1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 65-0949535
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
At May 11, 2001, Vector Group Ltd. had 25,994,721 shares of common
stock outstanding.
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VECTOR GROUP LTD.
FORM 10-Q
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. VECTOR GROUP LTD. CONSOLIDATED FINANCIAL STATEMENTS:
Vector Group Ltd. Consolidated Balance Sheets as of March 31, 2001 and
December 31, 2000 ................................................................ 2
Vector Group Ltd. Consolidated Statements of Operations for the three months ended
March 31, 2001 and March 31, 2000 ................................................ 3
Vector Group Ltd. Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2001 ...................................................... 4
Vector Group Ltd. Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and March 31, 2000 ................................................ 5
Notes to Consolidated Financial Statements ............................................. 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ................................. 29
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................ 38
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS ................................................................. 39
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ......................................... 39
Item 6. EXHIBITS AND REPORTS ON FORM 8-K .................................................. 39
SIGNATURE ................................................................................. 40
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PART I.
FINANCIAL INFORMATION
ITEM 1. VECTOR GROUP LTD. CONSOLIDATED FINANCIAL STATEMENTS
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
2001 2000
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents .............................................. $ 120,130 $ 157,513
Receivables from clearing brokers ...................................... 18,415 10,126
Investment securities available for sale ............................... 28,518 29,337
Trading securities owned ............................................... 8,566 18,348
Accounts receivable - trade ............................................ 8,403 9,748
Other receivables ...................................................... 1,715 1,669
Inventories ............................................................ 34,532 29,752
Restricted assets ...................................................... 1,508 4,489
Deferred income taxes .................................................. 3,153 3,304
Other current assets ................................................... 4,055 5,656
--------- ---------
Total current assets ............................................... 228,995 269,942
Property, plant and equipment, net ....................................... 67,110 48,539
Investment in real estate, net ........................................... 111,994 120,272
Long-term investments, net ............................................... 4,954 4,654
Restricted assets ........................................................ 3,179 3,060
Deferred income taxes .................................................... 7,531 7,094
Other assets ............................................................. 8,533 8,414
--------- ---------
Total assets ....................................................... $ 432,296 $ 461,975
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of notes payable and long-term debt .................... $ 8,704 $ 17,850
Margin loan payable .................................................... 3,848 4,675
Accounts payable ....................................................... 6,154 9,547
Cash overdraft ......................................................... 459 501
Securities sold, not yet purchased ..................................... 2,685 3,570
Accrued promotional expenses ........................................... 16,718 19,683
Accrued taxes payable .................................................. 28,513 32,133
Deferred income taxes .................................................. 2,592 2,587
Prepetition claims and restructuring accruals .......................... 7,639 10,229
Other accrued liabilities .............................................. 45,278 38,000
--------- ---------
Total current liabilities .......................................... 122,590 138,775
Notes payable, long-term debt and other obligations, less current portion 33,051 39,890
Noncurrent employee benefits ............................................. 4,042 7,313
Deferred income taxes .................................................... 131,009 129,887
Other liabilities ........................................................ 64,868 61,627
Minority interests ....................................................... 70,977 72,034
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 31,791,664 shares, outstanding 25,667,018 ............. 2,567 2,567
Additional paid-in capital ............................................. 175,517 184,807
Deficit ................................................................ (146,259) (148,789)
Accumulated other comprehensive income ................................. 1,407 1,337
Less: 6,124,646 shares of common stock in treasury, at cost ........... (27,473) (27,473)
--------- ---------
Total stockholders' equity ......................................... 5,759 12,449
--------- ---------
Total liabilities and stockholders' equity ......................... $ 432,296 $ 461,975
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
-------------------------------
March 31, March 31,
2001 2000
------------ ------------
Revenues:
Tobacco* .............................................. $ 137,136 $ 147,148
Broker-dealer transactions ............................ 19,065 30,296
Real estate leasing ................................... 2,641 771
------------ ------------
Total revenues ...................................... 158,842 178,215
Expenses:
Cost of goods sold* ................................... 40,764 68,575
Operating, selling, administrative and general expenses 107,506 99,503
Settlement charges .................................... 9,765 37
------------ ------------
Operating income .................................... 807 10,100
Other income (expenses):
Interest and dividend income .......................... 2,182 1,530
Interest expense ...................................... (1,258) (11,756)
Equity in loss of affiliate ........................... -- (1,551)
Gain on sale of assets ................................ 1,492 --
Foreign currency gain ................................. -- 1,223
Loss in joint venture ................................. (14) (226)
Gain on sale of investments, net ...................... 465 4,753
Other, net ............................................ 28 (23)
------------ ------------
Income from continuing operations before provision
for income taxes and minority interests ............. 3,702 4,050
Provision for income taxes ............................ 2,048 823
Minority interests .................................... (876) 1,739
------------ ------------
Income from continuing operations ......................... 2,530 1,488
------------ ------------
Loss on extraordinary items ............................... -- (230)
------------ ------------
Net income ................................................ $ 2,530 $ 1,258
============ ============
Per basic common share:
Income from continuing operations ..................... $ 0.10 $ 0.06
============ ============
Loss from extraordinary items ......................... -- $ (0.01)
============ ============
Net income applicable to common shares ................ $ 0.10 $ 0.05
============ ============
Basic weighted average common shares outstanding .......... 25,667,018 23,089,271
============ ============
Per diluted common share:
Income from continuing operations ..................... $ 0.08 $ 0.05
============ ============
Loss from extraordinary items ......................... -- $ (0.01)
============ ============
Net income applicable to common shares ................ $ 0.08 $ 0.04
============ ============
Diluted weighted average common shares outstanding ........ 29,951,988 27,543,971
============ ============
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* Tobacco Revenues and Cost of goods sold include excise taxes of $27,124 and
$24,701 for the three months ended March 31, 2001 and 2000, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
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VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Common Stock Additional Other
-------------------- Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Income Total
------ ------ ------- ------- -------- ------------- -----
Balance, December 31, 2000 ................ 25,667,018 $ 2,567 $ 184,807 $ (148,789) $ (27,473) $ 1,337 $ 12,449
Net income ................................ -- -- -- 2,530 -- -- 2,530
Effect of New Valley capital transactions -- -- -- -- -- 70 70
----------
Total other comprehensive income .... -- -- -- -- -- -- 70
----------
Total comprehensive income ................ -- -- -- -- -- -- 2,600
----------
Distributions on common stock ............. -- -- (10,267) -- -- -- (10,267)
Effect of New Valley share repurchase ..... -- -- 201 -- -- -- 201
Amortization of deferred compensation ..... -- -- 776 -- -- -- 776
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2001 ................... 25,667,018 $ 2,567 $ 175,517 $ (146,259) $ (27,473) $ 1,407 $ 5,759
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
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VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
-------------------------
March 31, March 31,
2001 2000
--------- ---------
Net cash used in operating activities ...................... $ (3,271) $ (22,086)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net ......... 11,981 2
Sale or maturity of investment securities ................ 3,166 14,849
Purchase of investment securities ........................ (1,761) (5,503)
Purchase of long-term investments ........................ (300) (504)
Purchase of real estate .................................. (565) --
Decrease in restricted assets ............................ 2,862 3,202
Payment of prepetition claims ............................ (2,590) (16)
Investment in joint venture .............................. -- (213)
Repurchase by New Valley of common shares ................ (239) (166)
Capital expenditures ..................................... (22,025) (8,029)
--------- ---------
Net cash (used in) provided by investing activities ........ (9,471) 3,622
--------- ---------
Cash flows from financing activities:
Proceeds from debt ....................................... 13,999 1,500
Repayments of debt ....................................... (10,610) (8,395)
Borrowings under revolvers ............................... 87,016 120,442
Repayments on revolvers .................................. (106,388) (89,890)
Proceeds from participating loan ......................... 2,478 --
Decrease in cash overdraft ............................... (42) --
(Decrease) increase in margin loans payable .............. (827) 3,324
Distributions on common stock ............................ (10,267) (5,498)
--------- ---------
Net cash (used in) provided by financing activities ........ (24,641) 21,483
--------- ---------
Effect of exchange rate changes on cash and cash equivalents -- (332)
Net (decrease) increase in cash and cash equivalents ....... (37,383) 2,687
Cash and cash equivalents, beginning of period ............. 157,513 20,123
--------- ---------
Cash and cash equivalents, end of period ................... $ 120,130 $ 22,810
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION:
The consolidated financial statements of Vector Group Ltd. (the
"Company" or "Vector") include the accounts of BGLS Inc. ("BGLS"),
Liggett Group Inc. ("Liggett"), New Valley Corporation ("New
Valley"), Brooke (Overseas) Ltd. ("Brooke (Overseas)"), Vector
Tobacco (USA) Ltd. ("Vector Tobacco"), through July 31, 2000
Liggett-Ducat Ltd. ("Liggett-Ducat"), and other less significant
subsidiaries.
Liggett is engaged primarily in the manufacture and sale of
cigarettes, principally in the United States. Vector Tobacco is
engaged in the development of new, less hazardous cigarette products.
Prior to its sale in August 2000, Liggett-Ducat was engaged in the
manufacture and sale of cigarettes in Russia. New Valley is engaged
primarily in the investment banking and brokerage business through
its ownership of Ladenburg Thalmann & Co. Inc. ("Ladenburg") and in
the real estate business in Russia.
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2000, as filed with the Securities and
Exchange Commission. The consolidated results of operations for
interim periods should not be regarded as necessarily indicative of
the results that may be expected for the entire year.
(b) RISKS AND UNCERTAINTIES:
The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the
country's currency continues to devalue, there is continued
volatility in the debt and equity market, hyperinflation persists,
confidence in the banking sector has yet to be restored and there
continues to be a general lack of liquidity in the economy. In
addition, laws and regulations affecting businesses operating within
the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to
a large extent on the effectiveness of the measures taken by the
government, decisions of international lending organizations, and
other actions, including regulatory and political developments, which
are beyond the Company's control.
The Company's assets and operations could be at risk if there are any
further significant adverse changes in the political and business
environment. Management is unable to predict what effect those
uncertainties might have on the future financial position of the
Company. No adjustments related to these uncertainties have been
included in the accompanying consolidated financial statements.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
(c) ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Significant estimates
subject to material changes in the near term include deferred tax
assets, allowance for doubtful accounts, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans and
litigation and defense costs. Actual results could differ from those
estimates.
(d) RECLASSIFICATIONS:
Certain amounts in the 2000 consolidated financial statements have
been reclassified to conform to the 2001 presentation.
(e) EARNINGS PER SHARE:
Information concerning the Company's common stock has been adjusted
to give effect to the 5% stock dividend paid to Company stockholders
on September 28, 2000. In connection with the stock dividend, the
Company increased the number of warrants and stock options by 5% and
reduced the exercise prices accordingly. All share amounts have been
presented as if the stock dividends had occurred on January 1, 2000.
(f) COMPREHENSIVE INCOME:
Other comprehensive income is a component of stockholders' equity and
includes such items as the Company's proportionate interest in New
Valley's capital transactions, unrealized gains and losses on
investment securities and minimum pension liability adjustments.
Total comprehensive income was $70 for the three months ended March
31, 2001 and $1,601 for the three months ended March 31, 2000.
