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Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
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
(Address of principal executive offices) (Zip Code)
(305) 579-8000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, par value $.10 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
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.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates
of Vector Group Ltd. as of March 28, 2002 was approximately $650,000,000.
At March 28, 2002, Vector Group Ltd. had 33,257,284 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III (Items 10, 11, 12 and 13) from the definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission no later than 120 days after the end of the Registrant's
fiscal year covered by this report.
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VECTOR GROUP LTD.
FORM 10-K
T A B L E O F C O N T E N T S
PAGE
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PART I
Item 1. Business..................................................................................... 1
Item 2. Properties................................................................................... 29
Item 3. Legal Proceedings............................................................................ 30
Item 4. Submission of Matters to a Vote of Security Holders;
Executive Officers of the Registrant......................................................... 30
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 32
Item 6. Selected Financial Data...................................................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................... 50
Item 8. Financial Statements and Supplementary Data.................................................. 50
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure..................................................................... 50
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 51
Item 11. Executive Compensation....................................................................... 51
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 51
Item 13. Certain Relationships and Related Transactions............................................... 51
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 52
SIGNATURES............................................................................................. 61
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ITEM 1. BUSINESS
OVERVIEW
Vector Group Ltd., a Delaware corporation, is a holding company for a
number of businesses. We hold these businesses through our wholly-owned
subsidiary VGR Holding Inc. We are engaged principally in:
o the development and marketing of new, reduced carcinogen and
nicotine-free cigarette products through our subsidiary Vector
Tobacco Inc., and
o the manufacture and sale of cigarettes in the United States through
our subsidiary Liggett Group Inc.
In March 2002, we announced that the sales and marketing functions of
our Liggett and Vector Tobacco subsidiaries will be combined into a new entity,
Liggett Vector Brands Inc. The newly formed company will coordinate and execute
the sales and marketing efforts for all of our tobacco operations. With the
combined resources of Liggett and Vector Tobacco, Liggett Vector Brands
initially will have 350 salesmen, and enhanced distribution and marketing
capabilities.
Our majority-owned subsidiary, New Valley Corporation, completed in
December 2001 the distribution to its stockholders of its shares in Ladenburg
Thalmann Financial Services Inc., its former majority-owned subsidiary engaged
in the investment banking and brokerage business. The Ladenburg Thalmann
Financial Services shares received by us were, in turn, distributed to our
stockholders. New Valley is currently engaged in the real estate business and is
seeking to acquire additional operating companies.
We are controlled by Bennett S. LeBow, our Chairman and the Chairman of
New Valley, who beneficially owns approximately 35.3% of our common stock.
Effective May 24, 2000, we changed our name from Brooke Group Ltd. to
Vector Group Ltd.
VECTOR TOBACCO
Vector Tobacco Inc., a wholly-owned subsidiary of VGR Holding, is
engaged in the development and marketing of new, reduced carcinogen and
nicotine-free cigarette products.
OMNI. In November 2001, Vector Tobacco launched nationwide OMNI, the
first reduced carcinogen cigarette that tastes, smokes and burns like other
premium cigarettes. In comparison to comparable styles of the leading U.S.
cigarette brand, OMNI cigarettes produce significantly lower levels of many of
the recognized carcinogens and toxins that the medical community has identified
as major contributors to lung cancer and other diseases in smokers. While OMNI
has not been proven to reduce health risks, management believes that the
significant reduction of carcinogens is a major step in the right direction. The
data show lower levels in OMNI of the main carcinogens and toxins in both
mainstream and sidestream tobacco smoke, including polycyclic aromatic
hydrocarbons (PAHs), tobacco specific nitrosamines (TSNAs), catechols and
organics, with somewhat increased levels of nitric oxide and formaldehyde.
Mainstream smoke is what the smoker directly inhales and sidestream smoke, which
is the major component of environmental tobacco smoke, is released from the
burning end of a cigarette.
OMNI cigarettes are produced using a patent pending process developed
by Vector Tobacco. Regular tobacco is treated with a complex catalytic system
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that significantly reduces the levels of certain carcinogens and other toxins.
Additionally, OMNI employs the use of an innovative carbon filter, which reduces
a wide range of harmful compounds in smoke, yet has no impact on OMNI's premium
taste. Vector Tobacco is committed to continuing its research to find new,
innovative ways to further reduce carcinogens as well as other identified
substances that may play a role in smoking-related diseases.
Published scientific literature indicates that excessive exposure to
both mainstream and environmental tobacco smoke is the single leading cause of
preventable disease and early mortality in the United States as well as other
countries. Consequently, it is widely accepted by the medical healthcare
community that significantly reducing exposure to tobacco smoke and the many
carcinogenic and toxic constituents in the smoke (preferably by abstaining from
smoking), will substantially improve the health of a large percentage of the
American population. However, despite various types of smoking cessation
programs currently available, the introduction over the last 20 years of several
different types of nicotine-replacement devices and a dramatic reduction in
cigarette advertising, approximately 45 million adult Americans (about 22%)
continue to smoke. Globally, there are more than one billion current smokers and
the World Health Organization estimates that by 2030 over ten million people
will die each year because of smoking related diseases. These ominous statistics
underscore the pressing need to develop alternatives to the existing types of
tobacco products in order to provide the smoker who cannot or will not quit with
a product that contains reduced concentrations of known carcinogens and toxins.
OMNI cigarettes have been developed with this need in mind. While
Vector Tobacco makes no health claims for OMNI, the development of the product
rests on the basic principle that significantly reducing the concentrations and
exposure to known tobacco toxins may potentially result in decreased harm, with
complete abstinence from smoking, of course, providing the greatest benefit.
Scientists have determined that, in addition to a number of substances,
collectively called "organics", that contribute directly and indirectly to a
spectrum of tobacco-related diseases, PAHs and TSNAs are among the most potent
and dangerous substances in tobacco smoke in relation to lung cancer incidence.
Furthermore, additional risk to the smoker and nonsmoking bystander occur
through the release from a lit cigarette of sidestream tobacco smoke, which is
the most prominent indoor source of PAHs, and, according to certain authorities,
a leading cause of preventable disease and mortality in the United States.
Analysis by validated methodologies conducted at independent testing
laboratories as well as Vector Tobacco's research division have confirmed that
OMNI cigarettes significantly reduce the concentration of many of the PAHs,
TSNAs and organics that reach the smoker and nonsmoker when compared to
comparable styles of the leading competitive brand. Refinements to the OMNI
product will continue to be made by Vector Tobacco to achieve further reductions
in harmful constituents. Vector Tobacco has established a website,
www.omnicigs.com, which contains detailed product information and a listing of
data concerning OMNI.
The relationship between smoking and disease occurrence is exceedingly
complex. Vector Tobacco has begun the process of devising and funding studies of
the health impact of its new OMNI product. Vector Tobacco does not presently
have any objective evidence that OMNI cigarettes will reduce the known health
risks of cigarette smoking to the smoker or nonsmoking bystander, and no health
claims are being made by Vector Tobacco. Moreover, to underscore and ensure that
the smoker is aware of this important fact, Vector Tobacco has added an
additional prominent warning to the OMNI package and advertising, which states
that: "WARNING: Smoking is addictive and dangerous to your health. Reductions in
carcinogens (PAHs, nitrosamines, catechols, and organics) have NOT been proven
to result in a safer cigarette. This product produces tar, carbon monoxide,
other harmful by-products, and increased levels of nitric oxide."
NICOTINE-FREE PRODUCT. In the third quarter of 2002, Vector Tobacco
expects to introduce, under the QUEST brand name, a new cigarette that is
nicotine-free. QUEST cigarettes will be sold in two styles, Lights and Menthol
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Lights. The cigarette will be produced using a patent pending process, which
genetically modifies the tobacco plant to produce nicotine-free tobacco.
Management believes that, based on testing at Vector Tobacco's research
facility, the QUEST product will contain trace levels of nicotine that have no
physiological impact on the smoker, and that, consistent with other products
bearing "free" claims, QUEST may be labeled as "nicotine-free" with an
appropriate disclosure of the trace levels. The QUEST product is similarly
referred to in this report as "nicotine-free". As the process genetically blocks
formation of nicotine in the root of the plant, the tobacco leaf, and its taste,
are not affected. Cigarettes produced with this technology have been tested in
focus groups in the United States and overseas, with such tests indicating that
these cigarettes smoke, light and taste like conventional cigarettes.
Because the QUEST cigarettes are nicotine-free, they contain greatly
reduced levels of NNK, which is widely accepted in the medical community to be
the most potent of the cancer-causing TSNAs. Nicotine, while not itself a
cancer-causing substance, is the primary precursor of NNK.
Nicotine is also the most important pharmacological agent in tobacco
smoke and is the chemical in tobacco that causes addiction among smokers. It is
generally believed by the medical community that chronic use of cigarettes leads
to physiological addiction because of nicotine. Of the more than 5,000 chemical
compounds found in cigarette smoke, nicotine is the main one that acts on the
brain and is the primary reason why people continue to smoke despite widespread
understanding that smoking is hazardous to health.
In addition to addiction and forming cancer-causing substances,
nicotine is a powerful chemical whose physiological effects include increased
heart rate and blood pressure, constriction of blood vessels and alteration of
platelet functioning, which suggests that nicotine plays an important role in
cardiovascular disease. New research shows that nicotine has a number of other
possible detrimental effects, including interfering with the body's natural
defense mechanisms to eliminate defective, precancerous cells.
Although Vector Tobacco's nicotine-free cigarettes will initially be
marketed as traditional cigarettes with a nicotine-free claim, management
believes that the technology used to produce the QUEST product may also allow
smokers to reduce their daily consumption of cigarettes, and may be a successful
bridge to smoking cessation. Vector Tobacco intends to apply to the FDA for
approval of an FDA-regulated tobacco-based product bearing specific smoking
cessation claims when necessary testing data has been obtained. A number of
national and international public health agencies have made recommendations that
seek to remove nicotine from tobacco products. Legislation was introduced in
Congress in 1995 which would have lowered nicotine to non-addictive levels over
a period of six years. Management believes that it is generally understood by
health advocates that phasing out nicotine in cigarettes should enable millions
of smokers who want to quit smoking to do so more easily.
Vector Tobacco has recently conducted market research with respect to
its planned nicotine-free product. Of the smokers that participated in the
study, 80% stated that they would "probably try" the product. In addition,
management believes, based on published sources, that 70-75% of the 45 million
United States smokers express a desire to quit smoking and 30-35% of smokers
actually attempt to do so each year. However, less than 5% of all smokers are
successful in quitting each year.
MANUFACTURING AND MARKETING. Both OMNI and QUEST will be priced as
premium cigarettes and marketed by the sales representatives of Liggett Vector
Brands. In the first quarter of 2002, Vector Tobacco began production of OMNI at
a facility it had purchased in Timberlake, North Carolina, and converted into a
modern cigarette manufacturing plant. The OMNI product uses regular tobacco, and
the QUEST product uses genetically modified tobacco grown specifically for
Vector Tobacco in Pennsylvania, Illinois, Mississippi and Louisiana.
The introduction of the new OMNI and QUEST brands requires the
expenditure of substantial sums for advertising and sales promotion. The
advertising media presently used includes magazines, newspapers, direct mail and
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point-of-sale display materials. Sales promotion activities are conducted by
distribution of store coupons, point-of-sale display advertising, advertising of
promotions in print media, and personal contact with distributors, retailers and
consumers.
Expenditures by Vector Tobacco for research and development activities
were $12,680 in 2001 and $6,170 in 2000.
COMPETITION. The cigarette industry is highly competitive. Vector
Tobacco's competitors generally have substantially greater resources than Vector
Tobacco has, including financial, marketing and personnel resources. Brown &
Williamson Tobacco Corporation has recently announced it is test marketing a new
cigarette with reduced levels of many toxins. Other major tobacco companies have
stated that they are working on reduced risk cigarette products and have made
publicly available only limited additional information concerning their
activities at this time. There is a substantial likelihood that other major
tobacco companies will continue to introduce new products that are designed to
compete directly with Vector Tobacco's reduced carcinogen and nicotine-free
products.
REGULATION. Vector Tobacco's business may become subject to increased
domestic and international government regulation. Various proposals have been
made for federal, state and international legislation to regulate cigarette
manufacturers generally, and reduced constituent cigarettes specifically. The
ultimate outcome of these proposals cannot be predicted. It is possible that
laws and regulations may be adopted covering issues like the manufacture, sale,
distribution and labeling of tobacco products as well as any health claims
associated with new, reduced carcinogen and nicotine-free cigarette products and
the use of genetically modified tobacco. A system of regulation by agencies like
the Food and Drug Administration, the Federal Trade Commission or the United
States Department of Agriculture may be established. In addition, a group of
public health organizations have recently submitted a petition to the Food and
Drug Administration, alleging that the marketing of the OMNI product is subject
to regulation by the FDA under existing law. The Federal Trade Commission has
also expressed interest in the regulation of tobacco products made by tobacco
manufacturers, including Vector Tobacco, which bear reduced constituent claims.
Any new laws or regulations or applications of existing law of this type could
significantly delay or obstruct Vector Tobacco's further development and
marketing of its new products or may require it to incur significant expense in
complying with any new regulation or in obtaining any necessary government
approvals.
There are currently no specific governmental standards or parameters
for Vector Tobacco's new reduced carcinogen and nicotine-free cigarette products
and product claims. There is a risk that federal or state regulators may object
to these products and claims as unlawful, and seek the removal of the products
from the marketplace, or significant changes to advertising claims. Allegations
by federal or state regulators, public health organizations and other tobacco
manufacturers that Vector Tobacco's 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 Tobacco's defense against such claims could require it to incur
substantial expense and to divert significant efforts of its scientific and
marketing personnel. An adverse determination in a judicial proceeding or by a
regulatory agency could have a material and adverse impact on Vector Tobacco's
business, operating results and prospects.
INTELLECTUAL PROPERTY. A subsidiary of Vector Tobacco is the exclusive
sublicensee of the technology for reducing or eliminating nicotine in tobacco
through certain genetic engineering techniques. Patent applications for this
invention have been filed in the United States, India and every nation that was
a member of the Patent Cooperation Treaty in 1998, approximately 100 countries
in all. Patents have been issued in more than 20 foreign countries. The
applications in the United States and in all other countries remain pending.
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Vector Tobacco has filed United States patent applications relating to
the use of palladium and other compounds to reduce the presence of carcinogens
and other toxins. Vector Tobacco plans to file these patent applications
internationally and plans to file additional patent applications relating to
this invention as warranted by its ongoing research. Additional patent
applications related to OMNI have been filed and others are currently being
considered.
The process to reduce carcinogens and toxins from cigarette smoke was
developed by Dr. Robert Bereman, Vice President of Chemical Research at Vector
Tobacco. Dr. Bereman was formerly a Professor in the Department of Chemistry at
North Carolina State University. The process to genetically modify tobacco seeds
to reduce or eliminate nicotine was developed by Dr. Mark A. Conkling, Vice
President of Genetic Research at Vector Tobacco. Dr. Conkling was formerly
Associate Professor in the Department of Genetics and Director of the
Biotechnology Program at North Carolina State University.
RISKS. Vector Tobacco's new product initiatives are subject to
substantial risks, uncertainties and contingencies which include, without
limitation, the challenges inherent in new product development initiatives, the
ability to raise capital and manage the growth of its business, potential
disputes concerning Vector Tobacco's intellectual property, potential delays in
obtaining any necessary government approvals of Vector Tobacco's proposed new
tobacco products, third party allegations that Vector Tobacco products are
unlawful or bear deceptive or unsubstantiated product claims, potential delays
in obtaining the tobacco, other raw materials and any technology needed to
produce Vector Tobacco's proposed new products, market acceptance of Vector
Tobacco's proposed new products, competition from companies with greater
resources and the dependence on key employees. See the section entitled "Risk
Factors".
LIGGETT GROUP INC.
GENERAL. Liggett, which is the operating successor to the Liggett &
Myers Tobacco Company, is currently the fifth largest manufacturer of cigarettes
in the United States in terms of unit sales. Substantially all of Liggett's
manufacturing facilities are located in Mebane, North Carolina.
Liggett is a wholly-owned subsidiary of Brooke Group Holding Inc., our
predecessor and a wholly-owned subsidiary of VGR Holding.
Liggett manufactures and sells cigarettes primarily in the United
States. Liggett believes, based on published industry sources, that Liggett's
domestic shipments of approximately 9.1 billion cigarettes during 2001 accounted
for 2.2% of the total cigarettes shipped in the United States during such year.
This market share percentage represents an increase of 46.6% from 2000 and 83.3%
from 1999. Liggett produces both premium cigarettes as well as discount
cigarettes (which include among others, control label, branded discount and
generic cigarettes). Premium cigarettes are generally marketed under
well-recognized brand names at full retail prices to adult smokers with strong
preference for branded products, whereas discount cigarettes are marketed at
lower retail prices to adult smokers who are more cost conscious. Liggett's
cigarettes are produced in approximately 260 combinations of length, style and
packaging.
Liggett's premium cigarettes represented approximately 13.1% in 2001,
10.9% in 2000 and 18.5% in 1999 of Liggett's net sales. Liggett's management
believes, based on published industry sources, that Liggett's share of the
premium market segment was approximately 0.3% for 2001, 0.2% for 2000 and 0.3%
for 1999. Until May 1999, Liggett produced four premium cigarette brands: L&M,
CHESTERFIELD, LARK and EVE. As part of the Philip Morris brand transaction
(which is further described below) which closed in May 1999, Liggett transferred
the L&M, CHESTERFIELD and LARK brands.
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Liggett nationally introduced a new premium cigarette, JADE, in
September 2001. JADE is a menthol cigarette with unique holographic packaging.
JADE's sales represented 17.7% of Liggett's total premium sales during 2001.
In 1980, Liggett was the first major domestic cigarette manufacturer to
successfully introduce discount cigarettes as an alternative to premium
cigarettes. In 1989, Liggett established a new price point within the discount
market segment by introducing PYRAMID, a branded discount product which, at that
time, sold for less than most other discount cigarettes. In 1999, Liggett
introduced LIGGETT SELECT, one of the fastest growing brands in the deep
discount category. LIGGETT SELECT is now the largest seller in Liggett's family
of brands, comprising 31.6% of Liggett's unit volume in 2001 and 11.1% in 2000.
Liggett's management believes, based on published industry sources, that Liggett
held a share of approximately 7.7% of the overall discount market segment for
2001 compared to 5.3% for 2000 and 3.9% for 1999.
In November 1999, Liggett acquired an industrial facility in Mebane,
North Carolina. Liggett completed the relocation of its tobacco manufacturing
operations from its old facility in Durham, North Carolina to the Mebane
facility in October 2000.
At the present time, Liggett has only minimal foreign operations.
Liggett does not own the international rights to its largest premium cigarette
brand, EVE, which is marketed by Philip Morris in foreign markets, thereby
adversely affecting Liggett's ability to profitably penetrate those markets.
Liggett exports other cigarette brands primarily to Eastern Europe and the
Middle East. Export sales of approximately 66 million cigarettes accounted for
approximately 0.7% of Liggett's 2001 total unit sales volume. Revenues from
export sales were $0.9 million for 2001 as compared to $1.2 million for 2000.
Operating income attributable to export sales in 2001 amounted to approximately
$0.3 million compared to operating loss of $0.3 million in 1999. In 2000,
Liggett effectively terminated its export business, other than to complete
existing contracts, as domestic margins, on even the lowest priced brands,
exceeded those of its export sales.
BUSINESS STRATEGY. Liggett's business strategy is to capitalize upon
its cost advantage in the United States cigarette market due to the favorable
treatment Liggett has received under the settlement agreements with the state
Attorneys General and the Master Settlement Agreement described below. Liggett's
long-term business strategy is to continue to focus its marketing efforts on the
discount segment of the market and to pursue niche opportunities in the premium
segment. Liggett will seek to increase its profitability by upgrading the
efficiency of its manufacturing operation at the Mebane facility and by better
targeting of marketing and selling costs using market research and analysis.
Liggett intends to continue to reinvest a portion of the price increases and
cost savings in marketing to grow its volume and income in the discount segment.
Liggett's strategy in the premium segment of the market is to improve the
profitability of its premium brands, EVE and JADE, through targeted promotional
strategies and extensions of the brands. In addition, Liggett intends to bring
other niche-driven premium brands to the market in the near future. Liggett may
also pursue strategic acquisitions of smaller tobacco manufacturers.
SALES, MARKETING AND DISTRIBUTION. Liggett's products are distributed
from a central distribution center in Mebane, North Carolina to 26 public
warehouses located throughout the United States. These warehouses serve as local
distribution centers for Liggett's customers. Liggett's products are transported
from the central distribution center to the warehouses via third-party trucking
companies to meet pre-existing contractual obligations to its customers.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. Liggett offers
its customers discount payment terms, traditional rebates and promotional
incentives. Customers typically pay for purchased goods within two weeks
following delivery from Liggett, and approximately 70% of customers pay more
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rapidly through electronic funds transfer arrangements. Liggett's largest single
customer, Speedway SuperAmerica LLC, accounted for approximately 27.9% of its
net sales in 2001, 33.8% of its net sales in 2000 and approximately 30.7% of its
net sales in 1999. Sales to this customer were primarily in the private label
discount segment and constituted approximately 32.2% in 2001, 38.1% in 2000 and
38.2% in 1999 of Liggett's discount segment sales.
Liggett's marketing and sales functions are currently performed by
approximately 215 direct sales representatives calling on national and regional
customer accounts, together with approximately 36 part-time retail sales
consultants who service retail outlets. The newly-formed Liggett Vector Brands
will coordinate and execute the sales and marketing efforts for Liggett and
Vector Tobacco.
TRADEMARKS. All of the major trademarks used by Liggett are federally
registered or are in the process of being registered in the United States and
other markets where Liggett's products are sold. Trademark registrations
typically have a duration of ten years and can be renewed at Liggett's option
prior to their expiration date. In view of the significance of cigarette brand
awareness among consumers, management believes that the protection afforded by
these trademarks is material to the conduct of its business. All of Liggett's
trademarks are owned by its wholly-owned subsidiary, Eve Holdings Inc.
MANUFACTURING. Liggett purchases and maintains leaf tobacco inventory
to support its cigarette manufacturing requirements. Liggett believes that there
is a sufficient supply of tobacco within the worldwide tobacco market to satisfy
its current production requirements. Liggett stores its leaf tobacco inventory
in warehouses in North Carolina and Virginia. There are several different types
of tobacco, including flue-cured leaf, burley leaf, Maryland leaf, oriental
leaf, cut stems and reconstituted sheet. Leaf components of American style
cigarettes are generally the flue-cured and burley tobaccos. While premium and
discount brands use many of the same tobacco products, input ratios of tobacco
products account for the differences between premium and discount products.
Domestically grown tobacco is an agricultural commodity subject to United States
government production controls and price supports which can substantially affect
its market price. Foreign flue-cured and burley tobaccos, some of which are used
in the manufacture of Liggett's cigarettes, are generally 30% to 35% less
expensive than comparable domestic tobaccos. Liggett normally purchases all of
its tobacco requirements from domestic and foreign leaf tobacco dealers, much of
it under long-term purchase commitments. As of December 31, 2001, virtually all
of Liggett's commitments were for the purchase of foreign tobacco.
Liggett's new cigarette manufacturing facilities in Mebane are designed
for the execution of short production runs in a cost-effective manner, which
enables Liggett to manufacture and market a wide variety of cigarette brand
styles. Liggett's cigarettes are produced in approximately 260 different brand
styles under Eve's trademarks and brand names as well as private labels for
other companies, typically retail or wholesale distributors who supply
supermarkets and convenience stores. Liggett believes that its existing
facilities are sufficient to accommodate a substantial increase in production.
Beginning in October 2001, Liggett has been upgrading the efficiency of
its manufacturing operation with the addition of four new state-of-the-art
cigarette makers and packers. The installation of the new lines will continue
through the first half of 2002, and a new dryer is scheduled to be installed in
the summer of 2002. The total cost of these upgrades is approximately $22
million.
While Liggett pursues product development, its total expenditures for
research and development on new products have not been financially material over
the past three years.
COMPETITION. Liggett's competition is now divided into two segments.
The first segment is made up of the four largest manufacturers of cigarettes in
the United States: Philip Morris Incorporated, R.J. Reynolds Tobacco Company,
Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company, Inc. The
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four largest manufacturers, while primarily premium cigarette based companies,
also produce and sell discount cigarettes. The second segment of competition is
comprised of a group of smaller companies, most of which are producing lower
quality, deep discount cigarettes.
Historically, there have been substantial barriers to entry into the
cigarette business, including extensive distribution organizations, large
capital outlays for sophisticated production equipment, substantial inventory
investment, costly promotional spending, regulated advertising and, for premium
brands, strong brand loyalty.
Recently, during the phase-in payment period under the Master
Settlement Agreement, these smaller manufacturers have generally not yet been
impacted to a significant degree by the agreement and have primarily focused on
the deepest discount segment of the market. Liggett's management believes, while
these companies have increased market share through competitive discounting in
this segment, they will lose their cost advantage over time as their payment
obligations under the Master Settlement Agreement increase.
In the cigarette business, Liggett must now compete on a dual front.
The four major manufacturers compete among themselves and with Liggett for
premium brand market share on the basis of brand loyalty, advertising and
promotional activities, and trade rebates and incentives. These four competitors
all have substantially greater financial resources and most of their brands have
greater sales and consumer recognition than Liggett's premium brands. Liggett's
discount brands must also compete in the marketplace with the four major
manufacturers' discount brands as well as the smaller manufacturers' deep
discount brands.
Liggett's management believes, based on published industry sources,
that Philip Morris' and RJR's sales together accounted for approximately 73.3%
of the domestic cigarette market in 2001. Liggett's domestic shipments of
approximately 9.08 billion cigarettes during 2001 accounted for 2.2% of the
approximately 406.3 billion cigarettes shipped in the United States during that
year, compared to 6.44 billion cigarettes in 2000 (1.5%) and 5.24 billion
cigarettes (1.2%) during 1999.
Industry-wide shipments of cigarettes in the United States have been
generally declining for a number of years, with published industry sources
estimating that domestic industry-wide shipments decreased by approximately 3.2%
(13.5 billion units) in 2001. Liggett's management believes that industry-wide
shipments of cigarettes in the United States will generally continue to decline
as a result of numerous factors, including health considerations, diminishing
social acceptance of smoking, legislative limitations on smoking in public
places, federal and state excise tax increases and settlement-related expenses,
which have contributed to large cigarette price increases.
Historically, because of their dominant market share, Philip Morris and
RJR have been able to determine cigarette prices for the various pricing tiers
within the industry and the other cigarette manufacturers have brought their
prices in line with the levels established by the two industry leaders. Off-list
price discounting by manufacturers, however, has substantially affected the
average price differential at retail, which can be significantly greater than
the manufacturers' list price gap.
PHILIP MORRIS BRAND TRANSACTION. In November 1998, Vector and Liggett
granted Philip Morris options to purchase interests in Trademarks LLC which
holds three domestic cigarette brands, L&M, CHESTERFIELD and LARK, formerly held
by Liggett's subsidiary, Eve.
Under the terms of the Philip Morris agreements, Eve contributed the
three brands to Trademarks, a newly-formed limited liability company, in
exchange for 100% of two classes of Trademarks' interests, the Class A Voting
Interest and the Class B Redeemable Nonvoting Interest. Philip Morris acquired
two options to purchase the interests from Eve. In December 1998, Philip Morris
paid Eve a total of $150 million for the options, $5 million for the option for
the Class A interest and $145 million for the option for the Class B interest.
8
The Class A option entitled Philip Morris to purchase the Class A
interest for $10.1 million. On March 19, 1999, Philip Morris exercised the Class
A option, and the closing occurred on May 24, 1999.
The Class B option entitles Philip Morris to purchase the Class B
interest for $139.9 million. The Class B option will be exercisable during the
90-day period beginning on December 2, 2008, with Philip Morris being entitled
to extend the 90-day period for up to an additional six months under certain
circumstances. The Class B interest will also be redeemable by Trademarks for
$139.9 million during the same period the Class B option may be exercised.
On May 24, 1999, Trademarks borrowed $134.9 million from a lending
institution. The loan is guaranteed by Eve and is collateralized by a pledge by
Trademarks of the three brands and Trademarks' interest in the trademark license
agreement (discussed below) and by a pledge by Eve of its Class B interest. In
connection with the closing of the Class A option, Trademarks distributed the
loan proceeds to Eve as the holder of the Class B interest. The cash exercise
price of the Class B option and Trademarks' redemption price were reduced by the
amount distributed to Eve. Upon Philip Morris' exercise of the Class B option or
Trademarks' exercise of its redemption right, Philip Morris or Trademarks, as
relevant, will be required to obtain Eve's release from its guaranty. The Class
B interest will be entitled to a guaranteed payment of $500,000 each year with
the Class A interest allocated all remaining income or loss of Trademarks.
Trademarks has granted Philip Morris an exclusive license of the three
brands for an 11-year term expiring May 24, 2010 at an annual royalty based on
sales of cigarettes under the brands, subject to a minimum annual royalty
payment of not less than the annual debt service obligation on the loan plus $1
million.
If Philip Morris fails to exercise the Class B option, Eve will have an
option to put its Class B interest to Philip Morris, or Philip Morris'
designees, at a put price that is $5 million less than the exercise price of the
Class B option (and includes Philip Morris' obtaining Eve's release from its
loan guaranty). The Eve put option is exercisable at any time during the 90-day
period beginning March 2, 2010.
If the Class B option, Trademarks' redemption right and the Eve put
option expire unexercised, the holder of the Class B interest will be entitled
to convert the Class B interest, at its election, into a Class A interest with
the same rights to share in future profits and losses, the same voting power and
the same claim to capital as the entire existing outstanding Class A interest,
i.e., a 50% interest in Trademarks.
ACQUISITION OF MEDALLION. On April 1, 2002, a subsidiary of ours
acquired the stock of The Medallion Company, Inc., and related assets from Gary
L. Hall, Medallion's principal stockholder. The total purchase price consisted
of $50 million in cash and $60 million in notes, with the notes guaranteed by
us and Liggett. Medallion, a discount cigarette manufacturer headquartered in
Richmond, Virginia, is a participant in the Master Settlement Agreement between
the state Attorneys General and the tobacco industry. Medallion has no payment
obligations under the Master Settlement Agreement unless its market share
exceeds approximately 0.28% of total cigarettes sold in the United States
(approximately 1.15 billion units in 2001).
The acquisition of Medallion was effected pursuant to a Purchase and
Sale Agreement dated as of February 15, 2002 between Medallion, Mr. Hall and a
subsidiary of ours. The sale was negotiated on an arm's length basis between
Mr. Hall and us. The purchaser is not affiliated with us or any of our
affiliates, or any director or officer of ours, or any affiliate or associate
of any such director or officer.
LEGISLATION, REGULATION AND LITIGATION. Reports with respect to the
alleged harmful physical effects of cigarette smoking have been publicized for
many years and, in the opinion of Liggett's management, have had and may
continue to have an adverse effect on cigarette sales. Since 1964, the Surgeon
General of the United States and the Secretary of Health and Human Services have
released a number of reports which claim that cigarette smoking is a causative
9
factor with respect to a variety of health hazards, including cancer, heart
disease and lung disease, and have recommended various government actions to
reduce the incidence of smoking. In 1997, Liggett publicly acknowledged that, as
the Surgeon General and respected medical researchers have found, smoking causes
health problems, including lung cancer, heart vascular disease and emphysema.
Since 1966, federal law has required that cigarettes manufactured,
packaged or imported for sale or distribution in the United States include
specific health warnings on their packaging. Since 1972, Liggett and the other
cigarette manufacturers have included the federally required warning statements
in print advertising, on billboards and on certain categories of point-of-sale
display materials relating to cigarettes. The Comprehensive Smoking Education
Act, which became effective in October 1985, requires that packages of
cigarettes distributed in the United States and cigarette advertisements (other
than billboard advertisements) in the United States bear one of the following
four warning statements on a quarterly rotating basis: "SURGEON GENERAL'S
WARNING: Smoking Causes Lung Cancer, Heart Disease, Emphysema, and May
Complicate Pregnancy"; "SURGEON GENERAL'S WARNING: Quitting Smoking Now Greatly
Reduces Serious Risks to Your Health"; "SURGEON GENERAL'S WARNING: Smoking by
Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth
Weight"; and "SURGEON GENERAL'S WARNING: Cigarette Smoke Contains Carbon
Monoxide". By a limited eligibility amendment to the Comprehensive Smoking
Education Act, for which Liggett qualifies, Liggett is allowed to display all
four required package warnings for the majority of its brand packages on a
simultaneous basis (such that the packages at any time may carry any one of the
four required warnings), although it rotates the required warnings for
advertising on a quarterly basis in the same manner as do the other major
cigarette manufacturers. The law also requires that each person who
manufactures, packages or imports cigarettes annually provide to the Secretary
of Health and Human Services a list of ingredients added to tobacco in the
manufacture of cigarettes. Annual reports to the United States Congress are also
required from the Secretary of Health and Human Services as to current
information on the health consequences of smoking and from the Federal Trade
Commission on the effectiveness of cigarette labeling and current practices and
methods of cigarette advertising and promotion. Both federal agencies are also
required annually to make such recommendations as they deem appropriate with
regard to further legislation. In addition, since 1997, Liggett has included the
warning "Smoking is Addictive" on its cigarette packages.
