Vector Group Ltd.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2006
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
|
|
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|
|
Delaware
|
|
1-5759
|
|
65-0949535 |
(State or other jurisdiction of
|
|
Commission File Number
|
|
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
|
|
100 S.E. Second Street
Miami, Florida 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
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 1934, as amended (the Exchange
Act), 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.
þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
o Large accelerated file þ Accelerated filer o Non-accelerated filer
Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of
the Exchange Act. o Yes þ No
At May 9, 2006, Vector Group Ltd. had 49,921,221 shares of common stock outstanding.
Explanatory Note
This Amendment No. 1 on Form 10-Q/A to Vector Group Ltd.s Quarterly Report on Form 10-Q
for the quarterly period ended March 31, 2006 is being filed to reflect the restatement of our
consolidated financial statements as of March 31, 2006, initially filed with the Securities and
Exchange Commission (SEC) on May 10, 2006 (the Original Filing). We have not amended and do
not intend to amend our previously filed Annual Report on Form 10-K for 2004 and Quarterly Reports
on Form 10-Q for periods ending prior to December 31, 2005. For this reason, the consolidated
financial statements, reports of independent registered certified public accounting firm and related financial
information for the affected periods contained in such reports filed prior to November 14, 2006
should no longer be relied upon. We have amended our Form 10-K/A for the year ended December 31,
2005, which was filed on November 22, 2006, and our Form 10-Q for the quarterly period ended June
30, 2006, which was filed on November 22, 2006.
The restatement adjustments corrected the previous amortization method used in calculating the
debt discount amortization created by the embedded derivative and beneficial conversion feature
associated with our 5% variable interest senior convertible notes due 2011 which were issued in the
fourth quarter of 2004 and the first half of 2005. We previously amortized the debt discount on
our 5% variable interest senior convertible notes due 2011 using an erroneous amortization method
that did not result in a consistent yield on the convertible debt over the debts term.
The aggregate net effect of the restatement was to increase stockholders equity by $4.142
million as of March 31, 2006, $3.422 million as of December 31, 2005 and $336,000 as of December
31, 2004. The restatement also increased net income by $720,000 ($0.01 per diluted common share)
and $731,000 ($0.02 per diluted common share) for the three months ended March 31, 2006 and 2005,
respectively.
Additionally, management has determined that a control deficiency existed related to the
accuracy of the debt discount amortization. Specifically, we did not maintain effective controls
to ensure that the amortization of the debt discount created by the embedded derivative and
beneficial conversion feature resulted in a consistent yield on our 5% variable interest senior
convertible notes due 2011 over the debts term in accordance with generally accepted accounting
principles through the application of the effective interest method. Accordingly, management has
determined that this control deficiency constitutes a material weakness.
For the convenience of the reader, this March 31, 2006 Amendment No. 1 to Form 10-Q sets forth
the original filing in its entirety, although we are only amending and restating certain
information in Items 1, 2, 3, and 4 of the Original Filing. The information contained in this Form
10-Q/A has not been updated to reflect other events occurring after May 10, 2006, the date of the
Original Filing, to modify or to update those disclosures affected by subsequent events including
the 5% stock dividend which was paid on September 29, 2006 to stockholders of record on
September 20, 2006. Information regarding subsequent periods is contained in our Quarterly
Report on Form 10-Q for the quarter ended September 30, 2006 filed with the SEC on November 14,
2006 and in other filings with the SEC. This filing should be read and considered in conjunction
with such filings including our Amended Form 10-K/A for the year ended December 31, 2005 filed on November
22, 2006.
In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has
been amended to include current dated certificates from our Chief Executive Officer and Chief
Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The
certifications of our Chief Executive Officer and Chief Financial Officer are attached to this Form
10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2, respectively.
VECTOR GROUP LTD.
FORM 10-Q/A
TABLE OF CONTENTS
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Restated (1) |
|
|
Restated (1) |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
172,151 |
|
|
$ |
181,059 |
|
Investment securities available for sale |
|
|
30,583 |
|
|
|
18,507 |
|
Accounts receivable trade |
|
|
16,503 |
|
|
|
12,714 |
|
Inventories |
|
|
72,318 |
|
|
|
70,395 |
|
Deferred income taxes |
|
|
25,396 |
|
|
|
26,179 |
|
Other current assets |
|
|
10,272 |
|
|
|
10,245 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
327,223 |
|
|
|
319,099 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
61,348 |
|
|
|
62,523 |
|
Long-term investments, net |
|
|
7,869 |
|
|
|
7,828 |
|
Investments in non-consolidated real estate businesses |
|
|
19,623 |
|
|
|
17,391 |
|
Restricted assets |
|
|
6,743 |
|
|
|
6,743 |
|
Deferred income taxes |
|
|
66,644 |
|
|
|
69,988 |
|
Intangible asset |
|
|
107,511 |
|
|
|
107,511 |
|
Other assets |
|
|
12,451 |
|
|
|
12,469 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
609,412 |
|
|
$ |
603,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current portion of notes payable and long-term debt |
|
$ |
22,503 |
|
|
$ |
9,313 |
|
Accounts payable |
|
|
9,552 |
|
|
|
15,394 |
|
Accrued promotional expenses |
|
|
15,924 |
|
|
|
18,317 |
|
Accrued taxes payable, net |
|
|
31,766 |
|
|
|
32,392 |
|
Settlement accruals |
|
|
27,118 |
|
|
|
22,505 |
|
Deferred income taxes |
|
|
6,640 |
|
|
|
3,891 |
|
Accrued interest |
|
|
3,699 |
|
|
|
5,770 |
|
Other accrued liabilities |
|
|
11,898 |
|
|
|
20,518 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
129,100 |
|
|
|
128,100 |
|
|
|
|
|
|
|
|
|
|
Notes payable, long-term debt and other obligations, less current portion |
|
|
238,324 |
|
|
|
238,242 |
|
Fair value of derivatives embedded within convertible debt |
|
|
38,147 |
|
|
|
39,371 |
|
Non-current employee benefits |
|
|
18,425 |
|
|
|
17,235 |
|
Deferred income taxes |
|
|
153,381 |
|
|
|
145,892 |
|
Other liabilities |
|
|
5,652 |
|
|
|
5,646 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares |
|
|
|
|
|
|
|
|
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 53,505,062 and 53,417,525 shares and outstanding
49,917,970 and 49,849,735 shares |
|
|
4,992 |
|
|
|
4,985 |
|
Additional paid-in capital |
|
|
102,105 |
|
|
|
133,325 |
|
Unearned compensation |
|
|
|
|
|
|
(11,681 |
) |
Accumulated deficit |
|
|
(60,620 |
) |
|
|
(70,633 |
) |
Accumulated other comprehensive loss |
|
|
(3,403 |
) |
|
|
(10,610 |
) |
Less: 3,587,092 and 3,567,790 shares of common stock in treasury, at cost |
|
|
(16,691 |
) |
|
|
(16,320 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
26,383 |
|
|
|
29,066 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
609,412 |
|
|
$ |
603,552 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Notes 1(i) and 2. |
The accompanying notes are an integral part
of the consolidated financial statements.
- 2 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
|
March 31, 2005 |
|
|
|
Restated (1) |
|
|
Restated (1) |
|
Revenues* |
|
$ |
117,704 |
|
|
$ |
104,173 |
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Cost of goods sold* |
|
|
73,341 |
|
|
|
58,998 |
|
Operating, selling, administrative and general expenses |
|
|
24,136 |
|
|
|
26,527 |
|
|
|
|
|
|
|
|
Operating income |
|
|
20,227 |
|
|
|
18,648 |
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
1,781 |
|
|
|
710 |
|
Interest expense |
|
|
(8,277 |
) |
|
|
(6,342 |
) |
Change in fair value of derivatives embedded within
convertible debt |
|
|
1,224 |
|
|
|
828 |
|
(Loss) gain on investments, net |
|
|
(30 |
) |
|
|
1,430 |
|
Gain from conversion of LTS notes |
|
|
|
|
|
|
9,461 |
|
Equity in loss on operations of LTS |
|
|
|
|
|
|
(299 |
) |
Equity income (loss) from non-consolidated real
estate businesses |
|
|
3,735 |
|
|
|
(306 |
) |
Other, net |
|
|
46 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before provision for income
taxes and minority interests |
|
|
18,706 |
|
|
|
24,129 |
|
Income tax expense |
|
|
8,693 |
|
|
|
12,920 |
|
Minority interests |
|
|
|
|
|
|
(2,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
10,013 |
|
|
|
9,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Income from discontinued operations, net of minority
interest and taxes |
|
|
|
|
|
|
82 |
|
Gain on disposal of discontinued operations, net of
minority interest and taxes |
|
|
|
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
3,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
10,013 |
|
|
$ |
12,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.19 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
|
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
0.19 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share: |
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
|
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
0.18 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share |
|
$ |
0.40 |
|
|
$ |
0.38 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
Revenues and Cost of goods sold include excise taxes of $40,118 and $33,432 for
the three months ended
March 31, 2006 and 2005, respectively. |
|
(1) |
|
See Note 1(i) |
The accompanying notes are an integral part
of the consolidated financial statements.
- 3 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Accumulated |
|
|
Unearned |
|
|
Treasury |
|
|
Comprehensive |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Compensation |
|
|
Stock |
|
|
Loss |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised(1) |
|
Balance, December 31, 2005, restated (1) |
|
|
49,849,735 |
|
|
$ |
4,985 |
|
|
$ |
133,325 |
|
|
$ |
(70,633 |
) |
|
$ |
(11,681 |
) |
|
$ |
(16,320 |
) |
|
$ |
(10,610 |
) |
|
$ |
29,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,013 |
|
Forward contract adjustments, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69 |
|
|
|
69 |
|
Unrealized gain on investment securities, net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,138 |
|
|
|
7,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, restated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications in accordance with SFAS No. 123(R) |
|
|
|
|
|
|
|
|
|
|
(11,681 |
) |
|
|
|
|
|
|
11,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions on common stock |
|
|
|
|
|
|
|
|
|
|
(21,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,541 |
) |
Exercise of options, net of 19,302 shares delivered to
pay exercise price |
|
|
68,235 |
|
|
|
7 |
|
|
|
918 |
|
|
|
|
|
|
|
|
|
|
|
(371 |
) |
|
|
|
|
|
|
554 |
|
Amortization of deferred compensation |
|
|
|
|
|
|
|
|
|
|
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2006, restated |
|
|
49,917,970 |
|
|
$ |
4,992 |
|
|
$ |
102,105 |
|
|
$ |
(60,620 |
) |
|
$ |
|
|
|
$ |
(16,691 |
) |
|
$ |
(3,403 |
) |
|
$ |
26,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Notes 1(i) and 2. |
The accompanying notes are an integral part
of the consolidated financial statements.
- 4 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
|
March, 31, 2005 |
|
|
|
Revised (1) |
|
|
Revised (1) |
|
Net cash provided by operating activities |
|
$ |
1,622 |
|
|
$ |
7,044 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sale or maturity of investment securities |
|
|
|
|
|
|
5,420 |
|
Purchase of investment securities |
|
|
(73 |
) |
|
|
(2,724 |
) |
Proceeds from sale or liquidation of long-term investments |
|
|
25 |
|
|
|
|
|
Purchase of long-term investments |
|
|
(64 |
) |
|
|
(46 |
) |
Purchase of LTS stock |
|
|
|
|
|
|
(1,500 |
) |
Issuance of note receivable |
|
|
|
|
|
|
(1,750 |
) |
Capital expenditures |
|
|
(1,446 |
) |
|
|
(968 |
) |
Discontinued operations |
|
|
|
|
|
|
66,912 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities |
|
|
(1,558 |
) |
|
|
65,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from debt |
|
|
78 |
|
|
|
14,959 |
|
Repayments of debt |
|
|
(1,648 |
) |
|
|
(1,434 |
) |
Deferred financing charges |
|
|
(200 |
) |
|
|
(678 |
) |
Borrowings under revolver |
|
|
130,788 |
|
|
|
91,615 |
|
Repayments on revolver |
|
|
(117,003 |
) |
|
|
(91,268 |
) |
Distributions on common stock |
|
|
(21,541 |
) |
|
|
(16,735 |
) |
Proceeds from exercise of Vector options and warrants |
|
|
554 |
|
|
|
779 |
|
Other, net |
|
|
|
|
|
|
92 |
|
Discontinued operations |
|
|
|
|
|
|
(39,213 |
) |
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(8,972 |
) |
|
|
(41,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(8,908 |
) |
|
|
30,505 |
|
Cash and cash equivalents, beginning of period |
|
|
181,059 |
|
|
|
110,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
172,151 |
|
|
$ |
140,509 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Notes 1(a) and 1(i). |
The accompanying notes are an integral part
of the consolidated financial statements.
- 5 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
1. |
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
|
(a) |
|
Basis of Presentation: |
|
|
|
|
The consolidated financial statements of Vector Group Ltd. (the Company or Vector)
include the accounts of VGR Holding LLC (VGR Holding), Liggett Group LLC (Liggett),
Vector Tobacco Inc. (Vector Tobacco), Liggett Vector Brands Inc. (Liggett Vector
Brands), New Valley LLC (New Valley) and other less significant subsidiaries. The
Company owned all of the limited liability company interests of New Valley at March 31,
2006 and owned 55.1% of the common shares of its corporate predecessor, New Valley
Corporation, at March 31, 2005. All significant intercompany balances and transactions
have been eliminated. |
|
|
|
|
Liggett is engaged in the manufacture and sale of cigarettes in the United States. Vector
Tobacco is engaged in the development and marketing of low nicotine and nicotine-free
cigarette products and the development of reduced risk cigarette products. New Valley is
engaged in the real estate business and is seeking to acquire additional operating
companies and real estate properties. |
|
|
|
|
As discussed in Note 14, New Valleys real estate leasing operations, sold in February
2005, are presented as discontinued operations for the three months ended March 31, 2005.
The 2005 interim condensed consolidated statement of cash flows has been revised to
separately disclose the operating, investing and financing portions of the cash flows
attributable to discontinued operations. These amounts had previously been reported on a
combined basis as a separate caption outside operating, financing and investing
activities. |
|
|
|
|
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 state fairly the Companys 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 in the Companys
Annual Report on Form 10-K, as amended, for the year ended December 31, 2005, 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. |
|
|
(b) |
|
Estimates and Assumptions: |
|
|
|
|
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, 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 restructuring
and impairment charges, inventory valuation, deferred tax assets, allowance for doubtful
accounts, promotional accruals, sales returns and allowances, actuarial assumptions of
pension plans, embedded derivative liability, the tobacco quota buy-out, settlement
accruals and litigation and defense costs. Actual results could differ from those
estimates. |
|
|
(c) |
|
Earnings Per Share: |
|
|
|
|
Information concerning the Companys common stock has been adjusted to give effect to the
5% stock dividend paid to Company stockholders on September 29, 2005. The dividend was |
- 6 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
recorded at par value of $210 in 2005 since stockholders equity was in a deficit
position. In connection with the 5% stock dividend, the Company increased the number of
outstanding stock options by 5% and reduced the exercise prices accordingly. All per
share amounts have been presented as if the stock dividend had occurred on January 1,
2005. |
|
|
|
|
In March 2004, the FASBs Emerging Issue Task Force (EITF) reached a final consensus on
Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement
128, which established standards regarding the computation of earnings per share (EPS)
by companies that have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the company. Earnings
available to common stockholders for the period are reduced by the contingent interest and
the non-cash interest expense associated with the beneficial conversion feature and
embedded derivative related to the Companys convertible notes issued in 2004 and 2005.
These notes, which are a participating security due to the contingent interest feature,
had no impact on EPS for the three months ended March 31, 2006 and 2005, as the dividends
on the common stock into which the notes are convertible increased interest expense and
reduced earnings available to common stockholders so there were no unallocated earnings
under EITF Issue No. 03-6. |
|
|
|
|
As discussed in Note 10, the Company has stock option awards which provide for common
stock dividend equivalents at the same rate as paid on the common stock with respect to
the shares underlying the unexercised portion of the options. These outstanding options
represent participating securities under EITF Issue No. 03-6. Because the Company
accounted for the dividend equivalent rights on these options as additional compensation
cost in accordance with APB Opinion No. 25, these participating securities had no impact
on the calculation of basic EPS in periods ending prior to January 1, 2006. Effective
with the adoption of SFAS No. 123(R) on January 1, 2006, the Company recognizes payments
of the dividend equivalent rights ($1,578 for the three months ended March 31, 2006) on
these options as reductions in additional paid-in capital on the Companys consolidated
balance sheet. As a result, in its calculation of basic EPS for the three months ended
March 31, 2006, the Company has adjusted its net income for the effect of these
participating securities as follows: |
|
|
|
|
|
Net income |
|
$ |
10,013 |
|
Income attributable to participating securities |
|
|
(733 |
) |
|
|
|
|
Net income available to common stockholders |
|
$ |
9,280 |
|
|
|
|
|
|
|
|
Basic EPS is computed by dividing net income available to common stockholders by the
weighted-average number of shares outstanding. Diluted EPS includes the dilutive effect
of stock options, unvested restricted stock grants and covertible debt. Basic and diluted EPS
were calculated using the following shares for the three months ended March 31, 2006 and
2005: |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Weighted-average shares for basic EPS |
|
|
49,220,398 |
|
|
|
43,883,341 |
|
Plus incremental shares related to
stock options and warrants |
|
|
1,474,234 |
|
|
|
1,849,284 |
|
Plus incremental shares related to
convertible securities |
|
|
|
|
|
|
5,659,057 |
|
|
|
|
|
|
|
|
|
Weighted-average shares for diluted EPS |
|
|
50,694,632 |
|
|
|
51,391,682 |
|
|
|
|
|
|
|
|
- 7 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
For the three months ended March 31, 2006 and 2005, the Company had 218,255 and
711,795 stock options, respectively, and 628,780 and 0 shares of non-vested restricted
stock, respectively, that were not included in the computation of diluted EPS because the
options, exercise price and the per share expense associated with the non-vested
restricted stock were greater than the average market price of the common stock during the
respective periods. For the three months ended March 31, 2006, 3,944,329 of stock options
with dividend equivalent rights were not included in the computation of diluted EPS.
The two issues of the Companys convertible debt were anti-dilutive for the three
months ended March 31, 2006 and the Companys 5% Variable Interest Senior Convertible Notes
due 2011 were anti-dilutive for the three months ended March 31, 2005 and were not included
in the computation of diluted EPS for the aforementioned respective periods. As a result
of the dilutive nature of the Companys 6.25% Convertible Subordinated Notes due 2008 for
the three months ended March 31, 2005, the Company has adjusted its net income for the
effect of these convertible securities for purposes of calculating
diluted EPS as follows: |
|
|
|
|
|
Net income |
|
$ |
12,227 |
|
Expense attributable to 6.25% Convertible
Subordinated Notes due 2008 |
|
|
1,442 |
|
|
|
|
|
Net income for diluted EPS |
|
$ |
13,669 |
|
|
|
|
|
|
(d) |
|
Share-Based Payments |
|
|
|
|
Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share-Based Payment using the modified
prospective method with guidance provided by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. Under the modified prospective method, the
share-based compensation cost recognized beginning January 1, 2006 includes compensation
cost for (i) all share-based payments granted prior to, but not vested as of January 1,
2006, based on the grant date fair value originally estimated in accordance with the
provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and
(ii) all share-based payments granted subsequent to December 31, 2005, based on the grant
date fair value estimated in accordance with the provisions of SFAS No. 123(R).
Compensation cost under SFAS No. 123(R) is recognized ratably using the straight-line
attribution method over the expected vesting period. In addition, pursuant to SFAS No.
123(R), the Company is required to estimate the amount of expected forfeitures when
calculating the compensation costs, instead of accounting for forfeitures as incurred,
which was the Companys previous method. As of January 1, 2006, the cumulative effect of
adopting the estimated forfeiture method was not significant. Prior periods are not
restated under this transition method (see Note 10). |
|
|
(e) |
|
Comprehensive Income: |
|
|
|
|
Other comprehensive income is a component of stockholders equity and includes such items
as the unrealized gains and losses on investment securities available for sale, forward
foreign contracts, minimum pension liability adjustments and, prior to December 9, 2005,
the Companys proportionate interest in New Valleys capital transactions. Total
comprehensive income was $17,220 for the three months ended March 31, 2006 and $12,210 for
the three months ended March 31, 2005. |
|
|
(f) |
|
Financial Instruments: |
|
|
|
|
As required by SFAS No. 133, derivatives embedded within the Companys convertible debt
are recognized on the Companys balance sheet and are stated at estimated fair value as
determined by an independent third party at each reporting period. Changes in the fair
value of the embedded derivatives are reflected quarterly as an adjustment to interest
expense. |
|
|
|
|
The Company uses forward foreign exchange contracts to mitigate its exposure to changes in
exchange rates relating to purchases of equipment from third parties. The primary
currency to which the Company is exposed is the euro. A substantial portion of the
Companys foreign |
- 8 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
exchange contracts is effective as hedges. The fair value of forward foreign exchange
contracts designated as hedges is reported in other current assets or current liabilities
and the change in fair value of the contracts during the period is recorded in other
comprehensive income. The fair value of the hedge at March 31, 2006 was a liability of
approximately $391. |
|
|
(g) |
|
Revenue Recognition: |
|
|
|
|
Revenues from sales are recognized upon the shipment of finished goods when title and risk
of loss have passed to the customer, there is persuasive evidence of an arrangement, the
sale price is determinable and collectibility is reasonably assured. The Company provides
an allowance for expected sales returns, net of any related inventory cost recoveries.
Certain sales incentives, including buydowns, are classified as reductions of net sales in
accordance with EITF Issue No. 01-9, Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors Products). In accordance with EITF Issue
No. 06-3, How Sales Taxes Should be Presented in the Income Statement (Gross versus
Net), the Companys accounting policy is to include federal excise taxes in revenues and
cost of goods sold. Such revenues totaled $40,118 and $33,432 for the three months ended
March 31, 2006 and 2005, respectively. Since the Companys primary line of business is
tobacco, the Companys financial position and its results of operations and cash flows
have been and could continue to be materially adversely affected by significant unit sales
volume declines, litigation and defense costs, increased tobacco costs or reductions in
the selling price of cigarettes in the near term. |
|
|
(h) |
|
Contingencies: |
|
|
|
|
The Company records Liggetts product liability legal expenses and other litigation costs
as operating, selling, general and administrative expenses as those costs are incurred.
As discussed in Note 8, legal proceedings covering a wide range of matters are pending or
threatened in various jurisdictions against Liggett. |
|
|
|
|
The Company records provisions in the consolidated financial statements for pending
litigation when it determines that an unfavorable outcome is probable and the amount of
the loss can be reasonably estimated. Except as discussed in Note 8, (i) management has
not concluded that it is probable that a loss has been incurred in any of the pending
smoking-related litigation; (ii) management is unable to make a meaningful estimate of the
amount or range of loss that could result from an unfavorable outcome of pending
smoking-related litigation; and (iii) accordingly, management has not provided any amounts
in the consolidated financial statements for unfavorable outcomes, if any. Litigation is
subject to many uncertainties, and it is possible that the Companys consolidated
financial position, results of operations or cash flows could be materially adversely
affected by an unfavorable outcome in any such smoking-related litigation. |
|
|
(i) |
|
New Accounting Pronouncements: |
|
|
|
|
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 changes the
requirements for the accounting for and reporting of a change in accounting principle.
The provisions of SFAS No. 154 require, unless impracticable, retrospective application to
prior periods financial statements of (1) all voluntary changes in accounting principles
and (2) changes required by a new accounting pronouncement, if a specific transition is
not provided. SFAS No. 154 also requires that a change in depreciation, amortization, or
depletion method for |
- 9 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
long-lived, non-financial assets be accounted for as a change in accounting estimate,
which requires prospective application of the new method. SFAS No. 154 is effective for
all accounting changes made in fiscal years beginning after December 15, 2005. The
current period impact of the application of SFAS No. 154 is discussed below in connection
with the application of EITF Issue No. 05-8, Income Tax Effects of Issuing Convertible
Debt with a Beneficial Conversion Feature. |
|
|
|
|
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations an Interpretation of SFAS Statement No. 143 (FIN 47). FIN 47
clarifies the timing of liability recognition for legal obligations associated with the
retirement of a tangible long-lived asset when the timing and/or method of settlement are
conditional on a future event. FIN 47 is effective for fiscal years ending after December
15, 2005. The application of FIN 47 did not have a material impact on the Companys
consolidated financial position, results of operations or cash flows. |
|
|
|
|
In September 2005, the EITF reached a consensus on Issue No. 04-13, Inventory Exchanges.
EITF Issue No. 04-13 required two or more inventory transactions with the same party to
be considered a single nonmonetary transaction subject to APB Opinion No. 29, Accounting
for Nonmonetary Transactions, if the transactions were entered into in contemplation of
one another. EITF Issue No. 04-13 is effective for the Company for new arrangements
entered into after April 2, 2006. The Company does not expect the adoption of EITF Issue
No. 04-13 to have a material impact on its financial position, results of operations or
cash flows. |
|
|
|
|
Effective January 1, 2006, the Company adopted EITF Issue No. 05-8, Income Tax Effects of
Issuing Convertible Debt with a Beneficial Conversion Feature. In Issue No. 05-8, the
EITF concluded that the issuance of convertible debt with a beneficial conversion feature
creates a temporary difference on which deferred taxes should be provided. The consensus
is required to be applied in fiscal periods beginning after December 15, 2005, by
retroactive restatement of prior financial statements retroactive to the issuance of the
convertible debt. The retrospective application of EITF Issue No. 05-8 reduced income
tax expense by $153 and $72 for the three months ended March 31, 2006 and 2005,
respectively. A reconciliation of the net impact of the application of EITF Issue No.
05-8 at December 31, 2005 on the Companys consolidated
balance sheet is as follows (as restated): |
- 10 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
|
Additional |
|
|
|
|
|
|
|
|
|
Deferred |
|
|
Paid-in |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Income Taxes |
|
|
Capital |
|
|
Deficit |
|
|
Equity |
|
December 31, 2005, as restated,
prior to adoption of EITF 05-8 |
|
$ |
137,381 |
|
|
$ |
141,184 |
|
|
$ |
(69,981 |
) |
|
$ |
37,577 |
|
Application of EITF 05-8: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Establishment of deferred tax
liability |
|
|
7,859 |
|
|
|
(7,859 |
) |
|
|
|
|
|
|
(7,859 |
) |
Increase to income tax benefit
for the year ended
December 31, 2004 |
|
|
(27 |
) |
|
|
|
|
|
|
27 |
|
|
|
27 |
|
Decrease to income tax expense
for the year ended
December 31, 2005 |
|
|
(406 |
) |
|
|
|
|
|
|
406 |
|
|
|
406 |
|
Decrease to extraordinary
item, unallocated goodwill |
|
|
1,085 |
|
|
|
|
|
|
|
(1,085 |
) |
|
|
(1,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revised balance, as restated,
December 31, 2005 |
|
$ |
145,892 |
|
|
$ |
133,325 |
|
|
$ |
(70,633 |
) |
|
$ |
29,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid
Instruments. SFAS No. 155 amends SFAS Nos. 133 and 140 and relates to the financial
reporting of certain hybrid financial instruments. SFAS No. 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account for the
whole instrument on a fair value basis. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of fiscal years commencing after
September 15, 2006. The Company has not completed its assessment of the impact of this
standard. |
2. |
|
RESTATEMENT OF FINANCIAL RESULTS |
|
|
|
On November 9, 2006, the Company determined it would restate its financial statements for each
of the years ended December 31, 2004 and 2005 as well as the Companys interim financial
statements for all interim periods within 2005 and the first two quarters of 2006. The
restatement corrected an error in the computation of the debt discount amortization created by
the embedded derivative and the beneficial conversion feature associated with the Companys 5%
variable interest senior convertible notes due 2011. The restatement adjustments affected the
Companys previously reported interest expense, the related income tax effect, and
extraordinary items, as well as the Companys previously reported other assets, long-term debt,
additional paid-in capital and accumulated deficit balances. The effects of the restatement
are reflected in the Companys consolidated financial statements and accompanying notes
included herein. See Note 16 Restated Financial Information. See also Notes 1, 2, 7, 10, 11
and 13 to the consolidated financial statements. All periods presented are unaudited. |
- 11 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
The aggregate net effect of the restatement was to increase stockholders equity by $4,142 as
of March 31, 2006, $3,422 as of December 31, 2005 and $336 as of December 31, 2004. The
restatement also increased net income by $720 ($0.01 per diluted common share) and $731 ($0.02
per diluted common share) for the three months ended March 31, 2006 and 2005, respectively. |
|
|
|
|
The restatement adjustments corrected the previous amortization method used in calculating the
amortization of the debt discount created by the embedded derivative and beneficial conversion
feature associated with the Companys 5% variable interest senior convertible notes due 2011.