2. PRO FORMA RESULTS
The following table presents unaudited pro forma results of operations as
if the sale of Western Tobacco Investments, through which the Company held
its equity interest in Liggett-Ducat, one of Russia's leading cigarette
producers, and the acquisition of Class A interests in Western Realty
Development LLC (refer to Note 4) had occurred immediately prior to
January 1, 2000. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of what
would have occurred had these transactions been consummated as of such
date.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Three Months Ended
March 31, 2000
------------------
Revenues .......................................... $141,771
========
Operating income .................................. $ 9,172
========
Income from continuing operations
before taxes and minority
interests ....................................... $ 11,248
========
Income from continuing operations ................. $ 5,255
========
Income from continuing operations per common share:
Basic ......................................... $ 0.23
========
Diluted ....................................... $ 0.19
========
3. NEW VALLEY CORPORATION
During 1999, New Valley's Board of Directors authorized the repurchase of
up to 2,000,000 Common Shares from time to time on the open market or in
privately negotiated transactions depending on market conditions. As of
March 31, 2001, New Valley had repurchased 412,000 shares for
approximately $1,423. At March 31, 2001, the Company owned 56.3% of New
Valley's Common Shares.
On February 8, 2001, New Valley entered into a stock purchase agreement
under which New Valley acquired a controlling interest in GBI Capital
Management Corp. ("GBI") and its operating subsidiary, GBI Capital
Partners, Inc., a securities and trading firm. On April 25, 2001, New
Valley and GBI entered into an amendment to the agreement which provided
for an increase in the number of shares of GBI common stock to be received
by New Valley and Berliner Effektengesellschaft AG ("Berliner") and a
decrease in the conversion price of the notes to be received by New Valley
and Berliner based on a post-closing determination of the respective
changes in the total stockholders' equities of Ladenburg, New Valley's
80.1% subsidiary, and GBI through April 30, 2001. Following the closing of
the transaction, which occurred on May 7, 2001, New Valley owns a majority
of the outstanding shares of GBI, an American Stock Exchange-listed
company, which has been renamed Ladenburg Thalmann Financial Services,
Inc. Under the terms of the amended agreement, New Valley and Berliner
sold all of the outstanding shares of Ladenburg to GBI for 18,181,818
shares (subject to increase) of GBI common stock, $10,000 of cash and
$10,000 principal amount of convertible notes (convertible at $2.60 per
share, subject to decrease). Upon closing, New Valley also acquired an
additional 3,945,060 shares of GBI from Joseph Berland, the former
Chairman and Chief Executive Officer of GBI, for $1.00 per share.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
4. INVESTMENT IN WESTERN REALTY
WESTERN REALTY DEVELOPMENT LLC. In February 1998, New Valley and Apollo
Real Estate Investment Fund III, L.P. ("Apollo") organized Western Realty
Development LLC ("Western Realty Development") to make real estate and
other investments in Russia. New Valley agreed to contribute the real
estate assets of BrookeMil Ltd. ("BrookeMil"), a wholly-owned subsidiary
of New Valley, including Ducat Place II and the site for Ducat Place III,
to Western Realty Development and Apollo agreed to contribute up to
$72,021, including the investment in Western Realty Repin discussed below.
Western Realty Development has three classes of equity: Class A interests,
representing 30% of the ownership of Western Realty Development, and Class
B and Class C interests, which collectively represent 70% of the ownership
of Western Realty Development. Prior to December 29, 2000, Apollo owned
the Class A interests, New Valley owned the Class B interests and
BrookeMil owned the Class C interests. On December 29, 2000, WRD Holding
Corporation ("WRD Holding"), a wholly-owned subsidiary of New Valley,
purchased for $4,000 29/30ths of the Class A interests of Western Realty
Development previously held by Apollo. WRD Holding paid the purchase price
of $4,000 with a promissory note due November 30, 2005. The note, which is
secured by a pledge of the purchased Class A interests, bears interest at
a rate of 7% per annum, compounded annually; interest is payable to the
extent of available cash flow from distributions from Western Realty
Development. In addition, upon the maturity date of the note or, if
earlier, upon the closing of various liquidity events, including sales of
interests in or assets of, or a business combination or financing
involving, Western Realty Development, additional interest will be payable
under the note. The additional interest would be in an amount equal to 30%
of the excess, if any, of the proceeds from a liquidity event occurring
prior to the maturity of the note or the appraised fair market value of
Western Realty Development, at maturity, over $13,750. The note is
classified in other long-term liabilities in the consolidated balance
sheet. Apollo and New Valley also agreed to loan Western Realty
Development on an equal basis any additional funds required to pay off its
existing indebtedness at an interest rate of 15% per annum.
As a result of the purchase of the Class A interests, New Valley and its
subsidiaries are entitled to 99% of distributions from Western Realty
Development and Apollo is entitled to 1% of distributions. Accordingly,
New Valley no longer accounts for its interests in Western Realty
Development using the equity method of accounting. Effective December 29,
2000, Western Realty Development became a consolidated subsidiary of New
Valley.
Summarized financial information for the three months ended March 31, 2000
for Western Realty Development follows:
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Three Months Ended
March 31, 2000
-------------------
Revenues ..................................... $2,390
Costs and expenses ........................... 2,170
Accretion of return on
participating loan....................... 1,412
Income tax expense ........................... --
------
Net income ................................... $1,632
======
WESTERN REALTY REPIN LLC. In June 1998, New Valley and Apollo organized
Western Realty Repin to make a loan to BrookeMil. The proceeds of the loan
have been used by BrookeMil for the acquisition and preliminary
development of the Kremlin sites, two adjoining sites totaling 10.25 acres
located in Moscow across the Moscow River from the Kremlin. BrookeMil is
planning the development of a hotel, office, retail and residential
complex on the Kremlin sites. BrookeMil owned 100% of both sites at March
31, 2001.
Through March 31, 2001, Western Realty Repin has advanced $41,425 to
BrookeMil, of which $29,015 was funded by Apollo and was classified in
other long-term obligations in the consolidated balance sheet. The loan
bears no fixed interest and is payable only out of 100% of the
distributions by the entities owning the Kremlin sites to BrookeMil. Such
distributions will be applied first to pay the principal of the loan and
then as contingent participating interest on the loan. Any rights of
payment on the loan are subordinate to the rights of all other creditors
of BrookeMil. BrookeMil used a portion of the proceeds of the loan to
repay New Valley for certain expenditures on the Kremlin sites previously
incurred. The loan is due and payable upon the dissolution of BrookeMil
and is collateralized by a pledge of New Valley's shares of BrookeMil.
As of March 31, 2001, BrookeMil had invested $36,230 in the Kremlin sites
and held $545 in cash and receivables from an affiliate, both of which
were restricted for future investment in the Kremlin sites. In connection
with the acquisition of a 34.8% interest in one of the Kremlin sites,
BrookeMil agreed with the City of Moscow to invest an additional $22,000
by May 2000 in the development of the property. In April 2000, Western
Realty Repin arranged short-term financing to fund the investment. Under
the terms of the investment, BrookeMil is required to utilize such
financing amount to make construction expenditures on the site by June
2002. Failure to make the expenditures could result in forfeiture of the
34.8% interest in the site.
New Valley has accounted for the formation of Western Realty Repin as a
financing by Apollo through a participating interest to be received from
the Kremlin sites. Based on the distribution terms contained in the
Western Realty Repin LLC agreement, the 20% annual rate of return
preference to be received by Apollo on funds advanced to Western Realty
Repin is treated as interest cost in the consolidated statement of
operations to the extent of New Valley's net investment in the Kremlin
sites. BrookeMil's historical cost in the Kremlin sites is $36,775 at
March 31, 2001 and the amount of the participating loan recorded in the
consolidated balance sheet is $38,605 at March 31, 2001. Apollo is
entitled to additional preferences of approximately $5,700 related to the
Kremlin sites at March 31, 2001.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. New Valley is considering
potential financing alternatives on behalf of Western Realty Development
and BrookeMil. However, in light of the recent economic turmoil in Russia,
there is a risk that financing will not be available on acceptable terms.
Failure to obtain sufficient capital for the projects would force Western
Realty Development and BrookeMil to curtail or delay the planned
development of Ducat Place III and the Kremlin sites.
5. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities classified as available for sale are carried at fair
value, with net unrealized gains included as a component of stockholders'
equity, net of minority interests. The Company had realized gains on sales
of investment securities available for sale of $465 and $4,753 for the
three months ended March 31, 2001 and 2000, respectively.
The components of investment securities available for sale at March 31,
2001 are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
---- ----------- ----------- -----
Marketable equity securities $23,072 $ 2 $3,056 $20,018
Marketable debt securities . 3,050 600 -- 3,650
Marketable warrants ........ -- 4,850 -- 4,850
------- ------ ------ -------
Investment securities ...... $26,122 $5,452 $3,056 $28,518
======= ====== ====== =======
6. INVENTORIES
Inventories consist of:
March 31, December 31,
2001 2000
------------ ---------------
Leaf tobacco ................. $ 8,787 $ 7,911
Other raw materials .......... 1,311 1,382
Work-in-process .............. 1,760 2,156
Finished goods ............... 20,704 18,924
Replacement parts and supplies 2,749 2,640
-------- --------
Inventories at current cost .. 35,311 33,013
LIFO adjustments ............. (779) (3,261)
-------- --------
$ 34,532 $ 29,752
======== ========
At March 31, 2001, the Company had leaf tobacco purchase commitments of
approximately $18,874.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
March 31, December 31,
2001 2000
--------- ------------
Land and improvements ....... $ 1,550 $ 1,670
Buildings ................... 15,886 15,641
Machinery and equipment ..... 90,179 71,741
--------- --------
107,615 89,052
Less accumulated depreciation (40,505) (40,513)
--------- --------
$ 67,110 $ 48,539
========= ========
In February 2001, Liggett sold a warehouse facility for $2,000 in a
sale-leaseback arrangement which resulted in a recognized gain of $542
during the first quarter 2001. The remaining gain of $1,139 will be
amortized over the 15-year lease term, ending in October 2015.
Also in February 2001, Liggett contracted to purchase production machinery
for approximately $16,200 denominated in foreign currencies. Deliveries
are expected to begin in October 2001. Liggett is seeking a capital lease
arrangement to finance a portion of the acquisition costs.
8. LONG-TERM INVESTMENTS
At March 31, 2001, long-term investments consisted primarily of
investments in limited partnerships of $4,954. The Company believes the
fair value of the limited partnerships exceeds their carrying amount by
approximately $5,800 based on the indicated market values of the
underlying investment portfolio provided by the partnerships. The
Company's estimates of the fair value of its long-term investments are
subject to judgment and are not necessarily indicative of the amounts that
could be realized in the current market. The Company's investments in
limited partnerships are illiquid, and the ultimate realization of these
investments is subject to the performance of the underlying partnership
and its management by the general partners.
