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Brooke Group Ltd. Stockholders' Report III II I Ill I ill Ill I I I I LI

BROOKE GROUP LTD. Dear Fellow Shareholder: Nineteen ninety-three and 1994 have seen important developments in the operations of Brooke Group and in the restructuring of our company. For 1993, Brooke Group reported consolidated revenues of $673.5 million, with net income of $106.8 million, or $5.60 per share after extraordinary items and accounting changes. These extraordinary items and accounting changes were primarily related to our decision to retain MAI Systems Inc. after its emergence from reorganization under Chapter 11, and its subsequent reconsolidation into Brooke Group. Prior to MAI's reorganization, Brooke Group had accounted for MAI as a discontinued operation, and not as a consolidated subsidiary. Liggett Group Inc. The past year was a difficult one for both Liggett and the cigarette industry. As a whole, 1993 certainly proved challenging, due in large part to increased competitive pressure coupled with the difficult regulatory environment and the proliferation of tobacco litigation. Liggett responded to these challenges by going back to basics. The Company refocused its sales efforts on the discount segment, restructured its manufacturing operations and streamlined its sales force. These moves were designed to enhance Liggett's position as a low cost producer of cigarettes. In the first quarter of 1994, Liggett reported its first profit since the fourth quarter of 1992. In addition, units sold through the third quarter of 1994 were approximately 10 percent higher than in the prior year's comparable period. Liggett intends to take additional steps to build on this forward momentum by further reducing costs, maintaining an aggressive yet flexible posture in the U.S. cigarette market and intensifying its efforts in the export and international arena. In June 1994, the Company named Rouben V. Chakalian, former Executive Vice President of R.J. Reynolds Tobacco International and a board member of both Liggett and Liggett-Ducat J.S.C. since 1993, as President and Chief Executive Officer. Mr. Chakalian, who served as a consultant to Liggett from 1991 to 1994, succeeds Edward A. Horrigan, Jr., who will continue to serve as Liggett's Chairman of the Board of Directors.

Today, as we look to the future, Brooke Group is focused on new opportunities while working hard to enhance the value of its existing assets and ongoing. businesses. While there is still a great deal of work to be done, we believe that we have made substantial progress. Sincerely, Bennett S. I'eBow Chairman, President and Chief Executive Officer October 21, 1994

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A NO. 2 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d| OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1993 Commission File Number : 1-5759 BROOKE GROUP LTD. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 100 S.E. Second Street, Miami, Florida (Address of principal executive offices) 51-0255124 (I.R.S. Employer Identification No.) 33131 (Zip Code) Registrant's telephone number, including area code: (305) 579-8000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Trtle of each class which re~zistered Common Stock, Par Value $.10 New York Stock Exchange Securities registered pursuant to Secl~n 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1~)34 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and |2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No Indicate by check mark if disclosure of delinquent fliers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of regisl;'ant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 7, 1994 was approximately $10,802,864. Directors and officers and ten percent or greater stockholders are considered affiliates for purposes of this calculation but should not necessarily be deemed affiliates for any other purpose. As of April 7, 1994, 15,228,121 shares of the registrant's Common Stock were outstanding.

INDEX PART I Page Item 1. Business ....................................................... 2 Item 2. Properties ...................................................... 8 Item 3. Legal Proceedings ................................................ 9 Item 4. Submission of Matters to a Vote of Security Holders ........................ 9 Executive Officers of the Registrant ................................... 9 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters ............................................. 11 Item 6. Selected Financial Data ........................................... 11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations .................................. 13 Item 8. Financial Statements and Supplementary Data ........................... 24 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................... 24 PART III Item 10. Directors and Executive Officers of the Registrant ......................... 25 Item 11. Executive Compensation .......................................... 25 Item 12. Security Ownership of Certain Beneficial Owners and Management ............. 29 Item 13. Certain Relationships and Related Transactions ........................... 32 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ............. 33 Signatures .................................................... 44

