduce the terms of the CASTANO settlement
agreement. If the CASTANO plaintiffs or their counsel enter into any such
settlement during this period, they shall pay BGL $250,000 within thirty days
of the more favorable agreement and offer BGL and
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14
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.
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. Brown &
Williamson has filed a Notice of Appeal.
On May 23, 1994, an action entitled MOORE, ATTORNEY GENERAL, EX REL
STATE OF MISSISSIPPI V. THE AMERICAN TOBACCO COMPANY, ET AL., Chancery Court of
Jackson County, Mississippi, was commenced against Liggett and others seeking
restitution and indemnity for medical payments and expenses allegedly made or
incurred for tobacco related illnesses. In May 1994, 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). On February 21, 1995, the State of Florida commenced an
action pursuant to this statutory scheme. In addition to Florida and
Mississippi, similar actions have been filed by many other states and
municipalities. The Mississippi, Florida and Texas Medicaid recovery actions
are scheduled for trial in 1997 (see settlement discussions below). Legislation
similar to that enacted in Florida has been introduced in the Massachusetts and
New Jersey legislatures.
In certain of the pending proceedings, state and local government
entities and others seek reimbursement for Medicaid and other health care
expenditures allegedly caused by tobacco products. The claims asserted in these
Medicaid recovery actions vary. All plaintiffs assert the equitable claim that
the tobacco industry was "unjustly enriched" by plaintiffs' payment of health
care costs allegedly attributable to smoking and seek reimbursement of those
costs. Other claims made by some but not all plaintiffs include the equitable
claim of indemnity, common law claims of negligence, strict liability, breach
of express and implied warranty, violation of a voluntary undertaking or
special duty, fraud, negligent misrepresentation, conspiracy, public nuisance,
claims under state and federal statutes governing consumer fraud, antitrust,
deceptive trade practices and false advertising, and claims under the Federal
Racketeer Influenced and Corrupt Organization Act.
On March 15, 1996, Liggett and BGL entered into a settlement of
tobacco-related litigation with the Attorneys General of Florida, Louisiana,
Mississippi, West Virginia and Massachusetts. The settlement with the Attorneys
General releases Liggett and BGL 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 payment by
Liggett of $5,000 ($1,000 of which was paid on March 22, 1996, with the balance
payable over nine years and indexed and adjusted for inflation), provided that
any unpaid amount will be due sixty days after either a default by Liggett in
its payment obligations under the settlement or a merger or other similar
transaction by Liggett or BGL with another defendant in the lawsuits. In
addition, Liggett will be required to pay the states a percentage of Liggett's
pretax income (income before income taxes) each year from the second through
the twenty-fifth year. This annual percentage is 2-1/2% of Liggett's pretax
income, subject to increase to 7-1/2%
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15
depending on the number of additional states joining the settlement. No
additional states have joined this settlement to date. All of Liggett's
payments are subject to certain reductions provided for in the agreement.
Liggett has also agreed to pay to the states $5,000 if Liggett or BGL fails to
consummate a merger or other similar transaction with another defendant in the
lawsuits within three years of the date of the settlement.
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, Liggett
and BGL also have agreed to phase in compliance with certain of the proposed
interim FDA regulations on the same basis as provided in the CASTANO
settlement.
Liggett and BGL have the right to terminate the 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. Liggett and BGL 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.
At December 31, 1995, the Company had accrued approximately $4,000 for
the present value of the fixed payments under the March 1996 Attorneys General
settlement, of which $2,278 was outstanding on March 31, 1997. No additional
amounts have been accrued with respect to the recent settlements discussed
below. The Company cannot quantify the future costs of the settlements at this
time as the amount Liggett must pay is based, in part, on future operating
results. Possible future payments based on a percentage of pretax income, and
other contingent payments based on occurrence of a business combination, will
be expensed when considered probable.
On March 20, 1997, Liggett, together with BGL, entered into a
comprehensive settlement of tobacco litigation through parallel agreements with
the Attorneys General of 17 additional states and with a nationwide class of
individuals and entities that allege smoking-related claims. Thereafter, on
April 14, 1997, the State of California entered into a settlement agreement
with Liggett and BGL, of the action which it comtemplates commencing against
the industry and on May 6, 1997, the State of Alaska entered into a settlement
agreement with Liggett and BGL, of the action which it recently commenced
against the industry. The settlements cover all smoking-related claims,
including both addiction-based and tobacco injury claims against Liggett and
BGL, brought by the Attorneys General and, upon court approval, the nationwide
class.
The recent Attorneys General settlements, which do not require court
approval, include the states of Alaska, Arizona, California, Connecticut,
Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, New
Jersey, New York, Oklahoma, Texas, Utah, Washington and Wisconsin. Liggett and
BGL's previous settlements on March 15, 1996, with the Attorneys General of
Florida, Louisiana, Massachusetts, Mississippi and West Virginia remain in
full force and effect. Several other states have either recently filed
Medicaid recovery actions or indicated intentions to do so. Both Liggett and
BGL will endeavor to resolve those matters on substantially the same terms and
conditions as the prior settlements; however, there can be no assurance that
any such settlements will be completed.
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, BGL and plaintiffs filed the mandatory
class settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the court
granted preliminary approval and preliminary certification of the class. Class
members will be notified of the settlement and will have an opportunity to
appear at a later court hearing. Effectiveness of the mandatory settlement is
conditioned on final court approval of the settlement after a fairness hearing.
There can be no assurance as to whether or when court approval will be
obtained. There are no opt out provisions in this settlement, except for
Medicaid claims by states that are not party to the Attorneys General
settlements.
