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Exhibit 99.4
BROOKE (OVERSEAS) LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
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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 March 31, 1998 and December 31, 1997.............................. 2
Consolidated Statements of Operations for the three months ended March 31, 1998
and March 31, 1997............................................................................ 3
Consolidated Statement of Stockholder's Equity (Deficit) for the three months
ended March 31, 1998.......................................................................... 4
Consolidated Statements of Cash Flows for the three months ended March 31, 1998
and March 31, 1997............................................................................ 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)
===============================================================================
March 31, December 31,
1998 1997
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 457 $ 968
Accounts receivable - trade...................................... 1,376 1,584
Inventories...................................................... 11,497 4,255
Prepaid expenses................................................. 5,567 9,290
------- -------
Total current assets.......................................... 18,897 16,097
Property, plant and equipment, at cost, less
accumulated depreciation of $1,224 and $1,020................ 28,960 29,122
Goodwill, net...................................................... 1,023 1,001
Other 1,168 2
------- ----------
Total assets.................................................. $ 50,048 $ 46,222
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Notes payable and current portion of long-term debt............ $ 5,000 $ 5,000
Accounts payable - trade....................................... 7,194 3,798
Due to affiliates.............................................. 52,917 67,539
Unearned revenue............................................... 184 1
Accrued taxes.................................................. 15,199 18,077
Other accrued liabilities...................................... 8,519 8,397
------- ---------
Total current liabilities................................... 89,013 102,812
Deferred gain.................................................... 25,498 25,498
Other long-term liabilities...................................... 12,479 2,000
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..................................... 15,767 5,600
Deficit........................................................ (93,410) (90,389)
-------- ------
Total stockholder's equity (deficit)........................ (76,942) (84,088)
-------- ------
Total liabilities and stockholder's equity (deficit)........ $ 50,048 $ 46,222
======== ========
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
-------------------------------------
March 31, March 31,
1998 1997
------------------ ------------------
Net sales................................................ $ 19,177 $13,704
Cost of sales............................................ 15,584 11,329
------ ------
Gross profit............................................. 3,593 2,375
Operating, selling, administrative and general
expenses............................................ 2,141 1,978
------- ------
Operating income......................................... 1,452 397
Other income (expense):
Interest income....................................... 480
Interest expense...................................... (3,510) (2,148)
Gain on sale of BML................................... 25,563
Gain on foreign currency exchange..................... 79 200
Other, net............................................ (1) (29)
--------- ---------
(Loss) income before income taxes........................ (1,980) 24,463
(Benefit) provision for income taxes..................... (234) 12,482
-------- ------
Net (loss) income........................................ $ (1,746) $11,981
======= ======
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 RETAINED
------------------- PAID-IN EARNINGS
AMOUNT CAPITAL CAPITAL (DEFICIT) TOTAL
------ ------- -------- ------------- --------
Balance, December 31, 1997.................... 701,000 $701 $ 5,600 $(90,389) $(84,088)
Net loss...................................... (1,746) (1,746)
Distributions to parent....................... (1,275) (1,275)
Capital contribution.......................... 10,167 10,167
------- ---- ------- -------- --------
Balance, March 31, 1998....................... 701,000 $701 $15,767 $(93,410) $(76,942)
======= ==== ======= ======== ========
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)
===============================================================================
Three Months Ended
------------------ ------------------
March 31, March 31,
1998 1997
------------------ ------------------
Net cash used in operating activities.................... $ (8,273) $ (1,218)
--------- --------
Cash flows from investing activities:
Capital expenditures................................. (42) (658)
Proceeds from sale of BML, net....................... 20,002
Proceeds from sale of option to purchase
stock in Liggett-Ducat............................. 2,200
--------- --------
Net cash (used in) provided by investing activities...... (42) 21,544
--------- --------
Cash flows from financing activities:
Proceeds from debt................................... 3,000
Repayments of debt................................... (155)
Proceeds from participating loan..................... 11,000
Capital contributions from parent.................... 9,000
Repayment of intercompany debt....................... (11,000)
Distributions paid to parent......................... (1,275) (24,028)
--------- --------
Net cash provided by (used in) financing activities...... 7,725 (21,183)
--------- --------
Effect of exchange rate changes on cash
and cash equivalents............................... 79
---------
Net decrease in cash and cash equivalents................ (511) (857)
Cash and cash equivalents, beginning of period........... 968 1,875
--------- --------
Cash and cash equivalents, end of period................. $ 457 $ 1,018
========= ========
Supplemental cash flow information:
Cash payments during the period for:
Interest........................................... 440 1,109
Income taxes....................................... 700 741
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, and Liggett-Ducat Tobacco ("LDT"), a
wholly-owned subsidiary of Liggett-Ducat engaged in the construction of
a new cigarette factory. Prior to January 31, 1997, BrookeMil Ltd.