PART I Item 1. Business Brooke Group Ltd. (the "Company"), a Delaware corporation founded in 1980, is principally engaged in the manufacture and sale of cigarettes, the sale of information processing systems and, through October 6, 1993, the production and sale of collectible picture products and related accessories. The Company also has investments in a number of additional companies engaged in a diverse group of businesses. Described below are the operations of the Company's principal segments. Financial information about the Company's remaining industry segments, its foreign and domestic operations and export sales is incorporated by reference from Note 19 to the Company's Consolidated Financial Statements included elsewhere in this Report. Tobacco Genera/. The Company's tobacco business is conducted principally through its wholly-owned subsidiary, Liggett Group Inc. ("Liggett"), a Delaware corporation, which is the ultimate operating successor to the Liggett & Myers Tobacco Company formed in 1873. Liggett is engaged primarily in the manufacture and sale of cigarettes. Liggett is the sixth largest manufacturer of cigarettes in the United States in terms of unit sales with approximately 2°4% of the total domestic cigarette market for the year ended December 31, 1993. Liggett is headquartered in Durham, North Carolina. Liggett produces both full-price branded cigarettes as well as price/value cigarettes. Full-price branded cigarettes are generally marketed under well-recognized brand names at full retail prices to adult smokers with strong preference for branded products, whereas price/value cigarettes (which includes branded discount and generic cigarettes), are marketed at lower retail prices to adult smokers that are more cost conscious. Liggett's full-price branded and price/value cigarettes are produced in over 300 combinations of lengths, styles and packaging. Liggett produces four full-price cigarette brands: L&M, Chesterfield, Lark and Eve. Liggett's full-price branded cigarettes represented in the years ended December 31, 1993, 1992 and 1991 approximately 42%, 50% and 47% of net sales (excluding federal excise taxes) and contributed substantially to Liggett's operating profits. Liggett's share of the full-price branded market was approximately 1.1% for the 12 months ended December 31, 1993, compared to 1.4% for the comparable period in 1992 and 1.1% for the comparable period in 1991, according to the Maxwell Report, a recognized industry publication. Liggett's share of the price/value market was approximately 4.7% for the twelve months ended December 31, 1993 according to the Maxwell Report. This represents a decline from 6.9% for the comparable period in 1992 and from 9.9% for the comparable period in 1991. Liggett has attempted to regain market share in this segment in 1993 by launching new label price/value cigarette brands and branded-discount product lines. Shifts in consumer preferences among different product tiers resulting from changes in the relationships among the prices for the respective tiers (for example, switches to premium brands resulting from the narrowing of the price differential between such brands and discount brands narrows) could affect Liggett's sales in the future, which are predominantly in the price/value segment. At the present time, Liggett sells its full-price and price/value cigarettes principally in the United States. Liggett does not own the international rights to its L&M, Chesterfield, Lark and Eve