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Pursuant to the settlements, Liggett and BGL have agreed to cooperate
fully with the Attorneys General and the nationwide class in their lawsuits
against the tobacco industry. Liggett and BGL have agreed to provide to these
parties all relevant tobacco documents in their possession, other than those
subject to claims of joint defense privilege, and to waive, subject to court
order, certain attorney-client privileges and work product protections
regarding Liggett's smoking-related documents to the extent Liggett and BGL can
so waive these privileges and protections.. The Attorneys General and the
nationwide class have agreed to keep Liggett's documents under protective order
and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may be
subject to a joint defense privilege with other tobacco companies will not be
produced to the Attorneys General or the nationwide class, but will be,
pursuant to court order, submitted to the appropriate court and placed under
seal for possible in camera review. Additionally, under similar protective
conditions, Liggett and BGL have agreed to offer their employees for witness
interviews and testimony at deposition and trial. Pursuant to both settlement
agreements, Liggett has also agreed to place an additional warning on its
cigarette packaging stating that "smoking is addictive" and to issue a public
statement, as requested by the Attorneys General.
Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after the
date of the agreements. Monies collected in the settlement fund will be
overseen by a court-appointed committee and utilized to compensate state health
care programs and settlement class members and to provide counter-market
advertising. Liggett has also agreed to phase-in compliance with certain
proposed FDA regulations regarding smoking by children and adolescents,
including a prohibition on the use of cartoon characters in tobacco advertising
and limitations on the use of promotional materials and distribution of sample
packages where minors are present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or BGL, prior to the
fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not
having to post a bond to appeal any further adverse judgment. In addition,
within 120 days following such a combination, Liggett would be required to pay
$25 million to a settlement fund. Both the Attorneys General and the nationwide
class have also agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or BGL from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.
Liggett and BGL are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies. In addition,
in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs have
agreed to use their "best efforts" to ensure that Liggett's and BGL's liability
under such a plan should be no more onerous than under these new settlements.
On March 20, 1997, R.J. Reynolds Tobacco Company, Philip Morris, Inc.,
Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company, Inc.
obtained a temporary restraining order from a North Carolina state court
preventing Liggett and BGL and their agents, employees, directors, officers and
lawyers from turning over documents allegedly subject to the joint defense
privilege in connection with the settlements, which restraining order was
converted to a preliminary injunction by the court on April 9, 1997. This
ruling is currently on appeal by Liggett and BGL. On March 24, 1997, the United
States District Court for the Eastern District of Texas and state courts in
Mississippi and Illinois each issued orders enjoining the other tobacco
companies from interfering with Liggett's filing with the courts, under seal,
those documents.
The Company understands that a grand jury investigation is being
conducted by the office of the United States Attorney for the Eastern District
of New York regarding possible violations of criminal law relating to the
activities of The Council for Tobacco Research - USA, Inc. The 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.
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17
In March 1996, Liggett received a subpoena from a Federal grand jury
sitting in the Southern District of New York. Documents have been produced in
response to the subpoena. The Company understands that this investigation has
been transferred to the main office of the United States Department of Justice.
In addition, in May 1996, Liggett was served with a subpoena by a grand jury
sitting in the District of Columbia. Liggett is in the process of responding to
that subpoena. Liggett and BGL are unable, at this time, to predict the outcome
of these investigations.
The Antitrust Division of the United States Department of Justice
investigation into the United States tobacco industry activities in connection
with product development efforts regarding "fire-safe" or self-extinguishing
cigarettes has been concluded. No action by the Department of Justice was
taken.
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 by order
dated March 10, 1997, the court dismissed the balance of plaintiff's claims. A
notice of appeal has been filed by the plaintiff.
Litigation is subject to many uncertainties, and it is possible that
some of the aforementioned actions could be decided unfavorably against the
Company. An unfavorable outcome of a pending smoking and health case could
encourage the commencement of additional similar litigation. The Company is not
able to evaluate the effect of these developing matters on pending litigation
or the possible commencement of additional litigation.
There are several other proceedings, lawsuits and claims pending
against Liggett unrelated to 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 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 and BGL. 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.
Legislation and Regulation
--------------------------
On August 28, 1996, the Food and Drug Administration ("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 was commenced in the United
States District Court for the Middle District of North Carolina challenging the
legal authority of the FDA to assert such jurisdiction, as well as challenging
the constitutionality of the rules. A hearing on the tobacco industry's motion
for summary judgment in that case was held on February 10, 1997 and a decision
by the Court was issued on April 25, 1997. The court granted plaintiffs' motion
for summary judgment prohibiting the FDA from regulating or restricting the
promotion and advertising of tobacco products. The court denied plaintiffs'
motion for summary judgment on the issue of whether the FDA has the authority
to regulate access to, and labeling of, tobacco products. The four major
cigarette manufacturers and the FDA have filed notices of appeal.
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Liggett and BGL, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed rule making and to phase in compliance with certain
of the proposed interim FDA regulations. See discussions of the CASTANO and
Attorneys General settlements above.
In August 1996, the Commonwealth of Massachusetts enacted legislation
requiring tobacco companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. Regulations adopted
pursuant to this legislation are scheduled to become effective on July 1, 1997.
On February 7, 1997, the United States District Court for the District of
Massachusetts denied an attempt to block the new legislation on the ground that
it is preempted by federal law.
On September 13, 1995, the President of the United States issued
Presidential Proclamation 6821, which established a tariff rate quota ("TRQ")
on certain imported tobacco, imposing extremely high tariffs on imports of
flue-cured and burley tobacco in excess of certain 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.
In April 1994, the United States Occupational Safety and Health
Administration ("OSHA") issued a proposed rule that could ultimately ban
smoking in the workplace. Hearings were completed during 1995. OSHA has not yet
issued a final rule or a proposed revised rule. 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
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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.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
the effects of which, at this time, the Company is not able to evaluate.