("BML") was a wholly-owned subsidiary engaged in construction of office
buildings and property management in Moscow, Russia. On January 31,
1997, the Company sold its shares (which represented 99.1% of all
shares outstanding) in BML 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, 1997, 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 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LIQUIDITY:
The Company has historically relied on Brooke and BGLS for sources of
financing. At March 31, 1998, the Company had net capital and working
capital deficiencies of $76,942 and $70,116, respectively. On February
2, 1998, Brooke and BGLS cancelled a note and interest thereon which
amounted to $20,384 at December 31, 1997. On February 5, 1998, Brooke
made a capital contribution of $9,000 to the Company, which was used to
repay intercompany indebtedness to BGLS. These contributions to capital
reduced the net capital deficiency and amounts due affiliates by
$29,384. Management believes that it will continue to receive financing
from BGLS as needed. In addition to a new factory under construction,
the Company has upgraded the present cigarette operations' tobacco
processing complex, increased production with over 14 billion units
sold in 1997 and is
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continuing to implement cost-saving measures. In connection with the
move to the new factory, Liggett-Ducat plans to begin the manufacture
and marketing of western style cigarettes in early 1999. Management
believes that such activities will result in improved operations and
cash flow, but there can be no assurances in this regard. (Refer to
Note 10.)
3. SALE OF BROOKEMIL
On January 31, 1997, the Company sold all of its 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 interest at
9%. The note was paid in full as of December 31, 1997. The
consideration received exceeded the carrying value of the Company's
investment in BML by $52,500. The Company recognized a gain on the sale
in 1997 in the amount of $25,500. The remaining $27,000 has been
deferred, reflecting recognition that the Company's parent, BGLS,
retains an interest in BML through its 42% equity ownership in New
Valley, and that a portion of the property sold (the site of the third
phase of the Ducat Place real estate project being developed by BML,
which is currently used by Liggett-Ducat for its existing cigarette
factory) is subject to a put option held by New Valley. This option
allows New Valley, under certain circumstances, to put this site back
to the Company at the greater of the appraised fair value of the
property at the date of exercise or $13,600, during the period
Liggett-Ducat operates the factory on such site. The Company
distributed the proceeds received from the sale of BML to BGLS.
Liggett-Ducat entered into a Use Agreement with BML whereby
Liggett-Ducat is permitted to continue to utilize the site on the same
basis as in the past. The Use Agreement is terminable by BML on 270
days' prior notice.
4. INVENTORIES
Inventories consist of:
March 31, December 31,
1998 1997
---------------- ------------
Finished goods........................... $ 1,999 $
Work-in-process.......................... 311 50
Raw materials............................ 8,266 3,284
Replacement parts and supplies........... 921 921
-------- ------
$11,497 $4,255
====== =====
Purchase commitments are for quantities not in excess of anticipated
requirements and are at prices established at the date of the
commitment. At March 31, 1998, the Company had leaf tobacco purchase
commitments of $14,200.
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5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
March 31, December 31,
1998 1997
-------------- -------------
Factory machinery and equipment.......... $10,810 $10,864
Computers and software................... 332 293
Office furniture and equipment........... 297 272
Vehicles................................. 544 534
Construction-in-progress................. 18,201 18,179
------- -------
30,184 30,142
Less accumulated depreciation............ (1,224) (1,020)
------- -------
$28,960 $29,122
======= =======
Liggett-Ducat is in the process of constructing a new cigarette factory
on the outskirts of Moscow which is currently scheduled to be
operational in early 1999. Liggett-Ducat has entered into a
construction contract for the plant. The remaining liability under that
contract, as amended, at March 31, 1998 is approximately $16,000.
Equipment purchase agreements in place at March 31, 1998 total $34,355,
of which $28,791 will be financed by the manufacturers.