In August 1996, the Food and Drug Administration 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 FDA's authority 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 have been made for
federal and state legislation to regulate cigarette manufacturers. In May 2001,
a Presidential commission appointed by former President Clinton issued a final
report recommending that the FDA be given authority by Congress to regulate the
manufacture, sale, distribution and labeling of tobacco products to protect
public health. In addition, Congressional advocates of FDA regulation have
introduced such legislation for consideration by the 107th Congress. The
ultimate outcome of these proposals cannot be predicted.
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 1997, the United States
District Court for the District of Massachusetts enjoined this legislation from
going into effect on the grounds that it was preempted by federal law. In
November 1998, the First Circuit affirmed this ruling. In September 2000, the
federal district court permanently enjoined enforcement of the law. In October
2001, the First Circuit reversed the district court's decision, ruling that the
10
ingredients disclosure provisions are valid. The entire court, however, agreed
to re-hear the appeal, reinstating the district court's injunction in the
meantime. Oral argument before the full court took place on January 7, 2002, and
the court has not yet issued its decision. Notwithstanding the foregoing, in
December 1997, Liggett began complying with this legislation by providing
ingredient information to the Massachusetts Department of Public Health. Several
other states have enacted, or are considering, legislation similar to that
enacted in Massachusetts.
In 1993, Congress amended the Agricultural Adjustment Act of 1938 to
require each United States cigarette manufacturer to use at least 75% domestic
tobacco in the aggregate of the cigarettes manufactured by it in the United
States, effective January 1994, on an annualized basis or pay a domestic
marketing assessment based upon price differentials between foreign and domestic
tobacco and, under certain circumstances, make purchases of domestic tobacco
from the tobacco stabilization cooperatives organized by the United States
government. After an audit, the United States Department of Agriculture informed
Liggett that it did not satisfy the 75% domestic tobacco usage requirement in
1994 and Liggett paid a $5.5 million assessment. Since the levels of domestic
tobacco inventories on hand at the tobacco stabilization organizations were
below reserve stock levels, Liggett was not obligated to make purchases of
domestic tobacco from the tobacco stabilization cooperatives.
In February 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota should be allocated. Currently,
tobacco imported under the quota is allocated on a "first-come, first-served"
basis, meaning that entry is allowed on an open basis to those first requesting
entry in the quota year. Others in the cigarette industry have suggested an
"end-user licensing" system under which the right to import tobacco under the
quota would be initially assigned on the basis of domestic market share. Such an
approach, if adopted, could have a material adverse effect on Liggett.
In January 1993, the Environmental Protection Agency released a report
on the respiratory effect of secondary smoke which concluded 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 domestic
cigarette manufacturers, together with other segments of the tobacco and
distribution industries, commenced a lawsuit against the agency seeking a
determination that the agency did not have the statutory authority to regulate
secondary smoke and that given the current body of scientific evidence and the
agency's failure to follow its own guidelines in making the determination, its
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 agency may have reached different conclusions had it
complied with relevant statutory requirements. The federal government has
appealed the court's ruling. Whatever the ultimate outcome of this litigation,
issuance of the report may encourage efforts to limit smoking in public areas.
As part of the 1997 budget agreement approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 34 cents, were
increased at the beginning of each of 2000 and 2002. In general, excise taxes
and other taxes on cigarettes have been increasing. These taxes vary
considerably and, when combined with sales taxes and the current federal excise
tax, may be as high as $2.00 per pack in a given locality in the United States.
Congress has considered significant increases in the federal excise tax or other
payments from tobacco manufacturers, and increases in excise and other
cigarette-related taxes have been proposed at the state and local levels.
In August 2000, the New York state legislature passed legislation
charging the state's Office of Fire Prevention and Control with developing
standards for "fire safe" or self-extinguishing cigarettes. The OFPC has until
January 1, 2003 to issue final regulations. Six months from the issuance of the
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standards, all cigarettes offered for sale in New York state will be required to
be manufactured to those standards. It is not possible to predict the impact of
this law on us until the standards are published. Similar legislation is being
considered by other state legislatures and at the federal level.
There are various other legislative efforts pending on the federal and
state level which seek, among other things, to restrict or prohibit smoking in
public buildings and other areas, increase excise taxes, require additional
warnings on cigarette packaging and advertising, ban vending machine sales,
curtail affirmative defenses of tobacco companies in product liability
litigation, place cigarettes under the regulatory jurisdiction of the FDA and
require that cigarettes meet certain fire safety standards. If adopted, at least
certain of the foregoing legislative proposals could have a material adverse
impact on Liggett and us.
While attitudes toward cigarette smoking vary around the world, a
number of foreign countries have also taken steps to discourage cigarette
smoking, to restrict or prohibit cigarette advertising and promotion and to
increase taxes on cigarettes. Those restrictions are, in some cases, more
onerous than restrictions imposed in the United States. Due to Liggett's lack of
foreign operations and minimal export sales to foreign countries, the risks of
foreign limitations or restrictions on the sale of cigarettes are limited to
entry barriers into additional foreign markets and the inability to expand the
existing markets.
The cigarette industry continues to be challenged on numerous fronts.
The industry is facing increased pressure from anti-smoking groups and an
increase in smoking and health litigation, including private class action
litigation and health care cost recovery actions brought by governmental
entities and other third parties, the effects of which, at this time, we are
unable to evaluate. As of December 31, 2001, there were approximately 279
individual suits, approximately 31 purported class actions or actions where
class certification has been sought and approximately 50 governmental and other
third-party payor health care recovery actions pending in the United States in
which Liggett was a named defendant. In addition to these cases, during 2000, an
action against cigarette manufacturers involving approximately 1,250 named
individual plaintiffs was consolidated before a single West Virginia state
court. Liggett is a defendant in most of the cases pending in West Virginia.
These cases are referred to herein as though commenced against Liggett (without
regard to whether such cases were actually commenced against Liggett or against
Brooke Group Holding, our predecessor, and a wholly-owned subsidiary of VGR
Holding). 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 Organization Act,
state racketeering 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 negligence, lack of design defect, statutes of limitations,
equitable defenses such as "unclean hands" and lack of benefit, failure to state
a claim and federal preemption.
The claims asserted in the 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.
12
In September 1999, the United States government commenced litigation
against Liggett and the other 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 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 billion annually. The action asserts
claims under three Federal statutes: the Medical Care Recovery Act, the Medicare
Secondary Payer provisions of the Social Security Act and RICO. In December
1999, Liggett filed a motion to dismiss the lawsuit on numerous grounds,
including that the statutes invoked by the government do not provide a basis for
the relief sought. In September 2000, the court dismissed the government's
claims based on the Medical Care Recovery Act and the Medicare Secondary Payor
provisions, and the court reaffirmed its decision in July 2001. In the September
2000 ruling, the court also determined not to dismiss the government's claims
based on RICO, 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 June 2001, the United States Attorney General assembled a team of
three Department of Justice lawyers to work on a possible settlement of the
federal lawsuit. The government lawyers met with representatives of the tobacco
industry, including Liggett, on July 18, 2001. No settlement was reached, and no
further meetings are planned. Discovery in the case has commenced, and trial has
been scheduled for July 2003.
Approximately 38 purported state and federal class action complaints
have been filed against the cigarette manufacturers for alleged antitrust
violations, including Liggett and Brooke Group Holding. 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 actions have been consolidated and, on July 28, 2000,
plaintiffs in the federal consolidated action filed a single consolidated
complaint that did not name Liggett or Brooke Group Holding as defendants,
although Liggett has complied with certain discovery requests. Fourteen
California actions have been consolidated and the consolidated complaint did not
name Liggett or Brooke Group Holding as defendants. In Nevada, an amended
complaint was filed that did not name Liggett or Brooke Group Holding as
defendants. The Arizona action was dismissed, but the plaintiffs are expected to
appeal that ruling.
In 1996, 1997 and 1998, Brooke Group Holding and Liggett entered into
settlements of smoking-related litigation with the Attorneys General of 45
states and territories. The settlements released Brooke Group Holding and
Liggett from all smoking-related claims, including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, RJR, Brown & Williamson, Lorillard and
Liggett entered into the Master Settlement Agreement with 46 states, the
District of Columbia, Puerto Rico, Guam, the United States Virgin Islands,
American Samoa and the Northern Marianas to settle the asserted and unasserted
health care cost recovery and certain other claims of those settling
jurisdictions. As described above, Brooke Group Holding and Liggett had previous
settlements with a number of these settling states. The Master Settlement
Agreement has received final judicial approval in each of the 52 settling
jurisdictions.
13
Liggett has no payment obligations under the Master Settlement
Agreement unless 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. During 1999 and 2000, Liggett's market share did not exceed the base
amount. Liggett believes, based on published industry sources, that its domestic
shipments accounted for 2.2% of the total cigarettes shipped in the United
States during 2001. On April 15 of any year following a year in which Liggett's
market share exceeds the base share, Liggett will pay on each excess unit an
amount equal (on a per-unit basis) to that paid during such following year by
the original participating manufacturers under the annual and strategic
contribution payment provisions of the Master Settlement Agreement, subject to
applicable adjustments, offsets and reductions. Liggett has expensed $24.6
million for its estimated Master Settlement Agreement obligations for 2001 as
part of cost of goods sold. Under the annual and strategic contribution payment
provisions of the Master Settlement Agreement, the original participating
manufacturers (and Liggett to the extent its market share exceeds the base
share) are required to pay the following annual amounts (subject to certain
adjustments):
YEAR AMOUNT
---- ------
2001................................................. $5.0 billion
2002 - 2003.......................................... $6.5 billion
2004 - 2007.......................................... $8.0 billion
2008 - 2017.......................................... $8.1 billion
2018 and each year thereafter....................... $9.0 billion
These annual payments will be allocated based on relative unit volume
of domestic cigarette shipments. The payment obligations under the Master
Settlement Agreement 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.
The Master Settlement Agreement replaces Liggett's prior settlements
with all states and territories except for Florida, Mississippi, Texas and
Minnesota. Each of the states of Florida, Mississippi, Texas and Minnesota,
prior to the effective date of the Master Settlement Agreement, negotiated and
executed settlement agreements with each of the other major tobacco companies
separate from those settlements reached previously with Liggett. Because these
states' settlement agreements with Liggett provided for "most favored nation"
protection for both Brooke Group Holding and Liggett, any payments due these
states by Liggett (with certain possible exceptions) have been eliminated.
In May 1994, an action entitled ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO
COMPANY, ET AL., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida,
was filed against Liggett and others. 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,
14
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. On April 7, 2000, the jury awarded compensatory
damages of $12.7 million to the three plaintiffs, to be reduced in proportion to
the respective plaintiff's fault. The jury also decided that the claim of one of
the plaintiffs, who was awarded compensatory damages of $5.8 million, was not
timely filed. On July 14, 2000, the jury awarded approximately $145 billion in
the punitive damages portion of Phase II against all defendants including $790
million against Liggett. The court entered a final order of judgment against the
defendants on November 6, 2000. The court's final judgment also denied various
of defendants' post-trial motions, which included a motion for new trial and a
motion seeking reduction of the punitive damages award. Liggett intends to
pursue all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it will
have a material adverse effect on Vector. Phase III of the trial will 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.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict was returned in the first phase of the
ENGLE smoking and health class action trial pending in Florida. In July 2000,
the jury awarded $790 million in punitive damages against Liggett in the second
phase of the trial, and the court has entered an order of final judgment.
Liggett intends to pursue all available post-trial and appellate remedies. If
this verdict is not eventually reversed on appeal, or substantially reduced by
the court, it will have a material adverse effect on us. Liggett has filed the
$3.45 million bond required under recent Florida legislation which limits the
size of any bond required, pending appeal, to stay execution of a punitive
damages verdict. On May 7, 2001, Liggett reached an agreement with the class in
the ENGLE case, which will provide assurance to Liggett that the stay of
execution, currently in effect pursuant to the bonding statute enacted in 2000
by the Florida legislature, will 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 $6.27 million into an escrow account to
be held for the benefit of the ENGLE class, and released, along with Liggett's
existing $3.45 million statutory bond, to the court for the benefit of the class
upon completion of the appeals process, regardless of the outcome of the appeal.
It is possible that additional cases could be decided unfavorably and that there
could be further adverse developments in the ENGLE case. 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 Brooke Group Holding or 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 individual's complaint against the tobacco
industry pray for 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 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.
Liggett's management is unaware of any material environmental
conditions affecting its existing facilities. Liggett's management believes that
current operations are conducted in accordance with all environmental laws and
regulations. Compliance with federal, state and local provisions regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, have not had a material effect on the capital
expenditures, earnings or competitive position of Liggett.
15
Liggett's management believes that it is in compliance in all material
respects with the laws regulating cigarette manufacturers.
See Note 15 to our consolidated financial statements, which contains a
description of legislation, regulation and litigation and of the Master
Settlement Agreement and Brooke Group Holding's and Liggett's other settlements.
LIGGETT-DUCAT LTD.
In August 2000, Brooke (Overseas) Ltd., a wholly-owned subsidiary of
VGR Holding, completed the sale of all of the membership interests of Western
Tobacco Investments LLC to Gallaher Overseas (Holdings) Ltd. Brooke (Overseas)
held its 99.9% equity interest in Liggett-Ducat Ltd., a Russian joint stock
company, through its subsidiary Western Tobacco Investments LLC. Liggett-Ducat,
one of Russia's leading cigarette producers since 1892, produced or had rights
to produce 26 different brands of cigarettes, including Russian brands such as
Pegas, Prima, Novosti and Belomorkanal, and American blend cigarettes under the
names Dukat and LD.
The purchase price for the sale consisted of $334.1 million in cash and
$64.4 million in assumed debt and capital commitments. The proceeds generated
from the sale were divided among Brooke (Overseas) and Western Realty
Development LLC, a joint venture of New Valley and Apollo Real Estate Investment
Fund III, L.P., in accordance with the terms of the participating loan. Of the
net cash proceeds from the transaction, Brooke (Overseas) received $197.1
million, New Valley received $57.2 million and Apollo received $68.3 million. We
recorded a gain of $161 million (including our share of New Valley's gain), net
of income taxes and minority interests, in connection with the sale in 2000.
NEW VALLEY CORPORATION
GENERAL. New Valley, a Delaware corporation, is currently engaged in
the real estate business through its New Valley Realty division and is seeking
to acquire additional operating companies. In December 2001, New Valley
completed the distribution to its stockholders of its shares in Ladenburg
Thalmann Financial Services, its former majority-owned subsidiary engaged in the
investment banking and brokerage business. New Valley (NASDAQ: NVAL) is
registered under the Securities Exchange Act of 1934 and files periodic reports
and other information with the SEC.
VGR Holding currently holds, either directly or indirectly through VGR
Holding's wholly-owned subsidiary, New Valley Holdings, Inc., approximately
56.3% of the common shares of New Valley.
New Valley was originally organized under the laws of New York in 1851
and operated for many years under the name "Western Union Corporation". In 1991,
bankruptcy proceedings were commenced against New Valley. In January 1995, New
Valley emerged from bankruptcy. As part of the bankruptcy plan, New Valley sold
the Western Union money transfer and messaging services businesses and all
allowed claims in the bankruptcy were paid in full.
In October 1999, New Valley's board of directors authorized the
repurchase of up to 2,000,000 common shares from time to time in the open market
or in privately negotiated transactions. As of December 31, 2001, New Valley had
repurchased 422,000 shares for approximately $1.5 million.
16
PLAN OF RECAPITALIZATION. New Valley consummated a plan of
recapitalization on June 4, 1999, following approval by New Valley's
stockholders. Pursuant to the plan of recapitalization:
o each $15.00 Class A senior preferred share ($100 liquidation) was
reclassified into 20 Common Shares and one Warrant exercisable for
five years,
o each $3.00 Class B preferred share was reclassified into 1/3 of a
common share and five warrants, and
o each outstanding common share was reclassified into 1/10 of a common
share and 3/10 of a warrant.
The recapitalization had a significant effect on New Valley's financial
position and results of operations. As a result of the exchange of the
outstanding preferred shares for common shares and warrants in the
recapitalization, New Valley's stockholders' equity increased by $343.4 million
from the elimination of the carrying value and dividend arrearages on the
redeemable preferred stock. Furthermore, the recapitalization resulted in the
elimination of the on-going dividend accruals on the existing redeemable
preferred shares of New Valley, as well as the redemption obligation for the
Class A preferred shares in January 2003. Also as a result of the
recapitalization, the number of outstanding common shares more than doubled, and
additional common shares were reserved for issuance upon exercise of the
warrants, which have an initial exercise price of $12.50 per common share. In
addition, we increased our ownership of the common shares from 42.3% to 55.1%,
and its total voting power from 42% to 55.1%. We currently own 56.3% of New
Valley's common shares. If all outstanding warrants were exercised, the
percentage of the common shares that we own would decline to 39.0%.
BUSINESS STRATEGY. Following the recent distribution of the Ladenburg
Thalmann Financial Services shares and asset dispositions in Russia (discussed
below), New Valley is engaged in the real estate business and holds a
significant amount of cash and other investments. The business strategy of New
Valley is to continue to operate its real estate business and to acquire
operating businesses through merger, purchase of assets, stock acquisition or
other means, or to acquire control of operating companies through one of such
means, with the purpose of being primarily engaged in a business or businesses
other than that of investing, reinvesting, owning, holding or trading in
securities. In the interim, New Valley's cash and investments are available for
general corporate purposes, including for acquisition purposes. Pending any use
of these funds in the real estate business or for acquisitions, New Valley's
liquid assets have been invested consistent with the preservation of their
value.
As a result of the distribution of the Ladenburg Thalmann Financial
Services shares, New Valley's broker-dealer operations, which were the primary
source of New Valley's revenues since 1995, have been treated as discontinued
operations in our accompanying consolidated financial statements. See
"Discontinued Operations".
The Investment Company Act and its regulations generally impose
substantive restrictions on a company that owns "investment securities" having a
value in excess of 40% of the company's "total assets". New Valley, which is now
above this threshold following the distribution of the Ladenburg Thalmann
Financial Services shares and asset dispositions in Russia, has been relying
since December 2001 on the one-year exemption from registration under the
Investment Company Act provided by Rule 3a-2. New Valley will attempt to be
engaged, within the one-year period prescribed by Rule 3a-2, primarily in a
business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities. However, there is a risk that New Valley will
not be successful in becoming engaged in such business and will become subject
to the Investment Company Act. If New Valley were required to register under the
17
Investment Company Act, it would be subject to a number of severe substantive
restrictions on its operations, capital structure and management. For example,
it would be prohibited from entering into principal transactions and joint
transactions with affiliates. It would also be prohibited from issuing
convertible securities and options and would be subject to limitations on
leverage.
NEW VALLEY REALTY DIVISION. In January 1996, New Valley acquired four
office buildings and eight shopping centers for an aggregate purchase price of
$183.9 million, consisting of $23.9 million in cash and $160 million in
non-recourse mortgage financing provided by the sellers. The office buildings
and shopping centers have been operated through its New Valley Realty division.
The shopping centers were acquired for an aggregate purchase price of
$72.5 million. Each seller was an affiliate of Apollo Real Estate Investment
Fund III, L.P. The shopping centers are located in Marathon and Royal Palm
Beach, Florida; Lincoln, Nebraska; Santa Fe, New Mexico; Milwaukie, Oregon;
Richland and Marysville, Washington; and Kanawha, West Virginia.
In November 1997, New Valley sold its Marathon, Florida shopping center
for $5.4 million and recognized a gain of $1.2 million on the sale. In August
1999, New Valley sold five shopping centers for an aggregate purchase price of
$46.1 million before closing adjustments and expenses. The shopping centers were
subject to approximately $35 million of mortgage financing, which was assumed by
the purchasers at closing. New Valley recorded a gain of $3.8 million on the
sale of the five centers. In February 2001, New Valley sold its Royal Palm
Beach, Florida shopping center for $9.5 million before closing adjustments and
expenses and recorded a gain of $0.9 million on the sale.
In September 1998, New Valley completed the sale to institutional
investors of the office buildings for an aggregate purchase price of $112.4
million and recognized a gain of $4.7 million on the sale. New Valley received
approximately $13.4 million in cash from the transaction before closing
adjustments and expenses. The office buildings were subject to approximately
$99.3 million of mortgage financing which was retired at closing.
Space in New Valley's remaining shopping center in Kanawha, West
Virginia is leased to a variety of commercial tenants and, as of December 31,
2001, the aggregate occupancy of the center was 90%. The property is subject to
approximately $11.2 million of an underlying mortgage in favor of its senior
lender and a second mortgage in favor of the original sellers. New Valley is in
negotiations to dispose of the Kanawha shopping center.
RUSSIAN REAL ESTATE
BROOKEMIL LTD. In January 1997, New Valley purchased BrookeMil Ltd.
from Brooke (Overseas). BrookeMil, which is engaged in the real estate
development business in Moscow, Russia, was the developer of a three-phase
complex on 2.2 acres of land in downtown Moscow, for which it had a 49-year
lease. In 1993, the first phase of the project, Ducat Place I, a 46,500 sq. ft.
Class-A office building, was successfully built and leased. In April 1997,
BrookeMil sold Ducat Place I to one of its tenants, Citibank. In 1997, BrookeMil
completed construction of Ducat Place II, a premier 150,000 sq. ft. office
building. Ducat Place II has been leased to a number of leading international
companies and is one of the leading modern office buildings in Moscow due to its
design and full range of amenities. The third phase, Ducat Place III, had been
planned as an office tower.
WESTERN REALTY DEVELOPMENT. In February 1998, New Valley and Apollo
Real Estate Investment Fund III, L.P. organized Western Realty Development to
make real estate investments in Russia. New Valley contributed the real estate
assets of BrookeMil, including the Ducat Place II office building and the
adjoining site for the proposed development of Ducat Place III, to Western
Realty Development, and Apollo contributed $73.3 million, including the
investment in Western Realty Repin discussed below.
18
Western Realty Development made a $30 million participating loan to,
and payable out of a 30% profits interest in, Western Tobacco Investments which
held Brooke (Overseas)'s interest in Liggett-Ducat. The net cash proceeds from
the August 2000 sale of Western Tobacco Investments were divided between Brooke
(Overseas) and Western Realty Development in accordance with the terms of the
participating loan. Through their investments in Western Realty Development, New
Valley received $57.2 million in cash proceeds from the sale and Apollo received
$68.3 million. New Valley recorded a gain of $52.5 million in connection with
the transaction in 2000.
On December 21, 2001, Western Realty Development sold to Andante
Limited, a Bermuda company, all of the membership interests in its subsidiary
Western Realty Investments LLC, the entity through which Western Realty
Development owned Ducat Place II and the adjoining Ducat Place III site. The
purchase price for the sale was approximately $42 million including the
assumption of mortgage debt and payables. Of the net cash proceeds from the
sale, New Valley received approximately $21 million, and Apollo received
approximately $9 million. These amounts are subject to adjustment based on final
closing expenses. New Valley recorded a loss of $21.8 million in connection with
the sale in 2001.
WESTERN REALTY REPIN. In June 1998, New Valley and Apollo organized
Western Realty Repin LLC to make a loan to BrookeMil. The proceeds of the loan
have been used by BrookeMil for the acquisition and preliminary development of
the Kremlin sites, two adjoining sites totaling 10.25 acres located on the
Sofiskaya Embankment of the Moscow River. The sites are directly across the
river from the Kremlin and have views of the Kremlin walls, towers and nearby
church domes. The Kremlin sites were planned for development as a residential
and hotel complex, subject to market conditions and the availability of
financing. BrookeMil owned 100% of both sites at December 31, 2001.
Through December 31, 2001, Western Realty Repin had advanced $42.2
million, of which $29.5 million was funded by Apollo to BrookeMil. The loan
bears no fixed interest and is payable only out of distributions by the entities
owning the Kremlin sites to BrookeMil. Such distributions must be applied first
to pay the principal of the loan and then as contingent participating interest
on the loan. Any rights of payment on the loan are subordinate to the rights of
all other creditors of BrookeMil. BrookeMil used a portion of the proceeds of
the loan to reimburse New Valley for expenditures on the Kremlin sites
previously incurred. The loan is due and payable upon the dissolution of
BrookeMil and is collateralized by a pledge of New Valley's shares of BrookeMil.
As of December 31, 2001, BrookeMil had invested $37.4 million in the
Kremlin sites. In acquiring its interest in one of the Kremlin sites, BrookeMil
agreed with the City of Moscow to invest an additional $22 million in 2000 in
the development of the property. In April 2000, Western Realty Repin arranged
short-term financing to fund the investment. Under the terms of the investment,
BrookeMil is required to utilize such financing amount to make construction
expenditures on the site by June 2002, although BrookeMil is seeking an
extension of that date. Failure to make the expenditures could result in the
forfeiture of a 34.8% interest in the site.
In connection with the sale of Western Tobacco Investments, Gallaher
also agreed for $1.5 million to purchase from a subsidiary of BrookeMil
additional land adjacent to the Liggett-Ducat manufacturing facility outside
Moscow, Russia. Closing of the sale occurred in the fourth quarter of 2001
following satisfaction of various regulatory requirements.
New Valley has engaged in discussions to sell the Kremlin sites, its
remaining real estate holdings in Russia. New Valley anticipates it would
receive approximately 37.5% of the net proceeds of a sale.
19
DISCONTINUED OPERATIONS - BROKER-DEALER. In May 1995, a subsidiary of
New Valley acquired all of the outstanding shares of common stock and other
equity interests of Ladenburg Thalmann & Co. Inc. for $25.8 million, net of cash
acquired. Ladenburg Thalmann & Co. is a full service broker-dealer, which has
been a member of the New York Stock Exchange since 1876.
In December 1999, New Valley completed the sale of a 19.9% interest in
Ladenburg Thalmann & Co. to Berliner Effektengesellschaft AG, a German public
financial holding company. New Valley received $10.2 million in cash and
Berliner shares valued in accordance with the purchase agreement.
On May 7, 2001, GBI Capital Management Corp. acquired all of the
outstanding common stock of Ladenburg Thalmann & Co., for 23,218,599 shares, $10
million in cash and $10 million principal amount of senior convertible notes due
December 31, 2005, and the name of GBI was changed to Ladenburg Thalmann
Financial Services Inc. The notes bear interest at 7.5% per annum and are
convertible into 4,799,271 shares of Ladenburg Thalman Financial Services common
stock. Upon closing, New Valley also acquired an additional 3,945,060 shares of
Ladenburg Thalmann Financial Services from the former Chairman of Ladenburg
Thalman Financial Services for $1.00 per share. Following completion of the
transactions, New Valley owned 53.6% of the outstanding common stock of
Ladenburg Thalman Financial Services. Ladenburg Thalmann Financial Services
(AMEX: LTS) is registered under the Securities Act of 1934 and files periodic
reports and other information with the SEC.
To provide the funds for the acquisition of the common stock of
Ladenburg Thalmann & Co., Ladenburg Thalmann Financial Services borrowed $10
million from Frost-Nevada, Limited Partnership and issued to Frost-Nevada $10
million principal amount of senior convertible notes due December 31, 2005. The
notes bear interest at 8.5% per annum and are convertible into 6,497,475 shares
of Ladenburg Thalman Financial Services common stock. The notes issued to the
Ladenburg Thalmann & Co. stockholders and to Frost-Nevada are secured by a
pledge of the Ladenburg Thalmann & Co. stock. If, during any period of 20
consecutive trading days, the closing sale price of Ladenburg Thalmann Financial
Services' common stock is at least $8.00, the principal and all accrued interest
on the notes will be automatically converted into shares of its common stock.
The notes also provide that if a change of control occurs, as defined in the
notes, Ladenburg Thalmann Financial Services must offer to purchase all of the
outstanding notes at a purchase price equal to the unpaid principal amount of
the notes and the accrued interest.
The actual number of shares of common stock issued to the former
Ladenburg Thalmann & Co. stockholders may be further increased and the
conversion prices of the senior convertible notes may be further decreased on or
about May 7, 2003, pending a final resolution of Ladenburg Thalmann Financial
Services' pre-closing litigation adjustments.
The transaction was accounted for under the purchase method of
accounting as a reverse acquisition. For accounting purposes, Ladenburg Thalmann
& Co. was treated as the acquirer of Ladenburg Thalmann Financial Services as
Ladenburg Thalmann & Co.'s stockholders held a majority of the Ladenburg
Thalmann Financial Services common stock following the closing of the
transaction. Between May 7, 2001, the date of the acquisition, and December 20,
2001, the date of the distribution of the Ladenburg Thalmann Financial Services
shares when Ladenburg Thalmann Financial Services became a discontinued
operation, Ladenburg Thalmann Financial Services was accounted for as a
consolidated subsidiary of New Valley.
On November 30, 2001, New Valley announced that it would distribute its
22,543,158 shares of Ladenburg Thalmann Financial Services common stock to
holders of New Valley common shares through a special dividend. On the same
date, we announced that we would, in turn, distribute the 12,694,929 shares of
Ladenburg Thalmann Financial Services common stock that we would receive from
20
New Valley to the holders of our common stock as a special dividend. The special
dividends were accomplished through pro rata distributions of the Ladenburg
Thalmann Financial Services shares, paid on December 20, 2001 to holders of
record as of December 10, 2001. New Valley stockholders received 0.988 of a
Ladenburg Thalmann Financial Services share for each share of New Valley, and
our stockholders received 0.348 of a Ladenburg Thalmann Financial Services share
for each share of ours.
Following completion of the special dividend of the Ladenburg Thalmann
Financial Services shares, New Valley continues to hold $8,010,000 principal
amount of Ladenburg Thalmann Financial Services' senior convertible promissory
notes, convertible into 3,844,216 shares of its common stock, and a warrant to
purchase 100,000 shares of its common stock at $1.00 per share. New Valley
intends within a 12-month period from November 30, 2001 to distribute to its
stockholders the remaining interests of New Valley in Ladenburg Thalmann
Financial Services' common stock.
Ladenburg Thalmann Financial Services is a holding company engaged in
various broker-dealer businesses including retail, institutional securities and
principal and agency trading, primarily through its wholly-owned subsidiaries
Ladenburg Thalmann & Co. and Ladenburg Capital Management Inc., formerly known
as GBI Capital Partners Inc. Ladenburg Thalmann & Co. provides its services
principally for middle market and emerging growth companies and high net worth
individuals through a coordinated effort among corporate finance, research,
capital markets, investment management, brokerage and trading professionals.
Ladenburg Capital Management, a broker-dealer subject to regulation by the SEC
and the NASD, acts as an introducing broker, market maker, underwriter and
trader for its own account.
Howard M. Lorber, Bennett S. LeBow and Richard J. Lampen, executive
officers and directors of New Valley, and Victor M. Rivas and Henry C.
Beinstein, directors of New Valley, serve as directors of Ladenburg Thalmann
Financial Services. Mr. Rivas also serves as President and CEO of Ladenburg
Thalmann Financial Services. J. Bryant Kirkland III, New Valley's Vice
President, Treasurer and Chief Financial Officer, is Chief Financial Officer of
Ladenburg Thalmann Financial Services. Messrs. LeBow and Lorber serve as
executive officers and directors, and Mr. Lampen serves as an executive officer,
of us and Robert J. Eide, a director of Ladenburg Thalmann Financial Services,
serves as a director of ours.
Following December 20, 2001, holders of New Valley's outstanding
warrants will be entitled, upon exercise of a warrant and payment of the $12.50
exercise price per warrant, to receive a common share of New Valley and a cash
payment of $1.20, an amount equal to 0.988 of the current market price of a
share of Ladenburg Thalmann Financial Services common stock on December 20,
2001, as determined by the terms of the warrants.
MISCELLANEOUS INVESTMENTS. At December 31, 2001, New Valley owned
approximately 48% of the outstanding shares of CDSI Holdings, Inc., which
completed an initial public offering in May 1997. CDSI holds a minority interest
in a marketing services company that provides direct mail and telemarketing
services.
As of December 31, 2001, long-term investments consisted primarily of
investments in limited partnerships of $10 million.
EMPLOYEES
At December 31, 2001, we had approximately 836 full-time employees, of
whom approximately 594 were employed by Liggett and approximately 211 were
employed by Vector Tobacco. Approximately 24% of our employees are hourly
employees who are represented by unions. We have not experienced any significant
work stoppages since 1977, and we believe that relations with our employees and
their unions are satisfactory.
21
RISK FACTORS
WE AND OUR SUBSIDIARIES HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS
We and our subsidiaries have significant indebtedness and debt service
obligations. At December 31, 2001, we and our subsidiaries had total outstanding
indebtedness of $219.1 million. In addition, subject to the terms of any future
agreements, we and our subsidiaries will be able to incur additional
indebtedness in the future. There is a risk that we will not be able to generate
sufficient funds to repay our debt. If we cannot service our fixed charges, it
would significantly harm us and the value of our common stock.