-12-
14
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
9. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
March 31, December 31,
2001 2000
--------- ------------
Liggett:
Revolving credit facility ........................................... $ -- $ 19,374
Term loan under credit facility ..................................... 4,140 4,320
Equipment loans ..................................................... 5,565 5,760
New Valley:
Notes payable - shopping centers .................................... 11,287 19,529
Notes payable - Russia............................................... 7,257 8,187
Vector Research ..................................................... 13,175 --
Other ............................................................... 331 570
-------- --------
Total notes payable, long-term debt and other obligations ........... 41,755 57,740
Less:
Current maturities ............................................ (8,704) (17,850)
-------- --------
Amount due after one year ........................................... $ 33,051 $ 39,890
======== ========
REVOLVING CREDIT FACILITY - LIGGETT:
Liggett has a $35,000 credit facility, under which $0 was outstanding at
March 31, 2001. Availability under the credit facility was approximately
$28,376 based on eligible collateral at March 31, 2001. The facility is
collateralized by all inventories and receivables of Liggett. Borrowings
under the facility, whose interest is calculated at a rate equal to 1.0%
above First Union's (the indirect parent of Congress Financial
Corporation, the lead lender) prime rate. The facility's interest rate was
9.5% at March 31, 2001. The facility requires Liggett's compliance with
certain financial and other covenants including a restriction on the
payment of cash dividends unless Liggett's borrowing availability under
the facility for the 30-day period prior to the payment of the dividend,
and after giving effect to the dividend, is at least $5,000. In addition,
the facility, as amended, imposes requirements with respect to Liggett's
adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of
$17,000 as computed in accordance with the agreement). At March 31, 2001,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $19,459 and net working capital was
$14,820, as computed in accordance with the agreement. The facility
expires on March 8, 2003 subject to automatic renewal for an additional
year unless a notice of termination is given by the lender at least 60
days prior to the anniversary date.
During 1999, 100 Maple Lane LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed $5,040
from the lender under Liggett's credit facility. The loan is payable in 59
monthly installments of $60 including annual interest at 1% above the
prime rate with a final payment of $1,500. Liggett has guaranteed the
loan, and a first mortgage on the Mebane property collateralizes the Maple
Lane loan and Liggett's credit facility. Liggett completed the relocation
of its manufacturing operations to this facility in October 2000.
-13-
15
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
EQUIPMENT LOANS - LIGGETT:
In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment
for $1,071 under two capital leases which are payable in 60 monthly
installments of $22 with an effective interest rate of 10.20%.
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 ($3,835 outstanding at March 31, 2001) to fund the purchase from a
third party. The loan, which is collateralized by the equipment and
guaranteed by BGLS and Vector, is payable in 60 monthly installments of
$56 including annual interest of 7.67% with a final payment of $2,550.
NOTES PAYABLE - NEW VALLEY:
In February 2001, New Valley sold its Royal Palm Beach, Florida shopping
center for $9,500 before closing adjustments and expenses and recorded a
gain of $897 for the three months ended March 31, 2001. Notes payable
relating to the shopping center with a balance of $8,226 at December 31,
2000 were repaid upon closing.
A credit facility with a Russian bank bears interest at 16% per year,
matures no later than August 2002, with principal payments commencing
after the first year, and is collateralized by a mortgage on Ducat Place
II and guaranteed by New Valley. At March 31, 2001, borrowings under the
new credit agreement totaled $7,257.
EQUIPMENT LOANS - VECTOR RESEARCH:
On February 20, 2001, a subsidiary of Vector Research Ltd. purchased
equipment for $15,500 and borrowed $13,175 to fund the purchase. The loan,
which is collateralized by the equipment and a letter of credit from the
Company for $775, is guaranteed by Vector Research Ltd., BGLS and the
Company. The loan is payable in 120 monthly installments of $125 including
annual interest of 7.78% with a final payment of $6,125.
SUBSEQUENT EVENT:
10% SENIOR SECURED NOTES DUE MARCH 31, 2006 - BGLS
On May 14, 2001, BGLS issued at a discount $60,000 principal amount of 10%
senior secured notes due March 31, 2006 in a private placement. BGLS
received net proceeds from the offering of approximately $46,500. The
notes were priced to provide the purchasers with a 15.75% yield to
maturity.
The notes are collateralized by substantially all of BGLS' assets,
including a pledge of BGLS' equity interests in its direct subsidiaries,
including Brooke Group Holding, Brooke (Overseas), Vector Tobacco and New
Valley Holdings, Inc. ("NV Holdings"), as well as a pledge of the shares
of Liggett and all of the New Valley securities held by BGLS and NV
Holdings. The purchase agreement for the notes contains covenants, which
among other things, limit the ability of BGLS to make distributions to the
-14-
16
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Company to 50% of BGLS' net income, unless BGLS holds $50,000 in cash
after giving effect to the payment of the distribution, limit additional
indebtedness of BGLS, Liggett and Vector Tobacco to 250% of EBITDA for the
trailing 12 months, restrict transactions with affiliates subject to
exceptions which include payments to the Company not to exceed $9,500 per
year for permitted operating expenses, and limit the ability of BGLS to
merge, consolidate or sell certain assets.
Prior to May 24, 2003, BGLS may redeem up to $21,000 of the notes at a
redemption price of 105% of the accreted value with proceeds from one or
more equity offerings. BGLS may redeem the notes, in whole or in part, at
a redemption price of 103% of accreted value in the year beginning May 14,
2003, 102% of accreted value in the year beginning May 14, 2004 and 100%
of accreted value after May 14, 2005. During the term of the notes, BGLS
is required to offer to repurchase all the notes at a purchase price of
101%, in the event of a change of control, and to offer to repurchase
notes, at the redemption prices, with the proceeds of material asset
sales.
10. EQUITY
On January 22, 2001, the Company granted non-qualified stock options to
two executive officers of the Company pursuant to the Company's 1999
Long-Term Incentive Plan. Under the options, the option holders have the
right to purchase an aggregate of 750,000 shares of common stock at an
exercise price of $19.125 per share (the fair market value of a share of
common stock on the date of grant). Common stock dividend equivalents are
paid currently with respect to each share underlying the unexercised
portion of the options. The options have a ten-year term and become
exercisable on November 4, 2003. However, the options will earlier vest
and become immediately exercisable upon (i) the occurrence of a change in
control or (ii) the termination of the option holder's employment with the
Company due to death or disability.
During the quarter ended March 31, 2001, new employees of the Company or
its subsidiaries were awarded a total of 305,000 non-qualified options to
purchase shares of common stock at prices ranging from $17.88 to $21.36,
the fair market value on the dates of grant, under the Company's 1998
Long-Term Incentive Plan.
11. CONTINGENCIES
SMOKING-RELATED LITIGATION:
OVERVIEW. Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in numerous direct and
third-party actions predicated on the theory that cigarette manufacturers
should be liable for damages alleged to have been caused by cigarette
smoking or by exposure to secondary smoke from cigarettes. These cases are
reported here as though having been commenced against Liggett (without
regard to whether such cases were actually commenced against Brooke Group
Holding Inc., the Company's predecessor and a wholly-owned subsidiary of
BGLS, or Liggett). There has been a noteworthy increase in the number of
cases commenced against Liggett and the other cigarette manufacturers in
recent years. The cases generally fall into the following categories: (i)
smoking and health cases alleging injury brought on behalf of individual
-15-
17
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
plaintiffs ("Individual Actions"); (ii) smoking and health cases alleging
injury and purporting to be brought on behalf of a class of individual
plaintiffs ("Class Actions"); (iii) health care cost recovery actions
brought by various governmental entities ("Governmental Actions"); and
(iv) health care cost recovery actions brought by third-party payors
including insurance companies, union health and welfare trust funds,
asbestos manufacturers and others ("Third-Party Payor Actions"). As new
cases are commenced, defense costs and the risks attendant to the inherent
unpredictability of litigation continue to increase. The future financial
impact of the risks and expenses of litigation and the effects of the
tobacco litigation settlements discussed below is not quantifiable at this
time. For the three months ended March 31, 2001, Liggett incurred counsel
fees and costs totaling approximately $2,519 compared to $1,969 for the
three months ended March 31, 2000.
INDIVIDUAL ACTIONS. As of March 31, 2001, there were approximately 314
cases pending against Liggett, and in most cases the other tobacco
companies, where one or more individual plaintiffs allege injury resulting
from cigarette smoking, addiction to cigarette smoking or exposure to
secondary smoke and seek compensatory and, in some cases, punitive
damages. Of these, 67 were pending in Florida, 92 in New York, 13 in
Massachusetts, 14 in Texas and 22 in California. The balance of the
individual cases were pending in 22 states. There are five individual
cases pending where Liggett is the only named defendant. In addition to
these cases, during the third quarter of 2000, an action against cigarette
manufacturers involving approximately 1,200 named individual plaintiffs
has been consolidated before a single West Virginia state court. Liggett
is a defendant in most of the cases pending in West Virginia.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence,
gross negligence, breach of special duty, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and
implied warranties, conspiracy, aiding and abetting, concert of action,
unjust enrichment, common law public nuisance, property damage, invasion
of privacy, mental anguish, emotional distress, disability, shock,
indemnity and violations of deceptive trade practice laws, the Federal
Racketeer Influenced and Corrupt Organization Act ("RICO"), state RICO
statutes and antitrust statutes. In many of these cases, in addition to
compensatory damages, plaintiffs also seek other forms of relief including
treble/multiple damages, medical monitoring, disgorgement of profits and
punitive damages. Defenses raised by defendants in these cases include
lack of proximate cause, assumption of the risk, comparative fault and/or
contributory negligence, lack of design defect, statute of limitations,
equitable defenses such as "unclean hands" and lack of benefit, failure to
state a claim and federal preemption.
Jury awards in California and Oregon have been entered against other
companies in the tobacco industry. The awards in these individual actions
are for both compensatory and punitive damages and represent a material
amount of damages. In each case, both the verdict and damage awards are
being appealed by the defendants. During 2001, as a result of a Florida
Supreme Court decision upholding the award, another cigarette manufacturer
paid $1,100 in compensatory damages and interest to a former smoker and
his spouse for injuries they allegedly incurred as a result of smoking.
This company has indicated it intends to appeal to the U. S. Supreme
Court.
-16-
18
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
CLASS ACTIONS. As of March 31, 2001, there were approximately 43 actions
pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named
defendant. Many of these actions purport to constitute statewide class
actions and were filed after May 1996 when the Fifth Circuit Court of
Appeals, in the CASTANO case (discussed below), reversed a Federal
district court's certification of a purported nationwide class action on
behalf of persons who were allegedly "addicted" to tobacco products.
In March 1994, an action entitled CASTANO, ET AL. V. THE AMERICAN TOBACCO
COMPANY INC., ET AL., United States District Court, Eastern District of
Louisiana, was filed against Liggett and others. The class action
complaint sought relief for a nationwide class of smokers based on their
alleged addiction to nicotine. In February 1995, the District Court
granted plaintiffs' motion for class certification. In May 1996, the Court
of Appeals for the Fifth Circuit reversed the class certification order
and instructed the District Court to dismiss the class complaint. The
Fifth Circuit ruled that the District Court erred in its analysis of the
class certification issues by failing to consider how variations in state
law affect predominance of common questions and the superiority of the
class action mechanism. The appeals panel also held that the District
Court's predominance inquiry did not include consideration of how a trial
on the merits in CASTANO would be conducted. The Fifth Circuit further
ruled that the "addiction-as-injury" tort is immature and, accordingly,
the District Court could not know whether common issues would be a
"significant" portion of the individual trials. According to the Fifth
Circuit's decision, any savings in judicial resources that class
certification may bring about were speculative and would likely be
overwhelmed by the procedural problems certification brings. Finally, the
Fifth Circuit held that in order to make the class action manageable, the
District Court would be forced to bifurcate issues in violation of the
Seventh Amendment.
