SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K10-K/A
(Amendment No. 1)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 20212022
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
| Delaware | | 1-5759 | | 65-0949535 |
(State or other jurisdiction of incorporation
incorporation or organization) | | Commission File Number | | (I.R.S. Employer Identification No.) |
4400 Biscayne Boulevard
Miami, Florida 33137
305-579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class: | Trading Symbol(s) | Name of each exchange on which registered: |
| Common stock, par value $0.10 per share | VGR | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. þ Yes o No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. o Yes þ No
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). þ Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ☑ | Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging Growth Company |
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to § 240.10D-1(b) ☐
Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. ☐ Yes þ No
The aggregate market value of the common stock held by non-affiliates of Vector Group Ltd. as of June 30, 20212022 was approximately $2.06$1.53 billion.
At February 25, 2022,April 27, 2023, Vector Group Ltd. had 153,868,177155,976,547 shares of common stock outstanding.
Auditor Firm PCAOB ID: 34 Auditor Name: Deloitte & Touche LLP Auditor Location: Miami, Florida
DOCUMENTS INCORPORATED BY REFERENCE:
Item 10 of Part III (Items 10, 11, 12, 13 and 14)of this form 10-K/A incorporates by reference to the registrant’s Form 10-K for the fiscal year ended December 31, 2022.
EXPLANATORY NOTE
Vector Group Ltd. (the “Company” or “Vector”) is filing this Amendment No. 1 to Form 10-K (this “Amendment”) to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2022, originally filed with the SEC on February 21, 2023 (the “Original Annual Report”), to provide the information required by Part III of Form 10-K. This information was previously omitted from the definitive Proxy Statement forOriginal Annual Report in reliance on General Instruction G(3) to Form 10-K, which permits the 2022 Annual Meeting of Stockholdersinformation in Part III to be incorporated in Form 10-K by reference from the registrant’s definitive proxy statement or included in an amendment to Form 10-K, in either case filed with the Securities and Exchange Commission (the “SEC”) no later than 120 days after the end of the Registrant’s fiscal year coveredyear.
In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934 (the “Exchange Act”), new certifications by our principal executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2002 are being filed as exhibits to this report.Amendment under Item 15 of Part IV. Because no financial statements are contained within this Amendment, we are not filing currently dated certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Amendment also amends the cover page to update the number of shares of our common stock outstanding and to remove the statement that information is being incorporated by reference from our definitive proxy statement.
Except as described above, no other changes have been made to the Original Annual Report. The Original Annual Report continues to speak as of the date on which it was filed, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the date on which it was filed. Accordingly, this Amendment should be read in conjunction with the Original Annual Report and with our other filings made with the SEC subsequent to the filing of the Original Annual Report. In this Amendment, we provide our website address, www.vectorgroupltd.com, to disclose that certain information is available on our website. Information contained on, or that can be accessed through, our website is not incorporated by reference into this Amendment, and references to our website address in this Amendment are inactive textual references only.
VECTOR GROUP LTD.
FORM 10-K
TABLE OF CONTENTS
| | | | | | | | |
| | | Page |
| | |
|
| | |
| | |
| | |
| | |
| | |
| | |
|
|
| | |
| Reserved | |
| | |
| | |
| | |
| | |
| | |
| | |
|
|
| | |
| | |
| | |
| | |
| | |
| |
|
| | |
Item 16. | Form 10-K Summary | |
| |
| | |
EX-21.1 |
EX-22.1 |
EX-23.1 |
EX-31.1 |
EX-31.2 |
EX-32.1 |
EX-32.2 |
EX-99.1 |
EX-99.2 |
EX-101 INSTANCE DOCUMENT - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
PART IIII
ITEM 1.10.BUSINESSDIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
BasisInformation regarding each of Presentationthe executive officers of the Company, including name, age, positions and offices held with the Company, and term of office as an officer of the Company, is provided in Item 5 of the Original Annual Report and incorporated by reference herein.
Directors
The Consolidated Financial Statements included in this annual report present the financial position of Vector Group Ltd., a Delaware corporation, as of December 31, 2021 and 2020 and the results of our operations for the years ended December 31, 2021, 2020 and 2019 giving effect to the spin-off of Douglas Elliman Inc. with the historical financial results of Douglas Elliman reflected as discontinued operations. The cash flows and comprehensive income related to Douglas Elliman have not been segregated and are included in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, respectively, for all periods presented. Unless otherwise indicated, thefollowing table sets forth certain information in the Notes to the Consolidated Financial Statements refer only to Vector Group’s continuing operations and do not include discussion of balances or activity of Douglas Elliman.
Spin-off of and Relationship with Douglas Elliman
On December 29, 2021, at 11:59 p.m., New York City time, we completed the distribution to our stockholders (including Vector Group common stock underlying outstanding stock options and restricted stock awards) of the common stock of Douglas Elliman. Each holder of our common stock (including common stock underlying outstanding stock option awards and restricted stock awards) received one share of Douglas Elliman’s common stock for every two shares of our common stock (including Vector Group common stock underlying outstanding stock option awards and restricted stock awards) held of record as of the close of business, New York City time, on December 20, 2021. An aggregate of 77,720,159 shares of Douglas Elliman’s common stock were issued and distributed, with fractional shares converted to cash and paid to applicable Vector Group stockholders.
Following the spin-off, Douglas Elliman is a separate public company listed on the New York Stock Exchange and trades under the symbol “DOUG”, and owns the real estate services and property technology investment business formerly owned by Vector Group through Vector Group’s subsidiary New Valley LLC, a Delaware limited liability company. Vector Group and Douglas Elliman entered into a Distribution Agreement and several ancillary agreements for the purpose of accomplishing the distribution of Douglas Elliman common stock to Vector Group’s stockholders. These agreements also govern our relationship with Douglas Elliman after the spin-off and provide for the allocation of employee benefits, tax and additional liabilities and obligations attributable to periods before and after the distribution. These agreements also include a Transition Services Agreement with respect to transition services and a number of ongoing commercial relationships. The Distribution Agreement includes an agreement that Vector Group and Douglas Elliman will provide each other with appropriate indemnities with respect to liabilities arising out of the business transferred to Douglas Elliman by Vector Group. Douglas Elliman is party to other arrangements with Vector Group and its subsidiaries. We also entered into a Tax Disaffiliation Agreement with Douglas Elliman that governs each of our respective rights, responsibilities and obligations with respect to taxes and tax benefits, the filing of tax returns, the control of audits and other tax matters.
In addition, Douglas Elliman has been engaged by developers as the sole broker or the co-broker for several real estate development projects that New Valley owns an interest in through its real estate venture investments.
Following the spin-off, there is an overlap between certain officers of Vector Group and Douglas Elliman. Howard M. Lorber serves as the President and Chief Executive Officer of Vector Group and of Douglas Elliman. Richard J. Lampen serves as the Chief Operating Officer of Vector Group and of Douglas Elliman, J. Bryant Kirkland III serves as the Chief Financial Officer and Treasurer of Vector Group and of Douglas Elliman, Marc N. Bell serves as the General Counsel and Secretary of Vector Group and of Douglas Elliman, and J. David Ballard serves as Senior Vice President, Enterprise Efficiency and Chief Technology Officer of Vector Group and of Douglas Elliman. Furthermore, immediately following the spin-off, three of the members of our Board of Directors, Messrs. Lorber and Lampen as well as Wilson L. White, will also serve as directors of Douglas Elliman.
Overview
Vector Groupmembers. Each director is a holding company and is engaged principally in two business segments:
•Tobacco: the manufacture and sale of cigarettes in the United States through our Liggett Group LLC and Vector Tobacco LLC subsidiaries, and
•Real Estate: the real estate investment business through our subsidiary New Valley LLC, which (i) has interests in numerous real estate projects across the United States and (ii) is seeking to acquire or invest in additional real estate properties or projects.
Strategy
Our strategy is to maximize stockholder value by increasing the profitability of our subsidiaries in the following ways:
Liggett and Vector Tobacco
•Continue to offer an excellent value proposition in the U.S. cigarette industry by consistently delivering high quality products within the discount segment;
•Capitalize on our tobacco subsidiaries’ cost advantage in the United States cigarette market due to the favorable treatment that they receive under the Master Settlement Agreement (“MSA”);
•Focus marketing and selling efforts on the discount segment, continue to build volume and margin in focus discount brands (Eagle 20’s, Pyramid, and Montego) and utilize core brand equity to selectively build distribution;
•Selectively expand the portfolio of partner brands and private label brands utilizing a pricing strategy that offers long-term price stability for customers;
•Increase operational efficiency by developing and adopting an organizational structure to maximize profit potential; and
•Identify, develop and launch relevant new tobacco products to the market in the future.
New Valley
•Continue to leverage our expertise as direct investors by actively pursuing real estate investments; and
•Invest our excess funds opportunistically in real estate situations that we believe can maximize stockholder value.
Tobacco Operations
General. Our Tobacco segment operates through our two subsidiaries, Liggett and Vector Tobacco. Liggett is the operating successor to Liggett & Myers Tobacco Company, which was founded in 1873. Vector Tobacco is a discount cigarette manufacturer selling product in the deep discount category. In this report, certain references to “Liggett” refer to our tobacco operations, including the business of Liggett and Vector Tobacco, unless otherwise specified.
For the year ended December 31, 2021, Liggett was the fourth-largest manufacturer of cigarettes in the United States in terms of unit sales. Liggett’s manufacturing facilities are located in Mebane, North Carolina where it manufactures most of Vector Tobacco’s cigarettes pursuant to a contract manufacturing agreement. At present, Liggett and Vector Tobacco have no foreign operations.
The U.S. cigarette market consists of premium cigarettes, which are generally marketed under well-recognized brand names at higher retail prices to adult smokers with a strong preference for branded products, and discount cigarettes, which are marketed at lower retail prices to adult smokers who are more value conscious. In recent years, however, the discounting of premium cigarettes has become far more significant in the marketplace. Since 2004, Liggett has only produced discount cigarettes and all of Liggett’s units sold in 2021, 2020 and 2019 were in the discount segment.
According to data from Management Science Associates, Inc., the discount segment represented 28.3% of the total U.S. cigarette market in 2021 compared to 28.6% in 2020 and 28.3% in 2019. Liggett’s domestic shipments of approximately 8.6 billion cigarettes during 2021 accounted for 4.1% of the total cigarettes shipped in the United States during such year. Liggett’s market share was 4.1% in 2021, 4.1% in 2020 and 4.0% in 2019. According to Management Science Associates, Liggett held a share of approximately 14.4% of the overall discount market segment for 2021 compared to 14.2% for 2020 and 14.3% for 2019.
Liggett produces cigarettes in approximately 100 combinations of length, style and packaging. Liggett’s current brand portfolio includes:
•Eagle 20’s — a brand positioned in the deep discount segment for long-term growth re-launched as a national brand in 2013; Eagle 20’s represented 57.0% of Liggett’s unit volume in 2021, 62.0% in 2020 and 59.9% in 2019. Eagle 20’s is the largest seller in Liggett’s family of brands,
•Pyramid — the industry’s first deep discount product with a brand identity re-launched in the second quarter of 2009; Pyramid represented 19.5% of Liggett’s unit volume in 2021, 23.2% in 2020 and 26.5% in 2019,
•Montego — From August 2020 to December 2021, Liggett expanded the distribution of its Montego deep discount brand into a total of 35 states. Montego was Liggett’s third-largest brand for the year ended December 31, 2021. Prior to August 2020, Montego was sold in select targeted markets in four states. Montego’s volume represented
approximately 15.9% of Liggett’s unit volume for the year ended December 31, 2021 compared to approximately 6.0% for the year ended December 31, 2020.
•Grand Prix, Liggett Select, Eve, USA and various partner brands and private label brands.
Under the MSA reached in November 1998 with 46 states and various territories, cigarette manufacturers selling product in the U.S. 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 its grandfathered market share established under the MSA of approximately 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco has no payment obligation unless its market share exceeds approximately 0.28% of the U.S. cigarette market. We believe our tobacco subsidiaries have gained a sustainable cost advantage over their competitors as a result of the settlement.
Liggett’s and Vector Tobacco’s payments under the MSA are based on each respective company’s incremental market share above the grandfathered market share applicable to each respective company. Thus, if Liggett’s total market share is 3%, its MSA payment is based on 1.35%, which is the difference between Liggett’s total market share of 3% and its approximate applicable grandfathered market share of 1.65%. We anticipate that both Liggett’s and Vector Tobacco’s payment exemptions will be fully utilized for the foreseeable future.
The source of industry data in this report is Management Science Associates, Inc., an independent third-party data management organization that collects wholesale and retail shipment data from various cigarette manufacturers and distributors and provides analysis of market share unit sales volume for individual companies and the industry as a whole. Management Science Associates, Inc.’s information relating to unit sales volume and market share of certain smaller, primarily deep discount, cigarette manufacturers is based on estimates developed by Management Science Associates, Inc.
Sales, Marketing and Distribution. Liggett’s products are distributed from a central distribution center in Mebane, North Carolina to 15 public warehouses located throughout the United States by third-party trucking companies. These warehouses serve as local distribution centers for Liggett’s customers.
Liggett’s customers are primarily wholesalers and distributors of tobacco and convenience products as well as large grocery, drug and convenience store chains. Two customers accounted for 14% and 12% of Liggett’s revenues in 2021, 18% and 12% of Liggett’s revenues in 2020, and 17% and 12% of Liggett’s revenues in 2019. Concentrations of credit risk with respect to trade receivables are generally limited due to Liggett’s large number of customers. Liggett’s two largest customers, represented approximately 0% and 2%, respectively, of net accounts receivable at December 31, 2021, 5% and 4%, respectively, at December 31, 2020, and 2% and 4%, respectively, at December 31, 2019. Ongoing credit evaluations of customers’ financial condition are performed and, generally, no security is required. Liggett maintains appropriate reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s expectations.
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. 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. These trademarks are pledged as collateral for certain of our senior secured debt.
Manufacturing. Liggett purchases and maintains leaf tobacco inventory to support its cigarette manufacturing requirements. Liggett believes that there is a sufficient worldwide supply of tobacco 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 leaf tobacco, including flue-cured, burley, Maryland, oriental, 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 these products may vary between premium and discount products. Liggett purchases its tobacco requirements from both domestic and foreign leaf dealers, much of it under long-term purchase commitments. As of December 31, 2021, the majority of Liggett’s commitments were for the purchase of foreign tobacco.
Liggett’s cigarette manufacturing facility was designed for the execution of short production runs in a cost-effective manner, which enables Liggett to manufacture and market approximately 100 different cigarette brand styles. Liggett’s facility produced approximately 8.5 billion cigarettes in 2021, but maintains the capacity to produce approximately 17.6 billion cigarettes per year. Vector Tobacco has contracted with Liggett to produce most of its cigarettes at Liggett’s manufacturing facility in Mebane.
Competition. Liggett’s competition is divided into two segments. The first segment consists of the three largest manufacturers of cigarettes in the United States: Philip Morris USA Inc., which is owned by Altria Group, Inc., RJ Reynolds Tobacco Company, which is owned by British American Tobacco Plc, and ITG Brands LLC, which is owned by Imperial Brands Plc. These three 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 manufacturers and importers, most of which sell 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. However, after the MSA was signed, some smaller manufacturers and importers that are not parties to the MSA (“Non-Participating Manufacturers”) were able to overcome these competitive barriers due to an unintended cost advantage resulting from the MSA. These Non-Participating Manufacturers were subsequently impacted by the state statutes enacted pursuant to the MSA; however, these companies still have significant market share in the aggregate through competitive discounting in this segment.
In the cigarette business, Liggett competes on dual fronts. Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, compete among themselves for premium brand market share based on advertising, promotional activities, trade rebates and incentives. They compete with Liggett and others for discount market share, primarily on the basis of price and in store merchandising. These competitors have substantially greater financial resources than Liggett, and most of their brands have greater sales and consumer recognition than Liggett’s products. Liggett’s discount brands must also compete in the marketplace with the smaller manufacturers’ and importers’ deep discount brands.
According to Management Science Associates Inc.’s data, the unit sales of Philip Morris and RJ Reynolds accounted in the aggregate for 73.8% of the domestic cigarette market in 2021. Liggett’s domestic shipments of approximately 8.6 billion cigarettes during 2021 accounted for 4.1% of the approximately 212 billion cigarettes shipped in the United States, compared to 9.2 billion cigarettes in 2020 (4.1%) and 9.0 billion cigarettes in 2019 (4.0%).
In 2021 industry wide shipments in the United States decreased by 6.5% (approximately 14.7 billion units) and for the five year period 2016 to 2021, industry-wide shipments of cigarettes in the United States have declined by approximately 3.6% per annum. Liggett’s management believes that industry-wide shipments of cigarettes in the United States will continue to decline as a result of numerous factors. These factors include health considerations, diminishing social acceptance of smoking, and a wide variety of federal, state and local laws limiting smoking in public places, as well as increases in federal and state excise taxes and settlement-related expenses which have contributed to higher cigarette prices in recent years.
Philip Morris and RJ Reynolds domination of the domestic cigarette market makes it more difficult for Liggett to compete for shelf space in retail outlets and could impact price competition in the market, either of which could have a material adverse effect on its sales volume, operating income and cash flows.
Historically, Philip Morris and RJ Reynolds, have been able to determine cigarette prices for the various pricing tiers within the industry. Market pressures have historically caused other cigarette manufacturers to bring their prices in line with the levels established by these two major manufacturers. Off-list price discounting and similar promotional activity by manufacturers, however, has substantially affected the average price differential at retail, which can be significantly less than the manufacturers’ list price gap. In addition, in recent years, the discount segment has experienced increased price competition from smaller manufacturers and this has led to more aggressive price discounting of certain “deep discount” brands when compared to “traditional discount” brands. Consequently, changes in the price gap of products at retail between “deep discount” and “traditional discount” has led to shifts in price segment performance.
Legislation and Regulation
In the United States, tobacco products are subject to substantial and increasing legislation, regulation, taxation, and litigation, which have a negative effect on revenue and profitability.
The cigarette industry continues to be challenged on numerous fronts. The industry faces increased pressure from anti-smoking groups and continued smoking and health litigation, the effects of which, at this time, we are unable to quantify. Product liability litigation continues to adversely affect the cigarette industry. See Item 1A. “Risk Factors”, Item 3. “Legal Proceedings” and Note 15 to our consolidated financial statements, which contain a description of litigation.
The harmful physical effects of cigarette smoking have been publicized for many years and, in the opinion of Liggett’s management, have had and will continue to have an adverse effect on cigarette sales. Since 1964, the Surgeon Generalcitizen of the United States and the Secretary of Health and Human Services have released a number of reports stating that cigarette smoking is a causative factor with respect to a variety of health hazards, including certain cancers and heart 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 and vascular disease, and emphysema.
On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “TCA”) became law. The law grants the U.S. Food and Drug Administration (“FDA”) broad authority over the manufacture, sale, marketing and packaging of
tobacco products, although FDA is prohibited from banning all cigarettes or all smokeless tobacco products. Among other measures, the law (under various deadlines):
•requires FDA to develop graphic warnings for cigarette packages and grants FDA authority to require new warnings;
•imposes new restrictions on the sale and distribution of tobacco products, including significant new restrictions on tobacco product advertising and promotion, as well as the use of brand and trade names;
•bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;
•bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol;
•gives FDA the authority to impose tobacco product standards that are appropriate for the protection of the public health (by, for example, requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling);
•requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products which could ultimately result in FDA prohibiting Liggett from selling certain of its products;
•requires pre-market approval by FDA for tobacco products represented (through labels, labeling, advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;
•requires manufacturers to report ingredients and harmful constituents and requires FDA to disclose certain constituent information to the public;
•mandates that manufacturers test and report on ingredients and constituents identified by FDA as requiring such testing to protect the public health and allows FDA to require the disclosure of testing results to the public;
•requires manufacturers to submit to FDA certain information regarding the health, toxicological, behavioral or physiological effects of tobacco products;
•requires FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing facilities;
•authorizes FDA to require the reduction of nicotine (although it may not require the reduction of nicotine yields of a tobacco product to zero) and the potential reduction or elimination of other constituents, including menthol;
•imposes (and allows FDA to impose) various recordkeeping and reporting requirements on tobacco product manufacturers; and
•grants FDA broad regulatory authority to impose additional restrictions.
The TCA imposes user fees on certain tobacco product manufacturers in order to fund tobacco-related FDA activities. User fees are allocated among tobacco product classes according to a formula set out in the statute, and then among manufacturers and importers within each class based on market share. FDA user fees for 2021 were $23,832 for Liggett and Vector Tobacco combined and will likely increase in the future.
The law also required establishment of a Tobacco Products Scientific Advisory Committee (“TPSAC”) to provide advice, information and recommendations with respect to safety, dependence and health issues related to tobacco products.
Menthol and Flavorings
On January 27, 2022, FDA announced that it expects to issue a proposed rule to prohibit menthol as a characterizing flavor in cigarettes by the spring of 2022. For the year ended December 31, 2021, approximately 19% of our cigarette unit sales were menthol flavored. We cannot predict how a tobacco product standard or a restriction on the sale and distribution of tobacco products with menthol, if ultimately issued by FDA, will impact product sales, whether it will have a material adverse effect on Liggett or Vector Tobacco, or whether it will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry. In addition to FDA, certain states, including California and Massachusetts, have, or are considering, a ban on the sale of menthol cigarettes.
Advertising and Warnings on Packaging
The TCA imposes significant new restrictions on the advertising and promotion of tobacco products. As written, these regulations significantly limit the ability of manufacturers, distributors and retailers to advertise and promote tobacco products, by, for example, restricting the use of color and graphics in advertising, limiting the use of outdoor advertising, restricting the
sale and distribution of non-tobacco items and services, gifts, and sponsorship of events, and imposing restrictions on the use for cigarette or smokeless tobacco products of trade or brand names that are used for non-tobacco products.
On March 18, 2020, FDA issued a final rule to require new health warnings on cigarette packages and in cigarette advertisements. This rule requires each cigarette package and advertisement to bear one of eleven textual warning statements accompanied by a corresponding graphic image covering 50% of the area of the front and rear panels of cigarette packages and at least 20% of the area at the top of cigarette advertisements. The rule establishes marketing requirements that include the random and equal display and distribution of the required warnings for cigarette packages and quarterly rotation of the required warnings for cigarette advertisements. The final rule provided for an effective date of June 18, 2021, 15 months after issuance of the final rule. On April 3, 2020, Liggett, along with other tobacco companies, commenced an action against the FDA in the United States District Court, District of Texas (Tyler Division) challenging the legality of the graphic warning final rule. On February 10, 2022, the court granted a motion to postpone the effective date of the final rule to April 9, 2023. The inclusion of new warnings and rotation requirements pursuant to the final rule would likely increase Liggett’s production costs.
Product Review
The TCA requires premarket review of “new tobacco products.” A “new tobacco product” is one that was not commercially marketed in the United States as of February 15, 2007 or that was modified after that date. In general, before a company may commercially market a “new tobacco product,” it must either (a) submit an application and obtain an order from FDA permitting the product to be marketed; or (b) submit an application and receive an FDA order finding the product to be “substantially equivalent” to a “predicate” tobacco product that was commercially marketed in the U.S. as of February 15, 2007. A “substantially equivalent” tobacco product is one that has the “same characteristics” as the predicate or one that has “different characteristics” but does not raise “different questions of public health.”
Manufacturers of products first introduced after February 15, 2007 and before March 22, 2011 who submitted a substantial equivalence application to FDA prior to March 23, 2011 may continue to market the tobacco product unless FDA issues an order that the product is not substantially equivalent (“NSE”). Failure to timely submit the application, or FDA’s conclusion that such a “new tobacco product” is not substantially equivalent, will cause the product to be deemed misbranded and/or adulterated. After March 22, 2011, a “new tobacco product” may not be marketed without an FDA substantial equivalence determination. Prior to the deadline, Liggett and Vector Tobacco submitted substantial equivalence applications to FDA for each of their respective cigarette brand styles.
To date, Liggett has received NSE orders relating to 20 cigarette brand styles. Liggett has elected to pursue administrative appeals with FDA for 14 of the 20 cigarette brand styles and discontinued six brand styles. Sales of these 14 cigarette brand styles accounted for approximately 0.6% of the tobacco segment’s annual revenue in 2021. Liggett is continuing to sell the affected cigarette brand styles during the administrative appeal process. Vector Tobacco received NSE orders relating to three cigarette brand styles in November 2017. Sales of these three cigarette brand styles accounted for approximately 0.4% of the tobacco segment’s annual revenue in 2021. Vector Tobacco elected to pursue administrative appeals with FDA and is continuing to sell the affected cigarette brand styles during the administrative appeal process.
On April 5, 2018, FDA announced a change in its process for reviewing “provisional” substantial equivalence applications. Both Liggett and Vector Tobacco submitted provisional substantial equivalence applications for all of their respective cigarette brand styles. FDA announced that it will continue to review the approximately 1,000 pending provisional applications that were determined to have the greatest potential to raise different questions of public health and will remove from review the approximately 1,500 provisional applications that were determined less likely to do so.
As a result, Vector Tobacco received a letter from FDA in April 2018, advising that FDA does not intend to conduct further review of Vector Tobacco’s remaining substantial equivalence applications that have not yet received a substantial equivalence determination unless one of the following occurs: (i) the new tobacco product that is the subject of the provisional application is also the subject of another pending application submitted by the same manufacturer; (ii) FDA receives new information (e.g., from inspectional findings) suggesting that the new tobacco product that is the subject of a provisional application is more likely to have the potential to raise different questions of public health than previously determined; or (iii) FDA has reason to believe that the new tobacco product was not introduced or delivered for introduction into interstate commerce for commercial distribution in the United States after February 15, 2007, and prior to March 22, 2011 ((i), (ii) and (iii) are collectively, the “Conditions”).
On May 21, 2018, FDA sent a letter to Liggett stating that the products identified in the letter would be removed from review unless one of the Conditions occurs.
We cannot predict whether FDA will deem Liggett’s and Vector Tobacco’s outstanding applications to be sufficient to support determinations of substantial equivalence for the products covered by these substantial equivalence reports. It is possible that FDA could determine that some, or all, of these products are “not substantially equivalent” to a preexisting
tobacco product, as the agency has already done for 20 of Liggett’s applications. NSE orders for other cigarette styles may require us to stop the sale of the applicable cigarettes and other cigarette styles and could have a material adverse effect on us.
Nicotine
Under the TCA, FDA may adopt a tobacco product standard for nicotine if the agency concludes that such a standard is appropriate for the protection of the public health. FDA may refer the proposed regulation to the TPSAC for a report and recommendation. FDA may consider a wide range of issues prior to the promulgation of a final rule, including the technical achievability of compliance with the proposed product standard. The rulemaking process could take many months or years and once a final rule is published it ordinarily would not be expected to take effect until at least one year after the date of publication. We cannot predict how a tobacco product standard, if ultimately issued by FDA, will impact product sales, whether it will have a material adverse effect on Liggett or Vector Tobacco, or whether it will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry.
State Minimum Price Legislation
In 2020, voters in the State of Colorado approved Proposition EE, increasing taxes on cigarettes, tobacco and nicotine products. In addition to raising the Colorado state excise tax on cigarettes, Proposition EE included a provision that fixed the minimum retail price of cigarettes in Colorado at $7.00 per pack as of January 1, 2021, and thus reduced the competitive advantage of our Company’s discount priced cigarettes in the Colorado marketplace. We have commenced litigation against Colorado challenging the legality of the minimum price provision contained in Proposition EE, the outcome of which cannot be predicted. Although no other state has adopted a fixed minimum retail price law for cigarettes, other states may attempt to do so if the minimum price provision in Proposition EE is determined by the courts to be legal. In the event that litigation challenging the minimum price legislation is not successful or other states pass similar legislation that withstands judicial scrutiny, the result could have a material adverse effect on our future financial condition, results of operations and cash flows.
The MSA and Other State Settlement Agreements
In March 1996, March 1997, and March 1998, Liggett entered into settlements of tobacco-related litigation with 45 states and territories. The settlements released Liggett from all tobacco-related claims within those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, R.J. Reynolds and two other companies (the “Original Participating Manufacturers” or “OPMs”) and Liggett (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”), (the OPMs and SPMs are hereinafter referred to jointly as the “Participating Manufacturers”) entered into the MSA with 46 states and various territories (collectively, the “Settling States”) to settle the asserted and unasserted healthcare cost recovery and certain other claims of those Settling States. The MSA received final judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett and Vector Tobacco from:
•all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; and (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
•all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds, relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
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 certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage usage of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating
Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual payments of $9.0 billion (subject to applicable adjustments, offsets and reductions). These annual payments are allocated based on 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.
Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector Tobacco’s domestic shipments accounted for 4.1% of the total cigarettes sold in the United States in 2021. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year.
Liggett may have additional payment obligations under the MSA and its other settlement agreements with the states. See Item 1A. “Risk Factors” and Note 15 to our consolidated financial statements.
New Valley
New Valley is our real estate investment business. We have invested in numerous real estate projects in different asset classes, including planned communities, condominium and mixed – use developments, apartment buildings, hotels and commercial properties.
Real Estate Investments
We own, and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our current real estate investments include the following projects (as of December 31, 2021):
Investments in Real Estate, net
Escena. We are developing a 450-acre approved master planned community in Palm Springs, CA. The development consists of 615 residential lots, which include both single and multi-family lots, an 18-hole golf course, clubhouse restaurant, golf shop and seven-acre site approved for a 450-room hotel.
Condominium and Mixed-Use Development
As of December 31, 2021, we owned investments in condominium and mixed-use development real estate ventures, carried at $80.1 million. We had condominium and mixed-use development real estate ventures, carried at $22.7 million as of December 31, 2021, in the New York City Standard Metropolitan Statistical Area (“SMSA”). Of the 9 condominium and mixed-use development real estate ventures in the New York City SMSA, seven were closing on units or completed as of December 31, 2021, and the remaining two had projected construction completion dates in 2023. We had condominium and mixed-use development real estate ventures with projected construction completion dates between August 2022 and July 2024 carried at $57.5 million in other U.S. areas as of December 31, 2021.
Apartment Buildings
As of December 31, 2021, we owned an investment in a venture that owns an apartment building located in Hoover, AL, which was carried at $11.9 million. The investment was operating as of December 31, 2021.
Hotels
As of December 31, 2021, we owned investments in hotels carried at $3.2 million, with ventures carried at $1.6 million located in the New York City SMSA and the remainder located in Bermuda. The hotels were operating as of December 31, 2021.
Commercial
As of December 31, 2021, we owned investments in commercial real estate ventures carried at $7.3 million, one located in the New York City SMSA and one located in Las Vegas, Nevada. Both of the commercial real estate ventures were operating as of December 31, 2021.
In our real estate investment business, we seek to acquire investment interests in domestic and international real estate projects through debt and equity investments. We and our partners seek to enhance the cash flows and returns from our investments by using varying levels of leverage. In addition, we and our partners may earn incentives on certain investments if the investments achieve rates of return that exceed targeted thresholds. Our real estate investments are located in the United States and Bermuda and we may pursue growth in other markets where we identify attractive opportunities to invest in or acquire assets and to achieve strong risk-adjusted returns. We strive to invest at attractive valuations, capitalize on distressed situations where possible, create opportunities for superior valuation gains and cash flow returns and monetize assets at appropriate times to realize value. As of December 31, 2021, our real estate investment business held interests in joint ventures recorded on our financial statements at approximately $105.1 million and approximately $9.1 million in consolidated real estate investments.
For additional information concerning these investments, see Note 10 to our consolidated financial statements and “Summary of Real Estate Investments” located in Item 7. - “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Human Capital
We have long believed that the diversity and talent of our people provide a competitive advantage to Vector Group and its subsidiaries.As of December 31, 2021, we employed approximately 500 employees, of which approximately 475 were employed by Liggett, and approximately 25 were employed at Vector Group’s corporate headquarters.
Approximately 31% of the Liggett workforce has been employed by the Company for more than 15 years. Liggett has maintained long relationships with its employees due to its philosophy of listening to their comments and concerns and regularly engaging them to enhance its human capital management objectives.
Historically, this has occurred with frequent communication across all levels of Liggett and in-person events with senior management. We believe this philosophy served Liggett well during the COVID-19 pandemic.
The health and safety of our employees is foundational to achieving our human capital objectives. In response to the COVID-19 pandemic, Liggett’s management proactively took the step of closing its cigarette factory for two weeks, beginning March 15, 2020, for scheduled maintenance and to plan for the necessary COVID-19 manufacturing protocols. Liggett’s management implemented and continues to use an extensive set of additional protocols and procedures to ensure the safety of its workforce. Among other things, Liggett introduced mandatory mask-wearing, physical distancing and reconfigured certain workspaces in its cigarette factory and the headquarters of Liggett Vector Brands.
Beginning in March 2020, management provided employees with periodic updates on Liggett’s business, including its response to the COVID-19 pandemic. Liggett believes that these initiatives were key in the successful execution of its manufacturing and sales operations throughout the COVID-19 pandemic.
Liggett offers comprehensive benefit programs to its employees which provide them with, among other things, medical, dental, and vision healthcare; 401(k) matching contributions; paid maternity leave; tuition assistance; and paid vacation time.
Of the approximately 475 employees at Liggett as of December 31, 2021, approximately 280 were employed at Liggett’s Mebane factory, 140 were employed throughout the United States in sales positions and the remaining 55 were employed in administrative functions supporting and coordinating sales and marketing efforts.
Of the employees at Liggett’s factory, approximately 200 were hourly employees who are represented by four unions affiliated with either the AFL-CIO or the Teamsters. Liggett has not experienced any significant work stoppages since 1977.
We will continue to listen, while engaging and connecting with employees at Liggett to further our human capital management objectives by continuing the initiatives we first began during the COVID-19 pandemic.
Available Information
Our website address is www.vectorgroupltd.com. We make available free of charge on the Investor Relations section of our website (http://www.vectorgroupltd.com/investor-relations/) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). We also make available through our website other reports filed with the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act. Copies of these filings also are available on the SEC’s website. Copies of our
Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee charter, Compensation Committee charter and Corporate Governance and Nominating Committee charter have been posted on the Investor Relations section of our website and are also available in print to any stockholder who requests it. We do not intend for information contained in, or available through, our website to be part of this Annual Report on Form 10-K.
ITEM 1A.RISK FACTORS
Our business faces many risks. We have described below the known material risks that we and our subsidiaries face. There may be additional risks that we do not yet know of or that we do not currently perceive to be significant that may also impact our business or the business of our subsidiaries. Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on the business, results of operations, cash flows, financial condition or equity of us or one or more of our subsidiaries, which in turn could negatively affect the value of our common stock. You should carefully consider and evaluate all of the information included in this report and any subsequent reports that we may file with the SEC or make available to the public before investing in any securities issued by us.
Risks Relating to Our Tobacco Business
Liggett faces intense competition in the domestic tobacco industry.
Liggett is considerably smaller and has fewer resources than its major competitors, and, as a result, has in certain circumstances a more limited ability to respond to market developments. Further, all of Liggett’s unit volume is generated in the discount segment, which is highly competitive, with consumers having less brand loyalty and placing greater emphasis on price. Management Science Associates’ data indicate that in 2021, Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, controlled 73.8% of the United States cigarette market. Philip Morris is the largest manufacturer in the market, and its profits are derived principally from its sale of premium cigarettes. Philip Morris had 57.5% of the premium segment and 44.3% of the total domestic market during 2021. During 2021, all of Liggett’s sales were in the discount segment, and its share of the total domestic cigarette market was 4.1%. Historically, because of their dominant market share, Philip Morris and RJ Reynolds, have been able to determine cigarette prices for the various pricing tiers within the industry.
Further consolidation in the industry could adversely affect our ability to compete in the U.S. cigarette market.
Liggett’s business is highly dependent on the discount cigarette segment and to maintain market share, it may be required to take steps to reduce prices.
All of Liggett’s unit volume is generated in the discount segment, which is highly competitive. While Philip Morris, RJ Reynolds, and ITG Brands compete with Liggett in the discount segment of the market, Liggett also faces intense competition for market share in the discount segment from a group of smaller manufacturers and importers, most of which sell low quality deep discount cigarettes. While Liggett’s share of the discount market was 14.4% in 2021, 14.2% in 2020, and 14.3% in 2019, Management Science Associates’ data indicate that the discount market share of these other smaller manufacturers and importers was approximately 34.2% in 2021, 35.5% in 2020, and 32.3% in 2019. If pricing in the discount market continues to be impacted by these smaller manufacturers and importers, margins in Liggett’s only market segment could be negatively affected and, to maintain market share, Liggett may be required to take steps to reduce prices. Thus, Liggett’s sales volume, operating income and cash flows would be materially adversely 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, which could result in lower sales or higher costs for us.
Management Science Associates’ data indicated that domestic industry-wide shipments of cigarettes declined by approximately 6.5% in 2021, increased by 1.5% in 2020, and declined by 5.3% in 2019. Since 1995, industry-wide shipments of cigarettes declined have declined in all years except 2020. We believe the 2020 increase in shipments was a COVID-19 related anomaly and that industry-wide shipments of cigarettes in the United States will continue to decline in future years as a result of numerous factors. These factors include health considerations, diminishing social acceptance of smoking, and a wide variety of federal, state and local laws limiting smoking in restaurants, bars and other public places, as well as increases in federal and state excise taxes and settlement-related expenses which have contributed to higher cigarette prices in recent years. In addition to a declining market impacting our sales volume, operating income and cash flows, our annual cost advantage from our payment exemption under the MSA declines by approximately $1.8 million for each percentage point decline in shipment volumes in the U.S. market and approximately $1.6 million for each percentage point increase in inflation (with the MSA rate increasing each year by the lesser of three percent or the Consumer Price Index increase). If this decline in industry-wide shipments continues and Liggett is unable to capture market share from its competitors, or if the industry as a whole is unable to offset the decline in unit sales with price increases, or if Liggett’s market share percentage falls below its MSA payment
exemption percentage, or if prevailing inflation rates continue, 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.
Our tobacco operations are subject to substantial and increasing legislation, regulation and taxation, which have a negative effect on revenue and profitability.
Cigarettes are subject to substantial regulation and taxation at the federal, state and local levels, which has had and may continue to have an adverse effect on our business. For a more complete discussion of the material regulations and taxation applicable to our Business, see Item 1. Business. Legislation and Regulation. For instance:
•Federal, state and local laws have limited the advertising, sale and use of cigarettes in the United States, such as laws prohibiting smoking in restaurants and other public places. Private businesses have also implemented prohibitions on the use of cigarettes. Further regulations or rules limiting advertising, sale or use of cigarettes or ingredients or flavorings could negatively impact sales of cigarettes, which would have an adverse effect on our results of operations.
•The federal government, as well as certain state, city and county governments, impose excise taxes on cigarettes, which has had, and is expected to continue to have, an adverse effect on sales of cigarettes. Since certain of these excise taxes were proportionately smaller on other types of tobacco products, a dramatic increase in the sale of mislabeled pipe tobacco occurred, which took away market share from traditional cigarette products.
•Various state and local government regulations have, among other things, increased the minimum age to purchase tobacco products, banned the sale of menthol cigarettes, restricted or banned sampling and advertising and required ingredient and constituent disclosure. Significantly, the federal government increased the minimum age of sale for tobacco products from 18 to 21 years of age in December 2019. Further regulations that limit the group of individuals able to purchase cigarettes in the United States or other regulations that limit the types of products we can offer, such as limitations on use of flavoring, could have a material adverse effect on demand for our products, our results of operations and our business. FDA and other organizations have also conducted anti-tobacco media campaigns, which have and may continue to have an adverse effect on the demand for cigarettes.
There have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, as well as restrictive actions by federal agencies, including the Environmental Protection Agency and FDA. Additionally, all states have enacted statutes requiring cigarettes to meet a reduced ignition propensity standard. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation or legislation. 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.
Additional federal, state or local regulations relating to the manufacture, sale, distribution, advertising, labeling, or information disclosure of tobacco products could further reduce sales, increase costs and have a material adverse effect on our business.
FDA Regulation under the Family Smoking Prevention and Tobacco Control Act may adversely affect our sales and operating profit.
In June 2009, the Family Smoking Prevention and Tobacco Control Act (the “TCA”) became law. The TCA grants FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although FDA is prohibited from banning all cigarettes or all smokeless tobacco products. For a more complete discussion of the TCA, see Item 1. Business. Legislation and Regulation.
On January 27, 2022, FDA announced that it expects to issue a proposed rule to prohibit menthol as a characterizing flavor in cigarettes by the spring of 2022.For the last twelve months ended March 31, 2021, approximately 19% of our cigarette unit sales were menthol flavored. We cannot predict how a tobacco product standard or a restriction on the sale and distribution of tobacco products with menthol, if ultimately issued by FDA, will impact product sales, whether it will have a material adverse effect on Liggett or Vector Tobacco, or whether it will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry.
As part of the comprehensive plan announced in July 2017, FDA said it would focus on nicotine addiction, with the goal of lowering nicotine levels in combustible cigarettes through a product standard developed through notice and comment rulemaking, which FDA announced in March 2018. See Item 1. Business. Legislation and Regulation. At this time, we cannot predict the specific regulations FDA will enact, the timeframe for such regulations, or the effect of such regulations. The rulemaking process could take years and once a final rule is issued it typically does not take effect for at least one year. We
cannot predict how a nicotine tobacco product standard, if ultimately issued by FDA, would impact product sales, whether it would have a material adverse effect on Liggett or Vector Tobacco, or whether it would impact Liggett and Vector Tobacco to a greater degree than other companies in the industry.
In April 2018, FDA announced a change in its process for reviewing “provisional” substantial equivalence applications. See Item 1. Business. Legislation and Regulation for additional information on the substantial equivalence process. Vector Tobacco received a letter from FDA in April 2018 advising that FDA does not intend to conduct further review of Vector Tobacco’s remaining applications, with certain “conditions” (as described under Item 1. Business. Legislation and Regulation). Liggett received a letter from FDA in May 2018 advising that FDA does not intend to conduct further review for certain applications, also with certain “conditions” (as described under Item 1. Business. Legislation and Regulation). FDA has not indicated whether the applications relating to Liggett’s other products, not covered by that May 2018 letter, would proceed through FDA review. We cannot predict whether FDA will deem Liggett’s outstanding applications to be sufficient to support determinations of substantial equivalence for the products covered by these substantial equivalence reports. It is possible that FDA could determine that some, or all, of these products are “not substantially equivalent” to a preexisting tobacco product, as the agency has already done for 20 of Liggett’s applications. NSE orders for other cigarette styles may require us to stop the sale of the applicable cigarettes and other cigarette styles and could have a material adverse effect on us.
On March 18, 2020, FDA issued a final rule to require new health warnings on cigarette packages and in cigarette advertisements. This rule requires each cigarette package and advertisement to bear one of eleven textual warning statements accompanied by a corresponding graphic image covering 50% of the area of the front and rear panels of cigarette packages and at least 20% of the area at the top of cigarette advertisements. The rule establishes marketing requirements that include the random and equal display and distribution of the required warnings for cigarette packages and quarterly rotation of the required warnings for cigarette advertisements. The final rule provided for an effective date of June 18, 2021, 15 months after issuance of the final rule. On April 3, 2020, Liggett, along with other tobacco companies, commenced an action against the FDA in the United States District Court, District of Texas (Tyler Division) challenging the legality of the graphic warning final rule. On February 10, 2022, the court granted a motion to postpone the effective date of the final rule to April 9, 2023. We cannot predict whether the court will further postpone the effective date and/or determine that some or all of the proposed textual and/or graphic warnings, or proposed prominence of the warnings, violate the First Amendment, Administrative Procedure Act, or other legal requirements, or what the impact of such a court ruling would have on the compliance timeline or requirements imposed on industry.
It is likely that the TCA and further regulatory efforts by FDA could result in a decrease in cigarette sales in the United States, including sales of Liggett’s and Vector Tobacco’s brands. Compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by FDA under the law. Costs, however, could be substantial and could have a material adverse effect on the companies’ financial condition, results of operations, and cash flows. In addition,FDA has a number of investigatory and enforcement tools available to it. Failure to comply with the law and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on the business, financial condition and results of operation of both Liggett and Vector Tobacco. At present, we are not able to predict whether the law will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry, thus affecting our competitive position.
Certain states may attempt to pass minimum price legislation.
In 2020, voters in the state of Colorado approved Proposition EE, increasing taxes on cigarettes, tobacco and nicotine products. In addition to raising the Colorado state excise tax on cigarettes, Proposition EE included a provision that fixed the minimum retail price of cigarettes in Colorado at $7.00 per pack as of January 1, 2021, and thus reduced the competitive advantage of our Company’s discount priced cigarettes in the Colorado marketplace. Although no other state has adopted a fixed minimum retail price law, other states may attempt to do so if the minimum price provision in Proposition EE is determined by the courts to be legal. In the event that other states pass similar legislation that withstands judicial scrutiny, the result could have a material adverse effect on our financial condition, results of operations and cash flows.
Litigation will continue to harm the tobacco industry, including Liggett.
Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse judgments could have a negative impact on our ability to operate due to their impact on cash flows. We and our Liggett subsidiary, as well as the entire cigarette industry, continue to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. As of December 31, 2021, there were 79 individual product liability lawsuits, two purported class actions and one health care cost recovery action pending in the United States in which Liggett and/or we were named defendants. It is likely that similar legal actions, proceedings and claims will continue to be filed against Liggett. Punitive damages, often in amounts ranging into the billions of dollars, are specifically pleaded in certain cases, in addition to compensatory and other damages. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related
litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal. As new product liability cases are commenced against Liggett, the costs associated with defending these cases and the risks relating to the inherent unpredictability of litigation continue to increase.
Individual tobacco-related cases resulting from the Florida Supreme Court’s ruling in Engle could continue to harm Liggett.
In May 1994, the Engle case was filed as a class action against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” A trial was held and the jury returned a verdict adverse to the defendants (approximately $145.0 billion in punitive damages, including $790.0 million against Liggett). Following an appeal to the Third District Court of Appeal, the Florida Supreme Court in July 2006 decertified the class on a prospective basis and affirmed the appellate court’s reversal of the punitive damages award. Former class members had until January 2008 to file individual lawsuits. As a result, we and Liggett, and other cigarette manufacturers, were sued in thousands of Engle progeny cases in both federal and state courts in Florida. Although we were not named as a defendant in the Engle case, we were named as a defendant in substantially all of the Engle progeny cases where Liggett was named as a defendant. Notwithstanding Liggett’s multi-plaintiff settlements, Liggett and Vector Group remain defendants in 28 state court Engle progeny cases. The costs associated with defending these cases continue to negatively impact our cash flows. We 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.
Liggett may have additional payment obligations under the MSA.
NPM Adjustment. In March 2006, an economic consulting firm selected pursuant to the MSA determined that the MSA was a “significant factor contributing to” the loss of market share of Participating Manufacturers for 2003. This same determination has been made for additional years. This is known as the “NPM Adjustment.” As a result, the Participating Manufacturers may be entitled to potential NPM Adjustments to their MSA payments.
As of December 31, 2021, the Participating Manufacturers had entered into agreements with 38 Settling States setting out terms for settlement of the NPM Adjustment and addressing the NPM Adjustment with respect tothose states for future years.
For 2003 - 2020, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco paid subject to dispute, withheld payment or paid into a disputed payment account the amounts associated with these NPM Adjustments. The arbitration for 2004, for those states that did not enter into the agreement or otherwise settle, has commenced. As of December 31, 2021, Liggett and Vector Tobacco accrued approximately $13.2 million related to disputed amounts withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett and Vector Tobacco lose the disputes for those years.
Liggett may have additional payment obligations under its individual state settlements.
In 2004, the Attorneys General of Mississippi and Texas advised Liggett that they believed Liggett had failed to make all required payments under the respective settlement agreements with these states. Liggett believes these allegations are without merit, based, among other things, on the language of the most favored nation provisions of the settlement agreements. No amounts have been accrued in our consolidated financial statements for any additional amounts that may be payable by Liggett under the settlement agreements with Mississippi and Texas.
In January 2016, the Attorney General for Mississippi filed a motion in Chancery Court in Jackson County, Mississippi to enforce the March 1996 settlement agreement (the “1996 Agreement”). In April 2017, the Chancery Court ruled that the 1996 Agreement should be enforced and referred the matter to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded.
In April 2021, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett to Mississippi pursuant to the 1996 Agreement (from inception through 2019) is approximately $16.7 million, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of such principal amount). In September 2019, the Special Master held a hearing regarding Mississippi’s claim for pre- and post-judgment interest. In August 2021, the Special Master issued a final report with proposed findings and recommendations that pre-judgment interest, in the amount of approximately $18.8 million, is due from Liggett from April 2005 - August 3, 2021. On November 18, 2021, a hearing was held on Liggett’s objection to the final report in Mississippi Chancery Court. A ruling is pending. In the event Liggett appeals an adverse judgment, the posting of a bond may be required.
Liggett may be required to make additional payments to Mississippi and Texas which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Risks Associated with Our New Valley Real Estate Business.
New Valley is subject to risks relating to the industries in which it operates.
The real estate industry is significantly affected by changes in economic and political conditions as well as real estate markets, which could adversely impact returns on our investments, trigger defaults in project financing, cause cancellations of property sales, reduce the value of our properties or investments and could affect our results of operations and liquidity. The real estate industry is cyclical and is significantly affected by changes in general and local economic conditions which are beyond our control.
These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, levels of unemployment, consumer confidence and the general economic condition of the United States and the global economy. The real estate market also depends upon the strength of financial institutions, which are sensitive to changes in the general macroeconomic environment. Lack of available credit or lack of confidence in the financial sector could impact the real estate market, which in turn could adversely affect our business, financial condition and results of operations.
Any of the following could be associated with cyclicality in the real estate market by halting or limiting a recovery in the residential and commercial real estate markets, and have an adverse effect on our business by causing periods of lower growth or a decline in the number of home sales and/or property prices which, in turn, could adversely affect our business and financial condition:
•periods of economic slowdown or recession;
•rising interest rates;
•the general availability of mortgage financing;
•a negative perception of the market for residential and commercial real estate;
•an increase in the cost of homeowners’ insurance;
•weak credit markets;
•a low level of consumer confidence in the economy and/or the real estate market;
•instability of financial institutions;
•legislative, tax or regulatory changes that would adversely impact the real estate market, including but not limited to potential reform relating to Fannie Mae, Freddie Mac and other government sponsored entities that provide liquidity to the U.S. housing and mortgage markets, and potential limits on, or elimination of, the deductibility of certain mortgage interest expense and property taxes;
•adverse changes in economic and general business conditions in the areas we invest;
•declining demand for real estate;
•acts of God, such as hurricanes, earthquakes and other natural disasters, or acts or threats of war or terrorism; and/or
•adverse changes in global, national, regional and local economic and market conditions, particularly in the New York metropolitan area and the other markets where our businesses operate, including those relating to pandemics and health crises, such as the outbreak of the coronavirus (COVID-19).
Real estate development is a competitive industry, and competitive conditions may adversely affect our results of operations. The real estate development industry is highly competitive. Real estate developers compete not only for buyers, but also for desirable properties, building materials, labor and capital. We compete with other local, regional, national and international real estate asset managers, investors and property developers, which have significant financial resources and experience. Competitive conditions in the real estate development industry could result in: difficulty in acquiring suitable investments in properties at acceptable prices; increased selling incentives; lower sales volumes and prices; lower profit margins; impairments in the value of our investments in real estate developments and other assets; and increased construction costs, delays in construction and increased carry costs. Development projects are subject to special risks including potential increase in costs, changes in market demand, inability to meet deadlines which may delay the timely completion of projects, reliance on contractors who may be unable to perform and the need to obtain various governmental and third party consents.
If the market value of our properties or investments decline, our results of operations could be adversely affected by impairments and write-downs. We acquire land and invest in real estate projects in the ordinary course of our business. There
is an inherent risk that the value of our land and investments may decline after purchase, which also may affect the value of existing properties under construction. The valuation of property is inherently subjective and based on the individual characteristics of each property. The market value of our land and investments in real estate projects depends on general and local real estate market conditions. These conditions can change and thereby subject valuations to uncertainty. Moreover, all valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell the property profitably. In addition, our deposits or investments in deposits for building lots controlled under option or similar contracts may be put at risk. If market conditions deteriorate, some of our assets may be subject to impairments and write-down charges which would adversely affect our operations and financial results.
If demand for residential or commercial real estate decreases below what was anticipated when we purchased interests in or developed such inventory, profitability may be adversely affected and we may not be able to recover the related costs when selling and building our properties and/or investments. We regularly review the value of our investments and will continue to do so on a periodic basis. Write-downs and impairments in the value of our properties and/or investments may be required, and we may in the future sell properties and/or investments at a loss, which could adversely affect our results of operations and financial condition.
We face risks associated with property acquisitions. We may be unable to finance acquisitions or investments on favorable terms or properties may fail to perform as expected. We may underestimate the costs necessary to bring an investment up to standards established for its intended market position. We may also acquire or invest in properties subject to liabilities and with recourse, with respect to unknown liabilities. New Valley’s acquisition of real estate investments are subject to several risks including: underestimated operating expenses for a property, possibly making it uneconomical or unprofitable; a property may fail to perform in accordance with expectations, in which case New Valley may sustain lower-than-expected income or need to incur additional expenses for the property; and New Valley may not be able to sell, dispose or refinance the property at a favorable price or terms, or at all, as the case may be; in addition to any potential loss on a sale, New Valley may have no choice but to hold on to the property and continue to incur net operating losses if underperforming for an indefinite period of time, as well as incur continuing tax, environmental and other liabilities. Acquisition agreements will typically contain conditions to closing, including completion of due diligence to our satisfaction or other conditions that are not within our control, which may not be satisfied. Each of these factors could have an adverse effect on our results of operations and financial condition.
Our success depends on the availability of suitable real estate investments at acceptable prices and having sufficient liquidity to acquire such investments. Our success in investing in real estate depends in part upon the continued availability of suitable real estate assets at acceptable prices. The availability of properties for investment at favorable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding on real estate assets. Should suitable opportunities become less available, the number of properties we develop and invest in would be reduced, which would reduce revenue and profits. In addition, our ability to make investments will depend upon whether we have sufficient liquidity to fund such purchases and investments.
If we, or the entities we invest in, are not able to develop and market our real estate developments successfully or within expected timeframes or at projected pricing, our business and results of operations will be adversely affected. Before a property development generates any revenues, material expenditures are incurred to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities, model offices, showrooms, apartments or homes and sales facilities. It generally takes several years for a real estate development to achieve cumulative positive cash flow. If we, or the entities we invest in, are unable to develop and market our real estate developments successfully or to generate positive cash flows from these operations within expected timeframes, it could have a material adverse effect on our business and results of operations.
Because certain of our assets are illiquid, we may not be able to sell these assets when appropriate or when desired. Large real estate developments like the ones that we retain investments in can be hard to sell, especially if local market conditions are poor. Such illiquidity could limit our ability to diversify our assets promptly in response to changing economic or investment conditions. Additionally, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate in times of illiquidity. These restrictions reduce our ability to respond to changes in the performance of our assets and could adversely affect our financial condition and results of operations.
Guaranty risks; risks of joint ventures. New Valley has a number of real estate-related investments in which other partners hold significant interests. New Valley must seek approval from these other parties for important actions regarding these joint ventures. Since the other parties’ interests may differ from those of New Valley, a deadlock could arise that might impair the ability of the ventures to function. Such a deadlock could significantly harm a venture. Further, our minority interest in these joint ventures means that we may not be able to influence the outcome of any particular project, and our rights to obtain information may be limited to the contractual requirements. As a result, we may not have adequate insight into the financial
condition of any of our joint ventures given that we do not oversee their financial reporting or decision making. If our partners face adverse financial conditions, it may impair their ability to fund capital calls or satisfy their share of any guarantees on project financing. In addition, we are typically obligated to execute guarantees or indemnify our partners for guarantees they may execute in connection with the acquisition or construction financing for our projects. The guarantees that we might be obligated to sign include guarantees for environmental liability at a project, improper acts committed by New Valley (otherwise known as a “bad boy” guaranty), as well as carry and completion guarantees for a project. In the event of a default, if a lender were to exercise its rights under these guarantees, it could have a material adverse effect on our business and results of operations.
Our real estate investments and the real estate market in general could be adversely impacted by changes in the law. Many different laws govern the development of real estate. Changes to laws such as affordable housing, zoning, air rights and others, could adversely impact our real estate projects. The Financial Crimes Enforcement Network of the Treasury Department has recently issued Geographic Targeting Orders that will temporarily require certain United States title insurance companies to identify the natural persons who directly or indirectly beneficially own companies that pay all cash for high-end residential real estate in the Borough of Manhattan in New York City and in Miami-Dade County in Florida. No assurances can be given as to the impact such requirements may have on the continued purchasing of high-end residential properties in Manhattan and Miami-Dade County by such individuals while such requirements are in effect, and no assurances can be given as to the impact such requirements may have in the event they are extended to other markets throughout the country in which New Valley is engaged in high-end residential properties.
The Tax Cuts and Jobs Act of 2017 could negatively impact New Valley’s markets. The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) places limits on mortgage interest deductions as well as state and local income and property tax deductions. The loss of the use of these deductions may encourage residents of states with high income and property taxes and costs of housing to migrate to states with lower tax rates and housing costs. In 2021, approximately 25% of New Valley’s investments are located in New York and California, and a migration of residents from these markets or a reduction in the attractiveness of these markets as a place to live could adversely impact New Valley’s business, financial condition and results of operations.
The real estate developments we invest in may be subject to losses as a result of construction defects. Real estate developers are subject to construction defect and warranty claims arising in the ordinary course of their business. These claims are common in the real estate development industry and can be costly.
Claims may be asserted against the real estate developments we invest in for construction defects, personal injury or property damage caused by the developer, general contractor or subcontractors, and if successful, these claims may give rise to liability. Subcontractors are independent of the homebuilders that contract with them under normal management practices and the terms of trade contracts and subcontracts within the industry; however, if U.S. or other regulatory agencies or courts reclassify the employees of sub-contractors as employees of real estate developers, real estate developers using subcontractors could be responsible for wage, hour and other employment-related liabilities of their subcontractors.
In addition, where the real estate developments in which we invest hire general contractors, unforeseen events such as the bankruptcy of, or an uninsured or under-insured loss claimed against, the general contractor may sometimes result in the real estate developer becoming responsible for the losses or other obligations of the general contractor. The costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies may be limited. There can be no assurance that this coverage will not be further restricted and become more costly. If the real estate developments in our real estate portfolio are not able to obtain adequate insurance against these claims in the future, our business and results of operations may be adversely affected.
Increasingly in recent years, individual and class action lawsuits have been filed against real estate developers asserting claims of personal injury and property damage caused by a variety of issues, including faulty materials and the presence of mold in residential dwellings. Furthermore, decreases in home values as a result of general economic conditions may result in an increase in both non-meritorious and meritorious construction defect claims, as well as claims based on marketing and sales practices. Insurance may not cover all of the claims arising from such issues, or such coverage may become prohibitively expensive. If real estate developments in our real estate portfolio are not able to obtain adequate insurance against these claims, they may experience litigation costs and losses that could reduce our revenues from these investments. Even if they are successful in defending such claims, we may incur significant losses.
Our real estate investments may face substantial damages as a result of existing or future litigation, arbitration or other claims. The real estate developments we invest in are exposed to potentially significant litigation, arbitration proceedings and other claims, including breach of contract, contractual disputes and disputes relating to defective title, property misdescription or construction defects. Class action lawsuits can be costly to defend, and if our assets were to lose any certified class action suit, it could result in substantial liability. With respect to certain general liability exposures, including construction defect and product liability claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process requires us to exercise significant judgment due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it is difficult to determine the extent to which the assertion of these claims will expand geographically. As a result, we may suffer losses on our investments which could adversely affect our business, financial condition and results of operations.
Our investments in real estate are susceptible to adverse weather conditions and natural and man-made disasters. Adverse weather conditions and natural and man-made disasters such as hurricanes, tornadoes, storms, earthquakes, floods, droughts, fires, snow, blizzards, as well as terrorist attacks, riots and electrical outages, can have a significant effect on the assets in our real estate portfolio. The severity and frequency of these adverse weather conditions are worsened by the effects of climate change. These adverse conditions can cause physical damage to work in progress and new developments, delays and increased costs in the construction of new developments and disruptions and suspensions of operations, whether caused directly or by disrupting or suspending operations of those upon whom our real estate developments rely in their operations. Such adverse conditions can mutually cause or aggravate each other, and their incidence and severity are unpredictable. If insurance is unavailable to the real estate developments we invest in or is unavailable on acceptable terms, or if insurance is not adequate to cover business interruptions or losses resulting from adverse weather or natural or man-made disasters, the real estate developments we invest in and our results of operations will be adversely affected. In addition, damage to properties in our real estate portfolio caused by adverse weather or a natural or man-made disaster may cause insurance costs for these properties to increase.