brands. Liggett does not currently have significant overseas sales, although it has commenced efforts to increase such sales. Business Strategy. Liggett's near-term business strategy is to reduce certain of its operating and selling costs so as to maintain or increase the profitability of both its full-price and price/value products at their current unit sales volume and, further, to reduce its investment in working capital. As part of this strategy, in April and May 1993 Liggett reduced overall headcount by 235 employees through workforce reductions in headquarters and manufacturing operations. Management has further reduced costs in both the administrative and manufacturing functions by making additional modifications to its manufacturing operations and significantly curtailing employee benefit programs. In addition, Liggett announced a reorganization of its field sales force in January 1994, reducing its field sales force by 150 permanent positions and adding approximately 300 part-time positions. Liggett's long-term business strategy in the full-price segment of the market is to maintain its share of that segment of the market by consistently offering advertising and promotional programs with the objective of maximizing the profitability of its full-price brands. Liggett's long-term business strategy in the price/value segment of the market is to maintain its market share and increase its profitability by providing consistently high quality products and services at prices and terms comparable to those available in the market. Sales, Marketing and Distribution. The majority of Liggett's products are distributed from a central distribution center in Durham, North Carolina to approximately 28 public warehouses located throughout the United States. These warehouses serve as local distribution centers for Liggett's customers. Liggett's products are transported from the central distribution center to the warehouses via third party trucking companies to meet pre-existing contractual obligations to its customers. Liggett's customers are primarily candy and tobacco distributors, the military, and large grocery, drug and convenience store chains. Liggett manufactures and markets the third largest selling brand family of cigarettes to the U.S. military. Liggett's marketing and sales functions are now performed by direct sales representatives calling on national and regional customer accounts, together with part-time retail sales consultants who service retail outlets. In addition, Liggett engages independent merchandisers and food brokers in certain geographic locations to perform these marketing and sales functions. Liggett offers its customers payment terms and promotional incentives consistent with industry practices, including traditional rebate and couponing programs. Customers typically pay for purchased goods within two weeks following delivery from Liggett. None of Liggett's customers accounted for more than 10% of revenues in 1993. Manufacturing. Liggett purchases and maintains leaf tobacco inventory to support cigarette manufacturing requirements. Tobacco is an agricultural commodity subject to United States government production controls and price supports which can substantially affect its market price. Liggett normally purchases all of its tobacco requirements from domestic and foreign leaf tobacco dealers (principally in the United States and South America), much of it under long-term purchase commitments, and believes that there is a sufficient supply of tobacco within the worldwide tobacco market to satisfy its current production requirements. Liggett stores its leaf tobacco inventory in warehouses in North Carolina and Virginia. As of December 31,1993, approximately 79% of Liggett's commitments are for the purchase of foreign tobacco. Recent federal legislation imposes domestic tobacco content requirements on domestic manufacturers. See "--Government Regulation." Liggett's cigarette manufacturing facilities are designed for the execution of short production runs in a cost-effective manner, which enables Liggett to manufacture and market a wide variety of cigarette brand styles. Liggett's full-price branded and price/value cigarettes are produced in over 300

different brand styles of cigarettes under its own trademarks and brand names as well as private labels for other companies, typically retail or wholesale distributors, who supply supermarkets and convenience stores. Liggett believes that its existing facilities are sufficient to accommodate a substantial increase in production. While Liggett pursues product development, its total expenditures for research and development on new products have not been financially material in the past three years. Trademarks. All of the major trademarks used by Liggett are federally registered or are in the process of being registered in the United States. In view of the significance of cigarette brand awareness among consumers, management of Liggett believes that the protection afforded by its trademarks is material to the conduct of Liggett's business. Competition. Liggett is the sixth largest manufacturer of cigarettes in the United States. The five largest manufacturers of cigarettes are Philip Morris Incorporated, R JR Nabisco, Inc., Brown & Williamson Tobacco Corporation, Lorillard Inc. and American Brands, Inc. According to the Maxwell Report, Liggett's shipments of approximately 11.2 billion cigarettes in 1993 accounted for 2.4% of the approximately 461.3 billion cigarettes shipped in the U.S. during such year. Industry-wide consumer purchases of cigarettes in the United States have been steadily declining at an average annual rate of 2% to 3% for many years. Liggett's management expects that industry-wide unit sales of cigarettes in the United States will continue to decline. Liggett's management believes that the decline is the result of numerous factors, including health consider- ations, diminishing social acceptance of smoking, legislative limitations on smoking in public places, and federal and state excise tax increases which have augmented cigarette price increases. While unit sales of cigarettes in certain other parts of the world have increased, Liggett, unlike its competitors, does not at this time have significant foreign operations. The cigarette industry has not historically competed on the basis of list price within a given price tier. In recent years, there have been substantial regular price increases by all manufacturers culminating in full-price branded list prices in excess of $14.00 per carton. These increases widened the gap between prices of this segment and prices in the price/value segment of the market, culminating in a price gap of $7.00 (50%) per carton in July 1993. In July 1993, Philip Morris reduced the price of its full-price brands to 1989-1990 levels, forcing other manufacturers, including Liggett, to do likewise. This price decrease also narrowed the gap between prices of full-price brands and prices in the price/value segment (reducing the price gap to approximately 25%), which appears to be leading to a substantial reduction in volumes in the latter segment. Since that price decrease, list prices at all tiers have again increased and the relative volume of full-price cigarettes appears to be increasing. Historically, because of their dominant market share, Philip Morris and R JR Nabisco have been able to determine cigarette prices for the various pricing tiers within the industry, and the other manufacturers have been compelled, in order to remain competitive, to bring their prices into line with the levels established by the two major manufacturers. The recent pricing changes described above have caused Liggett to become more reliant upon sales in the price/value segment of the market, relative to the full-price branded segment, than certain of its competitors. There are substantial barriers to entry into the cigarette business, including extensive distribution organizations, large capital outlays for sophisticated production equipment, substantial inventory investment, costly promotional spending, regulated advertising and strong brand loyalty. In this industry, the major cigarette manufacturers compete among themselves for market share on the basis of brand loyalty, advertising and promotional activities and trade and consumer rebates and