The extent of the impact of the CASTANO decision on smoking-related class
action litigation is still uncertain. The CASTANO decision has had a
limited effect with respect to courts' decisions regarding narrower
smoking-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, a court in
Louisiana (Liggett is not a defendant in this proceeding) has certified
"addiction-as-injury" class actions that covered only citizens in those
states. Two other class actions, BROIN and ENGLE, were certified in state
court in Florida prior to the Fifth Circuit's decision.
In May 1994, an action entitled ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO
COMPANY, ET AL., Circuit Court, Eleventh Judicial Circuit, Dade County,
Florida, was filed against Liggett and others. The class consists of all
Florida residents and citizens, and their survivors, who have suffered,
presently suffer or have died from diseases and medical conditions caused
by their addiction to cigarettes that contain nicotine. Phase I of the
trial commenced in July 1998 and in July 1999, the jury returned the Phase
I verdict. The Phase I verdict concerned certain issues determined by the
trial court to be "common" to the causes of action of the plaintiff class.
Among other things, the jury found that: smoking cigarettes causes 20
diseases or medical conditions, cigarettes are addictive or dependence
producing, defective and unreasonably dangerous, defendants made
materially false statements with the intention of misleading smokers,
-17-
19
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
defendants concealed or omitted material information concerning the health
effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of
smoking cigarettes, and defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress. The jury also found that defendants' conduct
"rose to a level that would permit a potential award or entitlement to
punitive damages." The court decided that Phase II of the trial, which
commenced November 1999, would be a causation and damages trial for three
of the class representatives and a punitive damages trial on a class-wide
basis, before the same jury that returned the verdict in Phase I. On April
7, 2000, the jury awarded compensatory damages of $12,704 to the three
plaintiffs, to be reduced in proportion to the respective plaintiff's
fault. The jury also decided that the claim of one of the plaintiffs, who
was awarded compensatory damages of $5,831, was not timely filed. On July
14, 2000, the jury awarded approximately $145,000,000 in the punitive
damages portion of Phase II against all defendants including $790,000
against Liggett. The court entered a final order of judgment against the
defendants on November 6, 2000. The court's final judgment also denied
various of defendants' post-trial motions, which included a motion for new
trial and a motion seeking reduction of the punitive damages award.
Liggett intends to pursue all available post-trial and appellate remedies.
If this verdict is not eventually reversed on appeal, or substantially
reduced by the court, it could have a material adverse effect on the
Company. Phase III of the trial will be conducted before separate juries
to address absent class members' claims, including issues of specific
causation and other individual issues regarding entitlement to
compensatory damages.
Now that the ENGLE jury has awarded punitive damages and final judgment
has been entered, it is unclear how the state court's order regarding the
determination of punitive damages will be implemented. The order provides
that the punitive damage amount should be standard as to each class member
and acknowledges that the actual size of the class will not be known until
the last case has withstood appeal. The order does not address whether
defendants will be required to pay the punitive damage award prior to a
determination of claims of all class members, a process that could take
years to conclude. In May 2000, legislation was enacted in Florida that
limits the size of any bond required, pending appeal, to stay execution of
a punitive damages verdict to the lesser of the punitive award plus twice
the statutory rate of interest, $100,000 or 10% of the net worth of the
defendant, but the limitation on the bond does not affect the amount of
the underlying verdict. Liggett has filed the $3,450 bond required by the
Florida law in order to stay execution of the ENGLE judgment. Similar
legislation has been enacted in Georgia, Kentucky, North Carolina,
Oklahoma and Virginia.
On May 7, 2001, Liggett, along with Philip Morris Incorporated and
Lorillard Tobacco Co., reached an agreement with the class in the ENGLE
case, which will provide assurance of Liggett's ability to appeal the
jury's July 2000 verdict. The agreement calls for the payment by Liggett
of $6,273 into an escrow account to be held for the benefit of the ENGLE
class, and released, along with Liggett's existing $3,450 statutory bond,
to the court for the benefit of the class upon completion of the appeals
process. As a result, the Company has recorded a $9,723 pre-tax charge to
the consolidated statement of operations for the first quarter of 2001.
The agreement, which was approved by the Dade County Circuit Court in
Miami, assures that the stay of execution, currently in effect pursuant to
the Florida bonding statute, will not be lifted or limited at any point
until completion of all appeals, including to the United States Supreme
Court.
-18-
20
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Class certification motions are pending in a number of putative class
actions. Classes remain certified against Liggett in Florida (ENGLE) and
in West Virginia (BLANKENSHIP). A number of class certification denials
are on appeal.
On August 16, 2000, in BLANKENSHIP V. PHILIP MORRIS, INC., a West Virginia
state court conditionally certified (only to the extent of medical
monitoring) a class of present or former West Virginia smokers who desire
to participate in a medical monitoring plan. The trial of this case ended
on January 25, 2001, when the judge declared a mistrial. In an order
issued on March 23, 2001, the court reaffirmed class certification of this
medical monitoring action. Retrial has been scheduled to begin in
September 2001.
Approximately 38 purported state and federal class action complaints have
been filed against the cigarette manufacturers for alleged antitrust
violations. The actions allege that the cigarette manufacturers have
engaged in a nationwide and international conspiracy to fix the price of
cigarettes in violation of state and federal antitrust laws. Plaintiffs
allege that defendants' price-fixing conspiracy raised the price of
cigarettes above a competitive level. Plaintiffs in the 31 state actions
purport to represent classes of indirect purchasers of cigarettes in 16
states; plaintiffs in the seven federal actions purport to represent a
nationwide class of wholesalers who purchased cigarettes directly from the
defendants. The federal actions have been consolidated and, on July 28,
2000, plaintiffs in the federal consolidated action filed a single
consolidated complaint that did not name Liggett or Brooke Group Holding
as defendants, although Liggett is obligated to comply with certain
discovery requests. Fourteen California actions have been consolidated and
the consolidated complaint did not name Liggett or Brooke Group Holding as
defendants. In Nevada, an amended complaint was filed that did not name
Liggett or Brooke Group Holding as defendants. The Arizona action was
dismissed, but the plaintiffs are expected to appeal that ruling.
Liggett and plaintiffs have advised the court, in SIMON V. PHILIP MORRIS
ET AL., a putative nationwide smokers class action, that Liggett and the
plaintiffs have engaged in preliminary settlement discussions. There are
no assurances that any settlement will be reached or that the class will
ultimately be certified.
GOVERNMENTAL ACTIONS. As of March 31, 2001, there were approximately 35
Governmental Actions pending against Liggett. In these proceedings, both
foreign and domestic governmental entities seek reimbursement for Medicaid
and other health care expenditures. The claims asserted in these health
care cost recovery actions vary. In most of these cases, plaintiffs assert
the equitable claim that the tobacco industry was "unjustly enriched" by
plaintiffs' payment of health care costs allegedly attributable to smoking
and seek reimbursement of those costs. Other claims made by some but not
all plaintiffs include the equitable claim of indemnity, common law claims
of negligence, strict liability, breach of express and implied warranty,
breach of special duty, fraud, negligent misrepresentation, conspiracy,
public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false
advertising, and claims under RICO.
THIRD-PARTY PAYOR ACTIONS. As of March 31, 2001, there were approximately
69 Third-Party Payor Actions pending against Liggett. The claims in these
cases are similar to those in the Governmental Actions but have been
commenced by insurance companies, union health and welfare trust funds,
asbestos manufacturers and others. Seven United States Circuit Courts of
Appeal have ruled that Third-Party Payors did not have standing to bring
-19-
21
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
lawsuits against the tobacco companies. In January 2000, the United States
Supreme Court denied petitions for certiorari filed by several of the
union health and welfare trust funds. However, a number of Third-Party
Payor Actions, including an action brought by 24 Blue Cross/Blue Shield
Plans, remain pending.
In other Third-Party Payor Actions claimants have set forth several
additional theories of relief sought: funding of corrective public
education campaigns relating to issues of smoking and health; funding for
clinical smoking cessation programs; disgorgement of profits from sales of
cigarettes; restitution; treble damages; and attorneys' fees.
Nevertheless, no specific amounts are provided. It is understood that
requested damages against the tobacco company defendants in these cases
might be in the billions of dollars.
FEDERAL GOVERNMENT ACTION. In September 1999, the United States government
commenced litigation against Liggett and the other tobacco companies in
the United States District Court for the District of Columbia. The action
seeks to recover an unspecified amount of health care costs paid for and
furnished, and to be paid for and furnished, by the Federal Government for
lung cancer, heart disease, emphysema and other smoking-related illnesses
allegedly caused by the fraudulent and tortious conduct of defendants, and
to restrain defendants and co-conspirators from engaging in fraud and
other unlawful conduct in the future, and to compel defendants to disgorge
the proceeds of their unlawful conduct. The complaint alleges that such
costs total more than $20,000,000 annually. The action asserts claims
under three federal statutes, the Medical Care Recovery Act ("MCRA"), the
Medicare Secondary Payer provisions of the Social Security Act ("MSP") and
RICO. In December 1999, Liggett filed a motion to dismiss the lawsuit on
numerous grounds, including that the statutes invoked by the government do
not provide the basis for the relief sought. In a September 2000 ruling,
the court dismissed the government's claims based on MCRA and MSP, on the
ground, among others, that these statutes do not provide a basis for the
relief sought. The government filed a motion seeking the court's
reconsideration of this ruling, which remains pending. In an amended
complaint filed in February 2001, the government attempted to plead with
more specificity the MSP claims dismissed by the court. Liggett has filed
a motion to dismiss the amended MSP claim. In the September 2000 ruling,
the court also determined not to dismiss the government's claims based on
RICO, under which the government continues to seek court relief to
restrain the defendant tobacco companies from allegedly engaging in fraud
and other unlawful conduct and to compel disgorgement. Discovery in the
case has commenced. Trial is scheduled for July 2003, although trial dates
are subject to change.
SETTLEMENTS. In March 1996, Brooke Group Holding and Liggett entered into
an agreement, subject to court approval, to settle the CASTANO class
action tobacco litigation. The CASTANO class was subsequently decertified
by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and Liggett
entered into settlements of smoking-related litigation with the Attorneys
General of 45 states and territories. The settlements released both Brooke
Group Holding and Liggett from all smoking-related claims, including
claims for health care cost reimbursement and claims concerning sales of
cigarettes to minors.
-20-
22
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (collectively,
the "Original Participating Manufacturers" or "OPMs") and Liggett
(together with the OPMs and any other tobacco product manufacturer that
becomes a signatory, the "Participating Manufacturers") entered into the
Master Settlement Agreement (the "MSA") with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American
Samoa and the Northern Marianas (collectively, the "Settling States") to
settle the asserted and unasserted health care cost recovery and certain
other claims of those Settling States. The MSA has received final judicial
approval in each of the 52 settling jurisdictions.