9. RELATED PARTY TRANSACTIONS
On July 5, 1996, Liggett purchased 140,000 shares (19.97%) of
Liggett-Ducat Ltd.'s ("Liggett-Ducat") tobacco operations from Brooke
(Overseas) Ltd. ("BOL"), an indirect subsidiary of BGL, for $2,100.
Liggett-Ducat, which produces cigarettes in Russia, manufactured and marketed
11.4 billion cigarettes in 1996. Liggett also acquired on that date for $3,400
a ten-year option, exercisable by Liggett in whole or in part, to purchase from
BOL at the same per share price up to 292,407 additional shares of
Liggett-Ducat, thereby entitling Liggett to increase its interest in
Liggett-Ducat to approximately 62%. The option fee is to be credited against
the purchase price. In addition, as part of the same transaction, Liggett had
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 shares of
Liggett-Ducat (an additional 33%). On March 13, 1997, Liggett acquired this
option and paid BOL $2,000, and recorded a payable to BOL for the remaining
$0.2 million. Liggett accounts for its investment in Liggett-Ducat under the
equity method of accounting. Liggett's equity in the net loss of Liggett-Ducat
amounted to $33 for the three months ended March 31, 1997. The excess of the
cost of the option over carrying amount of net assets to be acquired under the
option has been charged to stockholder's deficit.
Liggett is party to a Tax-Sharing Agreement dated June 29, 1990 with
BGL and certain other entities pursuant to which Liggett has paid taxes to BGL
as if it were filing a separate company tax return, except that the agreement
effectively limits the ability of Liggett to carry back losses for refunds.
Liggett is entitled to recoup overpayments in a given year out of future
payments due under the agreement.
Liggett is a party to an agreement dated February 26, 1991, as amended
October 1, 1995, with BGL to provide various management and administrative
services to the Company in consideration for an annual management fee of $900
paid in monthly installments and annual overhead reimbursements of $864 paid in
quarterly installments.
Liggett has entered into an annually renewable Corporate Services
Agreement with BGLS wherein BGLS agreed to provide corporate services to the
Company at an annual fee paid in monthly installments. Corporate services
provided by BGLS under this agreement include the provision of administrative
services related to Liggett's participation in its parent company's
multi-employer benefit plan, external publication of financial results,
preparation of consolidated financial statements and tax returns and such other
administrative and managerial services as may be reasonably requested by
Liggett. The charges for services rendered under the agreement amounted to $830
in 1997 and $790 in 1996. This fee is in addition to the management fee and
overhead reimbursements described above.
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Since April 1994, the Company has leased equipment from BGLS for $50
per month. On April 28, 1997, BOL purchased excess production equipment from
Liggett for $3,000, for a gain of $2,578.
10. RESTRUCTURING CHARGES
In the first three months of 1997, the Company reduced its headcount
by 87 positions and recorded a $1,761 restructuring charge to operations for
severance programs, primarily salary continuation and related benefits for
terminated employees. Approximately $285 in restructuring charges will be
funded in subsequent years. The Company expects to continue its cost reduction
programs.
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EVE HOLDINGS INC.
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
March 31, December 31,
1997 1996
--------- ------------
ASSETS
Cash ........................................................................... $ 4 $ --
Office equipment ............................................................... 1 2
Trademarks, at cost, less accumulated amortization of
$17,719 and $17,294, respectively .......................................... 2,694 3,119
-------- --------
Total assets .................................................... $ 2,699 $ 3,121
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Federal income taxes currently payable to parent ............................... $ 528 $ --
Dividends payable .............................................................. 980 4,623
Cash overdraft ................................................................. -- 92
Other current liabilities ...................................................... -- 19
Deferred income taxes .......................................................... 943 1,092
-------- --------
Total liabilities ................................................ 2,451 5,826
-------- --------
Stockholder's equity (deficit):
Common stock (par value $1.00 per share; authorized,
issued and outstanding 100 shares) and contributed
capital ................................................................ 47,848 46,548
Receivables from parent:
Note receivable - interest at 14%, due no sooner
than February 1, 1999 ............................................... (44,520) (44,520)
Other ................................................................... (3,080) (4,733)
-------- --------
Total stockholder's equity (deficit) ............................. 248 (2,705)
-------- --------
Total liabilities and stockholder's equity (deficit) ............. $ 2,699 $ 3,121
======== ========
The accompanying notes are an integral part
of these financial statements.
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EVE HOLDINGS INC.
STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
Revenues:
Royalties - parent .............................................................. $1,546 $1,713
Interest - parent ............................................................... 1,576 1,576
------ -----
3,122 3,289
Expenses:
Amortization of trademarks ...................................................... 425 425
Miscellaneous ................................................................... 37 24
------ -----
Income before income taxes ...................................................... 2,660 2,840
Income tax provision ................................................................ 379 994
------ ------
Net income ...................................................................... $2,281 $1,846
====== ======
The accompanying notes are an integral part
of these financial statements.
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EVE HOLDINGS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31,
-------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income ................................................................. $ 2,281 $ 1,846
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .......................................... 425 425
Deferred income taxes .................................................. (149) (149)
Changes in assets and liabilities:
Federal income taxes currently payable to parent ....................... 528 978
Other current liabilities .............................................. (19) --
------- -------
Net cash provided by operating activities .......................... 3,066 3,100
------- -------
Cash flows from financing activities:
Dividends/capital distributions ............................................ (4,623) (2,536)
Increase in due from parent ................................................ 1,653 (569)
Decrease in cash overdraft ................................................. (92) --
------- -------
Net cash used in financing activities ............................... (3,062) (3,105)
------- -------
Net increase (decrease) in cash ................................................ 4 (5)
Cash:
Beginning of period ........................................................ -- 8
------- -------
End of period .............................................................. $ 4 $ 3
======= =======
Supplemental cash flow information:
Payments of income taxes through receivable from parent .................... $ -- $ 164
Income taxes................................................................ 32 --
Dividends/capital distributions declared but not paid ...................... 980 2,122
The accompanying notes are an integral part
of these financial statements.
