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Exhibit 99.3
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
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Consolidated Balance Sheets as of September 30, 1997 and December 31, 1996.......................... 2
Consolidated Statements of Operations for the three months and nine months
ended September 30, 1997 and September 30, 1996............................................... 3
Consolidated Statement of Stockholder's Equity (Deficit) for the nine months
ended September 30, 1997...................................................................... 4
Consolidated Statements of Cash Flows for the nine months ended September 30, 1997
1997 and September 30, 1996................................................................... 5
Notes to Consolidated Financial Statements.......................................................... 6
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
1997 1996
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents ...................................... $ 2,191 $ 1,875
Accounts receivable - trade .................................... 538 166
Receivables from affiliates .................................... 12,178
Inventories .................................................... 3,567 3,569
Prepaid expenses and other ..................................... 2,496 2,640
-------- ---------
Total current assets ........................................ 20,970 8,250
Property, plant and equipment, at cost, less
accumulated depreciation of $751 and $676 .................. 20,286 59,607
Goodwill, net .................................................... 1,031 1,094
Deferred finance costs ........................................... 2,805
Other ............................................................ 5 540
-------- ---------
Total assets ................................................ $ 42,292 $ 72,296
======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt ............ $ 1,000 $ 21,658
Cash overdrafts ................................................ 973
Accounts payable - trade ....................................... 2,948 13,074
Due to affiliates .............................................. 56,851 48,875
Unearned revenue ............................................... 158 7,406
Accrued taxes .................................................. 7,812 8,474
Taxes due to affiliate ......................................... 11,741
Accrued interest ............................................... 597
Other accrued liabilities ...................................... 3,190 2,692
-------- ---------
Total current liabilities ................................... 83,673 102,776
Deferred gain .................................................... 2,253 1,494
Unearned revenue ................................................. 9,458
Other liabilities ................................................ 25,498
Commitments and contingencies
Stockholder's equity (deficit):
Common stock, par value $1 per share, 701,000 shares authorized,
authorized, issued and outstanding .......................... 701 701
Additional paid-in-capital ..................................... 5,600 3,400
Deficit ........................................................ (76,433) (45,533)
-------- ---------
Total stockholder's equity (deficit) ........................ (70,132) (41,432)
-------- ---------
Total liabilities and stockholder's equity (deficit) ........ $ 42,292 $ 72,296
======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
--------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------------------------------------------------
--------------------------------------------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------------- --------------- --------------- --------------
Net sales............................................. $ 20,940 $ 13,509 $ 53,095 $ 35,006
Cost of sales......................................... 17,224 12,897 43,847 33,070
-------- -------- ------- --------
Gross profit.......................................... 3,716 612 9,248 1,936
Operating, selling, administrative and
general expenses............................... 2,318 3,211 6,236 8,213
-------- -------- ------- --------
Operating income (loss)............................... 1,398 (2,599) 3,012 (6,277)
Other income (expense):
Interest income.................................... 273 2 1,424
Interest expense................................... (2,366) (1,859) (6,890) (5,806)
Gain on sale of stock.............................. 27,055
Gain on foreign currency exchange.................. 60 357 370 917
Other, net......................................... (21) (74) (121) (764)
-------- -------- ------- --------
(Loss) income before income taxes..................... (656) (4,173) 24,850 (11,930)
(Benefit) provision for income taxes.................. (248) 1,145 12,279 1,343
-------- -------- ------- --------
Net income (loss)..................................... $ (408) $ (5,318) $12,571 $(13,273)
======== ======== ======= ========
The accompanying notes are an integral part
of the consolidated financial statements.