A major health and safety incident relating to our real estate investments could be costly in terms of potential liabilities and reputational damage. Building sites are inherently dangerous, and operating in the real estate development industry poses certain inherent health and safety risks. Due to regulatory requirements, health and safety performance is critical to the success of our real estate investments. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on the reputation and relationships of the developer with relevant regulatory agencies or governmental authorities, which in turn could have an adverse effect on our investment and operating results.
Insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations. Real estate properties in our real estate portfolio maintain insurance on their properties in amounts and with deductibles that we believe are comparable with what owners of similar properties carry; however, such insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates in the future. There also are certain types of risks (such as war, environmental contamination such as toxic mold, and lease and other contract claims) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more properties.
The volatility in the capital and credit markets has increased in recent years. Because the volatility in capital and credit markets may create additional risks in the upcoming months and possibly years, we will continue to perform additional assessments to determine the impact, if any, on our consolidated financial statements. Thus, future impairment charges may occur.
Risks Relating to the Spin-Off
We may be unable to achieve some or all of the benefits that we expect to achieve from our spin-off from Douglas Elliman
On December 29, 2021, we completed the spin-off of Douglas Elliman, which included the real estate services and PropTech investment business formerly owned by Vector Group. Although we believe that the spin-off will enhance our long-term value, we may not be able to achieve some or all of the anticipated benefits from the separation of our businesses, and the spin-off may adversely affect our business. Separating the businesses resulted in two independent, publicly traded companies, each of which is now a smaller, less diversified and more narrowly focused business than before the spin-off, which makes us more vulnerable to changing market and economic conditions and the risk of takeover by third parties. Operating as a smaller, independent entity may reduce or eliminate some of the benefits and synergies which previously existed across our business platforms before the spin-off, including our operating diversity, borrowing leverage, available capital for investments, partnerships and relationships and opportunities to pursue integrated strategies with the businesses within our former combined company and the ability to attract, retain and motivate key employees. In addition, as a smaller company, our ability to absorb
costs may be negatively impacted, including the significant cost of the spin-off transaction, and we may be unable to obtain financing or refinance our existing indebtedness. Any of these factors could have a material adverse effect on our business, financial condition, results of operations, cash flows, business prospects and the trading price of our common stock. By spinning off Douglas Elliman, we also may be more susceptible to market fluctuations and other adverse events than we would be if we did not spin off Douglas Elliman. If we fail to achieve some or all of the benefits that we expect to achieve as a result of the spin-off, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.
In connection with the spin-off, we agreed to indemnify Douglas Elliman and Douglas Elliman agreed to indemnify us for certain liabilities, and if we are required to perform under these indemnities or if Douglas Elliman is unable to satisfy its obligations under these indemnities, our financial results could be negatively affected.
In connection with the Transition Services Agreement, we and Douglas Elliman, as parties receiving services under the agreement, agreed to indemnify the party providing services for losses incurred by such party that arise out of or are otherwise in connection with the provision by such party of services under the agreement, except to the extent that such losses result from the providing party’s gross negligence, willful misconduct or breach of its obligations under the agreement. Similarly, each party providing services under the agreement will agree to indemnify the party receiving services for losses incurred by such party that arise out of or are otherwise in connection with the indemnifying party’s provision of services under the agreement if such losses result from the providing party’s gross negligence, willful misconduct or breach of its obligations under the agreement.
In connection with our tobacco business, from time to time Douglas Elliman may be named as a defendant in tobacco-related lawsuits, notwithstanding the completion of the spin-off. Pursuant to the Distribution Agreement we entered into with Douglas Elliman in connection with the spin-off, we and each of our subsidiaries agreed to indemnify Douglas Elliman for liabilities related to our tobacco business, including liabilities that Douglas Elliman may incur for tobacco-related litigation. While we do not believe that Douglas Elliman has any liability for tobacco-related claims, an adverse decision in a tobacco-related lawsuit against Douglas Elliman could, if the indemnification is deemed for any reason to be unenforceable or any amounts owed to Douglas Elliman thereunder are not collectible, in whole or in part, have a material adverse effect on us.
In connection with the spin-off, Douglas Elliman provided us with indemnities with respect to liabilities arising out of Douglas Elliman’s business. If we are subject to an adverse decision in a lawsuit related to Douglas Elliman’s business, and Douglas Elliman fails to satisfy its obligations, our financial condition could be materially adversely affected.
The spin-off and related transactions may expose us to potential liabilities arising out of state and federal fraudulent conveyance laws and legal distribution requirements.
The spin-off could be challenged under various state and federal fraudulent conveyance laws. An unpaid creditor could claim that we did not receive fair consideration or reasonably equivalent value in the spin-off, and that the spin-off left us insolvent or with unreasonably small capital or that we intended or believed we would incur debts beyond our ability to pay such debts as they mature. If a court were to agree with such a plaintiff, then such court could void the spin-off as a fraudulent transfer and could impose a number of different remedies, including without limitation, returning the assets or the shares of common stock in Douglas Elliman being distributed as part of the spin-off or providing us with a claim for money damages against the spun-off business in an amount equal to the difference between the consideration received by us and the fair market value of Douglas Elliman at the time of the spin-off.
Certain directors who serve on our Board of Directors currently serve as directors of Douglas Elliman following the spin-off, and ownership of shares of common stock of Douglas Elliman following the spin-off by our directors and executive officers may create, or appear to create, conflicts of interest.
Certain of our directors who serve on our Board of Directors currently serve on the board of directors of Douglas Elliman. This may create, or appear to create, conflicts of interest when our or Douglas Elliman's management and directors face decisions that could have different implications for us and Douglas Elliman, including the resolution of any dispute regarding the terms of the agreements governing the spin-off and the relationship between us and Douglas Elliman after the spin-off or any other commercial agreements entered into in the future between us and Douglas Elliman. For example, in the past, subsidiaries of Douglas Elliman have been engaged by certain developers as the sole broker or the co-broker for several of the real estate development projects that New Valley owns an interest in through its real estate venture investments. Douglas Elliman had gross commissions of approximately $9.0 million, $10.8 million and $19.0 million from these projects for the years ended December 31, 2021, 2020 and 2019, respectively.
In addition, all of our executive officers and some of our non-employee directors currently own shares of the common stock of Douglas Elliman. The continued ownership of such common stock by our directors and executive officers following the spin-off creates or may create the appearance of a conflict of interest when these directors and executive officers are faced with decisions that could have different implications for us and Douglas Elliman
After the spin-off, certain of our executive officers will not devote their full time to Vector Group’s affairs, and the overlap may give rise to conflicts.
Our Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Technology Officer and General Counsel serve in the same roles at Douglas Elliman. This management model has and continues to use holding company executives to focus on public company matters while delegating the operations of our subsidiaries, including Liggett, to experienced operating professionals and we believe it has created stockholder value. Nonetheless, our management team divides its time between Vector Group and Douglas Elliman and consequently, does not spend its full time on our business. From time to time, our overlapping executive officers may be required to spend a significant portion of their time and attention on Douglas Elliman’s affairs, and there can be no assurance that they will be able to devote sufficient time to the Company’s affairs.
Our overlapping executive officers may also face actual or apparent conflicts of interest with respect to matters involving or affecting each company. For example, the potential for a conflict of interest may arise when we, on the one hand, and Douglas Elliman, on the other hand, consider corporate opportunities that may be suitable for both companies.
If the distribution, together with certain related transactions, were to fail to qualify as a reorganization for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Internal Revenue Code of l986, as amended (“Code”), then our stockholders, we and Douglas Elliman might be required to pay substantial U.S. federal income taxes.
The distribution was conditioned upon our receipt of an opinion of our spin-off tax advisor to the effect that, subject to the assumptions and limitations described therein, the distribution of Douglas Elliman common stock to holders of our common stock (such distribution, excluding, for the avoidance of doubt, the distribution of Douglas Elliman common stock with respect to our stock option awards and restricted stock awards), together with certain related transactions, will qualify as a reorganization for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code in which no gain or loss is recognized by us or our stockholders, except, in the case of our stockholders, for cash received in lieu of fractional shares. The opinion of our spin-off tax advisor was based on, among other things, certain assumptions as well as on the continuing accuracy of certain factual representations and statements that we and Douglas Elliman made to the spin-off tax advisor. In rendering its opinion, the spin-off tax advisor also relied on certain covenants that we and Douglas Elliman entered into, including the adherence by us and by Douglas Elliman to certain restrictions on future actions contained in the Tax Disaffiliation Agreement. If any of the representations or statements that we or Douglas Elliman made are or become inaccurate or incomplete, or if we or Douglas Elliman breach any of such covenants, the spin-off and such related transactions might not qualify for such tax treatment. The opinion of the spin-off tax advisor is not binding on the U.S. Internal Revenue Service (“IRS”) or a court, and there can be no assurance that the IRS will not challenge the validity of the spin-off and such related transactions as a reorganization for U.S. federal income tax purposes under Sections 368(a)(1)(D) and 355 of the Code eligible for tax-free treatment, or that any such challenge ultimately will not prevail.
If the spin-off does not qualify as a tax-free transaction for any reason, including as a result of a breach of a representation or covenant, we would recognize a substantial gain attributable to Douglas Elliman for U.S. federal income tax purposes. Additionally, if the spin-off does not qualify as tax-free under Section 355 of the Code, our stockholders will be treated as having received a distribution equal to the fair market value of the stock distributed, which generally would be treated first as a taxable dividend to the extent of such holder’s pro rata share of our current and accumulated earnings and profits, then as a non-taxable return of capital to the extent of such holder’s tax basis in our common stock, and thereafter as capital gain with respect to any remaining value.
We are subject to continuing contingent tax-related liabilities of Douglas Elliman following the spin-off.
After the spin-off, there are several significant areas where the liabilities of Douglas Elliman may become our obligations, either in whole or in part. For example, to the extent that any subsidiary of ours was included in the consolidated tax reporting group of Vector Group for any taxable period or portion of any taxable period ending on or before the effective date of the spin-off, such subsidiary is jointly and severally liable for the U.S. federal income tax liability of the entire consolidated tax reporting group of Vector Group, as applicable, for such taxable period. In connection with the spin-off, we have entered into a Tax Disaffiliation Agreement with Douglas Elliman, that allocates the responsibility for prior period consolidated taxes to Vector Group. If we are unable to pay any prior period taxes for which we are responsible, however, Douglas Elliman could be required to pay the entire amount of such taxes, and such amounts could be significant. Other provisions of federal, state or local law may establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.
Our ability to engage in acquisitions and other strategic transactions is subject to limitations because we have agreed to certain restrictions intended to support the tax-free nature of the spin-off.
The U.S. federal income tax laws that apply to transactions like the spin-off generally create a presumption that the spin-off would be taxable to us (but not to our stockholders) if we engage in, or enter into an agreement to engage in, an acquisition
of all or a significant portion of our common stock beginning two years before the distribution date, unless it is established that the transaction is not pursuant to a plan or series or transactions related to the spin-off. U.S. Treasury regulations currently in effect generally provide that whether an acquisition transaction and a distribution are part of a plan is determined based on all of the facts and circumstances, including specific factors listed in the Treasury regulations. In addition, these Treasury regulations provide several "safe harbors" for acquisition transactions that are not considered to be part of a plan that includes a distribution.
There are other restrictions imposed on us under current U.S. federal income tax laws with which we will need to comply in order for the spin-off and certain related transactions to qualify as a transaction that is tax-free under Sections 368(a)(1)(D) and 355 of the Code. For example, we will generally be required to continue to own and manage our business, and there will be limitations on issuances, redemptions and sales of our stock for cash or other property following the spin-off, except in connection with certain stock-for-stock acquisitions and other permitted transactions. If these restrictions are not followed, the spin-off could be taxable to us and our stockholders.
We entered into a Tax Disaffiliation Agreement with Douglas Elliman under which we have allocated, between Douglas Elliman and ourselves, responsibility for U.S. federal as well as state and local income and other taxes relating to taxable periods before and after the spin-off and provided for computing and apportioning tax liabilities and tax benefits between the parties. In the Tax Disaffiliation Agreement, we agreed that, among other things, we may not take, or fail to take, any action following the spin-off if such action, or failure to act: would be inconsistent with or prohibit the spin-off and certain related transactions from qualifying as a tax-free reorganization under Sections 368(a)(1)(D) and 355 and related provisions of the Code to us and our stockholders (except with respect to the receipt of cash in lieu of fractional shares of our stock).
In addition, we agreed that we may not, among other things, during the two-year period following the spin-off, except under certain specified circumstances, (i) redeem or otherwise repurchase our stock; (ii) liquidate, merge or consolidate with another person; (iii) sell or otherwise dispose of assets outside the ordinary course of business or materially change the manner of operating our business; or (iv) take any other action or actions that in the aggregate would have the effect that one or more persons acquire (or have the right to acquire), directly or indirectly, as part of a plan or series of related transactions, 35% of our stock. These restrictions could limit our strategic and operational flexibility, including our ability to finance our operations by issuing equity securities, make acquisitions using equity securities, repurchase our equity securities, or raise money by selling assets or enter into business combination transactions. We also agreed to indemnify Douglas Elliman for certain tax liabilities resulting from any such transactions. Further, our stockholders may consider these covenants and indemnity obligations unfavorable as they might discourage, delay or prevent a change of control.
Risks Relating to Our Indebtedness
We and our subsidiaries have a substantial amount of indebtedness and liquidity commitments.
We and our subsidiaries have significant indebtedness and debt service obligations. As of December 31, 2021, we and our subsidiaries had total outstanding indebtedness of $1.43 billion. In addition, subject to the terms of any future agreements, we and our subsidiaries may 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 have a material adverse effect on our business and results of operations.
We have significant liquidity commitments.
During 2022, we will have significant liquidity commitments that will require the use of our existing cash resources. As of December 31, 2021, our corporate expenditures (exclusive of Liggett, Vector Tobacco and New Valley) and other potential liquidity requirements over the next 12 months include the following:
•cash interest expense of approximately $108.6 million,
•dividends of approximately $127.5 million based on the assumed quarterly cash dividend rate of $0.20 per share and assuming 158,720,996 shares outstanding (153,959,427 common shares outstanding as of December 31, 2021 and 4,761,569 employee stock options with dividend equivalent rights), and
•other corporate expenses and taxes.
In order to meet the above liquidity requirements as well as other liquidity needs in the normal course of business, we will be required to use cash flows from operations and existing cash and cash equivalents. Should these resources be insufficient to meet the upcoming liquidity needs, we may also be required to liquidate investment securities available for sale and other long-term investments, or, if available, draw on the Liggett Credit Facility. While there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures will be successful.
Servicing our indebtedness requires a significant amount of cash and we may not generate sufficient cash flow from our businesses to pay our substantial indebtedness.
Our ability to make scheduled payments of the principal, to pay interest on, or to refinance our indebtedness, depends on our future performance, which is subject to economic, financial, competitive and regulatory factors, as well as other factors beyond our control. The cash flow from operations in the future may be insufficient to service our indebtedness because of factors beyond our control. If we are unable to generate the necessary cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Our high level of debt may adversely affect our ability to satisfy our obligations.
There can be no assurance that we will be able to meet our debt service obligations. A default in our debt obligations, including a breach of any restrictive covenant imposed by the terms of our indebtedness, could result in the acceleration of the affected debt as well as other of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under the debt or such other indebtedness or that we would otherwise be able to repay the accelerated indebtedness or make other required payments. Even in the absence of an acceleration of our indebtedness, a default under the terms of our indebtedness could have an adverse impact on our ability to satisfy our debt service obligations and on the trading price of our debt and our common stock.
Our high level of indebtedness, as well as volatility in the capital and credit markets, could have important consequences. For example, they could:
•make it more difficult for us to satisfy our other obligations with respect to our debt, including repurchase obligations, upon the occurrence of specified change of control events;
•increase our vulnerability to general adverse economic and industry conditions;
•limit our ability to obtain additional financing;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the amount of our cash flow available for dividends on our common stock and other general corporate purposes;
•require us to sell other securities or to sell some or all of our assets, possibly on unfavorable terms, to meet payment obligations;
•restrict us from making strategic acquisitions, investing in new capital assets or taking advantage of business opportunities;
•limit our flexibility in planning for, or reacting to, changes in our business and industry; and
•place us at a competitive disadvantage compared to competitors that have less debt.
Our 5.75% Senior Secured Notes, 10.5% Senior Notes, and Liggett Credit Facility contain restrictive covenants, and the Liggett Credit Facility contains financial ratios, that limit our operating flexibility, and may limit our ability to pay dividends in the future.
The indenture governing our 5.75% Senior Secured Notes due 2029 (the “2029 Indenture”), the indenture governing our 10.5% Senior Notes due 2026 (the “2026 Indenture”) and the Liggett Credit Facility contain covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest, including restrictions on our ability to:
•incur or guarantee additional indebtedness or issue certain preferred stock;
•pay dividends or distributions on, or redeem or repurchase, capital stock or subordinated indebtedness, or make other restricted payments;
•create or incur liens with respect to our assets;
•make investments, loans or advances;
•incur dividend or other payment restrictions;
•prepay subordinated indebtedness;
•enter into certain transactions with affiliates; and
•merge, consolidate, reorganize or sell our assets, or use asset sale proceeds.
Our ability to comply with the provisions of the 2029 Indenture, the 2026 Indenture, and the Liggett Credit Facility may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events beyond our control. The breach of any of these covenants could result in a default under our indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it. See Liquidity and Capital Resources in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations for details of debt covenant compliance.
Changes in respect of the debt ratings of our notes may materially and adversely affect the availability, the cost and the terms and conditions of our debt.
Both we and several issues of our notes have been publicly rated by Moody’s Investors Service, Inc., and Standard & Poor’s Rating Services, independent rating agencies. In addition, future debt instruments may be publicly rated. These debt ratings may affect our ability to raise debt. Any future downgrading of the notes or our other debt by Moody’s or S&P may affect the cost and terms and conditions of our financings and could adversely affect the value and trading of the notes.
The Tax Act may increase the after-tax cost of debt financings.
The Tax Ac limits our interest expense deduction to 30% of taxable income before interest, depreciation and amortization in 2018 and 2021 and 50% of taxable income before interest, depreciation, and amortization in 2019 and 2020 (as a result of provisions contained in the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, and then 30% of taxable income before interest thereafter for non-excepted trade or businesses. One such excepted trade or business is any electing real property trade or business, of which portions of our New Valley real estate business may qualify. Interest expense allocable to an excepted trade or business is not subject to limitation. The Tax Act permits us to carry forward disallowed interest expense indefinitely. Although all of our interest expense was deductible prior to the spin-off, due to our high degree of leverage, a portion of our interest expense in future years may not be deductible, which may increase the after tax cost of any new debt financings as well as the refinancing of our existing debt. We will continue to evaluate the impact of the nondeductible interest on our operations and capital structure.
Risks Relating to Our Structure and Other Business Risks
We are a holding company and depend on cash payments from our subsidiaries, which are subject to contractual and other restrictions, in order to service our debt and to pay dividends on our common stock.
We are a holding company and have no operations of our own. We hold our interests in our various businesses through our wholly-owned subsidiaries, VGR Holding LLC (“VGR Holding”) and New Valley. In addition to our own cash resources, our ability to pay interest on our debt and to pay dividends on our common stock depends on the ability of VGR Holding and New Valley to make cash available to us. VGR Holding’s ability to pay dividends to us depends primarily on the ability of Liggett and Vector Tobacco, its wholly-owned subsidiaries, to generate cash and make it available to VGR Holding. The Liggett Credit Facility contains a restricted payments test that limits the ability of Liggett to pay cash dividends to VGR Holding. The ability of Liggett to meet the restricted payments test may be affected by factors beyond its control.
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 and to pay dividends on our common stock, 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 and to continue to pay dividends on our common stock would significantly harm us and the value of our notes and our common stock.
Maintaining the integrity of our computer systems and protecting confidential information and personal identifying information has become increasingly costly, as cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.
Global cybersecurity threats and incidents can range from uncoordinated individual attempts that gain unauthorized access to information technology systems both internally and externally, to sophisticated and targeted measures known as advanced persistent threats, directed at us and our stakeholders. In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and intellectual property, and personally identifiable information of our tobacco customers. Additionally, we increasingly rely on third-party providers, including cloud storage solution providers. The secure processing, maintenance and transmission of this information are critical to our operations and with respect to information collected and stored by our third-party service providers, we are reliant upon their security procedures.
Our systems and the confidential information on them may also be compromised by employee misconduct or employee error. We and our third-party service providers have experienced, and expect to continue to experience, these types of internal and external threats and incidents, which can result, and have resulted, in the misappropriation and unavailability of critical data and confidential or proprietary information (our own and that of third parties, including personally identifiable information) and the disruption of business operations. For example, in April 2021, we determined that an unauthorized party gained access to the IT network of Douglas Elliman Property Management, a subsidiary of our former subsidiary, Douglas Elliman, and temporarily disrupted business operations and obtained certain files that contained personally identifiable information pertaining to owners and others in buildings managed by, and employees of, DEPM. The former subsidiary also took steps to secure its systems, contacted law enforcement, conducted an investigation and enhanced its security protocols to help prevent a similar incident from occurring in the future. Depending on their nature and scope, these incidents could potentially also result in the destruction or corruption of such data and information. Our business interruption insurance may be insufficient to compensate us for losses that may occur. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, diminution in the value of the services we provide to our customers, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations. Developments in the laws and regulations governing the handling and transmission of personal identifying information in the United States may require us to devote more resources to protecting such information, which could in turn adversely affect our results of operations and financial condition.
We depend on our key personnel.
We depend on the efforts of our executive officers and other key personnel as our named executive officers have been employed by us for an average of 27 years at December 31, 2021. 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. Please see the Risk Factor, “After the spin-off, our management team does not devote its full time to Vector Group’s Affairs.”
Failure to maintain effective internal control over financial reporting could adversely affect us.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting, the implementation of which requires significant management attention. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. These limitations include, among others, the possibility of human error, inadequacy or circumvention of controls and fraud. If we do not maintain effective internal control over financial reporting or design and implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, including in connection with controls executed for us by third parties, we might fail to timely detect any misappropriation of corporate assets or inappropriate allocation or use of funds and could be unable to file accurate financial reports on a timely basis. As a result, our reputation, results of operations and stock price could be materially adversely affected.
Risks Relating to our Common Stock
The price of our common stock may fluctuate significantly.
The trading price of our common stock has ranged between $8.76 and $12.43 per share over the past 52 weeks.
The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include the following:
•actual or anticipated fluctuations in our operating results;
•changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
•the operating and stock performance of our competitors;
•our dividend payment ratio and level;
•announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
•the initiation or outcome of litigation;
•the failure or significant disruption of our operations from various causes related to our critical information technologies and systems including cybersecurity threats to our data and customer data as well as reputational or financial risks associated with a loss of any such data;
•changes in interest rates;
•general economic, market and political conditions;
•additions or departures of key personnel; and
•future sales of our equity or convertible securities.
We cannot predict the extent, if any, to which future sales of shares of common stock or the availability of shares of common stock for future sale, may depress the trading price of our common stock.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our common stock, regardless of our operating performance. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management. These factors, among others, could significantly depress the price of our common stock.
ITEM 1B.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.PROPERTIES
Our principal executive offices are located in Miami, Florida. We lease 12,390 square feet of office space in an office building in Miami. The lease expires in April 2023, subject to another five-year renewal option.
We lease approximately 9,000 square feet of office space in New York, New York under a lease that expires in 2025. New Valley’s operating properties are discussed above under the description of New Valley’s business and in Note 10 to our consolidated financial statements.
Liggett and LVB
Liggett’s tobacco manufacturing facilities, and several of its distribution and storage facilities, are currently located in or near Mebane, North Carolina. Some of these facilities are owned and others are leased. Liggett’s office, manufacturing complex and warehouse are pledged as collateral under its Revolving Credit Facility. As of December 31, 2021, the principal properties owned or leased by Liggett are as follows:
| | | | | | | | | | | | | | |
| Name | | Age | | Principal Occupation |
| Bennett S. LeBow | | 85 | | | Chairman of the Board; Private Investor |
Howard M. Lorber
| | 74 | | | President and Chief Executive Officer |
| Richard J. Lampen | | 69 | | | Executive Vice President and Chief Operating Officer |
| | | | |
TypeHenry C. Beinstein
| | Location | | Owned or Leased | | Approximate Total
Square Footage |
| 80 | | | Partner, Gagnon Securities LLC |
Ronald J. Bernstein
| | 70 | | | Non-Executive Chairman of the Board of Managers of Liggett Vector Brands LLC and Senior Advisor to Liggett Group LLC |
Storage FacilitiesPaul V. Carlucci | | Danville, VA75 | | | Private Investor |
Jean E. Sharpe
| | Owned76 | | | Private Investor |
| Barry Watkins | | 578,00058 | | | CEO of Clairvoyant Media Strategies |
Office and Manufacturing ComplexWilson L. White | | Mebane, NC42 | | Owned | | 240,000 Vice President of Government Affairs and Public Policy, Google | |
Warehouse | | Mebane, NC | | Owned | | 60,000 | |
Warehouse | | Mebane, NC | | Leased | | 125,000 | |
Warehouse | | Mebane, NC | | Leased | | 22,000 | |
LVB leases approximately 22,000 square feetBusiness Experience and Qualifications of office space in Morrisville, North Carolina. Directors
The lease expires in June 2026.
Liggett’s managementCompany believes that the combination of the various qualifications, skills and experiences of its property, plantdirectors contribute to an effective and equipment are well maintained and in good conditionwell-functioning board and that its existing facilities are sufficientindividually and, as a whole, the directors possess the necessary qualifications to accommodate a substantial increase in production.
ITEM 3.LEGAL PROCEEDINGS
Liggettprovide effective oversight of the business and other United States cigarette manufacturers have been named as defendants in various types of cases predicated onprovide quality advice to the theory, among other things, 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.
Reference is made to Note 15 to our consolidated financial statements included elsewhere in this report which is incorporated by reference and contains a general description of certain legal proceedings to which we, or our subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1 for additional informationCompany’s management. Details regarding the pending smoking-related legal proceedingsexperience and qualifications of the directors are set forth below.
Bennett S. LeBow is the Chairman of the Company’s Board and has been a director of the Company since October 1986. Mr. LeBow, currently a private investor, served as the Company's Chairman and Chief Executive Officer from June 1990 to which Liggett we are a party. A copyDecember 2005 and Executive Chairman from January 2006 until his retirement on December 30, 2008. Mr. LeBow’s pertinent experience, qualifications, attributes and skills include his decades of Exhibit 99.1 will be furnished without charge
upon written request to us at our principal executive offices, 4400 Biscayne Boulevard, 10th Floor, Miami, Florida 33137, Attn. Investor Relations.
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed and traded on the New York Stock Exchange under the symbol “VGR.” At February 24, 2022, there were approximately 1,537 holders of record of our common stock.
Performance Graph
The following graph compares the cumulative total annual return of our Common Stock, the S&P 500 Index, the S&P Small Cap 600 Index,experience as an investor and the NYSE Arca Tobacco Index for the five years ended December 31, 2021. The graph assumes that $100 was invested on December 31, 2016knowledge and experience in the Common Stocktobacco industry he has attained through his service as the Company's CEO from 1990 to 2005 and eachas Chairman of the indices, and that all cash dividends and distributions were reinvested. The historical stock prices of Vector presented in the chart have been adjusted to reflect the impact of the spin-off. The chart does not reflect the Company’s forecast of future financial performance.Board since 1990.
| | | | | | | | | | | | | | | | | | | | |
| 12/16 | 12/17 | 12/18 | 12/19 | 12/20 | 12/21 |
| Vector Group Ltd. | 100 | | 111 | | 56 | | 94 | | 87 | | 126 | |
| S&P 500 | 100 | | 122 | | 116 | | 153 | | 181 | | 233 | |
| S&P 600 | 100 | | 113 | | 104 | | 127 | | 141 | | 179 | |
| NYSE Arca Tobacco | 100 | | 111 | | 86 | | 114 | | 116 | | 137 | |
Unregistered Sales of Equity Securities and Use of Proceeds
No securities of ours which were not registered under the Securities Act of 1933 were issued or sold by us during the three months ended December 31, 2021.
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 2, 2022. 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.
| | | | | | | | | | | | | | | | | | | | |
| Name | | Age | | Position | | Year Individual
Became an
Executive Officer |
| Howard M. Lorber | | 73 | | | President and Chief Executive Officer | | 2001 |
| Richard J. Lampen | | 68 | | | Executive Vice President and Chief Operating Officer | | 1996 |
| J. Bryant Kirkland III | | 56 | | | Senior Vice President, Chief Financial Officer and Treasurer | | 2006 |
| Marc N. Bell | | 61 | | | Senior Vice President, General Counsel and Secretary | | 1998 |
| J. David Ballard | | 54 | | | Senior Vice President, Enterprise Efficiency and Chief Technology Officer | | 2020 |
| Nicholas P. Anson | | 50 | | | President and Chief Operating Officer of Liggett | | 2020 |
Howard M. Lorber has been our President and Chief Executive Officer of the Company since January 2006. He served as our President and Chief Operating Officer of the Company from January 2001 to December 2005 and has served as a director of oursthe Company since January 2001. From November 1994 to December 2005, Mr. Lorber served as the President and as a member of the Board of Directors of New Valley Corporation, the predecessor to our wholly owned subsidiary, New Valley LLC. Mr. Lorber also serves as Chairman of the Board of Directors, President and Chief Executive Officer of Douglas Elliman Inc. (NYSE:DOUG), the sixth largestsixth-largest residential real estate brokerage company in the United States and as Executive Chairman of its subsidiary, Douglas Elliman Realty, LLC. Mr. Lorber was Chairman of the Board of Hallman & Lorber Assoc., Inc., consultants and actuaries of qualified pension and profit sharing plans, and various of its affiliates from 1975 to December 2004 and has been a consultant to these entities since January 2005; Chairman of the Board of Directors
since 1987 and Chief Executive OfficerCEO from November 1993 to December 2006 of Nathan’s Famous, Inc., a chain of fast food restaurants; and a Director of Clipper Realty, Inc., a real estate investment trust, since July 2015. Mr. Lorber was a member of the Board of Directors of Morgans Hotel Group Co. from March 2015 until November 2016, and Chairman from May 2015 to November 2016 and was Chairman of the Board of Ladenburg Thalmann Financial Services from May 2001 to July 2006 and Vice Chairman from July 2006 to February 2020. He is also a trustee of Long Island University. Mr. Lorber's pertinent experience, qualifications, attributes and skills include the knowledge and experience in the tobacco and real estate industries he has attained through his service as our President and CEO and a member of our Board of Directors since 2001 as well as his service as a director of other publicly traded corporations.
Richard J. Lampen was appointed our Chief Operating Officer on January 14, 2021 and has served as our Executive Vice President since 1995. From October 1995 to December 2005, Mr. Lampen servedwas elected to the Board in January 2021 in connection with his appointment as the Executive Vice President and General Counsel of New Valley Corporation, where he also served as a director.COO. Mr. Lampen also serves as Executive Vice President and Chief Operating OfficerCOO and as a member of the Board of Directors of Douglas Elliman (NYSE:DOUG), the sixth largest residential real estate brokerage company in the United States, and as a member of the Board of Managers of its subsidiary, Douglas Elliman Realty, LLC. From September 2006 to February 2020, he has served as President and Chief Executive OfficerCEO as well as a director of Ladenburg Thalmann Financial Services.Services ("LTS") prior to its acquisition by Advisor Group, a portfolio company of Reverence Capital Partners. Mr. Lampen also served as Chairman of Ladenburg Thalmann Financial ServicesLTS from September 2018 to February 2020. From October 2008 to October 2019, Mr. Lampen served as President and Chief Executive OfficerCEO as well as a director of Castle Brands Inc. prior to its acquisition by Pernod Ricard. Mr. Lampen's pertinent experience, qualifications, attributes and skills include the knowledge and managerial experience in the real estate and tobacco industry he has attained through his service to our business since 1995 as well as his service as CEO of LTS and Castle Brands Inc. and as a director of other publicly traded corporations.
J. Bryant Kirkland IIIHenry C. Beinstein has been our Chief Financial Officera director of the Company since March 2004. Since January 2005, Mr. Beinstein has been a partner of Gagnon Securities LLC, a broker-dealer and TreasurerFINRA member firm, and has been a money manager and registered representative at such firm since August 2002. He retired in August 2002 as the Executive Director of Schulte Roth & Zabel LLP, a New York-based law firm, a position he had held since August 1997. Before that, Mr. Beinstein had served as the Managing Director of Milbank, Tweed, Hadley & McCloy LLP, a New York-based law firm, commencing November 1995. Mr. Beinstein was the Executive Director of Proskauer Rose LLP, a New York-based law firm, from April 20061985 through October 1995. Mr. Beinstein is a certified public accountant in New York and our Senior Vice President since May 2016.prior to joining Proskauer was a partner and National Director of Finance and Administration at Coopers & Lybrand. He also holds the designation of Chartered Global Management Accountant from the American Institute of Certified Public Accountants. Mr. KirklandBeinstein also served as a Vice Presidentdirector of ours from January 2001LTS and Castle Brands Inc., prior to April 2016the sale of these companies in February 2020 and October 2019, respectively. Mr. Beinstein has been licensed as a Certified Public Accountant in the state of New York since 1968. Mr. Beinstein’s pertinent experience, qualifications, attributes and skills include financial literacy and expertise, managerial experience through his years at Coopers & Lybrand, Proskauer Rose LLP, Milbank, Tweed, Hadley & McCloy LLP and Schulte Roth & Zabel LLP, and the knowledge and experience he has attained through his service as a director of the Company and other publicly traded corporations.
Ronald J. Bernstein has been a director of the Company since March 2004. Until his retirement on March 31, 2020, Mr. Bernstein had served as New Valley Corporation’sPresident and CEO of Liggett Group LLC, an indirect subsidiary of the Company, since September 2000 and of Liggett Vector Brands LLC, an indirect subsidiary of the Company, since March 2002. On April 1, 2020, he became Non-Executive Chairman of Liggett Vector Brands and Senior Advisor to Liggett Group LLC. From July 1996 to December 1999, Mr. Bernstein served as General Director and, from December 1999 to September 2000, as Chairman of Liggett-Ducat Ltd., the Company’s former Russian tobacco business sold in 2000. Prior to that time, Mr. Bernstein served in various positions with Liggett commencing in 1991, including Executive Vice President and Chief Financial Officer. Mr. Bernstein’s pertinent experience, qualifications, attributes and skills include the knowledge and experience in the tobacco industry, which is the primary contributor to the Company's earnings, he has attained through his employment by our tobacco subsidiaries since 1991.
Paul V. Carlucci has been a director of the Company since March 2018 and was the Chairman and CEO of News America Marketing, a subsidiary of News Corporation (NASDAQ: NWSA) and a single-source provider of consumer advertising and promotional services, from October 1997 until his retirement in June 2014. He also served as publisher of the New York Post from September 2005 to September 2012 and was a member of the Executive Committee of News Corporation from October 1996 until his retirement in June 2014. He continued to serve as a consultant to News Corporation until June 2017. He was also President and CEO of News America Publishing, Inc. (the parent company of TV Guide, Weekly Standard and News America New Media), and has held executive positions in Caldor, Inc., a 175-store general merchandise chain, RH Macy’s and the New York Daily News. He has also served on the Boards of Directors of Herald Media, Inc., the American Jewish Committee, the Children’s Miracle Network and the Guardian Angels. Mr. Carlucci’s pertinent experience, qualifications, attributes and skills include managerial experience and the knowledge and experience he has attained through his service as an executive officer of large media corporations and his expertise in marketing and communications involving various industries, including the U.S. tobacco industry.
Jean E. Sharpe has been a director of the Company since May 1998. Ms. Sharpe is a private investor and has engaged in various philanthropic activities since her retirement in September 1993 as Executive Vice President and Secretary of the Company and as an officer of various of its subsidiaries. Ms. Sharpe previously served as a director of the Company from July 1990 until September 1993. Ms. Sharpe has been a member of the New York State Bar Association since 1979. Ms. Sharpe’s pertinent experience, qualifications, attributes and skills include the knowledge and managerial experience she attained from serving as our general counsel from 1988 until 1993 and her service as a director of the Company.
Barry Watkins has been a director of the Company since March 2018 and has been CEO of Clairvoyant Media Strategies, one of the country's most in-demand media training companies, since 2018. From 1997 to November 2017, Mr. Watkins was head of communications for Madison Square Garden Company L.P. ("MSG") and served as Executive Vice President and Chief Communications Officer from January 19982010 until November 2017. In his role, Mr. Watkins oversaw MSG's communications and government relations activities, as well as its extensive philanthropic efforts, and, from 2010 to December 2005. He2014, the human resources department of the MSG companies. Since 2014, Mr. Watkins has served since July 1992 in various financial capacities with us, Liggett and New Valley. Mr. Kirkland also serves as Senior Vice President, Treasurer and Chief Financial Officer of Douglas Elliman (NYSE:DOUG), the sixth largest residential real estate brokerage company in the United States. Mr. Kirkland has served as Chairman of the BoardGarden of Directors, PresidentDreams Foundation, a non-profit organization that works with the MSG companies (including their successors) to positively impact the lives of children facing obstacles. The pertinent experience, qualifications, attributes and Chief Executive Officerskills of Multi Soft II, Inc.Mr. Watkins include his managerial experience as well as the knowledge and Multi Solutions II, Inc. since July 2012.experience in communications, government relations and human resources that he attained through his service as an executive officer of publicly traded corporations.
Marc N. BellWilson L. White has been our General Counsel and Secretary since May 1994 and our Senior Vice President since May 2016 and the Senior Vice President and General Counsela director of Vector Tobacco since April 2002.June 2021. Mr. Bell servedWhite currently serves as a Vice President of ours from January 1998 to April 2016. From November 1994 to December 2005,Government Affairs and Public Policy at Google, a subsidiary of Alphabet Inc. (NASDAQ:GOOG, NASDAQ:GOOGL), where he is the global policy lead for Google’s Android, Hardware and Advanced Research business units. Mr. Bell served as Associate General Counsel and Secretary of New Valley Corporation and from February 1998 to December 2005,White also serves as a Vice Presidentmember of New Valley. Mr. Bell previously served as Liggett’s General Counsel and currently serves as an officer, director or manager for manythe Board of Vector’s or New Valley’s subsidiaries. In addition, Mr. Bell serves as Senior Vice President, Secretary and General CounselDirectors of Douglas Elliman (NYSE:DOUG),. In addition to his employment at Google, Mr. White is engaged in numerous philanthropic and community activities. He served, until 2022, as Board Chair of the sixth largest residential real estate brokerage companyBlack Bank Fund, which aims to raise and invest $250 million into Black banks throughout the United States by 2025. Mr. White also serves on the Boards of the University of North Carolina School of Law Foundation and the South Carolina Governor’s School for Science & Mathematics Foundation. Mr. White earned a Bachelor of Science in Computer Engineering from North Carolina State University, where he was a Park Scholar, and received his Juris Doctor, with honors, from the University of North Carolina at Chapel Hill. Prior to being named to his current position in 2013, he served as Patent Litigation Counsel at Google from 2011 to 2013 and was a Senior Associate at Kilpatrick Townsend & Stockton LLP from 2007 to 2011. He also served as a judicial law clerk to the Honorable Alexander Williams, Jr. of the U.S. District Court of Maryland from 2006 to 2007. Mr. White has achieved the designation of NACD Directorship Certification, which is the premier director designation available in the United States.
J. David Ballard has been our Senior Vice President, Enterprise Efficiency and Chief Technology Officer since July 2020 and, from February 2020 to July 2020, served as a consultant to us. Mr. Ballard also serves as Senior Vice President, Enterprise Efficiency and Chief Technology Officer of Douglas Elliman (NYSE:DOUG), the sixth largest residential real estate brokerage company in the United States. Prior to joining Vector Group, Mr. Ballard served as Senior Vice President, Enterprise Services of Ladenburg Thalmann Financial Services Inc. from April 2019 to February 2020. Prior to joining Ladenburg, he served as President and Chief Operating Officer for Docupace Technologies, a leading digital operations technology provider in the wealth management space from March 2018 to April 2019. Mr. Ballard was Executive Vice President and Chief Operating Officer at Cetera Financial Group from April 2015 to March 2018. Prior to his role at Cetera, Mr. Ballard spent more than two decades working in executive and management positions at several firms in the independent financial advisory and asset management industries, including AIG Advisor Group, SunAmerica Mutual Funds and AIG Retirement Services.
Nicholas P. Anson was promoted to President and Chief Operating Officer of Liggett and Liggett Vector Brands in April 2020. Mr. Anson joined Liggett in 2001States and has servedalso earned his NACD CERT in numerous senior roles overCybersecurity Oversight. In addition to Mr. White's NACD Directorship Certification and NACD CERT in Cybersecurity Oversight, his 20 years with Liggett. Previously, Mr. Anson served as Executive Vice President of Finance & Administrationpertinent experience, qualifications, attributes and Chief Financial Officer for Liggett Vector Brands from 2013 to 2020. Mr. Anson was responsible for Liggett Vector Brands’ financeskills include a strong background in computer engineering and human resources organizations. His duties included coordination withthe technology and certain indirect responsibilities for finance and human resources matters at Liggett and Vector Tobacco, which are affiliated companies of Liggett Vector Brands.
ITEM 6.
Board of Directors and Committees
The Board held four meetings in 2022 and currently has nine directors. Each director attended at least 75% of the aggregate number of meetings of the Board and of each committee on which the director served as a member during such period. To ensure free and open discussion and communication among the independent directors of the Board, the independent directors meet in executive sessions periodically, with no members of management present. The Board met in two executive sessions in 2022 and Ms. Sharpe, as chair of the corporate responsibility and nominating committee, presided over such sessions.
The Company’s corporate governance guidelines provide that the Board shall be free to choose its chair in any way it deems best for the Company at any time. The Board believes that it is desirable to have the flexibility to decide whether the roles of Chairman of the Board and Chief Executive Officer should be combined or separate in light of the Company’s circumstances from time to time. Two different directors presently hold the roles of CEO and Chairman of the Board. The CEO is responsible for setting the strategic direction of the Company and the day-to-day leadership and performance of the Company, while the Chairman of the Board provides guidance to the CEO, reviews the agenda for Board meetings and presides over meetings of the full Board.
The Board oversees the risks that could affect the Company through its committees and reports from officers responsible for particular risks within the Company.
The Board has four committees established in accordance with the Company’s Bylaws: an executive committee, an audit committee, a compensation and human capital committee and a corporate responsibility and nominating committee. The Board has determined that, other than Ronald J. Bernstein, the Company’s non-employee directors (Henry C. Beinstein, Paul V. Carlucci, Bennett S. LeBow, Jean E. Sharpe, Barry Watkins and Wilson L. White) have no material relationship with the Company and meet the New York Stock Exchange listing standards for independence. Each of the members of the audit committee, compensation and human capital committee and corporate responsibility and nominating committee meets the New York Stock Exchange listing standards for independence.
The executive committee, whose members are presently Messrs. LeBow, chairman, and Lorber, did not meet in 2022. The executive committee exercises, in the intervals between meetings of the Board, all the powers of the Board in the management and affairs of the Company, except for matters expressly reserved by law for Board action.
The audit committee, whose members are presently Messrs. Beinstein, chairman, Carlucci and White; and Ms. Sharpe, met five times in 2022. The committee is governed by a written charter which requires that it discuss policies and guidelines to govern the process by which risk assessment and risk management are handled and that it meets periodically with management to review and assess the Company’s major financial risk exposures and the manner in which such risks are being monitored and controlled. Accordingly, in addition to its other duties, the audit committee periodically reviews the Company’s risk assessment and management, including in the areas of legal compliance, cybersecurity, internal auditing and financial controls. In this role, the audit committee considers the nature of the material risks the Company faces, and the adequacy of the Company’s policies and procedures designed to respond to and mitigate these risks and receives reports from management and other advisors. Although the Board’s primary risk oversight has been assigned to the audit committee, the full Board also receives regular reports from members of senior management on areas of material risk to the Company, including operational, financial, competitive and legal risks. In addition to an ongoing compliance program, the Board encourages management to promote a corporate culture that understands risk management and incorporates it into the overall corporate strategy and day-to-day business operations. The Board and its audit committee regularly discuss with management the Company’s major risk exposures, their potential financial impact on the Company, and the steps (both short-term and long-term) the Company takes to manage them. The committee is also responsible for overseeing the Company's quantitative disclosures relating to its policies, procedures and programs designed to promote and monitor environmental sustainability, to the extent applicable. The audit committee oversees the Company’s financial statements, system of internal controls, and auditing, accounting and financial reporting processes and risks related thereto; the audit committee appoints, compensates, evaluates and, where appropriate, replaces the Company’s independent accountants; reviews annually the audit committee charter; and reviews and pre-approves audit and permissible non-audit services. Each of the members of the audit committee is financially literate as required of audit committee members by the New York Stock Exchange and independent as defined by the rules of the New York Stock Exchange and the SEC. The Board has determined that Mr. Beinstein is an “audit committee financial expert” as defined by the rules of the SEC. Mr. White holds a certification as an NACD CERT in Cybersecurity Oversight and the Board has determined that he is a cybersecurity expert.
The compensation and human capital committee, whose members are presently Mr. Carlucci and Ms. Sharpe, met twice in 2022. Prior to the Board's acceptance of Mr. Stanley S. Arkin's resignation as a member of the Board in December 2022, Mr. Arkin served as chair of the compensation and human capital committee. The Board is currently evaluating the appointment of a new chair of the compensation and human capital committee. The compensation and human capital committee is governed by
a written charter. The compensation and human capital committee is responsible for risks relating to employment policies and the Company’s compensation and benefits systems. To aid the compensation and human capital committee with its responsibilities, the compensation and human capital committee retains an independent consultant, as necessary, to understand the implications of compensation decisions being made. Commencing in June 2019, the compensation and human capital committee engaged FTI Consulting, Inc. to provide consulting services with respect to the Company's compensation program in the 2020 and subsequent compensation years. Since 2020, the compensation and human capital committee has directed FTI Consulting to benchmark the Company's compensation practices and structures against competitors. The compensation and human capital committee has assessed the independence of FTI Consulting pursuant to SEC and New York Stock Exchange rules and concluded that work performed by FTI Consulting for the compensation and human capital committee does not raise any conflict of interest. The compensation and human capital committee reviews, approves and administers management compensation and executive compensation plans and is responsible for management development and succession planning, overseeing human capital management initiatives (including diversity and inclusion), overseeing the Executive Compensation Clawback Policy and overseeing stockholder communications and engagement efforts with stockholders on executive compensation. The compensation and human capital committee also administers the Company’s Amended and Restated 1999 Long-Term Incentive Plan (the “1999 Plan”), the Senior Executive Incentive Compensation Plan (the “Bonus Plan”) and the 2014 Management Incentive Plan (the “2014 Plan”). See “Compensation Discussion and Analysis” for more information.
The corporate responsibility and nominating committee, whose members are presently Ms. Sharpe, chair, and Messrs. Beinstein and Watkins, met once in 2022. Prior to the Board's acceptance of Mr. Stanley S. Arkin's resignation as a member of the Board in December 2022, Mr. Arkin served as a member of the corporate responsibility and nominating committee. The corporate responsibility and nominating committee is governed by a written charter. This corporate responsibility and nominating committee is responsible for the oversight of risks relating to Board succession planning. The corporate responsibility and nominating committee assists the Board in identifying individuals qualified to become directors and recommends to the Board the nominees for election as directors at the next annual meeting of stockholders, develops and recommends to the Board the corporate governance guidelines and code of business conduct and ethics applicable to the Company, and oversees the evaluation of the Board and management. The corporate responsibility and nominating committee is also responsible for reviewing issues raised by the Company's stakeholders, including issues involving social and community engagement and environmental sustainability. In recommending candidates for the Board, the corporate responsibility and nominating committee takes into consideration applicable to independence criteria and the following criteria established by the Board in the Company’s corporate governance guidelines:
•RESERVEDpersonal qualities and characteristics, accomplishments and reputation in the business community;
•current knowledge and contacts in the communities in which the Company does business and in the Company’s industry or other industries relevant to the Company’s business;
•ability and willingness to commit adequate time to Board and committee matters;
•the fit of the individual’s skills and personality with those of other directors and potential directors in building a board that is effective, collegial and responsive to the needs of the Company; and
•diversity of viewpoints, background, experience and other demographics.
The corporate responsibility and nominating committee also considers such other factors as it deems appropriate, including judgment, skill, diversity, experience with businesses and other organizations of comparable size, the interplay of the candidate’s experience with the experience of other directors, and the extent to which the candidate would be a desirable addition to the Board and any committees of the Board. The committee does not assign specific weights to particular criteria and no particular criteria is necessarily applicable to all nominees. The composition of our current Board includes both gender and racial diversity.
The Company believes that the backgrounds and qualifications of the directors, considered as a group, should provide a significant composite mix of experience, knowledge and abilities that will allow the Board to fulfill its responsibilities. The corporate responsibility and nominating committee will consider nominees recommended by stockholders, which nominations should be submitted by directing an appropriate letter and resume to Marc N. Bell, the secretary of the Company, 4400 Biscayne Boulevard, 10th Floor, Miami, Florida 33137. If the Company were to receive recommendations of candidates from the Company’s stockholders, the committee would consider such recommendations in the same manner as all other candidates.
Corporate Governance Updates
In June 2019, the Board asked management and outside counsel to review the Company's governance practices and propose enhancements that align with market better-practices. Although this review remains ongoing, in December 2022, the Board adopted a number of updates to the Company's corporate governance guidelines as well as its audit committee and corporate responsibility and nominating committee charters to formally assign responsibility for Environment, Social and Governance ("ESG") matters to the corporate responsibility and nominating committee with input from the audit committee
related to measurement of climate-related information in response to proposed Climate-Related Disclosure Rules from the SEC. Further, in April 2022, the Board approved certain amendments to the Company's Bylaws to adopt a majority voting standard for director elections. This followed the Board's action, in March 2020, to approve certain other amendments to the Company’s Bylaws to, among other things, adopt a market-standard proxy access bylaw. Proxy access permits a stockholder (or a group of up to 20 stockholders), owning at least three percent of the Company's outstanding shares of Common Stock continuously for at least three years to nominate and include in the Company's proxy materials, director nominees constituting the greater of two directors or twenty percent of the total number of directors of the Company, provided the stockholder or group of stockholders and nominees satisfy the requirements set forth in Section 14 of Article II of the Company's Bylaws.
Under the Company's Equity Retention and Hedging Policy, adopted in January 2013 and amended in April 2020, each executive officer is required to retain at least 25% (after taxes and exercise costs) of shares of Common Stock acquired by them under an incentive equity or option award granted to them after January 1, 2013 (“Award Shares”) and executive officers are prohibited from participating in certain trading activities with respect to Award Shares, that by their nature would constitute hedging. Directors are prohibited from participating in certain trading activities with respect to Common Stock granted to them in connection with their service on the Board that by their nature would constitute hedging.
For both executive officers and directors, prohibited activities under the Company's Equity Retention and Hedging Policy include:
•Trading in publicly traded options;
•Trading in puts;
•Trading in calls; or
•Trading in other derivative instruments.
Reserved.In 2020, the Board approved a number of updates to the Company’s corporate governance guidelines and Code of Business Ethics. In addition, both the compensation and human capital committee and the corporate responsibility and nominating committee adopted revised charters in 2020. In 2021, the Board approved a number of updates to the Company's Audit Committee Charter, which delegated the audit committee with oversight over cybersecurity and data privacy risks. In 2022, the Board a number of updates to the Company's corporate governance guidelines and corporate responsibility and nominating committee charter to formally assign responsibility for ESG matters to the corporate responsibility and nominating committee with input from the audit committee related to measurement of climate-related information in response to proposed Climate-Related Disclosure Rules from the SEC.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934 requires directors and executive officers of the Company, as well as persons who beneficially own more than 10% of a registered class of the Company’s equity securities, to file reports of initial beneficial ownership and changes in beneficial ownership on Forms 3, 4 and 5 with the SEC. These persons are also required by SEC regulations to furnish the Company with copies of all reports that they file. As a practical matter, the Company assists its directors and officers by monitoring transactions and completing and filing Section 16 reports on their behalf.
To the Company’s knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no Forms 5 were required, during and with respect to the fiscal year ended December 31, 2022, all reporting persons timely complied with all filing requirements applicable to them with respect to the Company's equity securities, except that a Form 5 was not filed within the required period for Mr. Carlucci, a director, in connection with shares acquired through a dividend reinvestment plan administered by Mr. Carlucci's broker.
ITEM 7.11.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSEXECUTIVE COMPENSATION
(Dollars in Thousands, Except Per Share Amounts)Compensation Discussion and Analysis
Overview
In 2022, Vector created incremental stockholder value and delivered strong outperformance relative to its peers and the broader market, evidenced by a 11.63% total return for the year versus negative 18.13% for the S&P 500, negative 16.15% for the S&P SmallCap 600, and negative 11.75% for the NYSE ARCA Tobacco Index.
After the Company’s board created significant stockholder value by successfully completing the distribution of Douglas Elliman in December 2021, the Company’s Tobacco Segment continued to capitalize on opportunities in the discount cigarette segment, while leveraging our value brand portfolio and broad national distribution to meet evolving market demands. Consequently, in 2022, the Company reported record Tobacco Segment revenues in 2022 after increasing its wholesale market share from 4.1% in 2021 to 5.4% in 2022.
Response to Previous Say on Pay Vote Results
At the 2022 annual meeting of stockholders, the Company held its annual say on pay vote and approximately 43.9% of the Company's stockholders voted in favor of the advisory proposal. The Company's compensation and human capital committee thoughtfully considered the result of the 2022 vote in conducting the ongoing review and oversight of our compensation practices. We arevalue our stockholders’ perspectives and have continued our expanded outreach to stockholders to solicit their feedback.
As part of this commitment, the Company regularly requests meetings with each institutional stockholder owning more than two percent (2%) of our Common Stock. When appropriate, the engagement team includes independent directors and feedback received is conveyed to the Board and relevant committees. The table below summarizes our history of responsiveness to stockholder feedback.
In response to stockholder feedback received specifically related to their strong preference for (i) performance-based equity awards to be included as a holding companycomponent for all NEOs, and are engaged principally(ii) performance-based equity awards to incorporate a three-year performance period, the compensation and human capital committee implemented changes as outlined in the following table. The table also outlines the Board's track record of responsiveness to stockholder feedback received in recent years.
| | | | | |
| WHAT WE HEARD | WHAT WE DID |
| Incorporate performance-based equity incentives for all NEOs | NEW for 2023: Increased percentage of performance-based awards for the CEO to comprise 60% of total compensation (up from 50% in 2022 and 50% in 2021)
NEW for 2023: Implemented performance-based awards for NEOs other than the CEO |
| Emphasis on long-term incentives | NEW for 2023:Implemented performance-based equity awards for all NEOs with a 3-year performance period. |
| Benchmark against relevant industry peers | Reduced CEO and COO base salaries to reflect the distribution of Douglas Elliman (2022)
Adjusted peer group after distribution of Douglas Elliman (2022) |
| Align interest with long-term stockholders | Updated executive stock retention policy (2020)
NEW for 2023: Increased at-risk compensation (2023) |
| Increase board diversity | Added a diverse, independent Director (2021) |
| Update corporate governance practices | Adopted proxy access (2020) Adopted majority voting standard for director election (2022) |
Board Actions Explained
Performance-Based Incentives for all NEOs. In response to stockholder feedback that performance-based equity incentives should be an integral part of all NEOs compensation, beginning with the 2023 fiscal year compensation program the compensation and human capital committee designed and granted performance-based equity awards to all NEOs. As a result of its continuous focus on enhancing the compensation pay mix to better align with stockholder interests, for 2023, the compensation and human capital committee further enhanced the CEO's pay mix (as well as that of the COO, CFO and General Counsel) so that 60% of long-term equity compensation award was subject to performance-based vesting conditions (an increase from 50% in the case of the CEO). This increased focus on performance-based compensation follows the actions by the compensation and human capital committee in each of fiscal 2021 and 2022 to steadily increase the percentage of performance-vesting equity as a percentage of the CEO's long-term equity compensation award, with an increased focus on long-term equity incentive awards for the Company's COO, CFO and General Counsel.
Three Year Performance Periods for Performance-Based Equity Incentives. In alignment with stockholder preference for long-term performance periods, the compensation and human capital committee redesigned performance-based equity incentives to incorporate a three-year performance period for the performance-based equity incentives granted in 2023. Further, these awards were granted to all NEOs, not just the CEO as in prior years.
Appropriate Benchmarking. In response to stockholder feedback received in 2019 prior to the distribution of Douglas Elliman, despite at the time operating in two disparate industries, the compensation and human capital committee adopted a formal compensation benchmarking policy, as detailed in our prior proxy statements. The benchmarking analysis not only initially adopted a 14-company peer group (which has since been revised to reflect the changes in the Company's operations due to the distribution of Douglas Elliman) but also incorporated a comparison of compensation practices across the two industries. Following the distribution of Douglas Elliman in December 2021, the committee has adjusted the peer group to better reflect the companies in the tobacco and real estate industries and the companies with which we directly compete for talent. The revised peer group is discussed below in this section. Following the distribution, the compensation and human capital committee reduced the CEO's base salary from $3,426,270 to $1,837,500, effective January 1, 2022, and the COO's base salary from $1,250,000 to $650,000, effective January 1, 2022, to reflect each of Messrs. Lorber and Lampen will spend a portion of their business segments:time serving as CEO and COO of Douglas Elliman.
•
Alignment of InterestsTobacco:. In recent years, the manufacturecompensation and salehuman capital committee has consistently increased its emphasis on performance-based incentives – cash and equity incentives – to ensure a steady increase in the at-risk compensation percentage. In line with these efforts, the at-risk percentage of cigarettesCEO compensation has increased from 55.6% in 2012 to 85.0% in 2022. Further, our robust stock ownership guidelines, holding requirements, and our policy to prohibit hedging of Company Common Stock further align the interests of executives with those of long-term stockholders.
Increased Board Diversity. In June 2021, the Board appointed Wilson L. White, currently Vice President of Government Affairs and Public Policy at Google, to the Board. Mr. White has achieved the designation of NACD Directorship Certification, which is the premier director designation available in the United States throughand also earned his NACD CERT in Cybersecurity Oversight. With the addition of Mr. White in 2021, two of our Liggett Group LLCdirectors identify as racially diverse.
Corporate Governance Updates. In response to stockholder feedback, the Board formally adopted a market-standard proxy access bylaw in March 2020. In addition, also in response to stockholder feedback, in April 2022, the Board adopted a majority voting standard for uncontested director elections, which applies to the election to be held at the 2022 annual meeting. In December 2022, the Board adopted a number of updates to the Company's corporate governance guidelines, audit committee charter and Vector Tobacco LLC subsidiaries,corporate responsibility and nominating committee charter to formally assign responsibility for ESG matters to the corporate responsibility and nominating committee with input from the audit committee related to measurement of climate-related information in response to proposed Climate-Related Disclosure Rules from the SEC.
Executive Compensation Philosophy
The Company’s overall compensation philosophy is intended to reward its executives with fully competitive compensation, while providing opportunities to reward outstanding performance and align the interests of our executives with those of stockholders. More specifically, the compensation and human capital committee’s primary objectives for our executive compensation program are:
•to ensure alignment of pay and performance against preset annual and long-term goals;
•to provide long-term and short-term incentives that pay out in alignment with stockholder value creation;
•to provide competitive levels of compensation; and
•Real Estate:to attract talented executives and retain them for the real estate investment business through our subsidiary, New Valley LLC, which (i) has interests in numerous real estate projects acrossbenefit of the United StatesCompany and (ii) is seeking to acquire or invest in additional real estate properties or projects.
Our tobacco subsidiaries’ cigarettes are produced in 100 combinations of length, style and packaging. Liggett’s current brand portfolio includes:
•Eagle 20’s
•Pyramid
•Montego
•Grand Prix, Liggett Select, Eve, USA and various Partner Brands and private label brands.its subsidiaries.
The discount segment isCompany strives to achieve these objectives through a challenging marketplace, with consumers having less brand loyalty and placing greater emphasis on price. Liggett’s competition is divided into two segments. The first segment consistscompensation structure that ensures a substantial portion of the three largest manufacturersexecutives’ overall compensation remains at risk with compensation earned only if pre-established performance goals are achieved.