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EVE HOLDINGS INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
1. THE COMPANY
Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett
Group Inc. ("Liggett"). Eve, formed in June 1990, is the proprietor of, and has
all right, title and interest in, certain federal trademark registrations (the
"Trademarks"). Eve has entered into an exclusive licensing agreement with
Liggett (effective until 2010) whereby Eve grants the use of the Trademarks to
Liggett in exchange for royalties, computed based upon Liggett's annual net
sales, excluding excise taxes. The Trademarks are pledged as collateral for
Liggett's borrowings under the notes indentures (see Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Going Concern
The accompanying financial statements have been prepared assuming that
Eve will continue as a going concern. Eve's revenues are comprised solely of
royalties and interest income from Liggett. In addition, Eve holds a note
receivable from Liggett for $44,520 due no sooner than February 1, 1999.
Liggett had a working capital deficiency of $81,170 and a capital deficiency of
$179,782 as of March 31, 1997, is highly leveraged and has substantial
near-term debt service requirements. These matters raise substantial doubt
about Eve and Liggett meeting their liquidity needs and their ability to
continue as going concerns.
The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
b. Per Share Data
All of Eve's common shares (100 shares authorized, issued and
outstanding for all periods presented herein) are owned by Liggett.
Accordingly, earnings and dividends per share data are not presented in these
financial statements.
3. GUARANTEE OF LIGGETT NOTES
On February 14, 1992, Liggett issued $150,000 of Senior Secured Notes
(the "Series B Notes"). In connection with the issuance of the Series B Notes,
the Trademarks were pledged as collateral. In addition, Eve is a guarantor for
the Series B Notes.
During 1994, Liggett issued $32,850 of Series C Senior Secured Notes
(the "Series C Notes"). Eve is a guarantor for the Series C Notes.
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4. INCOME TAXES
Eve qualifies as a company conducting operations exempt from income
taxation under Delaware General Statute Section 1903(b). In recent years, some
states have been aggressively pursuing companies exempt under this statute.
Eve's management believes that certain state income tax rulings supporting
these states' arguments will be ultimately reversed and that Eve's status as a
company not conducting business in these states will be respected.
Consequently, management has not provided a reserve for additional state income
taxes. No assurance can be given with regard to future state income tax rulings
and audit activity with respect to Eve.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollars in thousands, except selling prices)
INTRODUCTION
Liggett Group Inc. ("Liggett" or the "Company") is the operating
successor to the Liggett & Myers Tobacco Company formed in 1873. Liggett is the
fifth largest manufacturer of cigarettes in the United States in terms of unit
sales.
The following discussion provides an assessment of Liggett's
consolidated results of operations and capital resources and liquidity and
should be read in conjunction with the consolidated financial statements of
Liggett and notes thereto included elsewhere in this Report on Form 10-Q. The
operating results of the periods presented were not significantly affected by
inflation.
Eve Holdings Inc. ("Eve") is a wholly-owned subsidiary of Liggett.
Eve's sole business is to hold certain federal trademark registrations used by,
and to license them on an exclusive basis to, Liggett and to hold a certain
note receivable from Liggett. Accordingly, Management's Discussion and Analysis
of Financial Condition and Results of Operations of Eve are not presented
herein because they are not material to Liggett's operations.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Liggett had a net
capital deficiency of $179,782 and a working capital deficiency of $81,170 as
of March 31, 1997, is highly leveraged and has substantial near-term debt
service requirements. Due to the many risks and uncertainties associated with
the cigarette industry and the impact of tobacco litigation, there can be no
assurance that the Company will be able to meet its future earnings and/or cash
flow goals. Consequently, the Company could be in violation of certain debt
covenants and if the lenders were to exercise acceleration rights under the
revolving credit facility or Senior Secured Notes indentures or refuse to lend
under the revolving credit facility, the Company would not be able to satisfy
such demands or its working capital requirements.
Further, the Company's Senior Secured Notes require a mandatory
principal redemption of $37,500 on February 1, 1998 and a payment at maturity
on February 1, 1999 of $107,400, and its revolving credit facility expires on
March 8, 1998 unless extended by its lenders. While management currently
intends to seek to refinance and/or restructure with the Company's note holders
the redemption and maturity requirements on the Senior Secured Notes and to
extend the revolving credit facility, there are no refinancing or restructuring
arrangements for the notes or commitments to extend the facility at this time,
and no assurances can be given in this regard. These circumstances raise
substantial doubt about the Company meeting its liquidity needs and continuing
as a going concern. (See "Capital Resources and Liquidity" below).
RECENT DEVELOPMENTS IN THE CIGARETTE INDUSTRY
Pricing Activity
- ----------------
On March 7, 1997, R. J. Reynolds Tobacco Company ("RJR") initiated a
list price increase on all brands of 40 cents per carton (approximately 4%).
Brown & Williamson Tobacco Corporation ("B & W"), Lorillard Tobacco Company,
Inc. ("Lorillard") and Liggett matched this increase, and on March 21, 1997,
Philip Morris, Inc. ("Philip Morris") announced a price increase of 50 cents
per carton. Subsequently, Liggett and the other manufacturers matched Philip
Morris' price increase.