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Common Stock Additional
------------ Paid-in
Shares Amount Capital Deficit Total
------ ------ ---------- ------- -----
Balance, December 31, 1996 ..... 701,000 $ 701 $3,400 $(45,533) $(41,432)
Net income ..................... 12,571 12,571
Distributions to parent ........ (43,471) (43,471)
Capital contribution ........... 2,200 2,200
-------- -------- ------ -------- --------
Balance, September 30, 1997 .... 701,000 $ 701 $5,600 $(76,433) $(70,132)
======== ======== ====== ======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
--------------------------------------
Nine Months Ended
--------------------------------------
--------------------------------------
September 30, September 30,
1997 1996
--------------------------------------
Net cash provided by operating activities..................... $ 10,841 $ 4,506
-------- --------
Cash flows from investing activities:
Capital expenditures.................................... (11,574) (21,002)
Proceeds from sale of BML, net.......................... 41,502
Proceeds from sale of stock in Liggett-Ducat, net....... 1,600
Proceeds from sale of option to purchase
stock in Liggett-Ducat................................ 2,200 3,400
-------- --------
Net cash provided by (used in) investing activities........... 32,128 (16,002)
-------- --------
Cash flows from financing activities:
Proceeds from debt...................................... 4,723 12,442
Repayments of debt...................................... (3,905) (1,375)
Borrowings under credit facility........................ 644
Repayments on credit facility........................... (800)
Distributions paid to parent............................ (43,471)
-------- --------
Net cash (used in) provided by financing activities........... (42,653) 10,911
-------- --------
Net increase (decrease) in cash and cash equivalents.......... 316 (585)
Cash and cash equivalents, beginning of period................ 1,875 1,660
-------- --------
Cash and cash equivalents, end of period...................... $ 2,191 $ 1,075
======== ========
The accompanying notes are an integral part
of the consolidated financial statements.
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. ORGANIZATION
Brooke (Overseas) Ltd. ("the Company"), a Delaware corporation, is a
wholly-owned subsidiary of BGLS Inc. ("BGLS") and an indirect
subsidiary of Brooke Group Ltd. ("Brooke"). The consolidated financial
statements of the Company include Liggett-Ducat Ltd. ("Liggett-Ducat"),
a Russian closed joint stock company engaged in the manufacture and
sale of cigarettes in Russia, Liggett-Ducat Tobacco Ltd. ("LDT"), a
wholly-owned subsidiary engaged in the construction of a new cigarette
factory, and, prior to January 31, 1997, BrookeMil Ltd. ("BML"), a
wholly-owned subsidiary engaged in construction of office buildings and
property management in Moscow, Russia.
On July 5, 1996, Liggett Group Inc. ("Liggett"), a wholly-owned
subsidiary of BGLS, purchased from the Company 140,000 shares (19.97%)
of the tobacco operations of Liggett-Ducat for $2,100. In addition,
Liggett acquired a ten-year option entitling Liggett to increase its
ownership in Liggett-Ducat to 95%. On March 13, 1997, Liggett acquired
a second option to purchase all remaining shares of Liggett-Ducat (an
additional 33%) from the Company for $2,200. Of that amount, $2,050 was
paid in cash and the Company recorded a receivable of $150.
In December 1996, the Company cancelled BML intercompany debt in
exchange for 10,483 shares of newly issued BML common stock. These
shares represent 99.1% of the outstanding shares of BML. On January 31,
1997, such shares were sold to New Valley Corporation ("New Valley").
(Refer to Note 3.)
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included as Exhibit 99.4 in Brooke's and BGLS' Annual Report on
Form 10-K, as amended, for the year ended December 31, 1996, as filed
with the Securities and Exchange Commission. The consolidated results
of operations for interim periods should not be regarded as necessarily
indicative of the results that may be expected for the entire year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform to the 1997 presentation.
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY:
The Company has historically relied on Brooke and BGLS for sources of
financing. At September 30, 1997, the Company had net capital and
working capital deficiencies of $70,132 and $63,703, respectively. The
Company has upgraded the cigarette operations' tobacco processing
complex and significantly increased production while continuing to
implement cost-saving measures. Liggett-Ducat plans to begin the
manufacture and marketing of western style cigarettes in 1998.