The Company previously amortized the debt discount on its 5% variable interest senior
convertible notes due 2011 using an erroneous amortization method that did not result in a
consistent yield on the convertible debt over its term. |
|
|
|
|
There was no change to each subtotal (operating, investing and financing) in the Companys
consolidated statements of cash flows as a result of the restatement. Certain balances related
to line items within certain cash flows were corrected as part of the restatement. The
adjustments relating to restated amounts affected by the restatement in the consolidated
financial statements as of and for the three months ended March 31, 2006 and 2005 are as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Restatement |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
Three months ended March 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
(9,490 |
) |
|
$ |
1,213 |
|
|
$ |
(8,277 |
) |
Income from continuing operations before benefit
for income taxes and minority interests |
|
|
17,493 |
|
|
|
1,213 |
|
|
|
18,706 |
|
Income tax provision |
|
|
8,200 |
|
|
|
493 |
|
|
|
8,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,293 |
|
|
$ |
720 |
|
|
$ |
10,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per common share |
|
$ |
0.17 |
|
|
$ |
0.02 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per common share |
|
$ |
0.17 |
|
|
$ |
0.01 |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
(7,475 |
) |
|
$ |
1,133 |
|
|
$ |
(6,342 |
) |
Income from continuing operations before benefit
for income taxes and minority interests |
|
|
22,996 |
|
|
|
1,133 |
|
|
|
24,129 |
|
Income tax provision |
|
|
12,518 |
|
|
|
402 |
|
|
|
12,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
|
8,462 |
|
|
|
731 |
|
|
|
9,193 |
|
Net income |
|
$ |
11,496 |
|
|
$ |
731 |
|
|
$ |
12,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share per common share |
|
$ |
0.19 |
|
|
$ |
0.02 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share per common share |
|
$ |
0.19 |
|
|
$ |
0.01 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share per common share |
|
$ |
0.26 |
|
|
$ |
0.02 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share per common share |
|
$ |
0.25 |
|
|
$ |
0.02 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
11,933 |
|
|
$ |
518 |
|
|
$ |
12,451 |
|
Total assets |
|
|
608,894 |
|
|
|
518 |
|
|
|
609,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
- 12 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Previously |
|
|
Restatement |
|
|
|
|
|
|
Reported |
|
|
Adjustments |
|
|
Restated |
|
Notes payable, long-term debt and other obligations
less current portion |
|
$ |
244,789 |
|
|
$ |
(6,465 |
) |
|
$ |
238,324 |
|
Deferred income taxes, long term |
|
|
150,540 |
|
|
|
2,841 |
|
|
|
153,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
$ |
102,309 |
|
|
$ |
(204 |
) |
|
$ |
102,105 |
|
Accumulated deficit |
|
|
(64,966 |
) |
|
|
4,346 |
|
|
|
(60,620 |
) |
Total stockholders equity as of March 31, 2006 |
|
|
22,241 |
|
|
|
4,142 |
|
|
|
26,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
$ |
12,047 |
|
|
$ |
422 |
|
|
$ |
12,469 |
|
Total assets |
|
|
603,130 |
|
|
|
422 |
|
|
|
603,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, long-term debt and other obligations
less current portion |
|
$ |
243,590 |
|
|
$ |
(5,348 |
) |
|
$ |
238,242 |
|
Deferred income taxes, long term |
|
|
143,544 |
|
|
|
2,348 |
|
|
|
145,892 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
$ |
133,529 |
|
|
$ |
(204 |
) |
|
$ |
133,325 |
|
Accumulated deficit |
|
|
(74,259 |
) |
|
|
3,626 |
|
|
|
(70,633 |
) |
Total stockholders equity as of December 31, 2005 |
|
|
25,644 |
|
|
|
3,422 |
|
|
|
29,066 |
|
3. |
|
RESTRUCTURING |
|
|
|
The components of the combined pre-tax restructuring charges relating to the 2004 Liggett
Vector Brands restructurings for the three months ended March 31, 2006 are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
Non-Cash |
|
|
Contract |
|
|
|
|
|
|
Severance |
|
|
Asset |
|
|
Termination/ |
|
|
|
|
|
|
and Benefits |
|
|
Impairment |
|
|
Exit Costs |
|
|
Total |
|
Balance, December 31, 2005 |
|
$ |
713 |
|
|
$ |
|
|
|
$ |
1,403 |
|
|
$ |
2,116 |
|
Utilized |
|
|
(247 |
) |
|
|
|
|
|
|
(137 |
) |
|
|
(384 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2006 |
|
$ |
466 |
|
|
$ |
|
|
|
$ |
1,266 |
|
|
$ |
1,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4. |
|
INVESTMENT SECURITIES AVAILABLE FOR SALE |
|
|
|
Investment securities classified as available for sale are carried at fair value, with net
unrealized gains or losses included as a component of stockholders equity, net of taxes and
minority interests. For the three months ended March 31, 2006 and 2005, net realized (losses)
gains were $(30) and $1,430, respectively. |
|
|
|
The components of investment securities available for sale at March 31, 2006 are as follows: |
- 13 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
|
Cost |
|
|
Gain |
|
|
Loss |
|
|
Value |
|
Marketable equity securities |
|
$ |
10,171 |
|
|
$ |
13,179 |
|
|
$ |
(40 |
) |
|
$ |
23,310 |
|
Marketable debt securities |
|
|
7,337 |
|
|
|
|
|
|
|
(64 |
) |
|
|
7,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17,508 |
|
|
$ |
13,179 |
|
|
$ |
(104 |
) |
|
$ |
30,583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale as of March 31, 2006 include New Valley LLCs
11,111,111 shares of Ladenburg Thalmann Financial Services Inc., which were carried at $16,000
(see Note 12). |
|
|
|
The Companys marketable debt securities have a weighted average maturity of 1.81 years at
March 31, 2006 and mature from April 2006 to March 2010. |
|
5. |
|
INVENTORIES |
|
|
|
Inventories consist of: |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Leaf tobacco |
|
$ |
31,779 |
|
|
$ |
35,312 |
|
Other raw materials |
|
|
3,269 |
|
|
|
3,157 |
|
Work-in-process |
|
|
1,521 |
|
|
|
1,685 |
|
Finished goods |
|
|
39,807 |
|
|
|
34,653 |
|
|
|
|
|
|
|
|
Inventories at current cost |
|
|
76,376 |
|
|
|
74,807 |
|
LIFO adjustments |
|
|
(4,058 |
) |
|
|
(4,412 |
) |
|
|
|
|
|
|
|
|
|
$ |
72,318 |
|
|
$ |
70,395 |
|
|
|
|
|
|
|
|
|
|
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. At March 31, 2006, Liggett had leaf tobacco
purchase commitments of approximately $16,938. There were no leaf tobacco purchase commitments
at Vector Tobacco at that date. |
|
|
|
Included in the above table was approximately $1,136 at March 31, 2006 and $1,208 at
December 31, 2005 of leaf inventory associated with Vector Tobaccos QUEST product, which is
carried at its estimated net realizable value. |
|
|
|
LIFO inventories represent approximately 93% of total inventories at March 31, 2006 and 92% of
total inventories at December 31, 2005. |
|
6. |
|
PROPERTY, PLANT AND EQUIPMENT |
|
|
|
Property, plant and equipment consist of: |
- 14 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Land and improvements |
|
$ |
1,418 |
|
|
$ |
1,418 |
|
Buildings |
|
|
13,718 |
|
|
|
13,718 |
|
Machinery and equipment |
|
|
97,876 |
|
|
|
98,037 |
|
Leasehold improvements |
|
|
2,869 |
|
|
|
2,724 |
|
Construction-in-progress |
|
|
3,719 |
|
|
|
2,960 |
|
|
|
|
|
|
|
|
|
|
|
119,600 |
|
|
|
118,857 |
|
Less accumulated depreciation |
|
|
(58,252 |
) |
|
|
(56,334 |
) |
|
|
|
|
|
|
|
|
|
$ |
61,348 |
|
|
$ |
62,523 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense on property, plant and equipment for the three months
ended March 31, 2006 and 2005 was $2,473 and $2,666, respectively. Future machinery and
equipment purchase commitments at Liggett were $6,720 at March 31, 2006. |
|
|
|
|
In February 2005, New Valley completed the sale of its two office buildings in Princeton, New
Jersey for $71,500. (Refer to Notes 12 and 14). The Company recorded a gain of $2,952, net of
minority interests and income taxes, in the first quarter of 2005 in connection with the sale. |
- 15 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
(Unaudited)
7. |
|
NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS |
|
|
|
Notes payable, long-term debt and other obligations consist of: |
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
Restated |
|
|
Restated |
|
Vector: |
|
|
|
|
|
|
|
|
5% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $57,600 and $58,655* |
|
$ |
54,264 |
|
|
$ |
53,209 |
|
6.25% Convertible Subordinated Notes due 2008 |
|
|
132,492 |
|
|
|
132,492 |
|
|
|
|
|
|
|
|
|
|
Liggett: |
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
13,785 |
|
|
|
|
|
Term loan under credit facility |
|
|
3,250 |
|
|
|
3,482 |
|
Equipment loans |
|
|
8,686 |
|
|
|
9,828 |
|
|
|
|
|
|
|
|
|
|
Vector Tobacco: |
|
|
|
|
|
|
|
|
Notes payable Medallion acquisition due 2007 |
|
|
35,000 |
|
|
|
35,000 |
|
|
|
|
|
|
|
|
|
|
V.T. Aviation: |
|
|
|
|
|
|
|
|
Note payable |
|
|
8,060 |
|
|
|
8,300 |
|
|
|
|
|
|
|
|
|
|
VGR Aviation: |
|
|
|
|
|
|
|
|
Note payable |
|
|
4,832 |
|
|
|
4,867 |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
458 |
|
|
|
377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, long-term debt and other obligations |
|
|
260,827 |
|
|
|
247,555 |
|
Less: |
|
|
|
|
|
|
|
|
Current maturities |
|
|
(22,503 |
) |
|
|
(9,313 |
) |
|
|
|
|
|
|
|
Amount due after one year |
|
$ |
238,324 |
|
|
$ |
238,242 |
|
|
|
|
|
|
|
|
|
|
|
* |
|
The fair value of the derivatives embedded within these notes ($38,147 at
March 31, 2006 and $39,371 at December 31, 2005) is separately classified
as a derivative liability in the consolidated balance sheet. |
5% Variable Interest Senior Convertible Notes Due November 2011 Vector:
In November 2004, the Company sold $65,500 of its 5% variable interest senior convertible notes
due November 15, 2011 in a private offering to qualified institutional investors in accordance
with Rule 144A under the Securities Act of 1933. The buyers of the notes had the right, for a
120-day period ending March 18, 2005, to purchase up to an additional $16,375 of the notes. At
December 31, 2004, buyers had exercised their rights to purchase an additional $1,405 of the
notes, and the remaining $14,959 principal amount of notes were purchased during the first
quarter of 2005. In April 2005, Vector issued an additional $30,000 principal amount of 5%
variable interest senior convertible notes due November 15, 2011 in a separate private offering
to qualified institutional investors in accordance with Rule 144A. These notes, which were
issued under a new indenture at a net price of 103.5%, were on the same terms as the $81,864
principal amount of notes previously issued in connection with the November 2004 placement.
The notes pay interest on a quarterly basis at a rate of 5% per year with an additional amount
of interest payable on the notes on each interest payment date. This additional amount is based
on the amount of cash dividends actually paid by the Company per share on its common stock
during the prior three-month period ending on the record date for such interest payment
multiplied by the number of shares of its common stock into which the notes are convertible on
such record date (together, the Total Interest). Notwithstanding the foregoing, however,
during the period prior to November 15, 2006, the interest payable on each interest payment
date is the higher of (i) the Total Interest and (ii) 6 3/4% per year. The notes are convertible
into the Companys common stock, at the
- 16 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
holders option. The conversion price, which was $18.48
at March 31, 2006, is subject to adjustment for various events, including the issuance of stock
dividends.
The notes will mature on November 15, 2011. The Company must redeem 12.5% of the total
aggregate principal amount of the notes outstanding on November 15, 2009. In addition to such
redemption amount, the Company will also redeem on November 15, 2009 and on each interest
accrual period thereafter an additional amount, if any, of the notes necessary to prevent the
notes from being treated as an Applicable High Yield Discount Obligation under the Internal
Revenue Code. The holders of the notes will have the option on November 15, 2009 to require the
Company
to repurchase some or all of their remaining notes. The redemption price for such redemptions
will equal 100% of the principal amount of the notes plus accrued interest. If a fundamental
change (as defined in the indenture) occurs, the Company will be required to offer to
repurchase the notes at 100% of their principal amount, plus accrued interest and, under
certain circumstances, a make-whole premium.
Embedded Derivatives. The portion of the Total Interest on the notes which is computed by
reference to the cash dividends paid on the Companys common stock is considered an embedded
derivative. Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, the Company has bifurcated this dividend portion of the interest
on the notes and, based on a valuation by an independent third party, estimated the fair value
of the embedded derivative liability. At issuance of the November 2004 notes, the estimated
initial fair value was $24,738, which was recorded as a discount to the notes and classified as
a derivative liability on the consolidated balance sheet. Issuances of $1,405 of additional
notes in December 2004, $14,949 of additional notes in the first quarter in 2005 and $30,000 of
additional notes in April 2005 increased the initial fair value of the derivative liability to
$42,042. The initial embedded derivative liability is amortized over the term of the debt and
reflected as non-cash interest expense. The Company recognized non-cash interest expense of
$679 and $376 in the first quarter of 2006 and 2005, respectively, due to the amortization of
the debt discount attributable to the embedded derivatives.
Changes to the fair value of this embedded derivative are reflected quarterly in the Companys
Consolidated Statement of Operations as Change in fair value of derivatives embedded within
convertible debt At March 31, 2006, the derivative liability was estimated at $38,147 and at
December 31, 2005, the derivative liability was estimated at $39,371. The Company recognized
gains of $1,224 and $828 in the first quarter of 2006 and 2005, respectively due to changes in
the fair value of the embedded derivative, which were reported as Change in fair value of
derivatives embedded within convertible debt.
Beneficial Conversion Feature. After giving effect to the recording of the embedded derivative
liability as a discount to the notes, the Companys common stock had a fair value at the
issuance date of the notes in excess of the conversion price resulting in a beneficial
conversion feature. Emerging Issues Task Force (EITF) No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable Convertible Ratios,
requires that the initial intrinsic value of the beneficial conversion feature ($22,139 at
December 31, 2005 prior to the impact of income taxes) be recorded to additional paid-in
capital and as a discount on the notes. The discount is then amortized to interest expense over
the term of the notes using the effective interest rate method. The Company recognized non-cash
interest expense of $376 and $204 in the first quarter of 2006 and 2005, respectively, due to
the amortization of the debt discount attributable to the beneficial conversion feature.
6.25% Convertible Subordinated Notes Due July 15, 2008 Vector:
- 17 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
In July 2001, Vector completed the sale of $172,500 (net proceeds of approximately $166,400) of
its 6.25% convertible subordinated notes due July 15, 2008 through a private offering to
qualified institutional investors in accordance with Rule 144A under the Securities Act of
1933. The notes pay interest at 6.25% per annum and are convertible into Vectors common stock,
at the option of the holder. The conversion price, which was $21.32 per share at March 31,
2006, is subject to adjustment for various events, and any cash distribution on Vectors common
stock will result in a corresponding decrease in the conversion price. If the conversion price
decreases below the Companys average share price, the Company could recognize an additional
beneficial conversion
feature with respect to these notes. In December 2001, $40,000 of the notes were converted
into Vectors common stock and, in October 2004, an additional $8 of the notes were converted.
A total $132,492 of the notes were outstanding at March 31, 2006.
Vector may redeem the notes, in whole or in part, at a price of 102.083% in the year beginning
July 15, 2005, 101.042% in the year beginning July 15, 2006 and 100% in the year beginning
July 15, 2007, together with accrued interest. If a change of control occurs, Vector will be
required to offer to repurchase the notes at 101% of their principal amount, plus accrued
interest and, under certain circumstances, a make whole payment.
Revolving Credit Facility Liggett:
Liggett has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which $13,785
was outstanding at March 31, 2006. Availability as determined under the facility was
approximately $22,037 based on eligible collateral at March 31, 2006. The facility is
collateralized by all inventories and receivables of Liggett and a mortgage on its
manufacturing facility. Borrowings under the facility bear interest at a rate equal to 1.0%
above the prime rate of Wachovia. The facility requires Liggetts compliance with certain
financial and other covenants including a restriction on Liggetts ability to pay cash
dividends unless Liggetts borrowing availability under the facility for the 30-day period
prior to the payment of the dividend, and after giving effect to the dividend, is at least
$5,000 and no event of default has occurred under the agreement, including Liggetts compliance
with the covenants in the credit facility, including an adjusted net worth and working capital
requirement. In addition, the facility imposes requirements with respect to Liggetts adjusted
net worth (not to fall below $8,000 as computed in accordance with the agreement) and working
capital (not to fall below a deficit of $17,000 as computed in accordance with the agreement).
At March 31, 2006, management believes that Liggett was in compliance with all covenants under
the credit facility; Liggetts adjusted net worth was $38,347 and net working capital was
$26,847, as computed in accordance with the agreement.
100 Maple LLC, a company formed by Liggett in 1999 to purchase its Mebane, North Carolina
manufacturing plant, has a term loan of $3,250 outstanding under Liggetts credit facility at
March 31, 2006. The remaining balance of the term loan is payable in two remaining monthly
installments of $77 with a final payment on June 1, 2006 of $3,095. Interest is charged at the
same rate as applicable to Liggetts credit facility, and the outstanding balance of the term
loan reduces the maximum availability under the credit facility. Liggett has guaranteed the
term loan, and a first mortgage on the Mebane property and manufacturing equipment
collateralizes the term loan and Liggetts credit facility.
Equipment Loans Liggett:
In October and December 2001, Liggett purchased equipment for $3,204 and $3,200, respectively,
through the issuance of notes guaranteed by the Company, each payable in 60 monthly
installments of $53 with interest calculated at the prime rate.
- 18 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
In March 2002, Liggett purchased equipment for $3,023 through the issuance of a note, payable
in 30 monthly installments of $62 and then 30 monthly installments of $51. Interest is
calculated at LIBOR plus 2.8%.
In May 2002, Liggett purchased equipment for $2,871 through the issuance of a note, payable in
30 monthly installments of $59 and then 30 monthly installments of $48. Interest is calculated
at LIBOR plus 2.8%.
In September 2002, Liggett purchased equipment for $1,573 through the issuance of a note
guaranteed by the Company, payable in 60 monthly installments of $26 plus interest calculated
at LIBOR plus 4.31%.
In October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable
in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%.
Liggett was required to provide a security deposit equal to 25% of the funded amount or $1,110.
In December 2005, Liggett purchased equipment for $2,273 through a financing agreement payable
in 24 installments of $58 and then 24 installments of $46. Interest is calculated at 5.03%.
Liggett was required to provide a security deposit equal to 25% of the funded amount or $568.
Each of these equipment loans is collateralized by the purchased equipment.
Notes for Medallion Acquisition Vector Tobacco:
The purchase price for the 2002 acquisition of the Medallion Company, Inc. (Medallion)
included $60,000 in notes of Vector Tobacco, guaranteed by the Company and Liggett. Of the
notes, $25,000 have been repaid with the final quarterly principal payment of $3,125 made on
March 31, 2004. The remaining $35,000 of notes bear interest at 6.5% per year, payable
semiannually, and mature on April 1, 2007.
Note Payable V.T. Aviation:
In February 2001, V.T. Aviation LLC, a subsidiary of Vector Research Ltd., purchased an
airplane for $15,500 and borrowed $13,175 to fund the purchase. The loan, which is
collateralized by the airplane and a letter of credit from the Company for $775, is guaranteed
by Vector Research, VGR Holding and the Company. The loan is payable in 119 monthly
installments of $125, including annual interest of 2.31% above the 30-day commercial paper
rate, with a final payment of $2,581 based on current interest rates.
Note Payable VGR Aviation:
In February 2002, V.T. Aviation purchased an airplane for $6,575 and borrowed $5,800 to fund
the purchase. The loan is guaranteed by the Company. The loan is payable in 119 monthly
installments of $40, including annual interest of 2.75% above the 30-day average commercial
paper rate, with a final payment of $3,836 based on current interest rates. During the fourth
quarter of 2003, this airplane was transferred to the Companys direct subsidiary, VGR Aviation
LLC, which assumed the debt.
- 19 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
8. |
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CONTINGENCIES |
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Smoking-Related Litigation: |
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|
Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named
as defendants in numerous direct and third-party actions predicated on the theory that
cigarette manufacturers should be liable for damages alleged to have been caused by cigarette
smoking or by exposure to secondary smoke from cigarettes. New cases continue to be commenced
against
Liggett and the other cigarette manufacturers. The cases generally fall into the following
categories: (i) smoking and health cases alleging injury brought on behalf of individual
plaintiffs (Individual Actions); (ii) smoking and health cases alleging injury and purporting
to be brought on behalf of a class of individual plaintiffs (Class Actions); (iii) health
care cost recovery actions brought by various foreign and domestic governmental entities
(Governmental Actions); and (iv) health care cost recovery actions brought by third-party
payors including insurance companies, union health and welfare trust funds, asbestos
manufacturers and others (Third-Party Payor Actions). As new cases are commenced, the costs
associated with defending these cases and the risks relating to the inherent unpredictability
of litigation continue to increase. The future financial impact of the risks and expenses of
litigation and the effects of the tobacco litigation settlements discussed below are not
quantifiable at this time. For the three months ended March 31, 2006, Liggett incurred legal
fees and other litigation costs totaling approximately $1,373 compared to $1,229 for the three
months ended March 31, 2005. |
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|
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Individual Actions. As of March 31, 2006, there were approximately 271 cases pending against
Liggett, and in most cases the other tobacco companies, where one or more individual plaintiffs
allege injury resulting from cigarette smoking, addiction to cigarette smoking or exposure to
secondary smoke and seek compensatory and, in some cases, punitive damages. Of these, 106 were
pending in Florida, 44 in Mississippi, 30 in Maryland and 20 in Missouri. The balance of the
individual cases were pending in 16 states and territories. |
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|
There are five individual cases pending where Liggett is the only tobacco company defendant.
In April 2004, in the Beverly Davis v. Liggett Group Inc. case, a Florida state court jury
awarded compensatory damages of $540 against Liggett. In addition, plaintiffs counsel was
awarded legal fees of $752. Liggett has appealed both the verdict and the award of legal fees.
In March 2005, in the Ferlanti v. Liggett Group Inc. case, a Florida state court granted
Liggetts motion for summary judgment. The plaintiff has appealed. In March 2006, in the
Schwartz, et. al. v. Liggett Group Inc. case, a Florida state court jury returned a verdict in
favor of Liggett. The plaintiff has appealed. |
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The plaintiffs allegations of liability in those cases in which individuals seek recovery for
injuries allegedly caused by cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and implied warranties,
conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public
nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability,
shock, indemnity and violations of deceptive trade practice laws, the Federal Racketeer
Influenced and Corrupt Organizations Act (RICO), state RICO statutes and antitrust statutes.
In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms
of relief including treble/multiple damages, medical monitoring, disgorgement of profits and
punitive damages. Defenses raised by defendants in these cases include lack of proximate
cause, assumption of the risk, comparative fault and/or contributory |
- 20 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
|
|
negligence, lack of design
defect, statute of limitations, equitable defenses such as unclean hands and lack of benefit,
failure to state a claim and federal preemption. |
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In February 2006, in an individual action in Missouri state court against the major tobacco
companies, including Liggett, the jury returned a verdict in favor of the defense. The
plaintiff may appeal. |
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|
Jury awards in various states have been entered against other cigarette manufacturers. The
awards in these individual actions are for both compensatory and punitive damages and represent
a material
amount of damages. Liggett is not a party to these actions. The following is a brief
description of various of these matters: |
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|
|
In February, 1999, in Henley v. Philip Morris, a California state court jury awarded
$1,500 in compensatory damages and $50,000 in punitive damages. The trial court reduced
the punitive damages award to $25,000. In September 2003, the California Court of Appeals
reduced the punitive damages award to $9,000 based on the United States Supreme Courts
2003 opinion in State Farm, limiting punitive damages. In September 2004, the California
Supreme Court upheld the $9,000 punitive damages award. In March 2005, the United States
Supreme Court denied review and the defendant has paid the amount of the judgment plus
accrued interest. |
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In March 1999, an Oregon state court jury found in favor of the plaintiff in
Williams-Branch v. Philip Morris. The jury awarded $800 in compensatory damages and
$79,500 in punitive damages. The trial court reduced the punitive damages award to
$32,000. In June 2002, the Oregon Court of Appeals reinstated the $79,500 punitive
damages award. In October 2003, the United States Supreme Court set aside the Oregon
appellate courts ruling and directed the Oregon court to reconsider the case in light of
the State Farm decision. In June 2004, the Oregon appellate court reinstated the original
jury verdict. In February 2006, the Oregon Supreme Court reaffirmed the $79,500 punitive
damages jury verdict. The defendant intends to seek review by the United States Supreme
Court. |
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In 2001, as a result of a Florida Supreme Court decision upholding the award, in Carter
v. Brown and Williamson Tobacco Corp., the defendant paid $1,100 in compensatory damages
and interest to a former smoker and his spouse for injuries they allegedly incurred as a
result of smoking. |
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In June 2001, a California state court jury found in favor of the plaintiff in Boeken
v. Philip Morris and awarded $5,500 in compensatory damages and $3,000,000 in punitive
damages. In August 2001, the trial court reduced the punitive damages award to $100,000.
In September 2004, the California Court of Appeals affirmed the compensatory damages
award, but reduced the punitive damages award to $50,000. In April 2005, the California
Court of Appeals reaffirmed its decision. In August 2005, the California Supreme Court
declined further review of the case. In March 2006, the United States Supreme Court
denied review and the defendant paid the judgment. |
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In December 2001, in Kenyon v. R.J. Reynolds Tobacco Co., a Florida state court jury
awarded the plaintiff $165 in compensatory damages, but no punitive damages. In May 2003,
the Florida Court of Appeals affirmed per curiam (that is, without an opinion) the trial
courts final judgment in favor of the plaintiffs. The defendant paid the amount of the
judgment plus accrued interest and attorneys fees after exhausting all appeals. |
- 21 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
|
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|
In February 2002, in Burton v. R.J. Reynolds Tobacco Co., et al, a federal district
court jury in Kansas awarded the plaintiff $198 in compensatory damages, and determined
that the plaintiff was entitled to punitive damages. In June 2002, the trial court
awarded the plaintiff $15,000 in punitive damages. In February 2005, the United States
Court of Appeals for the Tenth Circuit overturned the punitive damages award, while
upholding the compensatory damages award. The defendant paid the compensatory damages
award in June 2005. |
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|
In March 2002, an Oregon state court jury found in favor of the plaintiff in Schwarz v.
Philip Morris and awarded $169 in compensatory damages and $150,000 in punitive damages.
In May 2002, the trial court reduced the punitive damages award to $100,000. The parties
have appealed to the Oregon Court of Appeals. |
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|
In October 2002, a California state court jury found in favor of the plaintiff in
Bullock v. Philip Morris and awarded $850 in compensatory damages and $28,000,000 in
punitive damages. In December 2002, the trial court reduced the punitive damages award to
$28,000. In April 2006, the California Court of Appeals upheld the punitive damages
award. The defendant will seek further review. |
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|
In April 2003, in Eastman v. Brown & Williamson Tobacco Corp., et al, a Florida state
court jury awarded $6,540 in compensatory damages. In May 2004, the Florida Court of
Appeals affirmed the verdict in a per curiam opinion. The defendants motion for
rehearing was denied, and the judgment was paid in October 2004. |
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In May 2003, in Boerner v. Brown & Williamson Tobacco Corp., a federal district court
jury in Arkansas awarded $4,000 in compensatory damages and $15,000 in punitive damages.