The MSA restricts tobacco product advertising and marketing within the
Settling States and otherwise restricts the activities of Participating
Manufacturers. Among other things, the MSA prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products; bans
the use of cartoon characters in all tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any 12-month period; bans all outdoor advertising, with
the exception of signs 14 square feet or less in dimension at retail
establishments that sell tobacco products; prohibits payments for tobacco
product placement in various media; bans gift offers based on the purchase
of tobacco products without sufficient proof that the intended recipient
is an adult; prohibits Participating Manufacturers from licensing third
parties to advertise tobacco brand names in any manner prohibited under
the MSA; prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or trade
name or the names of sports teams, entertainment groups or individual
celebrities; and prohibits Participating Manufacturers from selling packs
containing fewer than twenty cigarettes.
The MSA also requires Participating Manufacturers to affirm corporate
principles to comply with the MSA and to reduce underage usage of tobacco
products and imposes requirements applicable to lobbying activities
conducted on behalf of Participating Manufacturers.
Liggett has no payment obligations under the MSA unless its market share
exceeds a base share of 125% of its 1997 market share, or approximately
1.65% of total cigarettes sold in the United States. Liggett believes,
based on published industry sources, that its domestic shipments accounted
for 1.5% of the total cigarettes shipped in the United States during 2000.
In the year following any year in which Liggett's market share does exceed
the base share, Liggett will pay on each excess unit an amount equal (on a
per-unit basis) to that paid during such following year by the OPMs under
the annual and strategic contribution payment provisions of the MSA,
subject to applicable adjustments, offsets and reductions. Under the
annual and strategic contribution payment provisions of the MSA, the OPMs
(and Liggett to the extent its market share exceeds the base share) are
required to pay the following annual amounts (subject to certain
adjustments):
-21-
23
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
YEAR AMOUNT
---- ------
2001............. $5,000,000
2002 - 2003 ..... $6,500,000
2004 - 2007 ..... $8,000,000
2008 - 2017 ..... $8,139,000
2018 and each
year thereafter $9,000,000
These annual payments will be allocated based on relative unit volume of
domestic cigarette shipments. The payment obligations under the MSA are
the several, and not joint, obligations of each Participating Manufacturer
and are not the responsibility of any parent or affiliate of a
Participating Manufacturer.
The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of
these states, prior to the effective date of the MSA, negotiated and
executed settlement agreements with each of the other major tobacco
companies separate from those settlements reached previously with Liggett.
Because these states' settlement agreements with Liggett provided for
"most favored nation" protection for both Brooke Group Holding and
Liggett, the payments due these states by Liggett (with certain possible
exceptions) have been eliminated. With respect to all non-economic
obligations under the previous settlements, both Brooke Group Holding and
Liggett are entitled to the most favorable provisions as between the MSA
and each state's respective settlement with the other major tobacco
companies. Therefore, Liggett's non-economic obligations to all states and
territories are now defined by the MSA.
In April 1999, a putative class action was filed on behalf of all firms
that directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in
part on the MSA. Plaintiffs seek treble damages computed as three times
the difference between current prices and the price plaintiffs would have
paid for cigarettes in the absence of an alleged conspiracy to restrain
and monopolize trade in the domestic cigarette market, together with
attorneys' fees. Plaintiffs also seek injunctive relief against certain
aspects of the MSA.
In March 1997, Liggett, Brooke Group Holding and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the
class. In July 1998, Liggett, Brooke Group Holding and plaintiffs filed an
amended class action settlement agreement in FLETCHER which agreement was
preliminarily approved by the court in December 1998. In July 1999, the
court denied approval of the FLETCHER class action settlement. The
parties' motion for reconsideration is still pending.
The Company accrued $16,902 for the present value of the fixed payments
under the March 1998 Attorneys General settlements. As a result of the
Company's treatment under the MSA, $14,928 of net charges accrued for the
prior settlements were reversed in 1998, $1,051 were reversed in 1999 and
$934 were reversed in 2000.
-22-
24
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Copies of the various settlement agreements are filed as exhibits to the
Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.
TRIALS. Cases currently scheduled for trial in 2001 include a third-party
action brought by Empire Blue Cross/Blue Shield, which began March 26,
2001 in the United States District Court for the Eastern District of New
York, an action brought by Owens Corning, a former asbestos manufacturer,
beginning June 2001 in a Mississippi state court, an individual action in
a South Carolina federal court that is scheduled to begin in August 2001,
and a trial in a medical monitoring class action in a West Virginia state
court that is scheduled to begin during September 2001. These cases, other
than the individual action, are presently scheduled to be tried pursuant
to multi-part trial plans. Trial dates, however, are subject to change.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In
July 2000, the jury awarded $790,000 in punitive damages against Liggett
in the second phase of the trial, and the court has entered an order of
final judgment. Liggett intends to pursue all available post-trial and
appellate remedies. If this verdict is not eventually reversed on appeal,
or substantially reduced by the court, it could have a material adverse
effect on the Company. Liggett has filed the $3,450 bond required under
recent Florida legislation which limits the size of any bond required,
pending appeal, to stay execution of a punitive damages verdict. On May 7,
2001, Liggett reached an agreement with the class in the ENGLE case, which
will provide assurance to Liggett that the stay of execution, currently in
effect pursuant to the bonding statute enacted last year by the Florida
legislature, will not be lifted or limited at any point until completion
of all appeals, including to the United States Supreme Court. The
agreement calls for the payment by Liggett of $6,273 into an escrow
account to be held for the benefit of the ENGLE class, and released, along
with Liggett's existing $3,450 statutory bond, to the court for the
benefit of the class upon completion of the appeals process. It is
possible that additional cases could be decided unfavorably and that there
could be further adverse developments in the ENGLE case. Management cannot
predict the cash requirements related to any future settlements and
judgments, including cash required to bond any appeals, and there is a
risk that those requirements will not be able to be met. An unfavorable
outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Management is unable to
make a meaningful estimate with respect to the amount or range of loss
that could result from an unfavorable outcome of the cases pending against
Brooke Group Holding or Liggett or the costs of defending such cases. The
complaints filed in these cases rarely detail alleged damages. Typically,
the claims set forth in an individual's complaint against the tobacco
industry pray for money damages in an amount to be determined by a jury,
plus punitive damages and costs. These damage claims are typically stated
as being for the minimum necessary to invoke the jurisdiction of the
court.
It is possible that the Company's consolidated financial position, results
of operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such smoking-related litigation.
-23-
25
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Liggett's management is unaware of any material environmental conditions
affecting its existing facilities. Liggett's management believes that
current operations are conducted in material compliance with all
environmental laws and regulations and other laws and regulations
governing cigarette manufacturers. Compliance with federal, state and
local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
has not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending against
the Company and certain of its consolidated subsidiaries unrelated to
smoking or tobacco product liability. Management is of the opinion that
the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect the Company's financial
position, results of operations or cash flows.
LEGISLATION AND REGULATION:
In 1993, the Environmental Protection Agency ("EPA") released a report on
the respiratory effect of secondary smoke which concludes that secondary
smoke is a known human lung carcinogen in adults and in children, causes
increased respiratory tract disease and middle ear disorders and increases
the severity and frequency of asthma. In June 1993, the two largest of the
major domestic cigarette manufacturers, together with other segments of
the tobacco and distribution industries, commenced a lawsuit against the
EPA seeking a determination that the EPA did not have the statutory
authority to regulate secondary smoke, and that given the current body of
scientific evidence and the EPA's failure to follow its own guidelines in
making the determination, the EPA's classification of secondary smoke was
arbitrary and capricious. In July 1998, a federal district court vacated
those sections of the report relating to lung cancer, finding that the EPA
may have reached different conclusions had it complied with relevant
statutory requirements. The federal government has appealed the court's
ruling. Whatever the ultimate outcome of this litigation, issuance of the
report may encourage efforts to limit smoking in public areas.
In February 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobaccos imported under a
previously established tobacco rate quota ("TRQ") should be allocated.
Currently, tobacco imported under the TRQ is allocated on a "first-come,
first-served" basis, meaning that entry is allowed on an open basis to
those first requesting entry in the quota year. Others in the cigarette
industry have suggested an "end-user licensing" system under which the
right to import tobacco under the quota would be initially assigned based
on domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company and Liggett.
In August 1996, the Food and Drug Administration (the "FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of
tobacco products and imposing restrictions on the sale, advertising and
promotion of tobacco products. Litigation was commenced challenging the
legal authority of the FDA to assert such jurisdiction, as well as
challenging the constitutionality of the rules. In March 2000, the United
-24-
26
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
States Supreme Court ruled that the FDA does not have the power to
regulate tobacco. Liggett supported the FDA Rule and began to phase in
compliance with certain of the proposed FDA regulations.
Since the Supreme Court decision, various proposals have been made for
federal and state legislation to regulate cigarette manufacturers.
Recently, a Presidential commission appointed by former President Clinton
issued a preliminary report recommending that the FDA be given authority
by Congress to regulate the manufacture, sale, distribution and labeling
of tobacco products to protect public health. In addition, Congressional
advocates of FDA regulation have introduced such legislation for
consideration by the 107th Congress. The ultimate outcome of these
proposals cannot be predicted.
In August 1996, Massachusetts enacted legislation requiring tobacco
companies to publish information regarding the ingredients in cigarettes
and other tobacco products sold in that state. In December 1997, the
United States District Court for the District of Massachusetts enjoined
this legislation from going into effect on the grounds that it is
preempted by federal law. In November 1999, the First Circuit affirmed
this ruling. Notwithstanding the foregoing, in December 1997, Liggett
began complying with this legislation by providing ingredient information
to the Massachusetts Department of Public Health. Several other states
have enacted, or are considering, legislation similar to that enacted in
Massachusetts.
As part of the 1997 budget agreement approved by Congress, federal excise
taxes on a pack of cigarettes, which are currently 34 cents, were
increased at the beginning of 2000 and will rise 5 cents more in the year
2002. In general, excise taxes and other taxes on cigarettes have been
increasing. These taxes vary considerably and, when combined with sales
taxes and the current federal excise tax, may be as high as $1.88 per pack
in a given locality in the United States. Congress has considered
significant increases in the federal excise tax or other payments from
tobacco manufacturers, and increases in excise and other cigarette-related
taxes have been proposed at the state and local levels.
In June 2000, the New York state legislature passed legislation charging
the state's Office of Fire Prevention and Control with developing
standards for "fire safe" or self-extinguishing cigarettes. The OFPC has
until July 1, 2002 to issue final regulations. Six months from the
issuance of the standards, but no later than January 1, 2003, all
cigarettes offered for sale in New York state will be required to be
manufactured to those standards. Similar legislation is being considered
by other state legislatures.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning cigarette smoking
and the tobacco industry, the effects of which, at this time, management
is not able to evaluate. These developments may negatively affect the
perception of potential triers of fact with respect to the tobacco
industry, possibly to the detriment of certain pending litigation, and may
prompt the commencement of additional similar litigation.