WE ARE A HOLDING COMPANY AND DEPEND ON CASH PAYMENTS FROM SUBSIDIARIES WHICH ARE
SUBJECT TO CONTRACTUAL AND OTHER RESTRICTIONS
We are a holding company and have no operations of our own. We hold our
interests in our various businesses through our wholly-owned subsidiary, VGR
Holding. In addition to our own cash resources, our ability to pay interest on
our convertible notes and to pay dividends on our common stock depends on the
ability of VGR Holding to make cash available to us. The purchase agreement for
the VGR Holding 10% senior secured notes due 2006 contains covenants which limit
the ability of VGR Holding to make distributions to us to 50% of VGR Holding's
net income, unless VGR Holding holds cash of $50 million after giving effect to
the payment of the distribution. VGR Holding's ability to pay dividends to us
depends primarily on the ability of Liggett, our wholly owned subsidiary, and
New Valley, in which we indirectly hold an approximately 56% interest, to
generate cash and make it available to VGR Holding. Liggett's revolving credit
agreement prohibits Liggett from paying cash dividends to VGR Holding unless
Liggett's borrowing availability exceeds $5 million for the thirty days prior to
payment of the dividend, and immediately after giving effect to the dividend,
and it is in compliance with the covenants in the credit facility, including an
adjusted net worth and working capital requirement.
As the controlling New Valley stockholder, we must deal fairly with New
Valley, which may limit its ability to enter into transactions with New Valley
that result in the receipt of cash from New Valley and to influence New Valley's
dividend policy. In addition, since we indirectly own only approximately 56% of
the common shares of New Valley, a significant portion of any cash and other
assets distributed by New Valley will be received by persons other than us and
our subsidiaries.
Our receipt of cash payments, as dividends or otherwise, from our
subsidiaries is an important source of our liquidity and capital resources. If
we do not have sufficient cash resources of our own and do not receive payments
from our subsidiaries in an amount sufficient to repay our debts, we must obtain
additional funds from other sources. There is a risk that we will not be able to
obtain additional funds at all or on terms acceptable to us. Our inability to
service these obligations would significantly harm us and the value of our
common stock.
LIGGETT FACES INTENSE COMPETITION IN THE DOMESTIC TOBACCO INDUSTRY
Liggett is considerably smaller and has fewer resources than all its
major competitors and as a result has a more limited ability to respond to
market developments. Published industry sources indicate that the three largest
manufacturers control approximately 84.2% of the United States cigarette market.
Philip Morris Companies Inc. is the largest and most profitable manufacturer in
the market, and its profits are derived principally from its sale of premium
cigarettes. Based on published industry sources, Liggett's management believes
that Philip Morris had approximately 61.8% of the premium segment and 51.0% of
the total domestic market during 2001. During 2001, Liggett's share of the
premium cigarette segment was 0.3%, and its share of the total domestic
cigarette market was 2.2%. Philip Morris and RJR, the two largest cigarette
22
manufacturers, have historically, because of their dominant market share, been
able to determine cigarette prices for the various pricing tiers within the
industry. The other cigarette manufacturers historically have brought their
prices into line with the levels established by the two major manufacturers.
LIGGETT'S BUSINESS IS HIGHLY DEPENDENT ON THE DISCOUNT CIGARETTE SEGMENT
Liggett depends more on sales in the discount cigarette segment of the
market, relative to the full-price premium segment, than its major competitors.
Approximately 91.4% of Liggett's unit sales in 2001 were generated in the
discount segment. The discount segment is highly competitive with consumers
having less brand loyalty and placing greater emphasis on price. While the four
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, most of which are producing low quality, deep
discount cigarettes. While Liggett's share of the discount market increased to
7.7% in 2001 from 5.3% in 2000 and 3.9% in 1999, published industry sources
indicate that these other smaller manufacturers' discount market share increased
to 16.2% in 2001 from 13.8% in 2000 and 8.8% in 1999 due to their increased
competitive discounting. If the discount market pricing continues to be impacted
by these smaller manufacturers, margins in Liggett's largest market segment
could be negatively affected, which in turn could negatively affect the value of
our common stock.
LIGGETT'S MARKET SHARE HAS DECLINED IN RECENT PERIODS
Liggett has suffered a substantial decline in unit sales and associated
market share in recent years, although Liggett's unit sales and market share
increased during 2000 and 2001. This earlier market share erosion resulted in
part from its highly leveraged capital structure that existed until December
1998 and Liggett's limited ability to match other competitors' wholesale and
retail trade programs, obtain retail shelf space for its products and advertise
its brands. The decline in recent years also resulted from adverse developments
in the tobacco industry, intense competition and changes in consumer
preferences. Based on published industry sources, Liggett's management believes
that Liggett's overall domestic market share during 2001 was 2.2%, compared with
1.5% for 2000 and 1.2% for 1999. Based on published industry sources, Liggett's
management believes that Liggett's share of the premium segment during 2001 was
0.3% as compared to 0.2% in 2000 and 0.3% in 1999, and its share of the discount
segment during 2001 was 7.7%, up from 5.3% in 2000 and 3.9% for 1999. If
Liggett's market share declines, Liggett's sales volume, operating income and
cash flows could be negatively affected, which in turn could negatively affect
the value of our common stock.
THE DOMESTIC CIGARETTE INDUSTRY HAS EXPERIENCED DECLINING UNIT SALES IN
RECENT PERIODS
Industry-wide shipments of cigarettes in the United States have been
generally declining for a number of years, with published industry sources
estimating that domestic industry-wide shipments decreased by approximately 3.2%
during 2001. Published industry sources estimate that domestic industry-wide
shipments increased by 0.1% in 2000 compared to 1999 and decreased by
approximately 9% in 1999 compared to 1998. While Liggett's domestic shipments
increased by 40% in 2001 and 22.9% in 2000, Liggett's unit sales volume in 1999
decreased more significantly (11.3%) than the overall domestic market. Liggett's
management believes that industry-wide shipments of cigarettes in the United
States will generally continue to decline as a result of numerous factors. These
factors include health considerations, diminishing social acceptance of smoking
and legislative limitations on smoking in public places, federal and state
excise tax increases and settlement-related expenses which have contributed to
large cigarette price increases. If this decline in industry shipments continues
and Liggett is unable to capture market share from its competitors, or if the
industry is unable to offset the decline in unit sales with price increases,
Liggett's sales volume, operating income and cash flows could be negatively
affected, which in turn could negatively affect the value of our common stock.
23
LITIGATION AND REGULATION WILL CONTINUE TO HARM THE TOBACCO INDUSTRY
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of December 31, 2001, there were approximately 279 individual
suits, 31 purported class actions and 50 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. In addition to these cases, during 2000, an
action against cigarette manufacturers involving approximately 1,250 named
individual plaintiffs was consolidated before a single West Virginia state
court. Liggett is a defendant in most of the cases pending in West Virginia.
Approximately 38 other purported class action complaints have been filed 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.
An unfavorable verdict was returned in the first phase of the ENGLE
smoking and health class action trial pending in Florida. In July 2000, the jury
awarded $790 million in punitive damages against Liggett, in the second phase of
the trial, and the court entered an order of final judgment. Liggett intends to
pursue all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it will
have a material adverse effect on us. Liggett has filed the $3.45 million bond
required under recent Florida legislation which limits the size of any bond
required, pending appeal, to stay execution of a punitive damages verdict. On
May 7, 2001, Liggett reached an agreement with the class in the ENGLE case,
which will provide assurance to Liggett that the stay of execution, currently in
effect under the Florida bonding statute, will 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 $6.27 million into an escrow
account to be held for the benefit of the ENGLE class, and released, along with
Liggett's existing $3.45 million statutory bond, to the court for the benefit of
the class upon completion of the appeals process, regardless of the outcome of
the appeal. It is possible that additional cases could be decided unfavorably
and that there could be further adverse developments in the ENGLE case.
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.
In recent years, there have been a number of 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 operations or cash flows could
be materially adversely affected by an unfavorable outcome in any
smoking-related litigation.
LIGGETT HAS SIGNIFICANT SALES TO A SINGLE CUSTOMER
During 2001, 27.9% of Liggett's net sales, 32.2% of Liggett's net sales
in the discount segment and 27.3% of our consolidated revenues were to Liggett's
largest customer. If this customer discontinues its relationship with Liggett or
experiences financial difficulties, Liggett's results of operations could be
materially adversely affected.
24
EXCISE TAX INCREASES MAY ADVERSELY AFFECT CIGARETTE SALES
As part of the 1997 budget agreement approved by Congress, federal
excise taxes on a pack of cigarettes, which are currently 39 cents, were
increased at the beginning of each of 2000 and 2002. In general, excise taxes
and other taxes on cigarettes have been increasing. These taxes vary
considerably and, when combined with sales taxes and the current federal excise
tax, may be as high as $2.00 per pack in a given locality in the United States.
Congress has considered significant increases in the federal excise tax or other
payments from tobacco manufacturers, and increases in excise and other
cigarette-related taxes have been proposed at the state and local levels. A
substantial federal or state excise tax increase could accelerate the trend away
from smoking and could have an unfavorable effect on Liggett's sales and
profitability.
VECTOR TOBACCO IS SUBJECT TO RISKS INHERENT IN NEW PRODUCT DEVELOPMENT
INITIATIVES
We have made and plan to continue to make significant investments in
Vector Tobacco's development projects in the tobacco industry. Vector Tobacco is
in the business of developing and marketing new cigarette products designed to
both reduce cancer causing agents in cigarettes and to be free of nicotine.
These initiatives are subject to high levels of risk, uncertainties and
contingencies, including the challenges inherent in new product development.
There is a risk that continued investments in Vector Tobacco will harm our
profitability (if any), liquidity or cash flow.
The substantial risks facing Vector Tobacco include:
RISKS OF MARKET ACCEPTANCE OF THE NEW PRODUCTS. Vector Tobacco has only
recently introduced its reduced carcinogen OMNI cigarettes and has conducted
limited testing of cigarettes made with tobacco genetically modified to produce
a nicotine-free cigarette. Vector Tobacco's nicotine-free QUEST product is
scheduled to be introduced in the third quarter of 2002. The introduction of the
new OMNI and QUEST brands requires the expenditure of substantial sums for
advertising and sales promotion, with no assurance of consumer acceptance.
Reduced carcinogen and nicotine-free cigarettes may not be accepted ultimately
by adult smokers and may not prove to be commercially successful products. Adult
smokers may decide not to purchase cigarettes made with reduced carcinogen and
nicotine-free tobaccos due to taste or other preferences, or due to the use of
genetically modified tobacco or other product modifications.
THIRD PARTY ALLEGATIONS THAT VECTOR TOBACCO PRODUCTS ARE UNLAWFUL OR
BEAR DECEPTIVE OR UNSUBSTANTIATED PRODUCT CLAIMS. Vector Tobacco is engaged in
the development and marketing of new, reduced carcinogen and nicotine-free
cigarettes. However, reductions in these constituents have not yet been proven
to result in a safer cigarette. These products also produce tar, carbon
monoxide, other harmful by-products, and, in the case of OMNI, increased levels
of nitric oxide and formaldehyde. There are currently no specific governmental
standards or parameters for these products and product claims. There is a risk
that federal or state regulators may object to these products and claims as
unlawful, and seek the removal of the products from the marketplace, or
significant changes to advertising claims. Allegations by federal or state
regulators, public health organizations and other tobacco manufacturers that
Vector Tobacco's 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
Tobacco's defense against such claims could require it to incur substantial
expense and to divert significant efforts of its scientific and marketing
personnel. An adverse determination in a judicial proceeding or by a regulatory
agency could have a material and adverse impact on Vector Tobacco's business,
operating results and prospects.
25
POTENTIAL DELAYS IN OBTAINING ANY NECESSARY GOVERNMENT APPROVALS.
Vector Tobacco's business may become subject to extensive domestic and
international government regulation. Various proposals have been made for
federal, state and international legislation to regulate cigarette manufacturers
generally, and reduced constituent cigarettes specifically. The ultimate outcome
of these proposals cannot be predicted. It is possible that laws and regulations
may be adopted covering issues like the manufacture, sale, distribution and
labeling of tobacco products as well as any health claims associated with new,
reduced carcinogen and nicotine-free cigarette products and the use of
genetically modified tobacco. A system of regulation by agencies like the Food
and Drug Administration, the Federal Trade Commission or the United States
Department of Agriculture may be established. In addition, a group of public
health organizations have recently submitted a petition to the Food and Drug
Administration, alleging that the marketing of the OMNI product is subject to
regulation by the FDA under existing law. The Federal Trade Commission has also
expressed interest in the regulation of tobacco products made by tobacco
manufacturers, including Vector Tobacco, which bear reduced carcinogen claims.
Any new laws or regulations or applications of existing law of this type could
significantly delay or obstruct Vector Tobacco's further development and
marketing of its new products or may require it to incur significant expense in
complying with any new regulation or in obtaining any necessary government
approvals.
COMPETITION FROM OTHER CIGARETTE MANUFACTURERS WITH GREATER RESOURCES.
The cigarette industry is highly competitive. Vector Tobacco's competitors
generally have substantially greater resources than Vector Tobacco has,
including financial, marketing and personnel resources. Brown & Williamson
Tobacco Corporation has recently announced it is test marketing a new cigarette
with reduced levels of many toxins. Other major tobacco companies have stated
that they are working on reduced risk cigarette products and have made publicly
available only limited additional information concerning their activities at
this time. There is a substantial likelihood that other major tobacco companies
will continue to introduce new products that are designed to compete directly
with Vector Tobacco's reduced carcinogen and nicotine-free products.
POTENTIAL DISPUTES CONCERNING INTELLECTUAL PROPERTY. Vector Tobacco's
ability to commercially exploit its proprietary technology for its reduced
carcinogen and nicotine-free products depends in large part on its ability to
obtain and defend issued patents, to obtain further patent protection for the
technology in the United States and other jurisdictions, and to operate without
infringing on the patents and proprietary rights of others both in the United
States and abroad. Additionally, it must be able to obtain appropriate licenses
to patents or proprietary rights held by third parties if infringement would
otherwise occur, both in the United States and in foreign countries.
Intellectual property rights, including Vector Tobacco's patents (owned
or licensed), involve complex legal and factual issues. Any conflicts resulting
from third party patent applications and granted patents could significantly
limit Vector Tobacco's ability to obtain meaningful patent protection or to
commercialize its technology. If necessary patents currently exist or are issued
to other companies that contain competitive or conflicting claims, Vector
Tobacco may be required to obtain licenses to these patents or to develop or
obtain alternative technology. Licensing agreements, if required, may not be
available on acceptable terms or at all. If licenses are not obtained, Vector
Tobacco could be delayed in or prevented from pursuing the further development
or marketing of its new cigarette products. Any alternative technology, if
feasible, could take several years to develop.
Litigation which could result in substantial cost may also be necessary
to enforce any patents to which Vector Tobacco has rights, or to determine the
scope, validity and unenforceability of other parties' proprietary rights which
may affect its rights. Vector Tobacco may also have to participate in
interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of an invention or opposition proceedings in foreign
counties or jurisdictions, which could result in substantial costs. There is a
26
risk that its licensed patents would be held invalid by a court or
administrative body or that an alleged infringer would not be found to be
infringing. The mere uncertainty resulting from the institution and continuation
of any technology-related litigation, interference proceedings or oppositions
could have a material and adverse effect on Vector Tobacco's business, operating
results and prospects.
Vector Tobacco may also rely on unpatented trade secrets and know-how
to maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants, suppliers and others.
There is a risk that these agreements will be breached or terminated, that
Vector Tobacco will not have adequate remedies for any breach, or that its trade
secrets will otherwise become known or be independently discovered by
competitors.
DEPENDENCE ON KEY SCIENTIFIC PERSONNEL. Vector Tobacco's business
depends for its continued development and growth on the continued services of
key scientific personnel. The loss of Dr. Robert Bereman, Vice President of
Chemical Research, or Dr. Mark A. Conkling, Vice President of Genetic Research,
could have a serious negative impact upon Vector Tobacco's business, operating
results and prospects.
ABILITY TO RAISE CAPITAL AND MANAGE GROWTH OF BUSINESS. If Vector
Tobacco succeeds in introducing to market and increasing consumer acceptance for
its new cigarette products, Vector Tobacco will be required to obtain
significant amounts of additional capital and manage substantial volume from its
customers. There is a risk that adequate amounts of additional capital will not
be available to Vector Tobacco to fund the growth of its business. To
accommodate growth and compete effectively, Vector Tobacco will also be required
to attract, integrate, motivate and retain additional highly skilled sales,
technical and other employees. Vector Tobacco will face competition for these
people. Its ability to manage volume also will depend on its ability to scale up
its tobacco processing, production and distribution operations. There is a risk
that it will not succeed in scaling its processing, production and distribution
operations and that its personnel, systems, procedures and controls will not be
adequate to support its future operations.
POTENTIAL DELAYS IN OBTAINING TOBACCO, OTHER RAW MATERIALS AND ANY
TECHNOLOGY NEEDED TO PRODUCE NEW PRODUCTS. Vector Tobacco is dependent on third
parties to produce tobacco and other raw materials that Vector Tobacco requires
to manufacture its new products. In addition, the growing of new tobacco and new
seeds is subject to adverse weather conditions. Vector Tobacco may also need to
obtain licenses to technology subject to patents or proprietary rights of third
parties to produce its products. The failure by such third parties to supply
Vector Tobacco with tobacco, other raw materials and technology on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would have a serious negative impact on Vector Tobacco's business,
operating results and prospects. There is also a risk that interruptions in the
supply of these materials and technology may occur in the future. Any
interruption in their supply could have a serious negative impact on Vector
Tobacco.
NEW VALLEY'S POTENTIAL INVESTMENTS ARE UNIDENTIFIED AND MAY NOT SUCCEED
New Valley currently holds a significant amount of marketable
securities and cash not committed to any specific investments. This subjects a
security holder to increased risk and uncertainty because a security holder will
not be able to evaluate how this cash will be invested and the economic merits
of particular investments. There may be substantial delay in locating suitable
investment opportunities. In addition, New Valley may lack relevant management
experience in the areas in which New Valley may invest. There is a risk that New
Valley will fail in targeting, consummating or effectively managing any of these
investments.
27
NEW VALLEY MAY BECOME SUBJECT TO BURDENSOME REGULATION UNDER THE INVESTMENT
COMPANY ACT
Following the recent distribution of the Ladenburg Thalmann Financial
Services shares and asset dispositions in Russia, New Valley is engaged in the
real estate business and holds a significant amount of cash and marketable
securities which it may be required to reinvest in operating companies in the
near future in order to avoid potentially burdensome regulation under the
Investment Company Act of 1940. The Investment Company Act and its regulations
generally impose substantive restrictions on a company that owns "investment
securities" having a value in excess of 40% of the company's "total assets". New
Valley, which is now above this threshold following the distribution of the
Ladenburg Thalmann Financial Services shares and asset dispositions in Russia,
has been relying since December 2001 on the one-year exemption from registration
under the Investment Company Act provided by Rule 3a-2. New Valley will attempt
to be engaged, within the one-year period prescribed by Rule 3a-2, primarily in
a business or businesses other than that of investing, reinvesting, owning,
holding or trading in securities. However, there is a risk that New Valley will
not be successful in becoming engaged in such business and will become subject
to the Investment Company Act. If New Valley were required to register under the
Investment Company Act, it would be subject to a number of severe substantive
restrictions on its operations, capital structure and management. For example,
it would be prohibited from entering into principal transactions and joint
transactions with affiliates. It would also be prohibited from issuing
convertible securities and options and would be subject to limitations on
leverage.
WE DEPEND ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers and other key
personnel. While we believe that we could find replacements for these key
personnel, the loss of their services could have a significant adverse effect on
our operations. We do not maintain key-man life insurance for any of our
personnel.
WE AND NEW VALLEY HAVE MANY POTENTIALLY DILUTIVE SECURITIES OUTSTANDING
We have outstanding warrants expiring in 2003 to purchase 121,623
shares of our common stock, at a price of $4.18 per share. In 1998, we granted
options expiring in 2003 for shares of our common stock, at a price of $5.18 per
share, to a law firm that represents us, Liggett and New Valley, of which
options for 591,281 shares are currently outstanding and exercisable. At
December 31, 2001, we had outstanding options granted to employees to purchase
10,678,774 shares of our common stock, at prices ranging from $.87 to $43.95 per
share, of which options for 5,726,266 shares are exercisable during 2002. The
issuance of these shares will cause dilution which may adversely affect the
market price of our common stock. The availability for sale of significant
quantities of our common stock could adversely affect the prevailing market
price of the stock.
As part of New Valley's recapitalization, a total of 17,898,629
warrants to purchase common shares were issued to New Valley's stockholders. The
potential issuance of common shares on exercise of the warrants would increase
the number of New Valley's common shares outstanding by more than 80% and
decrease our holdings.
OUR STOCK PRICE HAS BEEN VOLATILE
The trading price of our common stock has fluctuated widely, ranging
between $18.37 and $45.95 per share over the past 52 weeks. The overall market
and the price of our common stock may continue to fluctuate greatly. The trading
price of our common stock may be significantly affected by various factors,
including:
o the depth and liquidity of the trading market for our common stock,
28
o quarterly variations in its actual or anticipated operating results,
o changes in investors' and analysts' perceptions of the business and
legal risks facing us and the tobacco industry,
o changes in estimates of our earnings by investors and analysts, and
o announcements or activities by our competitors.
WE WILL HAVE BROAD DISCRETION WITH RESPECT TO THE USE OF PROCEEDS FROM OUR JULY
2001 NOTE OFFERING
The net proceeds of our July 2001 note offering were approximately $166
million. Our management will retain broad discretion as to the use and
allocation of the proceeds. Accordingly, you will not have the opportunity to
evaluate the economic, financial and other relevant information that we may
consider in the application of the net proceeds.
ITEM 2. PROPERTIES
Our and New Valley's principal executive offices are located in Miami,
Florida. We lease 12,356 square feet of office space from an unaffiliated
company in an office building in Miami, which we share with New Valley and
various of our and their subsidiaries. New Valley has entered into an expense-
sharing arrangement for use of such office space. The lease expires in May 2003.
We lease approximately 18,000 square feet of office space in New York,
New York under leases that expire in 2010 and 2013. New Valley's operating
properties are described above.
Substantially all of Liggett's tobacco manufacturing facilities,
consisting principally of factories, distribution and storage facilities, are
located in or near Mebane and Durham, North Carolina. Such facilities are both
owned and leased. As of December 31, 2001, the principal properties owned or
leased by Liggett are as follows:
OWNED APPROXIMATE
OR TOTAL SQUARE
TYPE LOCATION LEASED FOOTAGE
---- -------- ------ -------
Office and
Manufacturing Complex Durham, NC Owned 836,000
Warehouse Durham, NC Owned 203,000
Storage Facilities Danville, VA Owned 578,000
Office and
Manufacturing Complex Mebane, NC Owned 240,000
Warehouse Mebane, NC Owned 60,000
Warehouse Mebane, NC Leased 30,000
Liggett's Durham, North Carolina complex consists of eight major
structures over approximately 13 acres. Included are Liggett's former
manufacturing plant, a research facility and offices. Liggett leases a portion
of these facilities to Vector Tobacco.
In November 1999, 100 Maple LLC, a newly formed entity owned by
Liggett, purchased an approximately 240,000 square foot manufacturing facility
located on 42 acres in Mebane, North Carolina. In October 2000, Liggett
completed a 60,000 square foot warehouse addition at the Mebane facility, and
finished the relocation of its tobacco manufacturing operations to Mebane.
29
Liggett also leases a 30,000 square foot warehouse in Mebane. Liggett's
management believes its property, plant and equipment are well maintained and in
good condition and that its existing facilities are sufficient to accommodate a
substantial increase in production.
In June 2001, Vector Tobacco purchased for $8.4 million an industrial
facility in Timberlake, North Carolina which it converted to a modern cigarette
manufacturing facility. Vector Tobacco began production at the facility in the
first quarter of 2002.
ITEM 3. LEGAL PROCEEDINGS
Liggett (and, in certain cases, Brooke Group Holding) and other United
States cigarette manufacturers have been named as defendants in numerous direct,
third-party and class actions predicated on the theory that they should be
liable for damages from adverse health effects alleged to have been caused by
cigarette smoking or by exposure to secondary smoke from cigarettes. See Item 1.
"Business -- Liggett Group Inc. -- Legislation, Regulation and Litigation."
Reference is made to Note 15 to our consolidated financial statements, which
contains a general description of certain legal proceedings to which Brooke
Group Holding, Liggett, New Valley or their subsidiaries are a party and
certain related matters. Reference is also made to Exhibit 99.1, Material Legal
Proceedings, incorporated herein, for additional information regarding the
pending smoking-related material legal proceedings to which Brooke Group Holding
and/or Liggett are party. A copy of Exhibit 99.1 will be furnished to holders of
our securities and the securities of our subsidiaries without charge upon
written request to us at our principal executive offices, 100 S.E. Second
Street, Miami, Florida 33131, Attn: Investor Relations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the last quarter of 2001, no matter was submitted to
stockholders for their vote or approval, through the solicitation of proxies or
otherwise.
EXECUTIVE OFFICERS OF THE REGISTRANT
The table below, together with the accompanying text, presents certain
information regarding all our current executive officers as of March 28, 2002.
Each of the executive officers serves until the election and qualification of
such individual's successor or until such individual's death, resignation or
removal by the Board of Directors of the respective company.
YEAR INDIVIDUAL
BECAME AN
NAME AGE POSITION EXECUTIVE OFFICER
---- --- -------- -----------------
Bennett S. LeBow 64 Chairman of the Board 1990
and Chief Executive
Officer
Howard M. Lorber 53 President and Chief 2001
Operating Officer
Richard J. Lampen 48 Executive Vice President 1996
Joselynn D. Van Siclen 61 Vice President, Chief 1996
Financial Officer and
Treasurer
Marc N. Bell 41 Vice President, General 1998
Counsel and Secretary
Ronald J. Bernstein 48 President and Chief 2000
Executive Officer of
Liggett
30
BENNETT S. LEBOW has been our Chairman of the Board and Chief Executive
Officer of Vector since June 1990 and has been a director of ours since October
1986. Since November 1990, he has been Chairman of the Board and Chief Executive
Officer of VGR Holding. Mr. LeBow has served as President and Chief Executive
Officer of Vector Tobacco since January 2001 and as a director since October
1999. Mr. LeBow has been a director of Liggett since June 1990 and of Ladenburg
Thalmann Financial Services since May 2001. Mr. LeBow has been Chairman of the
Board of New Valley since January 1988 and Chief Executive Officer since
November 1994.
HOWARD M. LORBER has been our President and Chief Operating Officer and
a director of ours since January 2001. Since January 2001, Mr. Lorber has served
as President and Chief Operating Officer of VGR Holding. Since November 1994,
Mr. Lorber has served as President and Chief Operating Officer of New Valley,
where he also serves as a director. Mr. Lorber has been a stockholder and a
registered representative of Aegis Capital Corp., a broker-dealer and a member
firm of the National Association of Securities Dealers, since 1984; Chairman of
the Board of Directors since 1987 and Chief Executive Officer since November
1993 of Nathan's Famous, Inc., a chain of fast food restaurants; a consultant to
Vector and Liggett from January 1994 to January 2001; a director and member of
the Audit Committee of United Capital Corp., a real estate investment and
diversified manufacturing company, since May 1991; a director and member of the
Audit Committee of Prime Hospitality Corp., a company doing business in the
lodging industry, since May 1994; and Chairman of the Board of Ladenburg
Thalmann Financial Services since May 2001.
RICHARD J. LAMPEN has served as the Executive Vice President of us and
of VGR Holding since July 1996. Since October 1995, Mr. Lampen has been the
Executive Vice President of New Valley. From May 1992 to September 1995, Mr.
Lampen was a partner at Steel Hector & Davis, a law firm located in Miami,
Florida. From January 1991 to April 1992, Mr. Lampen was a Managing Director at
Salomon Brothers Inc, an investment bank, and was an employee at Salomon
Brothers Inc from 1986 to April 1992. Mr. Lampen is a director of New Valley,
Thinking Machines, CDSI Holdings Inc. and Ladenburg Thalmann Financial Services.
Mr. Lampen has served as a director of a number of other companies, including
U.S. Can Corporation, The International Bank of Miami, N.A., Spec's Music Inc.
and PANACO, Inc., as well as a court-appointed independent director of Trump
Plaza Funding, Inc.
JOSELYNN D. VAN SICLEN has been Vice President, Chief Financial Officer
and Treasurer of us and of VGR Holding since May 1996, and currently holds
various positions with certain of VGR Holding's subsidiaries, including Vice
President and Treasurer of Eve since April 1994 and May 1996, respectively.
Prior to May 1996, Ms. Van Siclen served as our Director of Finance and was
employed in various accounting capacities with our subsidiaries since 1992.
Since before 1990 to November 1992, Ms. Van Siclen was an audit manager for the
accounting firm of Coopers & Lybrand L.L.P.
MARC N. BELL has been the Vice President of us and of VGR Holding since
January 1998 and has served as General Counsel and Secretary of us and of VGR
Holding since May 1994. Since November 1994, Mr. Bell has served as Associate
General Counsel and Secretary of New Valley and since February 1998, as Vice
President of New Valley. Prior to May 1994, Mr. Bell was with the law firm of
Zuckerman, Spaeder, Taylor & Evans in Miami, Florida and from June 1991 to May
1993, with the law firm of Fischbein o Badillo o Wagner o Harding in New York,
New York.
RONALD J. BERNSTEIN has served as President and Chief Executive Officer
of Liggett since September 1, 2000. Mr. Bernstein will serve as President of
Liggett Vector Brands. From July 1996 to December 1999, Mr. Bernstein served as
General Director and, from December 1999 to September 2000, as Chairman of
Liggett-Ducat. Prior to that time, Mr. Bernstein served in various positions
with Liggett commencing in 1991, including Executive Vice President and Chief
Financial Officer.
31
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is listed and traded on the New York Stock Exchange
under the symbol "VGR". The following table sets forth, for the periods
indicated, high and low sale prices for a share of its common stock on the NYSE,
as reported by the NYSE, and quarterly cash dividends declared on shares of
common stock:
CASH
YEAR HIGH LOW DIVIDENDS
---- ---- --- ---------
2001:
Fourth Quarter $ 45.95 $ 31.00 $.40
Third Quarter 43.33 28.25 .38
Second Quarter 36.17 18.60 .38
First Quarter 22.14 14.66 .38
2000:
Fourth Quarter $ 16.37 $ 12.42 $.38
Third Quarter 18.39 12.00 .36
Second Quarter 17.94 9.70 .23
First Quarter 15.92 9.53 .23
At March 28, 2002, there were approximately 455 holders of record of
our common stock.
The declaration of future cash dividends is within the discretion of
our Board of Directors and is subject to a variety of contingencies such as
market conditions, earnings and our financial condition as well as the
availability of cash.
The payment of dividends and other distributions to us by VGR Holding
are subject to the note purchase agreement for VGR Holding's senior secured
notes. The agreement limits the ability of VGR Holding to make distributions to
us to 50% of VGR Holding's net income, unless VGR Holding holds $50 million in
cash after giving effect to the payment of the distribution.
Liggett's revolving credit agreement currently prohibits Liggett from
paying dividends to VGR Holding unless Liggett's borrowing availability exceeds
$5 million for the thirty days prior to payment of the dividend, and immediately
after giving effect to the dividend, and it is in compliance with the covenants
in the credit facility, including an adjusted net worth and working capital
requirement.
We paid 5% stock dividends on September 30, 1999, September 28, 2000
and September 28, 2001 to the holders of our common stock. A special dividend of
0.348 of a share of Ladenburg Thalmann Financial Services common stock was paid
on each of our shares of common stock on December 20, 2001. All information
presented in this report is adjusted for the stock dividends.
RECENT SALES OF UNREGISTERED SECURITIES
No securities of ours which were not registered under the Securities
Act of 1933 have been issued or sold by us during the fourth quarter of 2001,
except (i) for the grant of stock options to employees of us and/or our
subsidiaries as described in Note 13 to our consolidated financial statements;
(ii) 169,240 shares of our common stock issued upon exercise of warrants, with
an exercise price of $4.18 per share; and (iii) 170,000 shares issued as an
incentive fee in connection with the conversion of our notes. The foregoing
transactions were effected in reliance on the exemption from registration
afforded by Section 4(2) of the Securities Act of 1933.
32
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
(dollars in thousands, except per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenues(1) ............................... $ 744,218 $ 649,520 $ 526,193 $ 444,566 $ 389,615
Income (loss) from continuing operations .. 21,200 167,754 235,763 24,219 (51,421)
(Loss) income from discontinued operations. (537) 8,285 1,570 3,208 1,536
Loss from extraordinary items(2) .......... -- (1,821) (1,660) -- --
Net income (loss) ......................... 20,663 174,218 235,673 27,427 (49,885)
Per basic common share(3):
Income (loss) from continuing
operations .......................... $ 0.72 $ 6.79 $ 9.72 $ 1.02 $ (2.45)
(Loss) income from discontinued operations $ (0.02) $ 0.34 $ 0.07 $ 0.14 $ 0.07
Loss from extraordinary items ........... -- $ (0.07) $ (0.07) -- --
Net income (loss) applicable to
common shares ....................... $ 0.70 $ 7.06 $ 9.72 $ 1.16 $ (2.38)
Per diluted common share(3):
Income (loss) from continuing
operations .......................... $ 0.60 $ 5.77 $ 7.98 $ 0.84 $ (2.45)
(Loss) income from discontinued operations $ (0.02) $ 0.28 $ 0.05 $ 0.11 $ 0.07
Loss from extraordinary items ........... -- $ (0.06) $ (0.06) -- --
Net income (loss) applicable to
common shares ....................... $ 0.58 $ 5.99 $ 7.97 $ 0.95 $ (2.38)
Cash distributions declared per common
share(3) ................................ $ 1.54 $ 1.20 $ 0.58 $ 0.26 $ 0.26
BALANCE SHEET DATA:
Current assets ............................ $ 515,727 $ 269,942 $ 188,732 $ 122,560 $ 66,759
Total assets .............................. 688,903 425,848 504,448 228,982 125,234
Current liabilities ....................... 141,545 138,775 226,654 273,441 139,278
Notes payable, long-term debt and
other obligations, less current portion . 214,273 39,890 148,349 262,665 399,835
Noncurrent employee benefits, deferred
income taxes, minority interests and
other long-term liabilities ............. 219,727 234,734 262,543 87,051 74,518
Stockholders' equity (deficit) ............ 113,358 12,449 (133,098) (394,175) (488,397)
-------------------
(1) Revenues include excise taxes of $151,174, $116,166, $66,698, $82,613 and
$87,683, respectively.