In January 2005, the United States Court of Appeals for the Eighth Circuit affirmed the
compensatory damages award, but reduced the punitive damages award to $5,000. The
judgment was paid in February 2005. |
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In November 2003, in Thompson v. Brown & Williamson Tobacco Corp., et al., a Missouri
state court jury awarded $2,100 in compensatory damages. The defendants have appealed to
the Missouri Court of Appeals. |
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In December 2003, in Frankson v. Brown & Williamson Tobacco Corp., et al., a New York
state court jury awarded $350 in compensatory damages. In January 2004, the jury awarded
$20,000 in punitive damages. The deceased smoker was found to be 50% at fault. In June
2004, the court increased the compensatory damages to $500 and decreased the punitive
damages to $5,000. The defendants have appealed to the New York Supreme Court, Appellate
Division. |
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In October 2004, in Arnitz v. Philip Morris, a Florida state court jury awarded $600 in
damages but found that the plaintiff was 60% at fault, thereby reducing the verdict
against Philip Morris to $240. Philip Morris has appealed to the Florida Second District
Court of Appeals. |
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In February 2005, in Smith v. Brown & Williamson Tobacco Corp., et al., a Missouri
state court jury awarded $2,000 in compensatory damages and $20,000 in punitive damages.
The defendants have appealed to the Missouri Court of Appeals. |
- 22 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
|
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|
In March 2005, in Rose v. Philip Morris, a New York state court jury awarded $3,400 in
compensatory damages and $17,100 in punitive damages. The defendants have appealed to the
New York Supreme Court, Appellate Division. |
In 2003, the Mississippi Supreme Court ruled that the Mississippi Product Liability Act
precludes all tobacco cases that are based on product liability. In a 2005 decision, the
Mississippi Supreme Court ruled that certain claims against cigarette manufacturers may remain
available to plaintiffs.
Class Actions. As of March 31, 2006, there were approximately nine actions pending, for which
either a class has been certified or plaintiffs are seeking class certification, where Liggett,
among others, was a named defendant. Many of these actions purport to constitute statewide
class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in the
Castano case, reversed a Federal district courts certification of a purported nationwide class
action on behalf of persons who were allegedly addicted to tobacco products.
The extent of the impact of the Castano decision on smoking-related class action litigation is
still uncertain. The Castano decision has had a limited effect with respect to courts
decisions regarding narrower smoking-related classes or class actions brought in state rather
than federal court. For example, since the Fifth Circuits ruling, a court in Louisiana
(Liggett is not a defendant in this proceeding) certified an addiction-as-injury class
action, in the Scott v. American Tobacco Co., Inc. case, that covered only citizens in the
state. In May 2004, the Scott jury returned a verdict in the amount of $591,000, plus
prejudgment interest, on the class claim for a smoking cessation program. The case is on
appeal. Two other class actions, Broin, et al., v. Philip Morris Companies Inc., et al., and
Engle, et al., v. R.J. Reynolds Tobacco Company, et al., were certified in state court in
Florida prior to the Fifth Circuits decision.
In May 1994, the Engle case was filed against Liggett and others in the Circuit Court, Eleventh
Judicial Circuit, Miami-Dade County, Florida. The class consists of all Florida residents and
citizens, and their survivors, who have suffered, presently suffer or have died from diseases
and medical conditions caused by their addiction to cigarettes that contain nicotine. Phase I
of the trial commenced in July 1998 and in July 1999, the jury returned the Phase I verdict.
The Phase I verdict concerned certain issues determined by the trial court to be common to
the causes of action of the plaintiff class. Among other things, the jury found that: smoking
cigarettes causes 20 diseases or medical conditions, cigarettes are addictive or dependence
producing, defective and unreasonably dangerous, defendants made materially false statements
with the intention of misleading smokers, defendants concealed or omitted material information
concerning the health effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of smoking cigarettes,
and defendants were negligent and engaged in extreme and outrageous conduct or acted with
reckless disregard with the intent to inflict emotional distress. The jury also found that
defendants conduct rose to a level that would permit a potential award or entitlement to
punitive damages. The court decided that Phase II of the trial, which commenced November
1999, would be a causation and damages trial for three of the class representatives and a
punitive damages trial on a class-wide basis, before the same jury that returned the verdict in
Phase I. Phase III of the trial was to be conducted before separate juries to address absent
class members claims, including issues of specific causation and other individual issues
regarding entitlement to compensatory damages. In April 2000, the jury awarded compensatory
damages of $12,704 to the three plaintiffs, to be reduced in proportion to the respective
plaintiffs fault. The jury also decided that the claim of one of the plaintiffs, who was
awarded compensatory damages of $5,831, was not timely filed. In July 2000, the jury awarded
approximately $145,000,000 in the punitive damages portion of Phase II against all defendants
- 23 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
including $790,000 against Liggett. The court entered a final order of judgment against the
defendants in November 2000. The courts final judgment, which provided for interest at the
rate of 10% per year on the jurys awards, also denied various post-trial motions, including a
motion for new trial and a motion seeking reduction of the punitive damages award. Liggett
appealed the courts order.
In May 2003, Floridas Third District Court of Appeals decertified the Engle class and set
aside the jurys decision in the case against Liggett and the other cigarette makers, including
the $145,000,000
punitive damages award. The intermediate appellate court ruled that there were multiple legal
bases why the class action trial, including the punitive damages award, could not be sustained.
The court found that the class failed to meet the legal requirements for class certification
and that class members needed to pursue their claims on an individualized basis. The court
also ruled that the trial plan violated Florida law and the appellate courts 1996
certification decision, and was unconstitutional. The court further found that the proceedings
were irretrievably tainted by class counsels misconduct and that the punitive damages award
was bankrupting under Florida law.
In May 2004, the Florida Supreme Court agreed to review the case, and oral argument was held in
November 2004. If the Third District Court of Appeals ruling is not upheld on appeal, it will
have a material adverse effect on the Company.
In May 2000, legislation was enacted in Florida that limits the size of any bond required,
pending appeal, to stay execution of a punitive damages verdict to the lesser of the punitive
award plus twice the statutory rate of interest, $100,000 or 10% of the net worth of the
defendant, but the limitation on the bond does not affect the amount of the underlying verdict.
In November 2000, Liggett filed the $3,450 bond required by the Florida law in order to stay
execution of the Engle judgment, pending appeal. Legislation limiting the amount of the bond
required to file an appeal of an adverse judgment has been enacted in more than 30 states.
In May 2001, Liggett, Philip Morris and Lorillard Tobacco Company reached an agreement with the
class in the Engle case, which provided assurance of Liggetts ability to appeal the jurys
July 2000 verdict. As required by the agreement, Liggett paid $6,273 into an escrow account to
be held for the benefit of the Engle class, and released, along with Liggetts existing $3,450
statutory bond, to the court for the benefit of the class upon completion of the appeals
process, regardless of the outcome of the appeal. As a result, the Company recorded a $9,723
pre-tax charge to the consolidated statement of operations for the first quarter of 2001. The
agreement, which was approved by the court, assured that the stay of execution, in effect
pursuant to the Florida bonding statute, would not be lifted or limited at any point until
completion of all appeals, including an appeal to the United States Supreme Court. If
Liggetts balance sheet net worth fell below $33,781 (as determined in accordance with
generally accepted accounting principles in effect as of July 14, 2000), the agreement provided
that the stay granted in favor of Liggett in the agreement would terminate and the Engle class
would be free to challenge the Florida bonding statute.
In June 2002, the jury in a Florida state court action entitled Lukacs v. Philip Morris, et al.
awarded $37,500 in compensatory damages in a case involving Liggett and two other tobacco
manufacturers. In March 2003, the court reduced the amount of the compensatory damages to
$25,100. The jury found Liggett 50% responsible for the damages incurred by the plaintiff.
The Lukacs case was the first individual case to be tried as part of Phase III of the Engle
case; the claims of all other individuals who are members of the class were stayed pending
resolution of the appeal of the Engle verdict. The Lukacs verdict, which was subject to the
outcome of the Engle appeal, has been
- 24 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
overturned as a result of the appellate courts ruling.
As discussed above, class counsel in Engle is pursuing various appellate remedies seeking
reversal of the appellate courts decision.
Class certification motions are pending in a number of putative class actions. Classes remain
certified against Liggett in West Virginia (Blankenship), Kansas (Smith) and New Mexico
(Romero). A number of class certification denials are on appeal.
In August 2000, in Blankenship v. Philip Morris, a West Virginia state court conditionally
certified (only to the extent of medical monitoring) a class of present or former West Virginia
smokers who
desire to participate in a medical monitoring plan. In January 2001, the judge declared a
mistrial. In July 2001, the court issued an order severing Liggett from the retrial of the
case which began in September 2001. In November 2001, the jury returned a verdict in favor of
the other defendants. In May 2004, the West Virginia Supreme Court affirmed the defense jury
verdict, and it denied plaintiffs petition for rehearing. Plaintiffs did not seek further
appellate review of this matter and the case has been concluded in favor of the other
defendants.
In April 2001, the California state court in Brown, et al., v. The American Tobacco Co., Inc.
et al. granted in part plaintiffs motion for class certification and certified a class
comprised of adult residents of California who smoked at least one of defendants cigarettes
during the applicable time period and who were exposed to defendants marketing and
advertising activities in California. Certification was granted as to plaintiffs claims that
defendants violated Californias unfair business practices statute. The court subsequently
defined the applicable class period for plaintiffs claims, pursuant to a stipulation
submitted by the parties, as June 10, 1993 through April 23, 2001. In March 2005, the court
issued a ruling granting defendants motion to decertify the class based on a recent change in
California law. In April 2005, the court denied plaintiffs motion for reconsideration of the
order which decertified the case. The plaintiffs have appealed. Liggett is a defendant in the
case.
In September 2002, in In Re Simon II Litigation, the federal district court for the Eastern
District of New York granted plaintiffs motion for certification of a nationwide non-opt-out
punitive damages class action against the major tobacco companies, including Liggett. The
class is not seeking compensatory damages, but was created to determine whether smokers across
the country may be entitled to punitive damages. In May 2005, the United States Court of
Appeals for the Second Circuit vacated the trial courts class certification order and remanded
the case to the trial court for further proceedings. The Second Circuit Court of Appeals
denied plaintiffs motion for reconsideration of the decertification ruling. In February 2006,
the trial court entered an order dismissing the action effective March 8, 2006.
Class action suits have been filed in a number of states against individual cigarette
manufacturers, alleging that the use of the terms lights and ultra lights constitutes
unfair and deceptive trade practices. One such suit (Schwab v. Philip Morris, et al.), pending
in federal court in New York against the cigarette manufacturers, seeks to create a nationwide
class of light cigarette smokers and includes Liggett as a defendant. Plaintiffs motion for
class certification and summary judgment motions by both sides were heard in September 2005.
In November 2005, the court issued an opinion permitting plaintiffs to seek fluid recovery
damages if class certification is granted. Fluid recovery would permit potential damages to be
paid out in ways other than merely giving cash directly to plaintiffs, such as establishing a
pool of money that could be used for public purposes. Although trial was scheduled to commence
in January 2006, the judge has allowed an additional period for discovery before deciding the
class certification issue.
- 25 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
In March 2003, in a class action brought against Philip Morris on behalf of smokers of light
cigarettes, a state court judge in Illinois in the Price, et al., v. Philip Morris case awarded
$7,100,500 in actual damages to the class members, $3,000,000 in punitive damages to the State
of Illinois (which was not a plaintiff in this matter), and approximately $1,800,000 in
attorneys fees and costs. Entry of judgment was stayed. In December 2005, the Illinois
Supreme Court overturned the lower state courts ruling in Price, and sent the case back to the
lower court with instructions to dismiss the case. In May 2006, the Illinois Supreme court
denied plaintiffs motion for a rehearing.
Approximately 38 purported state and federal class action complaints were filed against the
cigarette manufacturers, including Liggett, for alleged antitrust violations. The actions
allege that the cigarette manufacturers have engaged in a nationwide and international
conspiracy to fix the price of cigarettes in violation of state and federal antitrust laws.
Plaintiffs allege that defendants price-fixing conspiracy raised the price of cigarettes above
a competitive level. Plaintiffs in the 31 state actions purport to represent classes of
indirect purchasers of cigarettes in 16 states; plaintiffs in the seven federal actions purport
to represent a nationwide class of wholesalers who purchased cigarettes directly from the
defendants. The federal class actions were consolidated and, in July 2000, plaintiffs filed a
single consolidated complaint that did not name Liggett as a defendant, although Liggett
complied with discovery requests. In July 2002, the court granted defendants motion for
summary judgment in the consolidated federal cases, which decision was affirmed on appeal by
the United States Court of Appeals for the Eleventh Circuit. All state court cases on behalf
of indirect purchasers have been dismissed, except for two cases pending in Kansas and New
Mexico. The Kansas state court, in the case of Smith v. Philip Morris, et al., granted class
certification in November 2001. In April 2003, plaintiffs motion for class certification was
granted in Romero v. Philip Morris, the case pending in New Mexico state court. In February
2005, the New Mexico Supreme Court affirmed the trial courts certification order. Liggett is
a defendant in both the Kansas and New Mexico cases.
Although not technically a class action, a West Virginia state court has consolidated for trial
on some common related issues approximately 1,000 individual smoker actions against cigarette
- 26 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
manufacturers, that were pending prior to 2001. Liggett is a defendant in most of the cases
pending in West Virginia. Trial has been set for March 2007. In January 2002, the court
severed Liggett from the trial of the consolidated action.
Governmental Actions. As of March 31, 2006, there were approximately five Governmental Actions
pending against Liggett. In these proceedings, both foreign and domestic governmental entities
seek reimbursement for Medicaid and other health care expenditures. The claims asserted in
these health care cost recovery actions vary. In most of these cases, 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,
breach of 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 RICO. A health care recovery case is pending in
Missouri state court brought by the City of St. Louis, Missouri, and approximately 50 area
hospitals against the major cigarette manufacturers. As a result of a June 2005 ruling, the
court has limited plaintiffs claims by barring those that occurred more than five years before
the case was filed.
Third-Party Payor Actions. As of March 31, 2006, there were approximately three Third-Party
Payor Actions pending against Liggett. The claims in Third-Party Payor Actions are similar to
those in the Governmental Actions but have been commenced by insurance companies, union health
and welfare trust funds, asbestos manufacturers and others. Nine United States Circuit Courts
of Appeal have ruled that Third-Party Payors did not have standing to bring lawsuits against
cigarette manufacturers. The United States Supreme Court has denied petitions for certiorari
in the cases decided by five of the courts of appeal.
In Third-Party Payor Actions claimants have set forth several theories of relief sought:
funding of corrective public education campaigns relating to issues of smoking and health;
funding for clinical smoking cessation programs; disgorgement of profits from sales of
cigarettes; restitution; treble damages; and attorneys fees. Nevertheless, no specific
amounts are provided. It is understood that requested damages against the tobacco company
defendants in these cases might be in the billions of dollars.
In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in a
Third-Party Payor Action brought by the largest private insurer in that country, Clalit Health
Services, against the major United States tobacco manufacturers. The court ruled that,
although Liggett had not sold product in Israel since 1978, it may still have liability for
damages resulting from smoking of its product if it did sell cigarettes there before 1978.
Motions filed by the defendants are pending before the Israel Supreme Court, seeking appeal
from a lower courts decision granting leave to plaintiffs for foreign service of process.
In August 2005, the United Seniors Association, Inc. filed a lawsuit in federal court in
Massachusetts pursuant to the private cause of action provisions of the Medicare Secondary
Payer Act seeking to recover for the Medicare program all expenditures since August 1999 on
smoking-related diseases.
Federal Government Action. In September 1999, the United States government commenced
litigation against Liggett and the other major tobacco companies in the United States District
Court for the District of Columbia. The action seeks to recover an unspecified amount of
health care costs
- 27 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
paid for and furnished, and to be paid for and furnished, by the Federal Government for lung
cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the
fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from
engaging in fraud and other unlawful conduct in the future, and to compel defendants to
disgorge the proceeds of their unlawful conduct. The complaint alleges that such costs total
more than $20,000,000 annually. The action asserted claims under three federal statutes, the
Medical Care Recovery Act (MCRA), the Medicare Secondary Payer provisions of the Social
Security Act (MSP) and RICO. In September 2000, the court dismissed the governments claims
based on MCRA and MSP, reaffirming its decision in July 2001. In the September 2000 decision,
the court also determined not to dismiss the governments RICO claims, under which the
government continues to seek court relief to restrain the defendant tobacco companies from
allegedly engaging in fraud and other unlawful conduct and to compel disgorgement. In a
January 2003 filing with the court, the government alleged that disgorgement by defendants of
approximately $289,000,000 is an appropriate remedy in the case. In February 2005, the United
States Court of Appeals for the District of Columbia upheld the defendants motion for summary
judgment to dismiss the governments disgorgement claim, ruling that disgorgement is not an
available remedy in a civil RICO action. In April 2005, the appellate court denied the
governments request that the disgorgement ruling be reconsidered by the full court. In
October 2005, the United States Supreme Court declined to review this decision, although the
government could again seek review of this issue following a verdict.
Trial of the case concluded June 2005. On June 27, 2005, the government sought to restructure
its potential remedies and filed a proposed Final Judgment and Order. The relief can be
grouped into four categories: (1) $14,000,000 for a cessation and counter marketing program;
(2) so-called corrective statements; (3) disclosures; and (4) enjoined activities.
Post-trial briefing was completed in October 2005.
Settlements. In March 1996, Liggett entered into an agreement, subject to court approval, to
settle the Castano class action tobacco litigation. The Castano class was subsequently
decertified by the court.
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with the Attorneys General of 45 states and territories. The settlements released
Liggett from all smoking-related claims within those states and territories, including claims
for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (collectively,
the Original Participating Manufacturers or OPMs) and Liggett (together with the OPMs and
any other tobacco product manufacturer that becomes a signatory, the Participating
Manufacturers) entered into the Master Settlement Agreement (the MSA) with 46 states, the
District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and
the Northern Mariana Islands (collectively, the Settling States) to settle the asserted and
unasserted health care cost recovery and certain other claims of those Settling States. The
MSA received final judicial approval in each settling jurisdiction.
The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco
products; bans the use of cartoon characters in all tobacco advertising and promotion; limits
each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month
period; bans all outdoor
- 28 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
advertising, with the exception of signs, 14 square feet or less, at retail establishments that
sell tobacco products; prohibits payments for tobacco product placement in various media; bans
gift offers based on the purchase of tobacco products without sufficient proof that the
intended recipient is an adult; prohibits Participating Manufacturers from licensing third
parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits
Participating Manufacturers from using as a tobacco product brand name any nationally
recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups
or individual celebrities.
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with
the MSA and to reduce underage usage of tobacco products and imposes requirements applicable to
lobbying activities conducted on behalf of Participating Manufacturers.
Liggett has no payment obligations under the MSA except to the extent its market share exceeds
a base share of 125% of its 1997 market share, or approximately 1.65% of total cigarettes sold
in the United States. As a result of the Medallion acquisition in April 2002, Vector Tobacco
has no payment obligations under the MSA, except to the extent its market share exceeds a base
amount of approximately 0.28% of total cigarettes sold in the United States. During 1999 and
2000, Liggetts market share did not exceed the base amount. According to data from Management
Science Associates, Inc., domestic shipments by Liggett and Vector Tobacco accounted for
approximately 2.2% of the total cigarettes shipped in the United States during 2001, 2.4%
during 2002, 2.5% during 2003, 2.3% during 2004 and 2.2% during 2005. On April 15 of any year
following a year in which Liggetts and/or Vector Tobaccos market shares exceed their
respective base shares, Liggett and/or Vector Tobacco will pay on each excess unit an amount
equal (on a per-unit basis) to that due during the same following year by the OPMs under the
payment provisions of the MSA, subject to applicable adjustments, offsets and reductions. In
March and April 2002, Liggett and Vector Tobacco paid a total of $31,130 for their 2001 MSA
obligations. In March and April 2003, Liggett and Vector Tobacco paid a total of $37,541 for
their 2002 MSA obligations. At that time, funds were held back based on Liggetts and Vector
Tobaccos belief that their MSA payments for 2002 should be reduced as a result of market share
loss to non-participating manufacturers. In June 2003, Liggett and Vector Tobacco entered into
a settlement agreement with the Settling States whereby Liggett and Vector Tobacco agreed to
pay $2,478 in April 2004 to resolve these claims. In April 2004, Liggett and Vector Tobacco
paid a total of $50,322 for their 2003 MSA obligations. In April 2005, Liggett and Vector
Tobacco paid a total of $20,982 for their 2004 MSA obligations. In April 2006, Liggett and
Vector Tobacco paid a total of $10,637 for their 2005 MSA obligations. Liggett and Vector
Tobacco have expensed $7,588 for their estimated MSA obligations for the first three months of
2006 as part of cost of goods sold.
Under the payment provisions of the MSA, the Participating Manufacturers are required to pay
the following base annual amounts (subject to applicable adjustments, offsets and reductions):
|
|
|
|
|
Year |
|
Amount |
2006 2007 |
|
$ |
8,000,000 |
|
2008 and each year thereafter |
|
$ |
9,000,000 |
|
These annual payments will be allocated based on relative unit volume of domestic cigarette
shipments. The payment obligations under the MSA are the several, and not joint, obligations
of each Participating Manufacturer and are not the responsibility of any parent or affiliate of
a Participating Manufacturer.
- 29 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
On March 30, 2005, the Independent Auditor under the MSA calculated $28,668 in MSA payments for
Liggetts 2004 sales. On April 15, 2005, Liggett paid $11,678 of this amount and, in
accordance with its rights under the MSA, disputed the balance of $16,990. Of the disputed
amount, Liggett paid $9,304 into the disputed payments account under the MSA and withheld from
payment $7,686. The $9,304 paid into the disputed payment accounts represents the amount
claimed by Liggett as an adjustment to its 2003 payment obligation under the MSA for market
share loss to non-participating manufacturers. At March 31, 2006, included in Other current
assets on the Companys consolidated balance sheet was a receivable of $6,513 relating to such
amount. The $7,686 withheld from payment represents $5,318 claimed as an adjustment to
Liggetts 2004 MSA obligation for market share loss to non-participating manufacturers and
$2,368 relating to the retroactive change, discussed below, to the method for computing payment
obligations under the MSA which Liggett contends, among other things, is not in accordance with
the MSA. On May 31, 2005, New York State filed a motion on behalf of the Settling States in
New York state court seeking to compel Liggett and the other Subsequent Participating
Manufacturers that paid into the disputed payments account to release to the Settling States
the amounts paid into such account. The Settling States contend that Liggett had no right
under the MSA and related agreements to pay into the disputed payments account any amount
claimed as an adjustment for market share loss to non-participating manufacturers for 2003,
although they acknowledge that Liggett has the right to dispute such amounts. By stipulation
among the parties dated July 25, 2005, New Yorks motion was dismissed and Liggett authorized
the release to the Settling States of the $9,304 it had paid into the account, although Liggett
continues to dispute that it owes this amount. Liggett withheld from its payment due under the
MSA on April 15, 2006 approximately $1,600 which Liggett claims as the non-participating
manufacturers adjustment to its 2005 payment obligation and $2,612 relating to the gross
versus net dispute discussed below.
In March 2006, an independent economic consulting firm, selected pursuant to the provisions of
the MSA, determined that the MSA was a significant factor contributing to the market share
loss of participating manufacturers for 2003. As a result, under the provisions of the MSA,
the manufacturers are entitled to a non-participating manufacturers adjustment to their 2003
MSA payments. States that diligently enforced in 2003 the escrow statutes enacted in
connection with the MSA may be able to avoid application of the adjustment to their payments
for that year. A number of states have filed, or are likely to file, actions seeking a
determination that they have diligently enforced their respective escrow statutes. Liggett
and several other subsequent participating manufacturers are in the process of organizing a
joint defense group to defend against these actions.
As of March 31, 2006, Liggett and Vector Tobacco have disputed the following assessments under
the MSA related to failure to receive credit for market share loss to non-participating
manufacturers: $6,513 for 2003, $3,789 for 2004 and approximately $800 for 2005. These
disputed amounts have not been accrued in the accompanying consolidated financial statements.
In October 2004, Liggett was notified that all Participating Manufacturers payment obligations
under the MSA, dating from the agreements execution in late 1998, have been recalculated
utilizing net unit amounts, rather than gross unit amounts (which have been utilized since
1999). The change in the method of calculation could, among other things, require additional
payments by Liggett under the MSA of approximately $12,300 for the periods 2001 through 2005,
and require Liggett to pay an additional amount of approximately $2,800 in 2006 and in future
periods by lowering Liggetts market share exemption under the MSA.
- 30 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
Liggett has objected to this retroactive change, and has disputed the change in methodology.
Liggett contends that the retroactive change from utilizing gross unit amounts to net unit
amounts is impermissible for several reasons, including:
|
|
|
utilization of net unit amounts is not required by the MSA (as reflected
by, among other things, the utilization of gross unit amounts for the past
six years), |
|
|
|
|
such a change is not authorized without the consent of affected parties to
the MSA, |
|
|
|
|
the MSA provides for four-year time limitation periods for revisiting
calculations and determinations, which precludes recalculating Liggetts 1997
Market Share (and thus, Liggetts market share exemption), and |
|
|
|
|
Liggett and others have relied upon the calculations based on gross unit
amounts for the past six years. |
No amounts have been accrued in the accompanying consolidated financial statements for any
potential liability relating to the gross versus net dispute.
The MSA replaces Liggetts prior settlements with all states and territories except for
Florida, Mississippi, Texas and Minnesota. Each of these four states, prior to the
effective date of the MSA, negotiated and executed settlement agreements with each of the
other major tobacco companies, separate from those settlements reached previously with
Liggett. Liggetts agreements with these states remain in full force and effect, and
Liggett made various payments to these states during 1996, 1997 and 1998 under the
agreements. These states settlement agreements with Liggett contained most favored
nation provisions, which could reduce Liggetts payment obligations based on subsequent
settlements or resolutions by those states with certain other tobacco companies.
Beginning in 1999, Liggett determined that, based on each of these four states
settlements or resolutions with United States Tobacco Company, Liggetts payment
obligations to those states had been eliminated. With respect to all non-economic
obligations under the previous settlements, Liggett is entitled to the most favorable
provisions as between the MSA and each states respective settlement with the other major
tobacco companies. Therefore, Liggetts non-economic obligations to all states and
territories are now defined by the MSA.
In 2003, in order to resolve any potential issues with the State of Minnesota as to Liggetts
settlement obligations, Liggett negotiated a $100 a year payment to Minnesota, to be paid any
year cigarettes manufactured by Liggett are sold in that state. In 2004, the Attorneys General
for each of Florida, Mississippi and Texas advised Liggett that they believed that Liggett has
failed to make all required payments under the respective settlement agreements with these
states for the period 1998 through 2003 and that additional payments may be due for 2004 and
subsequent years. Liggett believes these allegations are without merit, based, among other
things, on the language of the most favored nation provisions of the settlement agreements. In
December 2004, the State of Florida offered to settle all amounts allegedly owed by Liggett for
the period through 2003 for the sum of $13,500. In March 2005, the State of Florida reaffirmed
its December 2004 offer to settle and provided Liggett with a 60 day notice to cure the alleged
defaults. In November 2005, Florida made a revised offer that Liggett pay Florida $4,250 to
resolve all matters through December 31, 2005, and pay Florida $0.17 per pack on all Liggett
cigarettes sold in Florida beginning January 1, 2006. After further discussions, Floridas
most recent offer is that Liggett pay a total of $3,500 in four annual payments, $1,000 for the
first three years and $500 in the fourth year, and defer further discussion of any
- 31 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
alleged future obligations until the end of Floridas 2006 legislative session. Liggett has
not yet responded to this most recent offer from Florida and there can be no assurance that a
settlement will be reached. In November 2004, the State of Mississippi offered to settle all
amounts allegedly owed by Liggett for the period through 2003 for the sum of $6,500. In April
2005, the State of Mississippi reaffirmed its November 2004 offer to settle and provided
Liggett with a 60 day notice to cure the alleged defaults. No specific monetary demand has
been made by the State of Texas. Liggett has met with representatives of Mississippi and Texas
to discuss the issues relating to the alleged defaults, although no resolution has been
reached.
Except for $2,000 accrued for the year ended December 31, 2005, in connection with the
foregoing matters, no other amounts have been accrued in the accompanying consolidated
financial statements for any additional amounts that may be payable by Liggett under the
settlement agreements with Florida, Mississippi and Texas. At March 31, 2006, the $2,000
remained accrued in settlement accruals on the Companys consolidated balance sheet. There can
be no assurance that Liggett will prevail in any of these matters and that Liggett will not be
required to make additional material payments, which payments could adversely affect the
Companys consolidated financial position, results of operations or cash flows.
