Here is a snapshot of the nature of the presence of Brooke Group in the tobacco industry. Litigation involving Brooke Group was responsible for individual wealth creation but industry-wide losses in tobacco manufacturing. Precedents established are one reason for the declining investment attractiveness.

Tobacco-Related Subsidiaries and Affiliates

Brooke (Overseas) Ltd. (100%)
Cigarette Exporting Company of America Ltd. (100%)
Eve Holdings Inc. (100%)
Liggett Group Inc. (100%)
Liggett-Ducat Ltd. (95%)

Bennett S. LeBow, the company’s chairman and CEO, and other company insiders own or control approximately 53% of Brooke Group’s common stock. The company employs approximately 1,500 people.

Tobacco Operations

Tobacco manufacturing is the company’s primary business. Brooke Group manufactures and markets cigarettes through its Liggett subsidiary, the fifth largest manufacturer of cigarettes in the United States, and through its Brooke (Overseas) Ltd. subsidiary. The company’s brands include L&M, Chesterfield, Lark and Eve cigarettes, which are sold sells mainly in the United States. Brooke’s Liggett-Ducat subsidiary in Russia produces some of the leading Russian market brands, such as Pegas, Prima and Novosti. The company plans to build a new factory in Russia, slated to come on line in 1998, that will produce both American and Russian cigarette brands.

Liggett held approximately 1.9% of the total U.S. cigarette market in 1996, which represents a market share decline of 0.3% from 1995. The company was the first major domestic cigarette manufacturer to offer value-priced cigarettes as an alternative to full-priced brands. According to the Maxwell Consumer Report, Liggett’s share of the discount market segment was 4.9% in 1996, compared with 5.5% in 1995 and 5.4% in 1994. The company’s primary markets are candy and tobacco distributors, the military, and large grocery, drug and convenience store chains. One of Liggett’s customers accounted for 13.7% of net sales in 1996.

Litigation

Late in 1995, RJR Nabisco Holdings Corp. (RN) filed suit against Bennett LeBow and Carl Icahn for violating securities law by secretly conspiring to form a group to acquire a controlling interest in RN common stock. In the beginning of 1996, Brooke Group announced that it began to solicit consents for shareholders of RN in support of a resolution to spin off the Nabisco Holdings Corp. (NA) food business to RN shareholders. At the end of March 1996, the company reported that consents representing 50.58% of voting shareholders were delivered in favor of the spinoff resolution and 53.6% were delivered in favor of a bylaw amendment. A subsequent attempt by Bennett LeBow and Carl Icahn to take management control of RJR Nabisco was defeated by a three-to-one margin at RJR Nabisco’s 1996 annual meeting. Nabisco Holdings remains an 80.5% owned subsidiary of RJR Nabisco.

In March 1996, Liggett announced a settlement agreement with 22 states suing the tobacco industry to recover smoking-related Medicaid costs. In conjunction with the announcement, Brooke Chairman Lebow made public statements acknowledging that cigarettes are addictive and carcinogenic, and that manufacturers have targeted youth under the age of 18 with their cigarette marketing practices.

Liggett agreed to pay on an annual basis 25% of its pretax income for the next 25 years into a settlement fund to be used to compensate settling states and to fund anti-smoking advertising campaigns. The company also agreed to phase in compliance with 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. Also in conjunction with the settlement agreement, Liggett agreed to release certain internal company documents related to industry marketing practices, and to place addiction warning labels on its cigarette packages.

Management noted in its 1996 form 10-K filing that “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 [smoking and health] cases pending against the company…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 such pending litigation.”