(2) Represents loss resulting from the early extinguishment of debt.
(3) Per share computations include the impact of 5% stock dividends on
September 28, 2001, September 28, 2000 and September 30, 1999.
33
ITEM 7. MANAGEMENT'S 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:
o the development of new reduced carcinogen and nicotine-free
cigarette products through our subsidiary Vector Tobacco Inc. and
o the manufacture and sale of cigarettes in the United States through
our subsidiary Liggett Group Inc.
Our majority-owned subsidiary, New Valley, completed in December 2001
the distribution to its stockholders of its shares in Ladenburg Thalmann
Financial Services, its former majority-owned subsidiary engaged in the
investment banking and brokerage business. The Ladenburg Thalmann Financial
Services shares received by us were, in turn, distributed to our stockholders.
New Valley is currently engaged in the real estate business and is seeking to
acquire additional operating companies.
In November 2001, Vector Tobacco launched nationwide OMNI, the first
reduced carcinogen cigarette that tastes, smokes and burns like other premium
cigarettes. The OMNI cigarettes are produced using a patent pending process
developed by Vector Tobacco. In comparison to comparable styles of the leading
U.S. cigarette brand, OMNI cigarettes produce significantly lower levels of many
of the recognized carcinogens and toxins that the medical community has
identified as major contributors to lung cancer and other diseases in smokers.
In the third quarter of 2002, Vector Tobacco expects to introduce, under the
QUEST brand name, a new premium cigarette that is nicotine-free and will be
produced using a patent pending process. Cigarettes produced with this product
have been tested in focus groups in the United States and overseas, with such
tests indicating that these cigarettes also taste, smoke and burn like
conventional cigarettes.
Our domestic cigarette business, Liggett, shipped approximately 9.1
billion cigarettes during 2001 which accounted for 2.2% of the total cigarettes
shipped in the United States during that year. Approximately 91.4% of Liggett's
unit sales in 2001 were generated in the 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 state Attorneys General
and various territories, Liggett's four major competitors 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.
In recent years, the domestic tobacco business has experienced the
following trends:
o Declining unit volumes due to health considerations, diminishing
social acceptance of smoking, legislative limitations on smoking in
public places, federal and state excise tax increases and
settlement-related expenses which have augmented cigarette prices,
o Narrower price spreads between the premium and traditional discount
segments resulting from aggressive premium price promotions by
34
larger competitors including Philip Morris and RJR, while price
spreads between the premium and deep discount markets widen due
to the influx of smaller companies producing low quality, deep
discount cigarettes, and
o Loss of discount market share by generic brand discount cigarettes
such as those sold by Liggett due to increased market activity by
the smaller cigarette companies producing low quality, deep discount
cigarettes.
RECENT DEVELOPMENTS
LIGGETT VECTOR BRANDS. In March 2002, we announced that the sales and
marketing functions of our Liggett and Vector Tobacco subsidiaries will be
combined into a new entity, Liggett Vector Brands Inc. The newly formed company
will coordinate and execute the sales and marketing efforts for all of our
tobacco operations. With the combined resources of Liggett and Vector Tobacco,
Liggett Vector Brands initially will have 350 salesmen, and enhanced
distribution and marketing capabilities. In connection with the creation of the
new Liggett Vector Brands entity, we expect to take a charge of approximately
$3,800 in the first quarter of 2002, related to elimination of redundant
positions, consolidation of sales and marketing operations and systems
integration.
DISTRIBUTION OF LADENBURG THALMANN FINANCIAL SERVICES SHARES. On
November 30, 2001, New Valley announced that it would distribute its 22,543,158
shares of Ladenburg Thalmann Financial Services common stock, a 53.6% interest,
to holders of New Valley common shares through a special dividend. On the same
date, we announced that we would, in turn, distribute the 12,694,929 shares of
Ladenburg Thalmann Financial Services common stock that we would receive from
New Valley to the holders of our common stock as a special dividend. The special
dividends were accomplished through pro rata distributions of the Ladenburg
Thalmann Financial Services shares, paid on December 20, 2001 to holders of
record as of December 10, 2001. New Valley stockholders received 0.988 of a
Ladenburg Thalmann Financial Services share for each share of New Valley, and
our stockholders received 0.348 of a Ladenburg Thalmann Financial Services share
for each share of ours.
Following the distribution of the shares, New Valley's broker-dealer
operations, which were its primary source of revenues since 1995, are accounted
for as a discontinued operation.
ACQUISITION OF MEDALLION. On April 1, 2002, a subsidiary of ours
acquired the stock of The Medallion Company, Inc., and related assets from
Medallion's principal stockholder. The total purchase price consisted of $50,000
in cash and $60,000 in notes, with the notes guaranteed by us and Liggett.
Medallion, a discount cigarette manufacturer headquartered in Richmond,
Virginia, is a participant in the Master Settlement Agreement between the state
Attorneys General and the tobacco industry. Medallion has no payment obligations
under the Master Settlement Agreement unless its market share exceeds
approximately 0.28% of total cigarettes sold in the United States (approximately
1.15 billion units in 2001).
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 December 31, 2001, there were approximately 279 individual
suits, 31 purported class actions and 50 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. In addition to these cases, during 2000, an
35
action against cigarette manufacturers involving approximately 1,250 named
individual plaintiffs was consolidated before a single West Virginia state
court. Liggett is a defendant in most of the cases pending in West Virginia.
Approximately 38 other purported class action complaints have been filed 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.
An unfavorable verdict was returned in the first phase of the ENGLE
smoking and health class action trial pending in Florida. In July 2000, the jury
awarded $790,000 in punitive damages against Liggett in the second phase of the
trial, and the court entered an order of final judgment. Liggett intends to
pursue all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it will
have a material adverse effect on Vector. Liggett has filed the $3,450 bond
required under recent Florida legislation which limits the size of any bond
required, pending appeal, to stay execution of a punitive damages verdict. On
May 7, 2001, Liggett reached an agreement with the class in the ENGLE case,
which will provide assurance to Liggett that the stay of execution, currently in
effect under the Florida bonding statute, will 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
Liggett's 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. It is possible that additional cases could be decided unfavorably and
that there could be further adverse developments in the ENGLE case. 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.
In recent years, there have been a number of 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 operations or cash flows could
be materially adversely affected by an unfavorable outcome in any
smoking-related litigation. See Note 15 to our consolidated financial statements
for a description of legislation, regulation and litigation.
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. Note 1 to our consolidated financial statements includes a
summary of the significant accounting policies and methods used in the
preparation of our consolidated financial statements. The following is a brief
discussion of the more significant accounting policies and methods used by us.
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 deferred tax
assets, allowance for doubtful accounts, promotional accruals, sales returns
and allowances, actuarial assumptions of pension plans 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 to customers. We provide an allowance for
expected sales returns, net of related inventory cost recoveries. Since our
primary line of business is tobacco, our financial position and our results of
36
operations and cash flows have been and could continue to be materially
adversely effected 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. As discussed in Note 1 to our consolidated
financial statements, effective January 1, 2002, we will adopt new required
accounting standards mandating that certain sales incentives currently reported
as operating, selling, general and administrative expenses be shown as a
reduction of operating revenues. As a result, our previously reported revenues
will be reduced by approximately $304,000, $248,000 and $182,000 for 2001, 2000
and 1999, respectively. The adoption of the new accounting standards will have
no impact on our net earnings or basic or diluted earnings per share.
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 an expense in the period in which these programs are offered,
based on estimates of utilization and redemption rates that are developed from
historical information. As discussed above under "Revenue Recognition",
beginning January 1, 2002, we will adopt the previously mentioned revenue
recognition accounting standards that mandate that certain costs currently
reported as marketing expense be shown as a reduction of operating revenues. As
a result, previously reported amounts for operating, selling, general and
administrative expenses will be reduced by approximately $304,000, $248,000 and
$182,000 for 2001, 2000 and 1999, respectively. The adoption of the new
accounting standards will have no impact on our net earnings or basic or diluted
earnings per share.
CONTINGENCIES. As discussed in Note 15 of our consolidated financial
statements and above under the heading "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 meaningful 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. 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.
EMPLOYEE BENEFIT PLANS. Since 1997, income from our defined benefit
pension plans, partially offset by the costs of postretirement medical
benefits, have contributed to our reported operating income. 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 are described in Note 10 to our
consolidated financial statements and 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 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.
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
37
VGR Holding, Liggett, Vector Tobacco, Liggett-Ducat (through July 31, 2000) and
other less significant subsidiaries. As of June 1, 1999, New Valley became a
consolidated subsidiary of Vector as a result of New Valley's recapitalization
in which our interest in New Valley's common shares increased to 55.1%. New
Valley's stock repurchase program, which began in late 1999, increased our
interest to 56.3% at December 31, 2001.
For purposes of this discussion and other consolidated financial
reporting, our significant business segments for the year ended December 31,
2001 were Liggett, Vector Tobacco and real estate. Our significant business
segments for the years ended December 31, 2000 and 1999 were Liggett,
Liggett-Ducat, Vector Tobacco and real estate.
2001 COMPARED TO 2000 AND 2000 COMPARED TO 1999
For the Year Ended December 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------
(Dollars in Thousands)
NET REVENUES:
Liggett .................. $ 728,178 $ 539,059 $ 422,748
Liggett-Ducat(1) ......... -- 107,263 100,059
Vector Tobacco ........... 6,074 -- --
--------- --------- ---------
Total tobacco .......... 734,252 646,322 522,807
Real estate(2) ........... 9,966 3,198 3,386
--------- --------- ---------
Total revenues ....... $ 744,218 $ 649,520 $ 526,193
========= ========= =========
OPERATING INCOME:
Liggett .................. $ 107,052 $ 71,434 $ 76,700
Liggett-Ducat(1) ......... -- (5,667) 5,215
Vector Tobacco ........... (48,643) (15,459) (1,795)
--------- --------- ---------
Total tobacco ........ 58,409 50,308 80,120
Real estate(2) ........... 413 (5,335) (776)
Corporate and other(2) ... (27,479) (4,872) (8,832)
--------- --------- ---------
Total operating income $ 31,343 $ 40,101 $ 70,512
========= ========= =========
-------------
(1) Liggett-Ducat's revenues and operating income are included through the
seven months ended July 31, 2000 and for the year ended December 31, 1999.
(2) New Valley became a consolidated subsidiary of Vector on June 4, 1999. Real
estate and New Valley's portion of Corporate and other are included for the
years ended December 31, 2001 and 2000 and the seven months ended December
31, 1999.
2001 COMPARED TO 2000
REVENUES. Total revenues were $744,218 for the year ended December 31,
2001 compared to $649,520 for the year ended December 31, 2000. This 14.6%
($94,698) increase in revenues was due to a $189,119 or 35.1% increase in
revenues at Liggett, $6,074 in revenues at Vector Tobacco and an increase of
$6,768 in real estate revenues at New Valley, offset by the loss in revenues of
Liggett-Ducat ($107,263 in 2000) due to the sale of Western Tobacco Investments
on August 4, 2000.
TOBACCO REVENUES. During 2000, the major cigarette manufacturers,
including Liggett, announced list price increases of $3.30 per carton. In 2001,
the major cigarette manufacturers, including Liggett, announced list price
increases of $1.90 per carton.
38
Tobacco revenues at Liggett for the year ended December 31, 2001
increased for both the premium and discount segments due to a 43.5% ($234,224)
gain in unit sales volume (approximately 2,694 million units) and price
increases of $34,271, discussed above, offset by $79,376 in unfavorable sales
mix.
Premium sales at Liggett in 2001 amounted to $95,053 and represented
13.1% of total Liggett sales, compared to $58,892 and 10.9% of total sales for
2000. In the premium segment, revenues increased by 61.4% ($36,161) for the year
ended December 31, 2001, compared to 2000, due to a favorable volume variance of
$25,418, reflecting a 43.2% increase in unit sales volume (approximately 232
million units), corresponding with the JADE and EVE 100 product introductions in
the third quarter of 2001, along with price increases of $10,743.
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) in 2001 amounted to $633,125 and represented 86.9% of total
Liggett sales, compared to $480,167 and 89.1% of total Liggett sales for 2000.
In the discount segment, revenues grew by 31.9% ($152,958) for the year ended
December 31, 2001 compared to 2000, due to a 43.5% gain in unit sales volume
(approximately 2,462 million units) accounting for $208,767 in positive volume
variance and price increases of $23,528, partially offset by an unfavorable
product mix of $79,337.
For the year ended December 31, 2001, fixed manufacturing costs on a
basis comparable to 2000 were $864 lower with costs per thousand units of $1.67
decreasing 36.3% from the previous year's $2.62, concurrent with a 48.7%
increase in production volume. On a per-thousand unit basis, fixed payroll
expense and indirect labor of $0.97 for the year ended December 31, 2001
decreased from $1.11 in the prior year (12.6%), while fixed non-payroll expenses
declined to $0.70 from $1.52 in the prior year (53.9%) with the relocation of
the Liggett manufacturing facility to Mebane, North Carolina.
TOBACCO GROSS PROFIT. Gross profit was $483,465 for the year ended
December 31, 2001 compared to $389,609 for the year ended December 31, 2000, an
increase of $93,856 or 24.1% when compared to last year, due primarily to
volume and price increases and manufacturing efficiencies at Liggett offset by
the absence of Liggett-Ducat due to its sale discussed above. Liggett's premium
brands contributed 14.9% to our gross profit, the discount segment contributed
84.6% and Vector Tobacco contributed .5% for the year ended December 31, 2001.
In 2000, Liggett's premium brands contributed 11.2%, the discount segment
contributed 85.0% and Liggett-Ducat contributed 3.8%.
Liggett's gross profit of $480,460 for the year ended December 31, 2001
increased $106,381 from gross profit of $374,079 in 2000, due primarily to the
price and unit volume increases discussed above, offset by the estimated payment
obligations under the Attorneys General Master Settlement Agreement. As a
percent of revenues (excluding federal excise taxes), gross profit at Liggett
decreased to 83.1% for the year ended December 31, 2001 compared to 85.8% for
2000, with gross profit for the premium segment increasing to 87.9% for the year
ended December 31, of 2001 compared to 87.2% for the year ended December 31,
2000 and gross profit for the discount segment decreasing to 82.4% in 2001 from
85.9% in 2000. This decrease is due primarily to the inclusion of the estimated
payment obligation ($24,606) under the Attorneys General Master Settlement
Agreement within cost of goods sold and to the disproportionate rise in
deep-discount Liggett Select sales. The decrease was partially offset by the
overall 43.5% growth in unit sales volume (2,693.5 million units), the December
2000 and April 2001 list price increases and improved production variances.
REAL ESTATE REVENUES. New Valley's real estate revenues were $9,966 for
the year ended December 31, 2001. This compares to revenues of $3,198 from real
estate activities for the year ended December 31, 2000.
39
EXPENSES. Operating, selling, general and administrative expenses and
settlement charges were $462,088 for the year ended December 31, 2001 compared
to $352,706 for the prior year. The increase of $109,382 was due primarily to a
$70,763 increase in expenses at Liggett, a $35,589 increase in expenses at
Vector Tobacco and additional expenses of $1,480 at New Valley, offset by an
increase in pension income of $2,383 and the absence of expenses of
Liggett-Ducat due to the sale of Western Tobacco Investments. Expenses at
Liggett were $373,408 for the year ended December 31, 2001 compared to $302,645
for the prior year, an increase of $70,763. The increase in operating expenses
at Liggett was due primarily to higher spending for promotional and marketing
programs associated with the higher level of sales. Expenses at Vector Tobacco
for the year ended December 31, 2001 were $51,048, compared to expenses of
$15,459 for the prior year. The increase at Vector Tobacco was due to increased
expenses of product development and marketing for Vector Tobacco's new OMNI and
nicotine-free products. Increased expenses at New Valley were due primarily to
inclusion of expenses from Western Realty Development offset by lower expenses
as a result of the sale of the shopping center, lower expenses for BrookeMil and
discontinued operations.
For the year ended December 31, 2001, Liggett operating income was
reduced by $9,723 of expense relating to the ENGLE class action. As discussed in
Note 15 to our consolidated financial statements, on May 7, 2001, Liggett
reached an agreement with the class in the ENGLE case, which will provide
assurance to Liggett that the stay of execution, currently in effect pursuant to
the Florida bonding statute, will 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 Liggett's 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, we
recorded a $9,723 pre-tax charge to the consolidated statement of operations for
the first quarter of 2001.
OTHER INCOME (EXPENSES). Other income was $29,419 for the year ended
December 31, 2001 compared to other income of $261,155 for the year ended
December 31, 2000. Interest and dividend income of $11,799 and a gain on a legal
settlement of $17,620 were offset primarily by interest expense and a loss on
the sale of real estate assets. The gain on legal settlement arose from the
resolution of an insurance claim relating to New Valley's former Western Union
satellite business. For the year ended December 31, 2000, we recognized a gain
of $192,923 on the sale of Western Tobacco Investments and New Valley recognized
$52,589 on the sale through its interest in the joint venture, Western Realty
Development.
Interest expense was $21,387, and included a charge of $6,445 for the
loss on conversion of a portion of our convertible subordinated notes due 2008
to common stock, for the year ended December 31, 2001 compared to $30,610 for
the prior year. The decrease from the prior year of $9,223 was largely due to
the repurchase of all of the VGR Holding 15.75% senior secured notes in 2000
offset by issuance of long-term notes at the corporate level.
INCOME FROM CONTINUING OPERATIONS. The income from continuing operations
for the year ended December 31, 2001 was $21,200 compared to income of $167,754
for the year ended December 31, 2000. Income tax expense was $15,017 and
minority interests in losses of subsidiaries were $7,407 for the year ended
December 31, 2001. This compared to tax expense of $81,783 and minority
interests in income of subsidiaries of $15,512 for the year ended December 31,
2000. The effective tax rates for the year ended December 31, 2001 and December
31, 2000 do not bear a customary relationship to pre-tax accounting income
principally as a consequence of non-deductible expenses in 2001 and foreign
taxes in 2000.
40
2000 COMPARED TO 1999
REVENUES. Total revenues were $649,520 for the year ended December 31,
2000 compared to $526,193 for the year ended December 31, 1999. This 23.4%
($123,327) increase in revenues was due to a $116,311 or 27.5% increase in
revenues at Liggett and a $7,204 or 7.2% increase at Liggett-Ducat. This was
offset by a decrease in real estate revenues of 5.5% or $188.
TOBACCO REVENUES. During 2000, the major cigarette manufacturers,
including Liggett, announced list price increases of $3.30 per carton. In August
1999, the major cigarette manufacturers, including Liggett, announced a list
price increase of $1.80 per carton.
Tobacco revenues at Liggett increased for both the premium and discount
segments due to a 22.8% ($96,587) increase in unit sales volume (approximately
1,152.9 million units) and to price increases of $23,131 partially offset by
$3,407 in unfavorable sales mix.
Premium sales at Liggett for the year ended December 31, 2000 amounted
to $58,892 and represented 10.9% of total Liggett sales, compared to $78,182 and
18.5% of total sales for 1999. In the premium segment, revenues declined by
24.7% ($19,290) in the year ended December 31, 2000 compared to 1999, due to an
unfavorable volume variance of $26,344, reflecting a 33.7% decline in unit sales
volume (approximately 272.7 million units), primarily due to the closing of the
Philip Morris brand transaction on May 24, 1999, which was partially offset by
price increases of $7,054. As adjusted for the contribution of the three brands
in the Philip Morris brand transaction, the decline in Liggett's premium segment
from the prior year period was 7.5% (approximately 43.8 million units). This
compared to an overall industry increase in the premium segment of approximately
0.23% (approximately 700 million units) during 2000 versus the prior year.
Liggett's discount sales for 2000 amounted to $480,167 and represented
89.1% of total Liggett sales, compared to $344,566 and 81.5% of total Liggett
sales in 1999. In the discount segment, revenues grew by 39.4% ($135,601) in the
year ended December 31, 2000 compared to 1999, due to a 33.6% increase in unit
sales volume (approximately 1,425.6 million units) accounting for $115,940 in
positive volume variance, price increases of $16,077 and a favorable product mix
among the discount brand categories of $3,584.
For the year ended December 31, 2000, fixed manufacturing costs on a
basis comparable to 1999 at Liggett were $305 higher, although costs per
thousand units of $2.62 declined from the previous year's $2.97 (an 11.8%
decrease), against a 15.2% increase in production volume. On a
per-thousand-units basis, fixed payroll expense and indirect labor of $1.11 for
the year just ended fell from $1.27 in 1999 (a decline of 12.6%), while fixed
non-payroll expenses similarly declined to $1.52 from the prior year's $1.69 (a
10.1% decrease).
The increase in tobacco revenues at Liggett-Ducat, which was sold on
August 4, 2000, was attributable to increased volume at the new factory and a
favorable product mix of $3,672 offset by a continuing decline in prices
compared to the prior period. Liggett-Ducat's sales volume during the 1999
period was adversely affected by the move to the new factory and price declines
in Russia following the continued decline in the value of the ruble.
TOBACCO GROSS PROFIT. Tobacco consolidated gross profit was $389,609
for the year ended December 31, 2000 compared to $332,942 for the year ended
December 31, 1999, an increase of $56,667 or 17.0% over 1999, due primarily to
volume and price increases at Liggett offset by the price declines and the sale
41
of Liggett-Ducat on August 4, 2000 discussed above. Liggett's premium brands
contributed 11.2% to our gross profit, the discount segment contributed
85.0% and Liggett-Ducat contributed 3.8% for the year ended December 31, 2000.
In 1999, Liggett's premium brands contributed 17.7% to our gross profit,
the discount segment contributed 75.9% and Liggett-Ducat contributed 6.4%.
Liggett's gross profit of $374,079 for the year ended December 31, 2000
increased $63,115 or 20.3% from gross profit of $310,964 in 1999, due primarily
to the volume and price increases discussed above. As a percent of revenues
(excluding federal excise taxes), gross profit at Liggett increased to 85.8% for
the year ended December 31, 2000 compared to 85.5% in 1999, with gross profit
for the premium segment at 87.2% in 2000 and 85.8% in 1999 and gross profit for
the discount segment at 85.7% in 2000 and 85.4% in 1999. This increase was
primarily the result of the 2000 volume and list price increases and, to a
lesser degree, improved production variances.
REAL ESTATE REVENUES. New Valley's real estate revenues were $3,198 for
the year ended December 31, 2000 compared to $3,386 for the seven months ended
December 31, 1999. The decline in real estate revenue was primarily due to the
sale of the shopping centers in August 1999.
EXPENSES. Operating, selling, general and administrative expenses were
$352,706 for the year ended December 31, 2000 compared to $265,816 in 1999. The
increase of $86,890 was due primarily to a $68,409 increase at Liggett and
additional expenses at New Valley reflecting a full twelve months results in
consolidation, and also includes new product development costs at Vector
Tobacco. The increase in operating expenses at Liggett was due primarily to an
increase in spending primarily for promotional and marketing programs slightly
offset by a net reversal of legal settlement charges of $934 which were
previously accrued. In 1999, such expenses were offset by the reversal of
charges for the Attorneys General settlements of $1,051.
OTHER INCOME (EXPENSES). For the year ended December 31, 2000, other
income of $261,155 resulted primarily from the sale of Western Tobacco
Investments with us realizing a gain of $192,923 and New Valley gaining income
of $52,589 from its joint venture through the participating loan to Western
Tobacco Investments. Interest and dividend income increased as a result of cash
realized in the transaction.
For the year ended December 31, 1999, Liggett recognized a gain of
$294,078 in connection with the closing of the Philip Morris brand transaction.
In addition, we recognized a gain of $11,883 from the sales by New Valley of
five U.S. shopping centers and Thinking Machines' assets. We also recognized in
March 1999 a deferred gain of $7,050 relating to the expiration of the put
obligation on Ducat Place III (the site of the old cigarette factory in Russia)
in connection with the 1997 sale of the BrookeMil common shares.
Interest expense was $30,610 for the year ended December 31, 2000
compared to $54,378 in 1999. The decrease of $23,768 is largely due to the
retirement by VGR Holding of its senior secured notes during the third quarter
2000 and lower interest expense at Brooke (Overseas) slightly offset by an
increase at Liggett resulting from debt financing for the factory acquisition in
Mebane, N.C. and the purchase of new production machinery. In 1999, VGR Holding
realized a savings of $14,185 in interest expense due to the repurchase of a
portion of VGR Holding senior secured notes. This was offset by additional
interest expense at Brooke (Overseas) of $8,753 and interest at New Valley of
$5,060.
Equity in loss of affiliates for 2000 was $5,597 associated with losses
from certain of New Valley's investees accounted for on the equity method.
Equity in loss of affiliate in 1999 was $11,315 and includes our loss in New
Valley which was accounted for on the equity method for the five months ended
May 31, 1999 as well as losses at New Valley on its equity method investees. The
loss in joint venture of $12,082 in 1999 resulted primarily from an impairment
charge of $11,561 associated with Western Realty Development.
42
INCOME FROM CONTINUING OPERATIONS. The income from continuing
operations for the year ended December 31, 2000 was $167,754 compared to income
of $235,763 for 1999. Income tax expense for the year ended December 31, 2000
was $81,783 compared to an expense of $82,263 for the year ended December 31,
1999.
The loss on extraordinary items in 2000 and 1999 pertains to the early
extinguishment of debt.
DISCONTINUED OPERATIONS
On November 30, 2001, New Valley announced that it would distribute its
22,543,158 shares of Ladenburg Thalmann Financial Services common stock, a 53.6%
interest, to holders of New Valley common shares through a special dividend. On
the same date, we announced that we would, in turn, distribute the 12,694,929
shares of Ladenburg Thalmann Financial Services common stock that we would
receive from New Valley to the holders of our common stock. The special
dividends were accomplished through pro rata distributions of the Ladenburg
Thalmann Financial Services shares, paid on December 20, 2001 to holders of
record as of December 10, 2001. New Valley stockholders received 0.988 of a
Ladenburg Thalmann Financial Services share for each share of New Valley, and
our stockholders received 0.348 of a Ladenburg Thalmann Financial Services share
for each of our shares.
Our consolidated financial statements have been reclassified to reflect
as discontinued operations New Valley's broker-dealer operations. Accordingly,
revenues, costs and expenses, and cash flows of the discontinued operations have
been excluded from the respective captions in the consolidated statements of
operations and consolidated statements of cash flows. The net operating results
of these entities have been reported, net of minority interests and applicable
income taxes, as "Income (loss) from discontinued operations," and the net cash
flows of these entities have been reported as "Impact of discontinued
operations."
Summarized operating results of the discontinued broker-dealer
operations are as follows:
Year Ended December 31,
-------------------------------------
2001(1) 2000 1999(2)
-------- -------- --------
Revenues .............................. $ 88,473 $ 90,111 $ 40,852
(Loss) income from operations before
income taxes ....................... (12,030) 6,298 1,491
(Benefit) provision for income taxes .. (1,356) 1,084 195
Minority interests in subsidiary (loss)
income ............................. 8,557 (3,398) (975)
-------- -------- --------
Net (loss) income ..................... $ (2,117) $ 1,816 $ 321
======== ======== ========
----------------------
(1) Results of operations included for the period January 1 through December
20, 2001.
(2) Results of operations included for the period June 1 through December 31,
1999.
In 2001, Vector recognized a gain on disposal of discontinued
operations of $1,580 relating to New Valley's adjustments of accruals
established during its bankruptcy proceedings in 1993 and 1994. In 2000, Vector
recognized a gain on disposal of discontinued operations of $6,469 from
adjustments of New Valley's bankruptcy accruals. The reversal of the accruals
reduced restructuring, employee benefit and various tax accruals previously
43
established. In 1999, Vector recognized a gain on disposal of discontinued
operations of $1,249 related to the settlement of a lawsuit originally initiated
by New Valley's former Western Union telegraph business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash and cash equivalents increased $60,248 in 2001, $137,390 in
2000 and $12,727 in 1999.
Net cash provided by operations in 2001 was $19,720 compared to net
cash used in operations of $4,850 in 2000. Cash provided by operations in 2001
resulted primarily from increased net income of Liggett offset by expenses of
product development at Vector Tobacco and a loss at New Valley. In addition,
there was the non-cash impact of depreciation and amortization, non-cash stock-
based expense, losses on the sale of real estate and the conversion of debt
offset by the impact of discontinued operations, income taxes and minority
interests. Cash used in 2000 for operating activities resulted principally from
lower operating income at Liggett, the gain on the sale of Liggett-Ducat and
expenses of product development at Vector Tobacco offset by a reduction in debt
service due to the Company's repurchase of $150,294 of the VGR Holding senior
secured notes.
Net cash used in operations in 2000 of $4,850 compares to net cash
provided by operations of $65,296 in 1999. Although there was a reduction in
debt service of $23,768 in 2000 when compared to 1999, operating income declined
due to the sale of Western Tobacco Investments, lower operating income at
Liggett and expenses of new product development at Vector Tobacco. In addition,
there was the non-cash impact of the gain on the sale of assets, the gain in the
joint venture and the impact of discontinued operations offset by depreciation
and amortization, stock option expense and the minority interest expense.
Cash used in investing activities of $176,308 in 2001 compares to cash
provided of $313,899 in 2000. In 2001, cash was used primarily for investment in
debt securities at the corporate level of $152,793, investment in equity
securities at New Valley of $10,166 and for capital expenditures, primarily at
Vector Tobacco and Liggett, of $59,970. In addition, there were purchases of
long-term investments at New Valley of $5,711. These expenditures were offset
primarily by the sale or maturity of investment securities of $16,418, sales of
assets of $7,912 and proceeds from sales of real estate of $42,160 in Russia and
the United States. In 2000, the majority of the proceeds, $382,077, were
attributable to the sale of Western Tobacco Investments and the sale or maturity
of investment securities. This was offset primarily by the purchase of
investment securities at New Valley and capital expenditures at Liggett of
$13,387 and Liggett-Ducat of $9,000.
Net cash provided by investing activities of $313,899 in 2000 compared
to net cash provided of $129,877 in 1999. In 1999, the majority of the proceeds
were from the purchase of the Class A option by Philip Morris in May 1999, loan
proceeds which Trademarks borrowed and distributed to Eve and the sale of real
estate. In 1999, these proceeds were partially offset by capital expenditures
primarily for machinery and equipment at Liggett of $17,432 and equipment and
construction costs for the new factory of $42,825 at Liggett-Ducat.
Cash provided by financing activities was $212,830 in 2001 compared to
cash used of $173,288 in 2000. In 2001, proceeds from debt were $264,441 offset
by repayments on debt of $32,777 and net repayments on the revolving credit
facilities of $19,374. In addition, cash was provided by the issuance of common
stock of $50,000 as well as the exercise of warrants and options for $17,185.
These transactions were offset by distributions on common stock of $46,751,
deferred financing charges of $9,642 and decreases of $4,675 in margin loans
payable. Cash in the 2000 period was used primarily to redeem all outstanding
VGR Holding notes and to repay the participating loan and amounts related to
the sale of Western Tobacco Investments to Western Realty Development. In
addition, distributions on common stock were $30,759.
44
Net cash used in financing activities of $173,288 in 2000 compared to
net cash used of $181,281 in 1999. Cash was used in 1999 primarily to retire
the VGR Holding notes in principal amount of $144,794 and retire $35,023 of New
Valley mortgage financing relating to the five shopping centers sold in August
1999. Cash was also used in the 1999 period to decrease the margin loan at New
Valley, to purchase preferred stock in a New Valley subsidiary and for
distributions on common stock. Net borrowings under the revolving credit
facilities were $16,665, of which $19,203 was attributable to Liggett-Ducat,
offset by net repayments at Liggett of $2,438.
LIGGETT. Liggett has a $35,000 credit facility under which $0 was
outstanding at December 31, 2001. Availability under the facility was
approximately $29,301 based on eligible collateral at December 31, 2001. The
facility is collateralized by all inventories and receivables of Liggett.
Borrowings under the facility, whose interest is calculated at a rate equal to
1.0% above First Union's (the indirect parent of Congress Financial Corporation,
the lead lender) prime rate, bore a rate of 6.0% at December 31, 2001. The
facility requires Liggett's compliance with certain financial and other
covenants including a restriction on the payment of cash dividends unless
Liggett's 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. In addition, the facility, as amended, imposes requirements with
respect to Liggett's 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 December 31, 2001,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $40,158 and net working capital was $26,085, as
computed in accordance with the agreement. The facility expires on March 8, 2003
subject to automatic renewal for an additional year unless a notice of
termination is given by the lender at least 60 days prior to the anniversary
date.