In August 2004, the Company announced that Liggett and Vector Tobacco had notified the
Attorneys General of 46 states that they intend to initiate proceedings against one or more of
the Settling States for violating the terms of the MSA. The Companys subsidiaries allege that
the Settling States violated their rights and the MSA by extending unauthorized favorable
financial terms to Miami-based Vibo Corporation d/b/a General Tobacco when, on August 19, 2004,
the Settling States entered into an agreement with General Tobacco allowing it to become a
Subsequent Participating Manufacturer under the MSA. General Tobacco imports discount
cigarettes manufactured in Colombia, South America.
In the notice sent to the Attorneys General, the Companys subsidiaries indicated that they
will seek to enforce the terms of the MSA, void the General Tobacco agreement and enjoin the
Settling States and National Association of Attorneys General from listing General Tobacco as a
Participating Manufacturer on their websites. Several Subsequent Participating Manufacturers,
including Liggett and Vector Tobacco, filed a motion in state court in Kentucky seeking to
enforce the terms of the MSA with respect to General Tobacco. On January 26, 2006, the court
entered an order denying the motion and finding that the terms of the General Tobacco
settlement agreement were reasonable and not in violation of the MSA. The judge also found
that the Subsequent Participating Manufacturers, under these circumstances, were not entitled
to most favored nation treatment. These Subsequent Participating Manufacturers have given
notice of appeal in this case.
There is a suit pending against New York state officials, in which importers of cigarettes
allege that the MSA and certain New York statutes enacted in connection with the MSA violate
federal antitrust law. In September 2004, the court denied plaintiffs motion to preliminarily
enjoin the MSA and certain related New York statutes, but the court issued a preliminary
injunction against the allocable share provision of the New York escrow statute. In
addition, similar lawsuits are pending in Kentucky, Arkansas, Kansas, Louisiana, Nebraska,
Tennessee and Oklahoma. Liggett is not a defendant in these cases.
Trials. Trial in the United States government action concluded on June 15, 2005 in federal
court in the District of Columbia. Post-trial submissions have been completed, and the parties
are awaiting a final decision from the trial court. Cases currently scheduled for trial during
the next six months
- 32 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
include two individual actions in Missouri state court and one in New York state court where
Liggett is a defendant along with various of the other major tobacco companies. Trial dates,
however, are subject to change.
Management is not able to predict the outcome of the litigation pending against Liggett.
Litigation is subject to many uncertainties. In May 2003, a Florida intermediate appellate
court overturned a $790,000 punitive damages award against Liggett and decertified the Engle
smoking and health class action. In May 2004, the Florida Supreme Court agreed to review the
case, and oral argument was held in November 2004. If the intermediate appellate courts
ruling is not upheld on appeal, it will have a material adverse effect on the Company. In
November 2000, Liggett filed the $3,450 bond required under the bonding statute enacted in 2000
by the Florida legislature which limits the size of any bond required, pending appeal, to stay
execution of a punitive damages verdict. In May 2001, Liggett reached an agreement with the
class in the Engle case, which provided assurance to Liggett that the stay of execution, in
effect pursuant to the Florida bonding statute, would not be lifted or limited at any point
until completion of all appeals, including to the United States Supreme Court. As required by
the agreement, Liggett paid $6,273 into an escrow account to be held for the benefit of the
Engle class, and released, along with Liggetts existing $3,450 statutory bond, to the court
for the benefit of the class upon completion of the appeals process, regardless of the outcome
of the appeal. As a result, the Company recorded a $9,723 pre-tax charge to the consolidated
statement of operations for the first quarter of 2001. In June 2002, the jury in an individual
case brought under the third phase of the Engle case awarded $37,500 (subsequently reduced by
the court to $25,100) of compensatory damages against Liggett and two other defendants and
found Liggett 50% responsible for the damages. The verdict, which was subject to the outcome
of the Engle appeal, has been overturned as a result of the appellate courts ruling. In April
2004, a jury in a Florida state court action awarded compensatory damages of approximately $540
against Liggett in an individual action. In addition, plaintiffs counsel was awarded legal
fees of $752. Liggett has appealed both the verdict and the award of legal fees. It is
possible that additional cases could be decided unfavorably and that there could be further
adverse developments in the Engle case. Liggett may enter into discussions in an attempt to
settle particular cases if it believes it is appropriate to do so. Management cannot predict
the cash requirements related to any future settlements and judgments, including cash required
to bond any appeals, and there is a risk that those requirements will not be able to be met.
An unfavorable outcome of a pending smoking and health case could encourage the commencement of
additional similar litigation. Management is unable to make a meaningful estimate with respect
to the amount or range of loss that could result from an unfavorable outcome of the cases
pending against Liggett or the costs of defending such cases. The complaints filed in these
cases rarely detail alleged damages. Typically, the claims set forth in an individuals
complaint against the tobacco industry seek money damages in an amount to be determined by a
jury, plus punitive damages and costs. These damage claims are typically stated as being for
the minimum necessary to invoke the jurisdiction of the court.
It is possible that the Companys consolidated financial position, results of operations or
cash flows could be materially adversely affected by an unfavorable outcome in any such
smoking-related litigation.
Liggetts and Vector Tobaccos management are unaware of any material environmental conditions
affecting their existing facilities. Liggetts and Vector Tobaccos management believe that
current operations are conducted in material compliance with all environmental laws and
regulations and other laws and regulations governing cigarette manufacturers. Compliance with
federal, state and
- 33 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
local provisions regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, has not had a material effect on the capital
expenditures, results of operations or competitive position of Liggett or Vector Tobacco.
Liggett has been served in three reparations actions brought by descendants of slaves.
Plaintiffs in these actions claim that defendants, including Liggett, profited from the use of
slave labor. Seven additional cases have been filed in California, Illinois and New York.
Liggett is a named defendant in only one of these additional cases, but has not been served.
The nine cases were consolidated before the United States District Court for the Northern
District of Illinois. In June 2005, the court granted defendants motion to dismiss the
consolidated action. The plaintiffs have appealed.
There are several other proceedings, lawsuits and claims pending against the Company and
certain of its consolidated subsidiaries unrelated to smoking or tobacco 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 the Companys financial position,
results of operations or cash flows.
Legislation and Regulation:
Many cities and states have recently enacted legislation banning smoking in public places
including offices, restaurants, public buildings and bars. Efforts to limit smoking in public
places could have a material adverse effect on the Company.
In January 1993, the Environmental Protection Agency (EPA) released a report on the
respiratory effect of secondary smoke which concludes that secondary smoke 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 regulate secondary smoke,
and that given the scientific evidence and the EPAs failure to follow its own guidelines in
making the determination, the EPAs classification of secondary smoke was arbitrary and
capricious. In July 1998, a federal district court vacated those sections of the report
relating to lung cancer, finding that the EPA may have reached different conclusions had it
complied with relevant statutory requirements. The federal government appealed the courts
ruling. In December 2002, the United States Court of Appeals for the Fourth Circuit rejected
the industry challenge to the EPA report ruling that it was not subject to court review.
Issuance of the report may encourage efforts to limit smoking in public areas.
In August 1996, the Food and Drug Administration (the FDA) filed in the Federal Register a
Final Rule classifying tobacco as a drug or medical device, asserting jurisdiction over the
manufacture and marketing of tobacco products and imposing restrictions on the sale,
advertising and promotion of tobacco products. Litigation was commenced challenging the legal
authority of the FDA to assert such jurisdiction, as well as challenging the constitutionality
of the rules. In March 2000, the United States Supreme Court ruled that the FDA does not have
the power to regulate tobacco. Liggett supported the FDA Rule and began to phase in compliance
with certain of the proposed FDA regulations. Since the Supreme Court decision, various
proposals and recommendations have been made for additional federal and state legislation to
regulate cigarette manufacturers. Congressional advocates of FDA regulations have introduced
legislation that would give the FDA authority to regulate the manufacture, sale, distribution
and labeling of tobacco products to protect public health,
- 34 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
thereby allowing the FDA to reinstate its prior regulations or adopt new or additional
regulations. In October 2004, the Senate passed a bill, which did not become law, providing
for FDA regulation of tobacco products. A substantially similar bill was reintroduced in
Congress in March 2005. The ultimate outcome of these proposals cannot be predicted, but FDA
regulation of tobacco products could have a material adverse effect on the Company.
In October 2004, federal legislation was enacted which abolished the federal tobacco quota and
price support program. Pursuant to the legislation, manufacturers of tobacco products will be
assessed $10,140,000 over a ten year period to compensate tobacco growers and quota holders for
the elimination of their quota rights. Cigarette manufacturers will initially be responsible
for 96.3% of the assessment (subject to adjustment in the future), which will be allocated
based on relative unit volume of domestic cigarette shipments. Management currently estimates
that Liggetts and Vector Tobaccos assessment will be approximately $22,000 for the second
year of the program which began January 1, 2006. The relative cost of the legislation to the
three largest cigarette manufacturers will likely be less than the cost to smaller
manufacturers, including Liggett and Vector Tobacco, because one effect of the legislation is
that the three largest manufacturers will no longer be obligated to make certain contractual
payments, commonly known as Phase II payments, they agreed in 1999 to make to tobacco-producing
states. The ultimate impact of this legislation cannot be determined, but there is a risk that
smaller manufacturers, such as Liggett and Vector Tobacco, will be disproportionately affected
by the legislation, which could have a material adverse effect on the Company.
In August 1996, Massachusetts enacted legislation requiring tobacco companies to publish
information regarding the ingredients in cigarettes and other tobacco products sold in that
state. In December 2002, the United States Court of Appeals for the First Circuit ruled that
the ingredients disclosure provisions violated the constitutional prohibition against unlawful
seizure of property by forcing firms to reveal trade secrets. The decision was not appealed by
the state. Liggett began voluntarily complying with this legislation in December 1997 by
providing ingredient information to the Massachusetts Department of Public Health and,
notwithstanding the appellate courts ruling, has continued to provide ingredient disclosure.
Liggett also provides ingredient information annually, as required by law, to the states of
Texas and Minnesota. Several other states are considering ingredient disclosure legislation
and the Senate bill providing for FDA regulation also calls for, among other things, ingredient
disclosure.
Cigarettes are subject to substantial and increasing federal, state and local excise taxes.
The federal excise tax on cigarettes is currently $0.39 per pack. State and local sales and
excise taxes vary considerably and, when combined with sales taxes, local taxes and the current
federal excise tax, may currently exceed $4.00 per pack. In 2005, nine states enacted
increases in excise taxes. Further increases from other states are expected. Congress has
considered significant increases in the federal excise tax or other payments from tobacco
manufacturers, and various states and other jurisdictions have currently under consideration or
pending legislation proposing further state excise tax increases. Management believes
increases in excise and similar taxes have had an adverse effect on sales of cigarettes.
Various state governments have adopted or are considering adopting legislation establishing
ignition propensity standards for cigarettes. Compliance with this legislation could be
burdensome and costly. In June 2000, the New York State legislature passed legislation
charging the states Office of Fire Prevention and Control, referred to as the OFPC, with
developing standards for or self-extinguishing or reduced ignition propensity cigarettes.
All cigarettes manufactured for sale in New York state must be manufactured to specific reduced
ignition propensity standards set forth in the
- 35 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
(Unaudited)
regulations. Liggett and Vector Tobacco are in compliance with the New York reduced ignition
propensity regulatory requirements. Since the passage of the New York law, the states of
Vermont, California and Illinois have passed similar laws utilizing the same technical
standards, to become effective on May 1, 2006, June 1, 2007 and January 1, 2008, respectively.
Similar legislation is being considered by other state governments and at the federal level.
Compliance with such legislation could harm the business of Liggett and Vector Tobacco,
particularly if there are varying standards from state to state.
Federal or state regulators may object to Vector Tobaccos low nicotine and nicotine-free
cigarette products and reduced risk cigarette products it may develop as unlawful or allege
they bear deceptive or unsubstantiated product claims, and seek the removal of the products
from the marketplace, or significant changes to advertising. Various concerns regarding Vector
Tobaccos advertising practices have been expressed to Vector Tobacco by certain state
attorneys general. Vector Tobacco has engaged in discussions in an effort to resolve these
concerns and Vector Tobacco has, in the interim, suspended all print advertising for its Quest
brand. If Vector Tobacco is unable to advertise its Quest brand, it could have a material
adverse effect on sales of Quest. Allegations by federal or state regulators, public health
organizations and other tobacco manufacturers that Vector Tobaccos products are unlawful, or
that its public statements or advertising contain misleading or unsubstantiated health claims
or product comparisons, may result in litigation or governmental proceedings. Vector Tobaccos
business may become subject to extensive domestic and international governmental regulation.
Various proposals have been made for federal, state and international legislation to regulate
cigarette manufacturers generally, and reduced constituent cigarettes specifically. It is
possible that laws and regulations may be adopted covering issues like the manufacture, sale,
distribution, advertising and labeling of tobacco products as well as any express or implied
health claims associated with reduced risk, low nicotine and nicotine-free cigarette products
and the use of genetically modified tobacco. A system of regulation by agencies such as the
FDA, the Federal Trade Commission or the United States Department of Agriculture may be
established. In addition, a group of public health organizations submitted a petition to the
FDA, alleging that the marketing of the OMNI product is subject to regulation by the FDA under
existing law. Vector Tobacco has filed a response in opposition to the petition. The FTC has
expressed interest in the regulation of tobacco products made by tobacco manufacturers,
including Vector Tobacco, which bear reduced carcinogen claims. The ultimate outcome of any of
the foregoing cannot be predicted, but any of the foregoing could have a material adverse
effect on the Company.
In addition to the foregoing, there have been a number of other restrictive regulatory actions,
adverse legislative and political decisions and other unfavorable developments concerning
cigarette smoking and the tobacco industry. These developments may negatively affect the
perception of potential triers of fact with respect to the tobacco industry, possibly to the
detriment of certain pending litigation, and may prompt the commencement of additional similar
litigation or legislation.
Other Matters:
See Note 13 for information concerning purported class action lawsuits commenced against the
Company, New Valley and New Valleys directors in connection with the Companys exchange offer
for New Valley.
In May 1999, in connection with the Philip Morris brand transaction, Eve Holdings Inc., a
subsidiary of Liggett, guaranteed a $134,900 bank loan to Trademarks LLC. The loan is secured
by Trademarks three premium cigarette brands and Trademarks interest in the exclusive license
of the
- 36 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
|
|
three brands by Philip Morris. The license provides for a minimum annual royalty payment equal
to the annual debt service on the loan plus $1,000. The Company believes that the fair value
of Eves guarantee was negligible at March 31, 2006. |
|
|
|
In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five
year agreement with a subsidiary of the American Wholesale Marketers Association to support a
program to permit tobacco distributors to secure, on reasonable terms, tax stamp bonds required
by state and local governments for the distribution of cigarettes. Under the agreement,
Liggett Vector Brands has agreed to pay a portion of losses, if any, incurred by the surety
under the bond program, with a maximum loss exposure of $500 for Liggett Vector Brands. To
secure its potential obligations under the agreement, Liggett Vector Brands has delivered to
the subsidiary of the Association a $100 letter of credit and agreed to fund up to an
additional $400. Liggett Vector Brands has incurred no losses to date under this agreement,
and the Company believes the fair value of Liggett Vector Brands obligation under the
agreement was immaterial at March 31, 2006. |
|
|
|
In 1994, New Valley commenced an action against the United States government seeking damages
for breach of a launch services agreement covering the launch of one of the Westar satellites
owned by New Valleys former Western Union satellite business. New Valley had a contract with
NASA to launch two Westar satellites. The first satellite was launched in 1984, and the second
was scheduled to be launched in 1986. Following the explosion of the space shuttle Challenger
in January 1986, the President of the United States announced a change in the governments
policy regarding commercial satellite launches, and New Valleys satellite was not launched. |
|
|
|
In 1995, the United States Court of Federal Claims granted the governments motion to dismiss
and, in 1997, the United States Court of Appeals for the Federal Circuit reversed and remanded
the case. Trial of the case was completed in New York federal court in August 2004 and
decision was reserved. In December 2004, the case was transferred to Judge Wiese of the United
States Court of Federal Claims. On August 19, 2005, Judge Wiese issued an opinion concluding
that the United States government is liable for breach of contract to New Valley. A
determination of damages was deferred until presentation of further evidence in a supplementary
trial proceeding. |
|
|
|
In December 2001, New Valleys subsidiary, Western Realty Development LLC, sold all the
membership interests in Western Realty Investments LLC to Andante Limited. In August 2003,
Andante submitted an indemnification claim to Western Realty Development alleging losses of
$1,225 from breaches of various representations made in the purchase agreement. Under the
terms of the purchase agreement, Western Realty Development has no obligation to indemnify
Andante unless the aggregate amount of all claims for indemnification made by Andante exceeds
$750, and Andante is required to bear the first $200 of any proven loss. New Valley would be
responsible for 70% of any damages payable by Western Realty Development. New Valley has
contested the indemnification claim. |
|
9. |
|
EMPLOYEE BENEFIT PLANS |
|
|
|
Defined Benefit and Postretirement Plans: |
|
|
|
Net periodic benefit cost for the Companys pension and other postretirement benefit plans for
the three months ended March 31, 2006 and 2005 consists of the following: |
- 37 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
Service cost benefits earned
during the period |
|
$ |
1,225 |
|
|
$ |
1,321 |
|
|
$ |
5 |
|
|
$ |
7 |
|
Interest cost on projected benefit
obligation |
|
|
2,250 |
|
|
|
2,172 |
|
|
|
150 |
|
|
|
153 |
|
Expected return on plan assets |
|
|
(3,145 |
) |
|
|
(3,069 |
) |
|
|
|
|
|
|
|
|
Amortization of prior service cost |
|
|
262 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net actuarial loss |
|
|
435 |
|
|
|
468 |
|
|
|
3 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense |
|
$ |
1,027 |
|
|
$ |
892 |
|
|
$ |
158 |
|
|
$ |
171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company did not make contributions to its pension benefits plans for the three months ended
March 31, 2006 and does not anticipate making any contributions to such plans in 2006. The
Company anticipates paying approximately $550 in other postretirement benefits in 2006. |
|
10. |
|
STOCK-BASED COMPENSATION |
|
|
|
The Company grants equity compensation under two long term incentive plans. As of March 31,
2006, there were approximately 4,750,000 shares remaining available for issuance under the
Companys Amended and Restated 1999 Long-Term Incentive Plan (the 1999 Plan) and
approximately 800,000 shares remaining available for issuance under the 1998 Long-Term
Incentive Plan. |
|
|
|
Prior to January 1, 2006, the Company accounted for share-based compensation plans in
accordance with the provisions of APB Opinion No. 25, Accounting for Stock Issued to
Employees, as permitted by SFAS No. 123. The Company elected to use the intrinsic value
method of accounting for employee and director share-based compensation expense for its
non-compensatory employee and director stock option awards and did not recognize compensation
expense for the issuance of options with an exercise price equal to the market price of the
underlying common stock on the date of grant. |
|
|
|
Stock Options. On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R),
which requires the Company to value unvested stock options granted prior to the adoption of
SFAS No. 123(R) under the fair value method of accounting and expense this amount in the
statement of operations over the stock options remaining vesting period. Upon adoption, there
was no cumulative adjustment for the impact of the change in accounting principles because the
assumed forfeiture rate did not differ significantly from prior periods. The Company
recognized compensation expense of $186 related to stock options in the first quarter of 2006
as a result of adopting SFAS No. 123(R). |
|
|
|
The terms of certain stock options awarded under the 1999 Plan in January 2001 and November
1999 provide for common stock dividend equivalents (at the same rate as paid on the common
stock) with respect to the shares underlying the unexercised portion of the options. Prior to
January 1, 2006, in accordance with APB Opinion No. 25, the Company accounted for the dividend
equivalent rights on these options as additional compensation cost ($1,770 for the three months
ended March 31, 2005). Effective January 1, 2006, in accordance with SFAS No. 123(R), the
Company recognizes payments of the dividend equivalent rights on these options as reductions in
additional paid-in capital on the Companys consolidated balance sheet ($1,578 for the three
months ended March 31, 2006). |
- 38 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
The net impact of the adoption of SFAS No. 123(R) was a reduction in the operating, selling,
administrative and general expenses of $1,392 and an increase in net income of $1,467 for the
three months ended March 31, 2006. |
|
|
|
Awards of options to employees under the Companys stock compensation plans generally vest over
periods ranging from four to five years and have a term of ten years from the date of grant.
The expense related to stock option compensation included in the determination of net income
for the three month period ended March 31, 2005 differs than that which would have been
recognized if the fair value method had been applied to all awards since the original effective
date of SFAS No. 123. Had the Company elected to adopt the fair value approach as prescribed
by SFAS No. 123, which charges earnings for the estimated fair value of stock options, its pro
forma net income and pro forma EPS for the first quarter of fiscal 2005 would have been as
follows: |
- 39 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, 2005 |
|
|
|
Revised |
|
Net income |
|
$ |
12,227 |
|
|
|
|
|
|
Add: employee stock compensation
expense included in reported net income,
net of related tax effects |
|
|
1,950 |
|
Deduct: total employee stock compensation
expense determined under the fair
value method for all awards, net of
related tax effects |
|
|
(310 |
) |
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
13,867 |
|
|
|
|
|
|
|
|
|
|
Income per share: |
|
|
|
|
Basic as reported |
|
$ |
0.28 |
|
|
|
|
|
Diluted as reported |
|
$ |
0.27 |
|
|
|
|
|
Basic pro forma |
|
$ |
0.29 |
|
|
|
|
|
Diluted pro forma |
|
$ |
0.28 |
|
|
|
|
|
|
|
The amounts previously reported for the 2005 period have been revised to reflect payments of
dividend equivalent rights ($1,721, net of tax) on unexercised options as reductions in
additional paid-in capital rather than compensation expense in accordance with SFAS No. 123.
Additionally, upon reflecting the payment of dividend equivalent rights as a reduction of
additional paid-in capital in determining its pro forma net income, the Company accounted for
the effect of the underlying options as participating securities when calculating its basic pro
forma EPS. As a result, pro forma net income was reduced by $1,261 when calculating basic pro
forma EPS. |
|
|
|
As permitted by SFAS No. 123 and SFAS No. 123(R), the fair value of option grants is estimated
at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option
pricing model was developed for use in estimating the fair value of traded options which have
no vesting restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including expected stock price
characteristics which are significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the fair value estimate, the
existing models do not necessarily provide a reliable single measure of the fair value of
stock-based compensation awards. |
|
|
|
There were no option grants in the three months ended March 31, 2006 and 2005. If options had
been granted, the assumptions used in computing fair value under the Black-Scholes option
pricing model would have been based on the expected option life considering both the
contractual term of the option and expected employee exercise behavior, the interest rate
associated with U.S. Treasury issues with a remaining term equal to the expected option life
and the expected volatility of the Companys common stock over the expected term of the option. |
- 40 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
A summary of the Companys stock option activity during the three months ended March 31, 2006
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
|
Weighted-Average |
|
|
Contractual Term |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Exercise Price |
|
|
(in years) |
|
|
Value(1) |
|
Outstanding at December 31, 2005 |
|
|
8,567,174 |
|
|
|
10.54 |
|
|
|
3.6 |
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(87,537 |
) |
|
|
10.56 |
|
|
|
8.1 |
|
|
|
|
|
Forfeited or expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
8,479,637 |
|
|
|
10.54 |
|
|
|
3.4 |
|
|
$ |
74,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option exercisable at March 31, 2006 |
|
|
8,341,789 |
|
|
|
|
|
|
|
|
|
|
|
73,968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested during period |
|
|
2,729 |
|
|
|
|
|
|
|
|
|
|
$ |
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value represents the amount by which the fair
value of the underlying common stock ($19.06 at March 31, 2006) exceeds the option
exercise price. |
|
|
The total intrinsic value of options exercised during the three months ended March 31,
2006 and 2005 was $410 and $262, respectively. |
|
|
|
As of March 31, 2006, there was $243 of total unrecognized compensation cost related to
unvested stock options. The cost is expected to be recognized over a weighted-average period
of less than one year at March 31, 2006. |
|
|
|
In November 2005, the President of Liggett and Liggett Vector Brands agreed to the cancellation
of an option to purchase 303,876 shares of the Companys common stock at $31.59 per share
granted under the 1999 Long-Term Incentive Plan in September 2001. In this regard, the
President of Liggett and the Company entered into an agreement, in which the Company, in
accordance with the Incentive Plan, agreed after the passage of more than six months and
assuming his continued employment with the Company or an affiliate of the Company, to grant him
another stock option under the 1999 Amended Plan covering 250,000 shares of the Companys
common stock with the exercise price equal to the value of the common stock on the grant date
of the replacement option. The new option will have a ten-year term and will become
exercisable with respect to one-fourth of the shares on December 1, 2006, with an additional
one-fourth becoming exercisable on each of the three succeeding one-year anniversaries of the
first exercisable date through December 1, 2009. |
|
|
|
Prior to the adoption of SFAS No. 123(R), the Company presented the tax savings resulting from
the deductions resulting from the exercise of non-qualified stock options as an operating cash
flow in accordance with EITF Issue No. 00-15, Classification in the Statement of Cash Flows of
the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock
Option.
|
- 41 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
SFAS No. 123(R) requires the Company to reflect the tax savings resulting from tax deductions
in excess of expense reflected in its financial statements as a component of Cash Flows from
Financing Activities. |
|
|
|
Restricted Stock Awards. In January 2005, New Valley awarded the President and Chief Operating
Officer of New Valley, who also served in the same positions with the Company, a restricted
stock grant of 1,250,000 shares of New Valleys common shares. Under the terms of the award,
one-seventh of the shares vested on July 15, 2005, with an additional one-seventh vesting on
each of the five succeeding one-year anniversaries of the first vesting date through July 15,
2010 and an additional one-seventh vesting on January 15, 2011. In September 2005, in
connection with his election as Chief Executive Officer of the Company, he renounced and
waived, as of that date, the unvested 1,071,429 common shares deliverable by New Valley to him
in the future. The Company recorded an expense of $545 ($194 net of income taxes and minority
interests) associated with the grant in the first quarter of 2005. |
|
|
|
In September 2005, the President of the Company was awarded a restricted stock grant of 500,000
shares of the Companys common stock and, on November 16, 2005, he was awarded an additional
restricted stock grant of 78,570 shares of the Companys common stock, in each case, pursuant
to the Companys Amended and Restated 1999 Long-Term Incentive Plan (the 1999 Amended Plan).
Pursuant to the restricted share agreements, one-fourth of the shares vest on September 15,
2006, with an additional one-fourth vesting on each of the three succeeding one-year
anniversaries of the first vesting date through September 15, 2009. In the event his
employment with the Company is terminated for any reason other than his death, his disability
or a change of control (as defined in his restricted share agreements) of the Company, any
remaining balance of the shares not previously vested will be forfeited by him. These
restricted stock awards by the Company replaced the unvested portion of the New Valley
restricted stock grant relinquished by the President of the Company.
The number of restricted shares of the Companys common stock
awarded to him by the Company (578,570 shares) was the
equivalent of the number of shares of the Companys common stock that would have been issued to
him had he retained his unvested New Valley restricted shares and those shares were exchanged
for the Companys common stock in the exchange offer and subsequent merger whereby the Company
acquired the remaining minority interest in New Valley in December 2005. The Company recorded
deferred compensation of $11,340 representing the fair market value
of the total restricted shares on the dates of grant. The
deferred compensation will be amortized over the vesting
period as a charge to compensation expense. The Company recorded an expense of $781 associated
with the grants in the first quarter of 2006. |
|
|
|
In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted
stock grant of 50,000 shares of the Companys common stock pursuant to the 1999 Amended Plan.