Compensation After the Distribution of cigarettes inDouglas Elliman
Prior to the United States: Philip Morris USA Inc., which is owned by Altria Group, Inc., RJ Reynolds Tobacco Company, which is owned by British American Tobacco Plc, and ITG Brands LLC, which is owned by Imperial Brands Plc. These three 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 manufacturers and importers, most of which sell deep discount cigarettes.
See Item 1. “Business” for detailed overview and description of our principal operations.
The financial resultsdistribution of Douglas Elliman, throughVector was a complex and diversified company that operated in two challenging industries – tobacco and real estate brokerage services. The compensation and human capital committee established levels of executive compensation it believed were appropriate and reflective of Vector’s well-established record of strong operating performance. Following the distribution, date are presented as income (loss)the base salary for the CEO was reduced from discontinued operations, net of income taxes$3,426,270 to $1,837,500. The compensation and human capital committee also made appropriate changes to compensation for other executives, benchmarking pay against a revised peer group that focuses primarily on our consolidated statements of operations and are not included in our results from continuing operations discussed below. See Note 6.
COVID-19 Pandemic and Current Business and Industry Trends
The COVID-19 pandemic continues to evolve and disrupt normal activities in many segments of the U.S. economy even as COVID-19 vaccines have been and continue to be administered. Many uncertainties continue to surround the pandemic, including risks associated with the timing and extent of vaccine administration and the impact of COVID-19 variants, the duration of the pandemic and the length of immunity. The following provides a summary of our actions in our two segments - Tobacco and Real Estate - since COVID-19 was declared a pandemic in March 2020.
Impact of COVID-19 on Tobacco Segment. We believe many tobacco consumers have had incremental discretionary spending availability during the COVID-19 pandemic as a result of a variety of factors, including federal government stimulus payments and enhanced unemployment benefit payments enacted in response to the COVID-19 pandemic, and lower non-tobacco discretionary spending due to stay-at-home practices.
Although our Tobacco segment has not experienced a material adverse impact to date from the COVID-19 pandemic, there is continued uncertainty as to how the COVID-19 pandemic (including vaccine administration and the impact of variants as well as changes in COVID-19-related restrictions and guidelines) may impact tobacco consumerscompanies in the future. The majority
of retail stores in which our tobacco products are sold, including convenience stores, have been deemed to be essential businesses by authorities and have remained open.
Our management also continues to monitor the macroeconomic risks of the COVID-19 pandemic and its effect on tobacco consumer purchasing behaviors, including the mix of between premium and discount brand purchases. Our Montego brand is priced in the deep discount category and our other brands are primarily priced in the traditional discount category.
To date, we have not experienced any material disruptions to our supply or distribution chains and have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations. However, our suppliers and members of our distribution chain may be subject to government action requiring facility closures, vaccine mandates, remote working protocols and labor shortages. We continue to monitor the risk that a supplier, a distributor or any other entity within our supply and distribution chain closes temporarily or permanently.
Impact of COVID-19 on Real Estate Segment. New Valley has investments in multiple real estate ventures and properties in the New York metropolitan area, which had a carrying value of $24,289 at December 31, 2021. Published reports and data indicate that the New York metropolitan area was initially impacted more than any other area in the United States. Consequently, various governmental agencies in the New York metropolitan area and in other markets where New Valley invests, instituted quarantines, “pause” orders, “shelter-in-place” rules, restrictions on travel and restrictions on the types of businesses that could operate. These restrictions adversely impacted New Valley’s investment’s ability to conduct business during the year ended December 31, 2020 and, in particular from March 2020 to October 2020.
There remain significant uncertainties related to the COVID-19 pandemic, including the impact of COVID-19 variants, the duration of the pandemic and the length of immunity. See “Risk Factors.”
Recent Developments
Spin-off of Douglas Elliman Inc. On December 29, 2021, at 11:59 p.m., New York City time, we completed the distribution to our stockholders (including Vector common stock underlying outstanding stock option awards and restricted stock awards) of the common stock of Douglas Elliman. Each holder of Vector common stock received one share of Douglas Elliman’s common stock for every two shares of Vector common stock (including Vector common stock underlying outstanding stock option awards and restricted stock awards) held of record as of the close of business, New York City time, on December 20, 2021 (the “Spin-off”). In the Spin-off, an aggregate of 77,720,159 shares of Douglas Elliman’s common stock were issued, with fractional shares converted to cash and paid to applicable Vector stockholders.
We incurred significant costs in connection with the Spin-off. These costs include fees for third-party advisory, consulting, legal and professional services,industry as well as other itemscompanies that are incremental and one-time in nature. We expensed $10,468Vector competes with for talent.
Compensation Practices Align with Stockholder Interests
Following the year ended December 31, 2021. We also recorded expenses of $4,317 associated with the acceleration of stock compensation in connection with the Spin-off The expenses are reflected in operating, selling, administrative and general expenses.
For the three years ended December 31, 2021, the financial resultsdistribution of Douglas Elliman, throughthe compensation and human capital committee’s executive compensation philosophy remained the same – therefore, changes implemented in recent years that align with stockholder feedback will continue to drive the design of our compensation program. In short, executive compensation will continue its focus on maximizing stockholder returns and delivering compensation in a manner that supports long-term value creation for the Company. Therefore, compensation for the Company’s named executive officers in 2022 remained substantially at-risk; annual incentive awards remained contingent upon the Company meeting various performance goals that are consistent with the Company’s business plan; and, for 2022, annual long-term equity incentive awards continued to be granted in the form of restricted stock awards that vest ratably over four years (with, in the case of the CEO, 50% of such award subject to performance-based vesting) to further align management with the interests of the Company’s long-term stockholders.
Another critical aspect that has remained unchanged is the compensation and human capital committee’s focus on compensation risk mitigation and its efforts to further align the interests of management with those of long-term stockholders. Since 2013, the Company has implemented significant enhancements to discourage excessive risk-taking by our executives, including adopting an Executive Compensation Clawback Policy, an Equity Retention and Hedging Policy that prohibits hedging by executive officers and requires executive officers to retain at least 25% (after taxes and exercise costs) of the shares of Common Stock acquired under an incentive, equity or option award granted to them after January 1, 2013 and Stock
Ownership Guidelines that require each executive officer to hold a specified amount of Common Stock until normal retirement age. In addition, from 2013 to 2019, the Company's annual award of long-term equity compensation to its named executive officers (other than Mr. Anson) was in the form of stock options that cliff vest on the fourth anniversary of the date of grant. In 2020, 2021 and 2022, the Distribution are presented as income (loss) from discontinued operations, net of income taxesCompany granted restricted stock, which vests ratably over four years, to its named executive officers (other than Mr. Anson in 2020). These vesting schedules were chosen to incentivize executives to focus on our consolidated statements of operations and are not included in our results from continuing operations discussed below. See Note 6.long-term strategic directives.
Issuance of Senior Secured Notes due 2029. In January 2021, we issued $875,000 in aggregate principal of our 5.75% Senior Secured Notes due 2029 (“5.75% Senior Secured Notes”)Compensation Highlights
| | | | | |
| What we do | What we do not do |
| Pay for performance and align interests of executives with those of long-term stockholders | No single-trigger cash severance upon a change in control |
| Majority of executive pay is in the form of at-risk compensation | No repricing of stock options |
| Hold-until-retirement requirements applicable to 25% of all equity granted to executives | No hedging of stock permitted |
| Clawback policy — which provides for recoupment of previously earned incentives — is a precondition to receiving incentive-based compensation | |
| Independent compensation consultant | |
Year-Over-Year Compensation Mix
As a private offering that is exempt from the registration requirementsresult of the Securities Actincremental compensation changes thoughtfully implemented each year, the Company's executive compensation mix has transitioned to being comprised significantly of 1933,at-risk compensation as amended (the “Securities Act”),compared to qualified institutional buyers in accordance with Rule 144A underfixed compensation. The following charts illustrate the Securities Act and to persons outside the United States in compliance with Regulation S under the Securities Act. The 5.75% Senior Secured Notes pay interest on a semi-annual basis at a rate of 5.75% per year and mature on February 1, 2029. Prior to February 1, 2024, we may redeem some or allconsistent shift of the 5.75% Senior Secured Notes at any time at a make-whole redemption pricecompensation mix between fixed (i.e., base salary) and thereafter, we may redeem some or all ofat-risk (i.e., annual cash bonus and long-term equity incentives) compensation elements for our CEO and the 5.75% Senior Secured Notes at a premium that will decrease over time, plus accruedother named executive officers.
CEO Year-Over-Year Compensation Mix
In addition to becoming more at-risk, the CEO's compensation mix has also become more performance-based to increase alignment with stockholder interests. Specifically, as outlined above, the compensation and unpaid interest, if any,human capital committee has implemented changes to the redemption date.structure of CEO compensation to require that 60% (increase from 50% in 2022) of his equity compensation will be denominated in performance-based equity. The aggregate net proceeds fromchart below illustrates the issuancesignificant increase in the CEO's target compensation being comprised of the 5.75% Senior Secured Notes were approximately $855,500 after deducting offering expenses. We used the net proceeds of the issuance, together with cash on hand, to redeem all of our outstanding 6.125% Senior Secured Notes due 2025, including accrued interest and any premium thereon, and to pay fees and expenses in connection with the offering of the 5.75% Senior Secured Notes.performance-based incentives:
Liggett Credit Facility
. On March 22, 2021, Liggett, 100 Maple LLC (“Maple”), a subsidiary of Liggett, and Vector Tobacco entered into Amendment No. 4 and Joinder to the Third Amended and Restated Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association, as agent and lender.
The existing credit agreement was amended to, among other things, (i) add Vector Tobacco as a borrower under the Restated Credit Agreement, (ii) extend the maturity of the Credit Agreement to March 22, 2026, and (iii) increase the amount of
Compensation Components
The key components of the maximum credit line thereunder from $60,000Company’s executive compensation program consist of a base salary, an annual performance-based bonus pursuant to $90,000. As of December 31, 2021, approximately $81,000 was available for borrowing with an outstanding balance of $24the 2014 Plan, equity awards under the Credit Agreement.2014 Plan and various benefits, including the Company’s Supplemental Retirement Plan, the Liggett Vector Brands Inc. Savings Plan (the “401(k) Plan”) and certain perquisites, including business and personal use of corporate aircraft by each of the CEO and COO. The employment agreements with the Company’s named executive officers also provide for severance compensation in the event of termination other than for cause during the term of the agreement or, in certain cases, following a change in control of the Company during the term of the agreements.
Montego. Since August 2020, Liggett has expandedBase Salary
Base salaries for the Company’s named executive officers are established based on their overall business experience and managerial competence in their respective roles, as well as their personal contributions to the Company and are intended to provide competitive levels of fixed compensation. The compensation and human capital committee believes that executive base salaries should be set at competitive levels and reward our executives for our long-term outstanding performance with above-average total compensation. Base salaries are reviewed annually by the compensation and human capital committee, based on recommendations by the Company’s CEO with respect to the salaries of executive officers other than himself, and may be increased based on review of the Company's results and individual executive performance. As previously disclosed, following the successful distribution of its Montego deep discount brand into a total 35 states. Montego was Liggett’s third-largest brandDouglas Elliman, the base salaries for the year ended December 31, 2021.CEO and COO were reduced to reflect that these executives will be devoting a portion of their business time to Douglas Elliman. These reduced salaries are disclosed in the table below.
| | | | | | | | | | | |
| Base Salary |
| 2021 | 2022 | △ vs 2021 |
| Howard M. Lorber | $3,426,270 | $1,837,500 | (46) % |
| Richard J. Lampen | $1,250,000 | $650,000 | (48) % |
| J. Bryant Kirkland III | $550,000 | $575,000 | 5% |
| Marc N. Bell | $475,000 | $500,000 | 5% |
| Nicholas P. Anson | $650,000 | $650,000 | None |
Annual Incentive Awards
The Company's executive officers are eligible to earn annual cash incentive awards under the 2014 Plan. Prior to August 2020, Montego was sold2022, the compensation and human capital committee delegated to its subcommittee, which consisted of Mr. Carlucci and Mr. Stanley S. Arkin, a former member of the Board, the authority to select participants in select targeted markets in four states. Montego’s volume represented approximately 16% of Liggett’s unit volume for the year ended December 31, 2021 compared to approximately 6% for the year ended December 31, 2020.
Recent Developments in Tobacco-Related Litigation
The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse litigation outcomes could have a negative impact on our ability to operate due to their impact on cash flows. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.
Mississippi Dispute. In January 2016, the Attorney General for Mississippi filed a motion in Chancery Court in Jackson County, Mississippi to enforce the March 1996 settlement agreement (the “1996 Agreement”) alleging that Liggett owes Mississippi at least $27,000 in compensatory damages and interest. In April 2017, the Chancery Court ruled, over Liggett’s objections, that the 1996 Agreement should be enforced as Mississippi claims and referred the matter first to arbitration and then to a Special Master for further proceedings to2014 Plan, determine the amount of damages, if any,their annual award opportunities, select the applicable performance criteria and performance goals for each year, determine whether the performance goals for particular awards have been met and administer and interpret the 2014 Plan with respect to be awarded. In April 2021, following confirmation ofperformance-based compensation. Effective in 2022, the final arbitration award,compensation and human capital committee selects participants in the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett to Mississippi pursuant to the 1996 Agreement was approximately $16,700, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of the principal amount allegedly due).
In September 2019, the Special Master held a hearing regarding Mississippi’s claim for pre- and post-judgment interest. In August 2021, the Special Master issued a final report with proposed findings and recommendations that pre-judgment interest, in2014 Plan, determines the amount of approximately $18,800, is due from Liggett from April 2005 - August 3, 2021. Liggett filed formal objections totheir annual award opportunities, selects the final report in Mississippi Chancery Court. A ruling is pending. If the Mississippi Chancery Court rejects Liggett’s objectionsapplicable performance criteria and enters final judgment adopting the Special Master’s findings and recommendations, additional interest amounts will accrue if the judgment is not overturned on appeal. Liggett continues to assert that the April 2017 Chancery Court order is in error because the most favored nations provision in the 1996 Agreement eliminated all of Liggett’s payment obligations to Mississippi, and has reserved all rights to appeal this and other issues at the conclusion of the case. In the event Liggett appeals an adverse judgment, the posting of a bond will likely be required.
Liggett may be required to make additional payments to Mississippi which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
See “Legislation and Regulation” in Item 7 of the MD&Aperformance goals for further information on litigation.
Critical Accounting Policies
General. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 impairment charges, valuation of intangible assets, promotional accruals, actuarial assumptions of pension plans, deferred tax liabilities, settlement accruals, valuation of investments, including other-than-temporary impairments to such investments, and litigation and defense costs. Actual results could differ from those estimates.
Revenue Recognition. Revenue is measured based on a consideration specified in a contract with a customer and excludes any sales incentives. Revenue is recognized when (a) an enforceable contract with a customer exists, that has commercial substance, and collection of substantially all consideration for services is probable; and (b)each year, determines whether the performance obligations to the customer are satisfied either over time or at a point in time.
Revenue from cigarette sales, which include federal excise taxes billed to customers, are recognized upon shipment of cigarettes when control has passed to the customer. Average collection termsgoals for Tobacco sales range between threeparticular awards have been met and twelve
days fromadministers and interprets the time cigarettes are shipped2014 Plan with respect to performance-based compensation. An eligible executive may (but need not) be selected to receive annual incentive awards under the customer. We record a liability for goods estimated to be returned in other current liabilities and the associated receivable for anticipated federal excise tax refunds in other current assets on the consolidated balance sheets. The allowance for returned goods is based principally on sales volumes and historical return rates. The estimated costs of sales incentives, including customer incentives and trade promotion activities, are based principally on historical experience and are accounted for as reductions in Tobacco revenue. Expected payments for sales incentives are included in other current liabilities on our consolidated balance sheets. We account for shipping and handling costs as fulfillment costs as part of cost of sales.2014 Plan.
Revenue from facilities primarily relates to Escena and consists of revenues from food and beverage sales, fees charged for gameplay and the sale of golf related equipment and apparel. Revenue is recognized at the time of sale.
Revenue from investments in real estate is recognized from land and building sales at the timeIn 2022, each of the closing of a sale, which is typically whenCompany's named executive officers participated in the annual cash is due,incentive program under the 2014 Plan. For Messrs. Lorber, Lampen, Kirkland and Bell, the following performance obligation is satisfied as the title to and possessionmetrics were established for 2022: 62.5% of the real estate asset are transferredpayment was based on adjusted earnings before interest and taxes, or Adjusted EBIT, as defined in the 2014 Plan, of Liggett; and 37.5% of the payment was based on distributions to stockholders of the buyerCompany. For Mr. Anson, the following performance metrics were established for 2022: 50% of the payment was based on Liggett Adjusted EBIT and we have no further obligations or involvement50% was based on Liggett Volume. The compensation and human capital committee selected Liggett Adjusted EBIT as a performance criterion for 2022 as it is commonly used to measure performance in the tobacco industry and Adjusted EBITA is commonly used to measure performance in the real estate asset.brokerage industry; while selecting complementary metrics that incentivize management to seek strong stockholder returns and prioritize the Company's long-term performance.
Leases. Under Accounting Standards Committee (“ASC”) 842, we determine if an arrangement isFor 2022, like 2021 and prior years and in accordance with the terms of their respective employment agreements, Messrs. Lorber, Lampen, Kirkland and Bell remained eligible to receive a lease at contract inception. At lease commencement, we recordtarget annual incentive opportunity of 100%, 75%, 33.33% and recognize right-of-use (“ROU”) assets25% of their respective base salaries. In 2022, Mr. Anson received a target annual incentive opportunity of 50% of his respective base salary. The Company did not increase the target percentage annual incentive opportunity for any of its named executive officers from the lease liability amount and initial direct costs incurred, offset by lease incentives received. We record lease liabilities forpercentage set forth in each named executive officer’s employment agreements, as amended.
Depending on the net present valuelevel of future lease payments over the lease term. The discount rate we use is generally our estimated incremental borrowing rate unless the lessor’s implicit rate is readily determinable. We calculate discount rates periodically to estimate the rate we would pay to borrow the funds necessary to obtain an asset of similar value, over a similar term, with a similar security. The lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. We recognize operating lease expense on a straight-line basis over the lease term. We recognize finance lease cost on a straight-line basis over the shorterachievement of the useful lifeperformance criteria, the actual annual incentive payments could exceed the target annual incentive amount for each of the assetMessrs. Lorber, Lampen, Kirkland and the lease term. Operating leases are includedBell up to a maximum payout of 125% of target, whereas Mr. Anson's maximum payout is 200% of target (see “Grants of Plan-Based Awards in operating lease ROU assets and lease liabilities on the consolidated balance sheets. Finance leases are included in investments in real estate, net, property, plant and equipment and current and long-term portions of notes payable and long-term debt on the consolidated balance sheets.
Contingencies. We record Liggett’s product liability legal expenses and other litigation costs as operating, selling, administrative and general expenses as those costs are incurred. As discussed in Note 15 to our consolidated financial statements, legal proceedings regarding Liggett’s tobacco products are pending or threatened in various jurisdictions against Liggett and us.
We record provisions in our consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case2022”). The Subcommittee may occur, except as discussed in Note 15 to our consolidated financial statements and discussed below related to the 16 cases where an adverse verdict was entered against Liggett: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Although Liggett has generally been successful in managing litigation in the past, litigation is subject to uncertainty and significant challenges remain, particularlyexercise negative discretion with respect to the Engle progeny cases.
A reader of this Form 10-K should not infer from the absence of any reserve in our consolidated financial statementsaward to reduce any amount that we will notwould otherwise be subject to significant tobacco-related liabilities in the future. Litigation is subject to many uncertainties, and it is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.
There may be several other proceedings, lawsuits and claims pending against us and certain of our consolidated subsidiaries unrelated to tobacco or tobacco product liability. We are of the opinion that the liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially affect our financial position, results of operations or cash flows.
Master Settlement Agreement. As discussed in Note 15 to our consolidated financial statements, Liggett and Vector Tobacco are participants in the Master Settlement Agreement (“MSA”). Liggett and Vector Tobacco have no payment obligationspayable under the MSA except to the extent their market shares exceed approximately 1.65% and 0.28%, respectively, of total cigarettes sold in the United States. Their obligations, and the related expense chargesannual incentive program granted under the MSA, are subject2014 Plan.
The 2022 performance necessary for Messrs. Lorber, Lampen, Kirkland, Bell and Anson to adjustments based upon, among other things,receive annual incentive awards at the volume of cigarettes sold by Liggett and Vector Tobacco, their relative market shares and inflation. Since relative market shares aretarget level were set at levels which were believed to be rigorous, but achievable, based on cigarette shipments,internal corporate plans.
For Messrs. Lorber, Lampen, Kirkland and Bell, the best estimate ofperformance necessary to achieve the allocation of charges under the MSA is recordedminimum, target or maximum awards in cost of goods sold2022 was as the products are shipped. Settlement expenses under the MSA recorded in the accompanying consolidated statements of operations were $171,058 for 2021, $175,837 for 2020 and $165,471 for 2019.
Adjustments to these estimates are recorded in the period that the change becomes probable and the amount can be reasonably estimated.follows:
Stock-Based Compensation.• Our stock-based compensation uses a fair-value-based method to recognize non-cash compensation expense for share-based transactions. Under the fair value recognition provisions, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. We recognized stock-based compensation expense of $849, $1,428 and $1,923 in 2021, 2020 and 2019, respectively, related to the amortization of stock option awards and $13,949, $7,546 and $7,705, respectively, related to the amortization of restricted stock grants. As of December 31, 2021 and 2020, there was $381 and $1,229, respectively, of total unrecognized cost related to employee stock options and $10,627 and $12,081, respectively, of total unrecognized cost related to restricted stock grants. See Note 14 to our consolidated financial statements.
Employee Benefit Plans. The determination of our net pension and other postretirement benefit income or expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs. We determine discount rates by using a quantitative analysis that considers the prevailing prices of investment grade bonds and the anticipated cash flow from our two qualified defined benefit plans and our postretirement medical and life insurance plans. These analyses construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the annual projected cash flows from our pension and retiree health plans. As of December 31, 2021, our benefit obligations were computed assuming a discount rate between 1.80% - 2.85%. As of December 31, 2021, our service cost was computed assuming a discount rate of 1.40% - 2.55%. In determining our expected rate of return on plan assets, we consider input from our external advisors and historical returns based on the expected long-term rate of return which is the weighted averagepercentages of the target asset allocation of each individual asset class. Our actual 10-year annual rate of return on our pension plan assets was 7.74%, 6.91% and 7.59% for the years ended December 31, 2021, 2020 and 2019, respectively, and our actual five-year annual rate of return on our pension plan assets was 7.86%, 7.51% and 5.41% for the years ended December 31, 2021, 2020 and 2019, respectively. In computing expense for the year ended December 31, 2022, we will use an assumption of a 3.5% annual rate of return on our pension plan assets. In accordance with GAAP, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized income or expense in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our future net pension and other postretirement benefit income or expense.
Net pension expense for defined benefit pension plans and other postretirement expense was $1,390, $4,210 and $2,834 for the years ended December 31, 2021, 2020 and 2019, respectively, and we currently anticipate benefit expense will be approximately $1,358 for 2022. In contrast, our funding obligations under the pension plans are governed by the Employee Retirement Income Security Act (“ERISA”). To comply with ERISA’s minimum funding requirements, we do not currently anticipate that we will be required to make any funding to the tax qualified pension plans for the pension plan year beginning on January 1, 2022 and ending on December 31, 2022.
Long-Term Investments and Impairments. At December 31, 2021, our long-term investments were comprised of $32,089 of equity securities at fair value that qualify for the net asset value (“NAV”) practical expedient and $20,984 of long-term investments that were accounted for under the equity method. Our investments in equity securities at fair value that qualify for the NAV practical expedient consisted primarily of investment partnerships investing in investment securities. The investments in these investment 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 estimated fair value of these investments was provided by the partnershipscash incentive opportunity based on the indicated market values of the underlying assets or investment portfolio. Our investments accounted for under the equity method included interests in partnerships in which we have the ability to exercise significant influence over their operating and financial policies. The estimated fair value of the investments is either provided by the partnerships based on the indicated market values of the underlying assets or is calculated internally based on the number of shares owned and the equity in earnings or losses and interest income we recognize on the investment. Gains are recognized when realized in our consolidated statement of operations. Losses are recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair value. Pursuant to the amendments provided by ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”Liggett Adjusted EBIT were $300,000,000 (50%), our long-term investments that qualify$340,000,000 (100%), and $350,000,000 and above (125%); the actual Liggett Adjusted EBIT for the NAV practical expedient are measured at fair value with changes2022 were $355,539,000 resulting in fair value recognized in net income. Therefore, impairment analyses for these investments are no longer warranted.
At December 31, 2021, we also had $5,200 of investments in various limited liability companies that were classified as equity securities without readily determinable fair values that do not qualify for the NAV practical expedient. The investments are included in “Other assets”a 125% payment on the consolidated balance sheetsthis metric; and, are valued at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. On a quarterly basis, we evaluate our investments to determine if there are indicators of impairment. If so, we also make a determination of whether there is an impairment and if it is considered temporary or other than temporary. We believe that the assessment of
temporary or other-than-temporary impairment is facts-and-circumstances driven. The impairment indicators that are taken into consideration as part of our analysis include (a) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, and (d) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.
Current Expected Credit Losses. On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, therefore, our measurement of credit losses for most financial assets and certain other instruments has been modified as discussed in Note 3 to our consolidated financial statements.
•Tobacco receivables:percentages of the target cash incentive opportunity based on cash dividends per share of the Company were $0.70 (50%), $0.80 (100%), and $0.90 and above (125%); the actual cash dividends paid in 2022 were $0.80 per share, resulting in a 100% payment on this metric.
For Mr. Anson, the performance necessary to achieve the minimum, target or maximum awards in 2022 was as follows:
• Average collection termspercentages of the target cash incentive opportunity based on Liggett Adjusted EBIT were $345,000,000 (100%) and $355,000,000 and above (200%); the actual Liggett Adjusted EBIT for Tobacco sales range between three2022 were $355,539,000 resulting in a 200% payment on this metric; and twelve days from the time that the cigarettes are shipped to the customer. Based on Tobacco historical and ongoing cash collections from customers, an estimated credit loss in accordance with ASU 2016-13 was not recorded for these trade receivables as of January 1, 2021 and December 31, 2021.
•Term loan receivables: New Valley provides term loans to real estate developers, which are included in Other assets on the consolidated balance sheets. The loans are secured by guarantees and are evaluated individually. Because New Valley does not have internal historical loss information by which to evaluate the risk of credit losses, external market data measuring default risks on high yield loans as of each measurement date was utilized to estimate reserves for credit losses on these loans. New Valley’s expected credit loss estimate was $3,100 as of adoption (January 1, 2020). New Valley’s expected credit loss estimate was $15,928 as of December 31, 2021.
Intangible Assets. Intangible assets with indefinite lives are not amortized, but instead are tested for impairment on an annual basis, or whenever events or changes in business circumstances indicate the carrying valuepercentages of the assets may not be recoverable.
Our intangible asset associated withtarget cash incentive opportunity based on Liggett Volume (in billions of units) were 9.25 (100%), and 9.75 billion units (200%); the benefit under the MSA is related to Vector Tobacco. The fair value of the intangible asset associated with the benefit under the MSA is determined using discounted cash flows. This approach involves two steps: (i) estimating future cash savings due to the payment exemption under the MSA and (ii) discounting theactual Liggett Volume was 10.349 billion resulting cash flow savings to determine fair value. This fair value is then compared with the carrying value of the intangible asset associated with the benefit under the MSA. To the extent that the carrying amount exceeds the implied fair value of the intangible asset, an impairment loss is recognized. We performed its impairment test for the year ended December 31, 2021 and no impairment was noted.
Income Taxes. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and, as a result, changes in our subjective assumptions and judgments may materially affect amounts recognized in our consolidated financial statements.
See Note 13 to our consolidated financial statements for additional information regarding our accounting for income taxes and uncertain tax positions.
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 Liggett, Vector Tobacco, Liggett Vector Brands, New Valley, and other less significant subsidiaries.
Our business segments were Tobacco and Real Estate for the three years ended December 31, 2021, 2020 and 2019. The Tobacco segment consists of the manufacture and sale of cigarettes. The Real Estate segment includes our investment in New Valley, which includes Escena and investments in real estate ventures.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies and can be found in Note 1 to our consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2021 | | | 2020 | | | 2019 | | |
| | (Dollars in thousands) | | |
| Revenues: | | | | | | | | | |
| Tobacco | $ | 1,202,497 | | | | $ | 1,204,501 | | | | $ | 1,114,840 | | | |
| | | | | | | | | |
| Real Estate | 18,203 | | | | 24,181 | | | | 4,763 | | | |
| | | | | | | | | |
| Total revenues | $ | 1,220,700 | | | | $ | 1,228,682 | | | | $ | 1,119,603 | | | |
| | | | | | | | | |
| Operating income (loss): | | | | | | | | | |
| Tobacco | $ | 360,317 | | (1) | | $ | 319,536 | | (2) | | $ | 261,630 | | (3) | |
| | | | | | | | | |
| Real Estate | 4,066 | | | | (610) | | | | 550 | | | |
| Corporate and Other | (43,944) | | (4) | | (24,498) | | (5) | | (27,565) | | | |
| Total operating income | $ | 320,439 | | | | $ | 294,428 | | | | $ | 234,615 | | | |
_____________________________
(1)Operating income includes $211 of litigation settlement and judgment expense and $2,722 received from a litigation settlement associated with the MSA (which reduced cost of sales).
(2)Operating income includes $337 of litigation settlement and judgment expense and $299 of expense from MSA Settlement.
(3)Operating income includes $990 of litigation settlement and judgment expense.
(4)Operating loss includes transaction charges of $10,468 and accelerated stock compensation of $4,317 related to the spin-off of Douglas Elliman; and $910 of gain on sale of assets.
(5)Operating loss includes $2,283 of gain on sale of assets.
2021 Compared to 2020
Revenues. Total revenues were $1,220,700 for the year ended December 31, 2021 compared to $1,228,682 for the year ended December 31, 2020. The $7,982 (0.6%) decline in revenues was due to a $2,004 decline in Tobacco revenues related to lower unit volume, partially offset by increases in net pricing and a $5,978 decline in Real Estate revenues, primarily related to the absence of the $20,500 sale of an investment in real estate located in Sagaponack, NY, offset by the $12,850 sale of investments in real estate in the current period.
Cost of sales. Total cost of sales was $769,542 for the year ended December 31, 2021 compared to $819,602 for the year ended December 31, 2020. The $50,060 (6.1%) decline in cost of sales was due to a $37,889 decline in Tobacco cost of sales related to decreased sales volume and a $12,171 decline in Real Estate cost of sales.
Expenses. Operating expenses were $130,719 for the year ended December 31, 2021 compared to $114,652 for the year ended December 31, 2020. The $16,067 (14.0%) increase was due to a $19,446 increase in Corporate and Other expense and a $1,517 increase in Real Estate expenses. This was offset by a $4,896 decline in Tobacco expenses for the year ended December 31, 2021. The increase in Corporate and Other expense included transaction charges of $10,468 related to the spin-off of Douglas Elliman.
Operating income. Operating income was $320,439 for the year ended December 31, 2021 compared to $294,428 for the year ended December 31, 2020, an increase of $26,011 (8.8%). Tobacco operating income increased by $40,781 and Real Estate operating income increased by $4,676. This was offset by an increased Corporate and Other operating loss of $19,446.
Other expenses. Other expenses were $110,478 and $113,385 for the years ended December 31, 2021 and 2020, respectively. For the year ended December 31, 2021, other expenses primarily consisted of interest expense of $112,728 and loss on extinguishment of debt of $21,362. This was offset by equity in earnings from real estate ventures of $10,250, other income of $10,687, and equity in earnings from investments of $2,675. For the year ended December 31, 2020, other expenses primarily consisted of interest expense of $121,278, equity in losses from real estate ventures of $44,728, and other expenses of $8,646. This was offset by income of equity in earnings from investments of $56,268 and $4,999 from changes in fair value of derivatives embedded within convertible debt.
Income before provision for income taxes. Income before income taxes was $209,961 and $181,043 for the years ended December 31, 2021, and 2020, respectively.
Income tax expense. Income tax expense was $62,807 for the year ended December 31, 2021 compared to income tax expense of $54,121 for the year ended December 31, 2020. Our income tax rates for the years ended December 31, 2021 and 2020 do not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes, changes in valuation allowances, and excess tax benefits on stock-based compensation.
Tobacco.
Tobacco revenues. Liggett increased the list price of Eagle 20’s, Pyramid, Liggett Select, Eve and Grand Prix by $0.15 per pack in January 2022, $0.15 per pack in September 2021, $0.14 per pack in June 2021, $0.14 per pack in January 2021, $0.13 per pack in November 2020, $0.11 per pack in June 2020, and $0.08 per pack in February 2020. Liggett increased the list price of Montego by $0.10 per pack in January 2022.
All of our Tobacco sales were in the discount category in 2021 and 2020. For the year ended December 31, 2021, Tobacco revenues were $1,202,497 compared to $1,204,501 for the year ended December 31, 2020. Revenues declined by $2,004 (0.2%) due to declines in unit sales volume offset by a favorable price variance for the year ended December 31, 2021. The decline in sales volume (535.5 million units) resulted in an unfavorable variance of $70,378, while the higher selling prices resulted in a favorable price variance of $68,374.
Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows: 200% payment on this metric.
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 |
| | | |
| Manufacturing overhead, raw materials and labor | $ | 121,424 | | | $ | 128,091 | |
| Federal excise taxes | | 434,695 | | | 461,532 | |
| | | | |
| FDA expense | | 23,832 | | | 24,842 | |
| MSA expense, net of market share exemption | | 171,058 | | (1) | 175,837 | |
| Customer shipping and handling | | 7,006 | | | 5,602 | |
| Total cost of sales | | $ | 758,015 | | | $ | 795,904 | |
| | | | | |
_____________________________
(1)Includes $2,722 received from a litigation settlement associated with the MSA expense (which reduced cost of sales).
The Tobacco segment’s MSA expense is included in cost of sales. Under the terms of the MSA, we have no payment obligations except to the extent that our tobacco subsidiaries’ market share of the U.S. cigarette market exceeds 1.92%. The calculation of this benefit from the MSA is an estimate basedBased on taxable unit shipments of cigarettes in the U.S. As of December 31, 2021, we estimate taxable shipments in the U.S. decreased by approximately 7.3% in 2021. Our annual MSA liability changes by approximately $1,800 for each percentage change in the estimated shipment volumes in the U.S. market. For the year ended December 31, 2021, the estimated decrease in taxable shipments in conjunction with the annual MSA inflation adjustment decreased the value of Liggett’s market share exemptionactual 2022 results compared to the prior year endestablished performance criteria, annual cash incentive payments equal to 115.625% of target amounts were achieved and thus, increased cost of salesawarded to Messrs. Lorber, Lampen, Kirkland and Bell and 200% for Mr. Anson.
Annual cash incentive payment amounts for achieving performance criteria in between the amounts listed above are determined by $495.
Tobacco gross profit was $444,482 forlinear interpolation between the year ended December 31, 2021 compared to $408,597 for the year ended December 31, 2020, an increase of $35,885 (8.8%).higher and lower amounts. The increase in gross profit for the year ended December 31, 2021 was primarily attributable to increased pricing on the Eagle 20’s and Pyramid brands offset by declines in volume and increased cost of sales per unit. For the year ended December 31, 2021, Eagle 20’s remains Liggett’s primary low cost cigarette brand and its percentage of Liggett’s total unit volume sales has declined from approximately 62% for the year ended December 31, 2020 to approximately 57% for the year ended December 31, 2021. Pyramid, Liggett’s second largest brand, declined from approximately 23% of total unit volume sales for the year ended December 31, 2020 to approximately 20% for the year ended December 31, 2021. Montego, Liggett’s third largest brand, increased from approximately 6% of total unit volume sales for the year ended December 31, 2020 to approximately 16% for the year ended December 31, 2021. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit increased from 55.0% in the 2020 period to 57.9% in the 2021 period primarily as a result of price increases partially offset by a continued shift in sales volumeactual performance-based incentive payments made to the lower-priced Montego brand.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were $83,954 for the year ended December 31, 2021 compared to $88,724 for the year ended December 31, 2020. The $4,770 (5.4%) decline is primarily due to declines in professional fees and expenses associated with Colorado’s minimum price legislation partially offset by higher sales and marketing expenses related to the return to pre-pandemic business activities. Tobacco product liability legal expenses, including settlements and judgments, were $6,436 and $6,476 for the years ended December 31, 2021 and 2020, respectively.
Tobacco operating income. Tobacco operating income was $360,317 for the year ended December 31, 2021 compared to $319,536 for the year ended December 31, 2020. The increase of $40,781 (12.8%) was primarily attributable to higher gross profit margins, as discussed above, and declines in operating, selling, general and administrative expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were $18,203 and $24,181 for the years ended December 31, 2021 and 2020, respectively. Real Estate revenues declined by $5,978 (24.7%), which was primarily related to the absence of the $20,500 sale of an investment in real estate located in Sagaponack, NY in the prior period, offset by the $12,850 sale of investments in real estate in the current period.
Real Estate revenues and cost of sales were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 |
Real Estate Revenues: | | | |
| Revenues from investments in real estate | 12,850 | | | 20,500 | |
| Sales on facilities primarily from Escena | 5,353 | | | 3,681 | |
| | | |
| Total real estate revenues | $ | 18,203 | | | $ | 24,181 | |
| | | |
Real Estate Cost of Sales: | | | |
| Cost of sales from investments in real estate | 7,508 | | | 20,488 | |
| Cost of sales on facilities primarily from Escena | 4,019 | | | 3,210 | |
| | | |
| Total real estate cost of sales | $ | 11,527 | | | $ | 23,698 | |
Real Estate cost of sales. Real Estate cost of sales were $11,527 and $23,698 for the years ended December 31, 2021 and 2020, respectively. Real Estate cost of sales declined by $12,171, primarily related to the absence of the $20,488 cost of sales of an investment in real estate located in Sagaponack, NY in the prior period, offset by the $7,508 cost of sales of investments in real estate in the current period.
Real Estate expenses. Real Estate expenses were $2,610 and $1,093 for the years ended December 31, 2021 and 2020, respectively.
Real Estate operating income (loss). The Real Estate segment had operating income of $4,066 for the year ended December 31, 2021 and operating loss of $610 for the year ended December 31, 2020.
Corporate and other.
Corporate and other loss. The operating loss at the corporate segment was $43,944 for the year ended December 31, 2021 compared to $24,498 for the same period in 2020. The increase of $19,446 was primarily due to transaction charges of $10,468 and accelerated stock compensation of $4,317 related to the Spin-off for the year ended December 31, 2021.
2020 Compared to 2019
Revenues. Total revenues were $1,228,682 for the year ended December 31, 2020 compared to $1,119,603 for the year ended December 31, 2019. The $109,079 (9.7%) increase in revenues was due to a $89,661 increase in Tobacco revenues related to an increase in both unit volume and net pricing and a $19,418 increase in Real Estate revenues, primarily related to the $20,500 sale of an investment in real estate located in Sagaponack, NY.
Cost of sales. Total cost of sales was $819,602 for the year ended December 31, 2020 compared to $774,885 for the year ended December 31, 2019. The $44,717 (5.8%) increase in cost of sales was due to a $24,774 increase in Tobacco cost of sales related to increased sales volume and higher MSA expense and a $19,943 increase in Real Estate cost of sales, which was primarily an investment in real estate located in Sagaponack, NY.
Expenses. Operating expenses were $114,652 for the year ended December 31, 2020 compared to $110,103 for the year ended December 31, 2019. The $4,549 (4.1%) increase was due to a $6,981 increase in Tobacco expenses and a $635 increase in Real Estate expenses for the year ended December 31, 2020. This was offset by a $3,067 decline in Corporate and Other expense, including gain on sale of assets of $2,283.
Operating income. Operating income was $294,428 for the year ended December 31, 2020 compared to $234,615 for the year ended December 31, 2019, an increase of $59,813 (25.5%). Tobacco operating income increased by $57,906 and Corporate and Other operating loss declined by $3,067, while Real Estate operating income declined by $1,160.
Other expenses. Other expenses were $113,385 and $109,600selected participants for the years ended December 31, 2020, 2021 and 2019, respectively. For2022 are set forth in the year ended December 31, 2020, other expenses primarilycolumn labeled “Non-Equity Incentive Plan Compensation” in the Summary Compensation Table. Annual incentive compensation earned by named executive officers after February 26, 2014 is subject to the Company's Executive Compensation Clawback Policy.
Following the distribution of Douglas Elliman and based off the reduced executive base salaries of Messrs. Lorber and Lampen, the annual incentive opportunities are disclosed in the table below (at 100% of target), based on the same target annual incentive opportunity, as a percentage of base salary, in 2021 and 2022.
| | | | | | | | | | | | | | |
| | Target Annual Incentive Opportunity |
| % of Base Salary | 2021 | 2022 | △ vs 2021 |
| Howard M. Lorber | 100% | $3,426,270 | $1,837,500 | (46) % |
| Richard J. Lampen | 75% | $937,500 | $487,500 | (48) % |
| J. Bryant Kirkland III | 33.33% | $183,315 | $191,648 | 5% |
| Marc N. Bell | 25% | $118,750 | $125,000 | 5% |
| Nicholas P. Anson | 50% | $325,000 | $325,000 | None |
Equity Compensation
Long-term equity compensation is intended to provide a variable pay opportunity that rewards long-term performance by the Company as a whole and serves as a significant incentive to remain with the Company. In establishing long-term equity compensation awards, the compensation and human capital committee has considered the historical returns generated by the Company. In 2022, the Company's annual long-term equity compensation program for its named executive officers consisted of interest expenserestricted stock awards.
On March 1, 2022, the compensation and human capital committee granted restricted stock awards to Messrs. Lorber (600,000 shares with 300,000 of $121,278,such shares subject to performance based vesting conditions), Lampen (180,000 shares), Kirkland (100,000 shares), Bell (100,000 shares) and Anson (20,000 shares) to recognize past and current performance and to serve as a means of incentivizing and retaining these key employees. The restricted shares vest in four equal annual installments commencing on the first anniversary of the date of grant subject to continued employment through each vesting date subject to earlier vesting upon his death or disability, a termination of employment without cause or resignation for good reason or a change in control. Shares received in respect of the March 1, 2022 restricted stock grants will be subject to the Company's Equity Retention, Hedging and Pledging Policy. See “Equity Retention Policy.”
Performance-based compensation remains an important component of our compensation program and in response to stockholder feedback, the compensation and human capital committee adjusted the CEO's 2022 executive compensation pay mix such that 50% of the CEO's long-term equity in losses from real estate venturescompensation award is subject to performance-based vesting conditions. In 2023, the compensation and human capital committee further increased the pay mix so that 60% (from 50%) of $44,728,the CEO's annual equity award is subject to performance-based vesting conditions. The compensation and other expenseshuman capital committee also determined that 60% of $8,646. This was offset bythe annual equity in earnings from investments of $56,268 and income of $4,999 from changes in the fair value of derivatives embedded within convertible debt. For the year ended December 31, 2019, other expenses primarily consisted of interest expense of $137,543, loss on extinguishment of debt of $4,301 and equity in losses from real estate ventures of $27,760. This was offset by income of $26,425 from changes in fair value of derivatives embedded within convertible debt, equity in earnings from investments of $17,000 and other income of $16,579.
Income before provision for income taxes. Income before income taxes was $181,043 and $125,015awards for the years ended December 31, 2020, and 2019, respectively.Company's other NEOs would be subject to performance-based vesting conditions.
Income tax expense. Income tax expense was $54,121 for the year ended December 31, 2020 compared to $31,085 for the year ended December 31, 2019. Our income tax rates for the years ended December 31, 2020 and 2019 do not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes, changes in valuation allowances, and excess tax benefits on stock-based compensation.Dividend Equivalents
Tobacco.
Tobacco revenues. Liggett increased the list price of Eagle 20’s by $0.13In 2022, quarterly cash dividends were paid at $0.20 per pack in November 2020, $0.11 per pack in June 2020, $0.08 per pack in February 2020, $0.08 per pack in October 2019, and $0.11 per pack in February 2019. Liggett also increased the list price of Pyramid, Liggett Select, Eve and Grand Prix by $0.13 per pack in November 2020, $0.11 per pack in June 2020, $0.08 per pack in February 2020, $0.08 per pack in October 2019, $0.06 per pack in June 2019, and $0.11 per pack in February 2019.
All of our Tobacco sales were in the discount category in 2020 and 2019. For the year ended December 31, 2020, Tobacco revenues were $1,204,501 compared to $1,114,840 for the year ended December 31, 2019. Revenues increased by $89,661 (8.0%) due to increases in unit sales volume and the average selling price of our brands for the year ended December 31, 2020. The higher selling prices resulted in a favorable price variance of $65,348 and the increase in sales volume (195.6 million units) resulted in a favorable variance of $24,313. We believe a competitor’s announcement of a price increase in December 2020, as well as the prospect of increased restrictions and lockdowns associated with the COVID-19 pandemic, resulted in increased fourth quarter sales volumes and elevated wholesale inventories as of December 31, 2020.
Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows:
| | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2020 | | 2019 |
| | | |
| Manufacturing overhead, raw materials and labor | $ | 128,091 | | | $ | 123,654 | |
| Federal excise taxes | | 461,532 | | | 451,256 | |
| | | | |
| FDA expense | | 24,842 | | | 24,947 | |
| MSA expense, net of market share exemption | | 175,837 | | (1) | 165,471 | |
| Customer shipping and handling | | 5,602 | | | 5,802 | |
| Total cost of sales | | | $ | 795,904 | | | $ | 771,130 | |
| | | | | |
_____________________________
(1)Includes $299 increase in expense from MSA Settlement.
The Tobacco segment’s MSA expense is included in cost of sales.common share. Under the terms of the MSA, we have no payment obligations exceptcertain equity awards made to the extent that our tobacco subsidiaries’ market shareCompany’s named executive officers under the Company’s stock plans, dividend equivalent payments and distributions are made to the executive officers with respect to the shares of Common Stock underlying the unexercised and unvested portion of the U.S. cigarette market exceeds 1.92%.equity awards. These payments and distributions are made at the same rate as dividends and other distributions paid on shares of the Company’s Common Stock. In 2022, named executive officers earned cash dividend equivalent payments on unexercised stock options and unvested restricted stock (granted in 2020, 2021 and 2022) as follows: Mr. Lorber — $2,493,736; Mr. Lampen — $765,553; Mr. Kirkland — $444,679; Mr. Bell — $416,537; and Mr. Anson — $22,000.
Supplemental Retirement Plan
Retirement benefits are designed to reward long and continuous service by providing post-employment security and are an essential component of a competitive compensation package. The calculation of this benefit from the MSA is an estimate based on taxable unit shipments of cigarettesCompany’s named executive officers and certain other management employees are eligible to participate in the U.S.Supplemental Retirement Plan, which was adopted by the Board in January 2002 to promote retention of key executives and to provide them with financial security following retirement. As described more fully and quantified in “Pension Benefits at 2022 Fiscal Year End,” the Supplemental Retirement Plan provides for the payment to a participant at his or her normal retirement date of December 31, 2020, we estimated taxable shipmentsa lump sum amount that is the actuarial equivalent of a single life annuity commencing on that date. The single life annuity amounts for the named executives were determined by the
Company’s Board considering a variety of pertinent factors including (but not limited to) the executive’s level of annual compensation.
Other Benefits
The Company’s executive officers are eligible to participate in all its employee benefit plans, such as medical, dental, vision, group life, disability and accidental death and dismemberment insurance and the 401(k) Plan. These benefits are designed to provide a safety net of protection against the financial catastrophes that can result from illness, disability or death. The Company also provides vacation and other paid holidays to its executive officers, as well as certain other perquisites further described below and in the U.S. increasedSummary Compensation Table.
Perquisites
The Company’s corporate aircraft are available for the personal use of Mr. Lorber and other executive officers at Mr. Lorber’s discretion. The Company’s corporate aircraft policy permits personal use of corporate aircraft by approximately 1.0% in 2020. In 2020, ourexecutives, subject to an annual MSA liability changedlimit of $200,000 and $50,000 for personal use by approximately $1,700 for each percentage change inMessrs. Lorber and Lampen, respectively. For purposes of determining the estimated shipment volumes in the U.S. market. For the year ended December 31, 2020, the estimated increase in taxable shipments in conjunction with the annual MSA inflation adjustment increasedamounts allowable under this policy, the value of Liggett’sthe personal usage is calculated using the applicable standard industry fare level formula established by the Internal Revenue Service (as distinguished from the aggregate incremental cost approach used for determining the value included in the Summary Compensation Table), and Mr. Lorber and any other executive officers pay income tax on such value. In addition, Mr. Lorber is entitled to a car and driver provided by the Company, a $3,750 per month allowance for lodging and related business expenses (effective January 1, 2022, which was reduced from $7,500 in 2021), and one club membership (effective January 1, 2022, which was reduced from two, in 2021) and Mr. Lampen is reimbursed for automobile and club expenses on an after-tax basis. See the Summary Compensation Table for details regarding the value of perquisites received by the named executive officers.
Use of Peer Group
As previously disclosed, in direct response to stockholder feedback as well as to reflect the changes in the Company's operations since the distribution of Douglas Elliman, the compensation and human capital committee undertook a multi-step process to design an appropriate peer group that reflected that, in 2022, Vector operated as a complex and diversified company that operated in two challenging industries – tobacco and real estate.
Peer group design considerations included:
•Peer Group Size: an appropriate peer group should contain between 8 and 15 companies
•Peer Company Size: peer group companies should generally be between 0.5x and 2.5x the size of Vector (as defined by market share exemptioncapitalization, total assets, or total revenues)
•Peer Company Industry: peer group companies should include direct competitors, similar industry focus, and comparability of size and potentially geographic considerations
•Other Considerations: other considerations include which companies would stockholders compare Vector to, which companies Vector competes for talent, and which other companies may our executives to able to serve in similar functions
The compensation and human capital committee directed its independent compensation consultant to select companies for inclusion in Vector’s 2022 peer group based on the following characteristics:
•Must be within approximately 0.5x to 2.5x compared to the prior year end and, thus, decreased cost of sales by $7,731. Similar to some other consumer product categories, cigarette industry volumes outperformed
recent historical trends and benefited from increased consumer demand Company on at least two size‐related to changes in underlying cigarette purchasing and consumption patterns associated with the pandemic.
Tobacco gross profit was $408,597 for the year ended December 31, 2020 compared to $343,710 for the year ended December 31, 2019, an increase of $64,887 (18.9%). The increase in gross profit for the year ended December 31, 2020 was primarily attributable to increased pricing on the Eagle 20’s and Pyramid brands and increased Eagle 20’s volume. For the year ended December 31, 2020, Eagle 20’s remains Liggett’s primary low-cost cigarette brand and its percentage of Liggett’smetrics, including equity market capitalization, total unit volume sales has increased from approximately 60% for the year ended December 31, 2019 to approximately 62% for the year ended December 31, 2020. Pyramid, Liggett’s second largest brand, declined from approximately 27% ofassets, and/or total unit volume sales for the year ended December 31, 2019 to approximately 23% for the year ended December 31, 2020. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit increased from 51.8% in the 2019 period to 55.0% in the 2020 period primarily as a result of price increases partially offset by a continued shift in sales volumerevenues; or be located within close geographic proximity to the lower-priced Eagle 20’s brand.Company’s headquarters with whom the Company may compete for executive talent;
Tobacco expenses•. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were $88,724 for the year ended December 31, 2020 compared to $81,090 for the year ended December 31, 2019. The $7,634 (9.4%) increase is primarily due to increased professional fees and expenses associated with Colorado’s minimum price legislation. Tobacco product liability legal expenses, including settlements and judgments, were $6,476 and $7,363 for the years ended December 31, 2020 and 2019, respectively.Must be one or more of a:
Tobacco operating income▪. Tobacco operating income was $319,536 for the year ended December 31, 2020 compared to $261,630 for the year ended December 31, 2019. The increase of $57,906 (22.1%) was primarily attributable to higher gross profit margins, as discussed above, and was partially offset by increased operating, selling, general and administrative expenses.Tobacco/cannabis manufacturer or supplier,
Real Estate.
Real Estate revenues. ▪Real Estate revenues were $24,181 and $4,763 for the years ended December 31, 2020 and 2019, respectively. Real Estate revenues increased by $19,418, which was primarily related to the $20,500 sale of an investment inestate companies that are developers, have brokerages services, are real estate located in Sagaponack, NY.owners/managers/investors, and/or have an NYC-Metro Area portfolio, and/or
▪Consumer product companies that have manufacturing, operate as wholesaler, and/or employ a multi-brand strategy.
Real Estate revenuesIn developing the peer group of companies to inform 2022 compensation decisions, our compensation and costhuman capital committee, with the assistance of sales were as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 |
Real Estate Revenues: | | | |
| Revenues from investments in real estate | $ | 20,500 | | | $ | — | |
| Sales on facilities primarily from Escena | 3,681 | | | 4,763 | |
| | | |
| Total real estate revenues | $ | 24,181 | | | $ | 4,763 | |
| | | |
Real Estate Cost of Sales: | | | |
| Cost of sales from investments in real estate | $ | 20,488 | | | $ | — | |
| Cost of sales on facilities primarily from Escena | 3,210 | | | 3,755 | |
| | | |
| Total real estate cost of sales | $ | 23,698 | | | $ | 3,755 | |
Real Estate costFTI Consulting, established a peer group of sales. Real Estate cost of sales were $23,69810 publicly traded, national and $3,755 forregional companies with the years ended December 31, 2020 and 2019, respectively. Real Estate cost of sales increased by $19,943, primarily related to $20,488 from the sale of an investment in real estate located in Sagaponack, NY.
Real Estate expenses. Real Estate expenses were $1,093 and $458 for the years ended December 31, 2020 and 2019, respectively.
Real Estate operating (loss) income. The Real Estate segment had operating loss of $610 for the year ended December 31, 2020 and operating income of $550 for the year ended December 31, 2019. The Real Estate segment’s operating loss was primarily related to declines in operations at the Escena facility.following characteristics:
Corporate | | | | | | | | |
| Implied Equity Market Cap(1) | Revenue(2) |
75th Percentile | $3,191.00 | $2,427.00 |
| Median | $2,106.80 | $1,961.90 |
25th Percentile | $1,291.90 | $476.60 |
| Vector Group Ltd. | $1,708.90 | $1,220.70 |
| All financial data is $ millions. |
1. Per S&P Capital IQ as of 3/1/2022 2. Per S&P Capital IQ as of 3/1/2022; last twelve months/most recently disclosed |
The compensation and other.human capital committee, with the advice of FTI Consulting, examined the peer group list and, with reference to market capitalization, industry and revenue and approved the following 2022 peer group.
Corporate | | | | | | | | |
| Aurora Cannabis Inc. | Canopy Growth Corporation | G-III Apparel Group, Ltd. |
| Ingredion Incorporated | Steven Madden, Ltd. | The Andersons, Inc. |
| The Boston Beer Company, Inc. | Tilray Brands, Inc. | Turning Point Brands, Inc. |
| Universal Corporation | | |
In 2023, the compensation and human capital committee has added the following companies to the peer group - Alkermes plc (NASDAQ: ALKS), Beyond Meat, Inc. (NASDAQ: BYND) and The Simply Good Foods Co. (NASDAQ: SMPL).
Change in Control Provisions
The employment agreement between the Company and Mr. Lorber contains change in control provisions. In the event of a change in control that results in a termination of employment by the Company without cause or a resignation for good reason (a “double trigger” change in control provision), Mr. Lorber will receive severance benefits as set forth below in "Potential Termination and Change in Control Payments." The purpose of these provisions is to avoid the distraction and loss of key management personnel that may occur in connection with rumored or actual corporate transactions and/or other loss. fundamental corporate changes and to provide adequate protection to key management personnel if their employment is terminated following a change in control. A change in control provision protects stockholder interests by enhancing employee focus during rumored or actual change in control activity through incentives to remain with the Company despite uncertainties while a transaction is under consideration or pending by assurance of the payment of severance and benefits for terminated executives. A detailed summary of these provisions is set forth under the heading “Payments Made Upon a Change in Control.” In addition, any outstanding stock options and restricted stock awards held by named executive officers vest upon a change in control.
Inter-Relationship of Elements of Compensation Packages
The operating loss atvarious elements of the corporate segment was $24,498compensation packages for the Company’s executive officers are not directly inter-related. For example, if it does not appear as though the target annual cash incentive award will be achieved, the number of options or restricted shares that will be granted is not affected. If shares of restricted stock that are granted in one year ended December 31, 2020 compareddecline in value due to $27,565a decline in the Company’s stock price, the amount of the annual cash incentive award or compensation to be paid the executive officer for the same periodnext year is not impacted. Similarly, if shares of restricted stock granted to an executive in 2019. The decline of $3,067 was primarilyone year become extremely valuable due to a rising stock price, the $2,283 gainamount of compensation or annual cash incentive award to be awarded for the next year is not affected. However, the compensation and human capital committee does evaluate the total value of executive remuneration when making decisions with respect to any compensation element.
Prohibition on Hedging
The Company's Equity Retention, Hedging and Pledging Policy, adopted in January 2013 and amended in April 2020, applies to the Company's executive officers and directors. Executive officers are prohibited from participating in certain trading activities with respect to Award Shares, that by their nature would constitute hedging. Directors are prohibited from participating in certain trading activities with respect to Common Stock granted to them in connection with their service on the sale of assetsBoard that by their nature would constitute hedging. For both executive officers and decreased administrative costsdirectors, such prohibited activities, related to professional fees and travel expenses for the year ended December 31, 2020.Company's equity securities, include:
•Trading in publicly traded options;
•Trading in calls; or
•Trading in other derivative instruments.