-25-
27
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
OTHER MATTERS:
In March 1997, a stockholder derivative suit was filed in Delaware
Chancery Court against New Valley, as a nominal defendant, its directors
and Brooke Group Holding by a stockholder of New Valley. The suit alleges
that New Valley's purchase of the BrookeMil shares from Brooke (Overseas)
in January 1997 constituted a self-dealing transaction which involved the
payment of excessive consideration by New Valley. The plaintiff seeks (i)
a declaration that New Valley's directors breached their fiduciary duties,
Brooke Group Holding aided and abetted such breaches and such parties are
therefore liable to New Valley, and (ii) unspecified damages to be awarded
to New Valley. In December 1999, another stockholder of New Valley
commenced an action in Delaware Chancery Court substantially similar to
the March 1997 action. This stockholder alleges, among other things, that
the consideration paid by New Valley for the BrookeMil shares was
excessive, unfair and wasteful, that the special committee of New Valley's
board lacked independence, and that the appraisal by the independent
appraisal firm and the fairness opinion by the independent investment bank
were flawed. Brooke Group Holding and New Valley believe that the
allegations in both cases are without merit. By order of the court, both
actions were consolidated. In January 2001, the court denied a motion to
dismiss the consolidated action filed by Brooke Group Holdings and New
Valley. Discovery in the case has commenced. Although there can be no
assurances, Brooke Group Holding and New Valley believe, after
consultation with counsel, that the ultimate resolution of this matter
will not have a material adverse effect on the Company's or New Valley's
consolidated financial position, results of operations or cash flows.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
Group Holding and certain directors and officers of New Valley in Delaware
Chancery Court. The complaint alleges that the recapitalization, approved
by a majority of each class of New Valley's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and
the defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of unspecified compensatory
damages as well as all costs and fees. Brooke Group Holding and New Valley
believe that the allegations are without merit. The Court, on the
defendants' motion, recently dismissed six of plaintiff's nine claims
alleging inadequate disclosure in the proxy statement. The surviving
claims are plaintiff's allegations that (i) the fact that the fairness
opinion did not cover the relative fairness to each class of shares should
have been expressly disclosed; (ii) failure to disclose the identity of
shareholders who suggested the recapitalization and their respective
holdings, broken down by share class, was a material omission; and (iii)
the disclosure in the proxy statement was inadequate because it did not
reveal the value of the Company's lines of business or its assets. The
Court speculated that facts might exist under which one or more of the
foregoing alleged non-disclosures might be material and, therefore, the
motion to dismiss as to these three allegations was denied. An answer has
been filed as to the surviving claims. Discovery in the case has
commenced. Although there can be no assurances, Brooke Group Holding and
New Valley believe, after consultation with counsel, that the ultimate
resolution of this matter will not have a material adverse effect on the
Company's or New Valley's consolidated financial position, results of
operations or cash flows.
-26-
28
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
As of March 31, 2001, New Valley had $7,639 of prepetition
bankruptcy-related claims and restructuring accruals including claims for
lease rejection damages and for unclaimed monies that certain states are
seeking on behalf of money transfer customers. The remaining claims may be
subject to future adjustments based on potential settlements or decisions
of the court.
New Valley is a defendant in various lawsuits and may be subject to
unasserted claims primarily concerning its activities as a securities
broker-dealer and its participation in public underwritings. These
lawsuits involve claims for substantial or indeterminate amounts and are
in varying stages of legal proceedings. In the opinion of management,
after consultation with counsel, the ultimate resolution of these matters
will not have a material adverse effect on the Company's or New Valley's
consolidated financial position, results of operations or cash flows.
12. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
March 31, December 31,
2001 2000
---------------- -------------------
Note payable for Western Realty
Development Class A Interests........... $19,957 $19,968
Western Realty Repin participating loan..... 38,605 36,127
Other long-term liabilities................. 6,306 5,532
------- -------
Total $64,868 $61,627
======= =======
-27-
29
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
13. SEGMENT INFORMATION
Financial information for the Company's continuing operations before taxes
and minority interest for the three months ended March 31, 2001 and 2000
follows:
United
States Russian(1) Broker- Real(2) Corporate(2)
Tobacco Tobacco Dealer Estate and Other Total
------- ------- ------ ------ --------- -----
THREE MONTHS ENDED MARCH 31, 2001:
Revenues ......................... $137,136 -- $ 19,065 $ 2,641 $ -- $158,842
Operating income (loss) .......... 9,704 -- (364) 81 (8,614) 807
Identifiable assets .............. 100,089 -- 45,710 131,025 155,472 432,296
Depreciation and amortization .... 1,390 -- 505 680 109 2,684
Capital expenditures ............. 1,376 -- 1,665 565 18,419 22,025
THREE MONTHS ENDED MARCH 31, 2000:
Revenues ......................... $106,902 $ 40,246 $ 30,296 $ 771 $ -- $178,215
Operating income (loss) .......... 9,089 498 4,883 (1,983) (2,387) 10,100
Identifiable assets .............. 125,900 157,827 50,039 57,826 142,410 534,002
Depreciation and amortization .... 998 2,022 220 149 9 3,398
Capital expenditures ............. 4,514 2,775 66 674 -- 8,029
- ------------------
(1) Russian tobacco is included for the three months ended March 31, 2000.
Western Tobacco Investments was sold on August 4, 2000.
(2) New Valley's interest in Western Realty Development is included in real
estate operations for the 2001 period and in Corporate and Other for the
2000 period when it was accounted for on the equity method.
-28-
30
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion provides an assessment of the consolidated
results of operations, capital resources and liquidity of Vector Group Ltd. (the
"Company" or "Vector") and its subsidiaries and should be read in conjunction
with the Consolidated Financial Statements and notes thereto of the Company
included elsewhere in this document. The consolidated financial statements
include the accounts of BGLS Inc. ("BGLS"), Liggett Group Inc. ("Liggett"), New
Valley Corporation ("New Valley"), Brooke (Overseas) Ltd. ("Brooke Overseas"),
Vector Tobacco (USA) Ltd. ("Vector Tobacco"), through July 31, 2000
Liggett-Ducat Ltd. ("Liggett-Ducat"), and other less significant subsidiaries.
As of March 31, 2001, the Company owned 56.3% of New Valley's common shares.
The Company is a holding company for a number of businesses. Liggett is
engaged primarily in the manufacture and sale of cigarettes, principally in the
United States. Vector Tobacco is engaged in the development of new, less
hazardous cigarette products. New Valley is engaged in the investment banking
and brokerage business through its ownership of Ladenburg Thalmann & Co. Inc.
("Ladenburg") and in the real estate business in Russia.
RECENT DEVELOPMENTS
ACQUISITION OF GBI CAPITAL MANAGEMENT. On February 8, 2001, New Valley
entered into a stock purchase agreement under which New Valley acquired a
controlling interest in GBI Capital Management Corp. ("GBI") and its operating
subsidiary, GBI Capital Partners, Inc., a securities and trading firm. On April
25, 2001, New Valley and GBI entered into an amendment to the agreement which
provided for an increase in the number of shares of GBI common stock to be
received by New Valley and Berliner Effektengesellschaft AG ("Berliner") and a
decrease in the conversion price of the notes to be received by New Valley and
Berliner based on a post-closing determination of the respective changes in the
total stockholders' equities of Ladenburg, New Valley's 80.1% subsidiary, and
GBI through April 30, 2001. Following the closing of the transaction, which
occurred on May 7, 2001, New Valley owns a majority of the outstanding shares of
GBI, an American Stock Exchange-listed company, which has been renamed Ladenburg
Thalmann Financial Services, Inc. Under the terms of the amended agreement, New
Valley and Berliner sold all of the outstanding shares of Ladenburg to GBI for
18,181,818 shares (subject to increase) of GBI common stock, $10,000 of cash and
$10,000 principal amount of convertible notes (convertible at $2.60 per share,
subject to decrease). Upon closing, New Valley also acquired an additional
3,945,060 shares of GBI from Joseph Berland, the former Chairman and Chief
Executive Officer of GBI, for $1.00 per share.
BGLS PRIVATE PLACEMENT. On May 14, 2001, BGLS issued at a discount
$60,000 principal amount of 10% senior secured notes due March 31, 2006 in a
private placement. BGLS received net proceeds from the offering of approximately
$46,500.
-29-
31
RECENT DEVELOPMENTS IN LEGISLATION, REGULATION AND LITIGATION
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of March 31, 2001, there were approximately 314 individual
suits, 43 purported class actions and 104 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. In addition to these cases, during the third
quarter of 2000, an action against cigarette manufacturers involving
approximately 1,200 named individual plaintiffs has been consolidated before a
single West Virginia state court. Liggett is a defendant in most of the cases
pending in West Virginia. Approximately 38 other purported class action
complaints have been filed against the cigarette manufacturers for alleged
antitrust violations. As new cases are commenced, the costs associated with
defending such cases and the risks attendant to the inherent unpredictability of
litigation continue to increase. An unfavorable verdict was returned in the
first phase of the ENGLE smoking and health class action trial pending in
Florida. In July 2000, the jury awarded $790,000 in punitive damages against
Liggett in the second phase of the trial, and the court entered an order of
final judgment. Liggett intends to pursue all available post-trial and appellate
remedies. If this verdict is not eventually reversed on appeal, or substantially
reduced by the court, it could have a material adverse effect on Vector. Liggett
has filed the $3,450 bond required under recent Florida legislation which limits
the size of any bond required, pending appeal, to stay execution of a punitive
damages verdict. On May 7, 2001, Liggett reached an agreement with the class in
the ENGLE case, which will provide assurance to Liggett that the stay of
execution, currently in effect pursuant to the Florida bonding statute, will not
be lifted or limited at any point until completion of all appeals, including to
the United States Supreme Court. The agreement calls for the payment by Liggett
of $6,273 into an escrow account to be held for the benefit of the ENGLE class,
and released, along with Liggett's existing $3,450 statutory bond, to the court
for the benefit of the class upon completion of the appeals process. It is
possible that additional cases could be decided unfavorably and that there could
be further adverse developments in the ENGLE case. Management cannot predict the
cash requirements related to any future settlements and judgments, including
cash required to bond any appeals, and there is a risk that those requirements
will not be able to be met. In recent years, there have been a number of
restrictive regulatory actions from various Federal administrative bodies,
including the United States Environmental Protection Agency and the Food and
Drug Administration. There have also been adverse political decisions and other
unfavorable developments concerning cigarette smoking and the tobacco industry,
including the commencement and certification of class actions and the
commencement of third-party payor actions. These developments generally receive
widespread media attention. Vector is not able to evaluate the effect of these
developing matters on pending litigation or the possible commencement of
additional litigation, but Vector's consolidated financial position, results of
operations or cash flows could be materially adversely affected by an
unfavorable outcome in any of such smoking-related litigation. See Note 11 to
Vector's consolidated financial statements for a description of legislation,
regulation and litigation.
-30-
32
RESULTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
--------- ---------
REVENUES:
Liggett ................. $ 137,136 $ 106,902
Liggett-Ducat(1) ........ -- 40,246
--------- ---------
Total tobacco ........ 137,136 147,148
Broker-dealer .............. 19,065 30,296
Real estate ................ 2,641 771
--------- ---------
Total revenues ....... $ 158,842 $ 178,215
========= =========
OPERATING INCOME:
Liggett ................. 9,704 9,089
Liggett-Ducat(1) ........ -- 498
--------- ---------
Total tobacco ........ 9,704 9,587
Broker-dealer .............. (364) 4,883
Real estate ................ 81 (1,983)
Corporate and other ...... (8,614) (2,387)
--------- ---------
Total operating income $ 807 $ 10,100
========= =========
- ---------------
(1) Liggett-Ducat's revenues and operating income are included through March
31, 2000.