In February 1998, New Valley and Apollo Real Estate Investment Fund
III, L.P. organized Western Realty Development LLC ("Western Realty")
to make real estate and other investments in Russia. In April, 1998,
Western Realty completed making a $20,000 participating loan to a
company organized and wholly-owned by the Company, Western Tobacco
Investments LLC ("Western Investments"), which holds the Company's
interests in Liggett-Ducat and the new factory discussed above. The
loan, which bears no fixed interest, is payable only out of 30% of
distributions, if any, made by Western Tobacco to the Company. After
the prior payment of debt service on loans to finance the construction
of the new facility, 30% of distributions from Western Tobacco to the
Company will be applied first to pay the principal of the loan and then
as contingent participating interest on the loan. Any rights of payment
on the loan are subordinate to the rights of all other creditors of
Western Tobacco. An initial $11,000 was funded in February 1998, with
the proceeds used by the Company to reduce intercompany debt to BGLS,
and is classified in other long-term liabilities on the consolidated
balance sheet at March 31, 1998. (Refer to Note 2.)
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6. NOTES PAYABLE, CREDIT FACILITIES AND LONG-TERM DEBT
Current and long-term debt consist of the following:
March 31, December 31,
1998 1997
---------- -------------
Revolving credit facilities.............. $5,000 $5,000
Deferred financing fees..................
Notes payable............................
------ ------
5,000 5,000
Less:
Current maturities....................... 5,000 5,000
------ ------
Amount due after one year................ $ $
====== ======
At March 31, 1998, Liggett-Ducat had two 6-month credit facilities open
with a Russian bank. The first, for $2,000, which expired and was paid
on April 30, 1998, initially bore an interest rate of 21%, subsequently
raised to 28% on December 2, 1997. The second, for $3,000, which
expired and was paid on May 16, 1998, initially bore an interest rate
of 25%, subsequently raised to 28% on December 2, 1997. On April 24,
1998, Liggett-Ducat opened a credit facility for $2,000 with a Russian
bank. The facility, with a variable interest rate (currently 27%),
expires on October 25, 1998.
7. STOCK OF LIGGETT-DUCAT
In 1997, the Company purchased 1,666 shares of Liggett-Ducat stock from
other shareholders for $25. At December 31, 1997, the Company owned
75.3% of the stock of Liggett-Ducat and Liggett owned 19.97%. On
January 30, 1998, in connection with the restructuring of Liggett's
long-term debt, Liggett agreed to transfer to the Company all of its
shares and to cancel its option agreements to acquire additional
shares. At March 31, 1998, the Company owned approximately 96% of the
shares of common stock of Liggett-Ducat. In April 1998, the Company
transferred its interests in Liggett-Ducat to the Company's subsidiary
Western Tobacco. (Refer to Note 5.)
8. 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. In addition, Brooke and BGLS have advanced funds to BML for
its real estate developments projects. In February 1998, Brooke and
BGLS contributed $29,384 to the Company, in order to reduce
intercompany debt. The amounts
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due to Brooke and BGLS under this facility at March 31, 1998 were
$24,343, including interest of $11,746, and $28,475, including interest
of $4,700, respectively. (Refer to Note 2.)
Refer to Note 5 for information concerning the participating loan to
Western Tobacco by Western Realty.
9. INCOME TAXES
For the three months ended March 31, 1998 and 1997, the tax (benefit)
of $234 and the tax provision of $12,482, respectively, consist of
income tax expense pursuant to Russian statutory requirements of $931
and $741, respectively, and U.S. income tax (benefit) expense of
$(1,165) and $11,741 in accordance with the Company's tax sharing
agreement with Brooke.
10. 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.
On March 2, 1998, BGLS entered into an agreement with AIF II, L.P. and
an affiliated investment manager on behalf of a managed account
(together, the "Apollo Holders"), who hold approximately 41.8% of the
BGLS Notes in which the Apollo Holders agreed to defer the payment of
interest on the BGLS Notes held by them, commencing with the interest
payment that was due July 31, 1997, which they had previously agreed to
defer, through the interest payment due July 31, 2000. The deferred
interest payments will be payable at final maturity of the BGLS Notes
on January 31, 2001 or upon an event of default under the Indenture for
the BGLS Notes. In connection with the agreement, the Company pledged
50.1% of Western Tobacco to collateralize the BGLS Notes held by the
Apollo Holders. (Refer to Note 5.)
On January 30, 1998, in connection with the restructuring of Liggett's
long-term debt, Liggett agreed to transfer to the Company all of its
shares of Liggett-Ducat and the Liggett noteholders were granted a
security interest in 16% of Western Tobacco. (Refer to Note 7.)
The performance of Liggett-Ducat's cigarette operations in Russia is
affected by uncertainties in Russia which may include, among others,
political or diplomatic developments, regional tensions, currency
repatriation restrictions, foreign exchange fluctuations, inflation,
and an undeveloped system of commercial laws and legislative reform
relating to foreign ownership in Russia.
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