incentives. Liggett's five major competitors all have greater financial resources than Liggett, and many of these competitors' brands have greater sales and consumer recognition than Liggett's brands. Government Regulation. Reports with respect to the alleged harmful physical effects associated with cigarette smoking have been publicized for many years and, in the opinion of Liggett's management, have had and may continue to have an adverse effect on cigarette sales. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports which claim that cigarette smoking is a causative factor with respect to a variety of health hazards, including cancer, heart disease and lung disease, and have recommended various government actions to reduce the incidence of smoking. Since 1966, federal law has required that cigarettes manufactured, packaged or imported for sale or distribution in the United States include specific health warnings on their packaging. Since 1972, Liggett and the other cigarette manufacturers have included the federally-required warning statements in print advertising, on billboards and on certain categories of point-of-sale display materials relating to cigarettes. The Comprehensive Smoking Education Act, which became effective October 12, 1985, requires that packages of cigarettes distributed in the United States and cigarette advertisements (other than billboard advertisements) in the United States bear one of the following four warning statements, in lieu of the prior warning notice, on a quarterly rotating basis: "SURGEON GENERAL'S WARNING: Smoking Causes Lung Cancer, Heart Disease, Emphysema, And May Complicate Pregnancy"; "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks to Your Health"; "SURGEON GENERAL'S WARNING: Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight"; and "SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon Monoxide." Shortened versions of these statements are also required, on a rotating basis, on billboard advertisements. By a limited eligibility amendment to the Comprehensive Smoking Education Act for which Liggett qualifies, Liggett is allowed to display all four required package warnings for the majority of its brand packages on a simultaneous basis (such that the packages at any time may carry any one of the four required warnings), although it rotates the required warnings for advertising on a quarterly basis in the same manner as do the other major manufacturers. The law also requires that each person who manufactures, packages or imports cigarettes annually provide to the Secretary of Health and Human Services a list of the ingredients added to tobacco in the manufacture of cigarettes. Annual reports to the United States Congress also are required from the Secretary of Health and Human Services as to current information on the health consequences of smoking and from the Federal Trade Commission on the effectiveness of cigarette labeling and current practices and methods of cigarette advertising and promotion. Both federal agencies are also required annually to make such recommendations as they deem appropriate with regard to further legislation. The Omnibus Budget Reconciliation Act of 1993 requires that domestic tobacco comprise at least 75% of the tobacco content of cigarettes manufactured in the United States effective January 1, 1994. As part of an inventory management program, Liggett has entered into tobacco purchase agreements under which Liggett's commitments amounted to approximately $62,770,000 at December 31, 1993, of which approximately 79% is foreign tobacco. The foreign tobacco used in manufacturing Liggett's cigarettes costs approximately 10 to 15 percent less than comparable domestic tobacco. This legislation could cause Liggett to delay using some of the foreign tobaccos which Liggett has committed to purchase and may increase the cost of manufacturing due to the present higher costs of domestic tobacco. In response to this situation, Liggett has implemented certain changes in its manufacturing process in an effort to comply with these regulations and has modified its existing agreements with tobacco vendors to enable it to more readily comply with the legislation and to minimize its effect on Liggett's financial position.