Pursuant to his restricted share agreement, one-fourth of the shares vest on November 1, 2006,
with an additional one-fourth vesting on each of the three succeeding one-year anniversaries of
the first vesting date through November 1, 2009. In the event his employment with the Company
is terminated for any reason other than his death, his disability or a change of control (as
defined in his restricted share agreement) of the Company, any remaining balance of the shares
not previously vested will be forfeited by him. The Company recorded deferred compensation of
$1,018 representing the fair market value of the restricted shares on the date of grant. The
Company recorded an expense of $64 associated with the grants in the first quarter of 2006. |
|
|
|
The Company also recognized $53 of expense for the three months ended March 31, 2006 and March
31, 2005, respectively, in connection with restricted stock awards granted to its outside
directors in June 2004. |
- 42 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
As of March 31, 2006, there was $11,048 of total unrecognized compensation costs related to
unvested restricted stock awards. The cost is expected to be recognized over a
weighted-average period of approximately 1.7 years at March 31, 2006. |
|
|
|
The Companys accounting policy is to treat dividends paid on restricted stock as a reduction
to additional paid-in capital on the Companys consolidated balance sheet. |
|
11. |
|
INCOME TAXES |
|
|
|
Vectors income tax rate for the three months ended March 31, 2006 does not bear a customary
relationship to statutory income tax rates as a result of the impact of nondeductible expenses
and state income taxes. Vectors income tax rate for the three months ended March 31, 2005
does not bear a customary relationship to statutory income tax rates as a result of the impact
of nondeductible expenses, state income taxes and the intraperiod allocation at New Valley
between income from continuing and discontinued operations. |
|
|
|
The consolidated balance sheets of the Company include deferred income tax assets and
liabilities, which represent temporary differences in the application of accounting rules
established by generally accepted accounting principles and income tax laws. As of March 31,
2006, the Companys deferred income tax liabilities exceeded its deferred income tax assets by
$67,981. The largest component of the Companys deferred tax liabilities exists because of
differences that resulted from a 1998 and 1999 transaction with Philip Morris Incorporated
where a subsidiary of Liggett contributed three of its premium cigarette brands to Trademarks
LLC, a newly-formed limited liability company. In such transaction, Philip Morris acquired an
option to purchase the remaining interest in Trademarks for a 90-day period commencing in
December 2008, and the Company has an option to require Philip Morris to purchase the remaining
interest for a 90-day period commencing in March 2010. |
|
|
|
In connection with the transaction, the Company recognized in 1999 a pre-tax gain of $294,078
in its consolidated financial statements and established a deferred tax liability of $103,100
relating to the gain. Upon exercise of the options during the 90-day periods commencing in
December 2008 or in March 2010, the Company will be required to pay tax in the amount of the
deferred tax liability, which will be offset by the benefit of any deferred tax assets,
including any net operating losses, available to the Company at that time. In connection with
an examination of the Companys 1998 and 1999 federal income tax returns, the Internal Revenue
Service issued to the Company in September 2003 a notice of proposed adjustment. The notice
asserts that, for tax reporting purposes, the entire gain should have been recognized in 1998
and in 1999 in the additional amounts of $150,000 and $129,900, respectively, rather than upon
the exercise of the options during the 90-day periods commencing in December 2008 or in March
2010. If the Internal Revenue Service were to ultimately prevail with the proposed adjustment,
it would result in the potential acceleration of tax payments of approximately $129,000,
including interest, net of tax benefits, through March 31, 2006. These amounts have been
previously recognized in the Companys consolidated financial statements as tax liabilities. As
of March 31, 2006, the Company believes amounts potentially due have been provided for in its
consolidated statements of operations. |
|
|
|
The Company believes the positions reflected on its income tax returns are correct and intends
to vigorously oppose any proposed adjustments to its returns. The Company has filed a protest
with the Appeals Division of the Internal Revenue Service. No payment is due with respect to
these matters during the appeal process. Interest currently is accruing on the disputed amounts
at a rate of 9%, with the rate adjusted quarterly based on rates published by the U.S. Treasury
Department. If taxing |
- 43 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
authorities were to ultimately prevail in their assertion that the Company incurred a tax
obligation prior to the exercise dates of these options and it was required to make such tax
payments prior to 2009 or 2010, and if any necessary financing were not available to the
Company, its liquidity could be adversely affected. |
|
12. |
|
NEW VALLEY |
|
|
|
Office Buildings. In December 2002, New Valley purchased two office buildings in Princeton,
New Jersey for a total purchase price of $54,000. New Valley financed a portion of the purchase
price through a borrowing of $40,500 from HSBC Realty Credit Corporation (USA). In February
2005, New Valley completed the sale of the office buildings for $71,500. The mortgage loan on
the properties was retired at closing with the proceeds of the sale. |
|
|
|
Real Estate Businesses. New Valley accounts for its 50% interests in Douglas Elliman Realty
LLC, Koa Investors LLC and 16th & K Holdings LLC on the equity method. Douglas
Elliman Realty operates a residential real estate brokerage company in the New York
metropolitan area. Koa Investors owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona,
Hawaii. Following a major renovation, the property reopened in the fourth quarter 2004 as a
four star resort with 521 rooms. 16th and K Holdings acquired the St. Regis Hotel
in Washington, D.C. in August 2005. |
|
|
|
Residential Brokerage Business. New Valley recorded income of $2,590 and $1,334 for the three
months ended March 31, 2006 and 2005, respectively, associated with Douglas Elliman Realty. The
income includes 50% of Douglas Ellimans net income as well as, interest income and management
fees earned by New Valley. Summarized financial information for Douglas Elliman Realty for the
three months ended March 31, 2006 and 2005 and as of March 31, 2006 and December 31, 2005 is
presented below. |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
December 31, 2005 |
Cash |
|
$ |
16,776 |
|
|
$ |
15,384 |
|
Other current assets |
|
|
7,544 |
|
|
|
5,977 |
|
Property, plant and equipment, net |
|
|
18,204 |
|
|
|
17,973 |
|
Trademarks |
|
|
21,663 |
|
|
|
21,663 |
|
Goodwill |
|
|
37,991 |
|
|
|
37,924 |
|
Other intangible assets, net |
|
|
2,291 |
|
|
|
2,072 |
|
Other non-current assets |
|
|
865 |
|
|
|
1,579 |
|
Notes payable current |
|
|
6,636 |
|
|
|
4,770 |
|
Other current liabilities |
|
|
20,921 |
|
|
|
16,977 |
|
Notes payable long term |
|
|
50,656 |
|
|
|
54,422 |
|
Other long-term liabilities |
|
|
2,107 |
|
|
|
4,941 |
|
Members equity |
|
|
25,014 |
|
|
|
21,462 |
|
- 44 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
81,793 |
|
|
$ |
71,402 |
|
Costs and expenses |
|
|
75,497 |
|
|
|
66,325 |
|
Depreciation expense |
|
|
1,221 |
|
|
|
1,126 |
|
Amortization expense |
|
|
102 |
|
|
|
184 |
|
Interest expense, net |
|
|
1,280 |
|
|
|
1,548 |
|
Income tax expense |
|
|
120 |
|
|
|
181 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,573 |
|
|
$ |
2,038 |
|
|
|
|
|
|
|
|
|
|
Hawaiian Hotel. New Valley recorded income of $1,154 and a loss of $1,640 for the three months
ended March 31, 2006 and 2005, respectively, associated with Koa Investors. The income in the
2006 period related to the receipt of a tax credit of $1,154 from the State of Hawaii, which
was received in the first quarter of 2006. Summarized financial information for the three
months ended March 31, 2006 and 2005 and as of March 31, 2006 and December 31, 2005 for Koa
Investors is presented below. |
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
December 31, 2005 |
Cash |
|
$ |
958 |
|
|
$ |
1,375 |
|
Restricted assets |
|
|
3,023 |
|
|
|
3,135 |
|
Other current assets |
|
|
1,965 |
|
|
|
1,543 |
|
Property, plant and equipment, net |
|
|
71,496 |
|
|
|
72,836 |
|
Deferred financing costs, net |
|
|
1,824 |
|
|
|
2,018 |
|
Accounts payable and other current liabilities |
|
|
8,728 |
|
|
|
8,539 |
|
Notes payable |
|
|
82,000 |
|
|
|
82,000 |
|
Members equity (deficit) |
|
|
(11,462 |
) |
|
|
(9,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues |
|
$ |
8,560 |
|
|
$ |
5,530 |
|
Costs and operating expenses |
|
|
7,350 |
|
|
|
5,754 |
|
Management fees |
|
|
30 |
|
|
|
30 |
|
Depreciation and amortization expense |
|
|
1,545 |
|
|
|
1,527 |
|
Interest expense, net |
|
|
1,465 |
|
|
|
1,499 |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,830 |
) |
|
$ |
(3,280 |
) |
|
|
|
|
|
|
|
|
|
In August 2005, a wholly-owned subsidiary of Koa Investors borrowed $82,000 at an interest rate
of LIBOR plus 2.45%. Koa Investors used the proceeds of the loan to repay its $57,000
construction loan and distributed a portion of the proceeds to its members, including $5,500 to
New Valley. As a result of the refinancing, New Valley suspended its recognition of equity
losses in Koa Investors to the extent such losses exceed its basis plus any commitment to make
additional investments, which totaled $600 at March 31, 2006. Accordingly, the Companys
consolidated statements of operations do not include any equity losses of Koa Investors for the
three months ended March 31, 2006. |
|
|
|
St. Regis Hotel, Washington, D.C. In June 2005, affiliates of New Valley and Brickman
Associates formed 16th & K Holdings LLC (Hotel LLC), which acquired the St. Regis
Hotel, a 193 room luxury |
- 45 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
hotel in Washington, D.C., for $47,000 in August 2005. In connection with the closing of the
purchase of the hotel, a subsidiary of Hotel LLC entered into agreements to borrow up to
$50,000 of senior and subordinated debt. The members of Hotel LLC currently plan to renovate
the hotel commencing in 2006. In April 2006, Hotel LLC purchased for approximately $3,000 a
building adjacent to the hotel to house various administrative and sales functions. New
Valley, which holds a 50% interest in Hotel LLC, had invested $6,250 in the project and had
committed to make additional investments of up to $3,750 at March 31, 2006. New Valley
invested the additional $3,750 in Hotel LLC in May 2006 in connection with the purchase of the
adjacent property and repayments of debt. |
|
|
|
New Valley accounts for its interest in Hotel LLC under the equity method and recorded a loss
of $9 for the three months ended March 31, 2006. Hotel LLC will capitalize all costs related
to the renovation of the property during the renovation phase. |
|
|
|
Holiday Isle. During the fourth quarter of 2005, New Valley advanced a total of $2,750 to
Ceebraid Acquisition Corporation (Ceebraid), an entity which entered into an agreement to
acquire the Holiday Isle Resort in Islamorada, Florida. In February 2006, Ceebraid filed for
Chapter 11 bankruptcy after it was unable to consummate financing arrangements for the
acquisition. Although Ceebraid continued to seek to obtain financing for the transaction and
to close the acquisition pursuant to the purchase agreement, the Company determined that a
reserve for uncollectibility should be established against these advances at December 31, 2005.
In April 2006, an affiliate of Ceebraid completed the acquisition of the property for $98,000,
and New Valley increased its investment in the project to a total of $5,800 and indirectly
holds an approximate 21% equity interest. The investors intend to build a condominium hotel
resort and marina, with approximately 150 hotel units. In connection with the closing of the
purchase, an affiliate of Ceebraid borrowed $98,000 of mezzanine and senior debt to finance a
portion of the purchase price and anticipated development costs. In April 2006, Vector agreed,
under certain circumstances, to guarantee up to $2,000 of the debt. |
|
|
|
Long-Term Investments. New Valley owns long-term investments, which have a $7,869 carrying
value at March 31, 2006. The principal business of the limited partnerships is investing in
investment securities and real estate. New Valley believes the fair value of the limited
partnerships exceeds their carrying amount by approximately $9,476. The estimated fair market
value of the limited partnerships was provided by the partnerships based on the indicated market
values of the underlying assets or investment portfolio. New Valleys estimates of the fair
value of its long-term investments are subject to judgment and are not necessarily indicative of
the amounts that could be realized in the current market. The Company is required to make
additional investments in one of its limited partnerships of up to an aggregate of $501 at March
31, 2006. In addition, the investments in limited partnerships are illiquid, and the ultimate
realization of these investments is subject to the performance of the underlying partnership and
its management by the general partners. |
|
|
|
LTS. In March 2005, New Valley converted approximately $9,938 of principal amount and accrued
interest of the convertible notes of Ladenburg Thalmann Financial Services Inc. (LTS) into
19,876,358 shares of LTS common stock. In the first quarter of 2005, New Valley recorded a
gain of $9,461 which represented the fair value of the converted shares as determined by an
independent appraisal firm. In connection with the debt conversion, New Valley purchased
11,111,111 shares of LTS common stock for $5,000 ($0.45 per share). |
|
|
|
On March 30, 2005, New Valley distributed the 19,876,358 shares of LTS common stock it acquired
from the conversion of the note to holders of New Valley common shares through a special
distribution. On the same date, the Company distributed the 10,947,448 shares of LTS common |
- 46 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
|
|
stock that it received from New Valley to the holders of its common stock as a special
distribution. In the first quarter of 2005, the Company recognized equity loss in operations
of LTS of $299. |
|
|
|
Following the distribution, New Valley continued to hold the 11,111,111 shares of LTS common
stock (approximately 7.4% of the outstanding shares), $5,000 of LTSs notes due December 31,
2006 and a warrant to purchase 100,000 shares of its common stock at
$1.00 per share. The shares of LTS common stock held by New Valley have been accounted for as investment securities
available for sale and are carried at $16,000 on the Companys consolidated balance sheet at
March 31, 2006. |
|
13. |
|
NEW VALLEY EXCHANGE OFFER |
|
|
|
In December 2005, the Company completed an exchange offer and subsequent short-form merger
whereby it acquired the remaining 42.3% of the common shares of New Valley Corporation that it
did not already own. As result of these transactions, New Valley Corporation became a
wholly-owned subsidiary of the Company and each outstanding New Valley Corporation common share
was exchanged for 0.54 shares of the Companys common stock. The surviving corporation in the
short-form merger was subsequently merged into a new Delaware limited liability company named
New Valley LLC, which conducts the business of the former New Valley Corporation. |
|
|
|
New Valley LLC is engaged in the real estate business and is seeking to acquire additional
operating companies and real estate properties. (See Note 12.) |
|
|
|
Purchase Accounting. Approximately 5,044,359 shares of Vector common stock were issued in
connection with the transactions. The aggregate purchase price amounted to $106,900, which
included $101,039 in the Companys common stock, $758 of accrued purchase price obligation,
$4,130 in acquisition related costs and $973 of exchanged options, which represents the fair
value on the acquisition date of the Vector options issued in exchange for the outstanding New
Valley options. The transactions were accounted for under the provisions of SFAS No. 141,
Business Combinations. The purchase price has been allocated based upon the estimated fair
value of net assets acquired at the date of acquisition. |
|
|
|
The purchase price reflects the fair value of Vector common stock issued in connection with the
transactions based on the average closing price of the Vector common stock for the five trading
days including November 16, 2005, which was $20.03 per share. The purchase price for New Valley
was primarily determined on the basis of managements assessment of the value of New Valleys
assets (including deferred tax assets and net operating losses) and its expectations of future
earnings and cash flows, including synergies. |
|
|
|
In connection with the acquisition of the remaining interests in New Valley, Vector estimated
the fair value of the assets acquired and the liabilities assumed at the date of acquisition,
December 9, 2005. The Companys analysis indicated that the fair value of net assets acquired,
net of Vectors stock ownership of New Valley prior to December 9, 2005, totaled $150,543,
compared to a fair value of liabilities assumed of $22,212, yielding net assets acquired of
$128,331 which were then compared to the New Valley purchase price of $106,900 resulting in a
reduction of non-current assets acquired of $14,665 and negative goodwill of $6,766. |
|
|
|
Generally accepted accounting principles require, effective July 2001 for the year ended
December 31, 2005, that negative goodwill be reported as an extraordinary item on the Companys
statement of operations. |
- 47 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
|
|
Prior to December 9, 2005, New Valleys operating results were included in the accompanying
consolidated financial statements of the Company and had been reduced by the minority interests
in New Valley. The unaudited pro forma results of operations for the three months ended March
31, 2005 of the Company and New Valley, prepared based on the purchase price allocation for New
Valley described above and as if the New Valley acquisition had occurred at January 1, 2005,
would have been as follows: |
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2005 |
Pro forma total net revenues |
|
$ |
104,173 |
|
|
|
|
|
|
Pro forma net income from continuing operations |
|
$ |
9,832 |
|
|
|
|
|
|
Pro forma net income |
|
$ |
18,353 |
|
|
|
|
|
|
Pro forma basic weighted average shares outstanding |
|
|
48,927,700 |
|
|
|
|
|
|
Pro forma income from continuing operations per
basic common share |
|
$ |
0.21 |
|
|
|
|
|
|
Pro forma net income per basic common share |
|
$ |
0.38 |
|
|
|
|
|
|
Pro forma diluted weighted average shares outstanding |
|
|
50,776,984 |
|
|
|
|
|
|
Pro forma income from continuing operations per
diluted common share |
|
$ |
0.19 |
|
|
|
|
|
|
Pro forma net income per diluted common share |
|
$ |
0.36 |
|
|
|
The pro forma financial information above is not necessarily indicative of what the Companys
consolidated results of operations actually would have been if the New Valley acquisition had
been completed on January 1, 2005. In addition, the pro forma information above does not
attempt to project the Companys future results of operations. |
|
|
|
Related Litigation. On or about September 29, 2005, an individual stockholder of New Valley
filed a complaint in the Delaware Court of Chancery purporting to commence a class action
lawsuit against Vector, New Valley and each of the individual directors of New Valley. The
complaint was styled as Pill v. New Valley Corporation, et al. (C.A. No. 1678-N). A similar
action was also filed in state court in Miami-Dade County, Florida, on September 29, 2005 by
another individual stockholder of New Valley. This action has been stayed, pending final
resolution of the Pill action, by agreement of the parties. On or about October 28, 2005, a
separate action was filed in the Delaware Court of Chancery purporting to commence a class
action lawsuit against Vector, New Valley and each of the individual directors of New Valley.
The complaint was styled as Lindstrom v. LeBow, et al. (Civil Action No. 1745-N). On November
9, 2005, the Delaware Court of Chancery entered an order of consolidation providing that the
Pill action and the Lindstrom action be consolidated for all purposes. On November 15, 2005,
the Delaware Chancery Court entered an order certifying the Pill action as a class action
comprised of all persons who owned common shares of New Valley on October 20, 2005. |
|
|
|
On November 16, 2005, Vector and the plaintiff class in the Pill action reached an agreement in
principle to settle the litigation, which was memorialized in a memorandum of understanding
entered into on November 22, 2005. The memorandum of understanding provided, among other
things, that (i) the consideration being offered be raised from 0.461 shares of Vector common
stock per common |
- 48 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
|
|
share of New Valley to 0.54 shares of Vector common stock per common share of New Valley; (ii)
the plaintiff acknowledged that 0.54 shares of Vector common stock per common share of New
Valley was adequate and fair consideration; (iii) Vector agreed to make supplemental
disclosures in the Prospectus with respect to the offer to address claims raised in the Pill
action; (iv) the plaintiff shall have the right to comment upon and suggest additional
disclosures to be made to the public stockholders by New Valley prior to the filing of its
amended Schedule 14D-9 with the SEC and such suggested additional disclosures will be
considered in good faith for inclusion in such filing by New Valley; and (v) all claims,
whether known or unknown, of the plaintiff shall be released as against all of the defendants
in the Pill matter and the Lindstrom matter. On January 20, 2006, the parties executed a
Stipulation of Settlement providing for, among other things, payment by the Company of up to
$860 in legal fees and costs. The settlement received court approval on April 10, 2006. The
Company recorded a charge to operating, selling, administrative and general expense of $860
related to the settlement for the year ended December 31, 2005. The settlement amount is
included in accounts payable on the Companys consolidated balance sheet at March 31, 2006. |
|
14. |
|
DISCONTINUED OPERATIONS |
|
|
|
Real Estate Leasing. As discussed in Note 12, in February 2005, New Valley completed the sale
for $71,500 of its two office buildings in Princeton, N.J. As a result of the sale, the
consolidated financial statements of the Company reflect New Valleys real estate leasing
operations as discontinued operations for the three months ended March 31, 2005. Accordingly,
revenues, costs and expenses of the discontinued operations have been excluded from the
respective captions in the consolidated statements of operations. The net operating results of
the discontinued operations have been reported, net of applicable income taxes and minority
interests, as Income from discontinued operations. |
|
|
|
Summarized operating results of the discontinued real estate leasing operations for the three
months ended March 31, 2005 are as follows: |
|
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
March 31, 2005 |
|
Revenues |
|
$ |
924 |
|
|
|
|
|
|
Expenses |
|
|
515 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations before
income taxes and minority interests |
|
|
409 |
|
|
|
|
|
|
Income tax expense from discontinued
operations |
|
|
223 |
|
|
|
|
|
|
Minority interests |
|
|
104 |
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
82 |
|
|
|
|
|
|
|
Gain on Disposal of Discontinued Operations. New Valley recorded a gain on disposal of
discontinued operations of $2,952 (net of minority interests and taxes) for the three months
ended
March 31, 2005 in connection with the sale of the office buildings. |
- 49 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
15. |
|
SEGMENT INFORMATION |
|
|
|
The Companys significant business segments for the three months ended March 31, 2006 and 2005
were Liggett and Vector Tobacco. The Liggett segment consists of the manufacture and sale of
conventional cigarettes and, for segment reporting purposes, includes the operations of
Medallion acquired on April 1, 2002 (which operations are held for legal purposes as part of
Vector Tobacco). The Vector Tobacco segment includes the development and marketing of the low
nicotine and nicotine-free cigarette products as well as the development of reduced risk
cigarette products and, for segment reporting purposes, excludes the operations of Medallion.
The accounting policies of the segments are the same as those described in the summary of
significant accounting policies. |
|
|
|
Financial information for the Companys continuing operations before taxes and minority
interests for the three months ended March 31, 2006 and 2005 follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vector |
|
Real |
|
Corporate |
|
|
|
|
Liggett |
|
Tobacco |
|
Estate |
|
and Other |
|
Total |
Three months ended March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
115,739 |
|
|
$ |
1,965 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
117,704 |
|
Operating income (loss) |
|
|
30,421 |
|
|
|
(3,548 |
) |
|
|
|
|
|
|
(6,646 |
) |
|
|
20,227 |
|
Identifiable assets |
|
|
266,924 |
|
|
|
3,266 |
|
|
|
19,623 |
|
|
|
319,599 |
|
|
|
609,412 |
|
Depreciation and amortization |
|
|
1,814 |
|
|
|
57 |
|
|
|
|
|
|
|
602 |
|
|
|
2,473 |
|
Capital expenditures |
|
|
1,417 |
|
|
|
19 |
|
|
|
|
|
|
|
10 |
|
|
|
1,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
101,635 |
|
|
$ |
2,538 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
104,173 |
|
Operating income (loss) |
|
|
31,870 |
|
|
|
(4,432 |
) |
|
|
|
|
|
|
(8,790 |
) |
|
|
18,648 |
|
Identifiable assets |
|
|
260,762 |
|
|
|
7,972 |
|
|
|
26,620 |
|
|
|
209,650 |
|
|
|
505,004 |
|
Depreciation and amortization |
|
|
1,817 |
|
|
|
228 |
|
|
|
|
|
|
|
621 |
|
|
|
2,666 |
|
Capital expenditures |
|
|
698 |
|
|
|
12 |
|
|
|
|
|
|
|
258 |
|
|
|
968 |
|
- 50 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
16. |
|
RESTATED FINANCIAL INFORMATION |
|
|
|
The following tables set forth the effects of the restatement as discussed in Note 2 of the
Companys unaudited consolidated balance sheets as of March 31, 2006 and December 31, 2005 and
the Companys unaudited statements of operations for the three months ended March 31, 2006 and
2005, respectively. There was no change to each subtotal (operating, investing and financing)
in the Companys consolidated statements of cash flows as a result of the restatement. See
Note 2 Restatement of Financial Results. |
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 |
|
|
As of December 31, 2005 |
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
ASSETS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
172,151 |
|
|
$ |
172,151 |
|
|
$ |
181,059 |
|
|
$ |
181,059 |
|
Investment securities available for sale |
|
|
30,583 |
|
|
|
30,583 |
|
|
|
18,507 |
|
|
|
18,507 |
|
Accounts receivable trade |
|
|
16,503 |
|
|
|
16,503 |
|
|
|
12,714 |
|
|
|
12,714 |
|
Inventories |
|
|
72,318 |
|
|
|
72,318 |
|
|
|
70,395 |
|
|
|
70,395 |
|
Deferred income taxes |
|
|
25,396 |
|
|
|
25,396 |
|
|
|
26,179 |
|
|
|
26,179 |
|
Assets held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
10,272 |
|
|
|
10,272 |
|
|
|
10,245 |
|
|
|
10,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
327,223 |
|
|
|
327,223 |
|
|
|
319,099 |
|
|
|
319,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
61,348 |
|
|
|
61,348 |
|
|
|
62,523 |
|
|
|
62,523 |
|
Assets held for sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments, net |
|
|
7,869 |
|
|
|
7,869 |
|
|
|
7,828 |
|
|
|
7,828 |
|
Investments in non-consolidated real estate
businesses |
|
|
19,623 |
|
|
|
19,623 |
|
|
|
17,391 |
|
|
|
17,391 |
|
Restricted assets |
|
|
5,065 |
|
|
|
6,743 |
|
|
|
5,065 |
|
|
|
6,743 |
|
Deferred income taxes |
|
|
66,644 |
|
|
|
66,644 |
|
|
|
69,988 |
|
|
|
69,988 |
|
Intangible asset |
|
|
107,511 |
|
|
|
107,511 |
|
|
|
107,511 |
|
|
|
107,511 |
|
Other assets |
|
|
13,611 |
|
|
|
12,451 |
|
|
|
13,725 |
|
|
|
12,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
608,894 |
|
|
$ |
609,412 |
|
|
$ |
603,130 |
|
|
$ |
603,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable and
long-term debt |
|
$ |
22,503 |
|
|
$ |
22,503 |
|
|
$ |
9,313 |
|
|
$ |
9,313 |
|
Accounts payable |
|
|
9,552 |
|
|
|
9,552 |
|
|
|
15,394 |
|
|
|
15,394 |
|
Accrued promotional expenses |
|
|
15,924 |
|
|
|
15,924 |
|
|
|
18,317 |
|
|
|
18,317 |
|
Accrued taxes payable, net |
|
|
31,766 |
|
|
|
31,766 |
|
|
|
32,392 |
|
|
|
32,392 |
|
Settlement accruals |
|
|
27,118 |
|
|
|
27,118 |
|
|
|
22,505 |
|
|
|
22,505 |
|
Deferred income taxes |
|
|
6,640 |
|
|
|
6,640 |
|
|
|
3,891 |
|
|
|
3,891 |
|
Accrued interest |
|
|
3,699 |
|
|
|
3,699 |
|
|
|
5,770 |
|
|
|
5,770 |
|
Other accrued liabilities |
|
|
11,898 |
|
|
|
11,898 |
|
|
|
20,518 |
|
|
|
20,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
129,100 |
|
|
|
129,100 |
|
|
|
128,100 |
|
|
|
128,100 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable, long-term debt and
other obligations, less current portion |
|
|
244,789 |
|
|
|
238,324 |
|
|
|
243,590 |
|
|
|
238,242 |
|
Fair value of derivatives embedded within
convertible debt |
|
|
38,147 |
|
|
|
38,147 |
|
|
|
39,371 |
|
|
|
39,371 |
|
Non-current employee benefits |
|
|
18,425 |
|
|
|
18,425 |
|
|
|
17,235 |
|
|
|
17,235 |
|
Deferred income taxes |
|
|
150,540 |
|
|
|
153,381 |
|
|
|
143,544 |
|
|
|
145,892 |
|
Other liabilities |
|
|
5,652 |
|
|
|
5,652 |
|
|
|
5,646 |
|
|
|
5,646 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 51 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Continued)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006 |
|
|
As of December 31, 2005 |
|
|
|
As |
|
|
|
|
|
|
As |
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
Previously |
|
|
|
|
|
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
4,992 |
|
|
|
4,992 |
|
|
|
4,985 |
|
|
|
4,985 |
|
Additional paid-in capital |
|
|
102,309 |
|
|
|
102,105 |
|
|
|
133,529 |
|
|
|
133,325 |
|
Unearned compensation |
|
|
|
|
|
|
|
|
|
|
(11,681 |
) |
|
|
(11,681 |
) |
Accumulated deficit |
|
|
(64,966 |
) |
|
|
(60,620 |
) |
|
|
(74,259 |
) |
|
|
(70,633 |
) |
Accumulated other comprehensive loss |
|
|
(3,403 |
) |
|
|
(3,403 |
) |
|
|
(10,610 |
) |
|
|
(10,610 |
) |
Less: Treasury stock, at cost |
|
|
(16,691 |
) |
|
|
(16,691 |
) |
|
|
(16,320 |
) |
|
|
(16,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
22,241 |
|
|
|
26,383 |
|
|
|
25,644 |
|
|
|
29,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
608,894 |
|
|
$ |
609,412 |
|
|
$ |
603,130 |
|
|
$ |
603,552 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- 52 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) (Continued)
Unaudited
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Three Months Ended |
|
|
|
March 31, 2006 |
|
|
March 31, 2005 |
|
|
|
As Previously |
|
|
|
|
|
|
As Previously |
|
|
|
|
|
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues* |
|
$ |
117,704 |
|
|
$ |
117,704 |
|
|
$ |
104,173 |
|
|
$ |
104,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold* |
|
|
73,341 |
|
|
|
73,341 |
|
|
|
58,998 |
|
|
|
58,998 |
|
Operating, selling, administrative and general expenses |
|
|
24,136 |
|
|
|
24,136 |
|
|
|
26,527 |
|
|
|
26,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
20,227 |
|
|
|
20,227 |
|
|
|
18,648 |
|
|
|
18,648 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income |
|
|
1,781 |
|
|
|
1,781 |
|
|
|
710 |
|
|
|
710 |
|
Interest expense |
|
|
(9,490 |
) |
|
|
(8,277 |
) |
|
|
(7,475 |
) |
|
|
(6,342 |
) |
Change in fair value of derivatives embedded
within convertible debt |
|
|
1,224 |
|
|
|
1,224 |
|
|
|
828 |
|
|
|
828 |
|
Loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on investments, net |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
1,430 |
|
|
|
1,430 |
|
Gain from conversion of LTS notes |
|
|
|
|
|
|
|
|
|
|
9,461 |
|
|
|
9,461 |
|
Equity in loss on operations of LTS |
|
|
|
|
|
|
|
|
|
|
(299 |
) |
|
|
(299 |
) |
Equity (loss) income from non-consolidated real estate
businesses |
|
|
3,735 |
|
|
|
3,735 |
|
|
|
(306 |
) |
|
|
(306 |
) |
Other, net |
|
|
46 |
|
|
|
46 |
|
|
|
(1 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before provision for income taxes
and minority interests |
|
|
17,493 |
|
|
|
18,706 |
|
|
|
22,996 |
|
|
|
24,129 |
|
Income tax expense |
|
|
8,200 |
|
|
|
8,693 |
|
|
|
12,518 |
|
|
|
12,920 |
|
Minority interests |
|
|
|
|
|
|
|
|
|
|
(2,016 |
) |
|
|
(2,016 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
9,293 |
|
|
$ |
10,013 |
|
|
$ |
8,462 |
|
|
$ |
9,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations, net of minority
interests and taxes |
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
82 |
|
Gain on disposal of discontinued operations, net of
minority interests and taxes |
|
|
|
|
|
|
|
|
|
|
2,952 |
|
|
|
2,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
|
|
|
|
|
|
|
|
3,034 |
|
|
|
3,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,293 |
|
|
$ |
10,013 |
|
|
$ |
11,496 |
|
|
$ |
12,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.17 |
|
|
$ |
0.19 |
|
|
$ |
0.19 |
|
|
$ |
0.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
0.17 |
|
|
$ |
0.19 |
|
|
$ |
0.26 |
|
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
$ |
0.18 |
|
|
$ |
0.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
$ |
|
|
|
$ |
|
|
|
$ |
0.07 |
|
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares |
|
$ |
0.17 |
|
|
$ |
0.18 |
|
|
$ |
0.25 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share |
|
$ |
0.38 |
|
|
$ |
0.38 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
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* |
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Revenues and cost of goods sold include excise taxes of $40,118 and $33,432 for the three
months ended March 31, 2006 and 2005, respectively. |
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Overview
We are a holding company for a number of businesses. We are engaged principally in:
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the manufacture and sale of cigarettes in the United States through our subsidiary
Liggett Group LLC, |
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the development and marketing of the low nicotine and nicotine-free QUEST cigarette
products and the development of reduced risk cigarette products through our subsidiary
Vector Tobacco Inc., and |
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the real estate business through our subsidiary, New Valley LLC, which is seeking
to acquire additional operating companies and real estate properties. New Valley owns
50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area. |
In recent years, we have undertaken a number of initiatives to streamline the cost structure
of our tobacco business and improve operating efficiency and long-term earnings. During 2002, the
sales and marketing functions, along with certain support functions, of our Liggett and Vector
Tobacco subsidiaries were combined into a new entity, Liggett Vector Brands Inc. This company
coordinates and executes the sales and marketing efforts for our tobacco operations.