Summary of Real Estate Investments
We own and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our real estate investments primarily include the following projects as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in Thousands. Area and Unit Information in Ones) |
| Location | Date of Initial Investment | Percentage Owned (1) | Net Cash Invested | Cumulative Earnings (Losses) | Carrying Value as of 12/31/2021 | Future Capital Commit-
ments from New Valley (2) | Projected Residential and/or Hotel Area | Projected Commercial Space | Projected Number of Residential Lots, Units and/or Hotel Rooms | Projected Construction Start Date | Projected Construction End Date |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Escena, net | Master planned community, golf course, and club house in Palm Springs, CA | March 2008 | 100% | $ | (1,826) | | $ | 10,924 | | $ | 9,098 | | — | | 450 | | Acres | | | 667
450 | R Lots
H | N/A | N/A |
| Townhome A (11 Beach Street) | TriBeCa, Manhattan, NY | November 2020 | 100% | 22 | | (22) | | — | | — | | 6,169 | | SF | | | 1 | | R | N/A | Completed |
| Investments in real estate, net | | | | $ | (1,804) | | $ | 10,902 | | $ | 9,098 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Investments in real estate ventures: | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 111 Murray Street | TriBeCa, Manhattan, NY | May 2013 | 9.5% | 6,819 | | (4,414) | | 2,405 | | — | | 330,000 | | SF | 1,700 | | SF | 157 | | R | September 2014 | Completed |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| 87 Park (8701 Collins Avenue) | Miami Beach, FL | December 2013 | 23.1% | (6,485) | | 6,485 | | — | | — | | 160,000 | | SF | TBD | | 70 | | R | October 2015 | Completed |
| 125 Greenwich Street | Financial District, Manhattan, NY | August 2014 | 13.4% | 7,992 | | (7,992) | | — | | — | | 306,000 | | SF | 16,000 | | SF | 273 | | R | March 2015 | TBD |
| West Hollywood Edition (9040 Sunset Boulevard) | West Hollywood, CA | October 2014 | 48.5% | 17,188 | | (17,188) | | — | | — | | 210,000 | | SF | — | | | 20
190 | R
H | May 2015 | Completed |
| | | | | | | | | | | | | | | |
| Monad Terrace (1300 West Ave) | Miami Beach, FL | May 2015 | 19.6% | 7,635 | | (7,635) | | — | | — | | 160,000 | | SF | — | | | 59 | | R | May 2016 | Completed |
| Takanasee (805 Ocean Ave) | Long Branch, NJ | December 2015 | 22.8% | 6,144 | | (5,588) | | 556 | | — | | 63,000 | | SF | — | | | 13 | | R | June 2017 | TBD |
| Brookland (15 East 19th St) | Brooklyn, NY | April 2017 | 9.8% | 402 | | (11) | | 391 | | — | | 24,000 | | SF | — | | | 33 | | R | August 2017 | Completed |
| Dime (209 Havemeyer St) | Brooklyn, NY | November 2017 | 16.5% | 9,145 | | (3,791) | | 5,354 | | — | | 100,000 | | SF | 150,000 | | | 177 | | R | May 2017 | Completed |
| 352 6th Avenue | Brooklyn, NY | February 2019 | 37.0% | (416) | | 416 | | — | | — | | 5,200 | | SF | — | | 0 | 4 | | R | September 2019 | Completed |
| Meatpacking Plaza (44 Ninth Ave) | Meatpacking District, Manhattan, NY | April 2019 | 16.9% | 10,692 | | (2,808) | | 7,884 | | — | | 8,741 | | SF | 76,919 | | SF | 15 | | R | July 2021 | May 2023 |
| Five Park (500 Alton Road) | Miami Beach, FL | September 2019 | 38.9% | 18,098 | | 1,209 | | 19,307 | | — | | 472,000 | | SF | 15,000 | | SF | 291 | | R | April 2020 | February 2024 |
| 9 DeKalb Avenue | Brooklyn, NY | April 2019 | 4.2% | 5,000 | | 1,065 | | 6,065 | | — | | 450,000 | | SF | 120,000 | | SF | 540 | | R | March 2019 | February 2023 |
| Natura | Miami, FL | December 2019 | 77.8% | 7,354 | | 5,036 | | 12,390 | | — | | 460,000 | | SF | — | | | 460 | | R | December 2019 | November 2022 |
| Townhome B (11 Beach Street) | TriBeCa, Manhattan, NY | November 2020 | 46.7% | (594) | | 594 | | — | | — | | 4,752 | | SF | — | | | 1 | | R | N/A | Completed |
| Ritz-Carlton Villas (4701 Meridian Avenue) | Miami Beach, FL | December 2020 | 50.0% | 4,109 | | (125) | | 3,984 | | — | | 58,000 | | SF | — | | | 15 | | R | October 2020 | August 2022 |
| 2000 N. Atlantic Ave. | Daytona Beach, FL | November 2021 | 50.0% | 1,882 | | 37 | | 1,919 | | — | | TBD | | | | | | TBD | TBD |
| Society Nashville (915 Division St) | Nashville, TN | November 2021 | 89.1% | 19,500 | | 384 | | 19,884 | | — | | 320,000 | | SF | 8,000 | | SF | 472 | | R | May 2022 | July 2024 |
| Condominium and Mixed Use Development | | | | $ | 114,465 | | $ | (34,326) | | $ | 80,139 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Maryland Portfolio | Primarily Baltimore County, MD | July 2012 | 7.6% | (17,583) | | 17,583 | | — | | — | | N/A | | N/A | | 245 | | R | N/A | N/A |
| Riverchase Landing | Hoover, AL | October 2021 | 50.0% | 11,900 | | — | | 11,900 | | — | | 746,000 | | SF | N/A | | 468 | | R | N/A | N/A |
| Apartment Buildings | | | | $ | (5,683) | | $ | 17,583 | | $ | 11,900 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Park Lane Hotel (36 Central Park South) | Central Park South, Manhattan, NY | November 2013 | 1.0% | $ | 8,682 | | $ | (7,626) | | $ | 1,056 | | — | | 446,000 | | SF | — | | | 628 | | H | N/A | N/A |
| | | | | | | | | | | | | | | |
215 Chrystie Street (4) | Lower East Side, Manhattan, NY | December 2012 | 12.3% | (1,533) | | 1,533 | | — | | — | | 246,000 | | SF | — | | | 367 | | H | June 2014 | Completed |
| Coral Beach and Tennis Club | Coral Beach, Bermuda | December 2013 | 49.0% | 6,048 | | (4,526) | | 1,522 | | — | | 52 | | Acres | — | | | 101 | | H | N/A | N/A |
| Parker New York (119 W 56th St) | Midtown, Manhattan, NY | July 2019 | 0.4% | 1,000 | | (421) | | 579 | | — | | 470,000 | | SF | — | | | 587
99 | H
R | May 2020 | December 2022 |
| Hotels | | | | $ | 14,197 | | $ | (11,040) | | $ | 3,157 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| The Plaza at Harmon Meadow | Secaucus, NJ | March 2015 | 49.0% | $ | 4,200 | | $ | (4,200) | | $ | — | | $ | — | | — | | — | 219,000 | | SF | — | | — | N/A | N /A |
| Wynn Las Vegas Retail | Las Vegas, NV | December 2016 | 1.6% | 4,163 | | 3,127 | | 7,290 | | — | | — | | — | 160,000 | | SF | — | | — | N/A | N/A |
| Commercial | | | | $ | 8,363 | | $ | (1,073) | | $ | 7,290 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
Witkoff GP Partners (3) | Multiple | March 2017 | 15.0% | $ | 11,154 | | $ | (9,620) | | $ | 1,534 | | $ | — | | N/A | | N/A | | N/A | | N/A | N/A |
| 1 QPS Tower (23-10 Queens Plaza South) | Long Island City, NY | December 2012 | 45.4% | (14,406) | | 14,406 | | — | | — | | N/A | | N/A | | N/A | | March 2014 | Completed |
| Witkoff EB-5 Capital Partners | Multiple | September 2018 | 49.0% | 516 | | 526 | | 1,042 | | — | | N/A | | N/A | | N/A | | N/A | N/A |
| Diverse Real Estate Portfolio | | | | $ | (2,736) | | $ | 5,312 | | $ | 2,576 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Investment in real estate ventures | | | | $ | 128,606 | | $ | (23,544) | | $ | 105,062 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total Carrying Value | | | | $ | 126,802 | | $ | (12,642) | | $ | 114,160 | | $ | — | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| (1) The Percentage Owned reflects our estimated current ownership percentage. Our actual ownership percentage as well as the percentage of earnings and cash distributions may ultimately differ as a result of a number of factors including potential dilution, financing or admission of additional partners. |
Equity Retention Policy
Under its Equity Retention, Hedging and Pledging Policy, the Company formalized its long-standing practice of Contentssignificant share retention by senior management. Until normal retirement age as defined in the Company's Supplemental Executive Retirement Plan (age 60), each executive officer is required to retain at least 25% (after taxes and exercise costs) of the executive officer's Award Shares.
Stock Ownership Guidelines
The Company has Stock Ownership Guidelines that are applicable to all named executive officers and each non-employee member of the Board. Under the guidelines, which are phased in within the five years after the date that a covered person becomes a named executive officer or member of the Board, the following ownership requirements exist.
| | | | | | | | | | | | | | |
| Title | | Value of Shares Owned | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
(2) This column only represents capital commitments required under the various joint venture agreements. However, many of the operating agreements provide for the operating partner to call capital. If a joint venture partner, such as New Valley, declines to fund the capital call, then the partner’s ownership percentage could either be diluted or, in some situations, the character of a funding member’s contribution would be converted from a capital contribution to a member loan.Chief Executive Officer | | 3.0 | X | Base Salary |
(3) The Witkoff GP Partners venture includes a $1,534 investment in 500 Broadway, a Condominium and Mixed Use Development in Santa Monica, CA.Executive Vice Presidents | | 1.5 | X | Base Salary |
| Other named executive officers | | 1.0 | X | Base Salary |
N/A - Not applicable | SF - Square feet | H - Hotel rooms | TBD -To be determined | R - Residential Units | R Lots - Residential lotsNon-employee directors | | 2.0 | |
| X | | | | | | | | | | | | | | | Annual Retainer |
New Valley capitalizes net interest expense into“Shares owned” for purposes of the carrying value of its ventures whose projects were under development. Net capitalized interest costs included in Carrying Value as of December 31, 2021 were $8,658. This amount is included in the “Cumulative Earnings (Losses)” column in the table above. During the year ended December 31, 2021, New Valley capitalized $2,669of interest costs and utilized (reversed) $1,489of previously capitalized interest in connection with the recognition of equity in (losses) earnings, gains and liquidations from various ventures.
Liquidity and Capital Resources
Cash and cash equivalents from continuing and discontinued operations declined by $170,828, $13,799 and $212,253 in 2021, 2020 and 2019, respectively.
Cash provided by continuing and discontinued operations was $255,219, $267,547 and $124,071 in 2021, 2020 and 2019, respectively. The decline of cash provided by continuing and discontinued operations in 2021 compared to 2020 related primarily to increased MSA payments in 2021 in connection with tax planning strategies, increased income tax payments in 2021, the payment of a redemption premium in 2021 to retire our 6.125% Senior Secured Notes due 2025 and the absence of distributions from long-term investments, which were associated with the sale of LTS in 2020. These items were partially offset by an increase in operating income in 2021 from 2020. The increase in 2020 compared to 2019 related primarily to an increase in operating income, increased distributions from long-term investments, which were associated with the sale of LTS, and the proceeds from the sale of an investment in real estate located in Sagaponack, NY and, in connection with tax planning strategies, a deferral of a portion our MSA payments from 2020 to 2021.
Cash used in investing activities from continuing and discontinued operations was $61,970 and $23,099 in 2021 and 2019, respectively, and cash provided by investing activities from continuing and discontinued operations was $7,341 in 2020. Our investment philosophy is to maximize return on investments using a reasonable expectation for return. For example, we expect our investment returns to exceed the comparable return on cash or short-term U.S. Treasury Bills when investing in equity and debt securities and to exceed our weighted-average cost of capital when investing in non-consolidated real estate businesses and making capital expenditures. In 2021, cash used in investing activities from continuing operations comprised the purchase of investment securities of $124,080, investments in real estate ventures of $49,463, capital expenditures of $13,506, the purchase of long-term investments of $14,316, an increase in the cash surrender value of corporate-owned life insurance policies of $1,219, the purchase of subsidiaries of $500, and an increase in restricted assets of $5. These items were offset by maturities of investment securities of $71,505, sale of investment securities of $45,627, distributions from investments in real estate ventures of $11,936, proceeds from the sale or liquidation of long-term investments of $11,509, pay downs of investment securities of $525, and proceeds from the sale of fixed assets of $17. In 2020, cash provided by investing activities from continuing operations comprised the maturities of investment securities of $61,230, proceeds from the sale or liquidation of long-term investments of $32,572, the sale of investment securities of $30,458, distributions from investments in real estate ventures of $18,818, the proceeds from the sale of fixed assets of $5,162, cash acquired in purchase of subsidiary of $2,760, pay downs of investment securities of $812, and the decrease in restricted assets of $436. These items were offset by the purchase of investment securities of $99,871, capital expenditures of $19,063, investments in real estate ventures of $14,922, the purchase of long-term investments of $9,687, purchase of subsidiaries of $722, and an increase in the cash surrender value of corporate-owned life insurance policies of $642. In 2019, cash used in investing activities from continuing operations comprised the purchase of investment securities of $87,766, investments in real estate ventures of $52,529, capital expenditures of $12,575, the purchase of long-term investments of $9,223, investments in real estate, net of $2,295, an increase in the cash surrender value of corporate-owned life insurance policies of $719, and the purchase of subsidiaries of $380. These items were offset by maturities of investment securities of $68,859, distributions from investments in real estate ventures of $41,300, the sale of investment securities of $21,879, proceeds from the sale or liquidation of long-term investments of $8,256, pay downs of investment securities of $1,083, a decrease in restricted assets of $994, and the proceeds from the sale of fixed assets of $17.
Cash used in financing activities from continuing and discontinued operations was $364,077, $288,687 and $313,225 in 2021, 2020, and 2019, respectively. In 2021, cash used in financing activities from continuing and discontinued operations comprised repayments of debt of $862,973, dividends and distributions on common stock of $131,798, tax withholdings related to net share settlements of stock option exercise of $13,145, payment of deferred financing costs of $20,109, cash distributed in the Spin-off of $212,571, and other of $130. These items were offset by proceeds from debt issuance of $875,000, contributions from non-controlling interest of $1,625, and net borrowings of debt under the Liggett Credit Agreement described below of $24. In 2020, cash used in financing activities from continuing operations comprised repayments of debt of $174,989, dividends and distributions on common stock of $128,231, net repayments of debt under the Liggett Credit Agreement of $34,952, tax withholdings related to net share settlements of stock option exercise of $2,630, and distributions to non-controlling interest of $448. These items were offset by proceeds from the issuance of common stock of $52,563. In 2019, cash used in financing activities from continuing operations comprised repayments of debt of $293,419, dividends and distributions on common stock of $238,249, payment of deferred financing costs of $9,802, tax withholdings related to net share settlements of stock option exercise of $5,415, distributions to non-controlling interest of $286 and other of $216. These factors were offset by proceeds of debt issuance of $230,000 associated with the issuance of an additional amount of our 10.5% Senior Notes due 2026 in November 2019, and net borrowings of debt under the Liggett Credit Agreement described below of $4,162.
We have significant liquidity commitments in 2022 at the corporate level (not including our tobacco and real estate operations) that require the use of existing cash resources. Thesepolicy include cash interest expense of approximately $108,600, dividends on our outstanding common shares of approximately $127,500, whichthe Company's stock owned outright, any shares held under an employee benefit plan, and restricted shares. The valuation of shares includes all shares held beneficially or directly by any covered person or the person's family members or trusts but excludes pledged shares. Compliance is basedassessed on an assumed quarterly cash dividendthe last day of $0.20 per share, and other corporate expenses and taxes.
In order to meet these liquidity requirements as well as other liquidity needs in the normal course of business, we have in the past used cash flows from operations as well as existing cash and cash equivalents, which have, in the past, been generated from operations, monetization of investments and proceeds from debt issuances. Should these resources be insufficient to meet upcoming liquidity needs, we may also liquidate investment securities and other long-term investments, or, if available, draw on Liggett’s credit facility. While there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures will be successful.each quarter. As of December 31, 2021, we had cash and cash equivalents of $193,411 (including $14,899 of cash at Liggett)2022, all covered individuals were following the guidelines.
Executive Compensation Clawback Policy
The Company has an Executive Compensation Clawback Policy (the “Clawback Policy”), and investment securities, carried at $178,776 (see Note 7which requires, as a condition to our consolidated financial statements). As of December 31, 2021, our investments in real estate ventures were carried at $105,062 and our investments in real estate, net were carried at $9,098.
Limitation of interest expense deductible for income taxes. Since 2018, the amount of interest expense that is deductible in the computation of income tax liability has been limited to a percentage of adjusted taxable income, as defined by applicable law. In 2019 and 2020, the amount of deductible interest expense was limited to 50% of taxable income before interest, depreciation and amortization and, in 2021, the amount will be limited to 30% of taxable income before interest, depreciation and amortization. Beginning in 2022, the amount is limited to 30% of taxable income before interest. However, interest expense allocable to a designated excepted tradereceive bonus or business is not subject to limitation. One such excepted trade or business is any electing real property trade or business, for which portions of our real estate businesses may qualify. If any interest expense is disallowed, we are permitted to carry forward the disallowed interest expense indefinitely. As a result of interest expense that is allocated to our real estate businesses (from the holding company) not being subject to the limitation, all of our interest expense to date has been tax deductible; however, after the Spin-off, the allocation of interest expense to our real estate business will decline. Without the benefit of such an excepted trade or business, a portion of our interest expense in future years may not be deductible, which may increase the after-tax cost of any new debt financings as well as the refinancing of our existing debt.
Tobacco Litigation. As of December 31, 2021, 16 verdicts were entered in Engle progeny cases against Liggett. Several of these verdicts have been affirmed on appeal and have been satisfied by Liggett. Liggett has paid $40,111, including interest and attorney’s fees, to satisfy the judgments entered against it. It is possible that additional cases could be decided unfavorably.
Notwithstanding the comprehensive nature of the Engle Progeny Settlements of more than 5,200 cases, approximately 28 plaintiffs’ claims remain outstanding. Therefore, we and Liggett may still be subject to periodic adverse judgments that could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
In addition, Liggett may be required to make additional payments to Mississippi which could have a material adverse effect on our consolidated financial position, results of operations and cash flows. See Recent Developments in Litigation.
Management cannot predict the cash requirements related to any future settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. Management is unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases. It is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.
Vector.
6.125% Senior Secured Notes. On February 1, 2021, the 6.125% Senior Secured Notes due 2025 were redeemed in full and we recorded a loss on the extinguishment of debt of $21,362 for the year ended December 31, 2021, including $13,014 of premium and $8,348 of other costs and non-cash interest expense related to the recognition of previously unamortized deferred finance costs.
5.75% Senior Secured Notes due 2029. On January 28, 2021, we completed the sale of $875,000 in aggregate principal amount of our 5.75% Senior Secured Notes due 2029 (“5.75% Senior Secured Notes”) to qualified institutional buyers and non-U.S. persons in a private offering pursuant to the exemptionsincentive-based compensation from the registration requirements of the Securities Act of 1933 (the “Securities Act”) contained in Rule 144A and Regulation S thereunder. The aggregate net cash proceeds from the sale of the 5.75% Senior Secured Notes were approximately $855,500 after deducting the initial purchaser’s discount and estimated expenses and fees in connectionCompany, that each named executive officer must have entered into an agreement with the offering. We usedCompany providing that any performance-based compensation awarded, paid or payable by the net cash proceeds from the 5.75% Senior Secured Notes offering, together with cash on hand, to redeem all of our outstanding 6.125% Senior Secured Notes due 2025, including accrued interest and premium thereon, on January 28, 2021.
The 5.75% Senior Secured Notes pay interest on a semi-annual basis at a rate of 5.75% per year and mature on the earlier of February 1, 2029 and the date that is 91 days before the final stated maturity date of our 10.5% Senior Notes due 2026 (“10.5% Senior Notes”) if such 10.5% Senior Notes have not been repurchased and cancelledCompany or refinanced by such date. Prior to February 1, 2024, we may redeem some or all of the 5.75% Senior Secured Notes at any time at a make-whole redemption price. On or after February 1, 2024, we may redeem some or all of the 5.75% Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, any time prior to February 1, 2024, we may redeem up to 40% of the aggregate outstanding amount of the 5.75% Senior Secured Notes with the net proceeds
of certain equity offerings at 105.75% of the aggregate principal amount of the 5.75% Senior Secured Notes, plus accrued and unpaid interest, if any, to the redemption date, if at least 60% of the aggregate principal amount of the 5.75% Senior Secured Notes originally issued remains outstanding after such redemption, and the redemption occurs within 90 days of the closing of such equity offering. In the event of a change of control, as defined in the indenture governing the 5.75% Senior Secured Notes (the “2029 Indenture”), each holder of the 5.75% Senior Secured Notes may require us to repurchase some or all of its 5.75% Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, if any,subsidiaries subsequent to the date of purchase.adoption of the Clawback Policy shall be subject to recovery or “clawback” by the Company. Under the Clawback Policy, if the Company’s financial results are restated, the result of which is that any performance-based compensation would have been lower had it been calculated based on such restated results, the compensation and human capital committee shall review the performance-based compensation received by the named executive officers. If we sell certain assetsthe compensation and do not applyhuman capital committee determines that the proceeds as required pursuantperformance-based compensation would have been lower and that a named executive officer who received such compensation engaged in fraud, material financial or ethical misconduct or recklessness in the performance of the named executive officer's duties or intentional illegal conduct which materially contributed to the 2029 Indenture, we must offerrestatement, then the compensation and human capital committee may seek to repurchaserecover the 5.75% Senior Secured Notes atafter-tax portion of the prices listedexcess amount of performance-based compensation. Under the Clawback Policy, the compensation and human capital committee has the discretion to determine to seek recovery of the performance-based compensation after notice and an opportunity to be heard is provided to the named executive officer. The Company intends to update its clawback policies to comply with the SEC's and the New York Stock Exchange's new requirements regarding recovery of executive compensation prior to the effective date of those rules.
Role of Independent Compensation Consultant
The compensation and human capital committee may retain independent compensation consultants to render advice and guidance in assessing whether the Company's compensation program is reasonable and competitive.
Since June 2019, the compensation and human capital committee has engaged FTI Consulting to conduct a competitive market assessment of the Company’s executive compensation levels and structure, including an examination of market trends and best practices in the 2029 Indenture.Company’s primary industries, as well as advise on the design and structure of incentive compensation programs for executives.
FTI Consulting is directed by, and only provides services to, the compensation and human capital committee.
Accounting for Stock-Based Compensation
The 5.75% Senior Secured Notes are fullyCompany accounts for stock-based compensation, including stock option and unconditionally guaranteed, subject to certain customary automatic release provisions, on a joint and several basis by all of our wholly-owned domestic subsidiaries that are engagedrestricted stock awards under the Company's stock plans, in the conduct of our cigarette businesses, which subsidiaries, as of the issuance date of the 5.75% Senior Secured Notes, were also guarantors under our outstanding 10.5% Senior Notes. The 5.75% Senior Secured Notes are not guaranteed by New Valley LLC, or any of our subsidiaries engaged in our real estate business conducted through our subsidiary, New Valley LLC. The guarantees provided by certain of the guarantors are secured by first priority or second priority security interests in certain collateral of such guarantors pursuant to security and pledge agreements, subject to certain permitted liens and exceptions as further described in the 2029 Indenture and the security documents relating thereto. Vector Group Ltd does not provide any security for the 5.75% Senior Secured Notes.
The 2029 Indenture contains covenants that restrict the payment of dividends if our consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”), as defined in the 2029 Indenture, for the most recently ended four full quarters is less than $75,000. The 2029 Indenture also restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, each as defined in the 2029 Indenture, exceed 3.0 to 1.0 and 1.5 to 1.0, respectively. Our Leverage Ratio is defined in the 2029 Indenture as the ratio of our and our guaranteeing subsidiaries’ total debt less the fair market value of our cash, investment securities and long-term investments to Consolidated EBITDA, as defined in the 2029 Indenture. Our Secured Leverage Ratio is defined in the 2029 Indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. The following table summarizesaccordance with the requirements of these financial test and the extent to which we would have satisfied these requirements had the 2029 Indenture been in effect as of December 31, 2021.
| | | | | | | | | | | | | | | | |
| Covenant | | Indenture
Requirement | | December 31,
2021 | | |
| Consolidated EBITDA, as defined | | $ | 75,000 | | | $ | 407,165 | | | |
| Leverage ratio, as defined | | <3.0 to 1 | | 2.50 to 1 | | |
| Secured leverage ratio, as defined | | <1.5 to 1 | | 1.17 to 1 | | |
As of December 31, 2021, we were in compliance with all debt covenants related to the 2029 Indenture.
10.5% Senior Notes due 2026. On November 2, 2018 and November 18, 2019, we sold $325,000 and $230,000, respectively, in aggregate principal amount of our 10.5% Senior Notes to qualified institutional buyers and non-U.S. persons pursuant to the exemptions from the registration requirements of the Securities Act contained in Rule 144A and Regulation S thereunder. The aggregate net proceeds from the 2018 sale of the 10.5% Senior Notes and the 2019 sale of the 10.5% Senior Notes were approximately $315,000 and $220,400, respectively, after deducting underwriting discounts, commissions, fees and offering expenses. We used the net cash proceeds from the 2018 issuance of our 10.5% Senior Notes to retire the principal amount of, plus accrued and unpaid interest on, our 7.5% Variable Interest Senior Convertible Notes due 2019, and for general corporate purposes. We used the net cash proceeds from the 2019 issuance of our 10.5% Senior Notes to retire the principal amount of, plus accrued and unpaid interest on, our 5.5% Variable Interest Senior Convertible Notes due 2020.
The 10.5% Senior Notes pay interest on a semi-annual basis at a rate of 10.5% per year and mature on November 1, 2026. Prior to November 1, 2021, we may redeem some or all of the 10.5% Senior Notes at any time at a make-whole redemption price. On or after November 1, 2021, we may redeem some or all of the 10.5% Senior Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, any time prior to November 1, 2021, we may redeem up to 40% of the aggregate outstanding amount of the 10.5% Senior Notes with the net proceeds of certain equity offerings at 110.5% of the aggregate principal amount of the 10.5% Senior Notes, plus accrued and unpaid interest, if any, to the redemption date, if at least 60% of the aggregate principal amount of the 10.5% Senior Notes originally issued remains outstanding after such redemption, and the redemption occurs within 90 days of the closing of such equity offering. In the event of a change of control, as defined in the indenture governing the 10.5% Senior Notes (the “2026 Indenture”Financial Accounting Standards Board Accounting Standards Codification Topic 718 (“FASB ASC Topic 718”), each holder of the 10.5% Senior Notes may require us to make an offer to repurchase some or all of our 10.5% Senior Notes at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. If we sells certain assets and does not apply the proceeds as required pursuant to the 2026 Indenture, we must offer to repurchase the 10.5% Senior Notes at the prices listed in the 2026 Indenture..
Compensation and Human Capital Committee Report
The 10.5% Senior Notes were fullycompensation and unconditionally guaranteed subject to certain customary automatic release provisionshuman capital committee has reviewed and discussed the Compensation Discussion and Analysis set forth above with management and, based on a jointsuch review and several basis by all of our wholly-owned domestic subsidiaries that are engaged in the conduct of our cigarette businesses, and, priordiscussion, has recommended to the Spin-off, by DER Holdings LLC, through which we indirectly owned a 100% interestBoard that the Compensation Discussion and Analysis be included in Douglas Elliman as of December 31, 2021. In connection with the Spin-off, the guarantee by DER Holdings LLC was released. DER Holdings LLC did not guarantee our 5.75% Senior Secured Notes.
The 2026 Indenture contains covenants that restrict the payment of dividends and certain other distributions subject to certain exceptions, including exceptions for (1) dividends and other distributions in an amount up to 50% of our consolidated net income, plus certain specified proceeds received by us, if no event of default has occurred, and we are in compliance with a Fixed Charge Coverage Ratio (as defined in the 2026 Indenture) of at least 2.0 to 1.0, and (2) dividends and other distributions in an unlimited amount, if no event of default has occurred and we are in compliance with a Net Leverage Ratio (as defined in the 2026 Indenture) no greater than 4.0 to 1.0. As a result, absent an event of default, we can pay dividends if the Net Leverage ratio is below 4.0 to 1.0, regardless of the value of the Fixed Charge Coverage Ratio at the time. The 2026 Indenture also restricts our ability to incur debt if our Fixed Charge Coverage Ratio is less than 2.0 to 1.0, and restricts our ability to secure debt to the extent doing so would cause our Secured Leverage Ratio (as defined in the 2026 Indenture) to exceed 3.75 to 1.0, unless the 10.5% Senior Notes are secured on an equal and ratable basis. Our Fixed Charge Coverage Ratio is defined in the 2026 Indenture as the ratio of our Consolidated EBITDA to our Fixed Charges (each as defined in the 2026 Indenture). Our Net Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries’ total debt less our cash, cash equivalents, and the fair market value of our investment securities, long-term investments, investments in real estate, net, and investments in real estate ventures, to Consolidated EBITDA, as defined in the 2026 Indenture. Our Secured Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries’ total secured debt, to Consolidated EBITDA, as defined in the 2026 Indenture. The following table summarizes the requirements of these financial test and the extent to which we satisfied these requirements as of December 31, 2021.
| | | | | | | | | | | | | | | | |
Covenant | | Indenture
Requirement | | December 31,
2021 | | |
Fixed charge coverage ratio, as defined | | >2.0 to 1 | | 3.18 to 1 | | |
Net leverage ratio, as defined | | <4.0 to 1 | | 2.59 to 1 | | |
Secured leverage ratio, as defined | | <3.75 to 1 | | 2.46 to 1 | | |
As of December 31, 2021, we were in compliance with all of the debt covenants related to the 2026 Indenture.
Guarantor Summarized Financial Information. Vector Group Ltd. (the “Issuer”) and its wholly-owned domestic subsidiaries that are engaged in the conduct of its cigarette business (the “Subsidiary Guarantors”) have filed a shelf registration statement for the offering of debt and equity securities on a delayed or continuous basis and we are including this condensed consolidating financial information in connection therewith. Any such debt securities may be issued by us and guaranteed by our Subsidiary Guarantors. New Valley and any of its subsidiaries (the “Nonguarantor Subsidiaries”) will not guarantee any such debt securities. Both the Subsidiary Guarantors and the Nonguarantor Subsidiaries are wholly-owned by the Issuer. The Condensed Consolidating Balance Sheets as of December 31, 2021 and the related Condensed Consolidating Statements of Operations for the year ended December 31, 2021 of the Issuer, Subsidiary Guarantors and the Nonguarantor Subsidiaries are set forth in Exhibit 99.2.
Presented herein are the Summarized Combined Balance Sheets as of December 31, 2021 and December 31, 2020 and the related Summarized Combined Statements of Operations for the year ended December 31, 2021 for the Issuer and the Subsidiary Guarantors (collectively, the “Obligor Group”). The summarized combined financial information is presented after the elimination of: (i) intercompany transactions and balances among the Obligor Group, and (ii) equity in earnings from and investments in the Nonguarantor Subsidiaries.
Summarized Combined Balance Sheets:
| | | | | | | | | | | | | | |
| | December 31,
2021 | | December 31,
2020 |
| Assets: | | | | |
| Current assets | | $ | 487,797 | | | $ | 515,082 | |
| Current assets of discontinued operations | | — | | | — | |
| Noncurrent assets | | 274,292 | | | 264,041 | |
| Noncurrent assets of discontinued operations | | — | | | — | |
| Intercompany receivables from Nonguarantor Subsidiaries | | 1,832 | | | 2,040 | |
| | | | |
| Liabilities: | | | | |
| Current liabilities | | 194,097 | | | 180,406 | |
| Current liabilities of discontinued operations | | — | | | 12,719 | |
| Noncurrent liabilities | | 1,536,792 | | | 1,508,793 | |
| Noncurrent liabilities of discontinued operations | | — | | | 12,500 | |
| | | | |
Summarized Combined Statements of Operations:
| | | | | | | | |
| | Year EndedTHE COMPENSATION AND HUMAN CAPITAL COMMITTEE |
| |
| December 31,Jean E. Sharpe |
| | 2021Paul V. Carlucci |
Revenues | | $ | 1,202,557 | |
Cost of sales | | 758,015 | |
Operating income | | 316,615 | |
Net income from continuing operations | | 137,891 | |
| | |
Liggett Financing.
Liggett did not enter into any equipment financing arrangements
2022 SUMMARY COMPENSATION TABLE
The following table summarizes the compensation of the named executive officers for the years ended December 31, 2022, 2021 and 2020. The named executive officers are the Company’s Chief Executive Officer, Chief Financial Officer, and the three other most highly compensated executive officers ranked by their total compensation in 2021, 2020the table below (not considering the amount in the Change in Pension Value and 2019.Nonqualified Deferred Compensation Earnings column).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Salary | Bonus | Stock
Awards | | Option
Awards | | Non-Equity
Incentive Plan
Compensation | Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings | All Other
Compensation | | Total |
| Name and Principal Position | Year | ($)(1) | ($) | ($) (2) | | ($) (2) | | ($)(3) | ($)(4) | ($) | | ($) |
| Howard M. Lorber | 2022 | $ | 1,837,500 | | $ | — | | $ | 6,660,000 | | | $ | — | | | $ | 2,124,609 | | $ | — | | $ | 328,758 | | (5) | $ | 10,950,867 | |
| President and Chief | 2021 | $ | 3,426,270 | | $ | — | | $ | 7,155,000 | | | $ | — | | | $ | 4,282,838 | | $ | 2,707,353 | | $ | 300,197 | | | $ | 17,871,658 | |
| Executive Officer | 2020 | $ | 3,371,649 | | $ | — | | $ | 3,001,250 | | | $ | — | | | $ | 3,898,469 | | $ | 5,153,781 | | $ | 340,104 | | | $ | 15,765,253 | |
| Richard J. Lampen | 2022 | $ | 650,000 | | $ | — | | $ | 1,998,000 | | | $ | — | | | $ | 563,672 | | $ | — | | $ | 134,879 | | (6) | $ | 3,346,551 | |
| Executive Vice | 2021 | $ | 1,250,000 | | $ | — | | $ | 2,146,500 | | | $ | — | | | $ | 1,171,875 | | $ | 320,232 | | $ | 163,093 | | | $ | 5,051,700 | |
| President and Chief Operating Officer | 2020 | $ | 900,000 | | $ | — | | $ | 900,375 | | | $ | — | | | $ | 520,313 | | $ | 609,601 | | $ | 88,075 | | | $ | 3,018,364 | |
| J. Bryant Kirkland III | 2022 | $ | 575,000 | | $ | — | | $ | 1,110,000 | | | $ | — | | | $ | 221,592 | | $ | — | | $ | 9,150 | | (7) | $ | 1,915,742 | |
| Senior Vice President, | 2021 | $ | 550,000 | | $ | — | | $ | 1,144,800 | | | $ | — | | | $ | 229,144 | | $ | 78,146 | | $ | 8,700 | | | $ | 2,010,790 | |
| Chief Financial Officer and Treasurer | 2020 | $ | 550,000 | | $ | — | | $ | 480,200 | | | $ | — | | | $ | 211,958 | | $ | 330,737 | | $ | 8,550 | | | $ | 1,581,445 | |
| Marc N. Bell | 2022 | $ | 500,000 | | $ | — | | $ | 1,110,000 | | | $ | — | | | $ | 144,531 | | $ | — | | $ | 9,150 | | (7) | $ | 1,763,681 | |
| Senior Vice President, | 2021 | $ | 475,000 | | $ | — | | $ | 1,144,800 | | | $ | — | | | $ | 148,438 | | $ | — | | $ | 8,700 | | | $ | 1,776,938 | |
| General Counsel and Secretary | 2020 | $ | 475,000 | | $ | — | | $ | 480,200 | | | $ | — | | | $ | 137,305 | | $ | 606,881 | | $ | 8,550 | | | $ | 1,707,936 | |
| Nicholas P. Anson (8) | 2022 | $ | 650,000 | | $ | — | | $ | 222,000 | | | $ | — | | | $ | 650,000 | | $ | — | | $ | 9,150 | | (7) | $ | 1,531,150 | |
| President and Chief | 2021 | $ | 650,000 | | $ | — | | $ | 143,100 | | | $ | — | | | $ | 650,000 | | $ | — | | $ | 8,700 | | | $ | 1,451,800 | |
| Operating Officer of Liggett Vector Brands and Liggett | 2020 | $ | 475,000 | | $ | 650,000 | | — | | | $ | — | | | $ | — | | $ | — | | $ | 8,550 | | | $ | 1,133,550 | |
___________________________Liggett Credit Facility. (1)In January 2015, LiggettReflects actual base salary amounts paid for 2022, 2021 and Maple, entered into the Credit Agreement with Wells Fargo, as agent and lender.2020, unless otherwise indicated.
On October(2)Represents the aggregate grant date fair value of restricted stock granted under the 2014 Plan, respectively, during the years ended December 31, 2019, Liggett2022, 2021 and Maple amended2020 as determined in accordance with FASB ASC Topic 718, rather than an amount paid to or realized by the Credit Agreementnamed executive officer. Assumptions used in the calculation of such amount are included in note 14 to among other things, update the borrowing baseCompany’s audited financial statements. These grants are subject to adjustcontinued service conditions; consequently, FASB ASC Topic 718 amounts included in the advance ratestable may never be realized by the named executive officer.
(3)These amounts reflect performance-based cash awards under the 2014 Plan paid during 2023, 2022 and 2021 in respect of eligible inventoryservice performed in 2022, 2021 and add certain eligible real property. On March 22, 2021, Liggett, Maple and Vector Tobacco entered into Amendment No. 4 and Joinder to the Credit Agreement with Wells Fargo. The Credit Agreement was amended to, among other things, (i) add Vector Tobacco as a borrower2020, respectively. This plan is discussed in further detail under the Credit Agreement, (ii) extendheading “Annual Incentive Awards.”
(4)Amounts reported represent the maturityincrease in the actuarial present value of benefits associated with the Credit Agreement to March 22, 2026, and (iii)Company’s pension plans. Assumptions for 2022 amounts are further described in “Pension Benefits at 2022 Fiscal Year End.” The amounts reflect the increase in actuarial present value for the amount of the maximum credit line thereunder from $60,000 to $90,000.
Since October 31, 2019, all borrowingsnamed executive officer’s benefits under the Credit Agreement have been limited to a borrowing base equal to the sum of (I) the lesser of 85% of eligible trade receivables less certain reservesSupplemental Retirement Plan determined using interest rate, retirement date and $15,000; plus (II) 80% of the value of eligible inventory consisting of packaged cigarettes; plus (III) the designated percentage of the value of eligible inventory consisting of leaf tobacco (i.e., 65% of Liggett’s eligible cost of inventory consisting of leaf tobacco less certain reserves or 85% of the net orderly liquidation value of eligible inventory); plus (IV) the lesser of (a) the real property subline amount or (b) 60% of the fair market value of eligible real property. The obligations under the Credit Agreement are collateralized on a first priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject to certain permitted liens.mortality rate assumptions consistent with those used
The term of the Credit Agreement expires on March 22, 2026. Loans under the Credit Agreement bear interest at a rate equal to LIBOR plus 2.25%. The interest rate applicable to this Credit Agreement at December 31, 2021 was 2.35%. The Credit Agreement, as amended, permitted the guaranty of the 6.125% Senior Secured Notes due 2025, and permits the guaranty of the 5.75% Senior Secured Notes and the 10.5% Senior Notes, by each of Liggett, Maple and Vector Tobacco. Wells Fargo, Liggett, Maple, Vector Tobacco and the collateral agent for the holders of the 5.75% Senior Secured Notes have entered into an intercreditor agreement, pursuant to which the liens of such collateral agent on the assets that are subject to the Credit Agreement are subordinated to the liens of Wells Fargo on such assets.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit Liggett’s, Maple’s, Vector Tobacco’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Agreement also requires the Company to comply with specified financial covenants, including that Liggett’s earnings before interest, taxes, depreciation and amortization, as defined under the Credit Agreement, on a trailing twelve month basis, shall not be less than $150,000 if Liggett’s excess availability, as defined under the Credit Agreement, is less than $30,000. The covenants also require that annual capital expenditures, as defined under the Credit Agreement (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any fiscal year. The Credit Agreement also contains customary events of default. Liggett was in compliance with these covenants as of December 31, 2021.
As of December 31, 2021, there was $24 in outstanding balance under the Credit Agreement. Availability, as determined under the Credit Agreement, was $80,771 based on eligible collateral at December 31, 2021.
Anticipated Liquidity Obligations. We and our subsidiaries have significant indebtedness and debt service obligations. As of December 31, 2021, we and our subsidiaries had total outstanding indebtedness of $1,430,120. Of this amount $875,000 comprised of the outstanding amount under our 5.75% Senior Secured Notes due 2029, and $555,000 comprised of the outstanding amount under our 10.5% Senior Notes due 2026. 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 have a material adverse effect on our business and results of operations.
We believe that our cigarette operations are a positive cash-flow-generating unit and will continue to be able to sustain its operations without any significant liquidity concerns.
In order to meet the above liquidity requirements as well as other anticipated liquidity needs in the normal course of business, we had cashCompany’s financial statements. The amounts for Messrs. Lorber, Lampen, Kirkland and cash equivalents of approximately $193,400, investment securities at fairBell have been reported as $0 because the actuarial value of approximately $178,800their benefits declined by $2,291,348, $271,026, $259,799 and availability under Liggett’s credit facility$610,276, respectively, in 2022, primarily due to increases in assumed interest rates in 2022. No amount is payable from this plan before a participant attains age 60 during active service except in the case of approximately $81,000 as of December 31, 2021. Management currently anticipates that these amounts, as well as expected cash flows from our operations, proceeds from public and/death, disability or private debt and equity financing to the extent available, management fees and other payments from subsidiaries should be sufficient to meet our liquidity needs over the next 12 months.
We continue to evaluate our capital structure and current market conditions related to our capital structure. Depending on market conditions, we may utilize our cash, investment securities and long-term investments to repurchase our 10.5% Senior Notes due 2026 in open-market purchases or privately negotiated transactions.
termination without cause. There can be no assurance that wethe amounts shown will ever be realized by the named executive officers.
(5)Represents perquisites consisting of $256,033 for use of corporate aircraft in 2022, a $45,000 allowance paid for lodging and related business expenses and $18,575 for use of a Company-provided car and driver (which amount covers the cost of fuel, parking, tolls, depreciation expense and related expenses for Mr. Lorber's personal and business-related use) in 2022. Also includes $9,150 for 401(k) Plan matching contributions in 2022. For purposes of determining the value of corporate aircraft use, personal use is calculated based on the aggregate incremental cost to the Company. For flights on corporate aircraft, aggregate incremental cost for purposes of this table is calculated based on a cost-per-flight-mile charge developed from internal Company data. The charge reflects the direct operating cost of the aircraft, including fuel, additives and lubricants, airport fees and catering. In addition, the charge also reflects an allocable allowance for maintenance and engine restorations.
(6)Represents perquisites consisting of $93,083 for personal use of corporate aircraft in 2022 (computed using the same assumptions as in footnote (5) above), $28,174 for reimbursement of automobile expenses, $4,472 for reimbursement of club expenses and $9,150 for 401(k) Plan matching contributions in 2022.
(7)Represents 401(k) plan matching contributions.
(8)Mr. Anson serves as President and COO of Liggett Vector Brands LLC and Liggett Group LLC.
Employment Agreements and Severance Arrangements
Compensation arrangements, as reflected in the employment agreements with the Company’s named executive officers, are usually negotiated on an individual basis between the CEO and each of the other executives. While the compensation and human capital committee has delegated to the CEO the responsibility of negotiating these employment agreements and his input is given significant consideration by the compensation and human capital committee, the compensation and human capital committee and the Board have final authority over all executive compensation matters.
On January 27, 2006, the Company and Howard M. Lorber entered into an amended and restated employment agreement (the “Amended Lorber Agreement”), which replaced his prior employment agreements. The Amended Lorber Agreement had an initial term of three years effective as of January 1, 2006, with an automatic one-year extension on each anniversary of the effective date unless notice of non-extension is given by either party within 60 days before this date. Under the Amended Lorber Agreement, Mr. Lorber’s base salary is subject to an annual cost of living adjustment. In addition, the Company’s Board must periodically review his base salary and may increase, but not decrease, his base salary in its sole discretion. Mr. Lorber is eligible on an annual basis to receive a target bonus of 100% of his base salary under the Company’s non-equity incentive bonus plan. During the period of his employment, Mr. Lorber is entitled to various benefits, including a Company-provided car and driver, a $3,750 per month allowance for lodging and related business expenses, one club membership and dues, and use of corporate aircraft in accordance with the Company’s Corporate Aircraft Policy. Following termination of his employment by the Company without cause (as specified in the Amended Lorber Agreement), termination of his employment by him for good reason (as specified in the Amended Lorber Agreement) or upon death or disability, he (or his beneficiary in the case of death) would continue to receive for a period of 36 months following the termination date his base salary and the bonus amount earned by him for the prior year (with such bonus amount limited to 100% of base salary). In addition, except as otherwise provided in an award agreement, all of Mr. Lorber’s outstanding equity awards would be able tovested and any stock options granted after January 27, 2006 would continue to issue debtbe exercisable for no less than two years or the remainder of the original term if shorter. Following termination of his employment for any of the reasons described above (other than death or disability) within two years after a change in control (as defined in the Amended Lorber Agreement) or before a change in control that actually occurs in anticipation of or at the request of a lowerthird party effectuating such change in control, he would receive a lump sum payment equal to 2.99 times the sum of his then current base salary and the bonus amount earned by him for the prior year (with such bonus amount limited to 100% of base salary). In addition, Mr. Lorber will be indemnified in the event that excise taxes are imposed on change in control payments under Section 4999 of the Code.
In connection with the distribution of Douglas Elliman, Vector entered into a letter agreement with Mr. Lorber to acknowledge that he also serves as Douglas Elliman Inc.’s President and CEO and Chairman of its Board of Directors following the distribution. In addition, Mr. Lorber’s letter agreement provided that his base salary with the Company following the distribution of Douglas Elliman would be reduced from $3,642,270 per annum to $1,800,000 per annum. On April 29, 2022, the letter agreement with Mr. Lorber was amended to change the reference of Mr. Lorber’s annual cost of living adjustment from the New York metropolitan area to the South Florida metropolitan area and increase Mr. Lorber’s base salary from
$1,800,000 to $1,837,500. As of January 1, 2023, Mr. Lorber's base salary is $2,018,678, which increase reflects a contractual cost of living adjustment in 2023.
On January 27, 2006, the Company entered into employment agreements (the “Other Executive Agreements”) with Richard J. Lampen, the Company’s Executive Vice President and COO, J. Bryant Kirkland III, the Company’s Senior Vice President, Treasurer and Chief Financial Officer, and Marc N. Bell, the Company’s Senior Vice President, General Counsel and Secretary. The Other Executive Agreements replaced prior employment agreements. The Other Executive Agreements had an initial term of two years effective as of January 1, 2006, with an automatic one-year extension on each anniversary of the effective date unless notice of non-extension is given by either party within 60 days before this date. As of January 1, 2023, the annual base salaries provided for in these Other Executive Agreements were $682,500 for Mr. Lampen (increased from $650,000), $603,750 for Mr. Kirkland (increased from $575,000) and $525,000 for Mr. Bell (increased from $500,000). In addition, the Board must periodically review these base salaries and may increase, but not decrease them, their base salaries in its sole discretion. These executives are eligible to receive a target bonus of 75% for Mr. Lampen, 33.33% for Mr. Kirkland and 25% for Mr. Bell of their base salaries under the Company’s non-equity incentive bonus plan. Following termination of their employment by the Company without cause (as defined in the Other Executive Agreements), termination of their employment by the executives for good reason (as defined in the Other Executive Agreements) or upon death or disability, they (or their beneficiaries in the case of death) would continue to receive for a period of 24 months following the termination date their base salary and the bonus amount earned by them for the prior year (with such bonus amount limited to 75% of base salary for Mr. Lampen, 33.33% of base salary for Mr. Kirkland and 25% of base salary for Mr. Bell).
In connection with the distribution of Douglas Elliman, the Company entered into letter agreements with each of Messrs. Lampen, Kirkland and Bell, respectively, to acknowledge that they also serve as Douglas Elliman’s Executive Vice President and COO, Senior Vice President, CFO and Treasurer and Senior Vice President, Secretary and General Counsel, respectively, following the distribution. In addition, Mr. Lampen’s letter agreement provided that his annual base salary with the Company following the distribution was reduced from $1,250,000 to $650,000 to reflect that he devotes a portion of his business time to Douglas Elliman.
On March 6, 2020, the Company entered into an employment agreement (the "Anson Agreement") with Nicholas P. Anson, who became President and Chief Operating Officer of Liggett Vector Brands LLC and Liggett Group LLC on April 1, 2020. The Anson Agreement had an initial term of 21 months with an automatic one-year extension on December 31, 2021 and each year thereafter unless notice of non-extension is given by either party within six months before such renewal date. The Anson Agreement provided Mr. Anson with an initial annual base salary of $500,000, which was increased by the Anson Agreement to $650,000, effective January 1, 2021. Effective January 1, 2023, Mr. Anson's base salary is $682,500 (increased from $650,000). Mr. Anson is eligible to participate in any annual bonus plan Liggett may implement for its senior executives with a target bonus of 50% of base salary. Following termination of his employment by Liggett Vector Brands without cause (as defined in the Anson Agreement), termination of his employment by him for good reason (as defined in the Anson Agreement), termination of his employment due to the nonrenewal of his agreement or upon death, he (or his beneficiaries in the case of death) would continue to receive for a period of 24 months following the termination date his base salary and continued health and insurance benefits, with the base salary payable during the second year being reduced by any salary, bonus, consulting fees or other compensation earned (irrespective of when paid) from any employment or consulting work. If Mr. Anson's employment is involuntarily terminated for any of the reasons described in the foregoing sentence, after July 1 of the applicable year, the Anson Agreement calls for Mr. Anson to receive a pro-rated bonus for such year based on days worked. The severance payments and benefits payable to Mr. Anson under the Anson Agreement are subject to Mr. Anson's execution of a release of claims in favor of Liggett and its affiliates.
CEO Pay Ratio
Pursuant to Item 402(u) of Regulation S-K and Section 953(b) of the Dodd-Frank Act, presented below is the ratio of annual total compensation of the Company's CEO to the annual total compensation of the Company's median employee (excluding the CEO) for 2022.
The ratio presented below is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K. The SEC’s rules for identifying the median compensated employee and calculating the pay ratio based on that employee’s annual total compensation allow companies to adopt a variety of methodologies, to apply certain exclusions, and to make reasonable estimates and assumptions that reflect their employee populations and compensation practices. As a result, the pay ratio reported by other companies may not be comparable to the pay ratio reported below because other companies have different employee populations and compensation practices and may utilize different methodologies, exclusions, estimates, and assumptions in calculating their own pay ratios.
For our 2022 analysis, the Company first determined its employee population using a determination date of December 31, 2022. The Company selected December 31, 2022 as its determination date because December 31, 2022 is reflective of the Company's current structure. The Company identified the median employee using a compensation measure consisting of base
salary or wages (as applicable), overtime pay, and any bonuses paid during the twelve-month period preceding the determination date. Conforming adjustments were made for permanent employees who were hired during that period and did not receive pay for the full period.
The 2022 annual total compensation as determined under Item 402 of Regulation S-K for the Company's CEO was $10,950,867, as reported in the Summary Compensation Table of this document. The 2022 annual total compensation as determined under Item 402 of Regulation S-K for the median employee identified in 2022 was $84,368. The ratio of the Company's CEO’s annual total compensation to the Company's median employee’s annual total compensation for fiscal year 2022 is 130 to 1.
GRANTS OF PLAN-BASED AWARDS IN 2022
The table below provides information with respect to incentive compensation granted to each of the named executive officers during the year ended December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | All Other Stock Awards: Number of Shares of Stock (#) | | All Other Option Awards: Number of Shares of Securities Underlying Options (#) | | Exercise or Base Price of Option Awards ($) | | Grant Date Fair Value of Stock and Option Awards ($) (2) |
| | | Estimated Future Payouts Under Non-
Equity Incentive Plan Awards (1) | | Estimated Future Payouts
Under Equity Incentive Plan Awards | | | | |
| | | | Threshold | | Target | | Maximum | | Threshold | | Target | | Maximum | | | | |
| Name | Grant Date | | ($) | | ($) | | ($) | | (#) | | (#) | | (#) | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Howard M. Lorber | 3/1/2022 | | — | | | — | | | — | | | — | | — | | — | | 600,000 | | — | | | — | | | $ | 6,660,000 | |
| 4/18/2022 | | — | | | $ | 1,837,500 | | | $ | 2,296,875 | | | — | | — | | — | | — | | — | | | — | | | — | |
| Richard J. Lampen | 3/1/2022 | | — | | | — | | | — | | | — | | — | | — | | 180,000 | | — | | | — | | | $ | 1,998,000 | |
| 4/18/2022 | | — | | | $ | 487,500 | | | $ | 609,375 | | | — | | — | | — | | — | | — | | | — | | | — | |
| J. Bryant Kirkland III | 3/1/2022 | | — | | | — | | | — | | | — | | — | | — | | 100,000 | | — | | | — | | | $ | 1,110,000 | |
| 4/18/2022 | | — | | | $ | 191,648 | | | $ | 239,559 | | | — | | — | | — | | — | | — | | | — | | | — | |
| Marc N. Bell | 3/1/2022 | | — | | | — | | | — | | | — | | — | | — | | 100,000 | | — | | | — | | | $ | 1,110,000 | |
| 4/18/2022 | | — | | | $ | 125,000 | | | $ | 156,250 | | | — | | — | | — | | — | | — | | | — | | | — | |
| Nicholas P. Anson | 3/1/2022 | | — | | | — | | | — | | | — | | — | | — | | 20,000 | | — | | | — | | | $ | 222,000 | |
| 4/18/2022 | | — | | | $ | 325,000 | | | $ | 650,000 | | | — | | — | | — | | — | | — | | | — | | | — | |
___________________________
(1)Represents the annual incentive awards made under the 2014 Plan on April 18, 2022. In 2022, target levels were equal to 100% of base salary for Mr. Lorber, 75% of base salary for Mr. Lampen, 33.33% of base salary for Mr. Kirkland, 25% for Mr. Bell and 50% for Mr. Anson. The maximum amount is 125% of the target amount for Messrs. Lorber, Lampen, Kirkland and Bell; and, 200% for Mr. Anson. There is no threshold amount. The compensation and human capital committee approved the performance criteria for determining the award opportunities for each named executive officer under the 2014 Plan. The actual bonus amounts earned for 2022 have been determined and paid in 2023 and are reflected in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table.
(2)Represents the aggregate grant date fair value of restricted stock granted under the 2014 Plan for the year ended December 31, 2022 as determined in accordance with FASB ASC Topic 718, rather than an amount paid to or realized by the named executive officer. Assumptions used in the calculation of such amount are included in Note 14 to the Company’s consolidated financial statements. These grants are subject to continued service conditions and their value is tied to the Company's future stock price; consequently, FASB ASC Topic 718 amounts included in the table may never be realized by the named executive officer.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2022
The table below provides information with respect to the outstanding equity awards of the named executive officers as of December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Option Awards | | Stock Awards |
| Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable | | Number of
Securities
Underlying
Unexercised
Options
(#) Unexercisable | | Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options (#) | | Option
Exercise Price ($) | | Option
Expiration Date | | Number of
Shares or
Units of
Stock That
Have Not Vested (#) | | Market
Value of
Shares or
Units of
Stock That
Have Not Vested ($) | | Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That
Have Not Vested (#) | | Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not Vested ($) |
| Name | | | | | | | | |
| Howard M. Lorber | 703,547 | | | — | | | — | | $11.47 | | | 2/26/2023 | | — | | | — | | | — | | — |
| 335,022 | | | — | | | — | | $14.68 | | | 2/26/2024 | | — | | | — | | | — | | — |
| 319,069 | | | — | | | — | | $18.12 | | | 2/24/2025 | | — | | | — | | | — | | — |
| 303,876 | | | — | | | — | | $19.13 | | | 2/28/2026 | | — | | | — | | | — | | — |
| 289,406 | | | — | | | — | | $19.71 | | | 2/23/2027 | | — | | | — | | | — | | — |
| 275,625 | | | — | | | — | | $18.42 | | | 2/27/2028 | | — | | | — | | | — | | — |
| — | | | 262,500 | | (1) | — | | $10.92 | | | 2/27/2029 | | — | | | — | | | — | | — |
| | | | | | | | | | | 125,000 | | (2) | $ | 1,482,500 | | | — | | — |
| | | | | | | | | | | 187,500 | | (3) | $ | 2,223,750 | | | — | | — |
| | | | | | | | | | | 187,500 | | (4) | $ | 2,223,750 | | | — | | — |
| | | | | | | | | | | 300,000 | | (5) | $ | 3,558,000 | | | — | | — |
| | | | | | | | | | | 300,000 | | (6) | 3,558,000 | | | — | | — |
| Richard J. Lampen | 175,884 | | | — | | | — | | $11.47 | | | 2/26/2023 | | — | | | — | | | — | | — |
| 83,754 | | | — | | | — | | $14.68 | | | 2/26/2024 | | — | | | — | | | — | | — |
| 79,766 | | | — | | | — | | $18.12 | | | 45712 | | — | | | — | | | — | | — |
| 75,968 | | | — | | | — | | $19.13 | | | 2/28/2026 | | — | | | — | | | — | | — |
| 72,351 | | | — | | | — | | $19.71 | | | 2/23/2027 | | — | | | — | | | — | | — |
| 68,906 | | | — | | | — | | $18.42 | | | 2/27/2028 | | — | | | — | | | — | | — |
| — | | | 65,625 | | (1) | — | | $10.92 | | | 2/27/2029 | | — | | | — | | | — | | — |
| | | | | | | | | | | 37,500 | | (2) | $ | 444,750 | | | — | | — |
| | | | | | | | | | | 112,500 | | (3) | $ | 1,334,250 | | | — | | — |
| | | | | | | | | | | 180,000 | | (5) | $ | 2,134,800 | | | — | | — |
| J. Bryant Kirkland III | 105,531 | | | — | | | — | | $11.47 | | | 2/26/2023 | | — | | | — | | | — | | — |
| 50,251 | | | — | | | — | | $14.68 | | | 2/26/2024 | | — | | | — | | | — | | — |
| 47,859 | | | — | | | — | | $18.12 | | | 2/24/2025 | | — | | | — | | | — | | — |
| 45,580 | | | — | | | — | | $19.13 | | | 2/28/2026 | | — | | | — | | | — | | — |
| 43,410 | | | — | | | — | | $19.71 | | | 2/23/2027 | | — | | | — | | | — | | — |
| 41,343 | | | — | | | — | | $18.42 | | | 2/27/2028 | | — | | | — | | | — | | — |
| — | | | 39,375 | | (1) | — | | $10.92 | | | 2/27/2029 | | — | | | — | | | — | | — |
| | | | | | | | | | | 20,000 | | (2) | $ | 237,200 | | | — | | — |
| | | | | | | | | | | 60,000 | | (3) | $ | 711,600 | | | — | | — |
| | | | | | | | | | | 100,000 | | (5) | $ | 1,186,000 | | | — | | — |
| Marc N. Bell | 70,353 | | | — | | | — | | $11.47 | | | 2/26/2023 | | — | | | — | | | — | | — |
| 50,251 | | | — | | | — | | $14.68 | | | 2/26/2024 | | — | | | — | | | — | | — |
| 47,859 | | | — | | | — | | $18.12 | | | 2/24/2025 | | — | | | — | | | — | | — |
| 45,580 | | | — | | | — | | $19.13 | | | 2/28/2026 | | — | | | — | | | — | | — |
| 43,410 | | | — | | | — | | $19.71 | | | 2/23/2027 | | — | | | — | | | — | | — |
| 41,343 | | | — | | | — | | $18.42 | | | 2/27/2028 | | — | | | — | | | — | | — |
| — | | | 39,375 | | (1) | — | | $10.92 | | | 2/27/2029 | | — | | | — | | | — | | — |
| | | | | | | | | | | 20,000 | | (2) | $ | 237,200 | | | — | | — |
| | | | | | | | | | | 60,000 | | (3) | $ | 711,600 | | | — | | — |
| | | | | | | | | | | 100,000 | | (5) | $ | 1,186,000 | | | — | | — |
| Nicholas P. Anson | — | | | — | | | — | | — | | | — | | | 7,500 | | (3) | $ | 88,950 | | | — | | — |
| — | | | — | | | — | | — | | | — | | | 20,000 | | (5) | $ | 237,200 | | | — | | — |
___________________________(1)These option grants vested on February 27, 2023, the fourth anniversary of the grant date.
(2)These restricted shares vest in two equal annual installments. The first two tranches vested on May 27, 2021 and May 27, 2022 and the next two tranches will vest on each of May 27, 2023 and May 27, 2024, provided the recipient is then still an employee of the Company, subject to earlier vesting upon the recipient's death or disability, termination of employment without cause, resignation for good reason and change in control.
(3)These restricted shares vest in four equal annual installments. The first two tranches vested on February 24, 2022 and February 24, 2023 and the final two tranches will vest on each of February 24, 2024 and February 24, 2025, provided the recipient is then still an employee of the Company, subject to earlier vesting upon the recipient's death or disability, termination of employment without cause, resignation for good reason and change in control.
(4)This restricted stock award will vest using the following schedule: 62,500 shares vested on February 24, 2023 because Vector Group Ltd. Adjusted EBITDA from January 1, 2021 to December 31, 2022 exceeded $552 million, 125,000 shares minus shares previously vested will vest on February 24, 2024 if cumulative Vector Group Ltd. Adjusted EBITDA from January 1, 2021 to December 31, 2023 exceeds $728 million, 187,500 shares minus shares previously vested will vest on February 24, 2025 if cumulative Vector Group Ltd. Adjusted EBITDA from January 1, 2021 to December 31, 2024 exceeds $1.104 billion. “Vector Group Ltd. Adjusted EBITDA” is defined in the Award Agreement to mean the Company’s Earnings Before Interest, Income Taxes, Depreciation and Amortization excluding litigation or claim judgments or settlements and non-operating items and expenses for restructuring, productivity initiatives and new business initiatives.
(5)These restricted shares vest in four equal annual installments. The first vesting occurred on February 24, 2023 and the next three tranches will vest on each of February 24, 2024, February 24, 2025 and February 24, 2026, provided the recipient is then still an employee of the Company, subject to earlier vesting upon the recipient's death or disability, termination of employment without cause, resignation for good reason and change in control.
(6)This restricted stock award will vest using the following schedule: 75,000 shares vested on February 24, 2023 because Vector Group Ltd. Adjusted EBITDA from January 1, 2022 to December 31, 2022 exceeded $255 million, 150,000 shares minus shares previously vested will vest on February 24, 2024 if cumulative Vector Group Ltd. Adjusted EBITDA from January 1, 2021 to December 31, 2023 exceeds $510 million, 225,000 shares minus shares previously vested will vest on February 24, 2025 if cumulative Vector Group Ltd. Adjusted EBITDA from January 1, 2021 to December 31, 2024 exceeds $765 million; and, 250,000 shares minus shares previously vested will vest on February 24, 2026 if cumulative Vector Group Ltd. Adjusted EBITDA from January 1, 2021 to December 31, 2025 exceeds $1.02 billion. “Vector Group Ltd. Adjusted EBITDA” is defined in the Award Agreement to mean the Company’s Earnings Before Interest, Income Taxes, Depreciation and Amortization excluding litigation or claim judgments or settlements and non-operating items and expenses for restructuring, productivity initiatives and new business initiatives.