In November 1999, 100 Maple LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed $5,040 from
the lender under Liggett's credit facility. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $5,865 was outstanding at
December 31, 2001. In addition, the lender extended the term of the loan so that
it is payable in 59 monthly installments of $75 including annual interest at 1%
above the prime rate with a final payment of $1,890. Interest is charged at the
same rate as applicable to Liggett's credit facility, and borrowings under the
Maple loan reduce the maximum availability under the credit facility. Liggett
has guaranteed the loan, and a first mortgage on the Mebane property and
equipment collateralizes the Maple loan and Liggett's credit facility. Liggett
completed the relocation of its manufacturing operations to this facility in
October 2000.
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase. The loan, which was collateralized by the equipment
and guaranteed by VGR Holding and us, was payable in 60 monthly installments of
$56 including annual interest of 7.67% with a final payment of $2,550. The loan
was repaid in July 2001 in connection with the sale of the equipment.
In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment for
$1,071 under two capital leases which are payable in 60 monthly installments of
$22 with an effective interest rate of 10.20%.
Liggett has been upgrading 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 will be approximately $22,000. 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 capital lease arrangements guaranteed by us and payable in 60
45
monthly installments 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 a capital lease arrangement, payable in 30 monthly installments of $62
and then 30 monthly installments of $51 with an effective annual interest rate
of 4.68%.
Liggett (and, in certain cases, Brooke Group Holding, our predecessor
and a wholly-owned subsidiary of VGR Holding) 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 Brooke Group Holding and Liggett have a
number of valid defenses to claims asserted against them. Litigation is subject
to many uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In July
2000, the jury awarded $790,000 in punitive damages against Liggett in the
second phase of the trial, and the court entered an order of final judgment.
Liggett intends to pursue all available post-trial and appellate remedies. If
this verdict is not eventually reversed on appeal, or substantially reduced by
the court, it will have a material adverse effect on Vector. Liggett has filed
the $3,450 bond required under recent Florida legislation which limits the size
of any bond required, pending appeal, to stay execution of a punitive damages
verdict. On May 7, 2001, Liggett reached an agreement with the class in the
ENGLE case, which will provide assurance to Liggett that the stay of execution,
currently in effect pursuant to the Florida bonding statute, will 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 Liggett's 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. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the ENGLE
case. 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 15 to our
consolidated financial statements.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against Brooke Group Holding or 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.
VECTOR RESEARCH. In February 2001, a subsidiary of Vector Research Ltd.
purchased equipment for $15,500 and borrowed $13,175 to fund the purchase, of
which $12,724 was outstanding at December 31, 2001. The loan, which is
collateralized by the equipment and a letter of credit from us for $775, is
guaranteed by Vector Research, VGR Holding and us. The loan is payable in 120
monthly installments of $125 including annual interest of 2.31% above the 30-day
commercial paper rate with a final payment of $6,125.
In February 2002, the Vector Research subsidiary purchased equipment
for $6,575 and borrowed $6,150 to fund the purchase. The loan, which is
collateralized by the equipment, is guaranteed by Vector Research and us. The
loan is payable in 120 monthly installments of $44, including annual interest at
2.75% above the 30-day commercial paper rate.
46
VECTOR TOBACCO. In June 2001, Vector Tobacco purchased for $8,400 an
industrial facility in Timberlake, North Carolina. Vector Tobacco financed the
purchase with an $8,200 loan. The loan is payable in 60 monthly installments of
$85, including annual interest at 4.85% above the LIBOR rate, with a final
payment of approximately $3,160. The loan, which is collateralized by a mortgage
and a letter of credit of $1,750, is guaranteed by VGR Holding and Vector.
During December 2001, Vector Tobacco executed a second promissory note
with the same lender for approximately $1,159 to finance building improvements.
The second promissory note is payable in 30 monthly installments of $39 plus
accrued interest, with an annual interest rate of LIBOR plus 5.12%.
VGR HOLDING. On May 14, 2001, VGR Holding issued at a discount $60,000
principal amount of 10% senior secured notes due March 31, 2006 in a private
placement. VGR Holding received net proceeds from the offering of approximately
$49,700 before fees and expenses of $3,200.
The notes are collateralized by substantially all of VGR Holding's
assets, including a pledge of VGR Holding's equity interests in its direct
subsidiaries, including Brooke Group Holding, Brooke (Overseas), Vector Tobacco
and New Valley Holdings, Inc., as well as a pledge of the shares of Liggett and
all of the New Valley securities held by VGR Holding and New Valley Holdings.
The purchase agreement for the notes contains covenants, which among other
things, limit the ability of VGR Holding to make distributions to Vector to 50%
of VGR Holding's net income, unless VGR Holding holds $50,000 in cash after
giving effect to the payment of the distribution, limit additional indebtedness
of VGR Holding, Liggett and Vector Tobacco to 250% of EBITDA (as defined in the
purchase agreement) for the trailing 12 months, restrict transactions with
affiliates subject to exceptions which include payments to us not to exceed
$9,500 per year for permitted operating expenses, and limit the ability of VGR
Holding to merge, consolidate or sell certain assets.
Prior to May 24, 2003, VGR Holding may redeem up to $21,000 of the
notes at a redemption price of 105% of the accreted value with proceeds from one
or more equity offerings. VGR Holding may redeem the notes, in whole or in part,
at a redemption price of 103% of accreted value in the year beginning May 14,
2003, 102% of accreted value in the year beginning May 14, 2004 and 100% of
accreted value after May 14, 2005. During the term of the notes, VGR Holding is
required to offer to repurchase all the notes at a purchase price of 101% of
accreted value, in the event of a change of control, and to offer to repurchase
notes, at the redemption prices, with the proceeds of material asset sales.
On April 1, 2002, a subsidiary of ours acquired the stock of The
Medallion Company, Inc., and related assets from Medallion's principal
stockholder. Medallion is a discount cigarette manufacturer headquartered in
Richmond, Virginia. The total purchase price consisted of $50,000 in cash
and $60,000 in notes, with the notes guaranteed by us and Liggett.
VECTOR. We believe that we will continue to meet our liquidity
requirements through 2002. 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 $14,500, dividends on
our shares (currently at an annual rate of approximately $53,500) and corporate
expenses. We anticipate funding our expenditures for current operations with
available cash resources, proceeds from public and/or private debt and
equity financing, management fees from subsidiaries and tax sharing and other
payments from Liggett or New Valley. 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.
47
In May 2001, we completed the sale of 1,721,311 shares of our common
stock to High River Limited Partnership, an investment entity owned by Carl C.
Icahn, for $50,000 at a price of $29.05 per share, the market price when
negotiations with Mr. Icahn were completed. During 2001, we also issued
approximately 2,975,000 shares of our common stock and on exercise of warrants
and options by other persons and entities. We received total proceeds of
approximately $67,185 from the sale to High River and the other issuances of
common stock on exercise of warrants and options.
In July 2001, we completed the sale of $172,500 (net proceeds of
approximately $166,400) of our 6.25% convertible subordinated notes due 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 $33.26 at March 28, 2002, 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, the holder of $40,000 principal amount of our
convertible notes converted the notes into 1,188,353 shares of our common stock.
In connection with the conversion we issued an additional 170,000 shares of our
common stock to the holder and paid the holder $1,086 of accrued interest.
We recognized interest expense of $6,445 on the transaction.
We intend to use the net proceeds of the offering of notes, together
with the proceeds from the placement of VGR Holding's senior secured notes and
the investment in our common stock by High River, for general corporate
purposes, including to fund the planned advertising and promotion of Vector
Tobacco's new OMNI and nicotine-free cigarette products and to pursue strategic
acquisitions by Liggett of smaller tobacco manufacturers.
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.
FOREIGN MARKET RISK
BrookeMil's operations are conducted in Russia. The Russian Federation
continues to experience economic difficulties following the financial crisis of
August 1998. Consequently, the country's currency continues to devalue, there is
continued volatility in the debt and equity markets, hyperinflation persists,
confidence in the banking sector has yet to be restored and there continues to
be a general lack of liquidity in the economy. In addition, laws and regulations
affecting businesses operating within the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond our control. BrookeMil's
Russian operations may be significantly affected by these factors for the
foreseeable future.
DOMESTIC MARKET RISK
The market risk management procedures of us and New Valley cover all
market risk sensitive financial instruments.
We held investment securities available for sale totaling $173,697 at
December 31, 2001. Adverse market conditions could have a significant effect on
the value of these investments.
48
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 investee entities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. We adopted
SFAS No. 133 on January 1, 2001, the effect of which did not have a material
impact on its balance sheet since we are not engaged in significant hedging
activities.
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives", EITF Issue No. 00-14 addresses the
recognition, measurement and statement of operations classification for certain
sales incentives and will be effective in the first quarter of 2002. As a
result, certain items previously included in operating, selling, general and
administrative expense in the consolidated statement of operations will be
recorded as a reduction of operating revenues. We have determined that the
impact of adoption or subsequent application of EITF Issue No. 00-14 will not
have a material effect on our consolidated financial position or results of
operations. Upon adoption, prior period amounts, which are not expected to be
significant, will be reclassified to conform to the new requirements.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF Issue No. 00-25 requires that certain expenses included
in operating, selling, administrative and general expenses be recorded as a
reduction of operating revenues and will be effective in the first quarter of
2002. As discussed above under "Critical Accounting Policies", adoption of EITF
Issue No. 00-25 is expected to result in a significant reduction of revenues and
a corresponding reduction in operating, selling, administrative and general
expenses.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative
goodwill to be written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001, and SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. We are
currently assessing the impact, if any, of the adoption of these statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. We are currently assessing the
impact, if any, on the adoption of this statement.
49
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the foregoing
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in our reports to stockholders, which reflect our
expectations or beliefs with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
and, in connection with the "safe-harbor" provisions of the Private Securities
Reform Act, we have identified under "Risk Factors" in Item 1 above important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
us.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Notes thereto, together with
the report thereon of PricewaterhouseCoopers LLP dated March 29, 2002, are set
forth beginning on page F-1 of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
50
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information is contained in our definitive Proxy Statement for our
2002 Annual Meeting of Stockholders, to be filed with the SEC not later than 120
days after the end of our fiscal year covered by this report pursuant to
Regulation 14A under the Securities Exchange Act of 1934, and incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
This information is contained in the Proxy Statement and incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is contained in the Proxy Statement and incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information is contained in the Proxy Statement and incorporated
herein by reference.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) INDEX TO 2001 CONSOLIDATED FINANCIAL STATEMENTS:
Our Consolidated Financial Statements and the Notes thereto, together
with the report thereon of PricewaterhouseCoopers LLP dated March 29, 2002,
appear beginning on page F-1 of this report. Financial statement schedules not
included in this report have been omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
Notes thereto.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts .....................Page F-47
(a)(3) EXHIBITS
(a) The following is a list of exhibits filed herewith as part of this Annual
Report on Form 10-K:
INDEX OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
-------- -----------
*3.1 Amended and Restated Certificate of Incorporation of Vector Group
Ltd. (formerly known as Brooke Group Ltd.) ("Vector") (incorporated
by reference to Exhibit 3.1 in Vector's Form 10-Q for the quarter
ended September 30, 1999).
*3.2 Certificate of Amendment to the Amended and Restated Certificate of
Incorporation of Vector (incorporated by reference to Exhibit 3.1 in
Vector's Form 8-K dated May 24, 2000).
*3.3 By-Laws of Vector (incorporated by reference to Exhibit 3.2 in
Vector's Form 10-Q for the quarter ended June 30, 2001).
*4.1 Loan and Security Agreement, dated as of March 8, 1994, between
Liggett Group Inc. ("Liggett") and Congress Financial Corporation
(incorporated by reference to Exhibit 10(xx) in Vector's Form 10-K
for the year ended December 31, 1993).
*4.2 Note Purchase Agreement, dated as of May 14, 2001, between VGR
Holding Inc (formerly known as BGLS Inc.)("Vector Holding") and TCW
Leveraged Income Trust, L.P., TCW Leveraged Income Trust II, L.P.,
TCW LINC II CBO Ltd., POWRs 1997-2, Captive II Finance Ltd. and
AIMCO CDO, Series 2000-A (the "Purchasers"), relating to the 10%
Senior Secured Notes due March 31, 2006 (the "Notes"), including the
form of Note (the "Note Purchase Agreement") (incorporated by
reference to Exhibit 10.1 in Vector's Form 8-K dated May 14, 2001).
52
EXHIBIT
NO. DESCRIPTION
-------- -----------
*4.3 First Amendment to Note Purchase Agreement, dated as of November 6,
2001, by and between VGR Holding and the Purchasers (incorporated by
reference to Exhibit 104 in Vector's Form 10-Q for the quarter ended
September 30, 2001).
*4.4 Collateral Agency Agreement, dated as of May 14, 2001, by and among
VGR Holding, Brooke Group Holding Inc., Vector, New Valley Holdings,
Inc., United States Trust Company of New York, as collateral agent
for the benefit of the holders of the Notes pursuant to the Note
Purchase Agreement (the "Collateral Agent"), and the Purchasers
(incorporated by reference to Exhibit 10.2 in Vector's Form 8-K
dated May 14, 2001).
*4.5 First Amendment to Collateral Agency Agreement, dated as of
September 4, 2001, by and among VGR Holding, Brooke Group Holding
Inc., Vector, New Valley Holdings, Inc. and The Bank of New York, as
collateral agent (incorporated by reference to Exhibit 10.3 in
Vector's Form 10-Q for the quarter ended September 30, 2001).
*4.6 Pledge and Security Agreement, dated as of May 14, 2001 between VGR
Holding and the Collateral Agent (incorporated by reference to
Exhibit 10.3 in Vector's Form 8-K dated May 14, 2001).
*4.7 Pledge and Security Agreement, dated as of May 24, 2001, between New
Valley Holdings, Inc. and the Collateral Agent (incorporated by
reference to Exhibit 10.4 in Vector's Form 8-K dated May 14, 2001).
*4.8 Pledge and Security Agreement, dated as of May 14, 2001, between
Brooke Group Holding Inc. and the Collateral Agent (incorporated by
reference to Exhibit 10.5 in Vector's Form 8-K dated May 14, 2001).
*4.9 Acknowledgment and Pledge Agreement, dated as of May 14, 2001,
between Vector and the Collateral Agent (incorporated by reference
to Exhibit 10.6 in Vector's Form 8-K dated May 14, 2001).
*4.10 Account Control Agreement, dated as of May 14, 2001, between Vector
Holding, Bank of America, N.A. and the Collateral Agent
(incorporated by reference to Exhibit 10.7 in Vector's Form 8-K
dated May 14, 2001).
*4.11 Indenture, dated as of July 5, 2001, between Vector and U.S. Bank
Trust National Association, as Trustee, relating to the 6.25%
Convertible Subordinated Notes due 2008 (the "Notes"), including the
form of Note (incorporated by reference to Exhibit 10.1 in Vector's
Form 8-K dated July 16, 2001).
*10.1 Corporate Services Agreement, dated as of June 29, 1990, between
Vector and Liggett (incorporated by reference to Exhibit 10.10 in
Liggett's Registration Statement on Form S-1, No. 33-47482).
*10.2 Corporate Services Agreement, dated June 29, 1990, between Vector
and Liggett (incorporated by reference to Exhibit 10.11 in Liggett's
Registration Statement on Form S-1, No. 33-47482).
53
EXHIBIT
NO. DESCRIPTION
-------- -----------
*10.3 Services Agreement, dated as of February 26, 1991, between Brooke
Management Inc. ("BMI") and Liggett (the "Liggett Services Agreement")
(incorporated by reference to Exhibit 10.5 in VGR Holding's
Registration Statement on Form S-1, No. 33-93576).
*10.4 First Amendment to Liggett Services Agreement, dated as of November 30,
1993, between Liggett and BMI (incorporated by reference to Exhibit
10.6 of VGR Holding's Registration Statement on Form S-1, No.
33-93576).
*10.5 Second Amendment to Liggett Services Agreement, dated as of October 1,
1995, between BMI, Vector and Liggett (incorporated by reference to
Exhibit 10(c) in Vector's Form 10-Q for the quarter ended September 30,
1995).
*10.6 Corporate Services Agreement, dated January 1, 1992, between VGR
Holding and Liggett (incorporated by reference to Exhibit 10.13 of
Liggett's Registration Statement on Form S-1, No. 33-47482).
*10.7 Employment Agreement, dated February 21, 1992, between Vector and
Bennett S. LeBow (incorporated by reference to Exhibit 10(xx) in
Vector's Form 10-K for the year ended December 31, 1991).
*10.8 Amendment to Employment Agreement, dated as of July 20, 1998, between
Vector and Bennett S. LeBow (incorporated by reference to Exhibit 10.8
in Vector's Form 10-K for the year ended December 31, 1998).
*10.9 Tax-Sharing Agreement, dated June 29, 1990, among Brooke Group Holding
Inc. ("Brooke Group Holding"), Liggett and certain other entities
(incorporated by reference to Exhibit 10.12 in Liggett's Registration
Statement on Form S-1, No. 33-47482).
*10.10 Tax Indemnity Agreement, dated as of October 6, 1993, among Brooke
Group Holding, Liggett and certain other entities (incorporated by
reference to Exhibit 10.2 in SkyBox International Inc.'s Form 10-Q for
the quarter ended September 30, 1993).
*10.11 Expense Sharing Agreement, dated as of January 18, 1995, between Vector
and New Valley Corporation ("New Valley") (incorporated by reference to
Exhibit 10(d) in Vector's Form 10-Q for the quarter ended September 30,
1995).
*10.12 Stock Option Agreement, dated January 25, 1995, between Vector and
Howard M. Lorber (incorporated by reference to Exhibit 10(g) in
Vector's Form 10-K for the year ended December 31, 1994).
54
EXHIBIT
NO. DESCRIPTION
-------- -----------
*10.13 Settlement Agreement, dated March 12, 1996, by and between Dianne
Castano and Ernest Perry, the putative representative plaintiffs in
Dianne Castano, et al. v. The American Tobacco Company, Inc. et al.,
Civil No. 94-1044, United States District Court for the Eastern
District of Louisiana, for themselves and on behalf of the plaintiff
settlement class, and Brooke Group Holding and Liggett, as supplemented
by the agreement dated March 14, 1996 (the "Settlement Agreement")
(incorporated by reference to Exhibit 13 in the Schedule 13D filed by,
among others, Vector with the SEC on March 11, 1996, as amended, with
respect to the common stock of RJR Nabisco Holdings Corp. (the
"Schedule 13D")).
*10.14 Addendum to Settlement Agreement (incorporated by reference to Exhibit
10.30 in Vector's Form 10-K/A No. 1 for the year ended December 31,
1996).
*10.15 Settlement Agreement, dated March 15, 1996, by and among the State of
West Virginia, State of Florida, State of Mississippi, Commonwealth of
Massachusetts, and State of Louisiana, Brooke Group Holding and Liggett
(incorporated by reference to Exhibit 15 in the Schedule 13D).
*10.16 Addendum to Initial States Settlement Agreement (incorporated by
reference to Exhibit 10.43 in Vector's Form 10-Q for the quarter ended
March 31, 1997).
*10.17 Settlement Agreement, dated March 20, 1997, by and between the named
and representative plaintiffs in Fletcher, et al. v. Brooke Group Ltd.,
et al., for themselves and on behalf of the plaintiff settlement class,
and Brooke Group Holding and Liggett (incorporated by reference to
Exhibit 10.41 in Vector's Form 10-K for the year ended December 31,
1996).
*10.18 Settlement Agreement, dated March 12, 1998, by and among the States
listed in Appendix A thereto, Brooke Group Holding and Liggett
(incorporated by reference to Exhibit 10.35 in Vector's Form 10-K for
the year ended December 31, 1997).
*10.19 Amended Settlement Agreement, dated July 2, 1998, by and between the
named representative plaintiffs in Fletcher, et al., v. Liggett Group
Inc., et al., for themselves and on behalf of the plaintiff settlement
class, and Brooke Group Holding and Liggett (incorporated by reference
to Exhibit 10.32 in Vector's Form 10-K for the year ended December 31,
1998).
*10.20 Master Settlement Agreement made by the Settling States and
Participating Manufacturers signatories thereto (incorporated by
reference to Exhibit 10.1 in Philip Morris Companies Inc.'s Form 8-K
dated November 25, 1998).
*10.21 General Liggett Replacement Agreement, dated as of November 23, 1998,
entered into by each of the Settling States under the Master Settlement
Agreement, and Brooke Group Holding and Liggett (incorporated by
reference to Exhibit 10.34 in Vector's Form 10-K for the year ended
December 31, 1998).
55
EXHIBIT
NO. DESCRIPTION
-------- -----------
*10.22 Class Settlement Agreement, dated January 14, 1999, by and between the
named representative plaintiffs in Iron Workers Union No. 17 Insurance
Fund, et al., v. Philip Morris Inc., et al., for themselves and on
behalf of the plaintiff settlement class, and Brooke Group Holding and
Liggett (incorporated by reference to Exhibit 10.35 in Vector's Form
10-K for the year ended December 31, 1998).
*10.23 Stipulation and Agreed Order regarding Stay of Execution Pending Review
and Related Matters, dated May 7, 2001, entered into by Philip Morris
Incorporated, Lorillard Tobacco Co., Liggett Group Inc. and Brooke
Group Holding Inc. and the class counsel in Engel, et.al., v. R.J.
Reynolds Tobacco Co., et. al. (incorporated by reference to Exhibit
99.2 in Philip Morris Companies Inc.'s Form 8-K dated May 7, 2001,
Commission File No. 1-8940).
*10.24 Amended and Restated Stock Option Agreement, dated as of October 12,
1998, by and between Vector and Kasowitz, Benson, Torres & Friedman
LLP, Marc E. Kasowitz and Daniel R. Benson (incorporated by reference
to Exhibit 10.4 in Vector's Form 10-Q for the quarter ended September
30, 1998).
*10.25 Limited Liability Company Agreement, dated as of June 18, 1998, by and
among Western Realty Repin LLC, Apollo Real Estate Investment Fund III,
L.P. and New Valley (incorporated by reference to Exhibit 10.3 in New
Valley's Form 10-Q for the quarter ended June 30, 1998).
*10.26 Participating Loan Agreement, dated as of June 18, 1998, by and between
Western Realty Repin LLC and BrookeMil (incorporated by reference to
Exhibit 10.4 in New Valley's Form 10-Q for the quarter ended June 30,
1998).
*10.27 Stock Option Agreement, dated December 16, 1996, between Vector and
Howard M. Lorber (incorporated by reference to Exhibit 10.34 in
Vector's Form 10-K for the year ended December 31,1996).
*10.28 Stock Option Agreement, dated January 1, 1997, between Vector and
Richard J. Lampen (incorporated by reference to Exhibit 10.35 in
Vector's Form 10-K for the year ended December 31, 1996).
*10.29 Stock Option Agreement, dated January 1, 1997, between Vector and Marc
N. Bell (incorporated by reference to Exhibit 4.3 in the Vector's
Registration Statement on Form S-8, No. 333-24217).
*10.30 Stock Option Agreement, dated January 1, 1998, between Vector and
Joselynn D. Van Siclen (incorporated by reference to Exhibit 10.43 in
Vector's Form 10-K for the year ended December 31, 1997).
*10.31 Consulting Agreement, dated as of May 1, 1998, between Vector and J.
Sauter Enterprises, Inc. (incorporated by reference to Exhibit 4.1 in
Vector's Registration Statement on Form S-8, No. 333-59615).
*10.32 Vector Group Ltd. 1998 Long-Term Incentive Plan (incorporated by
reference to the Appendix to Vector's Proxy Statement dated September
15, 1998).
56
EXHIBIT
NO. DESCRIPTION
-------- -----------
*10.33 Stock Option Agreement, dated July 20, 1998, between Vector and Bennett
S. LeBow (incorporated by reference to Exhibit 6 in the Amendment No. 5
to the Schedule 13D filed by Bennett S. LeBow on October 16, 1998 with
respect to the common stock of Vector).
*10.34 Stock Option Agreement, dated July 20, 1998, between Vector and Howard
M. Lorber (incorporated by reference to Exhibit 10.3 in Vector's Form
10-Q for the quarter ended September 30, 1998).
*10.35 Letter Agreement, dated November 20, 1998, by and among Philip Morris
Incorporated ("PM"), Brooke Group Holding, Liggett & Myers Inc. ("L&M")
and Liggett (incorporated by reference to Exhibit 10.1 in Vector's
Report on Form 8-K dated November 25, 1998).
*10.36 Amended and Restated Formation and Limited Liability Company Agreement
of Trademarks LLC, dated as of May 24, 1999, among Brooke Group
Holding, L&M, Eve Holdings Inc. ("Eve"), Liggett and PM, including the
form of Trademark License Agreement (incorporated by reference to
Exhibit 10.4 in Vector's Form 10-Q for the quarter ended June 30,
1999).
*10.37 Class A Option Agreement, dated as of January 12, 1999, among Brooke
Group Holding, L&M, Eve, Liggett and PM (incorporated by reference to
Exhibit 10.61 in Vector's Form 10-K for the year ended December 31,
1998).
*10.38 Class B Option Agreement, dated as of January 12, 1999, among Brooke
Group Holding, L&M, Eve, Liggett and PM (incorporated by reference to
Exhibit 10.62 in Vector's Form 10-K for the year ended December 31,
1998).
*10.39 Pledge Agreement dated as of May 24, 1999 from Eve, as grantor, in
favor of Citibank, N.A., as agent (incorporated by reference to Exhibit
10.5 in Vector's Form 10-Q for the quarter ended June 30, 1999).
*10.40 Guaranty dated as of June 10, 1999 from Eve, as guarantor, in favor of
Citibank, N.A., as agent (incorporated by reference to Exhibit 10.6 in
Vector's Form 10-Q for the quarter ended June 30, 1999).
*10.41 Employment Agreement dated as of June 1, 1995, as amended, effective as
of January 1, 1996, between New Valley and Bennett S. LeBow
(incorporated by reference to Exhibit 10(b)(i) in New Valley's Form
10-K for the year ended December 31, 1995).
*10.42 Employment Agreement ("Lorber Employment Agreement") dated as June 1,
1995, as amended, effective as of January 1, 1996, between New Valley
and Howard M. Lorber (incorporated by reference to Exhibit 10(b)(ii) in
New Valley's Form 10-K for the year ended December 31, 1995).
*10.43 Amendment dated January 1, 1998 to Lorber Employment Agreement
(incorporated by reference to Exhibit 10(b)(iii) in New Valley's Form
10-K for the year ended December 31, 1997).
57
EXHIBIT
NO. DESCRIPTION
-------- -----------
*10.44 Employment Agreement dated September 22, 1995, between New Valley and
Richard J. Lampen (incorporated by reference to Exhibit 10(a) in New
Valley's Form 10-Q for the quarter ended September 30, 1995).
*10.45 Employment Agreement dated April 15, 1994, between Vector and Marc N.
Bell (incorporated by reference to Exhibit 10.67 in Vector's Form 10-K
for the year ended December 31, 1998).
*10.46 Employment Agreement dated as of August 1, 1999, between Vector and
Joselynn D. Van Siclen (incorporated by reference to Exhibit 10.8 in
Vector's Form 10-Q for the quarter ended June 30, 1999).
*10.47 Vector Group Ltd. 1999 Long-Term Incentive Plan (incorporated by
reference to Exhibit 10.58 in Vector's Form 10-K for the year ended
December 31, 1999).
*10.48 Stock Option Agreement, dated November 4, 1999, between Vector and
Bennett S. LeBow (incorporated by reference to Exhibit 10.59 in
Vector's Form 10-K for the year ended December 31, 1999).
*10.49 Stock Option Agreement, dated November 4, 1999, between Vector and
Richard J. Lampen (incorporated by reference to Exhibit 10.60 in
Vector's Form 10-K for the year ended December 31, 1999).
*10.50 Stock Option Agreement, dated November 4, 1999, between Vector and Marc
N. Bell (incorporated by reference to Exhibit 10.61 in Vector's Form
10-K for the year ended December 31, 1999).
*10.51 Stock Option Agreement, dated November 4, 1999, between Vector and
Joselynn D. Van Siclen (incorporated by reference to Exhibit 10.62 in
Vector's Form 10-K for the year ended December 31, 1999).
*10.52 Stock Option Agreement, dated November 4, 1999, between Vector and
Howard M. Lorber (incorporated by reference to Exhibit 10.63 in
Vector's Form 10-K for the year ended December 31, 1999).
*10.53 Stock Option Agreement, dated November 24, 1999, between Vector and
Ronald S. Fulford (incorporated by reference to Exhibit 10.64 in
Vector's Form 10-K for the year ended December 31, 1999).
*10.54 Purchase and Sale Agreement, dated as of June 14, 2000, between
Gallaher Overseas (Holdings) Ltd. and Brooke (Overseas) (incorporated
by reference to Exhibit 10.1 in Vector's Form 8-K dated June 14, 2000).
*10.55 Guaranty, dated as of June 14, 2000, by Vector in favor of Gallaher
Overseas (Holdings) Ltd. (incorporated by reference to Exhibit 10.2 in
Vector's Form 8-K dated June 14, 2000).
*10.56 Amendment to Purchase and Sale Agreement, dated as of August 4, 2000,
between Gallaher Overseas (Holdings) Ltd. and Brooke (Overseas)
(incorporated by reference to Exhibit 10.3 in Vector's Form 8-K dated
August 4, 2000).
58
EXHIBIT
NO. DESCRIPTION
-------- -----------
*10.57 Letter Agreement, dated September 1, 2000, between Ronald J. Bernstein
and Liggett (incorporated by reference to Exhibit 10.62 in Vector's
Form 10-K for the year ended December 31, 2000).
*10.58 Stock Option Agreement, dated October 26, 2000, between Vector and
Ronald J. Bernstein(incorporated by reference to Exhibit 10.63 in
Vector's Form 10-K for the year ended December 31, 2000).
*10.59 Stock Option Agreement, dated January 22, 2001, between Vector and
Bennett S. LeBow (incorporated by reference to Exhibit 10.1 in Vector's
Form 10-Q for the quarter ended March 31, 2001).
*10.60 Stock Option Agreement, dated January 22, 2001, between Vector and
Howard M. Lorber (incorporated by reference to Exhibit 10.2 in Vector's
Form 10-Q for the quarter ended March 31, 2001).
*10.61 Employment Agreement, dated as of January 17, 2001, between Vector and
Howard M. Lorber (incorporated by reference to Exhibit 10.3 in Vector's
Form 10-Q for the quarter ended March 31, 2001).
*10.62 Stock Purchase Agreement, dated May 16, 2001, between High River
Limited Partnership and Vector Group Ltd. (incorporated by reference to
Exhibit 10.8 in Vector's Form 8-K dated May 14, 2001).
*10.63 Registration Rights Agreement, dated as of July 5, 2001, by and between
Vector Group Ltd. and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 10.2 in Vector's Form 8-K dated July 16, 2001).
*10.64 Purchase and Sale Agreement, dated as of February 15, 2002, between VGR
Acquisition Inc., The Medallion Company, Inc. and Gary L. Hall
(incorporated by reference to Exhibit 10.1 in Vector's Form 8-K dated
February 15, 2002).
*10.65 Form of 9% Promissory Note of VGR Acquisition Inc. due 2004
(incorporated by reference to Exhibit 10.2 in Vector's Form 8-K dated
February 15, 2002).
*10.66 Form of 6 1/2% Promissory Note of VGR Acquisition Inc. due 2007
(incorporated by reference to Exhibit 10.3 in Vector's Form 8-K dated
February 15, 2002).
*10.67 Form of Asset Purchase Agreement between VGR Acquisition Inc. and Gary
L. Hall (incorporated by reference to Exhibit 10.4 in Vector's Form 8-K
dated February 15, 2002).
21 Subsidiaries of Vector.
59
EXHIBIT
NO. DESCRIPTION
-------- -----------
23 Consent of PricewaterhouseCoopers LLP relating to Vector's Registration
Statements on Form S-8 (No. 333-24217, No. 333-50189, No. 333-59615,
No. 333-59210 and No. 333-71596) and Registration Statements on Form
S-3 (No. 333-46055, No. 33-38869, No. 33-63119, No. 333-45377, No.
333-56873, No. 333-62156, No. 333-69294 and No. 333-82212).
99.1 Material Legal Proceedings.
-------------------------
* Incorporated by reference
Each management contract or compensatory plan or arrangement required
to be filed as an exhibit to this report pursuant to Item 14(c) is listed in
exhibit nos. 10.7, 10.8, 10.12, 10.27 through 10.34, 10.41 through 10.53, 10.57
through 10.61.
(B) REPORTS ON FORM 8-K:
We filed the following Report on Form 8-K during the fourth quarter of
2001:
FINANCIAL
DATE ITEMS STATEMENTS
---- ----- ----------
November 15, 2001 5, 7 None
60
SIGNATURES
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.
VECTOR GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
---------------------------------------------
Joselynn D. Van Siclen
Vice President, Chief Financial Officer and
Treasurer
Date: April 1, 2002
61
POWER OF ATTORNEY
The undersigned directors and officers of Vector Group Ltd. hereby
constitute and appoint Richard J. Lampen, Joselynn D. Van Siclen and Marc N.
Bell, and each of them, with full power to act without the other and with full
power of substitution and resubstitutions, our true and lawful attorneys-in-fact
with full power to execute in our name and behalf in the capacities indicated
below, this Annual Report on Form 10-K and any and all amendments thereto and to
file the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, and hereby ratify and
confirm all that such attorneys-in-fact, or any of them, or their substitutes
shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on April 1, 2002.