Effective year-end 2003, we closed Vector Tobaccos Timberlake, North Carolina cigarette
manufacturing facility in order to reduce excess cigarette production capacity and improve
operating efficiencies company-wide. Production of QUEST and Vector Tobaccos other cigarette
brands was transferred to Liggetts state-of-the-art manufacturing facility in Mebane, North
Carolina. In July 2004, we completed the sale of the Timberlake facility and equipment.
In April 2004, we eliminated a number of positions in our tobacco operations and subleased
excess office space. In October 2004, we announced a plan to restructure the operations of Liggett
Vector Brands. Liggett Vector Brands has realigned its sales force and adjusted its business model
to more efficiently serve its chain and independent customers nationwide. In connection with the
restructuring, we eliminated approximately 330 full-time positions and 135 part-time positions as
of December 15, 2004.
We may consider various additional opportunities to further improve efficiencies and reduce
costs. These prior and current initiatives have involved material restructuring and impairment
charges, and any further actions taken are likely to involve material charges as well. Although
management may estimate that substantial cost savings will be associated with these restructuring
actions, there is a risk that these actions could have a serious negative impact on our tobacco
operations and that any estimated increases in profitability cannot be achieved.
In December 2005, we completed an exchange offer and a subsequent short-form merger whereby we
acquired the remaining 42.3% of the common shares of New Valley that we did not already own. As a
result of these transactions, New Valley became our wholly-owned subsidiary and each outstanding
New Valley common share was exchanged for 0.54 shares of our common stock. A total of
approximately 5.05 million of our common shares were issued to the New Valley shareholders in the
transactions.
All of Liggetts unit sales volume in 2005 and the first three months of 2006 was in the
discount segment, which Liggetts management believes has been the primary growth segment in
- 48 -
the industry for over a decade. The significant discounting of premium cigarettes in recent
years has led to brands, such as EVE, that were traditionally considered premium brands to become
more appropriately categorized as discount, following list price reductions.
Liggetts cigarettes are produced in approximately 270 combinations of length, style and
packaging. Liggetts current brand portfolio includes:
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LIGGETT SELECT the third largest brand in the deep discount category, |
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GRAND PRIX a rapidly growing brand in the deep discount segment, |
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EVE a leading brand of 120 millimeter cigarettes in the branded discount category, |
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PYRAMID the industrys first deep discount product with a brand identity, and |
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USA and various Partner Brands and private label brands. |
In 1999, Liggett introduced LIGGETT SELECT, one of the leading brands in the deep discount
category. LIGGETT SELECT is now the largest seller in Liggetts family of brands, comprising 44.7%
of Liggetts unit volume in the first three months of 2006 and 44.6% of Liggetts volume in 2005.
In September 2005, Liggett repositioned GRAND PRIX to distributors and retailers nationwide. GRAND
PRIX is marketed as the lowest price fighter to specifically compete with brands which are priced
at the lowest level of the deep discount segment.
We believe that Liggett has gained a sustainable cost advantage over its competitors through
its various settlement agreements. Under the Master Settlement Agreement reached in November 1998
with 46 states and various territories, the three largest cigarette manufacturers must make
settlement payments to the states and territories based on how many cigarettes they sell annually.
Liggett, however, is not required to make any payments unless its market share exceeds
approximately 1.65% of the U.S. cigarette market. Additionally, as a result of the Medallion
acquisition, Vector Tobacco likewise has no payment obligation unless its market share exceeds
approximately 0.28% of the U.S. market.
The discount segment is highly competitive, with consumers having less brand loyalty and
placing greater emphasis on price. While the three major manufacturers all compete with Liggett in
the discount segment of the market, the strongest competition for market share has recently come
from a group of small manufacturers and importers, most of which sell low quality, deep discount
cigarettes.
In January 2003, Vector Tobacco introduced QUEST, its brand of low nicotine and nicotine-free
cigarette products. QUEST is designed for adult smokers who are interested in reducing their levels
of nicotine intake and is available in both menthol and non-menthol styles. Each QUEST style
(regular and menthol) offers three different packagings, with decreasing amounts of nicotine -
QUEST 1, 2 and 3. QUEST 1, the low nicotine variety, contains 0.6 milligrams of nicotine. QUEST 2,
the extra-low nicotine variety, contains 0.3 milligrams of nicotine. QUEST 3, the nicotine-free
variety, contains only trace levels of nicotine no more than 0.05 milligrams of nicotine per
cigarette. QUEST cigarettes utilize proprietary, patented and patent pending processes and
materials that enables the production of cigarettes with nicotine-free tobacco that tastes and
smokes like tobacco in conventional cigarettes. All six QUEST varieties are being sold in box style
packs and are priced comparably to other premium brands.
QUEST was initially available in New York, New Jersey, Pennsylvania, Ohio, Indiana, Illinois
and Michigan. These seven states account for approximately 30% of all cigarette sales in the United
States. A multi-million dollar advertising and marketing campaign, with advertisements running in
magazines and regional newspapers, supported the product launch. The brand continues to be
supported by point-of-purchase awareness campaigns.
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The premium segment of the industry continues to experience intense competitive activity, with
significant discounting of premium brands at all levels of retail. Given these marketplace
conditions, and the results that we have seen to date with QUEST, we have taken a measured approach
to expanding the market presence of the brand. In November 2003, Vector Tobacco introduced three
menthol varieties of QUEST in the seven state market. In January 2004, QUEST and QUEST Menthol were
introduced into an expansion market in Arizona, which accounts for approximately 2% of the industry
volume nationwide.
During the second quarter 2004, based on an analysis of the market data obtained since the
introduction of the QUEST product, we determined to postpone indefinitely the national launch of
QUEST. Any determination as to future expansion of the market presence of QUEST will be based on
the ongoing and projected demand for the product, market conditions in the premium segment and the
prevailing regulatory environment, including any restrictions on the advertising of the product.
QUEST brand cigarettes are currently marketed solely to permit adult smokers, who wish to
continue smoking, to gradually reduce their intake of nicotine. The products are not labeled or
advertised for smoking cessation or as a safer form of smoking.
In October 2003, we announced that Jed E. Rose, Ph.D., Director of Duke University Medical
Centers Nicotine Research Program and co-inventor of the nicotine patch, had conducted a study at
Duke University Medical Center to provide preliminary evaluation of the use of the QUEST technology
as a smoking cessation aid. In the preliminary study on QUEST, 33% of QUEST 3 smokers were able to
achieve four-week continuous abstinence, a standard threshold for smoking cessation. In March 2006,
Vector Tobacco concluded a multi-centered clinical trial to further evaluate QUEST technology as an
effective alternative to conventional smoking cessation aids. The study was designed in
collaboration with the Food and Drug Administration (FDA), and met their requirements for a Phase
II clinical study. Preliminary assessment of the study data indicates results which management
believes are consistent with FDA requirements to justify the continued development of QUEST as a
smoking cessation aid. The results of this study are being prepared for presentation to the FDA.
Upon analysis of these data, the FDA must also agree that the results of the Phase II study justify
further clinical testing in a Phase III trial. Management believes that obtaining the FDAs
approval to market QUEST as a smoking cessation product will be an important factor in the
long-term commercial success of the QUEST brand. No assurance can be given that such approval can
be obtained or as to the timing of any such approval if received.
Recent Developments
New Valley Exchange Offer. In December 2005, we completed an exchange offer and subsequent
short-form merger whereby we acquired the remaining 42.3% of the common shares of New Valley
Corporation that we did not already own. As result of these transactions, New Valley Corporation
became our wholly-owned subsidiary and each outstanding New Valley Corporation common share was
exchanged for 0.54 shares of our common stock. A total of approximately 5.05 million of our common
shares were issued to the New Valley Corporation shareholders in the transactions. The surviving
corporation in the short-form merger was subsequently merged into a new Delaware limited liability
company named New Valley LLC, which conducts the business of the former New Valley Corporation.
Prior to these transactions, New Valley Corporation was registered under the Securities Exchange
Act of 1934 and filed periodic reports and other information with the SEC.
On or about September 29, 2005, an individual stockholder of New Valley filed a complaint in
the Delaware Court of Chancery purporting to commence a class action lawsuit against us, New Valley
and each of the individual directors of New Valley. The complaint was styled as Pill v. New Valley
Corporation, et al. (C.A. No. 1678-N). A similar action was also filed in state court in
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Miami-Dade County, Florida, on September 29, 2005 by another individual stockholder of New
Valley. This action has been stayed, pending final resolution of the Pill action, by agreement of
the parties. On or about October 28, 2005, a separate action was filed in the Delaware Court of
Chancery purporting to commence a class action lawsuit against us, New Valley and each of the
individual directors of New Valley. The complaint was styled as Lindstrom v. LeBow, et al. (Civil
Action No. 1745-N). On November 9, 2005, the Delaware Court of Chancery entered an order of
consolidation providing that the Pill action and the Lindstrom action be consolidated for all
purposes. On November 15, 2005, the Delaware Chancery Court entered an order certifying the Pill
action as a class action comprised of all persons who owned common shares of New Valley on October
20, 2005.
On November 16, 2005, we and the plaintiff class in the Pill action reached an agreement in
principle to settle the litigation, which was memorialized in a memorandum of understanding entered
into on November 22, 2005. The memorandum of understanding provided, among other things, that (i)
the consideration being offered be raised from 0.461 shares of our common stock per common share of
New Valley to 0.54 shares of our common stock per common share of New Valley; (ii) the plaintiff
acknowledged that 0.54 shares of our common stock per common share of New Valley was adequate and
fair consideration; (iii) we agreed to make supplemental disclosures in the Prospectus with respect
to the offer to address claims raised in the Pill action; (iv) the plaintiff shall have the right
to comment upon and suggest additional disclosures to be made to the public stockholders by New
Valley prior to the filing of its amended Schedule 14D-9 with the SEC and such suggested additional
disclosures will be considered in good faith for inclusion in such filing by New Valley; and (v)
all claims, whether known or unknown, of the plaintiff shall be released as against all of the
defendants in the Pill matter and the Lindstrom matter. On January 20, 2006, the parties executed
a Stipulation of Settlement providing for, among other things, payment by us of up to $860 in legal
fees and costs. The settlement received court approval on April 10, 2006. We recorded a charge to
operating, selling, administrative and general expense for 2005 of $860 related to the settlement,
which has been accrued in accounts payable on the Companys consolidated balance sheet at March 31,
2006.
Sale of Durham Real Estate. In December 2005, Liggett completed the sale for $15,450 of its
former manufacturing plant, research facility and offices located in Durham, North Carolina. We
recorded a gain of $7,706, net of income taxes of $5,042, in 2005 in connection with the sale.
Ladenburg Distribution. In March 2005, New Valley converted a convertible note of Ladenburg
Thalmann Financial Services Inc. into 19,876,358 shares of Ladenburg common stock and purchased
11,111,111 Ladenburg shares for $5,000. In the first quarter 2005, New Valley recorded a gain of
$9,461 which represented the fair value of the converted shares as determined by an independent
appraisal firm. On March 30, 2005, New Valley distributed the 19,876,358 shares of Ladenburg
common stock it acquired from the conversion of the note to holders of New Valley common shares
through a special distribution. On the same date, we distributed the 10,947,448 shares of Ladenburg
common stock that we received from New Valley to the holders of our common stock as a special
distribution.
Tobacco Quota Elimination. In October 2004, federal legislation was enacted which abolished
the federal tobacco quota and price support program. Pursuant to the legislation, manufacturers of
tobacco products will be assessed $10,140,000 over a ten year period to compensate tobacco growers
and quota holders for the elimination of their quota rights. Cigarette manufacturers will
initially be responsible for 96.3% of the assessment (subject to adjustment in the future), which
will be allocated based on relative unit volume of domestic cigarette shipments. Management
currently estimates that Liggetts and Vector Tobaccos assessment will be approximately $22,000
for the second year of the program which began January 1, 2006. The cost of the legislation to the
three largest cigarette manufacturers will likely be less than the cost to smaller manufacturers,
including Liggett and Vector Tobacco, because one effect of the legislation is that the three
largest manufacturers will no longer be obligated to make certain contractual payments, commonly
known as Phase II payments, they agreed in 1999
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to make to tobacco-producing states. The ultimate impact of this legislation cannot be
determined, but there is a risk that smaller manufacturers, such as Liggett and Vector Tobacco,
will be disproportionately affected by the legislation, which could have a material adverse effect
on us.
Tax Matters. In connection with the 1998 and 1999 transaction with Philip Morris Incorporated
in which a subsidiary of Liggett contributed three of its premium cigarette brands to Trademarks
LLC, a newly-formed limited liability company, we recognized in 1999 a pre-tax gain of $294,078 in
our consolidated financial statements and established a deferred tax liability of $103,100 relating
to the gain. In such transaction, Philip Morris acquired an option to purchase the remaining
interest in Trademarks for a 90-day period commencing in December 2008, and we have an option to
require Philip Morris to purchase the remaining interest for a 90-day period commencing in March
2010. Upon exercise of the options during the 90-day periods commencing in December 2008 or in
March 2010, we will be required to pay tax in the amount of the deferred tax liability, which will
be offset by the benefit of any deferred tax assets, including any net operating losses, available
to us at that time. In connection with an examination of our 1998 and 1999 federal income tax
returns, the Internal Revenue Service issued to us in September 2003 a notice of proposed
adjustment. The notice asserts that, for tax reporting purposes, the entire gain should have been
recognized in 1998 and in 1999 in the additional amounts of $150,000 and $129,900, respectively,
rather than upon the exercise of the options during the 90-day periods commencing in December 2008
or in March 2010. If the Internal Revenue Service were to ultimately prevail with the proposed
adjustment, it would result in the potential acceleration of tax payments of approximately
$129,000, including interest, net of tax benefits, through March 31, 2006. These amounts have been
previously recognized in our consolidated financial statements as tax liabilities. As of March 31,
2006, we believe amounts potentially due have been provided for in our consolidated statements of
operations.
We believe the positions reflected on our income tax returns are correct and intend to
vigorously oppose any proposed adjustments to our returns. We have filed a protest with the
Appeals Division of the Internal Revenue Service. No payment is due with respect to these matters
during the appeals process. Interest currently is accruing on the disputed amounts at a rate of
9%, with the rate adjusted quarterly based on rates published by the U.S. Treasury Department. If
taxing authorities were to ultimately prevail in their assertion that we incurred a tax obligation
prior to the exercise dates of these options and we were required to make such tax payments prior
to 2009 or 2010, and if any necessary financing were not available to us, our liquidity could be
materially adversely affected.
Tobacco Settlement Agreements. In October 2004, Liggett was notified that all participating
manufacturers payment obligations under the Master Settlement Agreement, dating from the
agreements execution in late 1998, have been recalculated utilizing net unit amounts, rather
than gross unit amounts (which have been utilized since 1999). The change in the method of
calculation could, among other things, require additional payments by Liggett under the Master
Settlement Agreement of approximately $12,300 for the periods 2001 through 2005, and require
Liggett to pay an additional amount of approximately $2,800 in 2006 and in future periods by
lowering Liggetts market share exemption under the Master Settlement Agreement. Liggett contends
that the retroactive change from utilizing gross unit amounts to net unit amounts is
impermissible and has objected to the change. Liggett has disputed the change in methodology. No
amounts have been accrued in the accompanying consolidated financial statements for any potential
liability relating to the gross versus net dispute.
On March 30, 2005, the Independent Auditor under the Master Settlement Agreement calculated
$28,668 in Master Settlement Agreement payments for Liggetts 2004 sales. On
April 15, 2005, Liggett paid $11,678 of this amount and, in accordance with its rights under
the Master Settlement Agreement, disputed the balance of $16,990. Of the disputed amount, Liggett
paid $9,304 into the disputed payments account under the Master Settlement Agreement and
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withheld from payment $7,686. The $9,304 paid into the disputed payments account represents
the amount claimed by Liggett as an adjustment to its 2003 payment obligation under the Master
Settlement Agreement for market share loss to non-participating manufacturers. At March 31, 2006,
included in Other current assets on our balance sheet was a receivable of $6,513 relating to such
amount. The $7,686 withheld from payment represents $5,318 claimed as an adjustment to Liggetts
2004 Master Settlement Agreement obligation for market share loss to non-participating
manufacturers and $2,368 relating to the retroactive change, discussed above, to the method for
computing payment obligations under the Master Settlement Agreement which Liggett contends, among
other things, is not in accordance with the Master Settlement Agreement. On May 31, 2005, New York
State filed a motion on behalf of the settling states in New York state court seeking to compel
Liggett and the other subsequent participating manufacturers that paid into the disputed payments
account to release to the settling states the amounts paid into such account. The settling states
contend that Liggett had no right under the Master Settlement Agreement and related agreements to
pay into the disputed payments account any amount claimed as an adjustment for market share loss to
non-participating manufacturers for 2003, although they acknowledge that Liggett has the right to
dispute such amounts. By stipulation among the parties dated July 25, 2005, New Yorks motion was
dismissed and Liggett authorized the release to the settling states of the $9,304 it had paid into
the account, although Liggett continues to dispute that it owes this amount. Liggett withheld
approximately $1,600 from its payment due under the Master Settlement Agreement on April 15, 2006
which Liggett claims as the non-participating manufacturers adjustment to its 2005 payment
obligation and $2,612 relating to the gross versus net dispute.
In March 2006, an independent economic consulting firm, selected pursuant to the provisions of
the Master Settlement Agreement, determined that the Master Settlement Agreement was a significant
factor contributing to the market share loss of participating manufacturers for 2003. As a
result, under the provisions of the Master Settlement Agreement, the manufacturers are entitled to
a non-participating manufacturers adjustment to their 2003 Master Settlement Agreement payments.
States that diligently enforced in 2003 the escrow statutes enacted in connection with the Master
Settlement Agreement may be able to avoid application of the adjustment to their payments for that
year. A number of states have filed, or are likely to file, actions seeking a determination that
they have diligently enforced their respective escrow statutes. Liggett and several other
subsequent participating manufacturers are in the process of organizing a joint defense group to
defend against these actions.
As of March 31, 2006, Liggett and Vector Tobacco have disputed the following assessments under
the Master Settlement Agreement related to failure to receive credit for market share loss to
non-participating manufacturers: $6,513 for 2003, $3,789 for 2004 and approximately $800 for 2005.
These disputed amounts have not been accrued in the accompanying consolidated financial statements.
In 2004, the Attorneys General for each of Florida, Mississippi and Texas advised Liggett that
they believed that Liggett has failed to make all required payments under the respective settlement
agreements with these states for the period 1998 through 2003 and that additional payments may be
due for 2004 and subsequent years. Liggett believes these allegations are without merit, based,
among other things, on the language of the most favored nation provisions of the settlement
agreements. In December 2004, the State of Florida offered to settle all amounts allegedly owed by
Liggett for the period through 2003 for the sum of $13,500. In March 2005, the State of Florida
reaffirmed its December 2004 offer to settle and provided Liggett with a 60 day notice to cure the
alleged defaults. In November 2005, Florida made a revised offer that Liggett pay Florida $4,250
to resolve all matters through December 31, 2005, and pay Florida $0.17 per pack on all Liggett
cigarettes sold in Florida beginning January 1, 2006. After further discussions, Floridas most
recent offer is that Liggett pay a total of $3,500 in four annual payments, $1,000 for the first
three years and $500 in the fourth year, and defer further
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discussion of any alleged future obligations until the end of Floridas 2006 legislative
session. Liggett has not yet responded to this most recent offer from Florida and there can be no
assurance that a settlement will be reached. In November 2004, the State of Mississippi offered to
settle all amounts allegedly owed by Liggett for the period through 2003 for the sum of $6,500. In
April 2005, the State of Mississippi reaffirmed its November 2004 offer to settle and provided
Liggett with a 60 day notice to cure the alleged defaults. No specific monetary demand has been
made by the State of Texas. Liggett has met with representatives of Mississippi and Texas to
discuss the issues relating to the alleged defaults, although no resolution has been reached.
Except for $2,000 accrued for the year ended December 31, 2005 in connection with the
foregoing matters, no other amounts have been accrued in the accompanying financial statements for
any additional amounts that may be payable by Liggett under the settlement agreements with Florida,
Mississippi and Texas. There can be no assurance that Liggett will prevail in any of these matters
and that Liggett will not be required to make additional material payments, which payments could
adversely affect our consolidated financial position, results of operations or cash flows.
Real Estate Activities. In December 2002, New Valley purchased two office buildings in
Princeton, New Jersey for a total purchase price of $54,000. New Valley financed a portion of the
purchase price through a borrowing of $40,500 from HSBC Realty Credit Corporation (USA). In
February 2005, New Valley completed the sale of the office buildings for $71,500. The mortgage
loan on the properties was retired at closing with the proceeds of the sale.
New Valley accounts for its 50% interests in Douglas Elliman Realty LLC, Koa Investors LLC and
16th & K Holdings LLC on the equity method. Douglas Elliman Realty operates the largest
residential brokerage company in the New York metropolitan area. Koa Investors LLC owns the
Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii. Following a major renovation, the
property reopened in the fourth quarter 2004 as a four star resort with 521 rooms. In August 2005,
16th & K Holdings LLC acquired the St. Regis Hotel, a 193 room luxury hotel in
Washington, D.C., for $47,000.
Recent Developments in 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, 2006, there were
approximately 271 individual suits, nine purported class actions and eight governmental and other
third-party payor health care reimbursement actions pending in the United States in which Liggett
was a named defendant. A civil lawsuit was filed by the United States federal government seeking
disgorgement of approximately $289,000,000 from various cigarette manufacturers, including Liggett.
A federal appellate court ruled in February 2005 that disgorgement is not an available remedy in
the case. In October 2005, the United States Supreme Court declined to review this decision.
Trial of the case concluded on June 15, 2005. On June 27, 2005, the government sought to
restructure its potential remedies and filed a proposed Final Judgment and Order. That relief can
be grouped into four categories: (1) $14,000,000 for a cessation and counter marketing program;
(2) so-called corrective statements; (3) disclosures; and (4) enjoined activities. Post-trial
briefing was completed in October 2005. In one of the other cases pending against Liggett, in
2000, an action against cigarette manufacturers involving approximately 1,000 named individual
plaintiffs was consolidated for trial on some common related issues before a single West Virginia
state court. Liggett is a defendant in most of the cases pending in West Virginia. In January
2002, the court severed Liggett from the trial of the consolidated action. Two purported class
actions have been certified in state court in Kansas and New Mexico against the cigarette
manufacturers for alleged antitrust violations. As new cases are commenced, the costs associated
with defending these cases and the risks relating to the inherent unpredictability of litigation
continue to increase.
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There are five individual smoking-related actions where Liggett is the only tobacco company
defendant. In April 2004, in one of these cases, a Florida state court jury awarded compensatory
damages of $540 against Liggett. In addition, plaintiffs counsel was awarded legal fees of $752.
Liggett has appealed both the verdict and the award of legal fees. In March 2005, in another case
in Florida state court where Liggett is the only defendant, the court granted Liggetts motion for
summary judgment disposing of the case in its entirety. The plaintiff has appealed. In March
2006, in another of these cases, a Florida state court jury returned a verdict in favor of Liggett.
The plaintiff has appealed.
In May 2003, a Florida intermediate appellate court overturned a $790,000 punitive damages
award against Liggett and decertified the Engle smoking and health class action. In May 2004, the
Florida Supreme Court agreed to review the case, and oral argument was held in November 2004. If
the intermediate appellate courts ruling is not upheld on appeal, it will have a material adverse
effect on us. In November 2000, Liggett filed the $3,450 bond required under the bonding statute
enacted in 2000 by the Florida legislature which limits the size of any bond required, pending
appeal, to stay execution of a punitive damages verdict. In May 2001, Liggett reached an agreement
with the class in the Engle case, which provided assurance to Liggett that the stay of execution,
in effect under the Florida bonding statute, would not be lifted or limited at any point until
completion of all appeals, including to the United States Supreme Court. As required by the
agreement, Liggett paid $6,273 into an escrow account to be held for the benefit of the Engle
class, and released, along with Liggetts existing $3,450 statutory bond, to the court for the
benefit of the class upon completion of the appeals process, regardless of the outcome of the
appeal. In June 2002, the jury in an individual case brought under the third phase of the Engle
case awarded $37,500 (subsequently reduced by the court to $25,100) of compensatory damages against
Liggett and two other defendants and found Liggett 50% responsible for the damages. The verdict,
which is subject to the outcome of the Engle appeal, has been overturned as a result of the
appellate courts ruling discussed above. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the Engle case. Liggett may
enter into discussions in an attempt to settle particular cases if it believes it is appropriate to
do so. Management cannot predict the cash requirements related to any future settlements and
judgments, including cash required to bond any appeals, and there is a risk that those requirements
will not be able to be met.