OPTION EXERCISES AND STOCK VESTED IN YEAR ENDED DECEMBER 31, 2022
The table below provides information with respect to options that were exercised or restricted stock awards that vested during 2022, as well as the value realized on the vesting date, based on the average of the high and low of the Company's Common Stock on that date.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Option Awards | | Stock Awards |
| Name | | Number of Shares
Acquired on
Exercise (#) | | Value
Realized on
Exercise ($) | | Number of
Shares Acquired
on Vesting (#) | | Value Realized
on Vesting ($) |
| | |
| Howard M. Lorber | | — | | | — | | | 395,872 | | | $ | 6,540,872 | |
| Richard J. Lampen | | — | | | — | | | 56,250 | | | $ | 635,149 | |
| J. Bryant Kirkland III | | — | | | — | | | 30,000 | | | $ | 338,746 | |
| Marc N. Bell | | — | | | — | | | 30,000 | | | $ | 338,746 | |
| Nicholas P. Anson | | — | | | — | | | 2,500 | | | $ | 26,906 | |
Retirement Benefits
PENSION BENEFITS AT 2022 FISCAL YEAR END
The table below quantifies the benefits expected to be paid from the Company’s Supplemental Retirement Plan. The terms of the plans are described below the table.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Number of
Years of
Credited | | Present Value of
Accumulated | | Payments During |
| Name | | Plan Name | | Service (#) (1) | | Benefit ($) (2),(3) | | Last Fiscal Year ($) |
| Howard M. Lorber | | Supplemental | | 11 | | $ | 46,931,343 | | | $0 |
| | | Retirement Plan | | | | | | |
| Richard J. Lampen | | Supplemental | | 10 | | $ | 5,551,149 | | | $0 |
| | | Retirement Plan | | | | | | |
| J. Bryant Kirkland III | | Supplemental | | 19 | | $ | 1,754,673 | | | $0 |
| | | Retirement Plan | | | | | | |
| Marc N. Bell | | Supplemental | | 17 | | $ | 2,880,796 | | | $0 |
| | | Retirement Plan | | | | | | |
| Nicholas P. Anson (4) | | Supplemental | | N/A | | $ | — | | | $0 |
| | | Retirement Plan | | | | | | |
___________________________
(1)Equals number of years of credited service as of December 31, 2022. Credited service under the Supplemental Retirement Plan is based on a named executive officer’s period of full time continuous covered employment after commencing participation in the Supplemental Retirement Plan.
(2)Represents actuarial present value in accordance with the same assumptions outlined in note 12 to the Company’s audited financial statements.
(3)Includes amounts which the named executive officer is not currently entitled to receive because such amounts are not vested.
(4)Mr. Anson does not participate in the Supplemental Retirement Plan.
Supplemental Retirement Plan
The Supplemental Retirement Plan provides for the payment to a participant at his normal retirement date of a lump sum amount that is the actuarial equivalent of a single life annuity commencing on that date. The “normal retirement date” under the Supplemental Retirement Plan is defined as the January 1st following attainment by a participant of the later of age 60 or the completion of eight years of employment following January 1, 2002 (in the case of Mr. Lorber) or January 1, 2004 (in the case of Messrs. Lampen, Kirkland and Bell).
The following table sets forth for each named executive officer his hypothetical single life annuity, his normal retirement date and his projected lump sum payment at his normal retirement date.
| | | | | | | | | | | | | | | | | | | | |
| | Hypothetical | | Normal | | Lump-Sum |
| Name | | Single Life Annuity | | Retirement Date | | Equivalent |
| Howard M. Lorber | | $ | 1,051,875 | | | January 1, 2010 | | $ | 10,855,666 | |
| | | $ | 735,682 | | | January 1, 2013 | | $ | 7,121,988 | |
| Richard J. Lampen | | $ | 250,000 | | | January 1, 2014 | | $ | 2,625,275 | |
| J. Bryant Kirkland III | | $ | 202,500 | | | January 1, 2026 | | $ | 2,126,473 | |
| Marc N. Bell | | $ | 200,000 | | | January 1, 2021 | | $ | 2,100,220 | |
| Nicholas P. Anson | | $ | — | | | | | $ | — | |
No benefits are payable under the Supplemental Retirement Plan if a named executive officer resigns without good reason before attaining his normal retirement date. In the case of a participant who becomes disabled prior to his normal retirement date or whose service is terminated without cause, the participant’s benefit consists of a pro-rata portion of the full
projected retirement benefit to which he would have been entitled had he remained employed through his normal retirement date, as actuarially discounted back to the date of payment. The beneficiary of a participant who dies while working for the Company or a subsidiary (and before becoming disabled or attaining his normal retirement date) will be paid an actuarially discounted equivalent of his projected retirement benefit; conversely, a participant who retires beyond his normal retirement date will receive an actuarially increased lump sum payment to reflect the delay in payment using a post-retirement interest rate than our historical borrowing levelsof 7.5%. The lump sum amount under the Supplemental Retirement Plan is paid six months following the named executive officer’s retirement on or after his normal retirement date or termination of employment without cause, along with interest at the prime lending rate as published in the futureWall Street Journal on the lump sum amount for this six-month period.
Because Messrs. Lorber, Lampen and Bell did not retire on their normal retirement dates, their additional benefits are being increased by 7.5% per annum for each year they continue to be an employee of the Company after their normal retirement dates listed in the table above.
Potential Termination and Change in Control Payments
The compensation payable to named executive officers upon voluntary termination, involuntary termination without cause, termination for cause, termination following a change in control and in the event we pursue of disability or death of the executive is described below.
Payments Made Upon Termination
Regardless of the manner in which a named executive officer’s employment terminates, unless terminated for cause, he or she may be entitled to receive amounts earned during his or her term of employment. Such amounts include:
•unpaid base salary through the date of termination;
•any capital markets activities, our abilityaccrued and unused vacation pay;
•any unpaid award under the 2014 Plan or bonus under the 2014 Plan with respect to completea completed performance period;
•all accrued and vested benefits under the Company’s compensation and benefit programs, including the pension plan and the Supplemental Retirement Plan; and
•with respect solely to Mr. Lorber, payment by the Company of a tax gross-up for any debtexcise taxes and related income taxes on gross-ups for benefits received upon termination of employment in connection with a change in control.
Payments Made Upon Involuntary Termination of Employment Without Cause or equity offeringfor Good Reason, Death or Disability
In the event of the termination of employment of a named executive officer by the Company without cause or by the named executive officer for good reason, or upon the death or except for Mr. Anson, the disability of a named executive officer, in addition to the benefits listed under the heading “Payments Made Upon Termination,” the named executive officer or his designated beneficiary upon his death will receive the following benefits:
•payments for 36 months for Mr. Lorber or 24 months for the other named executive officers (the “Severance Period”) equal to 100% of the executive’s then-current base salary and (except for Mr. Anson) the most recent bonus paid to the executive (up to the amount of the executive’s target bonus);
•continued participation, at the Company’s expense, during the Severance Period in all employee welfare and health benefit plans, including life insurance, health, medical, dental and disability plans which cover the executive and the executive’s eligible dependents (or, if such plans do not permit the executive and his eligible dependents to participate after his termination, the Company is required to pay an amount each quarter (not to exceed $35,000 per year in the case of Messrs. Lampen, Kirkland and Bell) to keep them in the same economic position on an after-tax basis as if they had continued in such plans);
•with respect solely to Mr. Anson, a pro-rata amount of any bonus award for which the performance period has not been completed based on 100% of the target bonus award for such period to the extent that Mr. Anson is terminated on or after July 1 of the applicable year and bonuses are otherwise paid to the management of Liggett for that year;
•acceleration of the vesting of the named executive officer's stock options upon death or disability and with respect solely to Mr. Lorber, upon a termination of employment without cause or resignation for good reason; and,
•acceleration of the vesting of the named executive officer’s restricted stock awards upon death, disability, a termination of employment without cause or resignation for good reason.
Payments Made Upon a Change in Control
Howard M. Lorber
Mr. Lorber’s employment agreement has a “double-trigger” change in control provision: if his employment is terminated by the Company without cause or by Mr. Lorber for good reason within two years after a change in control (or before a change in control that actually occurs in anticipation of or at the request of a third party effectuating such a change in control), Mr. Lorber would be entitled to receive the following severance benefits:
•a lump-sum cash payment equal to 2.99 times the sum of his base salary plus the last annual bonus earned by him (up to 100% of base salary, including any deferred amount) for the performance period immediately preceding the date of termination;
•participation by Mr. Lorber and his eligible dependents in all welfare benefit plans in which they were participating on the date of termination until the earlier of (x) the end of the employment period under his employment agreement and (y) the date that he receives equivalent coverage and benefit under the plans and programs of a subsequent employer;
•continued participation at the Company’s expense for 36 months in life, disability, accident, health and medical insurance benefits substantially similar to those received by Mr. Lorber and his eligible dependents prior to such termination, subject to market conditions.reduction if comparable benefits are actually received from a subsequent employer; and
Furthermore, we may access•termination of certain restrictive covenants in his employment agreement, including non-competition and non-solicitation covenants.
Mr. Lorber's unvested and outstanding equity awards will vest in full upon a change in control.
Richard J. Lampen, J. Bryant Kirkland III, Marc N. Bell and Nicholas P. Anson
While their respective employment agreements do not contain any change in control provisions, in the event of the termination of Messrs. Lampen, Kirkland, Bell and Anson by the Company without cause or by the named executive officer for good reason upon a change in control, such named executive officers would receive the same severance benefits described in the section titled “Payments Made Upon Termination” and “Payments Made Upon Involuntary Termination of Employment Without Cause or for Good Reason, Death or Disability,” above. In addition, the unvested and outstanding stock options and restricted stock held by Messrs. Lampen, Kirkland and Bell will vest in full upon a change in control and the unvested .restricted stock held by Mr. Anson will vest in full upon a change in control.
Definition of Change in Control
Pursuant to the employment agreement between the Company and Mr. Lorber, a “change in control” is deemed to occur if:
•a person unaffiliated with the Company acquires more than 40 percent control over its voting securities;
•the individuals who, as of January 1, 2006, are members of the Company’s Board (the “Incumbent Board”), cease to constitute at least two-thirds of the Incumbent Board; however, a newly-elected director that was elected or nominated by two-thirds of the Incumbent Board shall be considered a member of the Incumbent Board;
•the Company’s stockholders approve a merger, consolidation or reorganization with an unrelated entity, unless the Company’s stockholders would own at least 51 percent of the voting power of the surviving entity; the individuals who were members of the Incumbent Board constitute at least a majority of the members of the board of directors of the surviving entity; and no person (other than one of the Company’s affiliates) has beneficial ownership of 40 percent or more of the combined voting power of the surviving entity’s then outstanding voting securities;
•the Company’s stockholders approve a plan of complete liquidation or dissolution of the Company; or
•the Company’s stockholders approve the sale or disposition of all or substantially all of the Company’s assets.
Definition of Termination for Cause
Under each of the employment agreements with Messrs. Lorber, Lampen, Kirkland and Bell, termination by the Company for “cause” is defined as the executive:
•being convicted of or entering a plea of nolo contendere with respect to a criminal offense constituting a felony;
•committing in the performance of his duties under his employment agreement one or more acts or omissions constituting fraud, dishonesty or willful injury to the Company which results in a material adverse effect on the business, financial condition or results of operations of the Company;
•committing one or more acts constituting gross neglect or willful misconduct which results in a material adverse effect on the business, financial condition or results of operations of the Company;
•exposing the Company to criminal liability substantially and knowingly caused by the executive which results in a material adverse effect on the business, financial condition or results of operations of the Company; or
•failing to substantially perform his duties under his employment agreement (excluding any failure to meet any performance targets or to raise capital marketsor any failure as a result of an approved absence or any mental or physical impairment that could reasonably be expected to refinance our 10.5% Senior Notes due 2026. We can presently redeemresult in a disability), after written warning from the Board specifying in reasonable detail the breach(es) complained of.
Under the employment agreement between Liggett and Mr. Anson, “cause” is defined as:
•a material breach by Mr. Anson of his duties and obligations under his employment agreement which breach is not remedied to the satisfaction of the board of managers of Liggett (“Liggett Board”), within 30 days after receipt by Mr. Anson of written notice of such bondsbreach from the Liggett Board;
•Mr. Anson’s conviction or indictment for a felony;
•an act or acts of personal dishonesty by Mr. Anson intended to result in personal enrichment of Mr. Anson at the expense of the Company or any of its affiliates or any other material breach or violation of Mr. Anson’s fiduciary duty owed to the Company or any of its affiliates;
•material violation of any Company or Liggett policy or the Company’s code of business conduct and ethics; or
•any grossly negligent act or omission or any willful and deliberate misconduct by Mr. Anson that results, or is likely to result, in material economic, or other harm, to the Company or any of its affiliates (other than any act or omission by Mr. Anson if it was taken or omitted to be done by Mr. Anson in good faith and with a reasonable belief that such action or omission was in the best interests of the Company).
Definition of Termination for Good Reason
Under each of the employment agreements with Messrs. Lorber, Lampen, Kirkland and Bell, termination by the executive for “good reason” is defined as:
•a material diminution of the executive’s duties and responsibilities provided in his employment agreement, including, without limitation, the failure to elect or re-elect the executive to his position (including with respect solely to Mr. Lorber, his position as a member of the Board) or the removal of the executive from any such position;
•a reduction of the executive’s base salary or target bonus opportunity as a percentage of base salary or any other material breach of any material provision of his employment agreement by the Company;
•relocation of the executive’s office from the Miami (or with respect solely to Mr. Lorber, Miami or New York City) metropolitan areas;
•the change in the executive’s reporting relationship from direct reporting to the Board, in the case of Mr. Lorber, to the Chairman and the CEO, in the case of Mr. Lampen, or to the Chairman, CEO or the Executive Vice President and COO, in the case of Messrs. Kirkland and Bell; or
•the failure of a successor to all or substantially all of the Company’s business or assets to promptly assume and continue his employment agreement obligations whether contractually or as a matter of law, within 15 days of such transaction.
Under the employment agreement with Mr. Anson, “good reason” exists if, without the prior written consent of Mr. Anson:
•Mr. Anson is removed as President and Chief Operating Officer of Liggett, other than in connection with the termination of his employment;
•a material reduction of Mr. Anson’s base salary, target annual bonus opportunity or the aggregate level of employee benefits made available in his employment agreement;
•Mr. Anson’s duties and responsibilities at Liggett are significantly diminished or there are assigned to him duties and responsibilities materially inconsistent with his position; or
•Mr. Anson is required to relocate more than 75 miles from Mr. Anson’s current work location.
Assumptions Regarding Post-Termination Payment Tables
The following tables were prepared as though each named executive officer’s employment was terminated on December 31, 2022 using the closing price of 105.25% and the redemption price declines to 102.625%Company’s Common Stock as of that day ($11.86). The amounts under the columns which reflect a change in control assume that a change in control followed by a qualifying termination of employment occurred on November 1,December 31, 2022. However, the executives’ employment was not terminated on December 31, 2022 and 100%a change in control did not occur on November 1, 2023.that date. There can be no assurance that wea termination of employment, a change in control or both would be ableproduce the same or similar results as those quantified below if either or both of these events occur on any other date or at any other price, or if any other assumption used in these estimates changes based on the facts and circumstances at the time of an actual change in control or termination of employment.
Equity-Based Assumptions
•Stock options held by Messrs. Lorber, Lampen, Kirkland and Bell would have vested on December 31, 2022 with respect to continuea change in control or a termination of employment due to issue debtthe executive's death, disability, or with respect solely to Mr. Lorber, upon a termination of employment without cause or resignation for good reason. Mr. Anson did not hold any unvested stock options at December 31, 2022.
•Restricted stock held by Messrs. Lorber, Lampen, Kirkland, Bell and Anson would have vested on December 31, 2022 with respect to a lower interest rate than our historical borrowing levelstermination of employment due to the executive's death, disability, or upon a termination of employment without cause or resignation for good reason or a change in control.
•Stock options that became vested due to a change in control were valued based on their “spread” (i.e., the difference between the stock’s fair market value and the exercise price).
•It is possible that in the futurecase of Mr. Lorber's payments, IRS rules would require these items to be valued using a valuation method such as, with respect to stock options, the Black-Scholes model if the stock options were continued after a change in control. Using a Black-Scholes value in lieu of the “spread” would cause higher value for excise taxes and the related tax gross-up payment.
Incentive Plan Assumptions
•All amounts under the 2014 Plan were deemed to have been earned for 2022 in the event we pursue any capital markets activities, our ability to complete any debt or equity offering would befull based on actual performance and are not treated as subject to market conditions.the excise tax upon a change in control.
We may acquire or seekRetirement Benefit Assumptions
•All benefits were assumed to acquire additional operating businesses through merger, purchase of assets, stock acquisition or other means, or to make other investments, which may limit our liquidity otherwise available.be payable in a single lump sum at the participant’s assumed retirement date.
The total amount of unrecognized tax benefits was $1,653 as of January 1, 2021 and increased $556 during the year ended December 31, 2021, primarily due to accruals for state tax audits offset by the expiration of various state statutes of limitations and settlements. The total amount of unrecognized tax benefits was $1,647 as of January 1, 2020 and increased $6 during the year ended December 31, 2020, primarily due to accruals for state tax audits offset by the expiration of various state statutes of limitations.Howard M. Lorber
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Termination by
Company without Cause
or by Named
Executive Officer
with Good Reason | | Disability | | Death | | Termination by Company
for Cause or Voluntary
Termination by
Named Executive Officer
Without Good Reason | | Termination by
Company without Cause
or by Named Executive
Officer with Good Reason
upon a
Change in Control | |
| Cash Severance | $ | 15,791,310 | | (1) | $ | 15,791,310 | | (1) | $ | 15,791,310 | | (1) | $ | — | | | $ | 15,738,672 | | (2) |
| Value of Accelerated Unvested Equity (3) | $ | 13,832,750 | | | $ | 13,832,750 | | | $ | 13,832,750 | | | $ | — | | | $ | 13,832,750 | | |
| Benefits Continuation (4) | $ | 167,957 | | | $ | 167,957 | | | $ | 30,310 | | | $ | — | | | $ | 167,957 | | |
| Value of Supplemental Retirement Plan (5) | $ | 42,553,087 | | | $ | 42,553,087 | | | $ | 42,553,087 | | | $ | 42,553,087 | | | $ | 42,553,087 | | |
| Excise Tax and Gross-Up | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | (6) |
___________________________
Table(1)Reflects the value of Contentsthe sum of Mr. Lorber’s 2022 base salary ($1,837,500) and last paid bonus limited to 100% of base salary ($3,426,270) paid over a period of 36 months after termination.(2)Reflects the value of the sum of Mr. Lorber’s 2022 base salary ($1,837,500) and last paid bonus limited to 100% of base salary ($3,426,270) for a period of 2.99 years paid in a lump-sum payment commencing after termination.
Off-Balance Sheet Arrangements
We(3)Reflects the value of any unvested stock options or restricted stock and related dividends that would have various agreements in which we may be obligated to indemnifyvested upon the other party with respect to certain matters. Generally, these indemnification clauses are included in contracts arising inevent using the normal courseclosing price of business under which we customarily agree to hold the other party harmless against losses arising from a breach of representations related to such matters as title to assets sold and licensed or certain intellectual property rights. In addition, in connection with the Spin-off, we agreed to indemnify Douglas Elliman for losses arising out of Vector’s business or incurred in our provision of services to Douglas Elliman under the Transition Services Agreement. Payment by us under such indemnification clauses is generally conditionedCompany’s Common Stock on the other party making a claim that is subject to challenge by us and dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount, and in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, payments made by us under these agreements have not been material. As of December 31, 2021, we were not aware of any indemnification agreements that would or are reasonably expected to have a current or future material adverse impact on our financial position, results of operations or cash flows.
As of December 31, 2021, we had an outstanding $1,438 letter of credit, which has been issued as security deposit for a lease of office space.
We have a leaf inventory management program whereby, among other things, we are 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 commitment date. At December 31, 2021, Liggett had tobacco purchase commitments of approximately $13,289. We have a single source supply agreement for reduced ignition propensity cigarette paper through 2022.
Future machinery and equipment purchase commitments at Liggett were $8902022 ($11.86). See “Outstanding Equity Awards at December 31, 2021.2022.”
(4)Reflects the value of premium payments for life insurance, medical, dental and disability plans for 36 months, as applicable, at the Company’s cost, based on 2022 premiums.
Market Risk
We are exposed to market risks principally from fluctuations in interest rates, foreign currency exchange rates and equity prices. We seek to minimize these risks through our regular operating and financing activities and our long-term investment strategy. Our market risk management procedures cover all market risk sensitive financial instruments.
As(5)Reflects the lump-sum value of December 31, 2021, there was an outstanding balance of $24 on the Liggett Credit Facility which also has variable interest rates. As of December 31, 2021, we had no interest rate caps or swaps. Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual interest expense could increase or decrease by approximately $0.
We held debt securities available for sale totaling $103,906benefits accrued under the Supplemental Retirement Plan as of December 31, 2021.2022. See Note 7“Pension Benefits at 2022 Fiscal Year End.”
(6)Mr. Lorber is entitled to our consolidated financial statements. Adverse market conditions could havereceive a significant impacttax gross-up for any excise taxes and related income taxes on gross-ups for benefits received upon a change in control. Based on the assumptions set forth above, no excise tax would be due on a qualifying termination of Mr. Lorber's employment in connection with a change in control.
Richard J. Lampen
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Termination by
Company without Cause
or by Named
Executive Officer
with Good Reason | | Disability | | Death | | Termination by Company
for Cause or Voluntary
Termination by
Named Executive Officer
Without Good Reason | | Termination by
Company without Cause
or by Named Executive
Officer with Good Reason
upon a
Change in Control |
| Cash Severance (1) | $ | 2,550,000 | | | $ | 2,550,000 | | | $ | 2,550,000 | | | $ | — | | | $ | 2,550,000 | |
| Value of Accelerated Unvested Equity (2) | $ | 3,975,488 | | | $ | 3,975,488 | | | $ | 3,975,488 | | | $ | — | | | $ | 3,975,488 | |
| Benefits Continuation (3) | $ | 107,844 | | | $ | 107,844 | | | $ | 20,207 | | | $ | — | | | $ | 107,844 | |
| Value of Supplemental Retirement Plan (4) | $ | 5,033,279 | | | $ | 5,033,279 | | | $ | 5,033,279 | | | $ | 5,033,279 | | | $ | 5,033,279 | |
| Excise Tax and Gross-Up (not applicable) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
___________________________
(1)Reflects the value of these investments.the sum of Mr. Lampen’s 2022 base salary ($650,000) and last paid bonus limited to 50% of base salary ($625,000) paid over a period of 24 months commencing after termination.
On a quarterly basis, we evaluate our debt securities available for sale(2)Reflects the value of any unvested stock options or restricted stock and equity securities without readily determinable fair valuesrelated dividends that do not qualify forwould have vested upon the NAV practical expedient to determine whether an impairment has occurred. If so, we also make a determination if such impairment is considered temporary or other-than-temporary. We believe thatevent using the assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven. The impairment indicators that are taken into consideration as part of our analysis include (a) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospectsclosing price of the investee, (b) a significant adverse change inCompany’s Common Stock on December 31, 2022 ($11.86). See “Outstanding Equity Awards at December 31, 2022.”
(3)Reflects the regulatory, economic, or technological environmentvalue of premium payments for life insurance, medical, dental and disability plans for 24 months, as applicable, at the Company’s cost, based on 2022 premiums.
(4)Reflects the lump-sum value of the investee, (c) a significant adverse change inbenefits accrued under the general market condition of either the geographical area or the industry in which the investee operates, and (d) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.
Equity Security Price Risk
As of December 31, 2021, we held various investments in equity securities with a total fair value of $74,870, of which $42,781 represents equity securities at fair value and $32,089 represents long-term investment securities at fair value. The latter securities represent long-term investments in various investment partnerships. These investments are illiquid and their ultimate realization is subject to the performance of the underlying entities. See Note 7 to our consolidated financial statements for more details on equity securities at fair value and long-term investment securities at fair value. The impact to our consolidated statement of operations related to equity securities fluctuates based on changes in their fair value.
We record changes in the fair value of equity securities in net income. To the extent that we continue to hold equity securities, our operating results may fluctuate significantly. Based on our equity securities heldSupplemental Retirement Plan as of December 31, 2021,2022. See “Pension Benefits at 2022 Fiscal Year End.”
J. Bryant Kirkland III
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Termination by
Company without Cause
or by Named
Executive Officer
with Good Reason | | Disability | Death | | Termination by Company
for Cause or Voluntary
Termination by
Named Executive Officer
Without Good Reason | | Termination by
Company without Cause
or by Named Executive
Officer with Good Reason
upon a
Change in Control |
| Cash Severance (1) | $ | 1,516,630 | | | $ | 1,516,630 | | $ | 1,516,630 | | | $ | — | | | $ | 1,516,630 | |
| Value of Accelerated Unvested Equity (2) | 2,171,813 | | | $ | 2,171,813 | | $ | 2,171,813 | | | $ | — | | | $ | 2,171,813 | |
| Benefits Continuation (3) | $ | 55,379 | | | $ | 55,379 | | $ | — | | | $ | — | | | $ | 55,379 | |
| Value of Supplemental Retirement Plan (4) | $ | 1,478,309 | | | $ | 1,478,309 | | $ | 1,711,727 | | | $ | — | | | $ | 1,478,309 | |
| Excise Tax and Gross-Up (not applicable) | $ | — | | | $ | — | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | |
___________________________
(1)Reflects the value of the sum of Mr. Kirkland’s 2022 base salary ($575,000) and last paid bonus limited to 33.33% of base salary ($183,315) paid over a period of 24 months commencing after termination.
(2)Reflects the value of any unvested stock options or restricted stock and related dividends that would have vested upon the event using the closing price of the Company’s Common Stock on December 31, 2022 ($11.86). See “Outstanding Equity Awards at December 31, 2022.”
(3)Reflects the value of premium payments for life insurance, medical, dental and disability plans for 24 months, as applicable, at the Company’s cost, based on 2022 premiums.
(4)Reflects the lump-sum value of the benefits accrued under the Supplemental Retirement Plan as of December 31, 2022. See “Pension Benefits at 2022 Fiscal Year End.”
hypothetical decrease of 10% inMarc N. Bell
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Termination by
Company without Cause
or by Named
Executive Officer
with Good Reason | | Disability | | Death | | Termination by Company
for Cause or Voluntary
Termination by
Named Executive Officer
Without Good Reason | | Termination by
Company without Cause
or by Named Executive
Officer with Good Reason
upon a
Change in Control |
| Cash Severance (1) | $ | 1,237,500 | | | $ | 1,237,500 | | | $ | 1,237,500 | | | $ | — | | | $ | 1,237,500 | |
| Value of Accelerated Unvested Equity (2) | $ | 2,171,813 | | | $ | 2,171,813 | | | $ | 2,171,813 | | | $ | — | | | $ | 2,171,813 | |
| Benefits Continuation (3) | $ | 135,980 | | | $ | 135,980 | | | $ | 77,362 | | | $ | — | | | $ | 135,980 | |
| Value of Supplemental Retirement Plan (4) | $ | 2,427,067 | | | $ | 2,427,067 | | | $ | 2,427,067 | | | $ | 2,427,067 | | | $ | 2,427,067 | |
| Excise Tax and Gross-Up (not applicable) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
___________________________
(1)Reflects the price of these equity securities would reduce the fair value of the investmentssum of Mr. Bell’s 2022 base salary ($500,000) and accordingly, our net income by approximately $7,487.last paid bonus limited to 25% of base salary ($118,750) paid over a period of 24 months commencing after termination.
New Accounting Pronouncements(3)Reflects the value of premium payments for life insurance, medical, dental and disability plans for 24 months, as applicable, at the Company’s cost, based on 2022 premiums.
Refer to Note 1, (4)SummaryReflects the lump-sum value of Significant Accounting Policies, to our consolidated financial statements for further information on New Accounting Pronouncements.the benefits accrued under the Supplemental Retirement Plan as of December 31, 2022. See “Pension Benefits at 2022 Fiscal Year End.”
Legislation, Regulation, Taxation and Litigation
In the United States, tobacco products are subject to substantial and increasing legislation, regulation, taxation, and litigation, which have a negative effect on revenue and profitability.Nicholas P. Anson
The cigarette industry continues to be challenged
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Termination by
Company without
Cause or by Named
Executive Officer
with Good Reason | | Disability | | Death | | Termination by Company
for Cause or Voluntary
Termination by
Named Executive Officer
Without Good Reason | | Termination by Company
without Cause or by
Named Executive Officer
with Good Reason
upon a
Change in Control |
| Cash Severance (1) | $ | 1,300,000 | | | $ | — | | | $ | 1,300,000 | | | $ | — | | | $ | 1,300,000 | |
| Value of Accelerated Unvested Equity (2) | $ | 326,150 | | | $ | 326,150 | | | $ | 326,150 | | | $ | — | | | $ | 326,150 | |
| Benefits Continuation (3) | $ | 58,570 | | | $ | 58,570 | | | $ | 51,670 | | | $ | — | | | $ | 58,570 | |
| Value of Retirement Benefits (4) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Excise Tax and Gross-Up (not applicable) | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
___________________________
(1)Reflects the value of the sum of Mr. Anson’s 2022 base salary ($650,000) paid over a period of 24 months, as applicable, commencing after termination. After 12 months, Mr. Anson's cash severance is reduced by any salary, bonus, consulting fees or other compensation earned (irrespective of when paid) from any employment or consulting work.
(2)Reflects the value of any unvested restricted stock and related dividends that would have vested upon the event using the closing price of the Company’s Common Stock on numerous fronts. The industry faces increased pressure from anti-smoking groupsDecember 31, 2022 ($11.86). See “Outstanding Equity Awards at December 31, 2022.”
(3)Reflects the value of premium payments for life insurance, medical, dental and continued smoking and health litigation,disability plans for 24 months, as applicable, at the effects of which, at this time, we are unable to quantify. Product liability litigation, particularly in FloridaCompany’s cost, based on 2022 premiums.
(4)Mr. Anson is not a participant in the Engle progeny cases, continues to adversely affect the cigarette industry. See Item 1. “Business - Legislation and Regulation”, Item 1A. “Risk Factors”, Item 3. “Legal Proceedings” and Note 15 to our consolidated financial statements, which contain a descriptionSupplemental Retirement Plan as of litigation. December 31, 2022.
Compensation of Directors
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains “forward-looking statements” within the meaningThe compensation of the federal securities law. Forward-looking statements include information relatingCompany's non-employee directors is designed to be fair based on the amount of work required of directors of the Company. Under our intent, belief or current expectations, primarily with respect to, but not limited to:director compensation program, each of the non-employee directors receives:
•economic outlook,
•capital expenditures,annual cash retainer fee of $75,000;
•cost reduction,annual committee retainer fee of $5,000;
•fees for serving as the committee chairperson of $25,000 for the corporate responsibility and nominating committee and $10,000 for each of the compensation and human capital and audit committees;
•competition,periodic grants of restricted shares (the Company granted 7,500 restricted shares on December 15, 2022, vesting in two installments on each of June 28, 2023 and June 28, 2024, to its independent directors);
•legislation and regulations,
•cash flows,
•operating performance,
•litigation,reimbursement for reasonable out-of-pocket expenses incurred in serving on the Company's Board; and
•related industry developments (including trends affecting our business, financial conditionaccess to and results of operations).
We identify forward-looking statements in this report by using words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may be,” “objective,” “plan,” “seek,” “predict,” “project”payment for the Company's health, dental and “will be” and similar words or phrases or their negatives.
The forward-looking information involves important risks and uncertainties that could cause our actual results, performance or achievements to differ materially from our anticipated results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, without limitation, the following:
•general economic and market conditions and any changes therein, due to acts of war and terrorism or otherwise,
•governmental regulations and policies,
•adverse changes in global, national, regional and local economic and market conditions, including those related to pandemics and health crises, such as the outbreak of COVID-19,
•significant changes in the price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic,
•potential dilution to our holders of or common stock as a result of issuances of additional shares of common stock to fund our financial obligations and other financing activities,
•the impacts of the Tax Cuts and Jobs Act of 2017, including the deductibility of interest expense and the impact of the markets on our Real Estate segment,
•effects of industry competition,
•impact of business combinations, including acquisitions and divestitures, both internally for us and externally in the tobacco industry,
•impact of legislation on our results of operations and product costs, i.e. the impact of federal legislation providing for regulation of tobacco products by FDA,
•impact of substantial increases in federal, state and local excise taxes,
•uncertainty related to product liability and other tobacco-related litigations including the Engle progeny cases pending in Florida and other individual and class action cases where certain plaintiffs have alleged compensatory and punitive damage amounts ranging into the hundreds of million and even billions of dollars; and,
•potential additional payment obligations for us under the MSA and other settlement agreements with the states.
Further information on the risks and uncertainties to our business include the risk factors discussed above under Item 1A. “Risk Factors” and in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. The forward-looking statements speak only as of the date they are made.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKstandard life insurance coverage.
The information undertable below summarizes 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 Deloitte & Touche LLP dated March 2, 2022, 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.
ITEM 9A.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed, in the reportscompensation the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicatedpaid to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In connection with the preparation of this Form 10-K, the Company carried out an evaluation under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as of December 31, 2021, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2021, the Company’s disclosure controls and procedures were effective as of December 31, 2021.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management andnon-employee directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, including the Chief Executive Officer and Chief Financial Officer, has conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, based on the criteria in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021 based on the criteria in Internal Control - Integrated Framework (2013) issued by COSO.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in its report which appears herein.
Changes in Internal Control Over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the year ended December 31, 2021 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Vector Group Ltd.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Vector Group Ltd. and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2021, of2022.
NON-EMPLOYEE DIRECTOR COMPENSATION IN FISCAL YEAR 2022
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fees
Earned
or Paid
in Cash | | Stock
Awards | | All Other
Compensation | | | | Total |
| Name | ($) | | ($) | | ($) | | | | ($) |
| Stanley S. Arkin | $ | 90,000 | | | $ | — | | | $ | 4,532 | | | (1) | | $ | 94,532 | |
| Henry C. Beinstein (5) | $ | 90,000 | | | $ | 84,225 | | (4) | $ | 25,693 | | | (2) | | $ | 199,918 | |
| Ronald J. Bernstein | $ | 75,000 | | | $ | — | | | $ | 761,701 | | | (3) | | $ | 836,701 | |
| Paul V. Carlucci (5) | $ | 85,000 | | | $ | 84,225 | | (4) | $ | 25,136 | | | (1) | | $ | 194,361 | |
| Bennett S. LeBow (5) | $ | 80,000 | | | $ | 84,225 | | (4) | $ | 43,597 | | | (2) | | $ | 207,822 | |
| Jean E. Sharpe (5) | $ | 110,000 | | | $ | 84,225 | | (4) | $ | 16,304 | | | (2) | | $ | 210,529 | |
| Barry Watkins (5) | $ | 80,000 | | | $ | 84,225 | | (4) | $ | 2,321 | | | (2) | | $ | 166,546 | |
| Wilson L. White (5) | $ | 80,000 | | | $ | 84,225 | | (4) | $ | 240 | | | (1) | | $ | 164,465 | |
___________________________
(1)Represents life insurance premiums paid by the Company.
(2)Represents health and life insurance premiums paid by the Company.
(3)Represents health and life insurance premiums paid by the Company and, our report dated March 2, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessmentconsulting fees related to Mr. Bernstein's service as Non-Executive Chairman of the effectivenessBoard of internal control over financial reporting, included inManagers of Liggett Vector Brands and as a Senior Advisor to Liggett, effective April 1, 2020.
(4)Represents the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion onaggregate grant date fair value of restricted stock granted under the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company2014 Plan as determined in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Miami, Florida
March 2, 2022
ITEM 9B.OTHER INFORMATION
None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information contained under the following headings in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders (the “2022 Proxy Statement”), 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, is incorporated herein by reference: “Board Proposal 1 — NominationCompensation and Election of Directors” and “Delinquent Section 16(a) Reports.” See Item 5 of this report for information regarding our executive officers. We have adopted a policy statement entitled Code of Business Conduct and Ethics that applies to all of our directors, officers and employees. In the event that an amendment to, or a waiver from, a provision of the Code of Business Conduct and Ethics is made or granted, we intend to post such information on our web site, which is www.vectorgroupltd.com.
ITEM 11.EXECUTIVE COMPENSATION
The information contained under the headings “Executive Compensation” and “CompensationHuman Capital Committee Interlocks and Insider Participation”Participation
No member of the Company’s compensation and human capital committee is, or has been, an employee or officer of the Company other than Ms. Sharpe who joined the compensation and human capital committee in ourMarch 2009. Ms. Sharpe retired as an officer of the Company in 1993. During 2022, Proxy Statement is incorporated herein by reference.(i) no member of the Company’s compensation and human capital committee had any relationship with the Company requiring disclosure under Item 404 of Regulation S-K; and (ii) none of the Company’s executive officers served on the compensation and human capital committee (or other board committee performing equivalent functions or, in the absence of such committee, the board of directors) of another entity whose executive officer(s) served on the Company’s compensation and human capital committee.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information containedfollowing table sets forth, as of April 27, 2023, the beneficial ownership of the Company’s Common Stock, the only class of voting securities, by:
•each person known to the Company to own beneficially more than five percent of the Common Stock;
•each of the Company’s directors and nominees;
•each of the Company’s named executive officers shown in the Summary Compensation Table below; and
•all directors and executive officers as a group.
Unless otherwise indicated, each person possesses sole voting and investment power with respect to the shares indicated as beneficially owned. Unless otherwise noted, the business address of each listed beneficial owner is c/o Vector Group Ltd., 4400 Biscayne Boulevard, Miami, Florida 33137.
| | | | | | | | | | | | | | |
Name and Address of
Beneficial Owner | | Number of
Shares | | Percent of
Class |
| |
| | | | |
BlackRock, Inc. (1)
55 East 52nd Street
New York, NY 10055 | | 21,405,021 | | | 13.72 | % |
| The Vanguard Group, Inc. (2) 100 Vanguard Blvd. Malvern, PA 19355 | | 17,047,005 | | | 10.93 | % |
Dr. Phillip Frost (3) 4400 Biscayne Boulevard Miami, FL 33137 | | 14,763,520 | | | 9.47 | % |
Capital Research Global Investors (4) 333 South Hope Street, 55th Fl, Los Angeles, CA 90071 | | 8,300,774 | | | 5.32 | % |
| Howard M. Lorber (5) (6) (7) | | 7,681,024 | | | 4.87 | % |
| Richard J. Lampen (6) (7) (8) (9) | | 1,382,554 | | | (*) |
| Henry C. Beinstein (6) (11) | | 150,851 | | | (*) |
| Ronald J. Bernstein (6) | | 25,630 | | | (*) |
| Paul V. Carlucci (6) | | 23,393 | | | (*) |
| Bennett S. LeBow (6) (10) | | 347,304 | | | (*) |
| Jean E. Sharpe (6) (12) | | 156,835 | | | (*) |
| Barry Watkins (6) | | 21,673 | | | (*) |
| Wilson L. White (6) | | 11,000 | | | (*) |
| J. Bryant Kirkland III (7) (13) | | 787,376 | | | (*) |
| Marc N. Bell (7) (13) | | 666,401 | | | (*) |
| J. David Ballard (7) (14) | | 72,252 | | | (*) |
| Nicholas P. Anson (15) (16) | | 50,435 | | | (*) |
| All directors and executive officers as a group (14 persons) | | 11,376,728 | | | 7.17 | % |
___________________________
(*) The percentage of shares beneficially owned does not exceed 1% of the outstanding Common Stock.
(1) Based on Schedule 13-G/A filed by BlackRock, Inc. with the Securities and Exchange Commission on February 7, 2023.
(2) Based on Schedule 13-G/A filed by The Vanguard Group, Inc. (“Vanguard”) with the SEC on February 9, 2023. Includes 168,029 shares, where Vanguard has shared voting power, 16,764,406 shares where Vanguard has sole dispositive power and 282,599 shares where Vanguard has shared dispositive power.
(3) Based upon Schedule 13-D/A filed by Dr. Frost with the SEC on December 10, 2019, which reports ownership of 14,746,422 shares of Common Stock owned by Frost Gamma Investments Trust (“Frost Gamma Trust”), a trust organized under Florida law. Dr. Frost is the sole trustee of Frost Gamma Trust. As the sole trustee, Dr. Frost may be deemed the beneficial owner of all shares owned by Frost Gamma Trust, by virtue of his shared power to vote or direct the vote of such shares or to dispose or direct the disposition of such shares owned by these trusts. Frost Gamma Limited Partnership (“Frost Gamma LP”) is the sole and exclusive beneficiary of Frost Gamma Trust. Dr. Frost is one of two limited partners of Frost Gamma LP. The general partner of Frost Gamma LP is Frost Gamma, Inc. Includes 17,098 shares owned by Dr. Frost’s spouse, as to which shares Dr. Frost disclaims beneficial ownership.
(4) Based on Schedule 13-G/A filed by Capital Research Global Investors ("CRGI") with the SEC on February 13, 2023. CRGI is a division of Capital Research and Management Company ("CRMC"), as well as its investment management subsidiaries and affiliates Capital Bank and Trust Company, Capital International, Inc., Capital International Limited, Capital International Sarl, Capital International K.K., Capital Group Private Client Services, Inc., and Capital Group Investment Management Private Limited (together with CRMC, the "investment management entities"). CRGI's divisions of each of the investment management entities collectively provide investment management services under the headings “Equityname "Capital Research Global Investors."
(5) Includes 3,266,472 shares (1,575,000 of which are subject to vesting restrictions) of Common Stock held directly by Mr. Lorber, 2,629,035 shares held by Lorber Alpha II Limited Partnership, a Nevada limited partnership and 19 shares in an Individual Retirement Account. Mr. Lorber's beneficial ownership also includes 1,785,498 shares of Common Stock that may be acquired by him within 60 days upon exercise of options. Mr. Lorber exercises sole voting power and sole dispositive power over the shares of Common Stock held by the partnership and by himself. Lorber Alpha II, LLC, a Delaware limited liability company, is the general partner of Lorber Alpha II Limited Partnership. Mr. Lorber is the managing member of Lorber Alpha II, LLC. Mr. Lorber disclaims beneficial ownership of 12,502 shares of Common Stock held by Lorber Charitable Fund, which are not included. Lorber Charitable Fund is a New York not-for-profit corporation, of which family members of Mr. Lorber serve as directors and executive officers.
(6) The named individual is a director of the Company.
(7) The named individual is an executive officer of the Company.
(8) Includes 6,179 shares held by Mr. Lampen's spouse, as to which Mr. Lampen disclaims beneficial ownership.
(9) Includes 472,500 shares subject to vesting restrictions and 446,370 shares issuable upon exercise of outstanding options to purchase Common Stock exercisable within 60 days of the record date.
(10) Includes 339,804 common shares held by Mr. LeBow that are pledged to collateralize a margin loan.
(11) Includes 878 shares beneficially owned by Mr. Beinstein's spouse, as to which shares Mr. Beinstein disclaims beneficial ownership.
(12) Includes 149,335 shares held by Wisdom Living Trust, of which Ms. Sharpe is a trustee and primary beneficiary.
(13) Includes 260,000 shares subject to vesting restrictions and 267,818 shares issuable upon exercise of outstanding options to purchase Common Stock exercisable within 60 days of record date.
(14) Includes 55,000 shares subject to vesting restrictions.
(15) Includes 45,000 shares subject to vesting restrictions.
(16) The named individual is an executive officer of the Company’s subsidiaries Liggett Vector Brands LLC and Liggett Group LLC.
Equity Compensation Plan Information”Information
The following table summarizes information about the options, warrants and “Security Ownershiprights and other equity compensation under the Company’s equity plans as of Certain Beneficial OwnersDecember 31, 2022.
| | | | | | | | | | | | | | | | | |
| Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (2) | | Weighted-average exercise
price of outstanding
options, warrants and rights | | Number of securities remaining
available for future issuance
under equity compensation
plans (3) |
| Plan Category | | |
| Equity compensation plans approved by stockholders (1) | 3,822,819 | | $15.40 | | 5,262,538 |
| Equity compensation plans not approved by stockholders | — | | — | | — |
| Total | 3,822,819 | | $15.40 | | 5,262,538 |
___________________________
(1)Includes options to purchase shares of the Company’s Common Stock under the following stockholder-approved plans: 1999 Plan and Management”2014 Plan.
(2)Excluding securities reflected in our 2022 Proxy Statement is incorporated herein by reference.first column.
(3)All shares remaining available for future issuance relate to the 2014 Plan.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information containedInformation regarding director independence is incorporated herein by reference from the material under the headings “Certain Relationships and Related Party Transactions” andheading “Board of Directors and Committees” in ourItem 10 of this Amendment.
Certain Relationships and Related Party Transactions
The Board has adopted a written policy for the review and approval of transactions between the Company and its directors, director nominees, executive officers, greater-than-five-percent beneficial owners and their immediate family members. The policy covers any related party transaction that meets the minimum threshold for disclosure in the Company’s proxy statement under the relevant SEC rules. The audit committee is responsible for reviewing and, if appropriate, approving or ratifying any related party transactions. In determining whether to approve, disapprove or ratify a related party transaction, the audit committee will consider, among other factors it deems appropriate, (i) whether the transaction is on terms no less favorable to the Company than terms that would have been reached with an unrelated third party, (ii) the extent of the interest of the related party in the transaction and (iii) the purpose and the potential benefits to the Company of the transaction.
The related party transactions described in this document entered into before this policy was adopted were approved by the Board or the audit committee.
On February 18, 2020, the Company and Liggett Vector Brands entered into a letter agreement with Mr. Bernstein pursuant to which he will serve as Non-Executive Chairman of the Board of Managers of Liggett Vector Brands and as a Senior Advisor to Liggett, effective April 1, 2020. The term of the letter agreement is for one year unless the term is terminated earlier or extended in accordance with the letter agreement. The agreement has been renewed for 2023, subject to termination on 30 days' notice. In such roles, Mr. Bernstein (i) provides advice and counsel regarding all aspects of the Liggett business to the senior management of Liggett, (ii) assists with special projects as requested by the senior management of the Company, (iii) continues to assist the Company with investor and stockholder engagement as well as community, customer and business relations as requested by the senior management of the Company, (iv) performs such additional duties as are customarily performed by a non-executive chairman and member of a board of managers and (v) performs such other services as the parties may mutually agree upon during the term. As compensation for these services, Mr. Bernstein receives $60,000 per month as well as access to an office, administrative support and reimbursement of expenses reasonably incurred in connection with the services, subject to existing reimbursement policy of Liggett Vector Brands. If Mr. Bernstein terminates the arrangement due to material breach by Liggett Vector Brands or Liggett Vector Brands terminates the arrangement other than for “cause” (as defined in the agreement), Liggett Vector Brands will pay the monthly fee to Mr. Bernstein and provide him with the other benefits under the letter agreement, in each case for the remainder of the term. Mr. Bernstein will not be entitled to these payments or benefits upon any other termination. Under the letter agreement, Mr. Bernstein is also subject to perpetual confidentiality and non-disparagement covenants as well as non-solicitation and non-competition covenants that expire 24 months after receipt of the last payment under the letter agreement. Mr. Bernstein received $720,000 under the agreement in 2022.
In September 2012, the Company entered into an office lease with Frost Real Estate Holdings, LLC, an entity affiliated with Dr. Phillip Frost, who beneficially owns more than 5% of the Company's Common Stock, to lease 12,390 square feet of space in an office building in Miami, Florida. The lease, which was extended for five years in 2023, currently provides for payments from $42,649 per month in the first year increasing to $48,470 per month in the fifth year. The rent is inclusive of operating expenses, property taxes and general parking expenses. In connection with the execution of the initial lease, the
Company received the advice and opinion of a commercial real estate firm that the initial lease terms were fair and that the Company received terms favorable in the market. The Company recognized rental expense of $458,349 in 2022 Proxy Statementassociated with the lease.
Mr. Lorber serves as a consultant and a 50% owner of Open Acq LLC. During 2022, Mr. Lorber and Open Acq LLC and its affiliates received ordinary and customary insurance commissions aggregating approximately $256,614 on various insurance policies issued for the Company and its subsidiaries and investees. Open Acq LLC and its affiliates have continued to provide services to the Company in 2023.
Mr. Kirkland serves as Chairman of the Board of Directors and as President and CEO of Multi Solutions II, Inc., an approximately 53%-owned subsidiary of the Company. The Company has entered into a $700,000 credit facility, as amended, with Multi Solutions II, Inc. and, as of March 31, 2023, had advanced $617,799 under the facility, which bears interest at 11% per annum and is incorporated hereindue December 31, 2024. As of March 31, 2023, there was accrued interest on the facility due to the Company by reference.Multi Solutions II, Inc. of $444,763.
Mr. Kirkland serves as Chairman of the Board of Directors and as President and CEO of Multi Soft II, Inc. (OTC BB: MSOF), an approximately 54%-owned subsidiary of the Company. The Company has entered into a $700,000 credit facility, as amended, with Multi Soft II, Inc. and, as of March 31, 2023, had advanced $615,111 under the facility, which bears interest at 11% per annum and is due December 31, 2024. As of March 31, 2023, there was accrued interest on the facility due to the Company by Multi Soft II, Inc. of $433,825.
Agreements with Douglas Elliman Inc. On December 29, 2021, the Company completed the distribution of Douglas Elliman, which included the real estate services and PropTech investment business formerly owned by the Company through its subsidiary, New Valley.
The Company and Douglas Elliman entered into a Distribution Agreement and a Transition Services Agreement with respect to transition services and a number of ongoing commercial relationships. Under the Transition Services Agreement, Douglas Elliman paid the Company $4,200,000 in 2022 and $1,050,000 for the three months ended March 31, 2023.
Subject to applicable Federal Aviation Administration rules, subsidiaries of the Company have entered into dry lease agreements with Douglas Elliman and certain of its subsidiaries, pursuant to which Douglas Elliman has the right to lease on a flight-by-flight basis certain aircraft owned by subsidiaries of the Company. Douglas Elliman is required to pay the Company an hourly rental rate for each flight and fixed costs are allocated on an equitable basis. Under the agreements, Douglas Elliman paid the Company $2,518,491 in 2022 and $655,028 for the three months ended March 31, 2023.
The Company has agreed to indemnify Douglas Elliman for certain tax matters under the Tax Disaffiliation Agreement. The Company reimbursed Douglas Elliman $589,356 in 2022 related to such tax indemnifications.
Following the distribution of Douglas Elliman, there is an overlap between certain officers of the Company and Douglas Elliman. Howard M. Lorber serves as the President and CEO of the Company and of Douglas Elliman. Richard J. Lampen serves as the Executive Vice President and COO of the Company and of Douglas Elliman, J. Bryant Kirkland III serves as the CFO and Treasurer of the Company and of Douglas Elliman, Marc N. Bell serves as the General Counsel and Secretary of the Company and of Douglas Elliman, and J. David Ballard serves as Senior Vice President, Enterprise Efficiency and Chief Technology Officer of the Company and of Douglas Elliman. Furthermore, three of the members of the Board, Messrs. Lorber, Lampen and White, also serve as directors of Douglas Elliman.
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained under the headings “AuditAudit and Non-Audit Fees”Fees
The audit committee reviews and “Pre-Approvalapproves audit and permissible non-audit services performed by Deloitte, as well as the fees charged by Deloitte for such services. In accordance with Section 10A(i) of the Securities Exchange Act, before Deloitte is engaged to render audit or non-audit services, the audit committee approves the engagement. All of the services provided and fees charged by Deloitte in 2022 and 2021 were pre-approved by the audit committee.
Pre-Approval Policies and Procedures”Procedures. The audit committee has adopted a policy that requires advance approval of all audit, audit-related, tax and other services performed by the independent registered certified public accounting firms. The policy provides for pre-approval by the audit committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the audit committee must approve the permitted service before any independent registered public accounting firm is engaged to perform it. The audit committee approved all services provided by Deloitte in our 2022 Proxy Statement is incorporated hereinand 2021.
Audit Fees. The aggregate fees billed by reference.Deloitte for professional services for the audit of the annual financial statements of the Company and its consolidated subsidiaries, audit of effectiveness of internal control over financial reporting under
Sarbanes-Oxley Section 404, audits of subsidiary financial statements, reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q, comfort letters, consents and review of documents filed with the SEC were $3,002,118 for 2022 and $5,260,530 for 2021.
Audit-Related Fees. There were no aggregate fees billed by Deloitte for professional services for audit-related fees in 2022 and 2021.
Tax Fees. The aggregate fees billed by Deloitte for professional services for tax were $33,406 in 2022 and $104,641 in 2021. The tax services in 2022 were for federal tax advice related to changes in the U.S. tax law related to the Tax Cuts and Jobs Act of 2017.
All Other Fees. The aggregate fees billed for other services by Deloitte were $7,391 in 2022 and $7,390 in 2021. The amounts consisted of licensing of accounting research software.
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) INDEX TO 2021 CONSOLIDATED FINANCIAL STATEMENTS:
Our consolidated financial statements and the notes thereto, together with the report thereon of Deloitte & Touche LLP for the three years ended December 31, 2021, dated March 2, 2022 appear beginning on page F-1 of this report.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
| | | | | |
Schedule II — Valuation and Qualifying Accounts Page | |
(a)(3) EXHIBITS:
(a) The following is a list of exhibits filed herewith as part of this Annual Report on Form 10-K:Amendment:
INDEX OF EXHIBITS
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| | |
| | |
| | Distribution Agreement, originally dated as of December 21, 2021 and amended and restated as of December 28, 2021, between Vector Group Ltd. and Douglas Elliman Inc. (incorporated by reference to Exhibit 2.1 in Vector’s Form 8-K dated January 4, 2022). |
| | |
| | Employee Matters Agreement, dated as of December 21, 2021 between Vector Group Ltd. and Douglas Elliman Inc. (incorporated by reference to Exhibit 2.2 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Amended and Restated Certificate of Incorporation of Vector Group Ltd. (formerly known as Brooke Group Ltd.) (“Vector Group”) (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter ended September 30, 1999). |
| | |
| | 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). |
| | |
| | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Vector Group Ltd. (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter ended June 30, 2007). |
| | |
| | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Vector Group Ltd. (incorporated by reference to Exhibit 3.1 in Vector’s Form 10-Q for the quarter ended June 30, 2014). |
| | |
| | Amended and Restated By-Laws of Vector Group Ltd. (incorporated by reference to Exhibit 3.1 in Vector’s Form 8-K dated March 5, 2020). |
| | |
| | Indenture, dated as of January 28, 2021, among Vector Group Ltd., the guarantors named therein and U.S. Bank National Association, as trustee and collateral agent (incorporated by reference to Exhibit 4.1 of Vector’s Form 8-K dated January 28, 2021). |
| | |
| | Pledge Agreement, dated as of January 28, 2021, between VGR Holding LLC and U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 4.2 of Vector’s Form 8-K dated January 28, 2021). |
| | |
| | Security Agreement, dated as of January 28, 2021, between Vector Tobacco and U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 4.3 of Vector’s Form 8-K dated January 28, 2021). |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| | |
| | Security Agreement, dated as of January 28, 2021, among Liggett Group LLC, 100 Maple LLC and U.S. Bank National Association, as collateral agent (incorporated by reference to Exhibit 4.4 of Vector’s Form 8-K dated January 28, 2021). |
| | |
| | Second Amended and Restated Intercreditor and Lien Subordination Agreement, dated as of January 28, 2021, among Liggett Group LLC, 100 Maple LLC, U.S. Bank National Association and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.5 of Vector’s Form 8-K dated January 28, 2021). |
| | |
| | Indenture, dated as of November 2, 2018, among Vector Group Ltd., the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to Vector’s Form 8-K dated November 2, 2018). |
| | |
| | First Supplemental Indenture, dated as of November 18, 2019, among Vector Group Ltd., the guarantors named therein and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.2 in Vector’s Form 8-K dated November 18, 2019). |
| | |
| | Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.12 in Vector’s Form 10-K for the year ended December 31, 2019). |
| | |
| | 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 filed by Vector on March 11, 1996, as amended, with respect to the common stock of RJR Nabisco Holdings Corp.). |
| | |
| | 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). |
| | |
| | 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). |
| | |
| | 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, Commission File No. 1-8940). |
| | |
| | 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). |
| | |
| | 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 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). |
| | |
| | Term Sheet agreed to by Liggett, certain other Participating Manufacturers, 18 states, the District of Columbia and Puerto Rico (incorporated by reference to Exhibit 10.1 to Reynolds American Inc.’s (Commission File Number 1-32258) Form 8-K, dated March 12, 2013). |
| | |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| | Settlement Agreement as of October 22, 2013, by, between and among: (a) Liggett and Vector and (b) Plaintiffs’ Coordinating Counsel, Participating Plaintiffs’ Counsel, and their respective clients who are plaintiffs in certain Engle Progeny Actions (incorporated by reference to Exhibit 10.18 to Vector’s Form 10-K for the year ended December 31, 2013).
|
| | |
| | Settlement Agreement as of October 22, 2013, by, between and among: (a) Liggett Group LLC and Vector, and (b) Plaintiffs’ Coordinating Counsel, The Wilner Firm, and The Wilner Firm’s clients who are plaintiffs in certain federal and state Engle Progeny Actions (incorporated by reference to Exhibit 10.19 to Vector’s Form 10-K for the year ended December 31, 2013). |
| | |
| | Amended and Restated Employment Agreement dated as of January 27, 2006, between Vector and Howard M. Lorber (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated January 27, 2006). |
| | |
| | Executive Letter Agreement, dated as of December 21, 2021 between Vector Group Ltd. and Howard M. Lorber (incorporated by reference to Exhibit 10.3 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Employment Agreement, dated as of January 27, 2006, between Vector and Richard J. Lampen (incorporated by reference to Exhibit 10.3 in Vector’s Form 8-K dated January 27, 2006). |
| | |
| | Amendment to the Employment Agreement dated as of February 22, 2012 between Vector Group Ltd. and Richard J. Lampen (incorporated by reference to Exhibit 10.3 in Vector’s Form 8-K/A dated February 21, 2012). |
| | |
| | Amendment to the Employment Agreement dated January 15, 2021 between Vector Group Ltd. and Richard J. Lampen (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated January 14, 2021). |
| | |
| | Executive Letter Agreement, dated as of December 21, 2021 between Vector Group Ltd. and Richard J. Lampen (incorporated by reference to Exhibit 10.4 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Amended and Restated Employment Agreement, dated as of January 27, 2006, between Vector and Marc N. Bell (incorporated by reference to Exhibit 10.4 in Vector’s Form 8-K dated January 27, 2006). |
| | |
| | Restricted Share Award Agreement, dated as of May 29, 2018, between Vector Group Ltd. and Marc N. Bell (incorporated by reference to Exhibit 10.1 in Vector’s Form 10-Q dated June 30, 2018). |
| | |
| | Executive Letter Agreement, dated as of December 21, 2021 between Vector Group Ltd. and Marc N. Bell (incorporated by reference to Exhibit 10.6 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Letter Agreement, dated as of February 18, 2020, by and among Ronald J. Bernstein, Liggett Vector Brands LLC and Vector Group Ltd. (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-k dated February 18, 2020). |
| | |
| | Employment Agreement, dated as of January 27, 2006, between Vector and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.5 in Vector’s Form 8-K dated January 27, 2006). |
| | |
| | Amendment to Employment Agreement, dated as of February 29, 2016, by and between Vector Group Ltd. and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated February 29, 2016). |
| | |
| | Second Amendment to Employment Agreement, dated as of December 21, 2021 between Vector Group Ltd. and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.7 in Vector’s Form 8-K dated December 21, 2021). |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| | |
| | Executive Letter Agreement, dated as of December 21, 2021 between Vector Group Ltd. and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.5 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Employment Agreement, dated as of March 6, 2020, by and between Liggett Vector Brands LLC and Nicholas P. Anson (incorporated by reference to Exhibit 10.22 of Vector’s Form 10-K for the period ending December 31, 2021). |
| | |
| | Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive Plan (incorporated by reference to Appendix B in Vector’s Proxy Statement dated April 21, 2004). |
| | |
| | Vector Group Ltd. Management Incentive Plan (incorporated by reference to Exhibit 10.3 of Vector’s Form 8-K dated March 10, 2014). |
| | |
| | Vector Group Ltd. Amended and Restated 2014 Management Incentive Plan (incorporated by reference to Exhibit 10.1 of Vector’s Form 10-Q for the period ending June 30, 2021). |
| | |
| | Restricted Shares Award Agreement Pursuant to the Vector Group Ltd. Amended and Restated 2014 Management Incentive Plan (incorporated by reference to Exhibit 10.2 of Vector’s Form 10-Q for the period ending June 30, 2021). |
| | |
| | Performance-based Restricted Shares Award Agreement Pursuant to the Vector Group Ltd. Amended and Restated 2014 Management Incentive Plan (incorporated by reference to Exhibit 10.3 of Vector’s Form 10-Q for the period ending June 30, 2021). |
| | |
| | Form of 1999 Amended and Restated Incentive Plan Option Agreement to Named Executive Officers (incorporated by reference to Exhibit 10.21 of Vector’s Form 10-K dated December 31, 2017). |
| | |
| | Form of 2014 Management Incentive Plan Option Award to Named Executive Officers (incorporated by reference to Exhibit 10.22 of Vector’s Form 10-K dated December 31, 2017). |
| | |
| | Performance-Based Restricted Share Award Agreement, pursuant to Vector Group Ltd. Management Incentive Plan, dated as of November 10, 2015 by and between Vector Group Ltd. and Howard M. Lorber (incorporated by reference to Exhibit 10.1 of Vector’s Form 8-K dated November 10, 2015). |
| | |
| | |
| | |
| | Vector Supplemental Retirement Plan (as amended and restated April 24, 2008) (incorporated by reference to Exhibit 10.1 in Vector’s Form 10-Q for the quarter ended June 30, 2008). |
| | |
| | Office Lease, dated as of September 10, 2012, between Vector Group Ltd. and Frost Real Estate Holdings, LLC. (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated September 10, 2012). |
| | |
| | First Amendment, dated as of November 12, 2012, to Office Lease, dated as of September 10, 2012, between Vector Group Ltd. and Frost Real Estate Holdings, LLC. (incorporated by reference to Exhibit 10.40 of Vector’s Form 10-K dated December 31, 2012). |
| | |
| | Second Amendment, dated as of September 1, 2017, to Office Lease, dated as of September 10, 2012, between Vector Group Ltd. and Frost Real Estate Holdings, LLC (incorporated by reference to Exhibit 10.32 of Vector’s Form 10-K dated December 31, 2017). |
| | |
| | Vector Group Ltd. Equity Retention and Hedging Policy (incorporated by reference to Exhibit 10.1 of Vector’s Form 8-K dated January 15, 2013). |
| | |
| | | | | | | | |
EXHIBIT
NO. | | DESCRIPTION |
| | Vector Group Ltd. Stock Ownership Guidelines (incorporated by reference to Exhibit 10.1 of Vector’s Form 8-K dated March 10, 2014). |
| | |
| | Vector Group Ltd. Executive Compensation Clawback Policy (incorporated by reference to Exhibit 10.2 of Vector’s Form 8-K dated March 10, 2014). |
| | |
| | Third Amended and Restated Credit Agreement, dated as of January 14, 2015, among Liggett Group LLC, 100 Maple LLC, and, upon its accession thereto pursuant to Amendment No. 4 and Joinder, Vector Tobacco Inc., the lenders party thereto from time to time and Wells Fargo Bank, National Association, as administrative and collateral agent, as amended by Amendment No. 1 to Third Amended and Restated Credit Agreement, dated as of January 27, 2017, Amendment No. 2 to Third Amended and Restated Credit Agreement, dated as of October 30, 2018, Amendment No. 3 to Third Amended and Restated Credit Agreement, dated as of October 31, 2019, and Amendment No. 4 and Joinder to Third Amended and Restated Credit Agreement, dated as of March 22, 2021 (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated March 22, 2021). |
| | |
| | Transition Services Agreement, dated as of December 21, 2021 between Vector Group Ltd. and Douglas Elliman Inc. (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Tax Disaffiliation Agreement, dated as of December 21, 2021 between Vector Group Ltd. and Douglas Elliman Inc. (incorporated by reference to Exhibit 10.2 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Form of Aircraft Lease Agreement (incorporated by reference to Exhibit 10.8 in Vector’s Form 8-K dated December 21, 2021). |
| | |
| | Subsidiaries of Vector. |
| | |
| | List of Subsidiary Guarantors. |
| | |
| | Consent of Deloitte & Touche LLP. |
| | |
| | Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | | |
| | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 104 | | |
| | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350,Cover Page Interactive Data File (Embedded as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Material Legal Proceedings. |
| | |
| | Condensed Consolidating Financial Statements of Vector Group Ltd.Inline XBRL document and contained in Exhibit 101). |
| | |
| | |
_____________________________
*
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 numbers 10.10 through 10.27.