SIGNATURE TITLE
--------- -----
/s/ Bennett S. LeBow
---------------------------------
Bennett S. LeBow Chairman of the Board
(Principal Executive Officer)
/s/ Joselynn D. Van Siclen
---------------------------------
Joselynn D. Van Siclen Vice President and Chief
Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Robert J. Eide
---------------------------------
Robert J. Eide Director
/s/ Howard M. Lorber
---------------------------------
Howard M. Lorber Director
/s/ Jeffrey S. Podell
---------------------------------
Jeffrey S. Podell Director
/s/ Jean E. Sharpe
---------------------------------
Jean E. Sharpe Director
62
VECTOR GROUP LTD.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
ITEMS 8, 14(a)(1) AND (2), AND 14(d)
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Financial Statements and Schedule of the Registrant and its
subsidiaries required to be included in Items 8, 14(a)(1) and (2), and 14(d)
are listed below:
PAGE
----
FINANCIAL STATEMENTS:
VECTOR GROUP LTD. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants................................... F-2
Vector Group Ltd. Consolidated Balance Sheets as of December 31, 2001 and 2000....... F-3
Vector Group Ltd. Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999................................................. F-4
Vector Group Ltd. Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999........................................... F-5
Vector Group Ltd. Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999................................................. F-6
Notes to Consolidated Financial Statements........................................... F-8
FINANCIAL STATEMENT SCHEDULE:
Schedule II -- Valuation and Qualifying Accounts..................................... F-47
Financial Statement Schedules not listed above have been omitted because
they are not applicable or the required information is contained in
our consolidated financial statements or accompanying notes.
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Vector Group Ltd.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Vector Group Ltd. and its subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
March 29, 2002
F-2
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31, December 31,
2001 2000
----------- ------------
ASSETS:
Current assets:
Cash and cash equivalents .............................................. $ 217,761 $ 157,513
Investment securities available for sale ............................... 173,697 29,337
Accounts receivable - trade ............................................ 34,380 9,748
Other receivables ...................................................... 1,234 1,669
Receivables from clearing brokers ...................................... -- 10,126
Trading securities owned ............................................... -- 18,348
Inventories ............................................................ 53,194 29,752
Restricted assets ...................................................... 20,054 4,489
Deferred income taxes .................................................. 6,294 3,304
Other current assets ................................................... 9,113 5,656
--------- ---------
Total current assets ................................................. 515,727 269,942
Property, plant and equipment, net ....................................... 102,185 48,539
Investment in real estate, net ........................................... -- 84,145
Long-term investments, net ............................................... 10,044 4,654
Restricted assets ........................................................ 1,881 3,060
Deferred income taxes .................................................... 9,778 7,094
Other assets ............................................................. 49,288 8,414
--------- ---------
Total assets ......................................................... $ 688,903 $ 425,848
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of notes payable and long-term debt .................... $ 4,808 $ 17,850
Margin loans payable ................................................... -- 4,675
Accounts payable ....................................................... 16,192 9,547
Cash overdraft ......................................................... -- 501
Securities sold, not yet purchased ..................................... -- 3,570
Accrued promotional expenses ........................................... 20,634 19,683
Accrued taxes payable .................................................. 33,992 32,133
Settlement accruals .................................................... 29,299 --
Deferred income taxes .................................................. 759 2,587
Accrued interest ....................................................... 6,799 --
Prepetition claims and restructuring accruals .......................... 2,700 10,229
Other accrued liabilities .............................................. 26,362 38,000
--------- ---------
Total current liabilities ............................................ 141,545 138,775
Notes payable, long-term debt and other obligations, less current portion 214,273 39,890
Noncurrent employee benefits ............................................. 14,749 7,313
Deferred income taxes .................................................... 132,528 129,887
Other liabilities ........................................................ 16,294 25,500
Minority interests ....................................................... 56,156 72,034
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 37,564,283 and outstanding 33,171,847 ................. 3,317 2,567
Additional paid-in capital ............................................. 309,849 184,807
Deficit ................................................................ (182,645) (148,789)
Accumulated other comprehensive income ................................. 1,170 1,337
Less: 4,392,436 shares of common stock in treasury, at cost ........... (18,333) (27,473)
--------- ---------
Total stockholders' equity ......................................... 113,358 12,449
--------- ---------
Total liabilities and stockholders' equity ......................... $ 688,903 $ 425,848
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
F-3
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
----------------------------------------------
2001 2000 1999
------------ ------------ ------------
Revenues:
Tobacco* ......................................................... $ 734,252 $ 646,322 $ 522,807
Real estate leasing .............................................. 9,966 3,198 3,386
------------ ------------ ------------
Total revenues ................................................. 744,218 649,520 526,193
Expenses:
Cost of goods sold* .............................................. 250,787 256,713 189,865
Operating, selling, administrative and general expenses .......... 452,183 353,640 266,867
Settlement charges ............................................... 9,905 (934) (1,051)
------------ ------------ ------------
Operating income ............................................... 31,343 40,101 70,512
Other income (expenses):
Interest and dividend income ..................................... 11,799 6,301 2,840
Interest expense ................................................. (21,387) (30,610) (54,378)
Gain on legal settlement ......................................... 17,620 -- --
Income (loss) in joint venture ................................... -- 52,589 (12,082)
(Loss) gain on sale of investments, net .......................... (1,799) 7,271 741
(Loss) gain on sale of assets .................................... (8,708) 192,923 12,172
Gain on brand transaction ........................................ -- -- 294,078
Equity in loss of affiliate ...................................... -- (5,597) (11,315)
Recognition of deferred gain on sale of assets ................... -- -- 7,050
Other, net ....................................................... (58) 2,071 1,966
------------ ------------ ------------
Income from continuing operations before provision for income taxes
and minority interests ......................................... 28,810 265,049 311,584
Provision for income taxes ....................................... 15,017 81,783 82,263
Minority interests ............................................... 7,407 (15,512) 6,442
------------ ------------ ------------
Income from continuing operations .................................... 21,200 167,754 235,763
------------ ------------ ------------
Discontinued operations:
(Loss) income from discontinued operations .......................... (2,117) 1,816 321
Gain on disposal of discontinued operations, net of minority interests 1,580 6,469 1,249
------------ ------------ ------------
(Loss) income from discontinued operations ........................... (537) 8,285 1,570
------------ ------------ ------------
Loss from extraordinary items ........................................ -- (1,821) (1,660)
------------ ------------ ------------
Net income ........................................................... $ 20,663 $ 174,218 $ 235,673
============ ============ ============
Per basic common share:
Income from continuing operations ................................ $ 0.72 $ 6.79 $ 9.72
============ ============ ============
(Loss) income from discontinued operations ....................... $ (0.02) $ 0.34 $ 0.07
============ ============ ============
Loss from extraordinary items .................................... -- $ (0.07) $ (0.07)
============ ============
Net income applicable to common shares ........................... $ 0.70 $ 7.06 $ 9.72
============ ============ ============
Basic weighted average common shares outstanding ..................... 29,516,071 24,690,361 24,243,734
============ ============ ============
Per diluted common share:
Income from continuing operations ................................ $ 0.60 $ 5.77 $ 7.98
============ ============ ============
(Loss) income from discontinued operations ....................... $ (0.02) $ 0.28 $ 0.05
============ ============ ============
Loss from extraordinary items .................................... -- $ (0.06) $ (0.06)
============ ============
Net income applicable to common shares ........................... $ 0.58 $ 5.99 $ 7.97
============ ============ ============
Diluted weighted average common shares outstanding ................... 35,534,916 29,086,005 29,559,427
============ ============ ============
---------------
* Revenues and Cost of goods sold include excise taxes of $151,174, $116,166
and $66,698 for ended the years ended December 31, 2001, 2000 and 1999,
respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
F-4
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Accumulated
Common Stock Additional Other
-------------------- Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Income Total
------ ------ ---------- ------- -------- ------------- -----
Balance, December 31, 1998 ................. 20,943,730 $ 2,094 $ 118,612 $(512,182) $(27,473) $ 24,774 $(394,175)
Net income ................................. -- -- -- 235,673 -- -- 235,673
Unrealized gain on investment securities . -- -- -- -- -- 565 565
Other New Valley capital transactions .... -- -- -- -- -- 342 342
Effect of New Valley recapitalization on
other comprehensive loss ............... -- -- -- -- -- (24,647) (24,647)
Pension-related minimum liability
adjustment ............................. -- -- -- -- -- 345 345
---------
Total other comprehensive loss ....... -- -- -- -- -- -- (23,395)
---------
Total comprehensive income ................. -- -- -- -- -- -- 212,278
---------
Effect of stock dividend ................... 1,046,052 105 25,541 (25,646) -- -- --
Recapitalization of New Valley ............. -- -- 58,390 -- -- -- 58,390
New Valley purchase of preferred stock
in subsidiary .......................... -- -- 850 -- -- -- 850
Distributions on common stock .............. -- -- (13,945) -- -- -- (13,945)
Amortization of deferred compensation ...... -- -- 3,504 -- -- -- 3,504
-------- --------- --------- -------- -------- ---------
Balance, December 31, 1999 ................. 21,989,782 2,199 192,952 (302,155) (27,473) 1,379 (133,098)
Net income ................................. -- -- -- 174,218 -- -- 174,218
Unrealized gain on investment securities . -- -- -- -- -- (63) (63)
Pension-related minimum liability
adjustment ........................... -- -- -- -- -- 21 21
---------
Total other comprehensive income ..... -- -- -- -- -- -- (42)
---------
Total comprehensive income ................. -- -- -- -- -- -- 174,176
---------
Exercise of options and warrants ........... 2,455,206 246 (156) -- -- -- 90
Effect of stock dividend ................... 1,222,030 122 20,730 (20,852) -- -- --
Effect of New Valley share repurchase ...... -- -- 413 -- -- -- 413
Distributions on common stock .............. -- -- (30,759) -- -- -- (30,759)
Amortization of deferred compensation ...... -- -- 1,627 -- -- -- 1,627
---------- -------- --------- --------- -------- -------- ---------
Balance, December 31, 2000 ................. 25,667,018 2,567 184,807 (148,789) (27,473) 1,337 12,449
Net income ................................. -- -- -- 20,663 -- -- 20,663
Unrealized gain on investment securities . -- -- -- -- -- (60) (60)
Effect of New Valley capital transactions -- -- -- -- -- (107) (107)
---------
Total other comprehensive income ..... -- -- -- -- -- -- (167)
---------
Total comprehensive income ................. -- -- -- -- -- -- 20,496
---------
Distributions on common stock .............. -- -- (46,751) -- -- -- (46,751)
Effect of New Valley acquisition of LTS .... -- -- 8,556 -- -- -- 8,556
Issuance of stock .......................... 1,669,344 167 41,974 -- 7,859 -- 50,000
Exercise of options and warrants ........... 2,975,025 297 15,607 -- 1,281 -- 17,185
Effect of stock dividend ................... 1,502,107 150 54,369 (54,519) -- -- --
Conversion of debt ......................... 1,358,353 136 45,018 -- -- -- 45,154
Tax benefit of options exercised ........... -- -- 11,133 -- -- -- 11,133
Effect of New Valley share repurchase ...... -- -- 176 -- -- -- 176
Amortization of deferred compensation ...... -- -- 5,907 -- -- -- 5,907
LTS distribution ........................... -- -- (10,947) -- -- -- (10,947)
---------- -------- --------- --------- -------- -------- ---------
Balance, December 31, 2001 ................. 33,171,847 $ 3,317 $ 309,849 $(182,645) $(18,333) $ 1,170 $113,358
========== ======== ========= ========= ======== ======== =========
The accompanying notes are an integral part
of the consolidated financial statements.
F-5
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income ......................................................... $ 20,663 $ 174,218 $ 235,673
--------- --------- ---------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .................................. 9,973 11,523 $ 7,162
Non-cash stock-based expense ................................... 5,878 2,583 5,360
Impact of discontinued operations .............................. 537 (8,285) (3,520)
Minority interests ............................................. (7,407) 15,512 (4,492)
Gain on brand transaction ...................................... -- -- (294,078)
Gain on sale of assets ......................................... (1,334) (192,064) (8,540)
Loss on sale of real estate .................................... 9,866 (5,858) --
Loss on debt conversion ........................................ 6,445 -- --
Deferred income taxes .......................................... (16,731) 1,526 (12,948)
Deferred finance charge ........................................ 1,929 -- --
Currency translation gain ...................................... -- (2,085) (1,352)
Gain on sale of securities ..................................... 820 -- --
Loss on retirement of debt ..................................... -- 1,821 1,660
Non-cash interest expense ...................................... 1,027 4,940 21,612
(Gain) loss in joint venture ................................... -- (52,589) 12,081
Equity in loss of affiliates ................................... -- -- 8,981
Income taxes ................................................... (9,596) -- --
Other .......................................................... (430) -- 476
Changes in assets and liabilities (net of effect of acquisitions and
dispositions):
Receivables .................................................... (23,613) (31) 1,590
Inventories .................................................... (23,730) (9,011) (9,589)
Accounts payable and accrued liabilities ....................... 54,075 36,907 (11,905)
Other assets and liabilities, net .............................. (8,652) 16,043 117,125
--------- --------- ---------
Net cash provided by (used in) operating activities .................. 19,720 (4,850) 65,296
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ................... 7,912 323,266 4,622
Proceeds from brand transaction .................................... -- -- 145,000
Sale or maturity of investment securities .......................... 16,418 58,811 5,421
Purchase of investment securities .................................. (162,959) (32,324) (8,585)
Sale or liquidation of long-term investments ....................... 1,133 -- 5,810
Purchase of long-term investments .................................. (5,711) (3,310) (7,000)
Investment in joint venture ........................................ -- (2,573) --
Decrease in restricted assets ...................................... 1,231 (1,565) --
Proceeds from sale of real estate, net ............................. 42,160 -- 45,288
Sale of preferred stock in subsidiary, net ......................... -- -- 3,628
Payment of prepetition claims ...................................... (3,183) (376) (85)
New Valley purchase of common shares ............................... (274) (1,190) (194)
Cash received in LTS acquisition, net............................... 4,065 -- --
Capital expenditures ............................................... (77,100) (26,840) (64,028)
--------- --------- ---------
Net cash (used in) provided by investing activities .................. (176,308) 313,899 129,877
--------- --------- ---------
The accompanying notes are an integral part
of the consolidated financial statements.
F-6
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31,
-----------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from financing activities:
Proceeds from debt ....................................... 264,441 700 29,914
Repayments of debt ....................................... (32,777) (107,868) (215,193)
Deferred financing charges ............................... (9,642) -- 100
Borrowings under revolver ................................ 508,121 433,075 375,394
Repayments on revolver ................................... (527,495) (405,602) (358,729)
(Decrease) increase in margin loan payable ............... (4,675) 3,692 (5,017)
(Decrease) increase in cash overdraft .................... (501) 501 (610)
Distributions on common stock ............................ (46,751) (30,759) (13,945)
Proceeds (repayments) from participating loan ............ 2,981 (67,027) 7,102
Issuance of common stock ................................. 50,000 -- --
Proceeds from exercise of options and warrants ........... 17,185 -- --
Cash impact of LTS distribution........................... (8,136) -- --
Other, net ............................................... 79 -- (297)
--------- --------- ---------
Net cash provided by (used in) financing activities ........ 212,830 (173,288) (181,281)
--------- --------- ---------
Net cash provided by discontinued operations................ 4,006 1,739 --
Effect of exchange rate changes on cash and cash equivalents -- (110) (1,165)
--------- --------- ---------
Net increase in cash and cash equivalents .................. 60,248 137,390 12,727
Cash and cash equivalents, beginning of year ............... 157,513 20,123 7,396
--------- --------- ---------
Cash and cash equivalents, end of year ..................... $ 217,761 $ 157,513 $ 20,123
========= ========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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 Inc. ("VGR
Holding"), Liggett Group Inc. ("Liggett"), Brooke (Overseas) Ltd.
("Brooke (Overseas)"), Vector Tobacco Inc. ("Vector Tobacco"),
through July 31, 2000 Liggett-Ducat Ltd. ("Liggett-Ducat"), and other
less significant subsidiaries. As of June 1, 1999, New Valley
Corporation ("New Valley") became a consolidated majority-owned
subsidiary of the Company as a result of New Valley's
recapitalization. The Company owned 56.3% of New Valley's common
shares at December 31, 2001. All significant intercompany balances
and transactions have been eliminated. Certain amounts in prior
years' consolidated financial statements have been reclassified to
conform to the current year's presentation.
Vector Tobacco is engaged in the development and marketing of new,
reduced carcinogen and nicotine-free cigarette products. Liggett is
engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. Prior to its sale in August 2000,
Liggett-Ducat was engaged in the manufacture and sale of cigarettes
in Russia. New Valley is currently engaged in the real estate
business through its New Valley Realty division and is seeking to
acquire additional operating companies.
As discussed more thoroughly in Note 19, New Valley's broker-dealer
operations are presented as discontinued operations.
SUBSEQUENT EVENT: On February 15, 2002, a subsidiary of the Company
entered into amended agreements to acquire the stock of The Medallion
Company, Inc., and related assets from Medallion's principal
stockholder. Medallion is a discount cigarette manufacturer
headquartered in Richmond, Virginia. The total purchase price will
consist of $50,000 in cash and $60,000 in notes, with the notes to be
guaranteed by the Company and Liggett. The transaction is expected to
close early in the second quarter of 2002 subject to customary
closing conditions.
(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 deferred tax assets, allowance for doubtful
accounts, promotional accruals, sales returns and allowances,
actuarial assumptions of pension plans and litigation and defense
costs. Actual results could differ from those estimates.
(c) CASH AND CASH EQUIVALENTS:
For purposes of the statements of cash flows, cash includes cash on
hand, cash on deposit in banks and cash equivalents, comprised of
short-term investments which have an original maturity of 90 days or
less. Interest on short-term investments is recognized when earned.
F-8
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(d) FINANCIAL INSTRUMENTS:
The carrying value of cash and cash equivalents, restricted assets
and short-term loans are reasonable estimates of their fair value.
The carrying amounts of short-term debt reported in the Consolidated
Balance Sheets are a reasonable estimate of fair value. Long-term
debt for the year ended December 31, 2001 was estimated based on
current market quotations, where available.
The methods and assumptions used by the Company's management in
estimating fair values for financial instruments presented herein are
not necessarily indicative of the amounts the Company could realize
in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the
estimated fair values.
(e) INVESTMENT SECURITIES:
The Company classifies investments in debt and marketable equity
securities as either trading, available for sale, or held to
maturity. Trading securities are carried at fair value, with
unrealized gains and losses included in income. Investments
classified as available for sale are carried at fair value, with net
unrealized gains and losses included as a separate component of
stockholders' equity. Debt securities classified as held to maturity
are carried at amortized cost. The cost of securities sold is
determined based on average cost.
(f) SIGNIFICANT CONCENTRATIONS OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and trade receivables. The Company places its temporary
cash in money market securities (investment grade or better) with
what management believes are high credit quality financial
institutions.
Liggett's customers are primarily candy and tobacco distributors, the
military and large grocery, drug and convenience store chains. One
customer accounted for approximately 27.9% of Liggett's net sales in
2001, 33.8% of Liggett's net sales in 2000 and 30.7% of Liggett's net
sales in 1999. Sales to this customer were primarily in the private
label discount segment. Concentrations of credit risk with respect to
trade receivables are generally limited due to the large number of
customers, located primarily throughout the United States, comprising
Liggett's customer base. Ongoing credit evaluations of customers'
financial condition are performed and, generally, no collateral is
required. Liggett maintains reserves for potential credit losses and
such losses, in the aggregate, have generally not exceeded
management's expectations.
(g) ACCOUNTS RECEIVABLE:
The allowance for doubtful accounts and cash discounts was $1,870 and
$1,073 at December 31, 2001 and 2000, respectively.
(h) INVENTORIES:
Tobacco inventories are stated at the 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.
F-9
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Although portions of leaf tobacco inventories may not be used or sold
within one year because of the time required for aging, they are
included in current assets, which is common practice in the industry.
It is not practicable to determine the amount that will not be used
or sold within one year.
(i) RESTRICTED ASSETS:
Restricted assets at December 31, 2001 consisted primarily of $16,856
held in escrow by the United States District Court of New Jersey for
New Valley in connection with the settlement of a lawsuit. (Refer to
Note 18.)
Restricted assets at December 31, 2000 consisted primarily of a bond
in the amount of $3,450 required by Florida law in order to stay
execution of the ENGLE judgment. (Refer to Note 15.)
(j) PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets,
which are 20 to 30 years for buildings and 3 to 15 years for
machinery and equipment.
Interest costs are capitalized in connection with the construction of
major facilities. Capitalized interest is recorded as part of the
asset to which it relates and is amortized over the asset's estimated
useful life. In 2001, 2000 and 1999, interest costs of $425, $0 and
$3,287, respectively, were capitalized.
Expenditures for repairs and maintenance are charged to expense as
incurred. The costs of major renewals and betterments are
capitalized. The cost and related accumulated depreciation of
property, plant and equipment are removed from the accounts upon
retirement or other disposition and any resulting gain or loss is
reflected in operations.
(k) INTANGIBLE ASSETS:
Intangible assets, consisting principally of trademarks, are
amortized using the straight-line method over 10-12 years.
Amortization expense for the years ended December 31, 2001, 2000 and
1999 was $19, $28 and $73, respectively. Management periodically
reviews the carrying value of such assets to determine whether asset
values are impaired.
(l) IMPAIRMENT OF LONG-LIVED ASSETS:
Impairment losses on long-lived assets are recognized when expected
future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and estimates of
future cash flows of the underlying business.
(m) SECURITIES SOLD, NOT YET PURCHASED:
Securities sold, not yet purchased represent obligations of the
Company to deliver a specified security at a contracted price and
thereby, create a liability to repurchase the security in the market
F-10
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
at prevailing prices. Accordingly, these transactions involve, to
varying degrees, elements of market risk, as the Company's ultimate
obligation to satisfy the sale of securities sold, not yet purchased
may exceed the amount recognized in the consolidated balance sheet.
(n) EMPLOYEE BENEFITS:
Liggett sponsors self-insured health and dental insurance plans for
all eligible employees. As a result, the expense recorded for such
benefits involves an estimate of unpaid claims as of December 31,
2001, 2000 and 1999 which are subject to significant fluctuations in
the near term.
(o) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS:
The cost of providing retiree health care and life insurance benefits
is actuarially determined and accrued over the service period of the
active employee group.
(p) STOCK OPTIONS:
The Company measures compensation expense for stock-based employee
compensation plans using the intrinsic value method and provides pro
forma disclosures of net income as if the fair value-based method had
been applied in measuring compensation expense.
(q) INCOME TAXES:
Deferred taxes reflect the impact of temporary differences between
the amounts of assets and liabilities recognized for financial
reporting purposes and the amounts recognized for tax purposes as
well as tax credit carryforwards and loss carryforwards. These
deferred taxes are measured by applying currently enacted tax rates.
A valuation allowance reduces deferred tax assets when it is deemed
more likely than not that some portion or all of the deferred tax
assets will not be realized.
(r) REVENUE RECOGNITION:
SALES: Revenues from sales are recognized upon the shipment of
finished goods to customers. The Company provides an allowance for
expected sales returns, net of related inventory cost recoveries.
Since the Company's primary line of business is tobacco, the
Company's 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.
REAL ESTATE LEASING REVENUES: The Company's real estate properties
are being leased to tenants under operating leases. Base rental
revenue is generally recognized on a straight-line basis over the
term of the lease. The lease agreements for certain properties
contain provisions which provide for reimbursement of real estate
taxes and operating expenses over base year amounts, and in certain
cases as fixed increases in rent. In addition, the lease agreements
for certain tenants provide additional rentals based upon revenues in
excess of base amounts, and such amounts are accrued as earned.
F-11
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(s) NEW ACCOUNTING PRONOUNCEMENTS:
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Vector
adopted SFAS No. 133 on January 1, 2001, the effect of which did not
have a material impact on its balance sheet since Vector is not
engaged in significant hedging activities.
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives". EITF Issue No. 00-14
addresses the recognition, measurement and statement of operations
classification for certain sales incentives and will be effective in
the first quarter of 2002. As a result, certain items previously
included in operating, selling, general and administrative expense in
the consolidated statement of operations will be recorded as a
reduction of operating revenues. The Company has determined that the
impact of adoption and subsequent application of EITF Issue No. 00-14
will not have a material effect on its consolidated financial
position or results of operations. Upon adoption, prior period
amounts, which are not expected to be significant, will be
reclassified to conform to the new requirements.
In April 2001, the EITF reached a consensus on Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products." EITF Issue No. 00-25 requires
that certain expenses included in operating, selling, administrative
and general expenses be recorded as a reduction of operating revenues
and will be effective in the first quarter of 2002. Adoption of EITF
Issue No. 00-25 is expected to result in a significant reduction of
reported revenues and a corresponding reduction in operating,
selling, administrative and general expenses.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets separately
from goodwill and requires unallocated negative goodwill to be
written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS
No. 141 is effective for all business combinations initiated after
June 30, 2001, and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing
the impact, if any, of the adoption of these statements.
In October 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", and requires (i) the
recognition and measurement of the impairment of long-lived assets to
be held and used and (ii) the measurement of long-lived assets to be
disposed of by sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing
the impact, if any, of the adoption of this statement.
F-12
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(t) ADVERTISING AND PROMOTIONAL COSTS:
Advertising and promotional costs are expensed as incurred.
Advertising and promotional expenses were $103,629, $95,584 and
$69,079 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(u) LEGAL COSTS:
The Company's policy is to accrue legal and other costs related to
contingencies as services are performed.
(v) EARNINGS PER SHARE:
Information concerning the Company's common stock has been adjusted
to give effect to the 5% stock dividends paid to Company stockholders
on September 30, 2001, September 28, 2000 and September 30, 1999. The
dividends were charged to retained earnings in the net amount of
$54,519 in 2001, $20,852 in 2000 and $25,646 in 1999 and were based
on the fair value of the Company's common stock. In connection with
each 5% dividend, the Company increased the number of warrants and
stock options by 5% and reduced the exercise prices accordingly. All
share amounts have been presented as if the stock dividends had
occurred on January 1, 1999.
Basic net income per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted net income per
share includes the dilutive effect of stock options, vested
restricted stock grants and warrants. Basic and diluted EPS were
calculated using the following for the years ended December 31, 2001,
2000 and 1999:
2001 2000 1999
---------- ---------- ----------
Weighted average shares for basic EPS . 29,516,071 24,690,361 24,243,734
Plus incremental shares related to:
stock options and warrants ........ 6,018,845 4,395,644 5,315,693
---------- ---------- ----------
Weighted average shares for diluted EPS 35,534,916 29,086,005 29,559,427
========== ========== ==========
(w) COMPREHENSIVE INCOME:
Other comprehensive income is a component of stockholders' equity and
includes such items as the Company's proportionate interest in New
Valley's capital transactions, unrealized gains and losses on
investment securities and minimum pension liability adjustments.
Total comprehensive income was $20,496 for the year ended December
31, 2001, $174,176 for the year ended December 31, 2000 and $212,278
for the year ended December 31, 1999.
F-13
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
2. SALE OF WESTERN TOBACCO INVESTMENTS
On August 4, 2000, Brooke (Overseas) completed the sale of all of the
membership interests of Western Tobacco Investments LLC ("Western Tobacco
Investments") to Gallaher Overseas (Holdings) Ltd. ("Gallaher Overseas").
Brooke (Overseas) held its 99.9% equity interest in Liggett-Ducat, one of
Russia's leading cigarette producers, through Western Tobacco Investments.
The purchase price for the sale consisted of $334,100 in cash and $64,400
in assumed debt and capital commitments. The proceeds generated from the
sale were divided among Brooke (Overseas) and Western Realty Development
LLC ("Western Realty Development"), a joint venture of New Valley and
Apollo Real Estate Investment Fund III, L.P. ("Apollo"), in accordance
with the terms of the participating loan. (Refer to Note 18.) Of the cash
proceeds from the transaction after estimated closing expenses, Brooke
(Overseas) received $197,098, New Valley received $57,208 and Apollo
received $68,338. The Company recorded a gain of $161,000 (including the
Company's share of New Valley's gain), net of income taxes and minority
interests, in connection with the sale in the third quarter of 2000.
3. PHILIP MORRIS BRAND TRANSACTION
In November 1998, the Company and Liggett granted Philip Morris
Incorporated options to purchase interests in Trademarks LLC which holds
three domestic cigarette brands, L&M, CHESTERFIELD and LARK, formerly held
by Liggett's subsidiary, Eve Holdings Inc.
Under the terms of the Philip Morris agreements, Eve contributed the three
brands to Trademarks, a newly-formed limited liability company, in
exchange for 100% of two classes of Trademarks' interests, the Class A
Voting Interest and the Class B Redeemable Nonvoting Interest. Philip
Morris acquired two options to purchase the interests from Eve. In
December 1998, Philip Morris paid Eve a total of $150,000 for the options,
$5,000 for the option for the Class A interest and $145,000 for the option
for the Class B interest.
The Class A option entitled Philip Morris to purchase the Class A interest
for $10,100. On March 19, 1999, Philip Morris exercised the Class A
option, and the closing occurred on May 24, 1999.
The Class B option entitles Philip Morris to purchase the Class B interest
for $139,900. The Class B option will be exercisable during the 90-day
period beginning on December 2, 2008, with Philip Morris being entitled to
extend the 90-day period for up to an additional six months under certain
circumstances. The Class B interest will also be redeemable by Trademarks
for $139,900 during the same period the Class B option may be exercised.
On May 24, 1999, Trademarks borrowed $134,900 from a lending institution.
The loan is guaranteed by Eve and collateralized by a pledge by Trademarks
of the three brands and Trademarks' interest in the trademark license
agreement (discussed below) and by a pledge by Eve of its Class B
interest. In connection with the closing of the Class A option, Trademarks
distributed the loan proceeds to Eve as the holder of the Class B
interest. The cash exercise price of the Class B option and Trademarks'
redemption price were reduced by the amount distributed to Eve. Upon
Philip Morris' exercise of the Class B option or Trademarks' exercise of
its redemption right, Philip Morris or Trademarks, as relevant, will be
required to obtain Eve's release from its guaranty. The Class B interest
will be entitled to a guaranteed payment of $500 each year with the Class
A interest allocated all remaining income or loss of Trademarks.
Trademarks has granted Philip Morris an exclusive license of the three
brands for an 11-year term expiring May 24, 2010 at an annual royalty
based on sales of cigarettes under the brands, subject to a minimum annual
royalty payment equal to the annual debt service obligation on the loan
plus $1,000.
F-14
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
If Philip Morris fails to exercise the Class B option, Eve will have an
option to put its Class B interest to Philip Morris, or Philip Morris'
designees, at a put price that is $5,000 less than the exercise price of
the Class B option (and includes Philip Morris' obtaining Eve's release
from its loan guarantee). The Eve put option is exercisable at any time
during the 90-day period beginning March 2, 2010.
If the Class B option, Trademarks' redemption right and the Eve put option
expire unexercised, the holder of the Class B interest will be entitled to
convert the Class B interest, at its election, into a Class A interest
with the same rights to share in future profits and losses, the same
voting power and the same claim to capital as the entire existing
outstanding Class A interest, i.e., a 50% interest in Trademarks.
Upon the closing of the exercise of the Class A option and the
distribution of the loan proceeds on May 24, 1999, Philip Morris obtained
control of Trademarks, and the Company recognized a pre-tax gain of
$294,078 in its consolidated financial statements to the extent of the
total cash proceeds received from the payment of the option fees, the
exercise of the Class A option and the distribution of the loan proceeds.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of stockholders'
equity, net of minority interests. The Company had unrealized losses on
sales of investment securities available for sale of $1,883 in 2001 and
gains of $2,271 in 2000.
The components of investment securities available for sale at December 31,
2001 and 2000 are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
---- ---- ---- -----
2001
Marketable equity securities $ 18,929 $1,933 $2,835 $ 18,027
Marketable debt securities . 152,885 430 522 152,793
Marketable warrants ........ -- 2,877 -- 2,877
-------- ------ ------ --------
Investment securities ...... $171,814 $5,240 $3,357 $173,697
2000
Marketable equity securities $ 24,016 $ 411 $4,096 $ 20,331
Marketable debt securities . 3,050 -- -- 3,050
Marketable warrants ........ -- 5,956 -- 5,956
-------- ------ ------ --------
Investment securities ...... $ 27,066 $6,367 $4,096 $ 29,337
======== ====== ====== ========
F-15
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
5. INVENTORIES
Inventories consist of:
December 31,
--------------------
2001 2000
-------- --------
Leaf tobacco ................. $ 26,364 $ 7,911
Other raw materials .......... 6,764 1,382
Work-in-process .............. 2,263 2,156
Finished goods ............... 15,317 18,924
Replacement parts and supplies 3,040 2,640
-------- --------
Inventories at current cost .. 53,748 33,013
LIFO adjustments ............. (554) (3,261)
-------- --------
$ 53,194 $ 29,752
======== ========
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 December 31, 2001, Liggett had leaf tobacco
purchase commitments of approximately $7,082 and Vector Tobacco had leaf
tobacco purchase commitments of approximately $8,300.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
December 31,
---------------------
2001 2000
--------- --------
Land and improvements ....... $ 2,252 $ 1,670
Buildings ................... 23,035 15,641
Machinery and equipment ..... 81,396 71,741
Leasehold improvements ...... 1,451 --
Construction-in-progress .... 27,464 --
--------- --------
135,598 89,052
Less accumulated depreciation (33,413) (40,513)
--------- --------
$ 102,185 $ 48,539
========= ========
Depreciation expense for the years ended December 31, 2001, 2000 and 1999
was $9,853, $11,479 and $7,069, respectively.