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
REVENUES. Total revenues were $158,842 for the three months ended March
31, 2001 compared to $178,215 for the three months ended March 31, 2000. This
10.9% decrease in revenues ($19,373) was due to a $11,231 or 37.1% decrease in
revenues at Ladenburg and the absence of revenues from Liggett-Ducat offset by a
$30,234 increase of revenues at Liggett and a $1,870 increase in real estate.
TOBACCO REVENUES. During 2000, the major cigarette manufacturers,
including Liggett, announced list price increases of $3.30 per carton. In April
2001, the major cigarette manufacturers, including Liggett, announced list price
increases of $1.40 per carton.
Total tobacco revenues were $137,136 for the three months ended March
31, 2001 compared to $147,148 for the three months ended March 31, 2000. This
6.8% decrease in revenues was due to a loss of revenues when Liggett-Ducat was
sold in August 2000 partially offset by a 28.3% increase in revenues at Liggett.
Revenues at Liggett increased by 28.3% ($30,234) for both the premium and
discount segments due to price increases of $7,501 and a 31.8% increase in unit
sales volume (approximately 388.8 million units), accounting for $34,027 in
positive volume variance, partially offset by an unfavorable sales mix of
$11,294.
Premium sales at Liggett for the first quarter of 2001 amounted to
$14,130 and represented 10.3% of Liggett's total sales, compared to $15,692 and
14.7% of total sales in the first quarter of 2000. In the premium segment,
revenues declined by 10.0% ($1,562) for the three months ended March 31, 2001,
compared to the prior year first quarter, due to an unfavorable volume variance
of $2,747, reflecting a 17.5% decline in unit sales volume (approximately 25.4
million units), which was partially offset by price increases of $1,185.
-31-
33
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the three months ended March 31, 2001 amounted to $123,006
and represented 89.7% of Liggett's total sales, compared to $91,210 and 85.3% of
total sales for the three months ended March 31, 2000. In the discount segment,
revenues grew by 34.9% ($31,796) for the three months ended March 31, 2001
compared to the prior year period, due to price increases of $6,316, along with
a 38.5% increase in unit sales volume (approximately 414.2 million units),
accounting for $35,098 in volume variance, partially offset by an unfavorable
product mix among the discount brand categories of $9,618.
For the three months ended March 31, 2001, fixed manufacturing costs at
Liggett on a basis comparable to 2000 were $430 higher although costs per
thousand units declined 20.5% ($1.82) from $2.29 in the prior period, due to a
41.3% increase in production volume.
TOBACCO GROSS PROFIT. Liggett's gross profit was $96,222 for the three
months ended March 31, 2001 representing a Company increase of $17,799 when
compared to the 2000 period, a period which also included the gross profit of
Liggett-Ducat. Liggett's gross profit increased $22,963 from gross profit of
$73,259 for the first quarter of 2000 primarily due to volume and price
increases discussed above.
In the first quarter 2001, Liggett's premium brand contributed 11.3%
and Liggett's discount brands contributed 88.7% to Company gross profit as
compared with the first quarter 2000 when Liggett's premium brand contributed
14.5%, Liggett's discount brands contributed 78.9% and Liggett-Ducat contributed
6.6% of the Company's gross profit. As a percent of revenues (excluding federal
excise taxes), gross profit at Liggett increased to 87.5% for the three months
ended March 31, 2001 compared to 84.3% for the same period in 2000, with gross
profit for the premium segment at 89.6% and 85.8% in the first quarter ended
March 31 of 2001 and 2000, respectively, and gross profit for the discount
segment at 87.2% and 84.1% 2001 and 2000, respectively. These increases are the
result of 31.8% growth in unit sales volume (388.8 million units), the July and
December 2000 list price increases and improved production variances.
BROKER-DEALER AND REAL ESTATE REVENUES. For the three months ended
March 31, 2001, Ladenburg's revenues were $19,065 and real estate revenues were
$2,641. Ladenburg's revenues for the first quarter of 2001 decreased $11,231 as
compared to revenues for the first quarter of 2000 due to decreased commissions
of $8,867 and a decline in principal transactions. The 68% decrease in
commissions was the result of a less active market for equity securities in 2001
versus 2000. The decrease in principal transactions was primarily the result of
decreased trading and brokerage activities in 2001 as compared to 2000.
Revenues from the real estate operations for the first quarter of 2001
increased $1,870 primarily due to the inclusion of the rental revenue of Western
Realty Development, which became a consolidated subsidiary on December 29, 2000.
EXPENSES. Operating, selling, general and administrative expenses were
$107,506 for the three months ended March 31, 2001 compared to $99,503 for the
same period last year, an increase of $8,003 primarily due to increased expenses
at Liggett of $14,348, increased expenses of product development at Vector
Tobacco and a small increase in real estate operating expenses offset by a
decrease in expenses at Ladenburg. The increase in operating expenses at Liggett
was due primarily to higher spending for promotional and marketing programs and
increased administrative expenses partially offset by the absence of factory
relocation costs.
For the quarter ended March 31, 2001, Liggett's operating income was
reduced by $9,723 of expense relating to the ENGLE class action. As discussed in
Note 11 to the consolidated financial statements, on May 7, 2001, Liggett
reached an agreement with the class in the ENGLE case, which will provide
assurance to Liggett that the stay of execution, currently in effect
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pursuant to the Florida bonding statute, will not be lifted or limited at any
point until completion of all appeals, including to the United States Supreme
Court. The agreement calls for the payment by Liggett of $6,273 into an escrow
account to be held for the benefit of the ENGLE class, and released, along with
Liggett's existing $3,450 statutory bond, to the court for the benefit of the
class upon completion of the appeals process. As a result, Liggett recorded a
$9,723 pre-tax charge to the consolidated statement of operations for the first
quarter of 2001.
Expenses of the real estate operations increased $703 in the 2001
period due primarily to the $2,242 inclusion of the expenses of Western Realty
Development in 2001 offset by lower expenses as a result of the sale of one of
New Valley's two U.S. shopping centers and lower expense at BrookeMil. BrookeMil
incurred expenses of $312 and $1,618 for the three month periods ended March 31,
2001 and 2000, respectively. For the 2000 period, BrookeMil's expenses consisted
primarily of accrued interest expense of $1,596 associated with the
participating loan from Western Realty Repin to BrookeMil in connection with the
development of the Kremlin sites. Ladenburg's expenses for the first quarter of
2001 decreased $5,984 as compared to expenses for the first quarter of 2000 due
primarily to a decrease in incentive based compensation associated with the
decreased revenues.
OTHER INCOME (EXPENSES). For the three months ended March 31, 2001,
other income was $2,895 compared to expense of $6,050 for the period ended March
31, 2000.
The Company had increased interest and dividend income and reported
gains in the sale of assets including the sale of a shopping center at New
Valley and a warehouse facility at Liggett for the three months ended March 31,
2001 compared to the same period in the prior year.
Interest expense was $1,258 for the three months ended March 31, 2001
compared to $11,756 for the same period last year. This decrease of $10,498 was
primarily due to a savings of $5,400 at corporate because of the redemption by
BGLS of all of its 15.75% senior secured notes in 2000 and lower interest
expense at New Valley and Brooke (Overseas).
Gain on sale of investments at New Valley was $465 compared to $4,753
in the prior year period.
For the three months ended March 31, 2000, equity in earnings of
affiliate was a loss of $1,551 partially offset by a foreign currency gain of
$1,223.
INCOME FROM CONTINUING OPERATIONS. The income from continuing
operations for the three months ended March 31, 2001 was $2,530 compared to
income of $1,488 for the three months ended March 31, 2000. Income tax expense
for the first quarter of 2001 was $2,048 compared to $823 for the first quarter
of 2000. The effective tax rates for the three months ended March 31, 2001 and
March 31, 2000 do not bear a customary relationship to pre-tax accounting income
principally as a consequence of non-deductible expenses in 2001 and foreign
taxes in 2000.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents decreased $37,383 for the three months
ended March 31, 2001 and increased $2,687 for the three months ended March 31,
2000. Net cash used in operations for the three months ended March 31, 2001 was
$3,271 compared to net cash used in operations of $22,086 for the comparable
period of 2000. Cash used in operations related to the increase in inventories
of $4,780 and the decrease in current liabilities of $16,185 for the quarter
ended March 31, 2001, partially offset by noncash expenses such as
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depreciation and amortization ($2,684) and stock based compensation expense
($2,565) as well as a decrease in receivables of $4,311. Cash used in the 2000
period for operating activities resulted principally from lower net income at
Liggett, an increase in inventories of $14,357, an increase in receivables from
clearing brokers of $10,217 and a decrease in net deferred taxes of $4,126
offset by an increase in accounts payable and accrued expenses of $10,320.
Cash used in investing activities of $9,471 compares to cash provided
of $3,622 for the periods ended March 31, 2001 and 2000, respectively. For the
three months ended March 31, 2001, cash was used primarily for capital
expenditures of $22,025, payment of prepetition claims of $2,590 and purchases
of investment securities for $1,761. These expenditures were offset primarily by
$11,981 of proceeds from the sale of one of New Valley's shopping centers and
sales at Liggett of a warehouse facility and machinery and equipment and the
sale or maturity of long-term investments. For the three months ended March 31,
2000, proceeds are primarily attributable to net sales of marketable securities
and long-term investments of $14,849 and the decrease in restricted assets of
$3,202 offset primarily by capital expenditures of $8,029 and purchase of
long-term investments and investment securities of $6,007.
Cash used in financing activities was $24,641 for the three months
ended March 31, 2001 compared to cash provided of $21,483 for the three months
ended March 31, 2000. In the 2001 period, net repayments on the revolving credit
facilities were $19,372 slightly offset by net proceeds from debt of $3,389.
Further cash was used for distributions on common stock of $10,267 and decreases
of $827 in margin loans payable and $42 in cash overdraft. Cash was provided in
the 2000 period through net borrowings under credit facilities of $30,552 and an
increase in margin loans payable. These amounts were offset by net repayments on
debt of $6,895 and distributions on common stock of $5,498.
LIGGETT. Liggett has a $35,000 credit facility under which $0 was
outstanding at March 31, 2001. Availability under the facility was approximately
$28,376 based on eligible collateral at March 31, 2001. The facility is
collateralized by all inventories and receivables of Liggett. Borrowings under
the facility, whose interest is calculated at a rate equal to 1.0% above First
Union's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate, bore a rate of 9.5% at March 31, 2001. The facility requires
Liggett's compliance with certain financial and other covenants including a
restriction on the payment of cash dividends unless Liggett's borrowing
availability under the facility for the 30-day period prior to the payment of
the dividend, and after giving effect to the dividend, is at least $5,000. In
addition, the facility, as amended, imposes requirements with respect to
Liggett's adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of $17,000
as computed in accordance with the agreement). At March 31, 2001, Liggett was in
compliance with all covenants under the credit facility; Liggett's adjusted net
worth was $19,459 and net working capital was $14,820, as computed in accordance
with the agreement. The facility expires on March 8, 2003 subject to automatic
renewal for an additional year unless a notice of termination is given by the
lender at least 60 days prior to the anniversary date.
During 1999, 100 Maple Lane LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed $5,040 from
the lender under Liggett's credit facility, of which $4,140 was outstanding at
March 31, 2001. The loan is payable in 59 monthly installments of $60 including
annual interest at 1% above the prime rate with a final payment of $1,500.