ITEM 16.FORM 10-K SUMMARY.
Not applicable.
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/ J. Bryant Kirkland III |
| | | J. Bryant Kirkland III |
| | | Senior Vice President, Chief Financial Officer and Treasurer |
| Date: | March 2, 2022May 1, 2023 | | |
POWER OF ATTORNEY
The undersigned directors and officers of Vector Group Ltd. hereby constitute and appoint Richard J. Lampen, J. Bryant Kirkland III 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 March 2, 2022.
| | | | | | | | |
SIGNATURE | | TITLE |
| | |
/s/ Howard M. Lorber | | President and Chief Executive Officer
(Principal Executive Officer) |
Howard M. Lorber | |
| | |
/s/ J. Bryant Kirkland III | | Senior Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer) |
J. Bryant Kirkland III | |
| | |
/s/ Bennett S. LeBow | | Director |
Bennett S. LeBow | | |
| | |
/s/ Stanley S. Arkin | | Director |
Stanley S. Arkin | | |
| | |
/s/ Henry C. Beinstein | | Director |
Henry C. Beinstein | | |
| | |
/s/ Ronald J. Bernstein | | Director |
Ronald J. Bernstein | | |
| | |
/s/ Paul V. Carlucci | | Director |
Paul V. Carlucci | | |
| | |
/s/ Richard J. Lampen | | Director |
Richard J. Lampen | | |
| | |
/s/ Jean E. Sharpe | | Director |
Jean E. Sharpe | | |
| | |
/s/ Barry Watkins | | Director |
Barry Watkins | | |
| | |
/s/ Wilson L. White | | Director |
Wilson L. White | | |
VECTOR GROUP LTD.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2021
ITEMS 8, 15(a)(1) AND (2), 15(c)
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules of the Registrant and its subsidiaries required to be included in Items 8, 15(a) (1) and (2), 15(c) are listed below:
| | | | | | | | |
| Page | |
| | |
FINANCIAL STATEMENTS: | | |
Vector Group Ltd. Consolidated Financial Statements | | |
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34) | | |
Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020 | | |
Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 | | |
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 | | |
Consolidated Statements of Stockholders' Deficiency for the years ended December 31, 2021, 2020 and 2019 | | |
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 | | |
Notes to Consolidated Financial Statements | | |
FINANCIAL STATEMENT SCHEDULE: | | |
Schedule II — Valuation and Qualifying Accounts | | |
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Vector Group Ltd.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vector Group Ltd. and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ deficiency, and cash flows, for each of the three years in the period ended December 31, 2021, and the related notes and the financial statement schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Contingencies: Tobacco-Related Litigation—Refer to Note 15 to the consolidated financial statements
Critical Audit Matter Description
The Company’s wholly owned subsidiary Liggett Group LLC (“Liggett”) is subject to litigation related to tobacco product liability. Legal proceedings regarding Liggett’s tobacco products are pending or threatened in various jurisdictions against Liggett and the Company. The Company records provisions for pending litigation when it determines that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. While it is reasonably possible that an unfavorable outcome in a case may occur: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco related cases or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco related cases. Therefore, management has not provided any amounts in the financial statements for unfavorable outcomes. Total tobacco-related litigation accruals were $21.6 million at December 31, 2021.
Given the subjectivity of estimating the projected liability of reported and unreported claims and assessing the probability of the outcome, performing audit procedures to evaluate whether tobacco product liabilities were appropriately recorded as of December 31, 2021 required a high level of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the evaluation of whether tobacco product liabilities were appropriately recorded included the following, among others:
–We tested the effectiveness of controls relating to the determination of tobacco product liability contingencies.
–We evaluated the provisions for tobacco litigation by:
–Obtaining letters from the Company’s internal and external counsel which include schedules and analysis of all pending tobacco-related cases.
–Conducting quarterly discussions with the Company’s general counsel and obtaining updates on tobacco litigation activity.
–Reviewing tobacco product liability activity of other public tobacco companies for which Liggett is often a co-defendant.
–Evaluating recorded provisions and disclosures based on the information obtained.
–Utilizing the information obtained from the letters from the Company’s internal and external counsel, quarterly discussions with the Company’s general counsel, and tobacco product liability activity of other tobacco companies, to assess management’s conclusion of the probability of the outcome for pending litigation.
/s/ Deloitte & Touche LLP
Miami, Florida
March 2, 2022
We have served as the Company’s auditor since 2015.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| (Dollars in thousands, except per share amounts) |
| ASSETS: | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 193,411 | | | $ | 258,421 | |
| Investment securities at fair value | 146,687 | | | 135,585 | |
| Accounts receivable - trade, net | 16,067 | | | 16,334 | |
| Inventories | 94,615 | | | 97,545 | |
| | | |
| Income taxes receivable, net | 10,948 | | | — | |
| | | |
| Other current assets | 10,075 | | | 7,653 | |
| Current assets of discontinued operations | — | | | 148,365 | |
| Total current assets | 471,803 | | | 663,903 | |
| Property, plant and equipment, net | 36,883 | | | 35,285 | |
| Investments in real estate, net | 9,098 | | | 15,631 | |
| Long-term investments (includes $32,089 and $33,981 at fair value) | 53,073 | | | 52,291 | |
| Investments in real estate ventures | 105,062 | | | 85,400 | |
| Operating lease right-of-use assets | 10,972 | | | 12,253 | |
| | | |
| | | |
| Intangible assets | 107,511 | | | 107,511 | |
| | | |
| Other assets | 76,685 | | | 65,518 | |
| Long-term assets of discontinued operations | — | | | 305,617 | |
| Total assets | $ | 871,087 | | | $ | 1,343,409 | |
| LIABILITIES AND STOCKHOLDERS' DEFICIENCY: | | | |
| Current liabilities: | | | |
| Current portion of notes payable and long-term debt | $ | 79 | | | $ | 57 | |
| | | |
| Current payments due under the Master Settlement Agreement | 11,886 | | | 38,767 | |
| Current operating lease liability | 3,838 | | | 3,454 | |
| Income taxes payable, net | — | | | 5,830 | |
| Other current liabilities | 149,487 | | | 135,558 | |
| Current liabilities of discontinued operations | — | | | 99,649 | |
| Total current liabilities | 165,290 | | | 283,315 | |
| Notes payable, long-term debt and other obligations, less current portion | 1,398,591 | | | 1,380,809 | |
| | | |
| Non-current employee benefits | 68,970 | | | 66,616 | |
| Deferred income taxes, net | 34,768 | | | 18,944 | |
| Non-current operating lease liability | 8,853 | | | 10,903 | |
| Payments due under the Master Settlement Agreement | 13,224 | | | 17,933 | |
| | | |
| Other liabilities | 22,944 | | | 20,464 | |
| Long-term liabilities of discontinued operations | — | | | 204,112 | |
| Total liabilities | 1,712,640 | | | 2,003,096 | |
| Commitments and contingencies (Notes 5 and 15) | 0 | | 0 |
| Stockholders' deficiency: | | | |
| Preferred stock, par value $1 per share, 10,000,000 shares authorized | — | | | — | |
| Common stock, par value $0.1 per share, 250,000,000 shares authorized, 153,959,427 and 153,324,629 shares issued and outstanding | 15,396 | | | 15,332 | |
| Additional paid-in capital | 11,172 | | | — | |
| Accumulated deficit | (852,398) | | | (653,945) | |
| Accumulated other comprehensive loss | (15,723) | | | (21,074) | |
| | | |
| Total Vector Group Ltd. stockholders' deficiency | (841,553) | | | (659,687) | |
| | | |
| | | |
| Total liabilities and stockholders' deficiency | $ | 871,087 | | | $ | 1,343,409 | |
The accompanying notes are an integral part of the consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands, except per share amounts) |
| Revenues: | | | | | |
| Tobacco* | $ | 1,202,497 | | | $ | 1,204,501 | | | $ | 1,114,840 | |
| Real estate | 18,203 | | | 24,181 | | | 4,763 | |
| | | | | |
| Total revenues | 1,220,700 | | | 1,228,682 | | | 1,119,603 | |
| | | | | |
| Expenses: | | | | | |
| Cost of sales: | | | | | |
| Tobacco* | 758,015 | | | 795,904 | | | 771,130 | |
| Real estate | 11,527 | | | 23,698 | | | 3,755 | |
| | | | | |
| Total cost of sales | 769,542 | | | 819,602 | | | 774,885 | |
| | | | | |
| Operating, selling, administrative and general expenses | 131,418 | | | 116,598 | | | 109,113 | |
| Litigation settlement and judgment expense | 211 | | | 337 | | | 990 | |
| Net gains on sales of assets | (910) | | | (2,283) | | | — | |
| | | | | |
| | | | | |
| Operating income | 320,439 | | | 294,428 | | | 234,615 | |
| | | | | |
| Other income (expenses): | | | | | |
| Interest expense | (112,728) | | | (121,278) | | | (137,543) | |
| Loss on extinguishment of debt | (21,362) | | | — | | | (4,301) | |
| Change in fair value of derivatives embedded within convertible debt | — | | | 4,999 | | | 26,425 | |
| | | | | |
| | | | | |
| Equity in earnings from investments | 2,675 | | | 56,268 | | | 17,000 | |
| | | | | |
| Equity in earnings (losses) from real estate ventures | 10,250 | | | (44,728) | | | (27,760) | |
| | | | | |
| | | | | |
| | | | | |
| Other, net | 10,687 | | | (8,646) | | | 16,579 | |
| Income before provision for income taxes | 209,961 | | | 181,043 | | | 125,015 | |
| Income tax expense | 62,807 | | | 54,121 | | | 31,085 | |
| Income from continuing operations | 147,154 | | | 126,922 | | | 93,930 | |
| Income (loss) from discontinued operations, net of income taxes | 72,119 | | | (33,984) | | | 7,085 | |
| Net income | 219,273 | | | 92,938 | | | 101,015 | |
| | | | | |
| Net (income) from continuing operations attributed to non-controlling interest | — | | | — | | | (41) | |
| Net loss from discontinued operations attributed to non-controlling interest | 190 | | | — | | | — | |
| Net loss (income) attributed to non-controlling interest | 190 | | | — | | | (41) | |
| | | | | |
| Net income attributed to Vector Group Ltd. from continuing operations | 147,154 | | | 126,922 | | | 93,889 | |
| Net income (loss) attributed to Vector Group Ltd. from discontinued operations | 72,309 | | | (33,984) | | | 7,085 | |
| Net income attributed to Vector Group Ltd. | $ | 219,463 | | | $ | 92,938 | | | $ | 100,974 | |
| | | | | |
| Per basic common share: | | | | | |
| | | | | |
| Net income from continuing operations applicable to common shares attributed to Vector Group Ltd. | $ | 0.94 | | | $ | 0.83 | | | $ | 0.59 | |
| Net income (loss) from discontinued operations applicable to common shares attributed to Vector Group Ltd. | 0.46 | | | (0.23) | | | 0.05 | |
| Net income applicable to common shares attributed to Vector Group Ltd. | $ | 1.40 | | | $ | 0.60 | | | $ | 0.64 | |
| | | | | |
| Per diluted common share: | | | | | |
| | | | | |
| Net income from continuing operations applicable to common shares attributed to Vector Group Ltd. | $ | 0.94 | | | $ | 0.83 | | | $ | 0.58 | |
| Net income (loss) from discontinued operations applicable to common shares attributed to Vector Group Ltd. | 0.46 | | | (0.23) | | | 0.05 | |
| Net income applicable to common shares attributed to Vector Group Ltd. | $ | 1.40 | | | $ | 0.60 | | | $ | 0.63 | |
_____________________________
* Revenues and cost of sales include federal excise taxes of $434,695, $461,532 and $451,256 for the years ended December 31, 2021, 2020 and 2019, respectively.
The accompanying notes are an integral part of the consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands) |
| Net income | $ | 219,273 | | | $ | 92,938 | | | $ | 101,015 | |
| | | | | |
| Net unrealized (losses) gains on investment securities available for sale: | | | | | |
| Change in net unrealized (losses) gains | (747) | | | (454) | | | 681 | |
| Net unrealized losses (gains) reclassified into net income | 232 | | | 306 | | | (118) | |
| Net unrealized (losses) gains on investment securities available for sale | (515) | | | (148) | | | 563 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net change in pension-related amounts: | | | | | |
| Amortization of prior service costs | (44) | | | 4 | | | (33) | |
| Effect of settlement | — | | | 1,805 | | | — | |
| Net gain (loss) arising during the year | 5,967 | | | (2,503) | | | 1,454 | |
| Amortization of loss | 1,921 | | | 1,847 | | | 1,961 | |
| Net change in pension-related amounts | 7,844 | | | 1,153 | | | 3,382 | |
| | | | | |
| Other comprehensive income | 7,329 | | | 1,005 | | | 3,945 | |
| | | | | |
| Income tax effect on: | | | | | |
| Change in net unrealized (losses) gains on investment securities | 202 | | | 123 | | | (187) | |
| Net unrealized losses (gains) reclassified into net income on investment securities | (63) | | | (83) | | | 32 | |
| | | | | |
| | | | | |
| | | | | |
| Pension-related amounts | (2,117) | | | (311) | | | (919) | |
| Income tax provision on other comprehensive income | (1,978) | | | (271) | | | (1,074) | |
| | | | | |
| Other comprehensive income, net of tax from continuing operations | 5,351 | | | 734 | | | 2,871 | |
| Other comprehensive income, net of tax from discontinued operations | — | | | — | | | — | |
| Other comprehensive income, net of tax | 5,351 | | | 734 | | | 2,871 | |
| | | | | |
| Comprehensive income | 224,624 | | | 93,672 | | | 103,886 | |
| | | | | |
| Comprehensive loss (income) attributed to non-controlling interest | 190 | | | — | | | (41) | |
| Comprehensive income attributed to Vector Group Ltd. | $ | 224,814 | | | $ | 93,672 | | | $ | 103,845 | |
The accompanying notes are an integral part of the consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional
Paid-In
Capital | | Accumulated Deficit | | Accumulated Other
Comprehensive
Income (Loss) | | | | Non-controlling Interest | | |
| | Shares | | Amount | | | | | | | Total |
| | (Dollars in thousands) |
| Balance, January 1, 2019 | 140,914,642 | | | $ | 14,092 | | | $ | — | | | $ | (542,169) | | | $ | (19,982) | | | | | $ | 693 | | | $ | (547,366) | |
| Impact of adoption of new accounting standards | | | | | | | 3,147 | | | (4,697) | | | | | — | | | (1,550) | |
| Net income | — | | | — | | | — | | | 100,974 | | | — | | | | | 41 | | | 101,015 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total other comprehensive income | — | | | — | | | — | | | — | | | 2,871 | | | | | — | | | 2,871 | |
| Total comprehensive income | — | | | — | | | — | | | — | | | — | | | | | | | 103,886 | |
| Distributions and dividends on common stock ($1.54 per share) | — | | | — | | | (4,041) | | | (233,298) | | | — | | | | | — | | | (237,339) | |
| Restricted stock grant | 60,000 | | | 6 | | | (6) | | | — | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Surrender of shares in connection with restricted stock vesting | (221,668) | | | (22) | | | (2,152) | | | — | | | — | | | | | — | | | (2,174) | |
| Surrender of shares in connection with restricted stock vesting and stock option exercise | (1,529,512) | | | (153) | | | (18,905) | | | — | | | — | | | | | — | | | (19,058) | |
| Effect of stock dividend | 7,037,087 | | | 703 | | | — | | | (703) | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Exercise of stock options | 1,824,351 | | | 182 | | | 15,635 | | | — | | | — | | | | | — | | | 15,817 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 9,469 | | | — | | | — | | | | | — | | | 9,469 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Basis adjustment on non-controlling interest | — | | | — | | | — | | | (6,415) | | | — | | | | | — | | | (6,415) | |
| | | | | | | | | | | | | | | |
| Distributions to non-controlling interest | — | | | — | | | — | | | — | | | — | | | | | (286) | | | (286) | |
| Balance, December 31, 2019 | 148,084,900 | | | 14,808 | | | — | | | (678,464) | | | (21,808) | | | | | 448 | | | (685,016) | |
| Impact of adoption of new accounting standards | — | | | — | | | — | | | (2,263) | | | — | | | | | — | | | (2,263) | |
| Net income | — | | | — | | | — | | | 92,938 | | | — | | | | | — | | | 92,938 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total other comprehensive income | — | | | — | | | — | | | — | | | 734 | | | | | — | | | 734 | |
| Total comprehensive income | — | | | — | | | — | | | — | | | — | | | | | — | | | 93,672 | |
| Distributions and dividends on common stock ($0.80 per share) | — | | | — | | | (58,892) | | | (66,236) | | | — | | | | | — | | | (125,128) | |
| Restricted stock grant | 425,000 | | | 43 | | | (43) | | | — | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Surrender of shares in connection with restricted stock vesting | (216,542) | | | (22) | | | (2,164) | | | — | | | — | | | | | — | | | (2,186) | |
| Surrender of shares in connection with stock option exercise | (589,256) | | | (59) | | | (7,298) | | | — | | | — | | | | | — | | | (7,357) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Issuance of common stock | 5,000,000 | | | 500 | | | 52,063 | | | — | | | — | | | | | — | | | 52,563 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Exercise of stock options | 620,527 | | | 62 | | | 6,851 | | | — | | | — | | | | | — | | | 6,913 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 9,483 | | | — | | | — | | | | | — | | | 9,483 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Distributions to non-controlling interest | — | | | — | | | — | | | — | | | — | | | | | (448) | | | (448) | |
| Other | — | | | — | | | — | | | 80 | | | — | | | | | — | | | 80 | |
| Balance, December 31, 2020 | 153,324,629 | | | 15,332 | | | — | | | (653,945) | | | (21,074) | | | | | — | | | (659,687) | |
| | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | 219,463 | | | — | | | | | (190) | | | 219,273 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Total other comprehensive income | — | | | — | | | — | | | — | | | 5,351 | | | | | — | | | 5,351 | |
| Total comprehensive income | — | | | — | | | — | | | — | | | — | | | | | — | | | 224,624 | |
| Distributions and dividends on common stock ($0.80 per share) | — | | | — | | | — | | | (126,371) | | | — | | | | | — | | | (126,371) | |
| Restricted stock grant | 873,500 | | | 88 | | | (88) | | | — | | | — | | | | | — | | | — | |
| | | | | | | | | | | | | | | |
| Surrender of shares in connection with restricted stock vesting | (238,702) | | | (24) | | | (3,539) | | | — | | | — | | | | | — | | | (3,563) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Stock-based compensation | — | | | — | | | 14,799 | | | — | | | — | | | | | — | | | 14,799 | |
| | | | | | | | | | | | | | | |
| Acquisition of subsidiary | — | | | — | | | — | | | — | | | — | | | | | 500 | | | 500 | |
| Contributions from non-controlling interest | — | | | — | | | — | | | — | | | — | | | | | 1,625 | | | 1,625 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Distribution of Douglas Elliman Inc. | — | | | — | | | — | | | (291,545) | | | — | | | | | (1,935) | | | (293,480) | |
| | | | | | | | | | | | | | | |
| Balance, December 31, 2021 | 153,959,427 | | | $ | 15,396 | | | $ | 11,172 | | | $ | (852,398) | | | $ | (15,723) | | | | | $ | — | | | $ | (841,553) | |
The accompanying notes are an integral part of the consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH CASH FLOWS — (Continued)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 219,273 | | | $ | 92,938 | | | $ | 101,015 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 16,334 | | | 17,629 | | | 17,851 | |
| Non-cash stock-based expense | 14,799 | | | 9,483 | | | 9,469 | |
| | | | | |
| Loss on extinguishment of debt | 8,349 | | | — | | | 2,944 | |
| Impairments of goodwill and intangible assets | — | | | 58,252 | | | — | |
| Gain on sale of assets | (724) | | | (1,114) | | | (42) | |
| Deferred income taxes | 14,464 | | | (673) | | | (11,198) | |
| | | | | |
| Distributions from investments | 134 | | | 54,004 | | | 17,940 | |
| | | | | |
| | | | | |
| Equity in earnings from investments | (2,675) | | | (56,268) | | | (17,000) | |
| Net gains on investment securities | (9,648) | | | (1,818) | | | (7,440) | |
| | | | | |
| Equity in (earnings) losses from real estate ventures | (9,972) | | | 44,698 | | | 19,288 | |
| Distributions from real estate ventures | 25,326 | | | 1,933 | | | 7,028 | |
| | | | | |
| Non-cash interest expense | 4,838 | | | 4,331 | | | 2,052 | |
| Non-cash lease expense | 21,941 | | | 20,496 | | | 21,088 | |
| Non-cash portion of restructuring charges | — | | | 1,214 | | | — | |
| | | | | |
| Excess tax benefit of stock compensation | — | | | 264 | | | 1,488 | |
| | | | | |
| | | | | |
| Provision for credit losses | 3,331 | | | 14,288 | | | 1,206 | |
| Other | 393 | | | (581) | | | — | |
| Changes in assets and liabilities: | | | | | |
| Receivables | (9,630) | | | (8,371) | | | (7,950) | |
| Inventories | 2,930 | | | 1,217 | | | (7,767) | |
| Accounts payable and accrued liabilities | 196 | | | 3,237 | | | (3,983) | |
| Payments due under the Master Settlement Agreement | (31,590) | | | 5,309 | | | (1,553) | |
| | | | | |
| | | | | |
| Investments in real estate, net | 5,652 | | | 12,449 | | | — | |
| Other assets and liabilities, net | (18,502) | | | (5,370) | | | (20,365) | |
| | | | | |
| | | | | |
| Net cash provided by operating activities | $ | 255,219 | | | $ | 267,547 | | | $ | 124,071 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| The accompanying notes are an integral part of the consolidated financial statements |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| (Dollars in thousands) |
| Cash flows from investing activities: | | | | | |
| Sale of investment securities | $ | 45,627 | | | $ | 30,458 | | | $ | 21,879 | |
| Maturities of investment securities | 71,505 | | | 61,230 | | | 68,859 | |
| Purchase of investment securities | (124,080) | | | (99,871) | | | (87,766) | |
| Proceeds from sale or liquidation of long-term investments | 11,509 | | | 32,572 | | | 8,256 | |
| Purchase of long-term investments | (14,316) | | | (9,687) | | | (9,223) | |
| (Increase) decrease in restricted assets | (5) | | | 436 | | | 994 | |
| Investments in real estate ventures | (49,463) | | | (14,922) | | | (52,529) | |
| Distributions from investments in real estate ventures | 11,936 | | | 18,818 | | | 41,300 | |
| | | | | |
| Cash acquired in purchase of subsidiaries | — | | | 2,760 | | | — | |
| Proceeds from sale of fixed assets | 17 | | | 5,162 | | | 17 | |
| Capital expenditures | (13,506) | | | (19,063) | | | (12,575) | |
| Increase in cash surrender value of life insurance policies | (1,219) | | | (642) | | | (719) | |
| Purchase of subsidiaries | (500) | | | (722) | | | (380) | |
| | | | | |
| | | | | |
| Pay downs of investment securities | 525 | | | 812 | | | 1,083 | |
| | | | | |
| Investments in real estate, net | — | | | — | | | (2,295) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash (used in) provided by investing activities | (61,970) | | | 7,341 | | | (23,099) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from issuance of debt | 875,000 | | | — | | | 230,000 | |
| Repayments of debt | (862,973) | | | (174,989) | | | (293,419) | |
| Deferred financing costs | (20,109) | | | — | | | (9,802) | |
| Borrowings under revolver | 27,892 | | | 130,741 | | | 243,688 | |
| Repayments on revolver | (27,868) | | | (165,693) | | | (239,526) | |
| Dividends and distributions on common stock | (131,798) | | | (128,231) | | | (238,249) | |
| Distributions to non-controlling interest | — | | | (448) | | | (286) | |
| Contributions from non-controlling interest | 1,625 | | | — | | | — | |
| Proceeds from the issuance of common stock | — | | | 52,563 | | | — | |
| | | | | |
| Tax withholdings related to net share settlements | (13,145) | | | (2,630) | | | (5,415) | |
| Cash transferred to Douglas Elliman Inc. at spin-off | (212,571) | | | — | | | — | |
| Other | (130) | | | — | | | (216) | |
| | | | | |
| | | | | |
| Net cash used in financing activities | (364,077) | | | (288,687) | | | (313,225) | |
| Net decrease in cash, cash equivalents and restricted cash | (170,828) | | | (13,799) | | | (212,253) | |
| Cash, cash equivalents and restricted cash, beginning of year | 365,677 | | | 379,476 | | | 591,729 | |
| Cash, cash equivalents and restricted cash, end of year | $ | 194,849 | | | $ | 365,677 | | | $ | 379,476 | |
| | | | | |
| | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
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 included in this annual report present the financial position of Vector Group Ltd. as of December 31, 2021 and 2020 and the results of operations of Vector Group Ltd. for the years ended December 31, 2021, 2020 and 2019 giving effect to the spin-off of Douglas Elliman Inc. (“Douglas Elliman”) with the historical financial results of Douglas Elliman reflected as discontinued operations (See Note 6.). The cash flows and comprehensive income related to Douglas Elliman have not been segregated and are included in the Consolidated Statements of Cash Flows and Consolidated Statements of Comprehensive Income, respectively, for all periods presented. Unless otherwise indicated, the information in the Notes to the Consolidated Financial Statements refer only to Vector Group’s continuing operations and do not include discussion of balances or activity of Douglas Elliman.
The consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of Liggett Group LLC (“Liggett”), Vector Tobacco LLC (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), New Valley LLC (“New Valley”) and other less significant subsidiaries. New Valley includes the accounts of other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. Liggett Vector Brands coordinates Liggett and Vector Tobacco’s sales and marketing efforts. Certain references to “Liggett” refer to the Company’s tobacco operations, including the business of Liggett and Vector Tobacco, unless otherwise specified. New Valley is engaged in the real estate business.
(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 impairment charges, valuation of intangible assets, promotional accruals, actuarial assumptions of pension plans, deferred tax liabilities, settlement accruals, valuation of investments, including other-than-temporary impairments to such investments, and litigation and defense costs. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents:
Cash includes cash on hand, cash on deposit in banks, and money market accounts. Cash equivalents is comprised of short-term investments which have an original maturity of 90 days or less. Interest on short-term investments is recognized when earned. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation and Securities Investor Protection Corporation insure these balances, up to $250 and $500, respectively. Substantially all of the Company’s cash balances at December 31, 2021 are uninsured.
(d) Reconciliation of Cash, Cash Equivalents and Restricted Cash:
Restricted cash amounts included in other current assets and other assets represent cash and cash equivalents required to be deposited into escrow for bonds required to appeal adverse product liability judgments, amounts required for letters of credit related to office leases, and certain deposit requirements for banking arrangements. The restrictions related to the appellate bonds will remain in place until the appeal process has been completed. The restrictions related to the letters of credit will remain in place for the duration of the respective lease. The restrictions related to the banking arrangements will remain in place for the duration of the arrangement.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of “Cash, cash equivalents and restricted cash” in the Consolidated Statements of Cash Flows were as follows:
| | | | | | | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Cash and cash equivalents | $ | 193,411 | | | $ | 258,421 | | | $ | 299,856 | |
| | | | | |
| Restricted cash and cash equivalents included in other assets | 1,438 | | | 554 | | | 552 | |
| Cash, cash equivalents and restricted cash of discontinued operations | — | | | 106,702 | | | 79,068 | |
| Total cash, cash equivalents, and restricted cash shown in the consolidated statements of cash flows | $ | 194,849 | | | $ | 365,677 | | | $ | 379,476 | |
(e) Investment Securities:
The Company classifies investments in debt securities as available for sale. Investments classified as available for sale are carried at fair value, with net unrealized gains and losses included as a separate component of stockholders’ deficiency. The cost of securities sold is determined based on average cost.
Gains are recognized when realized in the Company’s consolidated statements of operations. Losses are recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair value. The Company’s policy is to review its securities on a periodic basis to evaluate whether any security has experienced an other-than-temporary decline in fair value. If it is determined that an other-than-temporary decline exists in one of the Company’s debt securities, it is the Company’s policy to record an impairment charge with respect to such investment in the Company’s consolidated statements of operations.
The Company classifies investments in marketable equity securities as equity securities at fair value. The Company’s marketable equity securities are measured at fair value with changes in fair value recognized in net income. Gains and losses are recognized when realized in the Company’s consolidated statements of operations. Investments in marketable equity securities represent less than a 20 percent interest in the investees and the Company does not exercise significant influence over such entities.
(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, high credit quality financial institutions.
Liggett’s customers are primarily wholesalers and distributors of tobacco and convenience products as well as large grocery, drug and convenience store chains. Two customers accounted for 14% and 12% of Liggett’s revenues in 2021, 18% and 12% in 2020, and 17% and 12% in 2019. Concentrations of credit risk with respect to trade receivables are generally limited due to Liggett’s large number of customers. Liggett’s two largest customers represented approximately 0% and 2%, respectively, of Liggett’s net accounts receivable at December 31, 2021, and approximately 5% and 4%, respectively, at December 31, 2020. 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 not exceeded management’s expectations.
(g) Accounts Receivable - trade, net:
Accounts receivable-trade are recorded net of an allowance for credit losses and cash discounts. The Company estimates the allowance for credit losses based on historical experience, the age of the accounts receivable balances, credit quality of our customers, current economic conditions, supportable forecasts of future economic condition, and other factors that may affect our ability to collect from customers. The allowance for credit losses and cash discounts was $326 and $334 at December 31, 2021 and 2020, respectively. Uncollectible accounts are written off when the likelihood of collection is remote and when collection efforts have been abandoned.
(h) Inventories:
Tobacco inventories are stated at the lower of cost and net realizable value with cost determined primarily by the last-in, first-out (LIFO) method at Liggett and Vector Tobacco. Although portions of leaf tobacco inventories may not be used or sold
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
within one year because of the time required for aging, they are included in current assets, which is common practice in the industry.
(i) Property, Plant and Equipment:
Property, plant and equipment are stated at cost. 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 10 years for machinery and equipment.
Repairs and maintenance costs 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.
The cost of leasehold improvements is amortized over the lesser of the related leases or the estimated useful lives of the improvements. Costs of major additions and betterments are capitalized, while expenditures for routine maintenance and repairs are charged to expense as incurred.
(j) Investments in Real Estate Ventures:
In accounting for its investments in real estate ventures, the Company identified its participation in Variable Interest Entities (“VIE”), which are defined as (a) entities in which the equity investment at risk is not sufficient to finance its activities without additional subordinated financial support; (b) as a group, the equity investors at risk lack 1) the power to direct the activities of a legal entity that most significantly impact the entity’s economic performance, 2) the obligation to absorb the expected losses of the entity, or 3) the right to receive the expected residual returns of the entity; or (c) as a group, the equity investors have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company’s interest in VIEs is primarily in the form of equity ownership. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of economic disproportionality between the Company and its other partner(s).
Accounting guidance requires the consolidation of VIEs in which the Company is the primary beneficiary. The guidance requires consolidation of VIEs that an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company’s maximum exposure to loss in its investments in unconsolidated VIEs is limited to its investment in the VIE, any unfunded capital commitments to the VIE, and, in some cases, guarantees in connection with debt on the specific project. The Company’s maximum exposure to loss in its investment in consolidated VIEs is limited to its investment, which is the carrying value of the investment net of the non-controlling interest. Creditors of the consolidated VIEs have no recourse to the general credit of the primary beneficiary.
On a quarterly basis, the Company evaluates its investments in real estate ventures to determine if there are indicators of impairment. If so, the Company further investigates to determine if an impairment has occurred and whether such impairment is considered temporary or other than temporary. The Company believes that the assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(k) Intangible Assets:
Intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually as of December 31 and monitored for interim triggering events on an on-going basis. Our intangible asset associated with the benefit under the Master Settlement Agreement (“MSA”) relates to the market share payment exemption of The Medallion Company Inc. (now known as Vector Tobacco LLC), acquired in April 2002, under the MSA, which states payments under the MSA continue in perpetuity. As a result, the Company believes it will realize the benefit of the exemption for the foreseeable future.
The fair value of the intangible asset associated with the benefit under the MSA is calculated using discounted cash flows. This approach involves two steps: (i) estimating future cash savings due to the payment exemption under the MSA and (ii) discounting the resulting cash flow savings to determine fair value. This fair value is then compared with the carrying value of the intangible asset associated with the benefit under the MSA. To the extent that the carrying amount exceeds the implied fair value of the intangible asset, an impairment loss is recognized.
Indefinite life intangible assets as of December 31, 2021 and 2020, were $107,511. The Company performed its impairment test for the years ended December 31, 2021, 2020 and 2019 and no impairment was noted.
(l) Impairment of Long-Lived Assets:
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs a test for recoverability, comparing projected undiscounted cash flows to the carrying value of the asset group to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on fair value of the asset on the basis of discounted cash flow. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Additionally, the Company performs impairment reviews on its long-term investments that are classified as equity securities without readily determinable fair values that do not qualify for the net asset value (“NAV”) practical expedient. On a quarterly basis, the Company evaluates the investments to determine if there are indicators of impairment. If so, a determination is made of whether there is an impairment and if it is considered temporary or other than temporary. The assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven. The impairment indicators that are taken into consideration as part of the analysis include (a) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, and (d) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.
(m) Leases:
The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and lease liabilities on the Company’s consolidated balance sheets. Finance leases are included in investments in real estate, net, property, plant and equipment and current and long-term portions of notes payable and long-term debt on the Company’s consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset for the duration of the lease term. Lease liabilities represent the Company’s obligation to make lease payments as determined by the lease agreement. Lease liabilities are recorded at commencement for the net present value of future lease payments over the lease term. The discount rate used is generally the Company’s estimated incremental borrowing rate unless the lessor’s implicit rate is readily determinable. Discount rates are calculated periodically to estimate the rate the Company would pay to borrow the funds necessary to obtain an asset of similar value, over a similar term, with a similar security. ROU assets are recorded and recognized at commencement for the lease liability amount, initial direct costs incurred and is reduced for lease incentives received. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease cost is recognized on a straight-line basis over the shorter of the useful life of the asset and the lease term.
The Company has lease agreements with lease and non-lease components; the Company has elected the accounting policy to combine lease and non-lease components for all underlying asset classes.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(n) Pension, Postretirement and Postemployment Benefits Plans:
The cost of providing retiree pension benefits, health care and life insurance benefits is actuarially determined and accrued over the service period of the active employee group. The Company recognizes the funded status of each defined benefit pension plan, retiree health care and other postretirement benefit plans and postemployment benefit plans on the Company’s consolidated balance sheets. (See Note 12).
(o) Stock Options and Awards:
The Company accounts for employee stock compensation plans by measuring compensation cost for share-based payments at fair value at grant date. The fair value is recognized as compensation expense over the vesting period on a straight-line basis. The terms of certain stock options awarded under the 2014 Management Incentive Plan and under the 1999 Plan provide for common stock dividend equivalents (paid in cash at the same rate as paid on the common stock) with respect to the shares underlying the unvested portion of the options. The Company recognizes payments of the dividend equivalent rights on these options on the Company’s consolidated balance sheets as reductions in additional paid-in capital until fully utilized and then accumulated deficit ($3,832, $3,684 and $8,967, net of income taxes, for the years ended December 31, 2021, 2020 and 2019, respectively), which are included as “Distributions and dividends on common stock” in the Company’s consolidated statement of stockholders’ deficiency.
(p) Income Taxes:
The Company accounts for income taxes under the liability method and records deferred taxes for 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 the enacted tax rates relative to when the deferred item is expected to reverse. 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. A current tax provision is recorded for income taxes currently payable.
The Company accounts for uncertainty in income taxes by recognizing the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. The guidance requires that a liability created for unrecognized deferred tax benefits shall be presented as a liability and not combined with deferred tax liabilities or assets. The Company classifies all tax-related interest and penalties as income tax expense.
(q) Distributions and Dividends on Common Stock:
The Company records distributions on its common stock as dividends in its consolidated statement of stockholders’ deficiency to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in-capital to the extent paid-in-capital is available and then to accumulated deficit. The Company’s stock dividends are recorded as stock splits and given retroactive effect to earnings per share for all years presented.
(r) Revenue Recognition:
Tobacco: Revenue from cigarette sales, which include federal excise taxes billed to customers, are recognized upon shipment of cigarettes when control has passed to the customer. Average collection terms for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the customer. The Company records an allowance for goods estimated to be returned in other current liabilities and the associated receivable for anticipated federal excise tax refunds in other current assets on the consolidated balance sheets. The allowance for returned goods is based principally on sales volumes and historical return rates. The estimated costs of sales incentives, including customer incentives and trade promotion activities, are based principally on historical experience and are accounted for as reductions in Tobacco revenue. Expected payments for sales incentives are included in other current liabilities on the Company’s consolidated balance sheets. The Company accounts for shipping and handling costs as fulfillment costs as part of cost of sales.
Tobacco Shipping and Handling Fees and Costs: Shipping and handling fees related to sales transactions are neither billed to customers nor recorded as revenue. Shipping and handling costs were $7,006 in 2021, $5,602 in 2020 and $5,802 in 2019. Shipping and handling costs related to sales transactions are part of cost of sales.
Real estate: Revenue from facilities primarily relates to Escena and consists of revenues from food and beverage sales, fees charged for gameplay and the sale of golf related equipment and apparel. Revenue is recognized at the time of sale. See Note 11 for details of the Escena investment.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue from investments in real estate is recognized from land and building sales at the time of the closing of a sale, which is typically when cash is due, the performance obligation is satisfied as the title to and possession of the real estate asset are transferred to the buyer and the Company has no further obligations or involvement in the real estate asset.
(s) Advertising:
Tobacco advertising costs, which are expensed as incurred and included within operating, selling, administration and general expenses, were $4,464, $4,103 and $3,751 for the years ended December 31, 2021, 2020 and 2019, respectively.
(t) Comprehensive Income:
The Company presents net income and other comprehensive income in two separate, but consecutive, statements. The items are presented before related tax effects with detailed amounts shown for the income tax expense or benefit related to each component of other comprehensive income.
The components of accumulated other comprehensive loss, net of income taxes, were as follows:
| | | | | | | | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 | | December 31,
2019 |
| Net unrealized gains on investment securities available for sale, net of income taxes of $21, $160, and $200, respectively | $ | 46 | | | $ | 422 | | | $ | 530 | |
| | | | | |
| | | | | |
| Pension-related amounts, net of income taxes of $5,692, $7,809, and $8,120, respectively | (15,769) | | | (21,496) | | | (22,338) | |
| Accumulated other comprehensive loss | $ | (15,723) | | | $ | (21,074) | | | $ | (21,808) | |
(u) Contingencies:
The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. As discussed in Note 15, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett and the Company. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in Note 15: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.
The Company records Liggett’s product liability legal expenses as operating, selling, administrative and general expenses as those costs are incurred.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(v) Other, Net:
Other, net consisted of:
| | | | | | | | | | | | | | | | | |
| Year Ended |
| December 31, |
| 2021 | | 2020 | | 2019 |
| Interest and dividend income | $ | 1,920 | | | $ | 5,621 | | | $ | 11,085 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net gains recognized on investment securities | 9,384 | | | 1,818 | | | 7,440 | |
| Net periodic benefit cost other than the service costs | (975) | | | (3,618) | | | (2,298) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Credit loss expense | — | | | (12,828) | | | — | |
| Other income | 358 | | | 361 | | | 352 | |
| Other, net | $ | 10,687 | | | $ | (8,646) | | | $ | 16,579 | |
(w)Other Assets:
Other assets consisted of:
| | | | | | | | | | | |
| December 31,
2021 | | December 31, 2020 |
| Restricted assets | $ | 1,551 | | | $ | 3,456 | |
| Prepaid pension costs | 44,585 | | | 35,209 | |
| | | |
| Other assets | 30,549 | | | 26,853 | |
| Total other assets | $ | 76,685 | | | $ | 65,518 | |
(x) Other Current Liabilities:
Other current liabilities consisted of:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Accounts payable | $ | 9,443 | | | $ | 6,509 | |
| Accrued promotional expenses | 55,647 | | | 45,579 | |
| Accrued excise and payroll taxes payable, net | 22,919 | | | 13,849 | |
| Accrued interest | 30,676 | | | 31,624 | |
| | | |
| Accrued salaries and benefits | 13,982 | | | 15,066 | |
| | | |
| Allowance for sales returns | 6,669 | | | 7,356 | |
| Other current liabilities | 10,151 | | | 15,575 | |
| Total other current liabilities | $ | 149,487 | | | $ | 135,558 | |
(y) New Accounting Pronouncements:
Accounting Standards Updates (“ASU”) adopted in 2021:
In December 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740, and clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Adoption of this update did not have a material impact on the Company’s consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Adoption of this update did not have a material impact on the Company’s consolidated financial statements.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ASUs to be adopted in future periods:
In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This guidance is effective for all entities for contract modifications beginning March 12, 2020 and can be applied prospectively through December 31, 2022. In January 2021, the FASB issued ASU 2021-01 to clarify the scope of the guidance and allow certain aspects of Topic 848 to be applied to all derivative instruments that undergo a modification of the interest rate used for discounting, margining or contract price alignment as a result of the reference reform. The Company has not yet determined the extent to which it will utilize these expedients and exceptions should a modification occur. The Company does not anticipate an impact on its consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires that an acquirer recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.
2.REVENUE RECOGNITION
Revenue Recognition Policies
Revenue is measured based on a consideration specified in a contract with a customer less any sales incentives. Revenue is recognized when (a) an enforceable contract with a customer exists, that has commercial substance, and collection of substantially all consideration for services is probable; and (b) the performance obligations to the customer are satisfied either over time or at a point in time.
Tobacco sales: Revenue from cigarette sales, which include federal excise taxes billed to customers, is recognized upon shipment of cigarettes when control has passed to the customer. Average collection terms for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the customer. The Company records a liability for goods estimated to be returned in other current liabilities and the associated receivable for anticipated federal excise tax refunds in other current assets on the consolidated balance sheets. The liability for returned goods is based principally on sales volumes and historical return rates. The estimated costs of sales incentives, including customer incentives and trade promotion activities, are based principally on historical experience and are accounted for as reductions in Tobacco revenue. Expected payments for sales incentives are included in other current liabilities on the Company’s consolidated balance sheets. The Company accounts for shipping and handling costs as fulfillment costs as part of cost of sales.
Real estate sales: Revenue from facilities primarily relates to Escena and consists of revenues from food and beverage sales, fees charged for gameplay and the sale of golf related equipment and apparel. Revenue is recognized at the time of sale.
Revenue from investments in real estate is recognized from land and building sales at the time of the closing of a sale, which is typically when cash is due, the performance obligation is satisfied as the title to and possession of the real estate asset are transferred to the buyer and the Company has no further obligations or involvement in the real estate asset.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disaggregation of Revenue
In the following table, revenue is disaggregated by major product line for the Tobacco segment:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended |
| | | | December 31, |
| | | | | | 2021 | | 2020 | | 2019 |
| Tobacco Segment Revenues: | | | | | | | | | | |
Core Discount Brands - Eagle 20’s, Pyramid, Montego, Grand Prix, Liggett Select and Eve | | | | | | $ | 1,139,009 | | | $ | 1,133,660 | | | $ | 1,040,419 | |
| Other Brands | | | | | | 63,488 | | | 70,841 | | | 74,421 | |
| Total tobacco revenues | | | | | | $ | 1,202,497 | | | $ | 1,204,501 | | | $ | 1,114,840 | |
In the following table, revenue is disaggregated by major services line for the Real Estate segment:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
| Real Estate Segment Revenues | | | | | | |
| Sales on facilities primarily from Escena | | $ | 5,353 | | | $ | 3,681 | | | $ | 4,763 | |
| Revenues from investments in real estate | | 12,850 | | | 20,500 | | | — | |
| Total real estate revenues | | $ | 18,203 | | | $ | 24,181 | | | $ | 4,763 | |
3. CURRENT EXPECTED CREDIT LOSSES
Tobacco receivables: Average collection terms for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the customer. Based on Tobacco historical and ongoing cash collections from customers, an estimated credit loss in accordance with ASU 2016-13 was not recorded for these trade receivables as of December 31, 2021 and December 31, 2020.
Term loan receivables: New Valley periodically provides term loans to commercial real estate developers, which are included in Other assets on the consolidated balance sheets. New Valley had 2 loans in maturity default at December 31, 2021, with a total amortized cost basis of $15,928, including accrued interest receivable of $6,428 at both December 31, 2021 and December 31, 2020. The loans are secured by guarantees and given their risk profiles are evaluated individually. As New Valley does not have internal historical loss information by which to evaluate the risk of credit losses, external market data measuring default risks on high yield loans as of each measurement date was utilized to estimate reserves for credit losses on these loans. Pursuant to the requirements of ASU 2016-13, New Valley’s expected credit loss estimate was $15,928 at both December 31, 2021 and December 31, 2020.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is the rollforward of the allowance for credit losses for the year ended December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1,
2021 | | Current Period Provision | | Write-offs | | Recoveries | | December 31,
2021 |
| Allowance for credit losses: | | | | | | | | | |
| New Valley term loan receivables | 15,928 | | | — | | | — | | | — | | | 15,928 | |
The following is the rollforward of the allowance for credit losses for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1,
2020 | | Current Period Provision | | Write-offs | | Recoveries | | December 31,
2020 |
| Allowance for credit losses: | | | | | | | | | |
| New Valley term loan receivables | 3,100 | | | 12,828 | | (1) | — | | | — | | | 15,928 | |
_____________________________
(1)The credit losses related to the New Valley term loan receivables are included in Other, net on the consolidated statements of operations.
4. EARNINGS PER SHARE
Information concerning the Company’s common stock has been adjusted to give retroactive effect to the 5% stock dividend distributed to Company stockholders on September 29, 2019. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividend. The dividend was recorded at par value of $703 since the Company did not have retained earnings in 2019. In connection with the 5% stock dividend, the Company increased the number of shares subject to outstanding stock options by 5% and reduced the exercise prices accordingly. On November 5, 2019, the Company announced that its board of directors decided that the Company would no longer pay an annual stock dividend.
As discussed in Note 14, the Company has stock option awards which provide for common stock dividend equivalents at the same rate as paid on the common stock with respect to the shares underlying the unexercised portion of the options. These outstanding options represent participating securities under authoritative guidance. The Company recognizes payments of the dividend equivalent rights ($3,832, $3,684, and $8,967, for the years ended December 31, 2021, 2020 and 2019, respectively) on these options as reductions in additional paid-in-capital on the Company’s consolidated balance sheets. The Company included the income tax benefit associated with the dividend equivalent rights as a component of income tax expense due to the adoption of ASU 2016-09. As a result, in its calculation of basic earnings per share (“EPS”) for the years ended December 31, 2021, 2020 and 2019, respectively, the Company has adjusted its net income for the effect of these participating securities as follows:
Net income (loss) for purposes of determining basic EPS for discontinued operations and net income available to common stockholders attributed to Vector Group Ltd. was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net income attributed to Vector Group Ltd. from continuing operations | $ | 147,154 | | | $ | 126,922 | | | $ | 93,889 | |
| Net income (loss) attributed to Vector Group Ltd. from discontinued operations | 72,309 | | | (33,984) | | | 7,085 | |
| Net income attributed to Vector Group Ltd. | 219,463 | | | 92,938 | | | 100,974 | |
| Income from continuing operations attributable to participating securities | (5,862) | | | (2,560) | | | (7,464) | |
| Net income available to common stockholders attributed to Vector Group Ltd. | $ | 213,601 | | | $ | 90,378 | | | $ | 93,510 | |
Net income for purposes of determining basic EPS for continuing operations applicable to common shares attributed to Vector Group Ltd. was as follows:
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net income attributed to Vector Group Ltd. from continuing operations | $ | 147,154 | | | $ | 126,922 | | | $ | 93,889 | |
| Income from continuing operations attributable to participating securities | (3,694) | | | (2,580) | | | (7,464) | |
| Net income available to common stockholders attributed to Vector Group Ltd. | $ | 143,460 | | | $ | 124,342 | | | $ | 86,425 | |
Basic EPS is computed by dividing net income available to common stockholders attributed to Vector Group Ltd. by the weighted-average number of shares outstanding, which includes vested restricted stock.
Net income (loss) for purposes of determining diluted EPS for discontinued operations and net income available to common stockholders attributed to Vector Group Ltd. was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net income attributed to Vector Group Ltd. from continuing operations | $ | 147,154 | | | $ | 126,922 | | | $ | 93,889 | |
| Net income (loss) attributed to Vector Group Ltd. from discontinued operations | 72,309 | | | (33,984) | | | 7,085 | |
| Net income attributed to Vector Group Ltd. | 219,463 | | | 92,938 | | | 100,974 | |
| Income attributable to 7.5% Variable Interest Senior Convertible Notes | — | | | — | | | (1,255) | |
| Income from continuing operations attributable to participating securities | (5,862) | | | (2,560) | | | (7,464) | |
| Net income available to common stockholders attributed to Vector Group Ltd. | $ | 213,601 | | | $ | 90,378 | | | $ | 92,255 | |
Net income for purposes of determining diluted EPS for continuing operations applicable to common shares attributed to Vector Group Ltd. was as follows:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net income attributed to Vector Group Ltd. from continuing operations | $ | 147,154 | | | $ | 126,922 | | | $ | 93,889 | |
| Income attributable to 7.5% Variable Interest Senior Convertible Notes | — | | | — | | | (1,255) | |
| Income from continuing operations attributable to participating securities | (3,694) | | | (2,580) | | | (7,464) | |
| Net income available to common stockholders attributed to Vector Group Ltd. | $ | 143,460 | | | $ | 124,342 | | | $ | 85,170 | |
Basic and diluted EPS for continuing and discontinued operations were calculated using the following common shares for the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2021 | | 2020 | | 2019 |
| Weighted-average shares for basic EPS | 152,403,072 | | | 150,216,141 | | | 146,633,036 | |
| Plus incremental shares related to convertible debt | — | | | — | | | 718,918 | |
| Plus incremental shares related to stock options and non-vested restricted stock | 71,777 | | | 34,812 | | | 16,509 | |
| | | | | |
| Weighted-average shares for diluted EPS | 152,474,849 | | | 150,250,953 | | | 147,368,463 | |
It may not be possible to recalculate EPS attributable to common stockholders by adjusting EPS from continuing operations by EPS from discontinued operations as each amount is calculated independently.
The following non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the years ended December 31, 2021, 2020 and 2019, but were not included in the computation of diluted EPS because the impact of common shares issuable under the convertible debt were anti-dilutive to EPS.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | |
| | | | | |
| Weighted-average shares of non-vested restricted stock | 524,606 | | | 520,936 | | | 1,207,366 | |
| Weighted-average expense per share | $ | 17.42 | | | $ | 19.54 | | | $ | 17.97 | |
| Weighted-average number of shares issuable upon conversion of debt | — | | | 2,423,719 | | | 11,118,139 | |
| Weighted-average conversion price | $ | — | | | $ | 20.27 | | | $ | 20.27 | |
5. LEASES
The Company has operating and finance leases for corporate and sales offices, and certain vehicles and equipment accounted for under ASC 842. The leases have remaining lease terms of one year to five years, some of which include options to extend for up to five years, and some of which include options to terminate the leases within one year. However, the Company in general is not reasonably certain to exercise options to renew or terminate, and therefore renewal and termination options are not considered in the lease term or the ROU asset and lease liability balances. The Company’s lease population includes purchase options on equipment leases that are included in the lease payments when reasonably certain to be exercised. The Company’s lease population does not include any residual value guarantees. The Company’s lease population does not contain any material restrictive covenants.
The Company has leases with variable payments, most commonly in the form of Common Area Maintenance (“CAM”) and tax charges which are based on actual costs incurred. These variable payments were excluded from the ROU asset and lease liability balances since they are not fixed or in-substance fixed payments. Variable payments are expensed as incurred.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Operating lease cost | | | $ | 4,578 | | | $ | 4,572 | | | $ | 4,636 | |
| Short-term lease cost | | | 374 | | | 349 | | | 338 | |
| Variable lease cost | | | 320 | | | 634 | | | 623 | |
| | | | | | | |
| Finance lease cost: | | | | | | | |
| Amortization | | | 58 | | | 111 | | | 224 | |
| Interest on lease liabilities | | | 9 | | | 14 | | | 15 | |
| Total lease cost | | | $ | 5,339 | | | $ | 5,680 | | | $ | 5,836 | |
| | | | | | | |
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Cash paid for amounts included in measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 4,961 | | | $ | 4,034 | | | $ | 4,318 | |
| Operating cash flows from finance leases | 10 | | | 14 | | | 15 | |
| Financing cash flows from finance leases | 57 | | | 102 | | | 217 | |
| | | | | |
| ROU assets obtained in exchange for lease obligations: | | | | | |
| Operating leases | 1,993 | | | 3,298 | | | 676 | |
| Finance leases | — | | | 60 | | | 159 | |
| | | | | |
| | | | | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | | | | | | | |
| | | | |
| | December 31, | | December 31, |
| | 2021 | | 2020 |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| Finance leases: | | | | |
Investments in real estate, net (1) | | $ | 30 | | | $ | 62 | |
| | | | |
| Property, plant and equipment, at cost | | $ | 127 | | | $ | 127 | |
| Accumulated amortization | | (70) | | | (44) | |
| Property and equipment, net | | $ | 57 | | | $ | 83 | |
| | | | |
Current portion of notes payable and long-term debt | | $ | 55 | | | $ | 57 | |
Notes payable, long-term debt and other obligations, less current portion | | 41 | | | 96 | |
| Total finance lease liabilities | | $ | 96 | | | $ | 153 | |
| | | | |
| Weighted average remaining lease term in years: | | | | |
| Operating leases | | 3.36 | | 4.23 |
| Finance leases | | 1.84 | | 2.71 |
| | | | |
| Weighted average discount rate: | | | | |
| Operating leases | | 9.60 | % | | 10.20 | % |
| Finance leases | | 8.21 | % | | 7.82 | % |
| | | | |
| | | | |
_____________________________
(1)Included in Investments in real estate, net on the consolidated balance sheets are finance lease equipment, at a cost of $748 and $748 and accumulated amortization of $718 and $686 as of December 31, 2021 and 2020, respectively.
As of December 31, 2021, maturities of lease liabilities were as follows:
| | | | | | | | | | | | |
| Operating Leases | | Finance
Leases | |
| Year Ending December 31: | | | | |
| 2022 | $ | 4,889 | | | $ | 61 | | |
| 2023 | 4,181 | | | 35 | | |
| 2024 | 3,453 | | | 8 | | |
| 2025 | 2,086 | | | — | | |
| 2026 | 319 | | | — | | |
| Thereafter | — | | | — | | |
| | | | |
| Total lease payments | 14,928 | | | 104 | | |
| Less imputed interest | (2,237) | | | (8) | | |
| Total | $ | 12,691 | | | $ | 96 | | |
The Company has 1 lease for office space wherein the lessor is an affiliate of a significant stockholder of the Company. This lease represents $571 of the ROU asset balances and $616 of lease liability balances as of December 31, 2021. The rent expense for this lease was approximately $458 for the year ended December 31, 2021.
As of December 31, 2021, the Company had no undiscounted lease payments relating to leases that have not yet commenced.
The Company’s rental expense for the years ended December 31, 2021, 2020 and 2019 was $4,578, $4,572 and $4,552, respectively. Rent expense for the year ended December 31, 2021 consisted of $3,275 of amortization and $1,303 of lease expense for interest accretion on operating lease liabilities. Rent expense for the year ended December 31, 2020 consisted of $3,170 of amortization and impairment of ROU assets and $1,402 of lease expense for interest accretion on operating lease
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liabilities. Rent expense for the year ended December 31, 2019 consisted of $3,033 of amortization and impairment of ROU assets and $1,519 of lease expense for interest accretion on operating lease liabilities.