F-16
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
7. LONG-TERM INVESTMENTS
Long-term investments consisted of investments in the following:
December 31, 2001 December 31, 2000
------------------- --------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
Limited partnerships......... $10,044 $16,882 $4,654 $10,493
The principal business of the limited partnerships is investing in real
estate and investment securities. The estimated fair value of the limited
partnerships was provided by the partnerships based on the indicated
market values of the underlying assets or investment portfolio. The
Company is an investor in real estate partnerships where it is required to
make additional investments of up to an aggregate of $8,300 at December
31, 2001. The Company's 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.
The Company's estimate 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.
8. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
December 31, December 31,
2001 2000
------------ -------------
Vector:
6.25% Convertible Subordinated Notes due 2008 ............ $ 132,500 $ --
VGR Holding:
10% Senior Secured Notes due 2006, net of
unamortized discount of $9,242 ........................ 50,758 --
Liggett:
Revolving credit facility ................................ -- 19,374
Term loan under credit facility .......................... 5,865 4,320
Other notes payable ...................................... 7,748 5,760
New Valley:
Notes payable - shopping centers ......................... -- 19,529
Notes payable - Russia ................................... -- 8,187
Vector Research:
Equipment loan ........................................... 12,724 --
Vector Tobacco:
Note payable ............................................. 8,847 --
Equipment loan ........................................... 389
Other .................................................... 250 570
--------- --------
Total notes payable, long-term debt and other obligations 219,081 57,740
Less:
Current maturities ................................. (4,808) (17,850)
--------- --------
Amount due after one year ................................ $ 214,273 $ 39,890
========= ========
F-17
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
6.25% CONVERTIBLE SUBORDINATED NOTES DUE JULY 15, 2008 - VECTOR:
In July 2001, Vector completed the sale of $172,500 (net proceeds of
approximately $166,400) of its 6.25% convertible subordinated notes due
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 Vector's
common stock, at the option of the holder, at a conversion price of $33.66
per share at December 31, 2001. The conversion price is subject to
adjustment for various events, and any cash distribution on Vector's
common stock will result in a corresponding decrease in the conversion
price. The initial conversion price of $36.531 per share has been adjusted
to reflect a cash dividend of $0.40 per share of common stock and a 5%
stock dividend paid by the Company on September 28, 2001 and a cash
dividend of $0.40 per share of common stock and a special dividend in the
form of 0.348 of a share of Ladenburg Thalmann Financial Services Inc.
paid on December 20, 2001.
In December 2001, $40,000 of the notes were converted into 1,188,353
shares of Vector's common stock. In connection with the conversion of the
notes, Vector issued 170,000 additional shares of its common stock to the
holder and paid the holder $1,086 of accrued interest. Vector recognized
interest expense of $6,445 on the transaction.
The notes may be redeemed by Vector, in whole or in part, between July 15,
2003 and July 15, 2004, if the closing price of Vector's common stock
exceeds 150% of the conversion price then in effect for a period of at
least 20 trading days in any consecutive 30 day trading period, at a price
equal to 100% of the principal amount, plus accrued interest and a "make
whole" payment. Vector may redeem the notes, in whole or in part, at a
price of 103.125% in the year beginning July 15, 2004, 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.
10% SENIOR SECURED NOTES DUE MARCH 31, 2006 - VGR HOLDING:
On May 14, 2001, VGR Holding issued at a discount $60,000 principal amount
of 10% senior secured notes due March 31, 2006 in a private placement. VGR
Holding received net proceeds from the offering of approximately $46,500.
The notes were priced to provide the purchasers with a 15.75% yield to
maturity.
The notes are collateralized by substantially all of VGR Holding's assets,
including a pledge of VGR Holding's equity interests in its direct
subsidiaries, including Brooke Group Holding, Brooke (Overseas), Vector
Tobacco and New Valley Holdings, Inc. ("NV Holdings"), as well as a pledge
of the shares of Liggett and all of the New Valley securities held by VGR
Holding and NV Holdings. The purchase agreement for the notes contains
covenants, which among other things, limit the ability of VGR Holding to
make distributions to the Company to 50% of VGR Holding's net income,
unless VGR Holding holds $50,000 in cash after giving effect to the
payment of the distribution, limit additional indebtedness of VGR Holding,
Liggett and Vector Tobacco to 250% of EBITDA for the trailing 12 months,
restrict transactions with affiliates subject to exceptions which include
payments to the Company not to exceed $9,500 per year for permitted
operating expenses, and limit the ability of VGR Holding to merge,
consolidate or sell certain assets.
Prior to May 24, 2003, VGR Holding may redeem up to $21,000 of the notes
at a redemption price of 105% of the accreted value with proceeds from one
or more equity offerings. VGR Holding may redeem the notes, in whole or in
part, at a redemption price of 103% of accreted value in the year
F-18
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
beginning May 14, 2003, 102% of accreted value in the year beginning May
14, 2004 and 100% of accreted value after May 14, 2005. During the term of
the notes, VGR Holding is required to offer to repurchase all the notes at
a purchase price of 101% of accreted value, in the event of a change of
control, and to offer to repurchase notes, at the redemption prices, with
the proceeds of material asset sales.
15.75% SERIES B SENIOR SECURED NOTES DUE 2001 - VGR HOLDING:
In January 2000, VGR Holding repurchased $5,500 principal amount of its
Notes, together with accrued interest thereon. In connection with the sale
of Western Tobacco Investments on August 4, 2000, VGR Holding repurchased
a portion of the notes and redeemed the remaining Notes on September 5,
2000. The Company recognized an extraordinary loss in 2000 and 1999 on
early extinguishment of debt primarily due to the unamortized imputed
interest associated with the repurchased notes.
REVOLVING CREDIT FACILITY - LIGGETT:
Liggett has a $35,000 credit facility, under which $0 was outstanding at
December 31, 2001. Availability under the credit facility was
approximately $29,301 based on eligible collateral at December 31, 2001.
The facility is collateralized by all inventories and receivables of
Liggett. Borrowings under the facility, whose interest is calculated at a
rate equal to 1.0% above Philadelphia National Bank's (the indirect parent
of Congress Financial Corporation, the lead lender) prime rate, bore a
rate of 6.0% at December 31, 2001. The facility requires Liggett's
compliance with certain financial and other covenants including a
restriction on the payment of cash dividends unless Liggett's 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. In addition, the facility, as amended, imposes requirements with
respect to Liggett's 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 December 31, 2001, Liggett was in compliance with all
covenants under the credit facility; Liggett's adjusted net worth was
$40,158 and net working capital was $26,085, as computed in accordance
with the agreement. The facility expires on March 8, 2003 subject to
automatic renewal for an additional year unless a notice of termination is
given by the lender at least 60 days prior to the anniversary date.
In November 1999, 100 Maple LLC, a new company formed by Liggett to
purchase its Mebane, North Carolina facility, borrowed $5,040 from the
lender under Liggett's credit facility. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $5,865 was outstanding at
December 31, 2001. In addition, the lender extended the term of the loan
so that it is payable in 59 monthly installments of $75 with a final
payment of $1,890. Interest is charged at the same rate as applicable to
Liggett's credit facility, and borrowings under the Maple loan reduce the
maximum availability under the credit facility. Liggett has guaranteed the
loan, and a first mortgage on the Mebane property collateralizes the Maple
loan and Liggett's credit facility. Liggett completed the relocation of
its manufacturing operations to this facility in October 2000.
EQUIPMENT LOANS - LIGGETT:
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase. The loan, which is collateralized by the
equipment and guaranteed by VGR Holding and the Company, is payable in 60
monthly installments of $56 including annual interest of 7.67% with a
final payment of $2,550. The loan was repaid in July 2001 in connection
with the sale of the equipment.
F-19
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment
for $1,071 under two capital leases which are payable in 60 monthly
installments of $22 with an effective interest rate of 10.20%.
In October and December 2001, Liggett purchased equipment for $3,204 and
$3,200, respectively, through capital lease arrangements guaranteed by the
Company, each payable in 60 monthly installments with interest calculated
at the prime rate.
SUBSEQUENT EVENT: In March 2002, Liggett purchased equipment for $3,023
through a capital lease arrangement, payable in 30 monthly installments of
$62 and then 30 monthly installments of $51 with an effective annual
interest rate of 4.68%.
NOTE PAYABLE - VECTOR TOBACCO:
In June 2001, Vector Tobacco purchased for $8,400 an industrial facility
in Timberlake, North Carolina. Vector Tobacco financed the purchase with
an $8,200 loan, payable in 60 monthly installments of $85, including
annual interest at 4.85% above LIBOR with a final payment of approximately
$3,160. The loan, which is collateralized by a mortgage and a letter of
credit of $1,750, is guaranteed by VGR Holding and Vector.
During December 2001, Vector Tobacco executed a second promissory note
with the same lender for approximately $1,159 to finance building
improvements. The second promissory note is payable in 30 monthly
installments of $39 plus accrued interest, with an annual interest rate of
LIBOR plus 5.12%.
EQUIPMENT LOANS - VECTOR RESEARCH:
In February 2001, a subsidiary of Vector Research Ltd. purchased equipment
for $15,500 and borrowed $13,175 to fund the purchase. The loan, which is
collateralized by the equipment 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 120 monthly installments of $125, including annual
interest of 2.31% above the 30-day commercial paper rate with a final
payment of $6,125.
SUBSEQUENT EVENT: In February 2002, the Vector Research subsidiary
purchased equipment for $6,575 and borrowed $6,150 to fund the purchase.
The loan, which is collateralized by the equipment, is guaranteed by
Vector Research and the Company. The loan is payable in 120 monthly
installments of $44, including annual interest at a variable rate of 2.75%
plus the 30-day average commercial paper rate.
F-20
SCHEDULED MATURITIES:
Scheduled maturities of long-term debt are as follows:
Year ending December 31:
2002............................ $ 4,808
2003............................ 5,720
2004............................ 5,588
2005............................ 4,907
2006............................ 59,364
Thereafter...................... 138,694
-------
Total.................. $219,081
=======
9. COMMITMENTS
Certain of the Company's subsidiaries lease facilities and equipment used
in operations under both month-to-month and fixed-term agreements. The
aggregate minimum rentals under operating leases with noncancelable terms
of one year or more are as follows:
Year ending December 31:
2002 ................... $ 4,317
2003 ................... 4,118
2004 ................... 2,949
2005 ................... 2,510
2006 ................... 2,212
Thereafter .............. 9,462
-------
Total ................... $25,568
=======
The Company's rental expense for the years ended December 31, 2001, 2000
and 1999 was $3,792, $2,519 and $4,245, respectively.
10. EMPLOYEE BENEFIT PLANS
DEFINED BENEFIT RETIREMENT PLANS:
The Company sponsors several defined benefit pension plans, covering
virtually all of Liggett's full-time employees. These plans provide
pension benefits for eligible employees based primarily on their
compensation and length of service. Contributions are made to the pension
plans in amounts necessary to meet the minimum funding requirements of the
Employee Retirement Income Security Act of 1974.
In a continuing effort to reduce operating expenses, all defined benefit
plans were frozen between 1993 and 1995 and several early retirement
windows were offered between 1995 and 1999. As a result of these actions,
the Company recorded a curtailment charge (see table below).
F-21
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company's net pension expense (credit) consists of the following
components:
Year Ended December 31,
--------------------------------
2001 2000 1999
-------- -------- --------
Service cost - benefits earned during the period $ 350 $ 350 $ 350
Interest cost on projected benefit obligation .. 10,687 11,034 10,850
Expected return on assets ...................... (19,792) (18,157) (15,338)
Amortization of net gain ....................... (4,411) (4,010) (894)
Curtailment related to plan restructuring ...... -- -- 1,302
-------- -------- --------
Net pension expense (credit) ................... $(13,166) $(10,783) $ (3,730)
======== ======== ========
2001 2000
--------- ---------
Change in benefit obligation:
Benefit obligation at January 1 ................. $(146,882) $(151,508)
Interest cost ................................... (10,687) (11,034)
Benefits paid ................................... 15,043 15,829
Actuarial loss .................................. (5,174) (169)
--------- ---------
Benefit obligation at December 31 ............... $(147,700) $(146,882)
--------- ---------
Change in plan assets:
Fair value of plan assets at January 1 .......... $ 211,585 $ 198,787
Actual return on plan assets .................... (31,242) 28,276
Contributions ................................... 341 351
Benefits paid ................................... (15,043) (15,829)
--------- ---------
Fair value of plan assets at December 31 ........ $ 165,641 $ 211,585
========= =========
Excess of plan assets versus benefit
obligations at December 31 .................. $ 17,941 $ 64,703
Unrecognized actuarial gains .................... (223) (60,840)
Contributions or SERP benefits .................. 92 88
--------- ---------
Net pension asset before additional minimum liability
and purchase accounting valuation adjustments 17,810 3,951
Additional minimum liability ........................ (1,577) (1,523)
Purchase accounting valuation adjustments relating
to income taxes ............................. 1,687 2,035
--------- ---------
Pension asset included in the December 31
balance sheet ............................... $ 17,920 $ 4,463
========= =========
Assumptions used in the determination of net pension expense and the
actuarial present value of benefit obligations for the years ended
December 31, 2001 and 2000 follow:
2001 2000
---- ----
Discount rates.................................. 6.00% - 7.25% 6.50 - 7.75%
Accrued rates of return on invested assets...... 9.25% 9.75%
Salary increase assumptions..................... N/A N/A
Plan assets consist of commingled funds, marketable equity securities and
corporate and government debt securities.
F-22
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
POSTRETIREMENT MEDICAL AND LIFE INSURANCE PLANS:
LIGGETT
Substantially all of Liggett's employees are eligible for certain
postretirement benefits if they reach retirement age while working for the
Company. Retirees are required to fund 100% of participant medical
premiums.
The components of net periodic postretirement benefit cost for the years
ended December 31, 2001, 2000 and 1999 are as follows:
2001 2000 1999
----- ----- ------
Service cost, benefits attributed to employee
service during the year ................ $ 43 $ 34 $ 45
Interest cost on accumulated postretirement
benefit obligation ..................... 640 675 599
Charge for special termination benefits ..... -- -- 240
Amortization of net (loss) gain ............. (306) (272) 582
----- ----- ------
Net periodic postretirement benefit expense . $ 377 $ 437 $1,466
===== ===== ======
The following sets forth the actuarial present value of the Accumulated
Postretirement Benefit Obligation ("APBO") at December 31, 2001 and 2000
applicable to each employee group for benefits:
2001 2000
-------- --------
Change in benefit obligation:
Benefit obligation at January 1 ................... $ (8,636) $ (9,096)
Service cost ...................................... (43) (34)
Interest cost ..................................... (640) (675)
Benefits paid ..................................... 651 688
Actuarial (losses) gain ........................... (247) 481
-------- --------
Benefit obligation at December 31 ................. $ (8,915) $ (8,636)
======== ========
Change in plan assets:
Contributions ..................................... $ 651 $ 688
Benefits paid ..................................... (651) (688)
-------- --------
Fair value of plan assets at December 31 .......... $ -- $ --
======== ========
Accumulated postretirement benefit obligation (in excess
of plan assets) ............................... $ (8,915) $ (8,636)
Unrecognized net gain ............................. (2,892) (3,445)
Purchase accounting valuation adjustments relating
to income taxes ............................... 527 636
-------- --------
Postretirement liability included in the December 31
balance sheet ................................. $(11,280) $(11,445)
======== ========
The APBO at December 31, 2001 and 2000 was determined using a discount
rate of 7.75% and a health care cost trend rate of 4% in 2001 and 2000. A
1% increase in the trend rate for health care costs would have increased
F-23
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
the APBO and net periodic postretirement benefit cost by $21 and $290,
respectively, for the year ended December 31, 2001. The Company does not
hold any assets reserved for use in the plan.
PROFIT SHARING AND OTHER PLANS:
The Company maintains 401(k) plans for substantially all U.S. employees
which allow eligible employees to invest a percentage of their pre-tax
compensation. The Company contributed and expended $593, $553 and $527 to
the 401(k) plans for the years ended December 31, 2001, 2000 and 1999,
respectively.
Effective January 1, 2002, the Company adopted a Supplemental Executive
Retirement Plan. The plan is a defined benefit plan pursuant to which the
Company will pay supplemental pension benefits to certain key employees
upon retirement based upon the employees' years of service and
compensation. The plan will be funded through life insurance contracts on
various of the key employees, though the plan does not require formal
funding.
11. INCOME TAXES
The Company files a consolidated U.S. income tax return that includes its
more than 80%-owned U.S. subsidiaries. The consolidated U.S. income tax
return does not include the activities of New Valley and the Company's
foreign subsidiaries. New Valley files a consolidated U.S. income tax
return that includes its more than 80%-owned U.S. subsidiaries. The
amounts provided for income taxes are as follows:
Year Ended December 31,
-----------------------------
2001 2000 1999
-------- ------- -------
Current:
U.S. Federal ...................... $ 15,634 $ 9,239 $ 1,208
Foreign ........................... 227 -- 429
State ............................. 4,017 2,435 5,076
-------- ------- -------
19,878 11,674 6,713
-------- ------- -------
Deferred:
U.S. Federal ...................... $ (5,658) $67,908 $66,493
Foreign ........................... -- -- 445
State ............................. 797 2,201 8,612
-------- ------- -------
(4,861) 70,109 75,550
-------- ------- -------
Total provision ................... $ 15,017 $81,783 $82,263
======== ======= =======
The tax effect of temporary differences which give rise to a significant
portion of deferred tax assets and liabilities are as follows:
December 31, 2001 December 31, 2000
---------------------------- ----------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------ ------------ ------------
Excess of tax basis over book basis-
non-consolidated subsidiaries ...... $25,013 $ 16,981 $ -- $ 21,113
Deferral on brand transaction ........ -- 103,100 -- 103,100
Other ................................ 20,010 13,206 50,909 7,544
U.S. tax loss carryforwards-New Valley 48,730 -- 41,883 --
Valuation allowance .................. (77,681) -- (81,677) --
Reclassifications .................... -- -- (717) 717
-------- -------- --------- --------
$ 16,072 $133,287 $ 10,398 $132,474
======== ======== ========= ========
F-24
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that
some or all of the deferred tax assets will not be realized. The Company
has established a valuation allowance against deferred tax assets of
$77,681 at December 31, 2001, which relates to the deferred assets of New
Valley.
The valuation allowance of $77,681 at December 31, 2001 consisted
primarily of New Valley's net operating loss carryforwards of $48,730. In
addition, a valuation allowance was established against New Valley's
additional deferred tax assets of $28,950 primarily related to
differences between book and tax accounting purposes for basis in
investments and subsidiaries and restructuring accruals.
As of December 31, 2001, New Valley and its consolidated group had U.S.
net operating loss carryforwards of approximately $123,000 for tax
purposes, which expire at various dates from 2002 through 2008.
Approximately $7,743 of net operating loss carryforwards constitute
pre-change losses and are limited under Internal Revenue Code Section 382,
and $115,257 of net operating losses were unrestricted.
Differences between the amounts provided for income taxes and amounts
computed at the federal statutory tax rate are summarized as follows:
Year Ended December 31,
----------------------------------------------
2001 2000 1999
-------- --------- ---------
Income (loss) from continuing operations before
income taxes ................................ $ 36,217 $ 252,437 $ 318,542
-------- --------- ---------
Federal income tax provision (benefit) at
statutory rate .......................... 12,676 88,353 111,490
Increases (decreases) resulting from:
State income taxes, net of federal income tax
benefits .................................. 3,129 3,013 8,897
Foreign taxes ............................... 227 -- 873
Difference in basis related to disposal of
foreign subsidiary ........................ (4,228) (9,837) --
Impact of LTS distribution, net ............. 4,072 -- --
Other, net .................................. 3,137 1,338 822
Changes in valuation allowance .............. (3,996) -- (39,624)
-------- --------- ---------
Provision for income tax .................... $ 15,017 $ 82,867 $ 82,458
======== ========= =========
12. EQUITY
In May 2001, Vector completed the sale of 1,721,311 shares of its common
stock to High River Limited Partnership, an investment entity owned by
Carl C. Icahn, for $50,000 at a price of $29.05 per share, the market
price when negotiations with Mr. Icahn were completed.
During 2001, a total of 2,197,927 warrants to purchase Vector's common
stock at $4.18 per share were exercised. At December 31, 2001, Vector had
outstanding 121,623 of the $4.18 warrants which expire in 2003.
F-25
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
During 2001, 525,000 options to purchase Vector's common stock at $5.18
per share were exercised by a law firm which represents the Company and
Liggett. At December 31, 2001, the law firm had options for an additional
591,281 shares at $5.18 per share, which expire in 2003.
In June 2001, the Company granted 10,500 shares of its common stock to
each of its three outside directors which will vest over a period of three
years. The Company will recognize compensation expense of $1,017 over the
vesting period.
13. STOCK PLANS
In November 1999, the Company adopted its 1999 Long-Term Incentive Plan
(the "1999 Plan") which was approved by the stockholders of the Company in
May 2000. The 1999 Plan authorizes the granting of up to 5,512,500 shares
of common stock through awards of stock options (which may include
incentive stock options and/or nonqualified stock options), stock
appreciation rights and shares of restricted Company common stock. All
officers, employees and consultants of the Company and its subsidiaries
are eligible to receive awards under the 1999 Plan.
In October 1998, stockholders of the Company approved the adoption of the
1998 Long-Term Incentive Plan (the "1998 Plan"). The 1998 Plan, adopted in
May 1998, authorizes the granting of up to 5,788,125 shares of common
stock through awards of stock options (which may include incentive stock
options and/or nonqualified stock options), stock appreciation rights and
shares of restricted Company common stock. All officers, employees and
consultants of the Company and its subsidiaries are eligible to receive
awards under the 1998 Plan.
In January 2001, the Company granted non-qualified stock options to the
Chairman and the President of the Company pursuant to the Company's 1999
Long-Term Incentive Plan. Under the options, the option holders have the
right to purchase an aggregate of 787,500 shares of common stock at an
exercise price of $18.21 per share (the fair market value of a share of
common stock on the date of grant). Common stock dividend equivalents are
paid currently with respect to each share underlying the unexercised
portion of the options. The options have a ten-year term and become
exercisable on November 4, 2003. However, the options will earlier vest
and become immediately exercisable upon (i) the occurrence of a change in
control or (ii) the termination of the option holder's employment with the
Company due to death or disability.
During the year ended December 31, 2001, other employees of the Company or
its subsidiaries were awarded a total of 962,425 non-qualified options to
purchase shares of common stock at prices ranging from $17.02 to $45.53,
generally at the fair market value on the dates of grant under the
Company's 1998 and 1999 Long-Term Incentive Plan. The Company will
recognize compensation expense of $1,031 over the vesting period.
In November 1999, the Company granted non-qualified stock options to six
executive officers of the Company or its subsidiaries, including the
Chairman and a consultant to the Company who now serves as President and a
director of the Company (the "Consultant"), pursuant to the 1999 Plan.
Under the options, the option holders have the right to purchase an
aggregate of 2,436,525 shares of common stock at an exercise price of
$14.00 per share (the fair market value of a share of common stock on the
date of grant). Common stock dividend equivalents are paid currently with
respect to each share underlying the unexercised portion of the options.
The options have a ten-year term and become exercisable on the fourth
anniversary of the date of grant. However, the options will earlier vest
and become immediately exercisable upon (i) the occurrence of a "Change in
Control" or (ii) the termination of the option holder's employment with
the Company due to death or disability.
F-26
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
In July 1998, the Company granted a non-qualified stock option to each of
the Chairman and the Consultant, pursuant to the 1998 Plan. Under the
options, the Chairman and the Consultant have the right to purchase
2,894,062 shares and 578,812 shares, respectively, of common stock at an
exercise price of $8.43 per share (the fair market value of a share of
common stock on the date of grant). The options have a ten-year term and
become exercisable as to one-fourth of the shares on each of the first
four anniversaries of the date of grant. However, any then unexercisable
portion of the option will earlier vest and become immediately exercisable
upon (i) the occurrence of a "Change in Control," or (ii) the termination
of the option holder's employment or consulting arrangement with the
Company due to death or disability.
In November 1999, the Company granted non-qualified stock options to
purchase 1,014,300 shares of common stock to key employees of Liggett
under the 1998 Plan. Under the options, the Liggett option holders had the
right to purchase shares at prices ranging from $14.00 to $16.32 per
share. The options became exercisable as to 25% of the shares on December
31, 2001 and as to an additional 37.5% of the shares on each of December
31, 2002 and December 31, 2003, assuming the continued employment of the
option holder. Vesting is accelerated upon death or disability. The
Company will recognize compensation expense of $1,717 over the vesting
period.
As of January 1, 1998 and 1997, the Company granted to employees of the
Company non-qualified stock options to purchase 49,777 and 488,517,
respectively, shares of the Company's common stock at an exercise price of
$4.32 per share. The options have a ten-year term and vest in six equal
annual installments. The Company will recognize compensation expense of
$154 over the vesting period.
A summary of stock options granted to employees follows:
Weighted
Number of Exercise Average
Shares Price Fair Value
------------ ------------- ----------
Outstanding on December 31, 1998.............. 3,323,389 $4.32 $ 6.70
Granted.................................. 1,047,375 $14.00-$16.32 $ 6.90
Exercised................................ -- -- --
Cancelled................................ -- -- --
-----------
Outstanding on December 31, 1999.............. 4,370,764 $4.32-$16.32 $ 6.93
Granted.................................. 3,033,975 $12.92-$17.74 --
Exercised................................ -- -- --
Cancelled................................ (64,050) $14.00 $ 6.97
-----------
Outstanding on December 31, 2000.............. 7,340,689 $4.32-$17.74 $ 7.30
Granted.................................. 3,794,667 $17.02-$43.53 $24.31
Exercised................................ (387,610) $4.32-$16.32 $12.86
Cancelled................................ (89,972) $17.02-$23.69 $22.35
Outstanding on December 31, 2001.............. 10,657,774 $0.87-$43.53 $ 6.42
Options exercisable at:
December 31, 1999........................ 737,659 -- --
December 31, 2000........................ 1,549,046 -- --
December 31, 2001........................ 4,242,228 -- --
F-27
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
The Company will continue to account for stock options granted employees
at their intrinsic value. Had the fair value method of accounting been
applied to the Company's stock options granted to employees, the pro forma
effect would be as follows:
2001 2000 1999
---- -------- --------
Net income (loss) as reported .................. $ 20,663 $174,218 $235,673
Estimated fair value of the year's option grants 13,566 11,732 5,605
Net income adjusted ............................ 7,097 162,486 230,068
Adjusted net income per share - basic .......... 0.24 6.58 9.48
Adjusted net income per share - diluted ........ 0.20 5.58 7.77
The fair value of option grants to employees is estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions for options granted.
2001 2000 1999
---- ---- ----
Risk-free interest rate......... 4.6%-5.4% 5.3%-7.0% 6.1%
Expected volatility............. 47%-52.2% 42%-67% 47%-68%
Dividend yield.................. 0.0%-8.5% 0.0%-7.4% 5-9%-5.6%
Expected holding period......... 10 years 10 years 10 years
Weighted average fair value..... $4.23-$17.52 $3.59-$8.85 $4.84-$7.52
In December 1996, the Company granted the Consultant non-qualified stock
options to purchase 1,157,625 shares of the Company's common stock at an
exercise price of $0.87 per share. The options, which have a ten-year
term, vest and become exercisable in six equal annual installments
beginning on July 1, 1997. Under the agreement, common stock dividend
equivalents are paid on each vested and unexercised option. The Company
recognized compensation expense of $3,186 in 2001 and $792 in each of
2000 and 1999. In 2001, 2000 and 1999, the Company also recorded charges
to income of $1,940, $926 and $444, respectively, for the dividend
equivalent rights.
In January 1995, the Company granted the Consultant a non-qualified stock
option, of which options to purchase 289,406 shares at $1.72 per share
are outstanding at December 31, 2001. The options are exercisable over a
ten-year period and were fully vested in January 1999. The grant provides
for dividend equivalent rights on all the shares underlying the
unexercised options. In 2001, 2000 and 1999, the Company recorded charges
to income of $447, $302 and $166, respectively, for the dividend
equivalent rights.
F-28
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION
Year Ended December 31,
---------------------------------
2001 2000 1999
------- ------- -------
I. Cash paid during the period for:
Interest ................................. $ 8,253 $48,437 $48,030
Income taxes, net of refunds ............. 8,517 10,701 2,942
II. Non-cash investing and financing activities:
Issuance of stock dividend ............... 54,519 20,852 25,646
Conversion of debt ....................... 45,018 -- --
LTS acquisition:
Assets acquired, net of cash.............. 54,014
Liabilities assumed, including
minority interest....................... 49,523
Effect of acquisition in equity........... 8,556
LTS distribution:
Assets distributed, net of cash........... 90,645
Liabilities distributed................... 87,834
Effect of distribution in equity.......... 10,947
15. CONTINGENCIES
SMOKING-RELATED LITIGATION:
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. These cases are
reported here as though having been commenced against Liggett (without
regard to whether such cases were actually commenced against Brooke Group
Holding Inc., the Company's predecessor and a wholly-owned subsidiary of
VGR Holding, or Liggett). There has been a noteworthy increase in the
number of cases commenced against Liggett and the other cigarette
manufacturers in recent years. 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, defense costs and the risks
attendant 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 is not quantifiable at this time. For the year ended December 31,
2001, Liggett incurred counsel fees and costs totaling approximately
$6,832 compared to $7,236 and $5,733, respectively, for 2000 and 1999.
F-29
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
INDIVIDUAL ACTIONS. As of December 31, 2001, there were approximately 279
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, 90 were pending in New York, 64 in Florida, 33 in
Maryland, 17 in California and 15 in Mississippi. The balance of the
individual cases were pending in 20 states. There are four individual
cases pending where Liggett is the only named defendant. In addition to
these cases, during the third quarter of 2000, an action against cigarette
manufacturers involving approximately 1,250 named individual plaintiffs
has been consolidated 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,
which is scheduled to begin in September 2002.
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 Organization 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 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.
Jury awards in California and Oregon have been entered against other
companies in the tobacco industry. The awards in these individual actions
are for both compensatory and punitive damages and represent a material
amount of damages. In June 2001, a jury awarded $5,500 in compensatory
damages and $3,000,000 in punitive damages in a California state court
case involving Philip Morris. The punitive damages award was subsequently
reduced to $100,000 by the trial court. In each case, both the verdict and
damage awards are being appealed by the defendants. In November 2001, in
one of these cases, a $25,000 punitive damages judgment against Philip
Morris was affirmed by a California intermediate appellate court. Philip
Morris has appealed the decision to the California Supreme Court, which
has accepted the case for review. During 2001, as a result of a Florida
Supreme Court decision upholding the award, another cigarette manufacturer
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. In
June 2001, the U. S. Supreme Court declined to review the case. In
December 2001, in an individual smoking and health case involving another
cigarette manufacturer, a Florida jury awarded a smoker $165 in damages,
and the defendant has filed post-trial motions challenging the verdict.
CLASS ACTIONS. As of December 31, 2001, there were approximately 31
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 court's
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
F-30
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
smoking-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, a court in
Louisiana (Liggett is not a defendant in this proceeding) has certified
"addiction-as-injury" class actions that covered only citizens in those
states. Two other class actions, BROIN and ENGLE, were certified in state
court in Florida prior to the Fifth Circuit's decision. In April 2001, the
BROWN case was certified as a class action in California.
In May 1994, an action entitled ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO
COMPANY, ET AL., Circuit Court, Eleventh Judicial Circuit, Dade County,
Florida, was filed against Liggett and others. 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. On April
7, 2000, the jury awarded compensatory damages of $12,704 to the three
plaintiffs, to be reduced in proportion to the respective plaintiff's
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. On July
14, 2000, the jury awarded approximately $145,000,000 in the punitive
damages portion of Phase II against all defendants including $790,000
against Liggett. The court entered a final order of judgment against the
defendants on November 6, 2000. The court's final judgment, which provides
for interest at the rate of 10% per year on the jury's awards, also denied
various of defendants' post-trial motions, which included a motion for new
trial and a motion seeking reduction of the punitive damages award.
Liggett intends to pursue all available post-trial and appellate remedies.
If this verdict is not eventually reversed on appeal, or substantially
reduced by the court, it could have a material adverse effect on the
Company. Phase III of the trial will 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.
It is unclear how the ENGLE court's order regarding the determination of
punitive damages will be implemented. The order provides that the punitive
damage amount should be standard as to each class member and acknowledges
that the actual size of the class will not be known until the last case
has withstood appeal. The order does not address whether defendants will
be required to pay the punitive damage award prior to a determination of
claims of all class members, a process that could take years to conclude.
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. Liggett has filed the $3,450 bond required by the Florida law in
order to stay execution of the ENGLE judgment. Similar legislation has
been enacted in Georgia, Kentucky, Louisiana, Nevada, North Carolina,
Oklahoma, South Carolina, Virginia and West Virginia.