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Legislation, Regulation and Litigation
- --------------------------------------
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of March 31, 1997, there were 107 individual suits, 17
purported class actions and 23 state (and several municipality) Medicaid
reimbursement actions pending in the United States in which Liggett is a named
defendant. As new cases are commenced, the costs associated with defending such
cases and the risks attendant to the inherent unpredictability of litigation
continue to increase. Recently, there have been a number of restrictive
regulatory actions from various Federal administrative bodies, including the
EPA and FDA, adverse political and legal decisions and other unfavorable
developments concerning cigarette smoking and the tobacco industry, including
the commencement and certification of class actions and the commencement of
Medicaid reimbursement suits by various states' Attorneys General. These
developments generally receive widespread media attention. Management is not
able to evaluate the effect of these developing matters on pending litigation
or the possible commencement of additional litigation, but it is possible that
Liggett's financial position, results of operations and cash flows could be
materially adversely affected by an ultimate unfavorable outcome in any of such
pending litigation. See Note 8 to Liggett's consolidated financial statements
for a description of legislation, regulation and litigation.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for personal injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence, gross
negligence, strict liability, fraud, misrepresentation, design defect, failure
to warn, breach of express and implied warranties, conspiracy, concert of
action, unjust enrichment, common law public nuisance, indemnity, market share
liability, and violations of deceptive trade practices laws and antitrust
statutes. Plaintiffs also seek punitive damages in many of these cases.
Defenses raised by defendants in these cases include lack of proximate cause,
assumption of the risk, comparative fault and/or contributory negligence, lack
of design defect, statutes of limitations, equitable defenses such as "unclean
hands" and lack of benefit, failure to state a claim and federal preemption.
The claims asserted in the Medicaid recovery actions vary. All
plaintiffs assert the equitable claim that the tobacco industry was "unjustly
enriched" by plaintiffs' payment of health care costs allegedly attributable to
smoking and seek reimbursement of those costs. Other claims made by some but
not all plaintiffs include the equitable claim of indemnity, common law claims
of negligence, strict liability, breach of express and implied warranty,
violation of a voluntary undertaking or special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state and federal
statutes governing consumer fraud, antitrust, deceptive trade practices and
false advertising, and claims under the Federal Racketeer Influenced and
Corrupt Organization Act.
On March 12, 1996, Liggett, together with BGL, entered into an
agreement to settle the CASTANO class action tobacco litigation, and on March
15, 1996, Liggett, together with BGL, entered into an agreement with the
Attorneys General of West Virginia, Florida, Mississippi, Massachusetts and
Louisiana to settle certain actions brought against Liggett and the Company by
such states. Liggett and BGL, while neither consenting to FDA jurisdiction nor
waiving their objections thereto, agreed to withdraw their objections and
opposition to the proposed FDA regulations and to phase in compliance with
certain of the proposed interim FDA regulations.
Under the CASTANO settlement agreement, upon final court approval of
the settlement, the CASTANO class would be entitled to receive up to 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, and a $5,000 payment from Liggett if
BGL or Liggett fails to consummate a merger or similar transaction with another
non-settling tobacco company defendant within three years of the date of the
settlement. BGL and Liggett have the right to terminate the CASTANO settlement
under
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certain circumstances. On May 11, 1996, the CASTANO Plaintiffs Legal Committee
filed a motion with the District Court seeking preliminary approval of the
CASTANO settlement. On September 6, 1996, the CASTANO plaintiffs withdrew the
motion for approval of the CASTANO settlement.
On March 14, 1996, BGL, the CASTANO Plaintiffs Legal Committee and the
CASTANO plaintiffs entered into a letter agreement. According to the terms of
the letter agreement, for the period ending nine months from the date of Final
Approval (as defined in the letter), if granted, of the CASTANO settlement or,
if earlier, the completion by BGL or Liggett of a combination with any
defendant in CASTANO, except Philip Morris, the CASTANO plaintiffs and their
counsel agree not to enter into any more favorable settlement agreement with
any CASTANO defendant which would reduce the terms of the CASTANO settlement
agreement. If the CASTANO plaintiffs or their counsel enter into any such
settlement during this period, they shall pay 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.
Under the March 1996 Attorneys General settlement, the five states
would share an initial payment by Liggett of $5,000 ($1,000 of which was paid
on March 22, 1996, with the balance payable over nine years and indexed and
adjusted for inflation). In addition, Liggett will be required to pay the
states a percentage of Liggett's pretax income (income before income taxes)
each year from the second through the twenty-fifth year. This annual percentage
is 2-1/2% of Liggett's pretax income, subject to increase to 7-1/2% depending
on the number of additional states joining the settlement. No additional states
have joined this settlement to date. All of Liggett's payments are subject to
certain reductions provided for in the agreement. Liggett has also agreed to
pay to the states $5,000 if 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.
RECENT SETTLEMENTS. On March 20, 1997, Liggett, together with BGL,
entered into a comprehensive settlement of tobacco litigation through parallel
agreements with the Attorneys General of 17 additional states and with a
nationwide class of individuals and entities that allege smoking-related
claims. Thereafter, on April 14, 1997, the State of California entered into a
settlement agreement with Liggett and BGL, of the action which it comtemplates
commencing against the industry and on May 6, 1997, the State of Alaska entered
into a settlement agreement with Liggett and BGL, of the action which it
recently commenced against the industry. The settlements cover all smoking-
related claims, including both addiction-based and tobacco injury claims
against Liggett and BGL, brought by the Attorneys General and, upon court
approval, the nationwide class.