6. DISCONTINUED OPERATIONS
On December 29, 2021, at 11:59 p.m., New York City time, the Company completed the distribution to its stockholders (including Vector common stock underlying outstanding stock options awards and restricted stock awards) of the common stock of Douglas Elliman (the “Spin-off”). Each holder of Vector common stock received 1 share of Douglas Elliman’s common stock for every 2 shares of Vector common stock (including Vector common stock underlying outstanding stock option awards and restricted stock awards) held of record as of the close of business, New York City time, on December 20, 2021. In the Spin-off, an aggregate of 77,720,159 shares of Douglas Elliman’s common stock were issued, with any fractional shares converted to cash and paid to applicable Vector stockholders. Prior to the Spin-off, Douglas Elliman was a component of the Real Estate segment of the Company.
Following the Spin-off, Douglas Elliman is a separate public company. The Company and Douglas Elliman entered into a distribution agreement (the “Distribution Agreement”) and several ancillary agreements for the purpose of accomplishing the Spin-off. The Distribution Agreement includes an agreement that the Company and Douglas Elliman will provide each other with appropriate indemnities with respect to liabilities arising out of the business retained by Vector and the business transferred to Douglas Elliman by Vector. These agreements also govern the Company’s relationship with Douglas Elliman subsequent to the Spin-off and provide for the allocation of employee benefit, tax and some other liabilities and obligations attributable to periods prior to, at and after the Spin-off. These agreements also include arrangements with respect to transition services (the “Transition Services Agreement”). The Company entered into a Tax Disaffiliation Agreement with Douglas Elliman that governs Vector’s and Douglas Elliman’s respective rights, responsibilities and obligations with respect to taxes and tax benefits, the filing of tax returns, the control of audits and other tax matters. Douglas Elliman will be party to other arrangements with Vector and its subsidiaries.
Douglas Elliman and its eligible subsidiaries have previously joined with Vector in the filing of certain consolidated, combined, and unitary returns for state, local, and other applicable tax purposes. However, for periods (or portions thereof) beginning after the Spin-off, Douglas Elliman will not join with Vector or any of its subsidiaries (as determined after the Spin-off) in the filing of any federal, state, local or other applicable consolidated, combined or unitary tax returns.
Under the Tax Disaffiliation Agreement, with certain exceptions, Vector will be generally responsible for all of Douglas Elliman’s U.S. federal, state, local and other applicable income and non-income taxes for any taxable period or portion of such period ending on or before the Spin-off date. Douglas Elliman will be generally responsible for all taxes that are attributable to it or one of its subsidiaries after the Spin-off date.
Following the Spin-off, there is an overlap between certain officers of the Company and of Douglas Elliman. Howard M. Lorber serves as the President and Chief Executive Officer of the Company and of Douglas Elliman. Richard J. Lampen serves as the Chief Operating Officer of the Company and of Douglas Elliman, J. Bryant Kirkland III serves as the Chief Financial Officer and Treasurer of the Company and of Douglas Elliman, Marc N. Bell serves as the General Counsel and Secretary of the Company and of Douglas Elliman, and J. David Ballard serves as Senior Vice President, Enterprise Efficiency and Chief Technology Officer of the Company and of Douglas Elliman. Furthermore, immediately following the Spin-off, three of the members of the Board of Directors of the Company, Mr. Lorber, Mr. Lampen and Wilson L. White, will also serve as directors of Douglas Elliman.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations of Douglas Elliman:
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
ASSETS: | | | |
Current assets: | | | |
Cash and cash equivalents | $ | — | | | $ | 94,421 | |
Accounts receivable - trade, net | — | | | 24,377 | |
Other current assets | — | | | 29,567 | |
Total current assets | — | | | 148,365 | |
Property, plant and equipment, net | — | | | 42,703 | |
Long-term investments (includes $237 at fair value) | — | | | 237 | |
Operating lease right-of-use assets | — | | | 133,103 | |
Goodwill and other intangible assets, net | — | | | 100,066 | |
Other assets | — | | | 29,508 | |
Total long-term assets | — | | | 305,617 | |
Total assets | $ | — | | | $ | 453,982 | |
LIABILITIES: | | | |
Current liabilities: | | | |
Current portion of notes payable and long-term debt | $ | — | | | $ | 12,500 | |
Current operating lease liability | — | | | 23,753 | |
Income taxes payable, net | — | | | 17 | |
Other current liabilities | — | | | 63,379 | |
Total current liabilities | — | | | 99,649 | |
Notes payable, long-term debt and other obligations, less current portion | — | | | 12,920 | |
Deferred income taxes, net | — | | | 13,512 | |
Non-current operating lease liability | — | | | 143,296 | |
Other liabilities | — | | | 34,384 | |
Total long-term liabilities | — | | | 204,112 | |
Total liabilities | $ | — | | | $ | 303,761 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The financial results of Douglas Elliman through the Spin-off are presented as income (loss) from discontinued operations, net of income taxes on the Company’s consolidated statements of operations. The following table presents financial results of Douglas Elliman for the periods prior to the completion of the Spin-off:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands, except per share amounts) |
| Revenues: | | | | | |
| Real estate | $ | 1,344,825 | | | $ | 773,987 | | | $ | 784,108 | |
| | | | | |
| Expenses: | | | | | |
| Cost of sales | 989,436 | | | 547,543 | | | 526,694 | |
| | | | | |
| Operating, selling, administrative and general expenses | 253,942 | | | 212,926 | | | 260,894 | |
| Net loss on sales of asset | — | | | 1,169 | | | — | |
| Impairments of goodwill and intangible assets | — | | | 58,252 | | | — | |
| Restructuring charges | — | | | 3,382 | | | — | |
| Operating income (loss) | 101,447 | | | (49,285) | | | (3,480) | |
| | | | | |
| Other income (expenses): | | | | | |
| Interest expense | (164) | | | (263) | | | (905) | |
| Equity in (losses) earnings from real estate ventures | (278) | | | 30 | | | 8,472 | |
| Other, net | (870) | | | 3,190 | | | 4,726 | |
| Pretax income (loss) from discontinued operations | 100,135 | | | (46,328) | | | 8,813 | |
| Income tax expense | 28,016 | | | (12,344) | | | 1,728 | |
| Income (loss) from discontinued operations | 72,119 | | | (33,984) | | | 7,085 | |
| | | | | |
| Net loss from discontinued operations attributed to non-controlling interest | 190 | | | — | | | — | |
| | | | | |
| Net income (loss) from discontinued operations attributed to Vector Group Ltd. | $ | 72,309 | | | $ | (33,984) | | | $ | 7,085 | |
The following table presents the information regarding certain components of cash flows from discontinued operations:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | (Dollars in thousands, except per share amounts) |
| Depreciation and amortization | $ | 8,561 | | | $ | 8,537 | | | $ | 8,638 | |
| Non-cash lease expense | 18,667 | | | 17,326 | | | 17,973 | |
| | | | | |
| | | | | |
| | | | | |
| Capital expenditures | (4,106) | | | (6,126) | | | (8,079) | |
| | | | | |
| | | | | |
| | | | | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
7. INVESTMENT SECURITIES
Investment securities at fair value consisted of the following:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Debt securities available for sale | $ | 103,906 | | | $ | 91,204 | |
| | | |
| | | |
| Equity securities at fair value: | | | |
| Marketable equity securities | 19,560 | | | 21,155 | |
| Mutual funds invested in debt securities | 23,221 | | | 23,226 | |
Long-term investment securities at fair value (1) | 32,089 | | | 33,981 | |
| Total equity securities at fair value | 74,870 | | | 78,362 | |
| | | |
| Total investment securities at fair value | 178,776 | | | 169,566 | |
| Less: | | | |
Long-term investment securities at fair value (1) | 32,089 | | | 33,981 | |
| Current investment securities at fair value | $ | 146,687 | | | $ | 135,585 | |
| | | |
Long-term investment securities at fair value (1) | $ | 32,089 | | | $ | 33,981 | |
| Equity-method investments | 20,984 | | | 18,310 | |
| Total long-term investments | $ | 53,073 | | | $ | 52,291 | |
| | | |
Equity securities at cost: (2) | | | |
| Other equity securities at cost | $ | 5,200 | | | $ | 5,200 | |
(1) These assets are measured at net asset value (“NAV”) as a practical expedient under ASC 820.
(2) These assets are without readily determinable fair values that do not qualify for the NAV practical expedient and are included in Other assets on the consolidated balance sheets.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net gains recognized on investment securities were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Net gains recognized on equity securities at fair value | $ | 9,615 | | | $ | 2,123 | | | $ | 7,320 | |
| Net gains recognized on debt and equity securities available for sale | 45 | | | 110 | | | 135 | |
| | | | | |
| Impairment expense | (276) | | | (415) | | | (15) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net gains recognized on investment securities | $ | 9,384 | | | $ | 1,818 | | | $ | 7,440 | |
(a) Debt Securities Available for Sale:
The components of debt securities available for sale at December 31, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| | | | | | | |
| | | | | | | |
| Marketable debt securities | $ | 103,838 | | | $ | 68 | | | $ | — | | | $ | 103,906 | |
| | | | | | | |
The table below summarizes the maturity dates of debt securities available for sale at December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
Investment Type: | Fair Value | | Under 1 Year | | 1 Year up to 5 Years | | More than 5 Years |
| U.S. Government securities | $ | 6,481 | | | $ | 5,688 | | | $ | 793 | | | $ | — | |
| Corporate securities | 47,531 | | | 20,028 | | | 27,503 | | | — | |
| U.S. mortgage-backed securities | 19,572 | | | 1,824 | | | 17,748 | | | — | |
| | | | | | | |
| | | | | | | |
| Commercial paper | 29,103 | | | 29,103 | | | — | | | — | |
| | | | | | | |
| Foreign fixed-income securities | 1,219 | | | 1,219 | | | — | | | — | |
| Total debt securities available for sale by maturity dates | $ | 103,906 | | | $ | 57,862 | | | $ | 46,044 | | | $ | — | |
The components of debt securities available for sale at December 31, 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Fair
Value |
| | | | | | | |
| | | | | | | |
| Marketable debt securities | $ | 90,621 | | | $ | 583 | | | $ | — | | | $ | 91,204 | |
| | | | | | | |
There were no available-for-sale debt securities with continuous unrealized losses for less than 12 months and 12 months or greater at December 31, 2021 and 2020, respectively.
Gross realized gains and losses recognized on debt securities available for sale were as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Gross realized gains on sales | | $ | 108 | | | $ | 329 | | | $ | 144 | |
| Gross realized losses on sales | | (63) | | | (219) | | | (9) | |
| Net gains recognized on debt securities available for sale | | $ | 45 | | | $ | 110 | | | $ | 135 | |
| | | | | | |
| Impairment expense | | $ | (276) | | | $ | (415) | | | $ | (15) | |
Although management generally does not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing the Company’s investment securities portfolio, management may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(b) Equity Securities at Fair Value:
The following is a summary of unrealized and realized net gains and losses recognized in net income on equity securities at fair value for the years ended December 31, 2021, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2021 | | 2020 | | 2019 |
| Net gains recognized on equity securities | | | $ | 9,615 | | | $ | 2,123 | | | $ | 7,320 | |
| Less: Net gains (losses) recognized on equity securities sold | | | 7,534 | | | (121) | | | 1,526 | |
| Net unrealized gains recognized on equity securities still held at the reporting date | | | $ | 2,081 | | | $ | 2,244 | | | $ | 5,794 | |
| | | | | | | |
The Company’s mutual funds invested in debt securities are classified as Level 1 under the fair value hierarchy disclosed in Note 18. Their fair values are based on quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets. The Company has unfunded commitments of $514 related to long-term investment securities at fair value as of December 31, 2021.
The Company received cash distributions of $11,642 as of December 31, 2021, of which $11,509 were classified as investing cash inflows. The Company received cash distributions of $32,676 as of December 31, 2020, of which $32,572 were classified as investing cash inflows. The Company received cash distributions of $8,320 and recorded $8,502 of in-transit redemptions as of December 31, 2019, all of which were classified as investing cash inflows. $8,256 of total cash distributions received was classified as investing cash inflows.
(c) Equity Securities Without Readily Determinable Fair Values That Do Not Qualify for the NAV Practical Expedient
Equity securities without readily determinable fair values that do not qualify for the NAV practical expedient consisted of investments in various limited liability companies at December 31, 2021 and 2020, respectively. The total carrying value of these investments was $5,200 and $5,200 and was included in “Other assets” on the consolidated balance sheets at December 31, 2021 and 2020, respectively. No impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified for the years ended December 31, 2021, 2020 and 2019, respectively.
(d) Equity-Method Investments:
Equity-method investments consisted of the following:
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Mutual and hedge funds | $ | 20,984 | | | $ | 18,310 | |
| | | |
| | | |
At December 31, 2021, the Company’s ownership percentages in the mutual and hedge funds accounted for under the equity method ranged from 6.43% to 37.78%. The Company’s ownership percentage in these investments meets the threshold for equity-method accounting.
On February 14, 2020, Ladenburg Thalmann Financial Services Inc. (“LTS”) was acquired pursuant to a cash tender offer of $3.50 per outstanding common share and, in connection therewith, the Company received proceeds of $53,169 in exchange for the Company’s 15,191,205 common shares of LTS. The Company also tendered 240,000 shares of LTS 8% Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 Per Share) for redemption and received an additional $6,009 in March 2020.
On October 9, 2019, Castle Brands Inc. (“Castle”) was acquired pursuant to a cash tender offer of $1.27 per outstanding common share and, in connection therewith, the Company tendered the entire amount of its 12,895,017 common shares of Castle. The Company received and recognized a gain of $16,377 from the transaction.
See Note 17 Related Party Transactions for further discussion of the LTS and Castle investments.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity in earnings from investments were:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Mutual fund and hedge funds | $ | 2,675 | | | $ | 2,844 | | | $ | 958 | |
| Ladenburg Thalmann Financial Services Inc. | — | | | 53,424 | | | (410) | |
| Castle Brands Inc. | — | | | — | | | 16,452 | |
| | | | | |
| Equity in earnings from investments | $ | 2,675 | | | $ | 56,268 | | | $ | 17,000 | |
The Company received $50 in dividends from one of its equity-method investments that were reinvested back into the fund in 2021. The Company received total cash distributions of $54,089 ($53,901, net of reinvested dividends) and $17,875 from the Company’s equity-method investments in 2020 and 2019, respectively. The cash distributions of $53,901 in 2020 were classified as operating cash inflows. The cash distributions of $17,875 were classified as operating cash inflows.
(e) Combined Financial Statements for Unconsolidated Subsidiaries Accounted for on Equity Method
Pursuant to Rule 4-08(g), the following summarized financial data for unconsolidated subsidiaries includes information for the mutual fund and hedge funds.
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Investment securities | $ | 493,705 | | | $ | 486,390 | |
| Cash and cash equivalents | 44,644 | | | 7,126 | |
| Other assets | 14,151 | | | 41,004 | |
| Total assets | $ | 552,500 | | | $ | 534,520 | |
| | | |
| Other liabilities | $ | 214,607 | | | $ | 230,237 | |
| Total liabilities | 214,607 | | | 230,237 | |
| Partners’ capital | 337,893 | | | 304,283 | |
| Total liabilities and partners’ capital | $ | 552,500 | | | $ | 534,520 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Investment income | $ | 1,574 | | | $ | 1,779 | | | $ | 2,834 | |
| Expenses | 12,873 | | | 9,300 | | | 6,756 | |
| Net investment loss | (11,299) | | | (7,521) | | | (3,922) | |
| Total net realized gain and net change in unrealized depreciation from investments | 48,342 | | | 123,381 | | | 18,822 | |
| Net increase in partners’ capital resulting from operations | $ | 37,043 | | | $ | 115,860 | | | $ | 14,900 | |
Pursuant to Rule 4-08(g), the following summarized financial data is presented for LTS. The Company accounts for its investment in LTS using a three-month lag reporting period.
| | | | | | | | | |
| Three Months Ended | | |
| December 31, | | |
| 2019 | | | | |
Revenues | $ | 395,735 | | | | | |
Expenses | 394,992 | | | | | |
Income before other items | 743 | | | | | |
Change in fair value of contingent consideration | (374) | | | | | |
Income from continuing operations | 369 | | | | | |
Net income | $ | 508 | | | | | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. INVENTORIES
Inventories consist of:
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Leaf tobacco | $ | 38,825 | | | $ | 42,988 | |
| Other raw materials | 7,560 | | | 5,987 | |
| Work-in-process | 2,639 | | | 520 | |
| Finished goods | 64,218 | | | 68,781 | |
| | | |
| Inventories at current cost | 113,242 | | | 118,276 | |
| LIFO adjustments | (18,627) | | | (20,731) | |
| | $ | 94,615 | | | $ | 97,545 | |
All of the Company’s inventories as of December 31, 2021 and 2020 have been reported under the LIFO method. The $18,627 LIFO adjustment as of December 31, 2021 decreases the current cost of inventories by $12,128 for Leaf tobacco, $829 for Other raw materials, $18 for Work-in-process, and $5,652 for Finished goods. The $20,731 LIFO adjustment as of December 31, 2020 decreased the current cost of inventories by $14,139 for Leaf tobacco, $474 for Other raw materials, $26 for Work-in-process, and $6,092 for Finished goods. Cost of goods sold was reduced by $330 and $1,222 for the years ended December 31, 2021 and December 31, 2020, respectively, due to liquidations of LIFO inventories.
The amount of capitalized MSA cost in “Finished goods” inventory was $20,450 and $21,120 as of December 31, 2021 and 2020, respectively. Federal excise tax capitalized in inventory was $25,160 and $27,683 as of December 31, 2021 and 2020, respectively.
At December 31, 2021, Liggett had tobacco purchase commitments of approximately $13,289. Liggett has a single source supply agreement for reduced ignition propensity cigarette paper through 2022.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Land and improvements | $ | 1,624 | | | $ | 1,624 | |
| Buildings | 18,060 | | | 17,772 | |
| Machinery and equipment | 167,713 | | | 166,156 | |
| Leasehold improvements | 1,277 | | | 1,277 | |
| | 188,674 | | | 186,829 | |
| Less accumulated depreciation and amortization | (151,791) | | | (151,544) | |
| | $ | 36,883 | | | $ | 35,285 | |
Depreciation and amortization expense related to property, plant and equipment for the years ended December 31, 2021, 2020 and 2019 was $7,816, $9,092 and $9,213, respectively.
The Company, through Liggett, had future machinery and equipment purchase commitments of $890 at December 31, 2021.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. NEW VALLEY LLC
(a) Investments in real estate ventures.
New Valley also holds equity investments in various real estate projects domestically and internationally. The majority of New Valley’s investment in real estate ventures were located in the New York City Standard Metropolitan Statistical Area (“SMSA”). New Valley aggregated the disclosure of its investments in real estate ventures by property type and operating characteristics.
The components of “Investments in real estate ventures” were as follows:
| | | | | | | | | | | | | | | |
| Range of Ownership (1) | December 31, 2021 | | December 31, 2020 | |
| Condominium and Mixed Use Development: | | | | | |
| New York City SMSA | 4.2%- 46.7% | $ | 22,654 | | | $ | 30,465 | | |
| All other U.S. areas | 19.6% - 89.1% | 57,485 | | | 37,773 | | |
| | 80,139 | | | 68,238 | | |
| Apartment Buildings: | | | | | |
| | | | | |
| All other U.S. areas | 7.6% - 50.0% | 11,900 | | | — | | |
| | 11,900 | | | — | | |
| Hotels: | | | | | |
| New York City SMSA | 0.4% - 12.3% | 1,635 | | | 2,629 | | |
| International | 49.0% | 1,522 | | | 1,852 | | |
| | 3,157 | | | 4,481 | | |
| Commercial: | | | | | |
| New York City SMSA | 49.0% | — | | | 2,591 | | |
| All other U.S. areas | 1.6% | 7,290 | | | 7,084 | | |
| | 7,290 | | | 9,675 | | |
| | | | | |
| Other | 15.0% - 49.0% | 2,576 | | | 3,006 | | |
| Investments in real estate ventures | | $ | 105,062 | | | $ | 85,400 | | |
_____________________________
(1)The Range of Ownership reflects New Valley’s estimated current ownership percentage. New Valley’s actual ownership percentage as well as the percentage of earnings and cash distributions may ultimately differ as a result of a number of factors including potential dilution, financing or admission of additional partners.
Contributions
The components of New Valley’s contributions to its investments in real estate ventures were as follows:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Condominium and Mixed Use Development: | | | |
| New York City SMSA | $ | 396 | | | $ | 1,805 | |
| All other U.S. areas | 33,719 | | | 11,140 | |
| 34,115 | | | 12,945 | |
| Apartment Buildings: | | | |
| | | |
| All other U.S. areas | 11,900 | | | 284 | |
| 11,900 | | | 284 | |
| Hotels: | | | |
| New York City SMSA | 1,848 | | | 1,169 | |
| | | |
| 1,848 | | | 1,169 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other | — | | | 524 | |
| Total contributions | $ | 47,863 | | | $ | 14,922 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For ventures where New Valley previously held an investment, New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners during the years ended December 31, 2021 and 2020. New Valley’s direct investment percentage for these ventures did not significantly change.
Distributions
The components of distributions received by New Valley from its investments in real estate ventures were as follows:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Condominium and Mixed Use Development: | | | |
| New York City SMSA | $ | 4,440 | | | $ | 1,819 | |
| All other U.S. areas | 13,593 | | | 18,188 | |
| 18,033 | | | 20,007 | |
| Apartment Buildings: | | | |
| | | |
| All other U.S. areas | 18,566 | | | — | |
| 18,566 | | | — | |
| | | |
| | | |
| | | |
| | | |
| Commercial: | | | |
| New York City SMSA | — | | | 601 | |
| All other U.S. areas | 575 | | | 113 | |
| 575 | | | 714 | |
| | | |
| | | |
| Total distributions | $ | 37,174 | | | $ | 20,721 | |
Of the distributions received by New Valley from its investment in real estate ventures, $25,326 and $1,903 were from distributions of earnings and $11,848 and $18,818 were a return of capital for the years ended December 31, 2021 and 2020, respectively. Distributions from earnings are included in cash from operations in the consolidated statements of cash flows, while distributions that are returns of capital are included in cash flows from investing activities in the consolidated statements of cash flows.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Equity in Earnings (Losses) from Real Estate Ventures
New Valley recognized equity in earnings (losses) from real estate ventures as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Condominium and Mixed Use Development: | | | | | |
| New York City SMSA | $ | (4,147) | | | $ | (17,167) | | | $ | (31,011) | |
| All other U.S. areas | (1) | | | (16,578) | | | (6,467) | |
| (4,148) | | | (33,745) | | | (37,478) | |
| Apartment Buildings: | | | | | |
| | | | | |
| All other U.S. areas | 18,566 | | | (284) | | | 79 | |
| 18,566 | | | (284) | | | 79 | |
| Hotels: | | | | | |
| New York City SMSA | (1,597) | | | (3,248) | | | 8,081 | |
| International | (330) | | | (308) | | | 41 | |
| (1,927) | | | (3,556) | | | 8,122 | |
| Commercial: | | | | | |
| New York City SMSA | (2,591) | | | 1,340 | | | 1 | |
| All other U.S. areas | 780 | | | (437) | | | 773 | |
| (1,811) | | | 903 | | | 774 | |
| | | | | |
| Other | (430) | | | (8,046) | | | 743 | |
| Total equity in earnings (losses) from real estate ventures | $ | 10,250 | | | $ | (44,728) | | | $ | (27,760) | |
As part of the Company’s ongoing assessment of the carrying values of its investments in real estate ventures, the Company determined that the fair value of 1 of its New York City SMSA Commercial ventures was less than its carrying value for the year ended December 31, 2021. The Company determined that the impairments were other than temporary. The Company recorded impairment charges as a component of equity in losses from real estate ventures of $2,713 for the year ended December 31, 2021.
During the Company’s 2020 assessment of the carrying values of its investments in real estate ventures, the Company had determined that the fair value of 5 New York City SMSA and 1 All other U.S. areas Condominium and Mixed Use Development ventures were less than their carrying value as of December 31, 2020. The Company determined that the impairments were other than temporary. The Company recorded impairment charges of $16,513 for the year ended December 31, 2020.
During the Company’s 2019 assessment of the carrying values of its investments in real estate ventures, the Company had determined that the fair value of 6 New York City SMSA and 1 All other U.S. areas Condominium and Mixed Use Development ventures were less than their carrying value as of December 31, 2019. The Company determined that the impairments were other than temporary and recorded impairment charges of $39,757 of which $39,717 was attributed to the Company for the year ended December 31, 2019.
As a result of the Company recording impairment charges on certain of its investments in real estate ventures, the impaired real estate ventures were carried at fair value as of the period when the impairment charge was recorded. The impaired real estate ventures were measured at fair value on a nonrecurring basis as a result of recording an other-than-temporary impairment charge.
During the year ended 2021, New Valley’s Natura joint venture sold a parcel of land located in Miami, FL. New Valley recognized equity in earnings of $3,899 from the venture and received distributions of $5,168 for the year ended 2021. As of December 31, 2021, the venture had a carrying value of $13,009.
During the year ended 2021, New Valley’s Maryland joint venture sold its apartment complexes located in Baltimore, Maryland. New Valley recognized equity in earnings of $18,566 from the venture and received distributions of $18,566 for the year ended 2021. As of December 31, 2021, the venture had a carrying value of $0.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the year ended 2019, New Valley’s Park Lane joint venture sold 80% of its interest in the Park Lane Hotel, a Hotel located in the New York City SMSA. New Valley recognized equity in earnings of $10,328 from the sale and received distributions of $20,788 for the year ended 2019. The sale reduced New Valley’s direct ownership percentage of the Park Lane Hotel from 5.20% to 1.04%. New Valley continues to account for its investment in the joint venture under the equity method of accounting because its ownership percentage in its direct investment continues to meet the threshold for equity method accounting.
In 2019, the Company’s New York City SMSA Apartment Building venture sold the remaining parcel of land that was adjacent to a building that was sold the year before. The Company recognized equity in earnings from the venture of $740 and cash distributions of $2,524 for the year ended December 31, 2019. As of December 31, 2021, the venture had a carrying value of $0.
Investment in Real Estate Ventures Entered Into During 2021
In October 2021, New Valley invested $11,900 for an approximate 50.0% interest in Riverchase AL JV LP. The joint venture plans to improve, renovate, and manage an apartment complex located in Hoover, AL. The venture is a VIE; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in Riverchase AL JV LP was $11,900 at December 31, 2021.
In November 2021, New Valley invested $19,500 for an approximate 89.1% interest in 915 Division JV, LLC. The joint venture plans to develop a mixed use development. The venture is a VIE; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in 915 Division JV, LLC was $19,884 at December 31, 2021.
In November 2021, New Valley invested $1,882 for an approximate 50.0% interest in 2000 Atlantic LLC. The joint venture plans to develop a mixed use development. The venture is a VIE; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in 2000 Atlantic LLC was $1,919 at December 31, 2021.
VIE Consideration
The Company has determined that New Valley is the primary beneficiary of 1 real estate venture because it controls the activities that most significantly impact the economic performance of the real estate venture. Consequently, New Valley consolidates this variable interest entity (“VIE”).
The carrying amount of the consolidated assets of the VIE was $0 at both December 31, 2021 and December 31, 2020. Those assets are owned by the VIE, not the Company. The consolidated VIE had no recourse liabilities as of December 31, 2021 and December 31, 2020. A VIE’s assets can only be used to settle the obligations of that VIE. The VIE is not a guarantor of the Company’s senior notes and other debts payable.
For the remaining investments in real estate ventures, New Valley determined that the entities were VIEs but New Valley was not the primary beneficiary. Therefore, New Valley’s investment in such real estate ventures has been accounted for under the equity method of accounting.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Maximum Exposure to Loss
New Valley’s maximum exposure to loss from its investments in real estate ventures consisted of the net carrying value of the venture adjusted for any future capital commitments and/or guarantee arrangements. The maximum exposure to loss was as follows:
| | | | | |
| December 31, 2021 |
Condominium and Mixed Use Development: | |
New York City SMSA | $ | 22,654 | |
All other U.S. areas | 57,484 | |
| 80,138 | |
Apartment Buildings: | |
| |
All other U.S. areas | 11,900 | |
| 11,900 | |
Hotels: | |
New York City SMSA | 1,635 | |
International | 1,522 | |
| 3,157 | |
Commercial: | |
| |
All other U.S. areas | 7,290 | |
| 7,290 | |
| |
Other | 2,576 | |
Total maximum exposure to loss | $ | 105,061 | |
New Valley capitalized $2,669 and $4,003 of interest costs into the carrying value of its ventures whose projects were currently under development during the years ended December 31, 2021 and December 31, 2020, respectively.
(b) Guarantees and Commitments:
The joint venture agreements through which New Valley invests in real estate ventures set forth certain conditions where New Valley or its affiliate may be required to contribute payments towards the satisfaction of liabilities of the other partners in the joint venture, or to otherwise indemnify other partners. Mostly, these contribution/indemnity requirements are triggered in the event New Valley or its affiliate commits an act that results in liability of another partner under a guarantee that the other partner has given to a lender in connection with a loan. The guarantees given in connection with the loans may include non-recourse carve-out, environmental, carry and/or completion guarantees, depending on the specific project. In some instances, New Valley or its affiliate would be proportionately liable in the event of liability under a guarantee that is not the fault of any of the partners in the joint venture. In very limited circumstances, New Valley has agreed to be a guarantor directly in connection with a loan.
The Company believes that as of December 31, 2021, in the event New Valley becomes legally obligated to contribute funds or otherwise indemnify another partner due to a triggering event under a guarantee, or becomes legally obligated as a guarantor (in the limited circumstances where New Valley is a direct guarantor under the loan documents), the real estate underlying the applicable project is expected to be sufficient to largely repay any guaranteed obligation (although a lender need not necessarily resort to foreclosing on the real estate before seeking recourse under a loan guarantee). New Valley has no additional capital commitments as of December 31, 2021.
(c) Combined Financial Statements for Unconsolidated Subsidiaries Accounted for on Equity Method:
Pursuant to Rule 4-08(g), the following summarized financial data for unconsolidated subsidiaries includes information for the following: Other Condominium and Mixed Use Development, Apartment Buildings, Hotels, Commercial and Other.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Condominium and Mixed Use Development:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income Statements | | | | | |
| Revenue | $ | 301,703 | | | $ | 386,859 | | | $ | 208,767 | |
| Cost of goods sold | 317,894 | | | 302,234 | | | 76,162 | |
| Other expenses | 117,985 | | | 270,642 | | | 149,014 | |
| Loss from continuing operations | $ | (134,176) | | | $ | (186,017) | | | $ | (16,409) | |
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Balance Sheets | | | |
| Investment in real estate | $ | 1,434,205 | | | $ | 4,465,118 | |
| Total assets | 1,513,581 | | | 4,551,788 | |
| Total debt | 1,107,366 | | | 3,569,361 | |
| Total liabilities | 1,284,579 | | | 3,921,492 | |
| Non-controlling interest | 63,781 | | | 83,807 | |
Apartment Buildings:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income Statements | | | | | |
| Revenue | $ | 35,213 | | | $ | 65,808 | | | $ | 70,862 | |
| | | | | |
| Other expenses | 46,360 | | | 63,705 | | | 67,094 | |
| (Loss) income from continuing operations | $ | (11,147) | | | $ | 2,103 | | | $ | 3,768 | |
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Balance Sheets | | | |
| Investment in real estate | $ | — | | | $ | 544,610 | |
| Total assets | 6,780 | | | 563,523 | |
| Total debt | — | | | 392,324 | |
| Total liabilities | 131 | | | 399,269 | |
| Non-controlling interest | 4,990 | | | 123,273 | |
Hotels:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income Statements | | | | | |
| Revenue | $ | 42,549 | | | $ | 130,742 | | | $ | 147,446 | |
| Cost of goods sold | 3,671 | | | 2,671 | | | 5,399 | |
| Other expenses | 201,211 | | | 256,973 | | | 220,045 | |
| Loss from continuing operations | $ | (162,333) | | | $ | (128,902) | | | $ | (77,998) | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Balance Sheets | | | |
| Investment in real estate | $ | 1,553,911 | | | $ | 1,489,085 | |
| Total assets | 1,631,664 | | | 1,575,800 | |
| Total debt | 1,110,700 | | | 1,071,445 | |
| Total liabilities | 1,213,044 | | | 1,143,419 | |
| Non-controlling interest | 412,165 | | | 427,439 | |
Commercial:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income Statements | | | | | |
| Revenue | $ | 1,662 | | | $ | 7,911 | | | $ | 7,821 | |
| | | | | |
| Equity in (losses) earnings | 24,383 | | | (13,671) | | | 24,159 | |
| Other expenses | 1,412 | | | 4,740 | | | 7,724 | |
| Income (loss) from continuing operations | $ | 24,633 | | | $ | (10,500) | | | $ | 24,256 | |
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Balance Sheets | | | |
| Investment in real estate | $ | 51,173 | | | $ | 51,487 | |
| Total assets | 71,296 | | | 70,270 | |
| Total debt | 55,625 | | | 55,625 | |
| Total liabilities | 55,016 | | | 55,199 | |
| | | |
Other:
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Income Statements | | | | | |
| Revenue | $ | 180,092 | | | $ | 571 | | | $ | 390,478 | |
| Cost of Goods Sold | — | | | — | | | 220,316 | |
| Other expenses | 303,352 | | | 48,633 | | | 155,257 | |
| (Loss) income from continuing operations | $ | (123,260) | | | $ | (48,062) | | | $ | 14,905 | |
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| | | |
| Balance Sheets | | | |
| Investment in real estate | $ | 392,754 | | | $ | 1,216,819 | |
| Total assets | 444,520 | | | 1,237,794 | |
| Total debt | 227,724 | | | 722,930 | |
| Total liabilities | 233,329 | | | 903,196 | |
| Non-controlling interest | 152,775 | | | 272,196 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(d) Investments in real estate, net:
The components of “Investments in real estate, net” were as follows:
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Escena, net | $ | 9,098 | | | $ | 9,735 | |
| Townhome A (11 Beach Street) | — | | | 5,896 | |
| | | |
| Investment in real estate, net | $ | 9,098 | | | $ | 15,631 | |
Escena. In March 2008, a wholly owned subsidiary of New Valley purchased a loan collateralized by a substantial portion of a 450-acre approved master planned community in Palm Springs, California known as “Escena.” In April 2009, New Valley completed the foreclosure process and took title to the collateral. The project consists of 615 residential lots with site and public infrastructure, an 18-hole golf course, a completed clubhouse, and a 7-acre site approved for a 450-room hotel.
The assets have been classified as an “Investments in real estate, net” on the Company’s consolidated balance sheets and the components were as follows:
| | | | | | | | | | | |
| December 31,
2021 | | December 31,
2020 |
| Land and land improvements | $ | 8,520 | | | $ | 8,911 | |
| Building and building improvements | 1,926 | | | 1,926 | |
| Other | 1,643 | | | 1,672 | |
| | 12,089 | | | 12,509 | |
| Less accumulated depreciation | (2,991) | | | (2,774) | |
| | $ | 9,098 | | | $ | 9,735 | |
The Company recorded operating income of $63 and operating losses of $735 and $862 for the years ended December 31, 2021, 2020 and 2019, respectively, from Escena.
Investment in Sagaponack. In April 2015, New Valley invested $12,502 in a residential real estate project located in Sagaponack, NY. In August 2020, New Valley sold the project for $20,500 and recognized the revenue in accordance with the
scope of ASC Topic 606 since New Valley has no continuing investment or involvement. The sales were presented as revenues
and the cost of the investment as cost of goods sold on the consolidated statements of operations.
Townhome A (11 Beach Street). In November 2020, New Valley received, as part of a liquidating distribution from a real estate joint venture, Unit TH-A, a townhouse located in Manhattan, NY. In April 2021, New Valley sold the unit for $6,750 and recognized the revenue in accordance with the scope of ASC Topic 606 since New Valley has no continuing investment or involvement. The sale was presented as revenue and the cost of the investment as cost of sales on the consolidated statements of operations.
Real Estate Market Conditions. Because of the risks and uncertainties of the real estate markets, the Company will continue to perform additional assessments to determine the impact of the markets, if any, on the Company’s consolidated financial statements. Thus, future impairment charges may occur.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consisted of:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| Vector: | | | |
| 5.75% Senior Secured Notes due 2029 | $ | 875,000 | | | $ | — | |
| 6.125% Senior Secured Notes due 2025 | — | | | 850,000 | |
| 10.5% Senior Notes due 2026, net of unamortized discount of $2,647 and $3,040 | 552,353 | | | 551,960 | |
| | | |
| | | |
| | | |
| | | |
| Liggett: | | | |
| Revolving credit facility | 24 | | | — | |
| | | |
| Equipment loans | 64 | | | 89 | |
| Other | 32 | | | 64 | |
| Total notes payable, long-term debt and other obligations | 1,427,473 | | | 1,402,113 | |
| Less: | | | |
| Debt issuance costs | (28,803) | | | (21,247) | |
| Total notes payable, long-term debt and other obligations | 1,398,670 | | | 1,380,866 | |
| Less: | | | |
| Current maturities | (79) | | | (57) | |
| Amount due after one year | $ | 1,398,591 | | | $ | 1,380,809 | |
Senior Notes - Vector:
6.125% Senior Secured Notes due 2025:
On January 27, 2017, the Company sold $850,000 in aggregate principal amount of its 6.125% Senior Secured Notes due 2025 in a private offering to qualified institutional investors and non-U.S. persons pursuant to the exemptions from the registration requirements of the Securities Act of 1933 (“Securities Act”) contained in Rule 144A and Regulation S under the Securities Act.
The 6.125% Senior Secured Notes due 2025 paid interest on a semi-annual basis at a rate of 6.125% per year and had a maturity date of February 1, 2025. On February 1, 2021, the 6.125% Senior Secured Notes due 2025 were redeemed in full and the Company recorded a loss on the extinguishment of debt of $21,362 in 2021, including $13,014 of premium and $8,348 of other costs and non-cash interest expense related to the recognition of previously unamortized deferred finance costs.
The 6.125% Senior Secured Notes due 2025 were guaranteed subject to certain customary automatic release provisions on a joint and several basis by all of the wholly-owned domestic subsidiaries of the Company that are engaged in the conduct of the Company’s cigarette businesses. In addition, some of the guarantees were collateralized by first priority or second priority security interests in certain assets of some of the subsidiary guarantors, including their common stock, pursuant to security and pledge agreements.
5.75% Senior Secured Notes due 2029:
On January 28, 2021, the Company completed the sale of $875,000 in aggregate principal amount of its 5.75% Senior Secured Notes due 2029 (“5.75% Senior Secured Notes”) to qualified institutional buyers and non-U.S. persons in a private offering pursuant to the exemptions from the registration requirements of the Securities Act contained in Rule 144A and Regulation S under the Securities Act. The aggregate net cash proceeds from the sale of the 5.75% Senior Secured Notes were approximately $855,500 after deducting the initial purchaser’s discount and estimated expenses and fees payable by the Company in connection with the offering. The Company used the net cash proceeds from the 5.75% Senior Secured Notes offering, together with cash on hand, to redeem all of the Company’s outstanding 6.125% Senior Secured Notes due 2025, including accrued interest and any premium thereon, and to pay fees and expenses in connection with the offering of the 5.75% Senior Secured Notes.
The 5.75% Senior Secured Notes pay interest on a semi-annual basis at a rate of 5.75% per year and mature on the earlier of February 1, 2029 and the date that is 91 days before November 1, 2026, the final stated maturity date of the 10.5% Senior
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Notes due 2026 (“10.5% Senior Notes”) if such 10.5% Senior Notes have not been repurchased and cancelled or refinanced by such date.
The 5.75% Senior Secured Notes are fully and unconditionally guaranteed, subject to certain customary automatic release provisions, on a joint and several basis by all of the wholly-owned domestic subsidiaries of the Company that are engaged in the conduct of the Company’s cigarette businesses, which subsidiaries, as of the issuance date of the 5.75% Senior Secured Notes were also guarantors under the Company’s outstanding 10.5% Senior Notes. The 5.75% Senior Secured Notes are not guaranteed by New Valley, or any of the Company’s subsidiaries engaged in the Company’s real estate business conducted through its subsidiary, New Valley. The guarantees provided by certain of the guarantors are secured by first priority or second priority security interests in certain collateral of such guarantors pursuant to security and pledge agreements, subject to certain permitted liens and exceptions as further described in the indenture and the security documents relating thereto. The Company does not provide any security for the 5.75% Senior Secured Notes.
As of December 31, 2021, the Company was in compliance with all debt covenants.
10.5% Senior Notes due 2026:
On November 2, 2018, the Company completed the sale of $325,000 in aggregate principal amount of its 10.5% Senior Notes to qualified institutional buyers and non-U.S. persons in a private offering pursuant to the exemptions from the registration requirements of the Securities Act contained in Rule 144A and Regulation S under the Securities Act. The aggregate net proceeds from the initial sale of the 10.5% Senior Notes were approximately $315,000 after deducting underwriting discounts, commissions, fees and offering expenses.
On November 18, 2019, the Company completed the sale of an additional $230,000 in aggregate principal amount of its 10.5% Senior Notes. The Company received net proceeds of approximately $220,400 after deducting underwriting discounts, commissions, fees and offering expenses. The Company used a portion of the net cash proceeds from the offering to retire the Company’s outstanding 5.5% Variable Interest Senior Convertible Notes in April 2020. As of December 31, 2021, the Company has outstanding $555,000 aggregate principal amount of its 10.5% Senior Notes.
The Company pays cash interest on the 10.5% Senior Notes at a rate of 10.5% per year, payable semi-annually on May 1 and November 1 of each year. The 10.5% Senior Notes mature on November 1, 2026.
The 10.5% Senior Notes were fully and unconditionally guaranteed subject to certain customary automatic release provisions on a joint and several basis by all of the Company’s wholly-owned domestic subsidiaries that are engaged in the conduct of its cigarette businesses, and, prior to the spin-off, by DER Holdings LLC, through which the Company indirectly owned a 100% interest in Douglas Elliman as of December 31, 2021. In connection with the spin-off, the guarantee by DER Holdings LLC was released. DER Holdings LLC did not guarantee our 5.75% Senior Secured Notes.
As of December 31, 2021, the Company was in compliance with all debt covenants.
Variable Interest Senior Convertible Debt:
7.5% Variable Interest Senior Convertible Notes due 2019:
In November 2012, the Company sold $230,000 in aggregate principal amount of its 7.5% Variable Interest Senior Convertible Notes due 2019 (the “7.5% Convertible Notes”) in a public offering registered under the Securities Act. The notes matured on January 15, 2019 and the Company paid $230,000 of principal.
5.5% Variable Interest Senior Convertible Notes due 2020:
On March 24, 2014, the Company completed the sale of $258,750 in aggregate principal amount of its 5.5% Variable Interest Convertible Senior Notes due 2020 (the “5.5% Convertible Notes”). The 5.5% Convertible Notes matured on April 15, 2020 and the Company paid $169,610 of principal.
Embedded Derivatives on the Variable Interest Senior Convertible Debt:
The portion of the interest on the Company’s convertible debt which was computed by reference to the cash dividends paid on the Company’s common stock was considered an embedded derivative within the convertible debt, which the Company was required to separately value. In accordance with authoritative guidance on accounting for derivatives and hedging, the Company had bifurcated these embedded derivatives and estimated the fair value of the embedded derivative liability including using a third-party valuation. The resulting discount created by allocating a portion of the issuance proceeds to the embedded derivative was then amortized to interest expense over the term of the debt using the effective interest method. Changes to the fair value of these embedded derivatives were reflected quarterly in the Company’s consolidated statements of operations as
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
“Change in fair value of derivatives embedded within convertible debt.” The value of the embedded derivative was contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt as well as projections of future cash and stock dividends over the term of the debt.
A summary of non-cash interest expense associated with the amortization of the debt discount created by the embedded derivative liability associated with the Company’s variable interest senior convertible debt is set forth in the following table:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | |
| | | | | |
| | | | | |
| 7.5% Convertible Notes | $ | — | | | $ | — | | | $ | 2,031 | |
| 5.5% Convertible Notes | — | | | 4,053 | | | 16,481 | |
| Interest expense associated with embedded derivatives | $ | — | | | $ | 4,053 | | | $ | 18,512 | |
A summary of non-cash changes in fair value of derivatives embedded within convertible debt is set forth in the following table:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| | | | | |
| | | | | |
| | | | | |
| 7.5% Convertible Notes | $ | — | | | $ | — | | | $ | 6,635 | |
| 5.5% Convertible Notes | — | | | 4,999 | | | 19,790 | |
| Gain on changes in fair value of derivatives embedded within convertible debt | $ | — | | | $ | 4,999 | | | $ | 26,425 | |
The following table reconciles the fair value of derivatives embedded within convertible debt:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 7.5% Convertible Notes | | 5.5% Convertible Notes | | Total |
| Balance at January 1, 2019 | | | | | | | $ | 6,635 | | | $ | 24,789 | | | $ | 31,424 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Gain from changes in fair value of embedded derivatives | | | | | | | (6,635) | | | (19,790) | | | (26,425) | |
| Balance at December 31, 2019 | | | | | | | — | | | 4,999 | | | 4,999 | |
| | | | | | | | | | | |
| Gain from changes in fair value of embedded derivatives | | | | | | | — | | | (4,999) | | | (4,999) | |
| Balance at December 31, 2020 | | | | | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Beneficial Conversion Feature on Variable Interest Senior Convertible Debt:
After giving effect to the recording of the embedded derivative liability as a discount to the convertible debt, the Company’s common stock had a fair value at the issuance date of the debt in excess of the conversion price resulting in a beneficial conversion feature. The accounting guidance on debt with conversion and other options requires that the intrinsic value of the beneficial conversion feature be recorded to additional paid-in capital and as a discount on the debt. The discount is then amortized to interest expense over the term of the debt using the effective interest method. The beneficial conversion feature has been recorded, net of income taxes, as an increase to stockholders’ deficiency.
A summary of non-cash interest expense associated with the amortization of the debt discount created by the beneficial conversion feature on the Company’s variable interest senior convertible debt is set forth in the following table:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Amortization of beneficial conversion feature: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| 7.5% Convertible Notes | $ | — | | | $ | — | | | $ | 1,328 | |
| 5.5% Convertible Notes | — | | | 1,223 | | | 4,973 | |
| Interest expense associated with beneficial conversion feature | $ | — | | | $ | 1,223 | | | $ | 6,301 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unamortized Debt Discount on Variable Interest Senior Convertible Debt:
The following table reconciles unamortized debt discount within convertible debt:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 7.5% Convertible Notes | | 5.5% Convertible Notes | | Total |
| Balance at January 1, 2019 | | | | | | | $ | 3,359 | | | $ | 29,465 | | | $ | 32,824 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Partial redemption of 5.5% convertible notes | | | | | | | — | | | (2,735) | | | (2,735) | |
| | | | | | | | | | | |
| Amortization of embedded derivatives | | | | | | | (2,031) | | | (16,481) | | | (18,512) | |
| Amortization of beneficial conversion feature | | | | | | | (1,328) | | | (4,973) | | | (6,301) | |
| Balance at December 31, 2019 | | | | | | | — | | | 5,276 | | | 5,276 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Amortization of embedded derivatives | | | | | | | — | | | (4,053) | | | (4,053) | |
| Amortization of beneficial conversion feature | | | | | | | — | | | (1,223) | | | (1,223) | |
| Balance at December 31, 2020 | | | | | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Revolving Credit Agreement — Liggett:
In January, 2015, Liggett and 100 Maple LLC (“Maple”), a subsidiary of Liggett, entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”), with Wells Fargo Bank, National Association (“Wells Fargo”), as agent and lender.
On October 31, 2019, Liggett and Maple amended the Credit Agreement to, among other things, update the borrowing base to adjust the advance rates in respect of eligible inventory and add certain eligible real property. On March 22, 2021, Liggett, Maple and Vector Tobacco entered into Amendment No. 4 and Joinder to the Credit Agreement with Wells Fargo. The Credit Agreement was amended to, among other things, (i) add Vector Tobacco as a borrower under the Credit Agreement, (ii) extend the maturity of the Credit Agreement to March 22, 2026, and (iii) increase the amount of the maximum credit line thereunder from $60,000 to $90,000.
Since October 31, 2019, all borrowings under the Credit Agreement have been limited to a borrowing base equal to the sum of (I) the lesser of 85% of eligible trade receivables less certain reserves and $15,000; plus (II) 80% of the value of eligible inventory consisting of packaged cigarettes; plus (III) the designated percentage of the value of eligible inventory consisting of leaf tobacco (i.e., 65% of Liggett’s eligible cost of inventory consisting of leaf tobacco less certain reserves or 85% of the net orderly liquidation value of eligible inventory); plus (IV) the lesser of (a) the real property subline amount or (b) 60% of the fair market value of eligible real property. The obligations under the Credit Agreement are collateralized on a first priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject to certain permitted liens.
The term of the Credit Agreement expires on March 22, 2026. Loans under the Credit Agreement bear interest at a rate equal to LIBOR plus 2.25%. The interest rate applicable to this Credit Agreement at December 31, 2021 was 2.35%. The Credit Agreement, as amended, permitted the guaranty of the 6.125% Senior Secured Notes due 2025, and permits the guaranty of the 5.75% Senior Secured Notes and the 10.5% Senior Notes, by each of Liggett, Maple and Vector Tobacco. Wells Fargo, Liggett, Maple, Vector Tobacco and the collateral agent for the holders of the 5.75% Senior Secured Notes have entered into an intercreditor agreement, pursuant to which the liens of such collateral agent on the assets that are subject to the Credit Agreement are subordinated to the liens of Wells Fargo on such assets.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that limit Liggett’s, Maple’s, Vector Tobacco’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Agreement also requires the Company to comply with specified financial covenants, including that Liggett’s earnings before interest, taxes, depreciation and amortization, as defined under the Credit Agreement, on a trailing twelve month basis, shall not be less than $150,000 if Liggett’s excess availability, as defined under the Credit Agreement, is less than $30,000. The covenants also require that annual capital expenditures, as defined under the Credit Agreement (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any fiscal year. The Credit Agreement also contains customary events of default. Liggett was in compliance with these covenants as of December 31, 2021.
As of December 31, 2021, there was $24 in outstanding balance under the Credit Agreement. Availability, as determined under the Credit Agreement, was $80,771 based on eligible collateral at December 31, 2021.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value of Notes Payable and Long-Term Debt:
The estimated fair value of the Company’s notes payable and long-term debt were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value |
| Senior Notes | $ | 1,427,353 | | | $ | 1,426,176 | | | $ | 1,401,960 | | | $ | 1,464,208 | |
| | | | | | | |
| Liggett and other | 120 | | | 124 | | | 153 | | | 161 | |
| Notes payable and long-term debt | $ | 1,427,473 | | | $ | 1,426,300 | | | $ | 1,402,113 | | (1) | $ | 1,464,369 | |
_____________________________
(1) The carrying value does not include the carrying value of the embedded derivative. See Note 18.
Notes payable and long-term debt are carried on the consolidated balance sheets at amortized cost. The fair value determinations disclosed above would be classified as Level 2 under the fair value hierarchy disclosed in Note 18 if such liabilities were recorded on the consolidated balance sheets at fair value. The estimated fair value of the Company’s notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies including the evaluation of the Company’s credit risk as described in Note 1. The Company used a derived price based upon quoted market prices and trade activity as of December 31, 2021 to determine the fair value of its publicly-traded notes and debentures. The carrying value of the revolving credit facility is equal to the fair value. The fair value of the equipment loans and other obligations was determined by calculating the present value of the required future cash flows. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein is not necessarily indicative of the amount that could be realized in a current market exchange.
Scheduled Maturities:
Scheduled maturities of notes payable and long-term debt were as follows:
| | | | | | | | | | | | | | | | | |
| Principal | | Unamortized
Discount/ (Premium) | | Net |
| Year Ending December 31: | | | | | |
| 2022 | $ | 79 | | | $ | — | | | $ | 79 | |
| 2023 | 33 | | | — | | | 33 | |
| 2024 | 8 | | | — | | | 8 | |
| 2025 | — | | | — | | | — | |
| 2026 | 555,000 | | | 2,647 | | | 552,353 | |
| Thereafter | 875,000 | | | — | | | 875,000 | |
| Total | $ | 1,430,120 | | | $ | 2,647 | | | $ | 1,427,473 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. EMPLOYEE BENEFIT PLANS
Defined Benefit Plans and Postretirement Plans:
Defined Benefit Plans. The Company sponsors 4 defined benefit pension plans (2 qualified and 2 non-qualified) covering virtually all individuals who were employed by Liggett on a full-time basis prior to 1994. Future accruals of benefits under these 4 defined benefit plans were frozen between 1993 and 1995. These benefit plans provide pension benefits for eligible employees based primarily on their compensation and length of service. Contributions are made to the 2 qualified pension plans in amounts necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The plans’ assets and benefit obligations were measured at December 31, 2021 and 2020, respectively.
The Company also sponsors a Supplemental Retirement Plan (“SERP”) where the Company will pay supplemental retirement benefits to certain key employees, including certain executive officers of the Company. The plan meets the applicable requirements of Section 409A of the Internal Revenue Code and is intended to be unfunded for tax purposes. Payments under the SERP will be made out of the general assets of the Company. The SERP is a defined benefit plan. Under the SERP, the benefit payable to a participant at his normal retirement date is a lump sum amount which is the actuarial equivalent of a predetermined annual retirement benefit set by the Company’s Board of Directors. Normal retirement date is defined as the January 1 following the attainment by the participant of the latter of age 60 or the completion of eight years of employment following January 1, 2002 with the Company or a subsidiary.
The SERP provides the Company’s President and Chief Executive Officer with an additional benefit paid as a lump sum under the SERP that is actuarially equivalent to a $1,788 lifetime annuity. In addition, in the event of a termination of his employment under the circumstances where he is entitled to severance payments under his employment agreement, he will be credited with an additional 36 months of service towards vesting under the SERP.
At December 31, 2021, the aggregate lump sum equivalents of the annual retirement benefits payable under the Amended SERP at normal retirement dates occurring during the following years is as follows: 2022 to 2025 – none; 2026 – $59,116 and 2027 to 2031 – $6,866. In the case of a participant who becomes disabled prior to his normal retirement date or whose service is terminated without cause, the participant’s benefit consists of a pro-rata portion of the full projected retirement benefit to which he would have been entitled had he remained employed through his normal retirement date, as actuarially discounted back to the date of payment. A participant who dies while working for the Company or a subsidiary (and before becoming disabled or attaining his normal retirement date) will be paid an actuarially discounted equivalent of his projected retirement benefit; conversely, a participant who retires beyond his normal retirement date will receive an actuarially increased equivalent of his projected retirement benefit.
Postretirement Medical and Life Plans. The Company provides certain postretirement medical and life insurance benefits to certain employees and retirees. Substantially all of the Company’s manufacturing employees as of December 31, 2021 are eligible for postretirement medical benefits if they reach retirement age while working for Liggett or certain affiliates. Retirees are required to fund 100% of participant medical premiums and, pursuant to union contracts, Liggett reimburses approximately 74 hourly retirees, who retired prior to 1991, for Medicare Part B premiums. In addition, the Company provides life insurance benefits to approximately 89 active employees and 349 retirees who reach retirement age and are eligible to receive benefits under 2 of the Company’s defined benefit pension plans. The Company’s postretirement liabilities are comprised of Medicare Part B and life insurance premiums.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the pension plans and other postretirement benefits:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other
Postretirement Benefits |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Change in benefit obligation: | | | | | | | |
| Benefit obligation at January 1 | $ | (125,842) | | | $ | (128,997) | | | $ | (9,101) | | | $ | (8,986) | |
| Service cost | (415) | | | (592) | | | — | | | — | |
| Interest cost | (2,284) | | | (3,545) | | | (224) | | | (286) | |
| Plan settlement | — | | | 7,255 | | | — | | | — | |
| Plan amendment | — | | | — | | | (48) | | | — | |
| | | | | | | |
| Benefits paid | 6,452 | | | 7,008 | | | 471 | | | 500 | |
| Expenses paid | 291 | | | 255 | | | — | | | — | |
| Actuarial gain (loss) | 632 | | | (7,226) | | | 422 | | | (329) | |
| Benefit obligation at December 31 | $ | (121,166) | | | $ | (125,842) | | | $ | (8,480) | | | $ | (9,101) | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets at January 1 | $ | 102,812 | | | $ | 101,051 | | | $ | — | | | $ | — | |
| | | | | | | |
| Actual return on plan assets | 8,373 | | | 8,919 | | | — | | | — | |
| Plan settlement | — | | | (7,255) | | | — | | | — | |
| Expenses paid | (291) | | | (255) | | | — | | | — | |
| Contributions | 103 | | | 7,360 | | | 471 | | | 500 | |
| Benefits paid | (6,452) | | | (7,008) | | | (471) | | | (500) | |
| Fair value of plan assets at December 31 | $ | 104,545 | | | $ | 102,812 | | | $ | — | | | $ | — | |
| Unfunded status at December 31 | $ | (16,621) | | | $ | (23,030) | | | $ | (8,480) | | | $ | (9,101) | |
| Amounts recognized in the consolidated balance sheets: | | | | | | | |
| Prepaid pension costs | $ | 44,585 | | | $ | 35,209 | | | $ | — | | | $ | — | |
| Other accrued liabilities | (95) | | | (100) | | | (621) | | | (624) | |
| Non-current employee benefit liabilities | (61,111) | | | (58,139) | | | (7,859) | | | (8,477) | |
| Net amounts recognized | $ | (16,621) | | | $ | (23,030) | | | $ | (8,480) | | | $ | (9,101) | |
.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Other Postretirement Benefits |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service cost — benefits earned during the period | $ | 415 | | | $ | 592 | | | $ | 533 | | | $ | — | | | $ | — | | | $ | 3 | |
| Interest cost on projected benefit obligation | 2,284 | | | 3,545 | | | 4,860 | | | 224 | | | 286 | | | 347 | |
| Expected return on assets | (3,458) | | | (3,869) | | | (4,874) | | | — | | | — | | | — | |
| Prior service cost | — | | | — | | | — | | | 4 | | | 4 | | | 4 | |
| | | | | | | | | | | |
| Settlement loss | — | | | 1,805 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Amortization of net loss (gain) | 1,835 | | | 1,836 | | | 2,001 | | | 86 | | | 11 | | | (40) | |
| Net expense | $ | 1,076 | | | $ | 3,909 | | | $ | 2,520 | | | $ | 314 | | | $ | 301 | | | $ | 314 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of December 31, 2021, accumulated other comprehensive (loss) income, before income taxes, consisted of the following:
| | | | | | | | | | | | | | | | | |
| Defined
Benefit
Pension Plans | | Post-
Retirement
Plans | | Total |
| Accumulated other comprehensive loss as of January 1, 2021 | $ | (28,199) | | | $ | (1,106) | | | $ | (29,305) | |
| Amortization of prior service costs | — | | | 4 | | | 4 | |
| Plan amendment | — | | | (48) | | | (48) | |
| | | | | |
| Amortization of loss | 1,835 | | | 86 | | | 1,921 | |
| Net gain arising during the year | 5,547 | | | 420 | | | 5,967 | |
| Accumulated other comprehensive loss as of December 31, 2021 | $ | (20,817) | | | $ | (644) | | | $ | (21,461) | |
As of December 31, 2020, accumulated other comprehensive (loss) income, before income taxes, consisted of the following:
| | | | | | | | | | | | | | | | | |
| Defined
Benefit
Pension Plans | | Post-
Retirement
Plans | | Total |
| Accumulated other comprehensive (loss) income as of January 1, 2020 | $ | (29,664) | | | $ | (794) | | | $ | (30,458) | |
| Amortization of prior service costs | — | | | 4 | | | 4 | |
| Effect of settlement | 1,805 | | | — | | | 1,805 | |
| Amortization of loss | 1,836 | | | 11 | | | 1,847 | |
| Net loss arising during the year | (2,176) | | | (327) | | | (2,503) | |
| Accumulated other comprehensive loss as of December 31, 2020 | $ | (28,199) | | | $ | (1,106) | | | $ | (29,305) | |
As of December 31, 2021, our total accumulated benefit obligations, as well as our projected benefit obligations in excess of the fair value of the related plan assets, for defined benefit pension plans were as follows:
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Accumulated benefit obligation | $ | 61,206 | | | $ | 58,239 | |
| Fair value of plan assets | $ | — | | | $ | — | |
| | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| Projected benefit obligation | $ | 61,206 | | | $ | 58,239 | |
| Fair value of plan assets | $ | — | | | $ | — | |
The information for other postretirement benefit plans with an accumulated postretirement benefit obligation in excess of plan assets has been disclosed in the Obligations table above because all the other postretirement benefit plans are unfunded or underfunded.