Liggett has guaranteed the loan, and a first mortgage on the Mebane property
collateralizes the Maple Lane loan and Liggett's credit facility. Liggett
completed the relocation of its manufacturing operations to this facility in
October 2000.
In January 1999, Liggett purchased equipment for $5,750 and borrowed
$4,500 to fund the purchase, of which $3,835 was outstanding at March 31, 2001.
The loan, which is collateralized by the equipment and guaranteed by BGLS and
the Company, is payable in 60 monthly installments of $56 including annual
interest of 7.67% with a final payment of $2,550. In March 2000, Liggett
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purchased equipment for $1,000 under a capital lease which is payable in 60
monthly installments of $21 with an effective annual interest rate of 10.14%. In
April 2000, Liggett purchased equipment for $1,071 under two capital leases
which are payable in 60 monthly installments of $22 with an effective interest
rate of 10.20%.
Liggett (and, in certain cases, Brooke Group Holding, the Company's
predecessor and a wholly-owned subsidiary of BGLS) and other United States
cigarette manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke from cigarettes. The Company believes, and has been so advised
by counsel handling the respective cases, that Brooke Group Holding and Liggett
have a number of valid defenses to claims asserted against them. Litigation is
subject to many uncertainties. An unfavorable verdict was returned in the first
phase of the ENGLE smoking and health class action trial pending in Florida. In
July 2000, the jury awarded $790,000 in punitive damages against Liggett in the
second phase of the trial, and the court entered an order of final judgment.
Liggett intends to pursue all available post-trial and appellate remedies. If
this verdict is not eventually reversed on appeal, or substantially reduced by
the court, it could have a material adverse effect on the Company. Liggett has
filed the $3,450 bond required under recent Florida legislation which limits the
size of any bond required, pending appeal, to stay execution of a punitive
damages verdict. On May 7, 2001, Liggett reached an agreement with the class in
the ENGLE case, which will provide assurance to Liggett that the stay of
execution, currently in effect pursuant to the Florida bonding statute, will not
be lifted or limited at any point until completion of all appeals, including to
the United States Supreme Court. The agreement calls for the payment by Liggett
of $6,273 into an escrow account to be held for the benefit of the ENGLE class,
and released, along with Liggett's existing $3,450 statutory bond, to the court
for the benefit of the class upon completion of the appeals process. It is
possible that additional cases could be decided unfavorably and that there could
be further adverse developments in the ENGLE case. Management cannot predict the
cash requirements related to any future settlements and judgments, including
cash required to bond any appeals, and there is a risk that those requirements
will not be able to be met. An unfavorable outcome of a pending smoking and
health case could encourage the commencement of additional similar litigation.
In recent years, there have been a number of adverse regulatory, political and
other developments concerning cigarette smoking and the tobacco industry. These
developments generally receive widespread media attention. Neither the Company
nor Liggett is able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation or
regulation. See Note 11 to the Company's consolidated financial statements.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against Brooke Group Holding or Liggett or the costs of defending such cases. It
is possible that the Company's consolidated financial position, results of
operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such tobacco-related litigation.
VECTOR RESEARCH. On February 20, 2001, a subsidiary of Vector Research
Ltd. purchased equipment for $15,500 and borrowed $13,175 to fund the purchase.
The loan, which is collateralized by the equipment and a letter of credit from
the Company for $775, is guaranteed by Vector Research, BGLS and the Company.
The loan is payable in 120 monthly installments of $125 including annual
interest of 7.78% with a final payment of $6,125.
BGLS. On May 14, 2001, BGLS issued at a discount $60,000 principal
amount of 10% senior secured notes due March 31, 2006 in a private placement.
BGLS received net proceeds from the offering of approximately $46,500.
The notes are collateralized by substantially all of BGLS' assets,
including a pledge of BGLS' equity interests in its direct subsidiaries,
including Brooke Group Holding, Brooke (Overseas), Vector Tobacco and New Valley
Holdings, Inc. ("NV Holdings"), as well as a pledge of the shares of Liggett and
all of the New Valley securities held by BGLS and NV Holdings. The purchase
agreement for the notes contains covenants, which among other things, limit the
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ability of BGLS to make distributions to the Company to 50% of BGLS' net income,
unless BGLS holds $50,000 in cash after giving effect to the payment of the
distribution, limit additional indebtedness of BGLS, Liggett and Vector Tobacco
to 250% of EBITDA for the trailing 12 months, restrict transactions with
affiliates subject to exceptions which include payments to the Company not to
exceed $9,500 per year for permitted operating expenses, and limit the ability
of BGLS to merge, consolidate or sell certain assets.
Prior to May 24, 2003, BGLS may redeem up to $21,000 of the notes at a
redemption price of 105% of the accreted value with proceeds from one or more
equity offerings. BGLS may redeem the notes, in whole or in part, at a
redemption price of 103% of accreted value in the year beginning May 14, 2003,
102% of accreted value in the year beginning May 14, 2004 and 100% of accreted
value after May 14, 2005. During the term of the notes, BGLS is required to
offer to repurchase all the notes at a purchase price of 101%, in the event of a
change of control, and to offer to repurchase notes, at the redemption prices,
with the proceeds of material asset sales.
THE COMPANY. The Company believes that it will continue to meet its
liquidity requirements through 2001. Corporate expenditures (exclusive of
Liggett and New Valley) over the next twelve months for current operations
include cash interest expense of approximately $6,000, dividends on the
Company's shares (currently at an annual rate of approximately $41,600) and
corporate expenses. The Company anticipates funding its expenditures for current
operations with available cash resources, the proceeds from the public and/or
private debt and equity financing, management fees from subsidiaries and tax
sharing and other payments from Liggett or New Valley. New Valley may acquire or
seek to acquire additional operating businesses through merger, purchase of
assets, stock acquisition or other means, or to make other investments, which
may limit its ability to make such distributions.
MARKET RISK
The Company is exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity prices. The Company
seeks to minimize these risks through its regular operating and financing
activities and its long-term investment strategy.
FOREIGN MARKET RISK
BrookeMil's and Western Realty Development's operations are conducted
in Russia. The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. Consequently, the country's
currency continues to devalue, there is continued volatility in the debt and
equity markets, hyperinflation persists, confidence in the banking sector has
yet to be restored and there continues to be a general lack of liquidity in the
economy. In addition, laws and regulations affecting businesses operating within
the Russian Federation continue to evolve.
The Russian Federation's return to economic stability is dependent to a
large extent on the effectiveness of the measures taken by the government,
decisions of international lending organizations, and other actions, including
regulatory and political developments, which are beyond Vector's control. The
Company's Russian operations of may be significantly affected by these factors
for the foreseeable future.
DOMESTIC MARKET RISK
New Valley's market risk management procedures cover all market risk
sensitive financial instruments.
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Current and proposed underwriting, corporate finance, merchant banking
and other commitments at Ladenburg are subject to due diligence reviews by
Ladenburg's senior management, as well as professionals in the appropriate
business and support units involved. Credit risk related to various financing
activities is reduced by the industry practice of obtaining and maintaining
collateral. Ladenburg monitors its exposure to counterparty risk through the use
of credit exposure information, the monitoring of collateral values and the
establishment of credit limits.
EQUITY PRICE RISK. Ladenburg maintained inventories of trading
securities at March 31, 2001 with fair values of $8,566 in long positions and
$2,685 in short positions. Ladenburg performed an entity-wide analysis of its
financial instruments and assessed the related risk and materiality. Based on
this analysis, in the opinion of management the market risk associated with the
Ladenburg's financial instruments at March 31, 2001 will not have a material
adverse effect on the consolidated financial position or results of operations
of Vector.
New Valley held investment securities available for sale totaling
$28,516 at March 31, 2001. Adverse market conditions could have a significant
effect on the value of New Valley's investments.
New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. The Company
adopted SFAS No. 133 on January 2, 2001, the effect of which did not have a
material impact on its balance sheet.
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the
recognition, measurement and statement of earnings classification for certain
sales incentives and will be effective in the first quarter of 2002. As a
result, certain items previously included in operating, selling, general and
administrative expense in the consolidated statement of earnings will be
recorded as a reduction of operating revenues. The Company has determined that
the impact of adoption or subsequent application of EITF Issue No. 00-14 will
not have a material effect on its consolidated financial position or results of
operations. Upon adoption, prior period amounts, which are not expected to be
significant, will be reclassified to conform to the new requirements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make oral or
written "forward-looking statements" within the meaning of the Private
Securities Reform Act of 1995, including any statements that may be contained in
the foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations", in this report and in other filings with
the Securities and Exchange Commission and in its reports to stockholders, which
reflect management's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
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uncertainties and, in connection with the "safe-harbor" provisions of the
Private Securities Reform Act, the Company has identified under "Risk Factors"
in Item 1 of the Company's Form 10-K for the year ended December 31, 2000 filed
with the Securities and Exchange Commission important factors that could cause
actual results to differ materially from those contained in any forward-looking
statement made by or on behalf of the Company.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. The Company does not undertake to update
any forward-looking statement that may be made from time to time by or on behalf
of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
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PART II.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Note 11, incorporated herein by reference, to
the consolidated financial statements of Vector Group Ltd.
included elsewhere in this Report on Form 10-Q which contains a
general description of certain legal proceedings to which the
Brooke Group Holdings, BGLS, New Valley or their subsidiaries are
a party and certain related matters. Reference is also made to
Exhibit 99.1 for additional information regarding the pending
smoking-related material legal proceedings to which Brooke Group
Holding, BGLS and/or Liggett are party. A copy of Exhibit 99.1
will be furnished to security holders of the Company and its
subsidiaries without charge upon written request to the Company at
its principal executive offices, 100 S.E. Second St., Miami,
Florida 33131, Attn. Investor Relations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of the Company which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by
the Company during the three months ended March 31, 2001, except
for the grant of stock options to employees of the Company and/or
its subsidiaries as described in Note 10 to the Company's
consolidated financial statements. The foregoing transactions were
effected in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933 or did not involve a
"sale" under the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Stock Option Agreement, dated January 22, 2001,
between Vector and Bennett S. LeBow.
10.2 Stock Option Agreement, dated January 22, 2001,
between Vector and Howard M. Lorber.
10.3 Employment Agreement, dated as of January 17, 2001,
between Vector and Howard M. Lorber.
*10.4 Stipulation and Agreed Order regarding Stay of
Execution Pending Review and Related Matters, dated
May 7, 2001, entered into by Philip Morris
Incorporated, Lorillard Tobacco Co., Liggett Group
Ltd. and Brooke Group Holding Inc. and the class
counsel in Engel, et. al., v. R. J. Reynolds
Tobacco Co., et. al. (incorporated by reference to
Exhibit 99.2 in Philip Morris Companies Inc.'s Form
8-K dated May 7, 2001, Commission File No. 1-8940).
99.1 Material Legal Proceedings.
*99.2 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly periods
ended March 31, 2001 and 2000 (incorporated by
reference to New Valley's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001,
Commission File No. 1-2493).
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* Incorporated by reference
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
VECTOR GROUP LTD.
(Registrant)
By: /s/ Joselynn D. Van Siclen
-----------------------------
Joselynn D. Van Siclen
Vice President, Treasurer and
Chief Financial Officer
(Duly Authorized Officer and
Chief Accounting Officer)
Date: May 14, 2001
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