F-31
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
On May 7, 2001, Liggett, along with Philip Morris and Lorillard Tobacco
Co., reached an agreement with the class in the ENGLE case, which will
provide assurance of Liggett's ability to appeal the jury's 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 Liggett's 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, assures
that the stay of execution, currently in effect pursuant to the Florida
bonding statute, will not be lifted or limited at any point until
completion of all appeals, including an appeal to the United States
Supreme Court.
Class certification motions are pending in a number of putative class
actions. Classes remain certified against Liggett in Florida (ENGLE), in
West Virginia (BLANKENSHIP) and in California (BROWN). A number of class
certification denials are on appeal.
In August 2000, in BLANKENSHIP V. PHILIP MORRIS, INC., 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. The trial of this case ended
on January 25, 2001, when the judge declared a mistrial. In an order
issued on March 23, 2001, the court reaffirmed class certification of this
medical monitoring action. 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
defendants.
In April 2001, the California state court in the case of BROWN V. THE
AMERICAN TOBACCO COMPANY, INC., ET AL., granted in part plaintiff's 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
plaintiff's claims that defendants violated California's unfair business
practices statute. The court subsequently defined "the applicable class
period" for plaintiff's claims, pursuant to a stipulation submitted by the
parties, as June 10, 1993 through April 23, 2001. The California Court of
Appeals denied defendants' writ application, which sought review of the
trial court's class certification orders. Defendants filed a petition for
review with the California Supreme Court, which was subsequently denied.
Trial is scheduled to begin in October 2002. Liggett is a defendant in the
case.
Approximately 38 purported state and federal class action complaints have
been filed against the cigarette manufacturers for alleged antitrust
violations, including Liggett and Brooke Group Holding. 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 actions
have been consolidated and, on July 28, 2000, plaintiffs in the federal
consolidated action filed a single consolidated complaint that did not
name Liggett or Brooke Group Holding as defendants, although Liggett has
complied with certain discovery requests. Fourteen California actions have
been consolidated and the consolidated complaint did not name Liggett or
Brooke Group Holding as defendants. In Nevada, an amended complaint was
filed that did not name Liggett or Brooke Group Holding as defendants. The
Arizona action was dismissed by the trial court, but the plaintiffs have
appealed that ruling.
F-32
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Liggett and plaintiffs have advised the court, in SIMON V. PHILIP MORRIS
ET AL., a putative nationwide smokers class action, that Liggett and the
plaintiffs have engaged in preliminary settlement discussions. There are
no assurances that any settlement will be reached or that the class will
ultimately be certified.
GOVERNMENTAL ACTIONS. As of December 31, 2001, there were approximately 39
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.
THIRD-PARTY PAYOR ACTIONS. As of December 31, 2001, there were
approximately 11 Third-Party Payor Actions pending against Liggett. The
claims in these cases 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. Eight United States Circuit
Courts of Appeal have ruled that Third-Party Payors did not have standing
to bring lawsuits against the tobacco companies. In January 2000, the
United States Supreme Court denied petitions for certiorari filed by
several of the union health and welfare trust funds. However, a number of
Third-Party Payor Actions, including an action brought by 24 Blue
Cross/Blue Shield Plans, remain pending.
In June 2001, a jury in a third party payor action brought by Empire Blue
Cross and Blue Shield in the Eastern District of New York rendered a
verdict awarding the plaintiff $17,800 in damages against the major
tobacco companies. As against Liggett, the jury awarded the plaintiff
damages of $89. In February 2002, the court awarded plaintiff's counsel
$37,800 in attorneys' fees, without allocating the fee award among the
several defendants. Liggett has appealed both the jury verdict and the
attorneys' fee award.
In other Third-Party Payor Actions claimants have set forth several
additional 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.
FEDERAL GOVERNMENT ACTION. In September 1999, the United States government
commenced litigation against Liggett and the other 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 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 asserts 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 December 1999, Liggett filed a motion to dismiss the lawsuit on
numerous grounds, including that the statutes invoked by the government do
F-33
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
not provide the basis for the relief sought. In September 2000, the court
dismissed the government's claims based on MCRA and MSP, and the court
reaffirmed its decision in July 2001. In the September 2000 decision, the
court also determined not to dismiss the government's claims based on
RICO, 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 June 2001, the United States Attorney General assembled a team of three
Department of Justice ("DOJ") lawyers to work on a possible settlement of
the federal lawsuit. The DOJ lawyers met with representatives of the
tobacco industry, including Liggett, in July 2001. No settlement was
reached, and no further meetings are planned. Discovery in the case has
commenced, and trial has been scheduled for July 2003.
SETTLEMENTS. In March 1996, Brooke Group Holding and 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, Brooke Group Holding and Liggett
entered into settlements of smoking-related litigation with the Attorneys
General of 45 states and territories. The settlements released both Brooke
Group Holding and Liggett from all smoking-related claims, including
claims for health care cost reimbursement and claims concerning sales of
cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (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 Marianas (collectively, the "Settling States") to
settle the asserted and unasserted health care cost recovery and certain
other claims of those Settling States. The MSA has received final judicial
approval in each of the 52 settling jurisdictions.
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 advertising, with
the exception of signs 14 square feet or less in dimension 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; 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; and prohibits Participating Manufacturers from selling packs
containing fewer than 20 cigarettes.
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 unless 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. During 1999 and 2000,
Liggett's market share did not exceed the base amount. Liggett believes,
F-34
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
based on published industry sources, that its domestic shipments accounted
for 2.2% of the total cigarettes shipped in the United States during 2001.
On April 15 of any year following a year in which Liggett's market share
exceeds the base share, Liggett will pay on each excess unit an amount
equal (on a per-unit basis) to that paid during such following year by the
OPMs under the annual and strategic contribution payment provisions of the
MSA, subject to applicable adjustments, offsets and reductions. Liggett
has expensed $24,606 for its estimated MSA obligations for 2001 as part of
cost of goods sold. Under the annual and strategic contribution payment
provisions of the MSA, the OPMs (and Liggett to the extent its market
share exceeds the base share) are required to pay the following annual
amounts (subject to certain adjustments):
YEAR AMOUNT
---- ------
2001 .......................... $5,000,000
2002 - 2003 ................... $6,500,000
2004 - 2007 .................. $8,000,000
2008 - 2017 .................. $8,139,000
2018 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.
The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of
these 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.
Because these states' settlement agreements with Liggett provided for
"most favored nation" protection for both Brooke Group Holding and
Liggett, the payments due these states by Liggett (with certain possible
exceptions) have been eliminated. With respect to all non-economic
obligations under the previous settlements, both Brooke Group Holding and
Liggett are entitled to the most favorable provisions as between the MSA
and each state's respective settlement with the other major tobacco
companies. Therefore, Liggett's non-economic obligations to all states and
territories are now defined by the MSA.
In April 1999, a putative class action was filed on behalf of all firms
that directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in
part on the MSA. Plaintiffs seek treble damages computed as three times
the difference between current prices and the price plaintiffs would have
paid for cigarettes in the absence of an alleged conspiracy to restrain
and monopolize trade in the domestic cigarette market, together with
attorneys' fees. Plaintiffs also seek injunctive relief against certain
aspects of the MSA.
In March 1997, Liggett, Brooke Group Holding and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the
class. In July 1998, Liggett, Brooke Group Holding and plaintiffs filed an
amended class action settlement agreement in FLETCHER which agreement was
preliminarily approved by the court in December 1998. In July 1999, the
court denied approval of the FLETCHER class action settlement. The
parties' motion for reconsideration is still pending.
F-35
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
Copies of the various settlement agreements are filed as exhibits to the
Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.
TRIALS. Cases currently scheduled for trial during the next six months
include an individual action in Florida state court scheduled for May 2002
and an action consolidating the claims of four individuals in a
Mississippi state court scheduled for June 2002. In addition, the BROWN
class action is scheduled for trial in California state court for October
2002. Trial dates, however, are subject to change.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In
July 2000, the jury awarded $790,000 in punitive damages against Liggett
in the second phase of the trial, and the court has entered an order of
final judgment. Liggett intends to pursue all available post-trial and
appellate remedies. If this verdict is not eventually reversed on appeal,
or substantially reduced by the court, it could have a material adverse
effect on the Company. Liggett has filed the $3,450 bond required under
recent Florida legislation which limits the size of any bond required,
pending appeal, to stay execution of a punitive damages verdict. On May 7,
2001, Liggett reached an agreement with the class in the ENGLE case, which
will provide assurance to Liggett that the stay of execution, currently in
effect pursuant to the bonding statute enacted in 2000 by the Florida
legislature, will 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 Liggett's
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 $9,273 pre-tax charge to the
consolidated statement of operations for the year ended December 31, 2001.
It is possible that additional cases could be decided unfavorably and that
there could be further adverse developments in the ENGLE case. 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
Brooke Group Holding or 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 individual's complaint against the tobacco
industry pray for 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 Company's consolidated financial position, results
of operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such smoking-related litigation.
Liggett's management is unaware of any material environmental conditions
affecting its existing facilities. Liggett's management believes 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
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, earnings or
competitive position of Liggett.
F-36
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 Company's financial
position, results of operations or cash flows.
LEGISLATION AND REGULATION:
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 current body of scientific evidence and the EPA's failure to
follow its own guidelines in making the determination, the EPA's
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 has appealed the court's ruling. Whatever the ultimate
outcome of this litigation, issuance of the report may encourage efforts
to limit smoking in public areas.
In February 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobacco is imported under a
previously established tobacco rate quota ("TRQ") should be allocated.
Currently, tobacco imported under the TRQ is allocated on a "first-come,
first-served" basis, meaning that entry is allowed on an open basis to
those first requesting entry in the quota year. Others in the cigarette
industry have suggested an "end-user licensing" system under which the
right to import tobacco under the quota would be initially assigned based
on domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company and Liggett.
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
F-37
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
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 have been made for
federal and state legislation to regulate cigarette manufacturers. In May
2001, a Presidential commission appointed by former President Clinton
issued a final report recommending that the FDA be given authority by
Congress to regulate the manufacture, sale, distribution and labeling of
tobacco products to protect public health. In addition, Congressional
advocates of FDA regulation have introduced such legislation for
consideration by the 107th Congress. The ultimate outcome of these
proposals cannot be predicted.
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 1997, the
United States District Court for the District of Massachusetts
preliminarily enjoined this legislation from going into effect on the
grounds that it is preempted by federal law. In November 1999, the United
States Court of Appeals for the First Circuit affirmed this ruling. In
September 2000, the federal district court permanently enjoined
enforcement of the law. In October 2001, the First Circuit reversed the
district court's decision, ruling that the ingredients disclosure
provisions are valid. The entire court, however, agreed to re-hear the
appeal, reinstating the district court's injunction in the meantime. Oral
argument before the full court took place on January 7, 2002, and the
court has not yet issued its decision. Notwithstanding the foregoing, in
December 1997, Liggett began complying with this legislation by providing
ingredient information to the Massachusetts Department of Public Health.
Several other states have enacted, or are considering, legislation similar
to that enacted in Massachusetts.
As part of the 1997 budget agreement approved by Congress, federal excise
taxes on a pack of cigarettes, which are currently 39 cents, were
increased at the beginning of each of 2000 and 2002. In general, excise
taxes and other taxes on cigarettes have been increasing. These taxes vary
considerably and, when combined with sales taxes and the current federal
excise tax, may be as high as $2.00 per pack in a given locality in the
United States. Congress has considered significant increases in the
federal excise tax or other payments from tobacco manufacturers, and
increases in excise and other cigarette-related taxes have been proposed
at the state and local levels.
In August 2000, the New York state legislature passed legislation charging
the state's Office of Fire Prevention and Control ("OFPC") with developing
standards for "fire safe" or self-extinguishing cigarettes. The OFPC has
until January 1, 2003 to issue final regulations. Six months from the
issuance of the standards, all cigarettes offered for sale in New York
state will be required to be manufactured to those standards. It is not
possible to predict the impact of this law on the Company until the
standards are published. Similar legislation is being considered by other
state governments and at the federal level.
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, the effects of which, at this time, management
is not able to evaluate. 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.
OTHER MATTERS:
In March 1997, a stockholder derivative suit was filed in Delaware
Chancery Court against New Valley, as a nominal defendant, its directors
and Brooke Group Holding by a stockholder of New Valley. The suit alleges
that New Valley's purchase of the BrookeMil shares from Brooke (Overseas)
in January 1997 constituted a self-dealing transaction which involved the
payment of excessive consideration by New Valley. The plaintiff seeks a
declaration that New Valley's directors breached their fiduciary duties
and, Brooke Group Holding aided and abetted such breaches and that damages
be awarded to New Valley. In December 1999, another stockholder of New
Valley commenced an action in Delaware Chancery Court substantially
similar to the March 1997 action. This stockholder alleges, among other
things, that the consideration paid by New Valley for the BrookeMil shares
was excessive, unfair and wasteful, that the special committee of New
Valley's board lacked independence, and that the appraisal and fairness
F-38
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
opinion were flawed. By order of the court, both actions were
consolidated. In January 2001, the court denied a motion to dismiss the
consolidated action. Brooke Group Holding and New Valley believe that the
allegations in the case are without merit. Discovery in the case has
commenced.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
Group Holding and certain directors and officers of New Valley in Delaware
Chancery Court. The complaint alleges that the recapitalization, approved
by a majority of each class of New Valley's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and
the defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of compensatory damages as well
as all costs and fees. The Court has dismissed six of plaintiff's nine
claims alleging inadequate disclosure in the proxy statement. Brooke Group
Holding and New Valley believe that the remaining allegations are without
merit. Discovery in the case has commenced.
Although there can be no assurances, Brooke Group Holding and New Valley
believe, after consultation with counsel, that the ultimate resolution of
these matters will not have a material adverse effect on the Company's or
New Valley's consolidated financial position, results of operations or
cash flows.
As of December 31, 2001, New Valley had $2,700 of remaining prepetition
bankruptcy-related claims and restructuring accruals including claims for
unclaimed monies that certain states are seeking on behalf of money
transfer customers. The remaining claims may be subject to future
adjustments based on potential settlements or decisions of the court.
16. RELATED PARTY TRANSACTIONS
In connection with the Company's convertible note offering in July 2002,
the placement agent for the offering required that the principal
stockholder and Chairman of the Company grant the placement agent the
right, in its sole discretion, to borrow up to 3,150,000 shares of Common
Stock from the principal stockholder or any entity affiliated with him
during the three-year period ending June 29, 2004 and that he agree not
to dispose of such shares during the three-year period, subject to
limited exceptions. In consideration for the principal stockholder
agreeing to lend his shares in order to facilitate the Company's offering
and accepting the resulting liquidity risk, the Company agreed to pay him
or an affiliate designated by him an annual fee, payable on a quarterly
basis at his election in cash or shares of Common Stock, equal to 1% of
the aggregate market value of 3,150,000 shares of Common Stock. For the
six months ended December 31, 2001, the Company paid an entity affiliated
with the principal stockholder an aggregate of $593,854 under this
agreement.
F-39
An outside director of the Company is a stockholder of and serves as the
chairman and treasurer of, and an executive officer and director of the
Company is a stockholder and registered representative in, a registered
broker-dealer that has performed services for New Valley since before
December 31, 1998. The broker-dealer received brokerage commissions and
other income of approximately $12, $101 and $59 from New Valley during
2001, 2000 and 1999, respectively.
During 2001, New Valley paid a fee of $750 to a director of New Valley who
served as President of its Ladenburg Thalmann & Co. Inc. broker-dealer
subsidiary. The fee was paid for his services in connection with the
closing of the acquisition of the subsidiary. (Refer to Note 19.) One-half
of the fee was reimbursed to New Valley by the subsidiary.
An outside director of New Valley serves as a managing director of an
investment bank that provided advisory services to New Valley in 1999 in
connection with the sale of a 19.9% interest in its broker-dealer
subsidiary to Berliner Effektengesellschaft AG. New Valley paid this
firm a fee of $254 in cash and 8,816 Berliner shares in connection with
such services. During 2000, the investment bank provided services to
Brooke (Overseas) in connection with the sale of Western Tobacco
Investments. Brooke (Overseas) paid this firm $750 in connection with
such services.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of the Company's financial instruments have been
determined by the Company using available market information and
appropriate valuation methodologies described below. However, considerable
judgment is required to develop the estimates of fair value and,
accordingly, the estimates presented herein are not necessarily indicative
of the amounts that could be realized in a current market exchange.
December 31, 2001 December 31, 2000
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets:
Cash and cash equivalents ....... $217,761 $217,761 $157,513 $157,513
Investments available for sale .. 173,697 173,697 29,337 29,337
Trading securities owned ........ -- -- 18,348 18,348
Restricted assets ............... 21,935 21,935 7,549 7,549
Receivables from clearing brokers -- -- 10,126 10,126
Long-term investments ........... 10,044 16,882 4,654 10,493
Financial liabilities:
Margin loans payable ............ -- -- 4,675 4,675
Notes payable and long-term debt 219,081 243,273 57,740 57,740
18. NEW VALLEY CORPORATION
Following the December 2001 distribution of New Valley's broker-dealer
operations (refer to Note 19) and asset dispositions in Russia, New Valley
is engaged in the real estate business and holds a significant amount of
cash and other investments. The business strategy of New Valley is to
continue to operate its real estate business and to acquire operating
businesses through merger, purchase of assets, stock acquisition or other
means, or to acquire control of operating companies through one of such
means, with the purpose of being primarily engaged in a business or
businesses other than that of investing, reinvesting, owning, holding or
trading in securities. In the interim, New Valley's cash and investments
are available for general corporate purposes, including for acquisition
purposes. Pending any use of these funds in the real estate business or
for acquisitions, New Valley's liquid assets have been invested consistent
with the preservation of their value.
The Investment Company Act and its regulations generally impose
substantive restrictions on a company that owns "investment securities"
having a value in excess of 40% of the company's "total assets". New
Valley, which is now above this threshold following the distribution of
its broker-dealer operations and asset dispositions in Russia, has been
relying since December 2001 on the one-year exemption from registration
F-40
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
under the Investment Company Act provided by Rule 3a-2. New Valley will
attempt to be engaged, within the one-year period prescribed by Rule 3a-2,
primarily in a business or businesses other than that of investing,
reinvesting, owning, holding or trading in securities. However, there is a
risk that New Valley will not be successful in becoming engaged in such
business and will become subject to the Investment Company Act. If New
Valley were required to register under the Investment Company Act, it
would be subject to a number of severe substantive restrictions on its
operations, capital structure and management. For example, it would be
prohibited from entering into principal transactions and joint
transactions with affiliates. It would also be prohibited from issuing
convertible securities and options and would be subject to limitations on
leverage.
In October 1999, New Valley's Board of Directors authorized the repurchase
of up to 2,000,000 common shares from time to time on the open market or
in privately negotiated transactions depending on market conditions. As of
December 31, 2001, New Valley had repurchased 422,000 shares for
approximately $1,500. At December 31, 2001, the Company owned 56.3% of New
Valley's common shares.
In February 2001, New Valley sold its Royal Palm Beach, Florida shopping
center for $9,500 before closing adjustments and expenses and recognized a
gain of $900 on the sale. New Valley has engaged in discussions to dispose
of its remaining shopping center in Kanawha, West Virginia.
RUSSIAN REAL ESTATE. In February 1998, New Valley and Apollo organized
Western Realty Development to make real estate investments in Russia. New
Valley contributed the real estate assets of BrookeMil, including the
Ducat Place II office building in Moscow and the adjoining site for the
proposed development of Ducat Place III, to Western Realty Development,
and Apollo contributed $73,281, including the investment in Western Realty
Repin LLC discussed below.
Western Realty Development made a $30,000 participating loan to
Western Tobacco Investments which held Brooke (Overseas)'s interest in
Liggett-Ducat. The net cash proceeds from the August 2000 sale of Western
Tobacco Investments were divided between Brooke (Overseas) and Western
Realty Development in accordance with the terms of the participating loan.
Through their investments in Western Realty Development, New Valley
received $57,208 in cash proceeds from the sale, and Apollo received
$68,338. New Valley recorded a gain of $52,512 in connection with the
transaction in 2000.
In 2001, in connection with the sale of Western Tobacco Investments,
Gallaher Overseas purchased from a subsidiary of BrookeMil for $1,500 land
adjacent to the Liggett-Ducat manufacturing facility outside Moscow.
On December 21, 2001, Western Realty Development sold to Andante Limited,
a Bermuda company, all of the membership interests in its subsidiary
Western Realty Investments LLC, the entity through which Western Realty
Development owned Ducat Place II and the adjoining Ducat Place III site.
The purchase price for the sale was approximately $42,000 including the
assumption of mortgage debt and payables. Of the net cash proceeds from
the sale, New Valley received approximately $21,000, and Apollo received
approximately $9,000. These amounts are subject to adjustment based on
final closing expenses. New Valley recorded a loss of $21,842 in
connection with the sale in 2001.
In June 1998, New Valley and Apollo organized Western Realty Repin to make
a loan to BrookeMil. Through December 31, 2001, Western Realty Repin had
advanced $41,425, of which $29,015 was funded by Apollo to BrookeMil. The
proceeds of the loan have been used by BrookeMil for the acquisition and
preliminary development of the Kremlin sites, two adjoining sites totaling
F-41
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
10.25 acres located in Moscow across the Moscow River from the Kremlin. A
portion of the loan proceeds were also used to reimburse New Valley for
expenditures on the sites previously incurred. The sites were planned for
development as a residential and hotel complex, subject to market
conditions and the availability of financing.
As of December 31, 2001 and 2000, BrookeMil had invested $37,427 and
$35,665, respectively, in the Kremlin sites. These amounts were
classified, net of the Western Realty Repin participating loan of $38,406
and $36,127 at December 31, 2001 and 2000, respectively, as other
long-term liabilities in the consolidated balance sheet. In acquiring its
interest in one of the sites, BrookeMil agreed with the City of Moscow to
invest an additional $22,000 in 2000 in the development of the property.
In April 2000, Western Realty Repin arranged short-term financing to fund
the investment. Under the terms of the investment, BrookeMil is required
to utilize such financing amount to make construction expenditures on the
site by June 2002, although BrookeMil is seeking an extension of that
date. Failure to make the expenditures could result in the forfeiture of a
34.8% interest in the site.
New Valley has engaged in discussions to sell the Kremlin sites, its
remaining real estate holdings in Russia. New Valley anticipates it would
receive approximately 37.5% of the net proceeds of a sale.
LEGAL SETTLEMENT. In the fourth quarter of 2001, New Valley settled a
lawsuit against certain of its former insurers, which resulted in income
of $17,620. The litigation arose out of the insurers' participation in a
program of insurance covering the amount of fuel in the Westar IV and V
communication satellites owned by New Valley's former Western Union
satellite business, which was sold in 1989. The two satellites, each of
which were launched in 1982 with an expected ten-year life, had shortened
lives due to insufficient fuel. In the settlement, New Valley received
payment from the insurers for the shortened lives of the two satellites.
The settlement calls for dismissal of the lawsuit against the settling
insurers as well as dismissal of the counterclaims brought against New
Valley by these insurers.
19. DISCONTINUED OPERATIONS
The consolidated financial statements of the Company have been
reclassified to reflect as discontinued operations New Valley's
broker-dealer operations, which were New Valley's primary source of
revenues since 1995. Accordingly, revenues, costs and expenses, and cash
flows of the discontinued operations have been excluded from the
respective captions in the consolidated statements of operations and
consolidated statements of cash flows. The net operating results of these
entities have been reported, net of minority interests and applicable
income taxes, as "Income (loss) from discontinued operations," and the net
cash flows of these entities have been reported as "Impact of discontinued
operations."
In May 2001, GBI Capital Management Corp. acquired all of the outstanding
common stock of Ladenburg Thalmann & Co. Inc. ("Ladenburg Thalmann"), New
Valley's 80.1% owned broker-dealer subsidiary. The purchase price was
23,218,599 shares, $10,000 in cash and $10,000 principal amount of senior
convertible notes due December 31, 2005. Following the transaction, the
name of GBI, a public company listed on the American Stock Exchange, was
changed to Ladenburg Thalmann Financial Services Inc. ("LTS"). The notes
bear interest at 7.5% per annum and are convertible into 4,799,271 shares
of LTS common stock. Upon closing, New Valley also acquired an additional
3,945,060 shares of LTS from the former Chairman of LTS for $1.00 per
share. Following completion of the transaction, New Valley owned 53.6% of
the outstanding common stock of LTS.
On November 30, 2001, New Valley announced that it would distribute its
22,543,158 shares of LTS common stock to holders of New Valley common
shares through a special dividend. On the same date, Vector announced that
it would, in turn, distribute the 12,694,929 shares of LTS common stock
F-42
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
that it would receive from New Valley to the holders of Vector's common
stock as a special dividend. The special dividends were accomplished
through pro rata distributions of the LTS shares, paid on December 20,
2001 to holders of record as of December 10, 2001. New Valley stockholders
received 0.988 of a LTS share for each share of New Valley, and Vector
stockholders received 0.348 of a LTS share for each share of Vector.
Following completion of the special dividend of the LTS's shares, New
Valley continues to hold $8,010,000 principal amount of LTS's senior
convertible promissory notes, convertible into 3,844,216 shares of LTS
common stock, and a warrant to purchase 100,000 shares of LTS common stock
at $1.00 per share. New Valley intends within a 12-month period from
November 30, 2001 to distribute to its stockholders the remaining
interests of New Valley in LTS's common stock.
Summarized operating results of the discontinued broker-dealer operations
are as follow:
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001(1) 2000 1999(2)
-------- -------- --------
Revenues ..................................... $ 88,473 $ 90,111 $ 40,852
(Loss) income from operations before
income taxes .............................. (12,030) 6,298 1,491
(Benefit) provision for income taxes ......... (1,356) 1,084 195
Minority interests in subsidiary (loss) income 8,557 (3,398) (975)
-------- -------- --------
Net (loss) income ............................ $ (2,117) $ 1,816 $ 321
======== ======== ========
---------------------------
(1) Results of operations included for the period January 1 through
December 20, 2001.
(2) Results of operations included for the period June 1 through December
31, 1999.
GAINS ON DISPOSAL OF DISCONTINUED OPERATIONS. In 2001, Vector recognized a
gain on disposal of discontinued operations of $1,580 relating to New
Valley's adjustments of accruals established during its bankruptcy
proceedings in 1993 and 1994. In 2000, Vector recognized a gain on
disposal of discontinued operations of $6,469 from adjustments of New
Valley's bankruptcy accruals. The reversal of the accruals reduced
restructuring, employee benefit and various tax accruals previously
established. In 1999, Vector recognized a gain on disposal of discontinued
operations of $1,249 related to the settlement of a lawsuit originally
initiated by New Valley's former Western Union telegraph business.
F-43
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
20. SEGMENT INFORMATION
Financial information for the Company's continuing operations before taxes
and minority interests for the years ended December 31, 2001, 2000 and
1999 follows:
Vector Liggett- Real(2) Corporate(2)
Liggett Tobacco Ducat Estate and Other Total
------- ------- ----- ------ --------- -----
2001
Revenues ...................... $728,178 $ 6,074 -- $ 9,966 $ -- $744,218
Operating income .............. 107,052 (48,643) -- 413 (27,479) 31,343
Identifiable assets ........... 174,342 93,533 -- 12,496 408,532 688,903
Depreciation and amortization . 4,586 1,686 -- 2,353 1,348 9,973
Capital expenditures .......... 18,746 41,224 -- 1,762 15,368 77,100
2000
Revenues ...................... $539,059 $ -- $ 107,263 $ 3,198 $ -- $649,520
Operating income .............. 71,434 (15,459) (5,667) (5,335) (4,872) 40,101
Identifiable assets ........... 108,662 12,006 1,252 137,185 166,743 425,848
Depreciation and amortization . 4,505 22 5,970 1,020 6 11,523
Capital expenditures .......... 13,387 790 9,000 3,663 -- 26,840
1999
Revenues ...................... $422,748 $ -- $ 100,059 $ 3,386 $ -- $526,193
Operating income .............. 76,700 (1,795) 5,215 (776) (8,832) 70,512
Identifiable assets ........... 112,900 14 160,526 57,920 173,088 504,448
Depreciation and amortization . 2,878 -- 3,323 890 71 7,162
Capital expenditures .......... 17,432 -- 43,875 2,721 -- 64,028
--------------
(1) Liggett-Ducat's revenues and operating income are included through
the seven months ended July 31, 2000, and the year ended December 31,
1999.
(2) New Valley became a consolidated subsidiary of Vector on June 4,
1999. Real Estate and New Valley's portion of Corporate and Other are
included for 2001 and 2000 and the seven months ended December 31,
1999. For 2000 and 1999, the assets of the discontinued broker-dealer
segment are included in Corporate and Other.
F-44
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
21. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Quarterly data for the year ended December 31, 2001 and 2000 are as
follows:
December 31, September 30, June 30, March 31,
2001 2001 2001 2001
---------------- ----------------- ------------- -------------
Revenues..................................... $225,064 $196,419 $182,958 $139,777
Operating (loss) income...................... (6,216) 17,000 19,388 1,171
(Loss) income from continuing
operations................................. (1,467) 8,476 11,564 2,627
Income (loss) from discontinued
operations................................. 411 (1,107) 256 (97)
-------- -------- -------- --------
Net (loss) income applicable to
common shares.............................. $ (1,056) $ 7,369 $ 11,820 $ 2,530
======== ======== ======== ========
*Per basic common share:
(Loss) income from continuing
operations................................. $ (0.04) $ 0.27 $ 0.41 $ 0.10
Income (loss) from discontinued
operations................................. 0.01 (0.03) 0.01 (0.01)
-------- -------- -------- --------
Net (loss) income applicable to
common shares.............................. $ (0.03) $ 0.24 $ 0.42 $ 0.09
======== ======== ======== ========
*Per diluted common share:
(Loss) income from continuing
operations................................. $ (0.04) $ 0.23 $ 0.34 $ 0.08
Income (loss) from discontinued
operations................................. 0.01 (0.03) 0.01 --
-------- -------- -------- --------
Net (loss) income applicable to
common shares.............................. $ (0.03) $ 0.20 $ 0.35 $ 0.08
======== ======== ======== ========
F-45
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
December 31, September 30, June 30, March 31,
2000 2000 2000 2000
------------- ------------- ----------- -----------
Revenues ............................. $ 145,236 $ 167,901 $ 188,464 $ 147,919
Operating income ..................... 17,710 7,272 9,902 5,217
Income from continuing
operations ......................... 6,108 158,663 2,883 100
Income from discontinued
operations ......................... 6,808 26 63 1,388
Income (loss) from extraordinary items 831 (2,422) -- (230)
----------- ----------- ----------- -----------
Net income applicable to
common shares ...................... $ 13,747 $ 156,267 $ 2,946 $ 1,258
=========== =========== =========== ===========
*Per basic common share:
Income from continuing
operations ......................... $ 0.24 $ 6.31 $ 0.12 $ --
Income from discontinued
operations ......................... 0.27 0.01 -- 0.06
Income (loss) from extraordinary items 0.03 (0.10) -- (0.01)
----------- ----------- ----------- -----------
Net income applicable to
common shares ...................... $ 0.54 $ 6.22 $ 0.12 $ 0.05
=========== =========== =========== ===========
*Per diluted common share:
Income from continuing
operations ......................... $ 0.21 $ 5.31 $ 0.10 $ --
Income from discontinued operations .. 0.23 -- -- 0.05
Income (loss) from extraordinary items 0.03 (0.08) -- (0.01)
----------- ----------- ----------- -----------
Net income applicable to
common shares ...................... $ 0.47 $ 5.23 $ 0.10 $ 0.04
=========== =========== =========== ===========
-------------
* Per share computations include the impact of 5% stock dividends paid on
September 28, 2001 and on September 28, 2000. Quarterly basic and
diluted net income or loss per common share were computed independently
for each quarter and do not necessarily total to the year to date basic
and diluted net income per common share.
F-46
VECTOR GROUP LTD.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions of Period
--------------------------------------------- --------------- --------------- --------------- ---------------
YEAR ENDED DECEMBER 31, 2001
Allowances for:
Doubtful accounts ............ $ 565 $ 79 $ 406 $ 238
Cash discounts ............... 508 26,166 24,811 1,863
Sales returns ................ 3,690 204 -- 3,894
------ ------- ------- ------
Total ..................... $4,763 $26,449 $25,217 $5,995
====== ======= ======= ======
YEAR ENDED DECEMBER 31, 2000
Allowances for:
Doubtful accounts ............ $ 691 $ 253 $ 379 $ 565
Cash discounts ............... 311 18,867 18,670 508
Sales returns ................ 4,190 -- 500 3,690
------ ------- ------- ------
Total ..................... $5,192 $19,120 $19,549 $4,763
====== ======= ======= ======
YEAR ENDED DECEMBER 31, 1999
Allowances for:
Doubtful accounts ............ $1,096 $ 217 $ 622 $ 691
Cash discounts ............... 911 14,957 15,557 311
Sales returns ................ 7,100 -- 2,910 4,190
------ ------- ------- ------
Total ..................... $9,107 $15,174 $19,089 $5,192
====== ======= ======= ======
Provision for inventory obsolescence $1,965 $ 1,124 $ 679 $2,410
====== ======= ======= ======
F-47