The recent Attorneys General settlements, which do not require
court approval, include the states of Alaska, Arizona, California, Connecticut,
Hawaii, Illinois, Indiana, Iowa, Kansas, Maryland, Michigan, Minnesota, New
Jersey, New York, Oklahoma, Texas, Utah, Washington and Wisconsin. Liggett and
BGL's previous settlements on March 15, 1996, with the Attorneys General of
Florida, Louisiana, Massachusetts, Mississippi and West Virginia remain in full
force and effect. Several other states have either recently filed Medicaid
recovery actions or indicated intentions to do so. Both Liggett and BGL will
endeavor to resolve those matters on substantially the same terms and
conditions as the prior settlements; however, there can be no assurance that
any such settlements will be completed.
The settlement with the nationwide class covers all smoking-related
claims. On March 20, 1997, Liggett, BGL and plaintiffs filed the mandatory
class settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the court
granted preliminary approval and preliminary certification of the class. Class
members will be notified of the settlement and will have an opportunity to
appear at a later court hearing. Effectiveness of the mandatory settlement is
conditioned on final court approval of the settlement after a fairness hearing.
There can be
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29
no assurance as to whether or when court approval will be obtained. There are
no opt out provisions in this settlement, except for Medicaid claims by states
that are not party to the Attorneys General settlements.
Pursuant to the settlements, Liggett and BGL have agreed to cooperate
fully with the Attorneys General and the nationwide class in their lawsuits
against the tobacco industry. Liggett and BGL have agreed to provide to these
parties all relevant tobacco documents in their possession, other than those
subject to claims of joint defense privilege, and to waive, subject to court
order, certain attorney-client privileges and work product protections
regarding Liggett's smoking-related documents to the extent Liggett and BGL can
so waive these privileges and protections.. The Attorneys General and the
nationwide class have agreed to keep Liggett's documents under protective order
and, subject to final court approval, to limit their use to those actions
brought by parties to the settlement agreements. Those documents that may be
subject to a joint defense privilege with other tobacco companies will not be
produced to the Attorneys General or the nationwide class, but will be,
pursuant to court order, submitted to the appropriate court and placed under
seal for possible in camera review. Additionally, under similar protective
conditions, Liggett and BGL have agreed to offer their employees for witness
interviews and testimony at deposition and trial. Pursuant to both settlement
agreements, Liggett has also agreed to place an additional warning on its
cigarette packaging stating that "smoking is addictive" and to issue a public
statement, as requested by the Attorneys General.
Under the terms of the new settlement agreements, Liggett will pay on
an annual basis 25% of its pretax income for the next 25 years into a
settlement fund, commencing with the first full fiscal year starting after the
date of the agreements. Monies collected in the settlement fund will be
overseen by a court-appointed committee and utilized to compensate state health
care programs and settlement class members and to provide counter-market
advertising. Liggett has also agreed to phase-in compliance with certain
proposed FDA regulations regarding smoking by children and adolescents,
including a prohibition on the use of cartoon characters in tobacco advertising
and limitations on the use of promotional materials and distribution of sample
packages where minors are present.
Under both settlement agreements, any other tobacco company defendant,
except Philip Morris, merging or combining with Liggett or BGL, prior to the
fourth anniversary of the settlement agreements, would receive certain
settlement benefits, including limitations on potential liability and not
having to post a bond to appeal any further adverse judgment. In addition,
within 120 days following such a combination, Liggett would be required to pay
$25 million to a settlement fund. Both the Attorneys General and the nationwide
class have also agreed not to seek an injunction preventing a defendant tobacco
company combining with Liggett or BGL from spinning off any of its affiliates
which are not engaged in the domestic tobacco business.
Liggett and BGL are also entitled to certain "most favored nation"
benefits not available to the other defendant tobacco companies. In addition,
in the event of a "global" tobacco settlement enacted through Federal
legislation or otherwise, the Attorneys General and tobacco plaintiffs have
agreed to use their "best efforts" to ensure that Liggett's and BGL's liability
under such a plan should be no more onerous than under these new settlements.
On March 20, 1997, RJR, Philip Morris, B & W and Lorillard obtained a
temporary restraining order from a North Carolina state court preventing
Liggett and BGL and their agents, employees, directors, officers and lawyers
from turning over documents allegedly subject to the joint defense privilege in
connection with the settlements, which restraining order was converted to a
preliminary injunction by the court on April 9, 1997. This ruling is currently
on appeal by Liggett and BGL. On March 24, 1997, the United States District
Court for the Eastern District of Texas and state courts in Mississippi and
Illinois each issued orders enjoining the other tobacco companies from
interfering with Liggett's filing with the courts, under seal, those documents.
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30
At December 31, 1995, the Company had accrued approximately $4,000 for
the present value of the fixed payments under the March 1996 Attorneys General
settlement, of which $2,278 was outstanding on March 31, 1997. No additional
amounts have been accrued with respect to the recent settlements discussed
above. The Company cannot quantify the future costs of the settlements at this
time as the amount Liggett must pay is based, in part, on future operating
results. Possible future payments based on a percentage of pretax income, and
other contingent payments based on occurrence of a business combination, will
be expensed when considered probable. See the discussion of the tobacco
litigation settlements appearing in Note 8 to the Company's consolidated
financial statements.
RESULTS OF OPERATIONS
1997 Restructuring
- ------------------
In January 1997, Liggett underwent a major restructuring from a
centralized organization to a decentralized enterprise with four Strategic
Business Units, each a profit center, and a corporate headquarters. This
restructuring is intended to more closely align sales and marketing strategies
with the unique requirements of regional markets as well as reduce working
capital by improved production planning and inventory control. As a result of
this reorganization, Liggett will further reduce its salaried, hourly and
part-time headcount by a total of 273 positions (35%) over an eight-month
transition period.