In January 1993, the U.S. Environmental Protection Agency (the "EPA") released a report on the respiratory effects of environmental tobacco smoke ("ETS") which concludes that ETS is a known human lung carcinogen in adults, and in children causes increased respiratory tract diseases and middle ear disorders and increases the severity and frequency of asthma. In June 1993, the two largest of the six major domestic cigarette manufacturers, together with other segments of the tobacco and distribution industries, commenced a lawsuit against EPA seeking a determination that the EPA did not have the statutory authority to regulate ETS, and that given the current body of scientific evidence and the EPA's failure to follow its own guidelines in making the determination, the EPA's classification of ETS was arbitrary and capricious. Whatever the outcome of this litigation, issuance. of the report may encourage efforts to limit smoking in public areas. In March 1994, the Food and Drug Administration ("FDA") began an investigation of whether cigarettes should be regulated by that agency in response to certain accusations made on a tabloid television program. These accusations have been denied by the Company and others in the industry. In September 1991, the U.S. Occupational Safety and Health Administration ("OSHA") issued a Request for Information relating to indoor air quality, including ETS, in occupational settings. OSHA announced in March 1994 that it will commence formal rulemaking in 1994. While Liggett cannot predict the outcome, some form of regulation of smoking in the workplace may result. All radio and television advertising of cigarettes has been prohibited by federal statute since 1971 and federal law prohibits smoking aboard aircraft for domestic flights of six hours or less. The U.S. Interstate Commerce Commission has banned smoking on buses transporting passengers inter- state. In addition, the U.S. Congress and a number of states and local government units have enacted or are considering legislation which is intended to discourage smoking through education efforts or which imposes various restrictions or requirements relating to smoking including restrictions on public smoking. Certain employers have initiated programs restricting or eliminating smoking in the workplace. Other proposals previously presented to or currently before Congress and certain states and local government units include, but are not limited to, legislative efforts to further restrict or ban the advertising and promotion of cigarettes, to eliminate the income tax deductibility of expenses incurred for such advertising and promotion, to restrict or prohibit smoking in public buildings and other areas, to increase excise taxes, to require additional warnings on cigarette packaging and advertising, to ban vending machine sales, to eliminate the federal preemption defense in product liability actions, to place cigarettes under the regulatory jurisdiction of the FDA and to require that cigarettes meet certain fire safety hazards. If adopted, at least certain of the foregoing legislative proposals might have an unfavorable impact on Liggett's business. While attitudes toward cigarette smoking vary around the world, a number of foreign countries also have taken steps to discourage cigarette smoking, to restrict or prohibit cigarette advertising and promotion and to increase taxes on cigarettes. The price of cigarettes includes federal excise taxes at the rate of $12.00 per 1,000 cigarettes. This tax, which was levied as of January 1, 1993, increased the previous federal excise tax of $10.00 per 1,000 cigarettes. The current administration has introduced budget legislation that increases this tax to $49.50 per 1,000 cigarettes. In addition, although a lengthy Congressional debate is anticipated, the Health Subcommittee of the Ways and Means Committee of the U.S. House of Representatives voted to report a bill that would raise cigarette taxes to $74.50 per 1,000 cigarettes ($1.49 per pack). Excise and similar taxes on cigarettes, which are levied upon and typically paid by the distributors, are also in effect in the 50 states, the District of Columbia and many municipalities. These state and local taxes range from approximately $1.25 to $35.00 per 1,000 cigarettes. 6