Federal or state regulators may object to Vector Tobaccos low nicotine and nicotine-free
cigarette products and reduced risk cigarette products it may develop as unlawful or allege they
bear deceptive or unsubstantiated product claims, and seek the removal of the products from the
marketplace, or significant changes to advertising. Various concerns regarding Vector Tobaccos
advertising practices have been expressed to Vector Tobacco by certain state attorneys general.
Vector Tobacco has engaged in discussions in an effort to resolve these concerns and Vector Tobacco
has, in the interim, suspended all print advertising for its QUEST brand. If Vector Tobacco is
unable to advertise its QUEST brand, it could have a material adverse effect on sales of QUEST.
Allegations by federal or state regulators, public health organizations and other tobacco
manufacturers that Vector Tobaccos products are unlawful, or that its public statements or
advertising contain misleading or unsubstantiated health claims or product comparisons, may result
in litigation or governmental proceedings.
In recent years, there have been a number of proposed restrictive regulatory actions from
various Federal administrative bodies, including the United States Environmental Protection Agency
and the Food and Drug Administration. There have also been adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of third-party payor actions.
These developments generally receive widespread media attention. We are not able to evaluate the
effect of these developing matters on pending litigation or the possible commencement of additional
litigation, but our consolidated financial position, results of
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operations or cash flows could be materially adversely affected by an unfavorable outcome in
any smoking-related litigation. See Note 8 to our consolidated financial statements for a
description of legislation, regulation and litigation.
Restatement of Consolidated Financial Statements
On November 9, 2006, we determined we would restate our financial statements for each of the
years ended December 31, 2004 and 2005, and selected financial data for each of the years 2004 and
2005 appearing in Item 6 of our 2005 Annual Report on Form 10-K, as amended, as well as our interim
financial statements for all interim periods within 2005 and the first two quarters of 2006. The
restatement corrected an error in the computation of the debt discount amortization created by the
embedded derivative and the beneficial conversion feature associated with our 5% variable interest
senior convertible notes due 2011, which were issued in the last
quarter of 2004 and the first half of 2005. The restatement adjustments affected our previously reported
interest expense, the related income tax effect, and extraordinary items, as well as our previously
reported other assets, long-term debt, additional paid-in capital and accumulated deficit balances.
The effects of the restatement are reflected in our consolidated financial statements and
accompanying notes included herein. See Note 16 Restated Financial Information. All periods presented are unaudited.
The restatement adjustments corrected the previous amortization method used in calculating the
amortization of the debt discount created by the embedded derivative and beneficial conversion
feature associated with our 5% variable interest senior convertible notes due 2011. We previously
amortized the debt discount on our 5% variable interest senior convertible notes due 2011 using an
erroneous amortization method that did not result in a consistent yield on the convertible debt
over the debts term.
The aggregate net effect of the restatement was to increase stockholders equity by $4,142 as
of March 31, 2006, $3,422 as of December 31, 2005 and $336 as of December 31, 2004. The
restatement also increased net income by $720 ($0.01 per diluted common share) and $731 ($0.02 per
diluted common share) for the three months ended March 31, 2006 and 2005, respectively.
There
was no change to each subtotal (operating, investing and financing
activities) in the Companys
consolidated statements of cash flows as a result of the restatement.
Critical Accounting Policies
General. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, 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 restructuring and impairment charges,
inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals,
sales returns and allowances, actuarial assumptions of pension plans, embedded derivative
liability, the tobacco quota buyout, settlement accruals and litigation and defense costs. Actual
results could differ from those estimates.
Revenue Recognition. Revenues from sales of cigarettes are recognized upon the shipment of
finished goods when title and risk of loss have passed to the customer, there is persuasive
evidence of an arrangement, the sale price is determinable and collectibility is reasonably
assured. We provide an allowance for expected sales returns, net of any related inventory cost
recoveries. In accordance with the Emerging Issues Task Force (EITF) Issue No. 06-3, How Sales
Taxes Should Be Presented in the Income Statement (Gross Versus Net), our accounting policy is to
include federal excise taxes in revenues and cost of goods sold. Since our primary
- 56 -
line of business is tobacco, our financial position and our results of operations and cash
flows have been and could continue to be materially adversely affected by significant unit sales
volume declines, litigation and defense costs, increased tobacco costs or reductions in the selling
price of cigarettes in the near term.
Marketing Costs. We record marketing costs as an expense in the period to which such costs
relate. We do not defer the recognition of any amounts on our consolidated balance sheets with
respect to marketing costs. We expense advertising costs as incurred, which is the period in which
the related advertisement initially appears. We record consumer incentive and trade promotion
costs as a reduction in revenue in the period in which these programs are offered, based on
estimates of utilization and redemption rates that are developed from historical information.
Restructuring and Asset Impairment Charges. We have recorded charges related to employee
severance and benefits, asset impairments, contract termination and other associated exit costs
during 2003 and 2004. The calculation of severance pay requires management to identify employees
to be terminated and the timing of their severance from employment. The calculation of benefits
charges requires actuarial assumptions including determination of discount rates. As discussed
further below, the asset impairments were recorded in accordance with SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which requires management to estimate the fair
value of assets to be disposed of. On January 1, 2003, we adopted SFAS No. 146, Accounting for
Costs Associated with Exit or Disposal Activities. Charges related to restructuring activities
initiated after this date were recorded when incurred. Prior to this date, charges were recorded
at the date of an entitys commitment to an exit plan in accordance with EITF 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). These restructuring charges are based on
managements best estimate at the time of restructuring. The status of the restructuring
activities is reviewed on a quarterly basis and any adjustments to the reserve, which could differ
materially from previous estimates, are recorded as an adjustment to operating income.
Purchase Accounting. We account for business combination transactions, including the exchange
offer and merger with New Valley, in accordance with SFAS No. 141, Business Combinations. SFAS
No. 141 requires that we allocate the cost of the acquisition to assets acquired and liabilities
assumed, based on their fair values as of the acquisition date. Estimates of fair values for the
non-consolidated real estate businesses of New Valley are generally based on independent appraisals
and other accounts are based on managements best estimates using assumptions that are believed to
be reasonable. The determination of fair values involves considerable estimation and judgment,
including developing forecasts of cash flows and discount rates for the non-consolidated real
estate businesses.
Impairment of Long-Lived Assets. We evaluate our long-lived assets for possible impairment
annually or whenever events or changes in circumstances indicate that the carrying value of the
asset, or related group of assets, may not be fully recoverable. Examples of such events or
changes in circumstances include a significant adverse change in the manner in which a long-lived
asset, or group of assets, is being used or a current expectation that, more likely than not, a
long-lived asset, or group of assets, will be disposed of before the end of its estimated useful
life. The estimate of fair value of our long-lived assets is based on the best information
available, including prices for similar assets and the results of using other valuation techniques.
Since judgment is involved in determining the fair value of long-lived assets, there is a risk
that the carrying value of our long-lived assets may be overstated or understated.
Contingencies. We record Liggetts product liability legal expenses and other litigation
costs as operating, selling, general and administrative expenses as those costs are incurred. As
discussed in Note 8 to our consolidated financial statements and above under the heading
- 57 -
Recent Developments in Legislation, Regulation and Litigation, legal proceedings covering a
wide range of matters are pending or threatened in various jurisdictions against Liggett.
Management is unable to make a reasonable estimate with respect to the amount or range of loss that
could result from an unfavorable outcome of pending smoking-related litigation or the costs of
defending such cases, and we have not provided any amounts in our consolidated financial statements
for unfavorable outcomes, if any. You should not infer from the absence of any such reserve in our
financial statements that Liggett will not be subject to significant tobacco-related liabilities in
the future. Litigation is subject to many uncertainties, and it is possible that our consolidated
financial position, results of operations or cash flows could be materially adversely affected by
an unfavorable outcome in any such smoking-related litigation.
Settlement Agreements. As discussed in Note 8 to our consolidated financial statements,
Liggett and Vector Tobacco are participants in the Master Settlement Agreement, the 1998 agreement
to settle governmental healthcare cost recovery actions brought by various states. Liggett and
Vector Tobacco have no payment obligations under the Master Settlement Agreement except to the
extent their market shares exceed approximately 1.65% and 0.28%, respectively, of total cigarettes
sold in the United States. Their obligations, and the related expense charges under the Master
Settlement Agreement, are subject to adjustments based upon, among other things, the volume of
cigarettes sold by Liggett and Vector Tobacco, their relative market shares and inflation. Since
relative market shares are based on cigarette shipments, the best estimate of the allocation of
charges under the Master Settlement Agreement is recorded in cost of goods sold as the products are
shipped. Settlement expenses under the Master Settlement Agreement recorded in the accompanying
consolidated statements of operations were $7,588 for the three months ended March 31, 2006 and
$1,447 for the three months ended March 31, 2005. Adjustments to these estimates are recorded in
the period that the change becomes probable and the amount can be reasonably estimated.
Derivatives; Beneficial Conversion Feature. We measure all derivatives, including certain
derivatives embedded in other contracts, at fair value and recognize them in the consolidated
balance sheet as an asset or a liability, depending on our rights and obligations under the
applicable derivative contract. In November 2004, we issued in a private placement 5% variable
interest senior convertible notes due 2011 where a portion of the total interest payable on the
notes is computed by reference to the cash dividends paid on our common stock. In December 2004
and during the first half of 2005, we issued additional notes on the same terms. This portion of
the interest payment is considered an embedded derivative. Pursuant to SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, we have bifurcated this dividend
portion of the interest on the notes and, based on a valuation by an independent third party,
estimated the fair value of the embedded derivative liability. At issuance of the November 2004
notes, the estimated initial fair value was $24,738, which was recorded as a discount to the notes
and classified as a derivative liability on the consolidated balance sheet. Issuances of $1,405 of
additional notes in December 2004, $14,949 of additional notes in the first quarter in 2005 and
$30,000 of additional notes in April 2005 increased the initial fair value of the derivative
liability by $17,304 to $42,042. The initial embedded derivative liability is amortized over the
term of the debt and reflected as non-cash interest expense. We recognized non-cash interest
expense of $679 and $376 in the first quarter of 2006 and 2005, respectively, due to the
amortization of the debt discount attributable to the embedded derivatives.
Changes to the fair value of this embedded derivative are reflected quarterly in our
consolidated statement of operations as Change in fair value of derivatives embedded within
convertible debt At March 31, 2006, the derivative liability was estimated at $38,147 and at
December 31, 2005, the derivative liability was estimated at $39,371. We recognized gains of $1,224
and $828 in the first quarter of 2006 and 2005, respectively due to changes in the fair value of
the embedded derivative, which were reported as Change in fair value of derivatives embedded
within convertible debt.
- 58 -
After giving effect to the recording of the embedded derivative liability as a discount to the
notes, our common stock had a fair value at the issuance date of the notes in excess of the
conversion price resulting in a beneficial conversion feature. Emerging Issues Task Force (EITF)
No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Convertible Ratios, requires that the initial intrinsic value of the
beneficial conversion feature ($22,138 at December 31, 2005 prior to the impact of income taxes) be
recorded to additional paid-in capital and as a discount on the notes. The discount is then
amortized to interest expense over the term of the notes using the effective interest rate method.
We recognized non-cash interest expense of $376 and $204 in the first quarter of 2006 and 2005,
respectively, due to the amortization of the debt discount attributable to the beneficial
conversion feature.
Inventories. Tobacco inventories are stated at lower of cost or market and are determined
primarily by the last-in, first-out (LIFO) method at Liggett and the first-in, first-out (FIFO)
method at Vector Tobacco. Although portions of leaf tobacco inventories may not be used or sold
within one year because of time required for aging, they are included in current assets, which is
common practice in the industry. We estimate an inventory reserve for excess quantities and
obsolete items based on specific identification and historical write-offs, taking into account
future demand and market conditions. At March 31, 2006, approximately $1,136 of our leaf inventory
was associated with Vector Tobaccos QUEST product. During the second quarter of 2004, we
recognized a non-cash charge of $37,000 to adjust the carrying value of excess leaf tobacco
inventory for the QUEST product, based on estimates of future demand and market conditions. If
actual demand for the product or market conditions are less favorable than those estimated,
additional inventory write-downs may be required.
Stock-Based Compensation. In January 2006, we adopted SFAS No. 123(R), Share-Based Payment",
under which share-based transactions are accounted for using a fair value-based method to recognize
non-cash compensation expense. Prior to adoption, our stock-based compensation plans were
accounted for in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees
with the intrinsic value-based method permitted by SFAS No. 123, Accounting for Stock-Based
Compensation as amended by SFAS No. 148. We adopted SFAS No. 123(R) using the modified
prospective method. Under the modified prospective method, we recognize compensation expense for
all share-based payments granted after January 1, 2006 and prior to, but not yet vested as of
January 1, 2006 in accordance with SFAS No. 123(R). Under the fair value recognition provisions of
SFAS No. 123(R), we recognize stock-based compensation net of an estimated forfeiture rate and only
recognize compensation cost for those shares expected to vest on a straight line basis over the
requisite service period of the award. Upon adoption, there was no cumulative adjustment for the
impact of the change in accounting principles because the assumed forfeiture rate did not differ
significantly from prior periods. We recognized compensation expense of $186 related to stock
options in the first quarter of 2006 as a result of adopting SFAS No. 123(R). As of March 31,
2006, there was $243 of total unrecognized cost related to employee stock options. In addition,
effective January 1, 2006, as a result of the adoption of SFAS No. 123(R), payments of dividend
equivalent rights on the unexercised portion of stock options are accounted for as reductions in
additional paid-in capital on our consolidated balance sheet ($1,578 for the three months ended
March 31, 2006). Prior to January 1, 2006, in accordance with APB Opinion No. 25, we accounted for
these dividend equivalent rights as additional compensation expense ($1,770 for the three months
ended March 31, 2005). As of March 31, 2006, there was $356 of total unrecognized cost related to
employee stock options. See Note 10 to our consolidated financial statements for a discussion of
the adoption of this standard.
Employee Benefit Plans. The determination of our net pension and other postretirement benefit
income or expense is dependent on our selection of certain assumptions used by actuaries in
calculating such amounts. Those assumptions include, among others, the discount rate, expected
long-term rate of return on plan assets and rates of increase in compensation and healthcare costs.
In accordance with accounting principles generally accepted in the United
- 59 -
States of America, actual results that differ from our assumptions are accumulated and
amortized over future periods and therefore, generally affect our recognized income or expense in
such future periods. While we believe that our assumptions are appropriate, significant
differences in our actual experience or significant changes in our assumptions may materially
affect our future net pension and other postretirement benefit income or expense.
Net pension expense for defined benefit pension plans and other postretirement benefit expense
aggregated approximately $4,250 for 2005, and we currently anticipate such expense will be
approximately $4,650 for 2006. In contrast, our funding obligations under the pension plans are
governed by ERISA. To comply with ERISAs minimum funding requirements, we do not currently
anticipate that we will be required to make any funding to the pension plans for the pension plan
year beginning on January 1, 2006 and ending on December 31, 2006. Any additional funding
obligation that we may have for subsequent years is contingent on several factors and is not
reasonably estimable at this time.
Results of Operations
The following discussion provides an assessment of our results of operations, capital
resources and liquidity and should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. The consolidated financial
statements include the accounts of VGR Holding, Liggett, Vector Tobacco, Liggett Vector Brands, New
Valley and other less significant subsidiaries.
For purposes of this discussion and other consolidated financial reporting, our significant
business segments for the three months ended March 31, 2006 and 2005 were Liggett and Vector
Tobacco. The Liggett segment consists of the manufacture and sale of conventional cigarettes and,
for segment reporting purposes, includes the operations of the Medallion Company, Inc. acquired on
April 1, 2002 (which operations are held for legal purposes as part of Vector Tobacco). The Vector
Tobacco segment includes the development and marketing of the low nicotine and nicotine-free
cigarette products as well as the development of reduced risk cigarette products and, for segment
reporting purposes, excludes the operations of Medallion.
- 60 -
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Revenues: |
|
|
|
|
|
|
|
|
Liggett |
|
$ |
115,739 |
|
|
$ |
101,635 |
|
Vector Tobacco |
|
|
1,965 |
|
|
|
2,538 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
117,704 |
|
|
$ |
104,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income: |
|
|
|
|
|
|
|
|
Liggett |
|
$ |
30,421 |
|
|
$ |
31,870 |
|
Vector Tobacco |
|
|
(3,548 |
) |
|
|
(4,432 |
) |
|
|
|
|
|
|
|
Total tobacco |
|
|
26,873 |
|
|
|
27,438 |
|
|
|
|
|
|
|
|
|
|
Corporate and other |
|
|
(6,646 |
) |
|
|
(8,790 |
) |
|
|
|
|
|
|
|
Total operating income |
|
$ |
20,227 |
|
|
$ |
18,648 |
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 Compared to Three Months ended March 31, 2005
Revenues. Total revenues were $117,704 for the three months ended March 31, 2006 compared to
$104,173 for the three months ended March 31, 2005. This $13,531 (13.0%) increase in revenues was
due to a $14,104 (13.9%) increase in revenues at Liggett and a $573 (22.6%) decrease in revenues at
Vector Tobacco.
Tobacco Revenues. All of Liggetts sales for the first three months of 2006 and 2005 were in
the discount category. For the three months ended March 31, 2006, net sales at Liggett totaled
$115,739, compared to $101,635 for the three months ended March 31, 2005. Revenues increased by
13.9% ($14,104) due to a 21.2% increase in unit sales volume (approximately 355.0 million units)
accounting for $21,575 in favorable volume variance partially offset by $1,490 in unfavorable sales
mix, and unfavorable pricing and increased promotional spending of $5,981. Net revenues of the
LIGGETT SELECT brand increased $6,351 for the first quarter of 2006 compared to 2005, and its unit
volume increased 16.4% in 2006 period compared to 2005. Net revenues of the GRAND PRIX brand
increased $11,999 for the first quarter of 2006 compared to the prior year period when there were
no material sales.
Revenues at Vector Tobacco for the three months ended March 31, 2006 were $1,965 compared to
$2,538 in the 2005 period due to decreased sales volume. Vector Tobaccos revenues in both periods
related primarily to sales of QUEST.
Tobacco Gross Profit. Tobacco gross profit was $44,363 for the first three months ended March
31, 2006 compared to $45,175 for the three months ended March 31, 2005. This represented a decrease
of $812 (1.8%) when compared to the same period last year, due primarily to increased promotional
spending as well as higher Master Settlement Agreement expense. Liggetts brands contributed 99.0%
to our gross profit and Vector Tobacco contributed 1.0% for the three months ended March 31, 2006.
Over the same period in 2005, Liggetts brands contributed 98.2% to tobacco gross profit and Vector
Tobacco contributed 1.8%.
Liggetts gross profit of $43,921 for the three months ended March 31, 2006 decreased $438
from gross profit of $44,359 for the three months ended March 31, 2005. As a percent of revenues
(excluding federal excise taxes), gross profit at Liggett decreased to 57.8% for the three months
ended March 31, 2006 compared to gross profit of 64.5% for the three months ended March 31, 2005.
This decrease in Liggetts gross profit in 2006 period was attributable to increased promotional
spending and higher Master Settlement Agreement expense.
- 61 -
Vector Tobaccos gross profit was $442 for the three months ended March 31, 2006 compared to
gross profit of $816 for the same period in 2005. The decrease was due primarily to the reduced
sales volume.
Expenses. Operating, selling, general and administrative expenses were $24,136 for the three
months ended March 31, 2006 compared to $26,527 for the same period last year, a decrease of $2,391
(9.0%). Expenses at Liggett were $13,500 for the three months ended March 31, 2006 compared to
$12,489 for the same period in the prior year, an increase of $1,011 or 8.1%. The increase in
expense for the three months ended March 31, 2006 was due primarily to an increase in the sales
force. Liggetts product liability legal expenses of $1,373 for the three months ended March 31,
2006 compared to $1,229 for the same period in the prior year. Expenses at Vector Tobacco for the
three months ended March 31, 2006 were $3,991 compared to expenses of $5,248 for the three months
ended March 31, 2005 primarily due to reduced employee expense. Expenses at corporate for the
quarter ended March 31, 2006 were reduced as a result of the adoption of SFAS No. 123(R). Payments
of dividend equivalent rights on unexercised stock options previously charged to compensation cost
($1,770 for the three months ended March 31, 2005) are now recognized as reductions to additional
paid-in capital on our consolidated balance sheet ($1,578 for the three months ended March 31,
2006).
For the three months ended March 31, 2006, Liggetts operating income decreased $1,449 to
$30,421 compared to $31,870 for the same period in 2005 primarily due to higher promotional
spending and Master Settlement Agreement costs partially offset by higher revenues. For the three
months ended March 31, 2006, Vector Tobaccos operating loss was $3,548 compared to a loss of
$4,432 for the three months ended March 31, 2005 due to reduced employee expense offset by lower
sales volume.
Other Income (Expenses). For the three months ended March 31, 2006, other income (expenses)
was a loss of $1,521 compared to an income of $5,481 for the three months ended March 31, 2005.
For the three months ended March 31, 2006, interest expense of $8,277 and a loss on investments of
$30 were offset primarily by equity income from non-consolidated real estate businesses of $3,735,
changes in fair value of derivatives embedded within convertible debt of $1,224 and interest and
dividend income of $1,781. The equity income of $3,735 for the 2006 period resulted primarily from
income of $2,590 related to New Valleys investment in Douglas Elliman Realty, LLC and income of
$1,154 related to its investment in Koa Investors, which owns the Sheraton Keauhou Bay Resort and
Spa in Kailua-Kona, Hawaii. For the three months ended March 31, 2005, a gain on the LTS
conversion of $9,461, a gain on investments of $1,430, changes in fair value of derivatives
embedded within convertible debt of $828 and interest and dividend income of $710 were offset by
interest expense of $6,342, equity loss from non-consolidated real estate businesses of $306 and an
equity loss in LTS of $299.
Income from Continuing Operations. The income from continuing operations before income taxes
and minority interests for the three months ended March 31, 2006 was $18,706 compared to income of
$24,129 before income taxes and minority interests for the three months ended March 31, 2005. The
income tax provision was $8,693 in 2006. This compared to a tax provision of $12,920 and minority
interests of $2,016 in 2005. Our income tax rate for 2006 does not bear a customary relationship
to statutory income tax rates as a result of the impact of nondeductible expenses and state income
taxes. Our tax rate for 2005 considers the intraperiod allocation at New Valley between income
from continuing and discontinued operations and the utilization of deferred tax assets at New
Valley, the impact of nondeductible expenses and state income taxes.
Discontinued Operations
Real Estate Leasing. In February 2005, New Valley completed the sale for $71,500 of its two
office buildings in Princeton, N.J. As a result of the sale, our consolidated financial statements
- 62 -
reflect New Valleys real estate leasing operations as discontinued operations for the three
months ended March 31, 2005. Accordingly, revenues, costs and expenses of the discontinued
operations have been excluded from the respective captions in the consolidated statements of
operations. The net operating results of the discontinued operations have been reported, net of
applicable income taxes and minority interests, as Income from discontinued operations.
Summarized operating results of the discontinued real estate leasing operations for the three
months ended March 31, 2005 are as follows:
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2005 |
|
Revenues |
|
$ |
924 |
|
Expenses |
|
|
515 |
|
|
|
|
|
Income from operations before income taxes
and minority interests |
|
|
409 |
|
Provision for income taxes |
|
|
223 |
|
|
|
|
|
|
Minority interests |
|
|
104 |
|
|
|
|
|
Income from discontinued operations |
|
$ |
82 |
|
|
|
|
|
Gain on Disposal of Discontinued Operations. New Valley recorded a gain on disposal of
discontinued operations of $2,952 (net of minority interests and taxes) for the three months ended
March 31, 2005 in connection with the sale of the office buildings.
Liquidity and Capital Resources
Net cash and cash equivalents decreased $8,908 for the three months ended March 31, 2006 and
increased $30,505 for the three months ended March 31, 2005.
Net cash
provided from operations was $1,622 and $7,044 for the three months ended March 31, 2006 and 2005, respectively. The difference between the two periods relates to a
net change of $10,484 in the 2006 period versus the 2005 period primarily related to increased
payments of current liabilities related to income taxes and bonus accruals, a net increase of
inventory of $1,923 in the 2006 period versus a net decrease of inventory of $5,110 in 2005 and
lower net income of $2,214 in the 2006 period. The amount was offset by an increase of accounts
receivable of $3,789 in the 2006 period versus an increase of accounts receivable of $9,957 in the
2005 period, a decrease of $6,185 of non-cash income items (income from non-consolidated real
estate companies, gain from the conversion of LTS notes, equity loss on operations of LTS, changes
in fair value of derivatives embedded within convertible debt and net gains and losses from
investments) in the 2006 period and increased distributions from non-consolidated real estate
businesses of $1,269 in the 2006 period.
Cash used in investing activities was $1,558 for the three months ended March 31, 2006
compared to cash provided of $65,344 for the 2005 period. In the first quarter of 2006, cash was
used for capital expenditures of $1,446, the purchase of investment securities of $73 and the
purchase of long-term investments partially offset by proceeds from the liquidation of long-term
investments of $25. Cash was provided in 2005 principally from discontinued operations of $66,912
and proceeds from the sale or maturity of investment securities of $5,420 offset by the purchase of
investment securities for $2,724, capital expenditures of $968, the issuance by New Valley of notes
receivable from LTS for $1,750 and the purchase by New Valley of LTS common stock for $1,500.
- 63 -
Cash used in financing activities was $8,972 for the three months ended March 31, 2006
compared to cash used of $41,883 for the 2005 period. In the first quarter of 2006, cash was used
for distributions on common stock of $21,541, repayments on debt of $1,648 and deferred financing
charges of $200. Cash used was offset primarily by net borrowings under the Liggett credit facility
of $13,785, and proceeds from the exercise of options of $554. In the first quarter of 2005, cash
was used for distributions on common stock of $16,735, repayments on debt of $1,434 and deferred
financing charges of $678, offset by proceeds from the sale of convertible notes of $14,959,
proceeds from the exercise of options of $779 and net proceeds under the revolver of $347.
Liggett. Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $13,785
was outstanding at March 31, 2006. Availability as determined under the facility was approximately
$22,037 based on eligible collateral at March 31, 2006. The facility is collateralized by all
inventories and receivables of Liggett and a mortgage on its manufacturing facility. Borrowings
under the facility bear interest at a rate equal to 1.0% above the prime rate of Wachovia. The
facility requires Liggetts compliance with certain financial and other covenants including a
restriction on Liggetts ability to pay cash dividends unless Liggetts borrowing availability
under the facility for the 30-day period prior to the payment of the dividend, and after giving
effect to the dividend, is at least $5,000 and no event of default has occurred under the
agreement, including Liggetts compliance with the covenants in the credit facility, including an
adjusted net worth and working capital requirement. In addition, the facility imposes requirements
with respect to Liggetts adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of $17,000 as computed in
accordance with the agreement). At March 31, 2006, management believes that Liggett was in
compliance with all covenants under the credit facility; Liggetts adjusted net worth was $38,347
and net working capital was $26,847, as computed in accordance with the agreement.
100 Maple LLC, a company formed by Liggett in 1999 to purchase its Mebane, North Carolina
manufacturing plant, has a term loan of $3,250 outstanding as of March 31, 2006 under Liggetts
credit facility. The remaining balance of the term loan is payable in two monthly installments of
$77 with a final payment on June 1, 2006 of $3,095. Interest is charged at the same rate as
applicable to Liggetts credit facility, and the outstanding balance of the term loan reduces the
maximum availability under the credit facility. Liggett has guaranteed the term loan, and a first
mortgage on the Mebane property and manufacturing equipment collateralizes the term loan and
Liggetts credit facility.
Beginning in October 2001, Liggett upgraded the efficiency of its manufacturing operation at
Mebane with the addition of four new state-of-the-art cigarette makers and packers, as well as
related equipment. The total cost of these upgrades was approximately $20,000. Liggett took
delivery of the first two of the new lines in the fourth quarter of 2001 and financed the purchase
price of $6,404 through the issuance of notes, guaranteed by us and payable in 60 monthly
installments of $106 with interest calculated at the prime rate. In March 2002, the third line was
delivered, and the purchase price of $3,023 was financed through the issuance of a note, payable in
30 monthly installments of $62 and then 30 monthly installments of $51 with an interest rate of
LIBOR plus 2.8%. In May 2002, the fourth line was delivered, and Liggett financed the purchase
price of $2,871 through the issuance of a note, payable in 30 monthly installments of $59 and then
30 monthly installments of $48 with an interest rate of LIBOR plus 2.8%. In September 2002,
Liggett purchased additional equipment for $1,573 through the issuance of a note guaranteed by us,
payable in 60 monthly installments of $26 plus interest rate calculated at LIBOR plus 4.31%.