During the first quarter of 1997, the Company reduced its headcount by
approximately 87 positions and recorded a $1,761 restructuring charge to
operations for severance programs, primarily salary continuation and related
benefits for terminated employees. The anticipated savings of the restructuring
relate primarily to reduced payroll and benefits expenses in future periods.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
- -------------------------------------------------------------------------------
Net sales were $66,301 for the three months ended March 31, 1997
compared to $78,488 for the same period in 1996. This 15.5% decrease in
revenues was due primarily to a 21.6% decrease in overall unit sales volume,
partially offset by the effects of the March 7, 1997 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 13.5% and discount segment (which includes generic, control label
and branded discount products) of 22.7%. 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. The decline in the discount segment is consistent with
industry trends.
Gross profit was $36,042 for the three months ended March 31, 1997, a
decrease of $6,154 from $42,196 for the same period in 1996 due primarily to
the decline in unit sales volume discussed above. As a percent of revenues
(excluding federal excise taxes), gross profit decreased to 72.9% for the three
months ended March 31, 1997 compared to 73.7% for the same period in 1996. 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 March 1997 list price increase.
Operating income increased to $371 for the three months ended March
31, 1997 from $78 for the same period in 1996 due primarily to lower
advertising and marketing expenses and administrative charges resulting from
the 1997 restructuring discussed above, partially offset by higher legal
expenses.
Net interest expense was $5,983 for the three months ended March 31,
1997 compared to $5,856 for the same period in 1996. This increase in interest
expense was due to higher average outstanding balances under the revolving
credit facility, partially offset by the redemption of $7,500 Series B Notes in
February 1997.
Net loss amounted to $1,104 for the three months ended March 31, 1997
compared to $5,790 for the same period in 1996. This reduction in net loss was
primarily the result of a gain of $1,592 on the sale of assets and a gain of
$2,963 on the retirement of debt.
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CAPITAL RESOURCES AND LIQUIDITY
Cash used in operations was $6,038 for the three months ended March
31, 1997 compared to $9,657 for the same period in 1996 due primarily to
decreased inventories and a smaller reduction in payables.
The Company had 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, but
these benefits have recently ended. Certain joint defense arrangements, and the
financial benefits incident thereto, have ended. The future financial impact on
the Company of the termination of this assistance and the effects of the
tobacco litigation settlements discussed above is not quantifiable at this
time.
Cash used in investing activities for the three months ended March 31
related primarily to investments in an option in affiliate of approximately
$2,200 in 1997 and to capital expenditures of approximately $1,350 in 1996. For
the first three months of 1997, capital expenditures totaled approximately
$649, primarily for production facilities and further equipment modernization,
and anticipated spending for the remainder of the year is projected at $2,874.
These expenditures are expected to be funded with cash flow from operations,
borrowings under the revolving credit facility and proceeds from the potential
sale of certain surplus equipment or realty.
On March 11, 1997, Liggett sold certain surplus realty to Blue Devil
Ventures for a sale price of $2,200, which resulted in a gain of $1,531.
Cash provided by financing activities for the three months ended March
31, 1997 and 1996 of $7,460 and $11,007, respectively, resulted primarily from
net borrowings under the revolving credit facility, offset in 1997 by repayment
of long-term debt.
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 $461 based upon eligible collateral at March 31, 1997. The
Facility is collateralized by all inventories and receivables of the Company.
Borrowings under the Facility, whose interest is calculated at a rate equal to
1.5% above Philadelphia National Bank's (the indirect parent of Congress
Financial Corporation, the lead lender) prime rate of 8.25%, bore a rate of
9.75% on March 31, 1997. On April 1, 1997, Philadelphia National Bank raised
its prime rate to 8.5%, thereby increasing Liggett's interest rate to 10.0%.
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 currently
imposes requirements with respect to the Company's adjusted net worth (not to
fall below a deficit of $180,000 as computed in accordance with the agreement)
and working capital (not to fall below a deficit of $12,000 as computed in
accordance with the agreement). The Facility is classified as short-term debt
as of March 31, 1997, as it becomes due on March 8, 1998, unless extended by
the lender.
During the first quarter of 1997, the Company violated the working
capital covenant contained in the Facility as a result of the 1998 mandatory
redemption payment on the Senior Secured Notes becoming due within one year. On
March 19, 1997, the lead lender agreed to waive this covenant default, and the
Facility was amended as follows: (i) the working capital definition was changed
to exclude the current portion of the Senior Secured Notes; (ii) the maximum
permitted working capital deficit, as defined, was reduced to $12,000; (iii)
the maximum permitted adjusted net worth deficit was increased to $180,000; and
(iv) the permitted advance rates under the Facility for eligible inventory were
reduced by five percent.
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On February 14, 1992, Liggett issued $150,000 in Senior Secured Notes
(the "Series B Notes"). From the proceeds of $148,244, net of an original issue
discount, $144,054 was dividended to BGLS (which reduced stockholder's equity)
and $4,190 was paid as financing fees. Interest on the Series B Notes is
payable semiannually on February 1 and August 1 at an annual rate of 11.5%. The
Series B Notes and Series C Notes referred to below (collectively, the "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 accounts receivable and inventory.
Eve is a guarantor for the Notes. The Notes may be redeemed, in whole or in
part, at a price equal to 102% and 100% of the principal amount in the years
1997 and 1998, respectively, at the option of the Company. 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. At March 31, 1997, the Company was in compliance with all
covenants under the Note indenture.