Management believes that such activities will result in improved
operations and cash flow, but there can be no assurances in this
regard. In addition, the Company is in the process of constructing a
new tobacco factory as discussed in Note 5 and is actively pursuing
various potential financing alternatives related thereto.
3. SALE OF BROOKEMIL
On January 31, 1997, the Company sold its 99.1% of the outstanding
shares of BML to New Valley for $21,500 in cash and a promissory note
of $33,500, collateralized by the BML shares, payable during 1997 with
an annual interest rate of 9%. The consideration received exceeded the
carrying value of the Company's investment in BML by $52,500. The
Company recognized an immediate gain on the sale in the amount of
$25,500. The remaining $27,000 was deferred, reflecting recognition
that the Company's parent, BGLS, retains an interest in BML through its
42% equity ownership in New Valley, and that further, a portion of the
property sold is subject to a put option held by New Valley. This
option allows New Valley, under certain circumstances, to put a portion
of the property sold back to the Company at the greater of the
appraised fair value of the property at the date of exercise or
$13,600. The Company distributed the $21,500 cash proceeds received
from the sale of BML to BGLS on January 31, 1997. During the second
quarter 1997, New Valley paid $21,500 to BOL, representing a portion of
the promissory note together with accrued interest thereon. As of
September 30, 1997, the balance remaining on the note was $12,000,
subsequently reduced to $8,500. The balance is due on or before
December 31, 1997. As of September 30, 1997, BOL had distributed to
BGLS $21,500 in proceeds received from the New Valley note together
which accrued interest thereon.
On April 18, 1997, BML sold one of its office buildings, Ducat Place I,
to a third party. Accordingly, the Company recognized approximately
$1,490 of the deferred gain. At September 30, 1997, the balance of the
deferred gain was approximately $25,500.
In connection with the sale of the BML shares, certain specified
liabilities aggregating $40,800 remained with BML, including the
Vneshtorgbank loan with a balance of $20,418 which was paid in full
during the third quarter, 1997. Further, the Company, Brooke and BGLS
each contributed to the capital of BML, through cancellation of all
indebtedness of BML to each such entity, the aggregate amount of which
was $19,275 including accrued interest thereon. In addition,
Liggett-Ducat entered into a Use Agreement with BML whereby
Liggett-Ducat is permitted to continue to utilize the existing factory
site on the
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
same basis as in the past which includes obligations for costs involved
in carrying the site. The Use Agreement is terminable by BML on 270
days' prior notice.
4. INVENTORIES
Inventories consist of:
September 30, December 31,
1997 1996
------------- ------------
Finished goods........................... $ 5 $
Work-in-process.......................... 227 53
Raw materials............................ 2,394 2,664
Replacement parts and supplies........... 941 852
------ ------
$3,567 $3,569
====== ======
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 established at the date of
the commitment. At September 30, 1997, the Company had leaf tobacco
purchase commitments of approximately $23,900.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
September 30, December 31,
1997 1996
------------- ------------
Buildings................................ $ $ 8,064
Factory machinery and equipment.......... 10,564 4,419
Computers and software................... 308 289
Office furniture and equipment........... 245 129
Vehicles................................. 457 416
Construction-in-progress................. 9,463 46,966
------- -------
21,037 60,283
Less accumulated depreciation............ 751 676
------- -------
$20,286 $59,607
======= =======
On May 6, 1997, LDT entered into two contracts for construction of a
new tobacco factory on the outskirts of Moscow which provide for
payments of $1,700 over a three-month period ending July 1997 and
$18,760 over a twelve-month period ending July 1998. A pre-construction
payment of $520 was paid in April 1997.
On September 9, 1997, the Company entered into a contract to purchase
cigarette manufacturing and processing equipment to be used in the new
factory for $15,000. Of
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
this amount, $12,750 will be financed by a series of ten promissory
notes payable every six months at 6.71% per annum interest with the
first note due in 1999. Brooke is a guarantor of the notes.