In October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable
in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%.
Liggett was required to provide a security deposit equal to 25% of the funded amount or $1,110.
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In December 2005, Liggett purchased equipment for $2,273 through a financing agreement payable
in 24 installments of $58 and then 24 installments of $46. Interest is calculated at 5.03%.
Liggett was required to provide a security deposit equal to 25% of the funded amount or $568.
Each of these equipment loans is collateralized by the purchased equipment.
Liggett and other United States cigarette manufacturers have been named as defendants in a
number of direct and third-party actions (and purported class 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 so-called secondary smoke from cigarettes. We
believe, and have been so advised by counsel handling the respective cases, that Liggett has a
number of valid defenses to claims asserted against it. Litigation is subject to many
uncertainties. In May 2003, a Florida intermediate appellate court overturned a $790,000 punitive
damages award against Liggett and decertified the Engle smoking and health class action. In May
2004, the Florida Supreme Court agreed to review the case, and oral argument was held in November
2004. If the intermediate appellate courts ruling is not upheld on appeal, it will have a
material adverse effect on us. In November 2000, Liggett filed the $3,450 bond required under the
bonding statute enacted in 2000 by the Florida legislature which limits the size of any bond
required, pending appeal, to stay execution of a punitive damages verdict. In May 2001, Liggett
reached an agreement with the class in the Engle case, which provided assurance to Liggett that the
stay of execution, in effect pursuant to the Florida bonding statute, would not be lifted or
limited at any point until completion of all appeals, including to the United States Supreme Court.
As required by the agreement, Liggett paid $6,273 into an escrow account to be held for the
benefit of the Engle class, and released, along with Liggetts existing $3,450 statutory bond, to
the court for the benefit of the class upon completion of the appeals process, regardless of the
outcome of the appeal. In June 2002, the jury in an individual case brought under the third phase
of the Engle case awarded $37,500 (subsequently reduced by the court to $25,100) of compensatory
damages against Liggett and two other defendants and found Liggett 50% responsible for the damages.
The verdict, which was subject to the outcome of the Engle appeal, has been overturned as a result
of the appellate courts ruling discussed above. In April 2004, a Florida state court jury awarded
compensatory damages of $540 against Liggett in an individual action. In addition, plaintiffs
counsel was awarded legal fees of $752. Liggett has appealed both the verdict and the award of
legal fees. It is possible that additional cases could be decided unfavorably and that there could
be further adverse developments in the Engle case. Liggett may enter into discussions in an
attempt to settle particular cases if it believes it is appropriate to do so. Management cannot
predict the cash requirements related to any future settlements and judgments, including cash
required to bond any appeals, and there is a risk that those requirements will not be able to be
met. An unfavorable outcome of a pending smoking and health case could encourage the commencement
of additional similar litigation. In recent years, there have been a number of adverse regulatory,
political and other developments concerning cigarette smoking and the tobacco industry. These
developments generally receive widespread media attention. Neither we nor Liggett are able to
evaluate the effect of these developing matters on pending litigation or the possible commencement
of additional litigation or regulation. See Note 8 to our consolidated financial statements.
Management is unable to make a reasonable estimate of the amount or range of loss that could
result from an unfavorable outcome of the cases pending against Liggett or the costs of defending
such cases. It is possible that our consolidated financial position, results of operations or cash
flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related
litigation.
V.T. Aviation. In February 2001, V.T. Aviation LLC, a subsidiary of Vector Research Ltd.,
purchased an airplane for $15,500 and borrowed $13,175 to fund the purchase. The loan, which
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is collateralized by the airplane and a letter of credit from us for $775, is guaranteed by
Vector Research, VGR Holding and us. The loan is payable in 119 monthly installments of $125
including annual interest of 2.31% above the 30-day commercial paper rate, with a final payment of
$2,581, based on current interest rates.
VGR Aviation. In February 2002, V.T. Aviation purchased an airplane for $6,575 and borrowed
$5,800 to fund the purchase. The loan is guaranteed by us. The loan is payable in 119 monthly
installments of $40, including annual interest at 2.75% above the 30-day commercial paper rate,
with a final payment of $3,836 based on current interest rates. During the fourth quarter of 2003,
this airplane was transferred to our direct subsidiary, VGR Aviation LLC, which has assumed the
debt.
Vector Tobacco. On April 1, 2002, a subsidiary of ours acquired the stock of The Medallion
Company, Inc., a discount cigarette manufacturer, and related assets from Medallions principal
stockholder. Following the purchase of the Medallion stock, Vector Tobacco merged into Medallion
and Medallion changed its name to Vector Tobacco Inc. The total purchase price for the Medallion
shares and the related assets consisted of $50,000 in cash and $60,000 in notes, with the notes
guaranteed by us and by Liggett. Of the notes, $25,000 have been repaid with the final quarterly
principal payment of $3,125 made on March 31, 2004. The remaining $35,000 of notes bear interest
at 6.5% per year, payable semiannually, and mature on April 1, 2007.
New Valley. In December 2002, New Valley financed a portion of its purchase of two office
buildings in Princeton, New Jersey with a $40,500 mortgage loan from HSBC Realty Credit Corporation
(USA). In February 2005, New Valley completed the sale of the office buildings. The mortgage loan
on the properties was retired at closing with the proceeds of the sale.
Vector. We believe that we will continue to meet our liquidity requirements through 2006.
Corporate expenditures (exclusive of Liggett, Vector Research, Vector Tobacco and New Valley) over
the next twelve months for current operations include cash interest expense of approximately
$23,600, dividends on our outstanding shares (currently at an annual rate of approximately $87,000)
and corporate expenses. In addition, as discussed above, $35,000 of Vector Tobacco notes issued in
the 2002 Medallion acquisition mature on April 1, 2007. We anticipate funding our expenditures for
current operations and required principal payments with available cash resources, proceeds from
public and/or private debt and equity financing, management fees and other payments from
subsidiaries. New Valley may acquire or seek to acquire additional operating businesses through
merger, purchase of assets, stock acquisition or other means, or to make other investments, which
may limit its ability to make such distributions.
In November 2004, we sold $65,500 of our 5% variable interest senior convertible notes due
November 15, 2011 in a private offering to qualified institutional investors in accordance with
Rule 144A under the Securities Act of 1933. The buyers of the notes had the right, for a 120-day
period ending March 18, 2005, to purchase an additional $16,375 of the notes. At December 31,
2004, buyers had exercised their rights to purchase an additional $1,405 of the notes, and the
remaining $14,959 principal amount of notes were purchased during the first quarter of 2005. In
April 2005, we issued an additional $30,000 principal amount of 5% variable interest senior
convertible notes due November 15, 2011 in a separate private offering to qualified institutional
investors in accordance with Rule 144A. These notes, which were issued under a new indenture at a
net price of 103.5%, were on the same terms as the $81,864 principal amount of notes previously
issued in connection with the November 2004 placement.
The notes pay interest on a quarterly basis at a rate of 5% per year with an additional amount
of interest payable on the notes on each interest payment date. This additional amount is based on
the amount of cash dividends actually paid by us per share on our common stock during the prior
three-month period ending on the record date for such interest payment multiplied by the number of
shares of our common stock into which the notes are convertible on such record date (together, the
Total Interest). Notwithstanding the foregoing, however, during the period prior to
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November 15, 2006, the interest payable on each interest payment date is the higher of (i) the
Total Interest and (ii) 6 3/4% per year. The notes are convertible into our common stock, at the
holders option. The conversion price, which was of $18.48 at March 31, 2006, is subject to
adjustment for various events, including the issuance of stock dividends.
The notes will mature on November 15, 2011. We must redeem 12.5% of the total aggregate
principal amount of the notes outstanding on November 15, 2009. In addition to such redemption
amount, we will also redeem on November 15, 2009 and on each interest accrual period thereafter an
additional amount, if any, of the notes necessary to prevent the notes from being treated as an
Applicable High Yield Discount Obligation under the Internal Revenue Code. The holders of the
notes will have the option on November 15, 2009 to require us to repurchase some or all of their
remaining notes. The redemption price for such redemptions will equal 100% of the principal amount
of the notes plus accrued interest. If a fundamental change occurs, we will be required to offer
to repurchase the notes at 100% of their principal amount, plus accrued interest and, under certain
circumstances, a make-whole premium payable in cash and/or common stock.
In July 2001, we completed the sale of $172,500 (net proceeds of approximately $166,400) of
our 6.25% convertible subordinated notes due July 15, 2008 through a private offering to qualified
institutional investors in accordance with Rule 144A under the Securities Act of 1933. The notes
pay interest at 6.25% per annum and are convertible into our common stock, at the option of the
holder. The conversion price, which was $21.32 at March 31, 2006, is subject to adjustment for
various events, and any cash distribution on our common stock results in a corresponding decrease
in the conversion price. In December 2001, $40,000 of the notes were converted into our common
stock, and in October 2004, $8 of the notes were converted. A total of $132,492 principal amount
of the notes were outstanding at March 31, 2006.
Our consolidated balance sheets include deferred income tax assets and liabilities, which
represent temporary differences in the application of accounting rules established by generally
accepted accounting principles and income tax laws. As of March 31, 2006, our deferred income tax
liabilities exceeded our deferred income tax assets by $67,981. The largest component of our
deferred tax liabilities exists because of differences that resulted from a 1998 and 1999
transaction with Philip Morris Incorporated in which a subsidiary of Liggett contributed three of
its premium brands to Trademarks LLC, a newly-formed limited liability company. In such
transaction, Philip Morris acquired an option to purchase the remaining interest in Trademarks for
a 90-day period commencing in December 2008, and we have an option to require Philip Morris to
purchase the remaining interest commencing in March 2010. For additional information concerning
the Philip Morris brand transaction, see Note 16 to our consolidated financial statements in our
Annual Report on Form 10-K, as amended, for the year ended December 31, 2005.
In connection with the transaction, we recognized in 1999 a pre-tax gain of $294,078 in our
consolidated financial statements and established a deferred tax liability of $103,100 relating to
the gain. Upon exercise of the options during the 90-day periods commencing in December 2008 or in
March 2010, we will be required to pay tax in the amount of the deferred tax liability, which will
be offset by the benefit of any deferred tax assets, including any net operating losses, available
to us at that time. In connection with an examination of our 1998 and 1999 federal income tax
returns, the Internal Revenue Service issued to us in September 2003 a notice of proposed
adjustment. The notice asserts that, for tax reporting purposes, the entire gain should have been
recognized in 1998 and in 1999 in the additional amounts of $150,000 and $129,900, respectively,
rather than upon the exercise of the options during the 90-day periods commencing in December 2008
or in March 2010. If the Internal Revenue Service were to ultimately prevail with the proposed
adjustment, it would result in the potential acceleration of tax payments of approximately
$129,000, including interest, net of tax benefits, through March 31, 2006. These amounts have been
previously recognized in our consolidated financial statements as tax
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liabilities. As of March 31, 2006, we believe amounts potentially due have been provided for
in our consolidated statements of operations.
We believe the positions reflected on our income tax returns are correct and intend to
vigorously oppose any proposed adjustments to our returns. We have filed a protest with the
Appeals Division of the Internal Revenue Service. No payment is due with respect to these matters
during the appeal process. Interest currently is accruing on the disputed amounts at a rate of 9%,
with the rate adjust quarterly based on rates published by the U.S. Treasury Department. If taxing
authorities were to ultimately prevail in their assertion that we incurred a tax obligation prior
to the exercise dates of these options and we were required to make such tax payments prior to 2009
or 2010, and if any necessary financing were not available to us, our liquidity could be materially
adversely affected.
Off-Balance Sheet Arrangements
We have various agreements in which we may be obligated to indemnify the other party with
respect to certain matters. Generally, these indemnification clauses are included in contracts
arising in the normal course of business under which we customarily agree to hold the other party
harmless against losses arising from a breach of representations related to such matters as title
to assets sold and licensed or certain intellectual property rights. Payment by us under such
indemnification clauses is generally conditioned on the other party making a claim that is subject
to challenge by us and dispute resolution procedures specified in the particular contract.
Further, our obligations under these arrangements may be limited in terms of time and/or amount,
and in some instances, we may have recourse against third parties for certain payments made by us.
It is not possible to predict the maximum potential amount of future payments under these
indemnification agreements due to the conditional nature of our obligations and the unique facts of
each particular agreement. Historically, payments made by us under these agreements have not been
material. As of March 31, 2006, we were not aware of any indemnification agreements that would or
are reasonably expected to have a current or future material adverse impact on our financial
position, results of operations or cash flows.
In May 1999, in connection with the Philip Morris brand transaction, Eve Holdings Inc., a
subsidiary of Liggett, guaranteed a $134,900 bank loan to Trademarks LLC. The loan is secured by
Trademarks three premium cigarette brands and Trademarks interest in the exclusive license of the
three brands by Philip Morris. The license provides for a minimum annual royalty payment equal to
the annual debt service on the loan plus $1,000. We believe that the fair value of Eves guarantee
was negligible at March 31, 2006.
In December 2001, New Valleys subsidiary, Western Realty Development LLC, sold all the
membership interests in Western Realty Investments LLC to Andante Limited. In August 2003, Andante
submitted an indemnification claim to Western Realty Development alleging losses of $1,225 from
breaches of various representations made in the purchase agreement. Under the terms of the
purchase agreement, Western Realty Development has no obligation to indemnify Andante unless the
aggregate amount of all claims for indemnification made by Andante exceeds $750, and Andante is
required to bear the first $200 of any proven loss. New Valley would be responsible for 70% of any
damages payable by Western Realty Development. New Valley has contested the indemnification claim.
In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five
year agreement with a subsidiary of the American Wholesale Marketers Association to support a
program to permit tobacco distributors to secure, on reasonable terms, tax stamp bonds required by
state and local governments for the distribution of cigarettes. Under the agreement, Liggett
Vector Brands has agreed to pay a portion of losses, if any, incurred by the surety under the bond
program, with a maximum loss exposure of $500 for Liggett Vector Brands. To secure its potential
obligations under the agreement, Liggett Vector Brands has delivered to
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the subsidiary of the Association a $100 letter of credit and agreed to fund up to an
additional $400. Liggett Vector Brands has incurred no losses to date under this agreement, and we
believe the fair value of Liggett Vector Brands obligation under the agreement was immaterial at
March 31, 2006.
At March 31, 2006, we had outstanding approximately $3,608 of letters of credit,
collateralized by certificates of deposit. The letters of credit have been issued as security
deposits for leases of office space, to secure the performance of our subsidiaries under various
insurance programs and to provide collateral for various subsidiary borrowing and capital lease
arrangements.
As of March 31, 2006, New Valley has committed to fund as up to $600 to a non-consolidated
real estate business and up to $501 to a limited partnership in which it is an investor. Vector
has agreed, under certain circumstances, to guarantee up to $2,000 of debt of another
non-consolidated real estate business.
Market Risk
We are exposed to market risks principally from fluctuations in interest rates, foreign
currency exchange rates and equity prices. We seek to minimize these risks through our regular
operating and financing activities and our long-term investment strategy. Our market risk
management procedures cover all market risk sensitive financial instruments.
As of March 31, 2006, approximately $32,643 of our outstanding debt had variable interest
rates, which increases the risk of fluctuating interest rates. Our exposure to market risk
includes interest rate fluctuations in connection with our variable rate borrowings, which could
adversely affect our cash flows. As of March 31, 2006, we had no interest rate caps or swaps.
Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual
interest expense could increase or decrease by approximately $171.
In addition, as of March 31, 2006, approximately $54,264 ($111,864 at stated value) of
outstanding debt had a variable interest rate determined by the amount of the dividends on our
common stock. Included in the difference between the stated value of the debt and carrying value
are embedded derivatives, which were estimated at $38,147 at March 31, 2006. Changes to the fair
value of these embedded derivatives are reflected quarterly within our statements of operations as
Change in fair value of derivatives embedded within convertible debt. The value of the embedded
derivative is contingent on changes in interest rates of debt instruments maturing over the
duration of the convertible debt as well as projections of future cash and stock dividends over the
term of the debt. Based on a hypothetical 100 basis point increase or decrease in interest rates
(1%), our annual Change in fair value of derivatives embedded within convertible debt could
increase or decrease by approximately $800 resulting from the embedded derivative associated with
our 5% variable interest senior convertible notes due 2011.
We held investment securities available for sale totaling $30,583 at March 31, 2006, which
includes 11,111,111 shares of Ladenburg Thalmann Financial Services Inc., which were carried at
$16,000 (see Note 4 to our consolidated financial statements). Adverse market conditions could
have a significant effect on the value of these investments.
New Valley also holds long-term investments in limited partnerships and limited liability
companies. These investments are illiquid, and their ultimate realization is subject to the
performance of the underlying entities.
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New Accounting Pronouncements
In 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151 requires that abnormal
idle facility expense and spoilage, freight and handling costs be recognized as current-period
charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead costs to
inventories be based on the normal capacity of the production facility. We are required to adopt
the provisions of SFAS No. 151 prospectively after January 1, 2006, but the effect of adoption is
not expected to have a material impact on our consolidated financial position, results of
operations or cash flows.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). SFAS No. 154 changes
the requirements for the accounting for and reporting of a change in accounting principle. The
provisions of SFAS No. 154 require, unless impracticable, retrospective application to prior
periods financial statements of (1) all voluntary changes in accounting principles and (2) changes
required by a new accounting pronouncement, if a specific transition is not provided. SFAS No. 154
also requires that a change in depreciation, amortization, or depletion method for long-lived,
non-financial assets be accounted for as a change in accounting estimate, which requires
prospective application of the new method. SFAS No. 154 is effective for all accounting changes
made in fiscal years beginning after December 15, 2005. The impact of the application of SFAS No.
154 is discussed below in connection with the application of EITF Issue No. 05-8, Income Tax
Effects of Issuing Convertible Debt with a Beneficial Conversion Feature.
In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset
Retirement Obligations an Interpretation of SFAS Statement No. 143 (FIN 47). FIN 47 clarifies
the timing of liability recognition for legal obligations associated with the retirement of a
tangible long-lived asset when the timing and/or method of settlement are conditional on a future
event. FIN 47 is effective for fiscal years ending after December 15, 2005. The application of
FIN 47 is not expected to have a material impact on our consolidated financial position, results of
operations or cash flows.
In September 2005, the EITF reached a consensus on Issue No. 04-13, Inventory Exchanges.
EITF Issue No. 04-13 required two or more inventory transactions with the same party to be
considered a single nonmonetary transaction subject to APB Opinion No. 29, Accounting for
Nonmonetary Transactions, if the transactions were entered into in contemplation of one another.
EITF Issue No. 04-13 is effective for us for new arrangements entered into after April 2, 2006. We
do not expect the adoption of EITF Issue No. 04-13 to have a material impact on our financial
position, results of operations or cash flows.
Effective January 1, 2006, we adopted EITF Issue No. 05-8, Income Tax Effects of Issuing
Convertible Debt with a Beneficial Conversion Feature. The issuance of convertible debt with a
beneficial conversion feature creates a temporary difference on which deferred taxes should be
provided. The consensus is required to be applied in fiscal periods (years or quarters) beginning
after December 15, 2005, by retroactive restatement of prior financial statements back to the
issuance of the convertible debt. The retrospective application of EITF Issue No. 05-8 reduced our
income tax expense by $186 for the three months ended March 31, 2005 and increased long-term
deferred tax liabilities and decreased stockholders equity by $7,759 as of January 1, 2006. See
Note 1 to our consolidated financial statements for a reconciliation of stockholders equity
accounts.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Instruments.
SFAS No. 155 amends SFAS Nos. 133 and 140 and relates to the financial reporting of certain hybrid
financial instruments. SFAS No. 155 allows financial instruments that have embedded derivatives to
be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the
holder elects to account for the whole instrument on a fair value
basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning
of fiscal years commencing after September 15, 2006. We have not completed our assessment of the
impact of this standard.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking statements
within the meaning of the federal securities law. Forward-looking statements include information
relating to our intent, belief or current expectations, primarily with respect to, but not limited
to:
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impairment charges and cost savings associated with restructurings of our tobacco
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related industry developments (including trends affecting our business, financial
condition and results of operations). |
We identify forward-looking statements in this report by using words or phrases such as
anticipate, believe, estimate, expect, intend, may be, objective, plan, seek,
predict, project and will be and similar words or phrases or their negatives.
The forward-looking information involves important risks and uncertainties that could cause
our actual results, performance or achievements to differ materially from our anticipated results,
performance or achievements expressed or implied by the forward-looking statements. Factors that
could cause actual results to differ materially from those suggested by the forward-looking
statements include, without limitation, the following:
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general economic and market conditions and any changes therein, due to acts of war
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impact of business combinations, including acquisitions and divestitures, both
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impact of restructurings on our tobacco business and our ability to achieve any
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impact of new legislation on our competitors payment obligations, results of
operations and product costs, i.e. the impact of recent federal legislation
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uncertainty related to litigation and potential additional payment obligations for
us under the Master Settlement Agreement and other settlement agreements with the
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risks inherent in our new product development initiatives. |
Further information on risks and uncertainties specific to our business include the risk
factors discussed above under Managements Discussion and Analysis of Financial Condition and
Results of Operations and under Item 1A, Risk Factors in our Annual Report on Form 10-K, as
amended, for the year ended December 31, 2005 filed with the Securities and Exchange Commission.
Although we believe the expectations reflected in these forward-looking statements are based
on reasonable assumptions, there is a risk that these expectations will not be attained and that
any deviations will be material. The forward-looking statements speak only as of the date they are
made.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption Managements Discussion and Analysis of Financial Condition
and Results of Operations Market Risk is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has completed an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
and Exchange Act of 1934, as amended (the Exchange Act)) as of March 31, 2006. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
March 31, 2006, as a result of the material weakness described below, our disclosure controls and
procedures were not effective to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified by the Securities and Exchange Commissions rules and forms and
that such information is accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
As discussed in Notes 2 and 16 to the consolidated financial statements, we determined that we
would restate our consolidated financial statements for each of the years ended December 31, 2004
and 2005, as well as our interim financial statements for all interim periods within 2005 and the
first two quarters of 2006. The restatement corrected an error in the computation of the
amortization of the debt discount created by the embedded derivative and the beneficial conversion
feature associated with our 5% variable interest senior convertible notes due in 2011.
In our Quarterly Reports on Form 10-Q for each of the quarterly periods ended March 31, 2005
and 2006, June 30, 2005 and 2006, and September 30, 2005, and in our Annual Report on Form 10-K for
the year ended December 31, 2005, management originally reported that our disclosure controls and
procedures were effective. In light of the restatement discussed above, we have reassessed the
effectiveness of our disclosure controls and procedures as of those dates, and have concluded that
they were not effective due to the material weakness discussed below.
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A material weakness is a control deficiency, or a combination of control deficiencies,
that result in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected.
As of March 31, 2006, we did not maintain effective controls over the accuracy of our debt
discount amortization. Specifically, we did not maintain effective controls to ensure that the
amortization of our debt discount created by the embedded derivative and beneficial conversion
feature resulted in a consistent yield on our 5% variable interest senior convertible notes due
2011 over its term, in accordance with generally accepted accounting principles through the
application of the effective interest method. This control deficiency resulted in the restatement
of our annual consolidated financial statements for the years ended December 31, 2004 and 2005, all
interim periods in 2005, the first two interim periods of 2006 and audit adjustments to the third
interim period of 2006. In addition, this control deficiency could result in misstatement of our
debt, other assets and interest expense that would result in a material misstatement to our annual
or interim consolidated financial statements that would not be prevented or detected. Accordingly,
our management has determined that this control deficiency constitutes a material weakness.
Plan of Remediation
In response to the material weakness in internal control over financial reporting described
above, we have reviewed our procedures and processes over the accuracy of our debt discount
amortization. Specifically, we have revised the amortization of our debt discount for our 5%
variable interest senior convertible notes due 2011 and have plans to establish a control to test
the amortization of debt discounts to ascertain that such amortization results in a consistent
yield on our convertible debt over its term in accordance with the effective interest method and
generally accepted accounting principles. We will perform such a review and test for any new
convertible debt or any changes to projected interest payments on our existing convertible debt to
ensure it results in a consistent yield.
The material weakness will be fully remediated when management determines the revised control
process has been operating for a sufficient period of time to provide reasonable assurance as to
its effectiveness. The remediation and ultimate resolution of our material weakness will be
reviewed with the Audit Committee of our Board of Directors.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter
ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
Reference is made to Note 8, incorporated herein by
reference, to our consolidated financial statements included
elsewhere in this report which contains a general description
of certain legal proceedings to which VGR Holding, New Valley
or their subsidiaries are a party and certain related
matters. Reference is also made to Exhibit 99.1 for
additional information regarding the pending smoking-related
material legal proceedings to which Liggett is a party. A
copy of Exhibit 99 will be furnished without charge upon
written request to us at our principal executive offices, 100
S.E. Second St., Miami, Florida 33131, Attn. Investor
Relations.
Item 1A.
Risk Factors
There are no material changes from the risk factors set forth
in Item 1A, Risk Factors, of our Annual Report on 10-K, as
amended, for the year ended December 31, 2005. Please refer
to that section for disclosures regarding the risks and
uncertainties related to our business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No securities of ours which were not registered under the
Securities Act of 1933 have been issued or sold by us during
the three months ended March 31, 2006.
Our purchases of our common stock during the three months
ended March 31, 2006 were as follows:
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Total Number |
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Maximum Number |
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of Shares |
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of Shares that |
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Total |
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Purchased as |
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May Yet Be |
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Number of |
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Average |
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Part of Publicly |
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Purchased Under |
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Shares |
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Price Paid |
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Announced Plans |
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the Plans |
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Period |
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Purchased |
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per Share |
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or Programs |
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or Programs |
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January 1 to January 31,
2006 |
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$ |
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February 1 to February
28, 2006 |
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March 1 to March 31, 2006 |
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19,302 |
(1) |
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19.21 |
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Total |
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19,302 |
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$ |
19.21 |
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(1) |
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Delivery of shares to us in payment of exercise price in connection
with exercise of an employee stock option for 35,279 shares on March 13, 2006. |
- 72 -
Item 6. Exhibits
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*10.1
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Amendment dated January 27, 2006 to Amended and Restated
Employment Agreement, dated as of September 27, 2005,
between Vector and Bennett S. LeBow (incorporated by
reference to Exhibit 10.2 in Vectors Form 8-K dated
January 27, 2006). |
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*10.2
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Amended and Restated Employment Agreement dated as of
January 27, 2006, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 to Vectors Form
8-K dated January 27, 2006). |
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*10.3
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Employment Agreement, dated as of January 27, 2006, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.3 in Vectors Form 8-K dated January 27, 2006). |
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*10.4
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Amended and Restated Employment Agreement, dated as of
January 27, 2006, between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.4 in Vectors Form
8-K dated January 27, 2006). |
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*10.5
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Executive Retirement Agreement and Release, dated as of
February 3, 2006, between Vector and Joselynn D. Van Siclen
(incorporated by reference to Exhibit 10.1 in Vectors Form
8-K dated February 3, 2006). |
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*10.6
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Employment Agreement, dated as of January 27, 2006, between
Vector and J. Bryant Kirkland III (incorporated by
reference to Exhibit 10.5 in Vectors Form 8-K dated
January 27, 2006). |
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*10.7
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Vector Senior Executive Annual Bonus Plan (incorporated by
reference to Exhibit 10.7 in Vectors Form 8-K dated
January 27, 2006). |
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*10.8
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Vector Supplemental Retirement Plan (as amended and restated
January 27, 2006) (incorporated by reference to Exhibit
10.6 in Vectors Form 8-K dated January 27, 2006). |
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31.1
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Certification of Chief Executive Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Chief Financial Officer, Pursuant to
Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
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32.1
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Certification of Chief Executive Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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32.2
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Certification of Chief Financial Officer, Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. |
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*99.1
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Material Legal Proceedings (incorporated by reference to
Exhibit 99.1 in Vectors Form 10-Q for the quarterly period
ended March 31, 2006). |
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* |
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Incorporated by reference. |
- 73 -
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
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VECTOR GROUP LTD. |
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(Registrant) |
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By:
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/s/ J. Bryant Kirkland III |
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J. Bryant Kirkland III |
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Vice President and Chief |
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Financial Officer |
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Date: November 22, 2006
- 74 -