The assumptions used for the pension benefits and other postretirement benefits were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Other Postretirement Benefits |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Weighted average assumptions: | | | | | | | | | | | |
| Discount rates — benefit obligation | 1.80% - 2.70% | | 1.40% - 2.30% | | 2.55% - 3.10% | | 2.85% | | 2.55% | | 3.30% |
| Discount rates — service cost | 1.40% - 2.30% | | 2.55% - 3.10% | | 3.90% - 4.25% | | 2.55% | | 3.30% | | 4.35% |
| Assumed rates of return on invested assets | 3.50% | | 4.00 % | | 5.50% | | N/A | | N/A | | N/A |
| Salary increase assumptions | N/A | | N/A | | N/A | | 3.00% | | 3.00% | | 3.00% |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analysis analyzes the cash flow from each of the Company’s 4 benefit plans as well as a separate analysis of the cash flows from the postretirement medical and life insurance plans sponsored by Liggett. The aforementioned analyses then construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the year-by-year, projected benefit cash flow from the respective pension or retiree health plans. The Company uses the lower discount rate derived from the two independent analyses in the computation of the benefit obligation and service cost for each respective retirement liability.
The Company considers input from its external advisors and historical returns in developing its expected rate of return on plan assets. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. The Company’s actual 10-year annual rate of return on its pension plan assets was 7.74%, 6.91% and 7.59% for the years ended December 31, 2021, 2020 and 2019, respectively, and the Company’s actual five-year annual rate of return on its pension plan assets was 7.86%, 7.51% and 5.41% for the years ended December 31, 2021, 2020 and 2019, respectively.
Gains and losses resulted from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and changes in actual returns on plan assets as compared to assumed returns. These gains and losses are only amortized to the extent that they exceed 10% of the greater of Projected Benefit Obligation and the fair value of assets. For the year ended December 31, 2021, Liggett used a 12.39-year period for its Hourly Plan and a 11.61-year period for its Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are reflected in the pension expense calculation beginning the year after the gains or losses occur. The amortization of deferred losses negatively impacts pension expense in the future.
Plan assets are invested employing multiple investment management firms. Managers within each asset class cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk is controlled through a diversification among asset classes, managers, styles and securities. Risk is further controlled both at the manager and asset class level by assigning excess return and tracking error targets. Investment managers are monitored to evaluate performance against these benchmark indices and targets.
Allowable investment types include equity, investment grade fixed income, high yield fixed income, hedge funds and short term investments. The equity fund is comprised of common stocks and mutual funds of large, medium and small companies, which are predominantly U.S. based. The investment grade fixed income fund includes managed funds investing in fixed income securities issued or guaranteed by the U.S. government, or by its respective agencies, mortgage backed securities, including collateralized mortgage obligations, and corporate debt obligations. The high yield fixed income fund includes a fund which invests in non-investment grade corporate debt securities. The hedge funds invest in both equity, including common and preferred stock, and debt obligations, including convertible debentures, of private and public companies. The Company generally utilizes its short-term investments, including interest-bearing cash, to pay benefits and to deploy in special situations.
The Liggett Employee Benefits Committee has established the following target assets allocation to equal 35% equity investments and 65% investment grade fixed income, with a rebalancing range of approximately plus or minus 5% around the target asset allocations.
Vector’s defined benefit retirement plan allocations by asset category, were as follows:
| | | | | | | | | | | |
| Plan Assets at
December 31, |
| | 2021 | | 2020 |
| Asset category: | | | |
| Equity securities | 38 | % | | 35 | % |
| Investment grade fixed income securities | 62 | % | | 65 | % |
| High yield fixed income securities | — | % | | — | % |
| | | |
| | | |
| Total | 100 | % | | 100 | % |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The defined benefit plans’ recurring financial assets subject to fair value measurements and the necessary disclosures were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2021 |
| | | | Quoted Prices in
Active Markets for
Identical Assets | | Significant Other
Observable Inputs | | Significant
Unobservable Inputs |
| Description | | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets: | | | | | | | | |
| Insurance contracts | | $ | 1,868 | | | $ | — | | | $ | 1,868 | | | $ | — | |
| Amounts in individually managed investment accounts: | | | | | | | | |
| Cash, mutual funds and common stock | | 91 | | | 91 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Common collective trusts at NAV (1) | | 102,586 | | | — | | | — | | | — | |
| | | | | | | | |
| Total | | $ | 104,545 | | | $ | 91 | | | $ | 1,868 | | | $ | — | |
(1) In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurements as of December 31, 2020 |
| | | | Quoted Prices in
Active Markets for
Identical Assets | | Significant Other
Observable Inputs | | Significant
Unobservable Inputs |
| Description | | Total | | (Level 1) | | (Level 2) | | (Level 3) |
| Assets: | | | | | | | | |
| Insurance contracts | | $ | 2,236 | | | $ | — | | | $ | 2,236 | | | $ | — | |
| Amounts in individually managed investment accounts: | | | | | | | | |
| Cash, mutual funds and common stock | | 78 | | | 78 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Common collective trusts at NAV(1) | | 100,498 | | | — | | | — | | | — | |
| | | | | | | | |
| Total | | $ | 102,812 | | | $ | 78 | | | $ | 2,236 | | | $ | — | |
(1) In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy. |
The fair value of investment included in Level 1 are based on quoted market prices from various stock exchanges. The Level 2 investments are based on quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets in markets that are not active.
For 2021 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between 4.21% and 7.19% between 2022 and 2029 and 4.5% thereafter. For 2020 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between 2.87% and 6.06% between 2021 and 2028 and 4.5% thereafter.
To comply with ERISA’s minimum funding requirements, the Company does not currently anticipate that it will be required to make any contributions to the pension plan year beginning on January 1, 2022 and ending on December 31, 2022. Any additional funding obligation that the Company may have for subsequent years is contingent on several factors and is not reasonably estimable at this time.
Estimated future pension and postretirement medical benefits payments were as follows:
| | | | | | | | | | | |
| Pension | | Postretirement
Medical |
| 2022 | $ | 6,347 | | | $ | 621 | |
| 2023 | 5,993 | | | 627 | |
| 2024 | 5,648 | | | 629 | |
| 2025 | 5,289 | | | 606 | |
| 2026 | 64,060 | | | 590 | |
| 2027 - 2031 | 26,666 | | | 2,596 | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Profit Sharing and 401(k) 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 to the 401(k) plans and expensed $1,473, $1,465 and $1,350 for the years ended December 31, 2021, 2020 and 2019, respectively.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. INCOME TAXES
The amounts provided for income taxes were as follows:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| U.S. Federal | $ | 33,398 | | | $ | 30,583 | | | $ | 31,002 | |
| State | 14,945 | | | 12,910 | | | 9,705 | |
| | 48,343 | | | 43,493 | | | 40,707 | |
| Deferred: | | | | | |
| U.S. Federal | 11,399 | | | 7,343 | | | (6,075) | |
| State | 3,065 | | | 3,285 | | | (3,547) | |
| | 14,464 | | | 10,628 | | | (9,622) | |
| Total | $ | 62,807 | | | $ | 54,121 | | | $ | 31,085 | |
The tax effect of temporary differences which give rise to a significant portion of deferred tax assets and liabilities is as follows:
| | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
| Deferred tax assets: | | | |
| Employee benefit accruals | $ | 7,828 | | | $ | 10,529 | |
| Impairment of investments | 12,337 | | | 13,961 | |
| Impact of timing of settlement payments | 10,854 | | | 20,137 | |
| | | |
| Various U.S. federal and state tax loss carryforwards | 2,378 | | | 3,123 | |
| Operating lease liabilities | 3,277 | | | 3,884 | |
| Current expected credit losses | 4,111 | | | 4,299 | |
| Other | 3,910 | | | 2,852 | |
| 44,695 | | | 58,785 | |
| Less: Valuation allowance | (348) | | | (852) | |
| Net deferred tax assets | $ | 44,347 | | | $ | 57,933 | |
| | | |
| Deferred tax liabilities: | | | |
| Basis differences on non-consolidated entities | $ | (24,441) | | | $ | (22,809) | |
| Basis differences on fixed and intangible assets | (35,154) | | | (35,555) | |
| | | |
| Basis differences on inventory | (10,808) | | | (10,698) | |
| Basis differences on long-term investments | (4,383) | | | (912) | |
| | | |
| Basis differences on available for sale securities | (1,490) | | | (3,579) | |
| Operating lease right of use assets | (2,839) | | | (3,324) | |
| | | |
| $ | (79,115) | | | $ | (76,877) | |
| | | |
| Net deferred tax liabilities | $ | (34,768) | | | $ | (18,944) | |
_____________________________
The Company files a consolidated U.S. income tax return that includes its more than 80%-owned U.S. subsidiaries. Stand alone subsidiaries had tax-effected federal and state and local net operating loss (“NOL”) carryforwards of $2,378 and $3,123 at December 31, 2021 and 2020, respectively, expiring through tax year 2027. The Company records 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 had valuation allowances of $348 and $852 at December 31, 2021 and 2020, respectively. The valuation allowances at December 31, 2021 and 2020 primarily related to state net operating loss carryforwards of stand alone subsidiaries.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law. The Act includes several significant tax and payroll-related provisions for corporations, including the usage of net operating losses, bonus depreciation, interest expense, and certain payroll benefits. The Company determined that there was a minimal impact of the CARES Act on its financial statements and required disclosures.
The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which represent temporary differences in the application of accounting rules established by U.S. GAAP and income tax laws.
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, |
| | 2021 | | 2020 | | 2019 |
| Income before provision for income taxes | $ | 209,961 | | | $ | 181,043 | | | $ | 125,015 | |
| Federal income tax expense at statutory rate | 44,092 | | | 38,018 | | | 26,253 | |
| Increases (decreases) resulting from: | | | | | |
| State income taxes, net of federal income tax benefits | 13,946 | | | 12,974 | | | 6,047 | |
| | | | | |
| Non-deductible expenses | 6,205 | | | 2,859 | | | 2,048 | |
| | | | | |
| | | | | |
| Excess tax benefits on stock-based compensation | (561) | | | (206) | | | (1,488) | |
| | | | | |
| | | | | |
| Changes in valuation allowance, net of equity and tax audit adjustments | (504) | | | (440) | | | (2,525) | |
| | | | | |
| Other | (371) | | | 916 | | | 750 | |
| Income tax expense | $ | 62,807 | | | $ | 54,121 | | | $ | 31,085 | |
The Company’s income tax expense is principally attributable to the Company’s federal and state income taxes based on the Company’s earnings. The non-deductible expenses presented in the table above largely relate to the Company’s non-deductible executive compensation and spin-off expenses. The federal and state NOLs and valuation allowance are decreased by the spin-off entity and NOLs expiration.
The following table summarizes the activity related to the unrecognized tax benefits:
| | | | | |
Balance at January 1, 2019 | $ | 391 | |
| |
Additions based on tax positions related to prior years | 1,586 | |
| |
| |
Expirations of the statute of limitations | (330) | |
Balance at December 31, 2019 | 1,647 | |
| |
Additions based on tax positions related to prior years | 458 | |
| |
Settlements | (402) | |
Expirations of the statute of limitations | (50) | |
Balance at December 31, 2020 | 1,653 | |
| |
Additions based on tax positions related to prior years | 1,640 | |
| |
Settlements | (1,065) | |
Expirations of the statute of limitations | (19) | |
Balance at December 31, 2021 | $ | 2,209 | |
In the event the unrecognized tax benefits of $2,209 at December 31, 2021 were recognized, such recognition would impact the effective tax rate. The Company classifies all tax-related interest and penalties as income tax expense.
It is reasonably possible the Company may recognize up to approximately $45 of unrecognized tax benefits over the next 12 months, primarily pertaining to expiring statutes of limitations on prior state and local income tax return positions.
The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations. The Company, from time to time, receives notices related to audits and adjustments related to its partnerships.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. STOCK COMPENSATION
The Company granted equity compensation under its Amended and Restated 1999 Long-Term Incentive Plan (the “1999 Plan”) until the 1999 Plan expired on December 31, 2013. On May 16, 2014, the Company’s stockholders approved the 2014 Management Incentive Plan (the “2014 Plan”). The 2014 Plan replaced the 1999 Plan. Like the 1999 Plan, the 2014 Plan provides for the Company to grant stock options, stock appreciation rights and restricted stock. The 2014 Plan also provides for awards based on a multi-year performance period and for annual short-term awards based on a twelve-month performance period. Shares available for issuance under the 2014 Plan are 6,377,538 shares. The Company may satisfy its obligations under any award granted under the 2014 Plan by issuing new shares. Awards previously granted under the 1999 Plan remain outstanding in accordance with their terms.
Stock Options. The Company recognized compensation expense of $849, $1,428 and $1,923 related to stock options in the years ended December 31, 2021, 2020 and 2019, respectively.
All awards have a contractual term of ten years and awards vest over a period of two to seven years depending upon each grant. The fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including expected stock price characteristics which are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards.
The assumptions used under the Black-Scholes option pricing model in computing fair value of options are based on the expected option life considering both the contractual term of the option and expected employee exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal to the expected option life and the expected volatility of the Company’s common stock over the expected term of the option. The assumptions used for grants in the year ended December 31, 2019 were as follows:
| | | | | | | | | |
| | | | | 2019 |
Risk-free interest rate | | | | | 2.5% - 2.7% |
Expected volatility | | | | | 20.24% - 20.45% |
Dividend yield | | | | | 0.0 | % |
Expected holding period | | | | | 4 - 10 years |
Weighted-average grant date fair value (1)
| | | | | $2.36 - $4.08 |
_____________________________
(1)Per share amounts have not been adjusted to give effect to the stock dividend in 2019.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of employee stock option transactions follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Number of
Shares | | Weighted-Average
Exercise Price | | Weighted-Average
Remaining
Contractual Term
(Years) | | Aggregate
Intrinsic
Value(1) |
| Outstanding on January 1, 2019 | 5,860,833 | | | $ | 13.16 | | | 4.1 | | $ | 1,095 | |
| Granted | 406,875 | | | $ | 10.92 | | | | | |
| Exercised | (1,824,351) | | | $ | 8.67 | | | | | |
| Canceled | (11) | | | $ | — | | | | | |
| Outstanding on December 31, 2019 | 4,443,346 | | | $ | 14.80 | | | 5.0 | | $ | 4,427 | |
| | | | | | | |
| Exercised | (620,527) | | | $ | 11.14 | | | | | |
| | | | | | | |
| Outstanding on December 31, 2020 | 3,822,819 | | | $ | 15.40 | | | 4.6 | | $ | 487 | |
| | | | | | | |
| Exercised | — | | | $ | — | | | | | |
| | | | | | | |
| Outstanding on December 31, 2021 | 3,822,819 | | | $ | 15.40 | | | 3.6 | | $ | 238 | |
| Options exercisable at: | | | | | | | |
| December 31, 2019 | 2,689,673 | | | | | | | |
| December 31, 2020 | 2,540,150 | | | | | | | |
| December 31, 2021 | 2,988,727 | | | | | | | |
_____________________________
(1)The aggregate intrinsic value represents the amount by which the fair value of the underlying common stock ($11.48, $11.65 and $13.39 at December 31, 2021, 2020 and 2019, respectively) exceeds the option exercise price.
Additional information relating to options outstanding at December 31, 2021 follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Options Outstanding | | Options Exercisable | | |
| Range of Exercise Prices | | Outstanding
as of | | Weighted-Average
Remaining
Contractual Life
(Years) | | Weighted-Average
Exercise Price | | Exercisable
as of | | Weighted-Average
Remaining
Contractual Life
(Years) | | Weighted-Average
Exercise Price | | Aggregate Intrinsic Value |
| 12/31/2021 | | | | 12/31/2021 | | | |
| $9.86 | - | $11.83 | | 1,462,190 | | | 2.8 | | $ | 11.32 | | | 1,055,315 | | | 1.2 | | $ | 11.47 | | | $ | — | |
| $11.83 | - | $13.80 | | — | | | — | | | $ | — | | | — | | | — | | | $ | — | | | — | |
| $13.80 | - | $15.77 | | 519,278 | | | 2.4 | | $ | 14.68 | | | 519,278 | | | 2.4 | | $ | 14.68 | | | — | |
| $15.77 | - | $17.74 | | — | | | — | | | $ | — | | | — | | | — | | | $ | — | | | — | |
| $17.74 | - | $19.71 | | 1,841,351 | | | 4.6 | | $ | 18.84 | | | 1,414,134 | | | 4.1 | | $ | 18.96 | | | — | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | 3,822,819 | | | 3.6 | | $ | 15.40 | | | 2,988,727 | | | 2.8 | | $ | 15.57 | | | $ | 238 | |
As of December 31, 2021, there was $381 of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of approximately 0.65 years at December 31, 2021.
As a result of adopting ASU 2016-09, the Company reflects the net excess tax benefits of stock-based compensation in its consolidated financial statements as a component of “Cash Flows from Operating Activities.”
The Company has elected to use the long-form method under which each award grant is tracked on an employee-by-employee basis and grant-by-grant basis to determine if there is a tax benefit or tax deficiency for such award. The Company then compares the fair value expense to the tax deduction received for each grant in order to calculate the related tax benefits and deficiencies. All excess tax benefits and deficiencies are recognized as a component of income tax expense or benefit on the income statement.
The total intrinsic value of options exercised during the year ended December 31, 2020 was $835. Tax benefits related to option exercises of $104 were recorded as reductions to income tax expense for the year ended December 31, 2020.
The total intrinsic value of options exercised during the year ended December 31, 2019 was $6,577. Tax benefits related to option exercises of $1,546 were recorded as reductions to income tax expense for the year ended December 31, 2019.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Awards. In 2021, the Company granted 623,500 restricted shares of the Company’s common stock pursuant to the 2014 Plan. The shares vest over a period of four years and the Company will recognize $8,919 of expense over the vesting period. The Company recognized expense of $4,245 for the year ended December 31, 2021.
In 2021, the Company granted an award of 250,000 shares of its common stock pursuant to its 2014 Plan subject to service and performance-based vesting (and continued employment) over a period of four-years. The Company will recognize $3,578 of expense over the vesting period. The Company recognized expense of $1,699 for the year ended December 31, 2021.
In 2020, the Company granted 425,000 restricted shares of the Company’s common stock pursuant to the 2014 Plan. The shares vest over a period of four years and the Company will recognize $5,041 of expense over the vesting period. The Company recognized expense of $2,271 and $747 for the years ended December 31, 2021 and 2020, respectively.
In 2019, the Company granted 63,000 restricted shares of the Company’s common stock pursuant to the 2014 Plan. The shares vest over a period of three years and the Company will recognize $564 of expense over the vesting period. The Company recognized expense of $209, $188 and $124 for the years ended December 31, 2021, 2020, and 2019, respectively.
The Company recognized expense of $5,525, $7,022, and $7,043 for the years ended December 31, 2021, 2020 and 2019, respectively, related to performance based restricted stock awards granted in 2013, 2014 and 2015.
As of December 31, 2021, there was $10,627 of total unrecognized compensation costs related to unvested restricted stock awards. The cost is expected to be recognized over a weighted-average period of approximately 1.41 years.
As of December 31, 2020, there was $12,081 of total unrecognized compensation costs related to unvested restricted stock awards.
The Company’s accounting policy is to treat dividends paid on unvested restricted stock as a reduction to additional paid-in capital on the Company’s consolidated balance sheets.
Included in the stock compensation costs for the year ended December 31, 2021, were expenses of $4,317 associated with the acceleration of stock compensation in connection with the Company’s spin-off of Douglas Elliman.
15. CONTINGENCIES
Tobacco-Related Litigation:
Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class 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. The cases have generally fallen into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (“Individual Actions”); (ii) lawsuits by individuals requesting the benefit of the Engle ruling (“Engle progeny cases”); (iii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging that use of the terms “lights” and/or “ultra lights” constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); and (iv) health care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (“Health Care Cost Recovery Actions”). The future financial impact of the risks and expenses of litigation are not quantifiable. For the years ended December 31, 2021, 2020, and 2019, Liggett incurred tobacco product liability legal expenses and costs totaling $6,256, $6,476, and $7,363, respectively. The tobacco product liability legal expenses and costs are included in the operating, selling, administrative and general expenses and litigation settlement and judgment expense line items in the consolidated statements of operations. Legal defense costs are expensed as incurred.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. Management reviews on a quarterly basis with counsel all pending litigation and evaluates the probability of a loss being incurred and whether an estimate can be made of the possible loss or range of loss that could result from an unfavorable outcome. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. Damages awarded in tobacco-related litigation can be significant.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. As of December 31, 2021, Liggett had no outstanding bonds.
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. The maximum amount of any such bond for an appeal in the Florida state courts will be no greater than $5,000. In several cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts have upheld the constitutionality of the statute. It is possible that the Company’s consolidated financial position, results of operations, and cash flows could be materially adversely affected by an unfavorable outcome of such challenges.
Accounting Policy. The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as discussed in this Note 15: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.
Although Liggett has generally been successful in managing the litigation filed against it, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining Engle progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of the Company could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are and will continue to be vigorously defended. Liggett has entered into settlement discussions in individual cases or groups of cases where Liggett has determined it was in its best interest to do so, and it may continue to do so in the future. As cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Individual Actions
As of December 31, 2021, there were 79Individual Actions pending against Liggett, 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. These cases do not include the remaining Engle progeny cases. The following table lists the number of Individual Actions by state:
| | | | | | | | |
State | | Number
of Cases |
| | |
Florida | | 44 |
Illinois | | 19 |
Nevada | | 7 |
New Mexico | | 5 |
Louisiana | | 2 |
Hawaii | | 1 |
Massachusetts | | 1 |
| | |
The plaintiffs’ allegations of liability in 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, concealment, 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, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, statute of repose, equitable defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.
Engle Progeny Cases
In May 1994, the Engle case was filed as a class action against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” A trial was held and the jury returned a verdict adverse to the defendants (approximately $145,000,000 in punitive damages, including $790,000 against Liggett). Following an appeal to the Third District Court of Appeal, the Florida Supreme Court in July 2006 decertified the class on a prospective basis and affirmed the appellate court’s reversal of the punitive damages award. Former class members had until January 2008 to file individual lawsuits. As a result, Liggett and the Company, and other cigarette manufacturers, were sued in thousands of Engle progeny cases in both federal and state courts in Florida. Although the Company was not named as a defendant in the Engle case, it was named as a defendant in substantially all of the Engle progeny cases where Liggett was named as a defendant.
Cautionary Statement About Engle Progeny Cases. Since 2009, judgments have been entered against Liggett and other cigarette manufacturers in Engle progeny cases. A number of the judgments were affirmed on appeal and satisfied by the defendants. Many were overturned on appeal. As of December 31, 2021, 25 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts.
There have been 16 verdicts returned in favor of the plaintiffs and 9 in favor of Liggett. In 5 of the cases, punitive damages were awarded against Liggett. Several of the adverse verdicts were overturned on appeal and new trials were ordered. In certain cases, the judgments were entered jointly and severally with other defendants and Liggett may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, under certain circumstances, Liggett may have to pay more than its proportionate share of any bonding or judgment related amounts. Except as discussed in this Note 15, management is unable to estimate the possible loss or range of loss from the remaining Engle progeny cases as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact Engle class members, the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify the amount of their demand for damages. As cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Engle Progeny Settlements.
In October 2013, the Company and Liggett entered into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay a total of approximately $110,000, with $61,600 paid in an initial lump sum and the balance to be paid in installments over 14 years starting in February 2015. The Company’s future payments will be approximately $3,600 per annum through 2028, including an annual cost of living increase that began in 2021. In exchange, the claims of these plaintiffs were dismissed with prejudice against the Company and Liggett.
Liggett subsequently entered into 2 separate settlement agreements with a total of 152 Engle progeny plaintiffs where Liggett paid a total of $23,150. On an individual basis, Liggett settled an additional 204Engle progeny cases for approximately $8,100 in the aggregate.
Notwithstanding the comprehensive nature of the Engle progeny settlements, 28 plaintiffs’ claims remain pending in state court. Therefore, the Company and Liggett may still be subject to periodic adverse judgments which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Judgments Paid in Engle Progeny Cases.
As of December 31, 2021, Liggett had paid in the aggregate $40,111, including interest and attorneys’ fees, to satisfy the judgments in the following Engle progeny cases: Lukacs, Campbell, Douglas, Clay,Tullo, Ward, Rizzuto, Lambert, Buchanan and Santoro.
Maryland Cases
Liggett was a defendant in 16 multi-defendant personal injury cases in Maryland alleging claims arising from asbestos and tobacco exposure (“synergy cases”). In July 2016, the Court of Appeals (Maryland’s highest court) ruled that joinder of tobacco and asbestos cases may be possible in certain circumstances, but plaintiffs must demonstrate at the trial court level how such cases may be joined while providing appropriate safeguards to prevent embarrassment, delay, expense or prejudice to defendants and “the extent to which, if at all, the special procedures applicable to asbestos cases should extend to tobacco companies.” The Court of Appeals remanded these issues to be determined at the trial court level. In June 2017, the trial court issued an order dismissing all synergy cases against the tobacco defendants, including Liggett, without prejudice. Plaintiffs may seek appellate review or file new cases against the tobacco companies.
Liggett Only Cases
There are currently 6 cases where Liggett is the sole defendant: Baluja, Cowart and Cellini are Individual Actions and Tumin, Forbing and Alvarez are Engle progeny cases. It is possible that cases where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases and newly filed Individual Actions.
Upcoming Trials
As of December 31, 2021, there were 2 Engle progeny cases (Duncan and O’Rourke) and 12 individual Actions (Barnes, Baron, Camacho, Clark, Cupp, Geist, Harcourt, Johnson, Lane, Mendez, Rowan and Tully) scheduled for trial through December 31, 2022, where Liggett is a named defendant. Trial dates are subject to change and additional cases could be set for trial during this time.
Class Actions
As of December 31, 2021, 2 actions were pending for which either a class had been certified or plaintiffs were seeking class certification where Liggett is a named defendant. Other cigarette manufacturers are also named in these 2 cases.
Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption.
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were manufactured by the defendants, including Liggett, and suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. No class certification hearing has been held. A stay order entered on March 16, 2016 stays the case pending completion of the smoking cessation program ordered by the court in Scott v. The American Tobacco Co.
In February 1998, in Parsons v. AC & S Inc., a purported class action was commenced on behalf of all West Virginia residents who allegedly have claims arising from their exposure to cigarette smoke and asbestos fibers. The operative complaint seeks to recover unspecified compensatory and punitive damages on behalf of the putative class. The case is stayed as a result of the December 2000 bankruptcy of 3 of the defendants.
Health Care Cost Recovery Actions
As of December 31, 2021, 1 Health Care Cost Recovery Action was pending against Liggett, Crow Creek Sioux Tribe v. American Tobacco Company, a South Dakota case filed in 1997, where the plaintiff seeks to recover damages from Liggett
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and other cigarette manufacturers based on various theories of recovery as a result of alleged sales of tobacco products to minors. The case is dormant.
The claims asserted in health care cost recovery actions vary, but can 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. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover, among other things, an unspecified amount of health care costs paid and to be paid by the federal government for smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants. In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. The judgment was affirmed on appeal. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which ordered, among other things, the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “lights” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke.
MSA and Other State Settlement Agreements
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims made by those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, R.J. Reynolds and two other companies (the “Original Participating Manufacturers” or “OPMs”) and Liggett and Vector Tobacco (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are hereinafter referred to jointly as “PMs”) entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett and Vector Tobacco from:
•all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
•all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of PMs. 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 PM to 1 tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; 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 PMs from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits PMs 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.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The MSA also requires PMs to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of PMs. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, PMs are required to make annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions including a “Non-Participating Manufacturers Adjustment” or “NPM Adjustment”). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligations of each PM and are not the responsibility of any parent or affiliate of a PM.
Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector Tobacco’s domestic shipments accounted for approximately 4.1% of the total cigarettes sold in the United States in 2021. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. On December 30, 2021, Liggett and Vector Tobacco pre-paid $169,500 of their approximate $181,000 2021 MSA obligation, the balance of which will be paid in April 2022, subject to applicable disputes or adjustments.
Certain MSA Disputes
NPM Adjustment. Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment for each year from 2003 - 2021. The NPM Adjustment is a potential adjustment to annual MSA payments, available when PMs suffer a market share loss to NPMs for a particular year and an economic consulting firm selected pursuant to the MSA determines (or the parties agree) that the MSA was a “significant factor contributing to” that loss. A Settling State that has “diligently enforced” its qualifying escrow statute in the year in question may be able to avoid its allocable share of the NPM Adjustment. For 2003 - 2020, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco either paid subject to dispute, withheld payment, or paid into a disputed payment account, the amounts associated with these NPM Adjustments.
In June 2010, after the PMs prevailed in 48 of 49 motions to compel arbitration, the parties commenced the arbitration for the 2003 NPM Adjustment. That arbitration concluded in September 2013. It was followed by various challenges filed in state courts by states that did not prevail in the arbitration. Those challenges resulted in reductions, but not elimination of, the amounts awarded.
The PMs settled most of the disputed NPM Adjustment years with 38 states representing approximately 75% of the MSA share for 2003 - 2022. The 2004 NPM Adjustment arbitration commenced in 2016, with the arbitration panel issuing interim decisions on most individual states in September 2021, finding two of them liable for the NPM Adjustment; the final individual state hearing was held in February 2022; and a second phase addressing the effect of the settlements on recovery of the NPM Adjustment to start thereafter. The parties have selected an arbitration panel to address the NPM Adjustments for 2005 - 2007, and are engaged in discovery, with a common hearing set for July 2022 and individual state hearings likely to start in the third quarter of 2022.
As a result of the settlement and arbitration award described above, Liggett and Vector Tobacco reduced cost of sales for the year ended December 31, 2021 by $7,896, for an aggregate reduction in costs of sales for years 2013 - 2021 of $62,278. Liggett and Vector Tobacco may be entitled to further adjustments. As of December 31, 2021, Liggett and Vector Tobacco had accrued approximately $13,200 related to the disputed amounts withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett and Vector Tobacco lose the disputes for those years. As of December 31, 2021, there remains approximately $49,800 in the disputed payments account relating to Liggett and Vector Tobacco’s 2011 - 2020 NPM Adjustment disputes with the non-settling states. If Liggett and Vector Tobacco lose the disputes for all or any of those years, pursuant to the MSA, no interest would be due on the amounts paid into the disputed payment account.
Other State Settlements. The MSA replaced Liggett’s prior settlements with all states and territories except for Florida, Mississippi, Texas and Minnesota. Each of these 4 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. Except as described below, Liggett’s agreements with these states remain in full force and effect. These states’ settlement agreements with Liggett contained most favored nation provisions which could reduce Liggett’s payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on settlements or resolutions with United States Tobacco Company, Liggett’s payment obligations to those 4 states were eliminated. With respect to all non-economic obligations under the previous settlements, Liggett believes
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
it is 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 2003, as a result of a dispute with Minnesota regarding its settlement agreement, Liggett agreed to pay $100 a year in any year cigarettes manufactured by Liggett are sold in that state. Further, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed Liggett had failed to make payments under the respective settlement agreements with those states. In 2010, Liggett settled with Florida and agreed to pay $1,200 and to make further annual payments of $250 for a period of 21 years, starting in March 2011, with the payments from year 12 forward being subject to an inflation adjustment.
In January 2016, the Attorney General for Mississippi filed a motion in Chancery Court in Jackson County, Mississippi to enforce the March 1996 settlement agreement among Liggett, Mississippi and other states (the “1996 Agreement”) alleging that Liggett owes Mississippi at least $27,000 in compensatory damages and interest. In April 2017, the Chancery Court ruled, over Liggett’s objections, that the 1996 Agreement should be enforced as Mississippi claims and referred the matter first to arbitration and then to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded. In April 2021, following confirmation of the final arbitration award, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett to Mississippi pursuant to the 1996 Agreement was approximately $16,700, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of the principal amount allegedly due).
In September 2019, the Special Master held a hearing regarding Mississippi’s claim for pre- and post-judgment interest. In August 2021, the Special Master issued a final report with proposed findings and recommendations that pre-judgment interest, in the amount of approximately $18,800, is due from Liggett from April 2005 - August 3, 2021. On November 18, 2021, a hearing was held on Liggett’s objection to the final report in Mississippi Chancery Court. A ruling is pending. If the Mississippi Chancery Court rejects Liggett’s objections and enters final judgment adopting the Special Master’s findings and recommendations, additional interest amounts will accrue if the judgment is not overturned on appeal. Liggett continues to assert that the April 2017 Chancery Court order is in error because the most favored nations provision in the 1996 Agreement eliminated all of Liggett’s payment obligations to Mississippi, and has reserved all rights to appeal this and other issues at the conclusion of the case. In the event Liggett appeals an adverse judgment, the posting of a bond will likely be required.
Liggett may be required to make additional payments to Mississippi and Texas which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Cautionary Statement
Management is not able to reasonably predict the outcome of the litigation pending or threatened against Liggett or the Company. Litigation is subject to many uncertainties. Liggett has been found liable in multiple Engle progeny cases and Individual Actions, several of which were affirmed on appeal and satisfied by Liggett. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes it is in its best interest to do so.
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that Liggett may not be able to meet those requirements. An unfavorable outcome of a pending smoking-related case could encourage the commencement of additional litigation. Except as discussed in this Note 15, management is unable to estimate the loss or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its consolidated financial statements for unfavorable outcomes.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional litigation or legislation.
It is possible that the Company’s consolidated financial position, results of operations and cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The activity in the Company’s accruals for the MSA and tobacco litigation for the three years ended December 31, 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Current Liabilities | | Non-Current Liabilities |
| Payments due under Master Settlement Agreement | | Litigation Accruals | | Total | | Payments due under Master Settlement Agreement | | Litigation Accruals | | Total |
| | | | | | | | | | | |
| Balance as of January 1, 2019 | $ | 36,561 | | | $ | 310 | | | $ | 36,871 | | | $ | 16,383 | | | $ | 21,794 | | | $ | 38,177 | |
| Expenses | 165,471 | | | 990 | | | 166,461 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Change in MSA obligations capitalized as inventory | 4,936 | | | — | | | 4,936 | | | — | | | — | | | — | |
| Payments | (171,960) | | | (670) | | | (172,630) | | | — | | | — | | | — | |
| Reclassification to/(from) non-current liabilities | (892) | | | 3,338 | | | 2,446 | | | 892 | | | (3,338) | | | (2,446) | |
| Interest on withholding | — | | | 281 | | | 281 | | | — | | | 2,138 | | | 2,138 | |
| Balance as of December 31, 2019 | 34,116 | | | 4,249 | | | 38,365 | | | 17,275 | | | 20,594 | | | 37,869 | |
| Expenses | 175,538 | | | 312 | | | 175,850 | | | — | | | — | | | — | |
| NPM Settlement adjustment | 299 | | | — | | | 299 | | | — | | | — | | | — | |
| Change in MSA obligations capitalized as inventory | 182 | | | — | | | 182 | | | — | | | — | | | — | |
| Payments, net of credits received | (170,513) | | | (4,334) | | | (174,847) | | | (197) | | | — | | | (197) | |
| Reclassification to/(from) non-current liabilities | (855) | | | 3,252 | | | 2,397 | | | 855 | | | (3,252) | | | (2,397) | |
| Interest on withholding | — | | | 488 | | | 488 | | | — | | | 1,926 | | | 1,926 | |
| Balance as of December 31, 2020 | 38,767 | | | 3,967 | | | 42,734 | | | 17,933 | | | 19,268 | | | 37,201 | |
| Expenses | 173,786 | | | 211 | | | 173,997 | | | — | | | — | | | — | |
| | | | | | | | | | | |
| Change in MSA obligations capitalized as inventory | (670) | | | — | | | (670) | | | — | | | — | | | — | |
| Payments, net of credits received | (204,706) | | | (4,091) | | | (208,797) | | | — | | | — | | | — | |
| Reclassification to/(from) non-current liabilities | 4,709 | | | 3,351 | | | 8,060 | | | (4,709) | | | (3,351) | | | (8,060) | |
| Interest on withholding | — | | | 480 | | | 480 | | | — | | | 1,763 | | | 1,763 | |
| Balance as of December 31, 2021 | $ | 11,886 | | | $ | 3,918 | | | $ | 15,804 | | | $ | 13,224 | | | $ | 17,680 | | | $ | 30,904 | |
| | | | | | | | | | | |
Other Matters:
Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material impact on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco.
Liggett and the Company have received 3 separate demands for indemnification from Altria Client Services, on behalf of Philip Morris, relating to lawsuits alleging smokers’ use of L&M cigarettes. The indemnification demands are purportedly issued in connection with Eve Holdings’ 1999 sale of certain trademarks to Philip Morris.
Management is of the opinion that the liabilities, if any, resulting from other proceedings, lawsuits and claims pending against the Company and its consolidated subsidiaries, unrelated to tobacco product liability, should not materially affect the Company’s consolidated financial position, results of operations or cash flows.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. SUPPLEMENTAL CASH FLOW INFORMATION
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash paid during the period for: | | | | | |
| Interest, including interest related to finance leases | $ | 111,759 | | | $ | 118,807 | | | $ | 118,966 | |
| Income taxes, net | 92,698 | | | 41,372 | | | 44,184 | |
| Non-cash investing and financing activities: | | | | | |
| Issuance of stock dividend | — | | | — | | | 703 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
17. RELATED PARTY TRANSACTIONS
Ladenburg Thalmann Financial Services Inc. Prior to February 14, 2020, the Company owned 15,191,205 common shares (or approximately 10.2%) of LTS, which was a publicly-traded diversified financial services company prior to its merger with Advisor Group. The Company accounted for its investment in LTS under the equity method of accounting. In connection with the merger, in February 2020, the Company received cash proceeds of $53,169. The Company recorded equity in earnings of $53,424 for the year ended December 31, 2020. The Company also received $6,009 for the redemption of its 240,000 shares of LTS 8% Series A Cumulative Redeemable Preferred Stock.
Prior to the merger, the Company and LTS were parties to a management agreement and LTS paid the Company $103 and $850 under the agreement for 2020 and 2019, respectively; these amounts were recorded as equity income.
LTS paid cash compensation to the President and Chief Executive Officer of the Company, who served as Vice Chairman of LTS, prior to the merger, of $19 and $1,600 for 2020 and 2019, respectively. LTS paid cash compensation to the Company’s Executive Vice President and COO (the “Company’s COO”), who served as President and CEO of LTS, of $41 and $2,142 for 2020 and 2019, respectively. At the closing of the transaction, the Company’s COO resigned as Chairman, President and Chief Executive Officer of LTS, and the Company’s management agreement with LTS was terminated.
Dr. Philip Frost, who beneficially owns more than 5% of the Company’s common stock, was a director of LTS until September 2018 and was the largest shareholder of LTS until December 2018.
Castle Brands Inc. Prior to October 2019, the Company owned 12,895,017 shares (or approximately 7.6%) of Castle, which was a publicly-traded spirits company prior to its acquisition by Pernod Ricard. The Company accounted for its investment in Castle under the equity method of accounting. In connection with the acquisition, in October 2019, the Company received cash proceeds of $16,377 and recorded a pre-tax gain of $16,377.
Prior to the acquisition, the Company and Castle were parties to a management agreement and Castle paid the Company $75 in 2019 under the agreement. Castle paid retention payments of $515 in 2019 to the Company’s COO who served as President and Chief Executive Officer as well as a director of Castle until October 2019. Dr. Frost was a director of Castle and was the largest shareholder of Castle until October 2019. At the closing of the transaction, the Company’s COO resigned as President and Chief Executive Officer of Castle and the Company’s management agreement with Castle was terminated.
Insurance. The Company’s Chief Executive Officer, a firm in which he is a shareholder, and affiliates of that firm received insurance commissions aggregating approximately $241, $265 and $215 in 2021, 2020 and 2019, respectively, on various insurance policies issued for the Company and its subsidiaries.
Consulting services. Beginning in April 2020, a director of the Company, who served as President and Chief Executive Officer of Liggett Group and Liggett Vector Brands until March 2020, has served as Non-Executive Chairman of the Board of Managers of Liggett Vector Brands and as a Senior Advisor to Liggett. The director has been receiving compensation of $60 per month for his services as well as access to an office, administrative support and reimbursement of expenses reasonably incurred in connection with the services. The director received $540 in 2021.
Other. In addition, the Company had made investments in other entities where Dr. Frost has had relationships. In 2020, the Company liquidated its investments in BioCardia, Inc. (OTC: BCDA) and Cocrystal Pharma, Inc. (NASDAQ: COCP). Dr. Frost was a more than 10% shareholder of BioCardia, Inc. and a director and was a more than 5% shareholder of CoCrystal as of the date the investments were liquidated.
In September 2012, the Company entered into an office lease with an entity affiliated with Dr. Frost. The lease is for space in an office building in Miami, Florida and will expire on April 20, 2023. The Lease provides for payments of $36 per
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
month increasing to $41 per month. The Company recorded rental expense of $458 for the three years ended December 31, 2021, 2020 and 2019, associated with the lease.
Douglas Elliman Inc. On December 29, 2021, the Company completed the Spin-off of Douglas Elliman, which included the real estate services and PropTech investment business formerly owned by the Company through its subsidiary, New Valley.
Vector Group and Douglas Elliman entered into the Distribution Agreement and the Transition Services Agreement with respect to transition services and a number of ongoing commercial relationships. Under the Transition Services Agreement, Douglas Elliman will pay the Company $4,200 in 2022.
Following the spin-off, there is an overlap between certain officers of Vector Group and Douglas Elliman. Howard M. Lorber serves as the President and Chief Executive Officer of Vector Group and of Douglas Elliman. Richard J. Lampen serves as the Chief Operating Officer of Vector Group and of Douglas Elliman, J. Bryant Kirkland III serves as the Chief Financial Officer and Treasurer of Vector Group and of Douglas Elliman, Marc N. Bell serves as the General Counsel and Secretary of Vector Group and of Douglas Elliman, and J. David Ballard serves as Senior Vice President, Enterprise Efficiency and Chief Technology Officer of Vector Group and of Douglas Elliman. Furthermore, immediately following the spin-off, three of the members of our Board of Directors, Messrs. Lorber and Lampen as well as Wilson L. White, will also serve as directors of Douglas Elliman.
Douglas Elliman Realty LLC has been engaged by certain developers as the sole broker or the co-broker for several of the real estate development projects that New Valley owns an interest in through its real estate venture investments. Douglas Elliman had gross commissions of approximately $8,956, $10,783 and $18,952 from these projects for the years ended December 31, 2021, 2020 and 2019, respectively.
A son of the Company’s President and Chief Executive Officer is an associate broker with Douglas Elliman and he received commissions and other payments of $925, $870 and $712, respectively, in accordance with brokerage activities in 2021, 2020 and 2019, respectively.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
18. INVESTMENTS AND FAIR VALUE MEASUREMENTS
The Company’s financial assets and liabilities subject to fair value measurements were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2021 | | |
| Description | | Total | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | |
Significant Other Observable Inputs
(Level 2) | |
Significant Unobservable Inputs
(Level 3) | | |
| Assets: | | | | | | | | | | |
Money market funds (1) | | $ | 130,583 | | | $ | 130,583 | | | $ | — | | | $ | — | | | |
| | | | | | | | | | |
Commercial paper (1) | | 24,426 | | | — | | | 24,426 | | | — | | | |
| | | | | | | | | | |
Certificates of deposit (2) | | 110 | | | — | | | 110 | | | — | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Investment securities at fair value | | | | | | | | | | |
| Equity securities at fair value | | | | | | | | | | |
| Marketable equity securities | | 19,560 | | | 19,560 | | | — | | | — | | | |
| Mutual funds invested in debt securities | | 23,221 | | | 23,221 | | | — | | | — | | | |
| Total equity securities at fair value | | 42,781 | | | 42,781 | | | — | | | — | | | |
| Debt securities available for sale | | | | | | | | | | |
| U.S. government securities | | 6,481 | | | — | | | 6,481 | | | — | | | |
| Corporate securities | | 47,531 | | | — | | | 47,531 | | | — | | | |
| U.S. government and federal agency | | 19,572 | | | — | | | 19,572 | | | — | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Commercial paper | | 29,103 | | | — | | | 29,103 | | | — | | | |
| | | | | | | | | | |
| Foreign fixed-income securities | | 1,219 | | | — | | | 1,219 | | | — | | | |
| Total debt securities available for sale | | 103,906 | | | — | | | 103,906 | | | — | | | |
| | | | | | | | | | |
| Total investment securities at fair value | | 146,687 | | | 42,781 | | | 103,906 | | | — | | | |
| | | | | | | | | | |
| Long-term investments | | | | | | | | | | |
Long-term investment securities at fair value (3) | | 32,089 | | | — | | | — | | | — | | | |
| | | | | | | | | | |
| Total | | $ | 333,895 | | | $ | 173,364 | | | $ | 128,442 | | | $ | — | | | |
| | | | | | | | | | |
| Liabilities: | | | | | | | | | | |
| Fair value of contingent liability | | $ | 2,646 | | | $ | — | | | $ | — | | | $ | 2,646 | | | |
| | | | | | | | | | |
| Total | | $ | 2,646 | | | $ | — | | | $ | — | | | $ | 2,646 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
_____________________________
(1)Amounts included in Cash and cash equivalents on the consolidated balance sheets.
(2)Amounts included in current restricted assets and non-current restricted assets on the consolidated balance sheets.
(3)In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements as of December 31, 2020 | | |
| Description | | Total | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | |
Significant Other Observable Inputs
(Level 2) | |
Significant Unobservable Inputs
(Level 3) | | |
| Assets: | | | | | | | | | | |
Money market funds (1) | | $ | 194,095 | | | $ | 194,095 | | | $ | — | | | $ | — | | | |
| | | | | | | | | | |
Commercial paper (1) | | 44,397 | | | — | | | 44,397 | | | — | | | |
| | | | | | | | | | |
Certificates of deposit (2) | | 1,542 | | | — | | | 1,542 | | | — | | | |
| | | | | | | | | | |
Money market funds securing legal bonds (2) | | 535 | | | 535 | | | — | | | — | | | |
| | | | | | | | | | |
| Investment securities at fair value | | | | | | | | | | |
| Equity securities at fair value | | | | | | | | | | |
| Marketable equity securities | | 21,155 | | | 21,155 | | | — | | | — | | | |
| Mutual funds invested in debt securities | | 23,226 | | | 23,226 | | | — | | | — | | | |
| Total equity securities at fair value | | 44,381 | | | 44,381 | | | — | | | — | | | |
| Debt securities available for sale | | | | | | | | | | |
| U.S. government securities | | 19,200 | | | — | | | 19,200 | | | — | | | |
| Corporate securities | | 52,434 | | | — | | | 52,434 | | | — | | | |
| U.S. government and federal agency | | 10,484 | | | — | | | 10,484 | | | — | | | |
| | | | | | | | | | |
| Commercial paper | | 9,086 | | | — | | | 9,086 | | | — | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Total debt securities available for sale | | 91,204 | | | — | | | 91,204 | | | — | | | |
| | | | | | | | | | |
| Total investment securities at fair value | | 135,585 | | | 44,381 | | | 91,204 | | | — | | | |
| | | | | | | | | | |
| Long-term investments | | | | | | | | | | |
Long-term investment securities at fair value (3) | | 33,981 | | | — | | | — | | | — | | | |
| Total | | $ | 410,135 | | | $ | 239,011 | | | $ | 137,143 | | | $ | — | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
_____________________________
(1)Amounts included in Cash and cash equivalents on the consolidated balance sheets.
(2)Amounts included in current restricted assets and non-current restricted assets on the consolidated balance sheets.
(3)In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy.
The fair value of the Level 2 certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is the rate offered by the financial institution. The fair value of investment securities at fair value included in Level 1 is based on quoted market prices from various stock exchanges. The Level 2 investment securities at fair value are based on quoted market prices of securities that are thinly traded, quoted prices for identical or similar assets in markets that are not active or inputs other than quoted prices such as interest rates and yield curves.
The long-term investments are based on NAV per share provided by the partnerships based on the indicated market value of the underlying assets or investment portfolio. In accordance with Subtopic 820-10, these investments are not classified under the fair value hierarchy disclosed above because they are measured at fair value using the NAV practical expedient.
The fair value of the Level 3 contingent liability was derived using a Monte Carlo valuation model. As part of the acquisition of the 29.41% non-controlling interest in Douglas Elliman Realty LLC, New Valley entered into a four-year payout agreement that requires it to pay the sellers a portion of the fair value in excess of the purchase price of Douglas Elliman Realty LLC should a sale of a controlling interest in Douglas Elliman Realty LLC occur. In connection with the Spin-off, Vector agreed to indemnify Douglas Elliman for this contingent liability and accordingly remains potentially liable therefor.
The contingent liability is recorded within “Other liabilities” in the consolidated balance sheets, and any change in fair value will be recorded in “Other, net” within the consolidated statements of operations. The value of the contingent liability is calculated using the outstanding payable owed to the sellers and the estimated fair value of Douglas Elliman Realty LLC. The liability is contingent upon the sale of a controlling interest in Douglas Elliman Realty LLC prior to October 1, 2022.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quantitative Information about Level 3 Fair Value Measurements |
| | Fair Value at | | | | | | |
| | December 31,
2021 | | Valuation Technique | | Unobservable Input | | Range (Actual) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Fair value of contingent liability | | $ | 2,646 | | | Monte Carlo simulation model | | Estimated fair value of the Douglas Elliman reporting unit | | $ | 776,351 | |
| | | | | | Risk-free rate for a 0.75-year term | | 0.39 | % |
| | | | | | Leverage-adjusted equity volatility of peer firms | | 26.13 | % |
| | | | | | | | |
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company had no nonrecurring nonfinancial assets subject to fair value measurements except for investments in real estate ventures that were impaired as of December 31, 2021 and 2020, respectively.
The Company’s investment in real estate ventures subject to nonrecurring fair value measurements are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using: |
| | Year Ended December 31,
2021 | | | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | |
Significant Other Observable Inputs
(Level 2) | |
Significant Unobservable Inputs
(Level 3) |
Description | | Impairment Charge | | Total | | | |
| | | | | | | | | | |
Assets: | | | | | | | | | | |
Investments in real estate ventures | | $ | 2,713 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
The Company estimated the fair value of its investments in real estate ventures using observable inputs such as market pricing based on recent events, however, significant judgment was required to select certain inputs from observed market data. The decrease in the investments in real estate ventures was attributed to the decline in the projected sales prices and the duration of the estimated sell out of the respective real estate ventures. The $2,713 of impairment charges were included in equity in losses from real estate ventures for the year ended December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value Measurement Using: |
| | Year Ended December 31,
2020 | | | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | |
Significant Other Observable Inputs
(Level 2) | |
Significant Unobservable Inputs
(Level 3) |
Description | | Impairment Charge | | Total | | | |
| | | | | | | | | | |
Assets: | | | | | | | | | | |
Investments in real estate ventures | | $ | 16,513 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | |
The Company estimated the fair value of its investments in real estate ventures using observable inputs such as market pricing based on recent events, however, significant judgment was required to select certain inputs from observed market data. The decrease in the investments in real estate ventures was attributed to the decline in the projected sales prices and the duration of the estimated sell out of the respective real estate ventures. The $16,513 of impairment charges were included in equity in losses from real estate ventures for the year ended December 31, 2020.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. SEGMENT INFORMATION
The Company’s business segments were Tobacco and Real Estate. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Financial information for the Company’s operations before taxes and non-controlling interests for the years ended December 31, 2021, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Real | | Corporate | | |
| Tobacco | | | | Estate | | and Other | | Total |
| | | | | | | | | |
| 2021 | | | | | | | | | |
| Revenues | $ | 1,202,497 | | | | | $ | 18,203 | | | $ | — | | | $ | 1,220,700 | |
| Operating income (loss) | 360,317 | | (1) | | | 4,066 | | | (43,944) | | (5) | 320,439 | |
| Equity in earnings from real estate ventures | — | | | | | 10,250 | | | — | | | 10,250 | |
| Identifiable assets of continuing operations | 302,051 | | | | | 128,256 | | (4) | 440,780 | | (7) | 871,087 | |
| Depreciation and amortization | 6,525 | | | | | 249 | | | 1,042 | | | 7,816 | |
| Capital expenditures | 5,827 | | | | | 3 | | | 3,570 | | | 9,400 | |
| | | | | | | | | |
| 2020 | | | | | | | | | |
| Revenues | $ | 1,204,501 | | | | | $ | 24,181 | | | $ | — | | | $ | 1,228,682 | |
| Operating income (loss) | 319,536 | | (2) | | | (610) | | | (24,498) | | (6) | 294,428 | |
| Equity in losses from real estate ventures | — | | | | | (44,728) | | | — | | | (44,728) | |
| Identifiable assets of continuing operations | 357,518 | | | | | 103,523 | | (4) | 428,386 | | (7) | 889,427 | |
| Depreciation and amortization | 7,877 | | | | | 337 | | | 878 | | | 9,092 | |
| Capital expenditures | 4,491 | | | | | 100 | | | 8,346 | | | 12,937 | |
| | | | | | | | | |
| 2019 | | | | | | | | | |
| Revenues | $ | 1,114,840 | | | | | $ | 4,763 | | | $ | — | | | $ | 1,119,603 | |
| Operating income (loss) | 261,630 | | (3) | | | 550 | | | (27,565) | | | 234,615 | |
| Equity in losses from real estate ventures | — | | | | | (27,760) | | | — | | | (27,760) | |
| Identifiable assets of continuing operations | 336,566 | | | | | 177,943 | | (4) | 501,973 | | (7) | 1,016,482 | |
| Depreciation and amortization | 7,824 | | | | | 395 | | | 994 | | | 9,213 | |
| Capital expenditures | 4,173 | | | | | 197 | | | 126 | | | 4,496 | |
| | | | | | | | | |
_____________________________
(1)Operating income includes $2,722 received from a litigation settlement associated with the MSA expense (which reduced cost of sales) and $211 of litigation settlement and judgment expense.
(2)Operating income includes $337 of litigation settlement and judgment expense and $299 of expense from MSA settlement.
(3)Operating income includes $990 of litigation settlement and judgment expense.
(4)Includes real estate investments accounted for under the equity method of accounting of $105,062, $85,400 and $131,556 as of December 31, 2021, 2020 and 2019, respectively.
(5)Operating loss includes includes transaction charges of $10,468 and accelerated stock compensation of $4,317 related to the spin-off of Douglas Elliman; and $910 of gain on sale of assets.
(6)Operating loss includes $2,283 of gain on sale of assets.
(7)Corporate and Other identifiable assets primarily includes cash of $167,383, investment securities of $146,687 and long-term investments of $53,073 as of December 31, 2021. Corporate and other identifiable assets primarily includes cash of $211,729, investment securities of $135,585, and long-term investments of $52,291 as of December 31, 2020. Corporate and other identifiable assets primarily includes cash of $272,459, investment securities of $129,641, and long-term investments of $61,723 as of December 31, 2019.
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
20. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
Unaudited quarterly data for the years ended December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | September 30, | | June 30, | | March 31, |
| 2021 | | 2021 | | 2021 | | 2021 |
| Revenues | $ | 313,673 | | | $ | 298,485 | | | $ | 337,554 | | | $ | 270,988 | |
| Gross Profit | 110,373 | | | 111,041 | | | 125,148 | | | 104,596 | |
| Operating income | 68,556 | | | 82,015 | | | 93,893 | | | 75,975 | |
| Net income from continuing operations | 30,711 | | | 29,912 | | | 64,981 | | | 21,550 | |
| Net income from discontinued operations | 14,531 | | | 18,857 | | | 28,324 | | | 10,407 | |
| Net income applicable to common shares attributed to Vector Group Ltd. | $ | 45,312 | | | $ | 48,889 | | | $ | 93,305 | | | $ | 31,957 | |
| Per basic common share: | | | | | | | |
| Net income from continuing operations applicable to common shares attributed to Vector Group Ltd. | $ | 0.20 | | | $ | 0.19 | | | $ | 0.41 | | | $ | 0.14 | |
| Net income from discontinued operations applicable to common shares attributed to Vector Group Ltd. | 0.09 | | | 0.12 | | | 0.19 | | | 0.06 | |
| Net income applicable to common shares attributed to Vector Group Ltd. | $ | 0.29 | | | $ | 0.31 | | | $ | 0.60 | | | $ | 0.20 | |
| Per diluted common share: | | | | | | | |
| Net income from continuing operations applicable to common shares attributed to Vector Group Ltd. | $ | 0.20 | | | $ | 0.19 | | | $ | 0.41 | | | $ | 0.14 | |
| Net income from discontinued operations applicable to common shares attributed to Vector Group Ltd. | 0.09 | | | 0.12 | | | 0.19 | | | 0.06 | |
| Net income applicable to common shares attributed to Vector Group Ltd. | $ | 0.29 | | | $ | 0.31 | | | $ | 0.60 | | | $ | 0.20 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | September 30, | | June 30, | | March 31, |
| 2020 | | 2020 | | 2020 | | 2020 |
| Revenues | $ | 287,129 | | | $ | 339,835 | | | $ | 312,831 | | | $ | 288,887 | |
| Gross Profit | 105,872 | | | 114,406 | | | 98,201 | | | 90,601 | |
| Operating income | 74,011 | | | 84,130 | | | 71,803 | | | 64,484 | |
| Net income from continuing operations | 21,839 | | | 29,387 | | | 29,762 | | | 45,934 | |
| Net income (loss) from discontinued operations | 10,417 | | | 8,752 | | | (3,988) | | | (49,165) | |
| Net income (loss) applicable to common shares attributed to Vector Group Ltd. | $ | 32,256 | | | $ | 38,139 | | | $ | 25,774 | | | $ | (3,231) | |
| Per basic common share: | | | | | | | |
| Net income from continuing operations applicable to common shares attributed to Vector Group Ltd. | $ | 0.14 | | | $ | 0.19 | | | $ | 0.20 | | | $ | 0.30 | |
| Net income (loss) from discontinued operations applicable to common shares attributed to Vector Group Ltd. | 0.07 | | | 0.06 | | | (0.03) | | | (0.33) | |
| Net income (loss) applicable to common shares attributed to Vector Group Ltd. | $ | 0.21 | | | $ | 0.25 | | | $ | 0.17 | | | $ | (0.03) | |
| Per diluted common share: | | | | | | | |
| Net income from continuing operations applicable to common shares attributed to Vector Group Ltd. | $ | 0.14 | | | $ | 0.19 | | | $ | 0.19 | | | $ | 0.30 | |
| Net income (loss) from discontinued operations applicable to common shares attributed to Vector Group Ltd. | 0.07 | | | 0.06 | | | (0.03) | | | (0.33) | |
| Net income (loss) applicable to common shares attributed to Vector Group Ltd. | $ | 0.21 | | | $ | 0.25 | | | $ | 0.16 | | | $ | (0.03) | |
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
It may not be possible to recalculate EPS attributable to common stockholders by adjusting EPS from continuing operations by EPS from discontinued operations as each amount is calculated independently.
VECTOR GROUP LTD.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(Dollars in Thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | Balance at
Beginning
of Period | | Additions
Charged to
Costs and
Expenses | | Deductions | | Balance
at End
of Period |
| Year Ended December 31, 2021 | | | | | | | | |
| Allowances for: | | | | | | | | |
| | | | | | | | |
| Cash discounts | | 334 | | | 28,663 | | | 28,671 | | | 326 | |
| Deferred tax valuation allowance | | 852 | | | — | | | 504 | | | 348 | |
| Sales returns | | 7,356 | | | 2,439 | | | 3,126 | | | 6,669 | |
| Total | | $ | 8,542 | | | $ | 31,102 | | | $ | 32,301 | | | $ | 7,343 | |
| Year Ended December 31, 2020 | | | | | | | | |
| Allowances for: | | | | | | | | |
| | | | | | | | |
| Cash discounts | | 319 | | | 28,046 | | | 28,031 | | | 334 | |
| Deferred tax valuation allowance | | 1,292 | | | — | | | 440 | | | 852 | |
| Sales returns | | 7,785 | | | 2,617 | | | 3,046 | | | 7,356 | |
| Total | | $ | 9,396 | | | $ | 30,663 | | | $ | 31,517 | | | $ | 8,542 | |
| Year Ended December 31, 2019 | | | | | | | | |
| Allowances for: | | | | | | | | |
| | | | | | | | |
| Cash discounts | | 317 | | | 25,970 | | | 25,968 | | | 319 | |
| Deferred tax valuation allowance | | 3,817 | | | — | | | 2,525 | | | 1,292 | |
| Sales returns | | 6,935 | | | 4,068 | | | 3,218 | | | 7,785 | |
| Total | | $ | 11,069 | | | $ | 30,038 | | | $ | 31,711 | | | $ | 9,396 | |