On January 31, 1994, the Company issued $22,500 of Variable Rate
Series C Senior Secured Notes (the "Series C Notes"). Liggett received $15,000
from the issuance in cash and received $7,500 in Series B Notes which were
credited against the mandatory redemption requirements for February 1, 1994.
The Series C Notes have the same terms (other than interest rate) and stated
maturity as the Series B Notes. The Series C Notes bore a 16.5% interest rate,
which was reset on February 1, 1995 to 19.75%. The Company had received the
necessary consents from the required percentage of holders of its Series B
Notes allowing for an aggregate principal amount up to but not exceeding
$32,850 of Series C Notes to be issued under the indenture. In connection with
the consents, holders of Series B Notes received Series C Notes totaling two
percent of their current Series B Note holdings. The total principal amount of
such Series C Notes issued for this purpose was $2,842. On November 20, 1994,
the Company issued the remaining $7,508 of Series C Notes in exchange for an
equal amount of Series B Notes and cash of $375. The Series B Notes so
exchanged were credited against the mandatory redemption requirements for
February 1, 1995.
While management currently intends to seek to refinance and/or
restructure with the Company's note holders the mandatory principal redemption
on the Notes of $37,500 due on February 1, 1998 and the payment at maturity, on
February 1, 1999, of $107,400 and to extend the Facility, there are no
refinancing or restructuring arrangements for the Notes or commitments to
extend the Facility at this time, and no assurances can be given in this
regard. Based on the Company's net loss for 1996 and anticipated 1997 operating
results, the Company does not anticipate it will be able to generate sufficient
cash from operations to make such payments. If the Company is unable to
refinance or restructure such obligations, renegotiate the payment terms of the
Senior Secured Notes, extend the revolving credit facility, or otherwise make
such payments, substantially all of its long-term debt and revolving credit
facility would be in default and holders of such debt could accelerate the
maturity of such debt. In such event, the Company may be forced to seek
protection from creditors under applicable laws. The Company's independent
accountants have issued a report covering the Company's December 31, 1996
consolidated financial statements containing an explanatory paragraph that
states that these facts raise substantial doubt about the Company's ability to
continue as a going concern. The accompanying consolidated financial statements
of the Company do not include any adjustments that might arise from the outcome
of this uncertainty. See Note 1 of the Company's consolidated financial
statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995 (the "Reform Act"), including any statements that
may be contained in the foregoing discussion in "Management's Discussion and
Analysis of Financial Condition and Results of Operations", and elsewhere in
this report and in other
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filings with the Securities and Exchange Commission and in its reports
to securityholders which reflect management's current views with respect to
future events and financial performance. These forward-looking statements are
subject to certain risks and uncertainties and, in connection with the
"safe-harbor" provisions of the Reform Act, the Company is hereby identifying
important factors that could cause actual results to differ materially from
those contained in any forward-looking statement made by or on behalf of the
Company. The Company continues to be subject to risk factors endemic to the
domestic tobacco industry including, without limitation, health concerns
relating to the use of tobacco products and exposure to environmental tobacco
smoke, legislation, including tax increases, governmental regulation, privately
imposed smoking restrictions, decline in consumption, governmental and grand
jury investigations and litigation. Furthermore, the Company is subject to
intense competition, changes in consumer preferences, the effects of changing
prices for its raw materials and local economic conditions. In addition, the
Company has a high degree of leverage and substantial near-term debt service
requirements, a mandatory principal redemption of $37,500 on its Notes due
February 1, 1998 and a payment at maturity of its Notes of $107,400 on February
1, 1999, as well as a significant net worth deficiency and working capital
deficiency and recent net losses, and is highly dependent upon its revolving
credit facility which expires in March 1998, unless extended by its lenders.
The Notes and the Facility contain restrictions on the Company's ability to
incur additional debt, grant liens, enter into any new agreements with
affiliates and declare or pay cash dividends, among others. Due to such
uncertainties and risks, investors are cautioned not to place undue reliance on
such forward-looking statements, which speak only as of the date such
statements are made. The Company does not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
the Company.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to information entitled "Commitments and
Contingencies" in Note 8 to the Company's consolidated financial statements
included elsewhere in this Report on Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Reference is made to information entitled "Revolving Credit Facility"
in Note 7 to the Company's consolidated financial statements included elsewhere
in this Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a). Exhibits
--------
* 10.27 Addendum to Initial States Settlement Agreement (incorporated
by reference to exhibit 10.43 in BGL's Form 10-Q for the
quarterly period ended March 31, 1997).
* 10.28 Settlement Agreement, dated April 14, 1997, by and among the
State of California, BGL and Liggett (incorporated by
reference to exhibit 10.44 in BGL's Form 10-Q for the
quarterly period ended March 31, 1997).
* 10.29 Settlement Agreement, dated May 6, 1997, by and among the
State of Alaska, BGL and Liggett (incorporated by reference
to exhibit 10.45 in BGL's Form 10-Q for the quarterly
period ended March 31, 1997).
27.1 Liggett Group Inc.'s Financial Data Schedule
(for SEC use only)
27.2 Eve Holdings Inc.'s Financial Data Schedule (for SEC use only)
(b). Reports on Form 8-K
-------------------
The Company filed no reports on Form 8-K for the three months ended
March 31, 1997.
- ------------
* Incorporated by reference
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by
the undersigned thereunto duly authorized on May 15, 1997.
LIGGETT GROUP INC.
By: /s/ Samuel M. Veasey
-------------------------------------
Samuel M. Veasey
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and Principal
Accounting Officer)
EVE HOLDINGS INC.
By: /s/ Joselynn D. Van Siclen
------------------------------------
Joselynn D. Van Siclen
Vice President, Treasurer and
Assistant Secretary
(Principal Financial and Principal
Accounting Officer)
35