On September 24, 1997, the Company entered into an additional contract
to purchase cigarette manufacturing and processing equipment to be used
in the new factory for $12,400, of which $10,500 will be financed by a
series of sixty promissory notes payable monthly at 7.5% per annum
interest. The first note will be due six months after delivery of the
equipment. Delivery is estimated to be completed by September 1998.
6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
September 30, December 31,
1997 1996
------------- ------------
Bank loan................................... $ $ 20,418
Deferred financing fees..................... 1,240
Other obligations........................... 3,253
------- --------
Total....................................... 3,253 21,658
Less current maturities..................... 1,000 21,658
------- --------
Amount due after one year................... $ 2,253 $
======= ========
In October 1995, Liggett-Ducat entered into a loan agreement with
Vneshtorgbank to borrow up to $20,418 to fund real estate development.
At December 31, 1996, BML had drawn down $20,418 of the loan. In
connection with the sale of BML to New Valley, the Russian bank loan
remained at BML and the Company and Brooke, as guarantor, were
indemnified by New Valley with respect to this liability. The loan was
repaid in full by BML in August 1997. (Refer to Note 3.)
REVOLVING CREDIT FACILITIES:
In February and March 1997, the Company obtained lines of credit in the
amounts of $1,000 at 28% per annum and $2,000 at 26%, respectively, in
order to secure tobacco commitment purchases. The lines of credit were
extended in May 1997 and interest rates reduced to 23%. Also in April
1997, an additional $1,000 line of credit was obtained. Lines of credit
expired in August and September 1997 and any balance outstanding was
paid in full.
7. RELATED PARTY TRANSACTIONS
The Company has obtained funding through a revolving credit facility
with Brooke and BGLS at an annual interest rate of 20% to cover certain
expenses including the cost of certain administrative services and
personnel, tobacco and material purchases and upgrades of factory
equipment. The amount due to Brooke and BGLS under this facility
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BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
at September 30, 1997 was $40,208 together with interest of $16,543. As
of such date, $19,513 together with interest of $8,067 is due to the
Company from Liggett-Ducat and LDT, which amounts are collateralized by
a pledge of the LDT stock.
On April 28, 1997, the Company purchased excess production equipment
from Liggett for $3,000.
8. INCOME TAXES
The entire 1996 and a portion ($538) of the 1997 provision for income
taxes is payable pursuant to Russian statutory requirements. Further,
the Company has recorded a provision for income taxes of $11,741
related to its sale of BML in 1997 in accordance with its tax sharing
agreement with Brooke.
The provision for taxes for the nine months ended September 30, 1997
and 1996 does not bear the customary relationship to the pretax
loss/income for the Company due principally to the effects of taxes
provided for foreign operations and an increase in the valuation
allowance related to deferred tax assets.
9. CONTINGENCIES
BGLS has pledged its ownership interest in the Company's Common Stock
as collateral in connection with the issuance of BGLS' 15.75% Senior
Secured Notes ("BGLS Notes") due 2001. Liggett has engaged in
negotiations with its note holders to restructure the terms of its
Senior Secured Notes. During such negotiations, BGLS postponed making
its interest payment due on July 31, 1997 of approximately $18,338 on
the BGLS Notes. A Standstill Agreement and Consent (the "Standstill
Agreement") was reached on August 28, 1997, as amended, among the
holders of more than 83% of the BGLS Notes and BGLS whereby each of
such principal holders of the BGLS Notes waived the right to receive on
August 29, 1997 its pro rata share of the July 31, 1997 interest
payment (in total, $15,340). On August 29, 1997, BGLS made the interest
payment on the BGLS Notes to all holders other than the principal
holders discussed above. Pending completion of the negotiations with
the principal holders, such holders have agreed with BGLS that they
will be entitled to receive their portion of the July 31, 1997 interest
payment only after giving BGLS 20 days' notice but in any event by
December 10, 1997.
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