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Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 65-0949535
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation
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 November 13, 2001, Vector Group Ltd. had 31,665,753 shares of common
stock outstanding.
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VECTOR GROUP LTD.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Vector Group Ltd. Consolidated Financial Statements:
Vector Group Ltd. Consolidated Balance Sheets as of September 30, 2001 and
December 31, 2000............................................................................. 2
Vector Group Ltd. Consolidated Statements of Operations for the three and nine months
ended September 30, 2001 and September 30, 2000............................................... 3
Vector Group Ltd. Consolidated Statement of Stockholders' Equity for the nine
months ended September 30, 2001............................................................... 4
Vector Group Ltd. Consolidated Statements of Cash Flows for the nine months ended
September 30, 2001 and September 30, 2000..................................................... 5
Notes to Consolidated Financial Statements.......................................................... 6
Item 2 .Management's Discussion and Analysis
of Financial Condition and Results of Operations.............................................. 33
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................... 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................................. 46
Item 2. Changes in Securities and Use of Proceeds...................................................... 46
Item 6. Exhibits and Reports on Form 8-K............................................................... 46
SIGNATURE 48
- 1 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
September 30, December 31,
2001 2000
--------- ---------
ASSETS:
Current assets:
Cash and cash equivalents .............................................. $ 234,507 $ 157,513
Investment securities available for sale ............................... 173,623 29,337
Trading securities owned by LTS ........................................ 8,724 18,348
Accounts receivable - trade ............................................ 15,937 9,748
Receivables from clearing brokers ...................................... 17,717 10,126
Other receivables ...................................................... 1,257 1,669
Inventories ............................................................ 47,877 29,752
Restricted assets ...................................................... 2,627 4,489
Deferred income taxes .................................................. 4,239 3,304
Other current assets ................................................... 11,057 5,656
--------- ---------
Total current assets ................................................. 517,565 269,942
Property, plant and equipment, net ....................................... 85,582 48,539
Investment in real estate, net ........................................... 110,605 120,272
Long-term investments, net ............................................... 10,080 4,654
Restricted assets ........................................................ 6,176 3,060
Deferred income taxes .................................................... 16,124 7,094
Goodwill ................................................................. 19,389 --
Other assets ............................................................. 32,408 8,414
--------- ---------
Total assets ......................................................... $ 797,929 $ 461,975
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of notes payable and long-term debt .................... $ 5,650 $ 17,850
Margin loans payable ................................................... 2,647 4,675
Accounts payable ....................................................... 8,547 9,547
Securities sold, not yet purchased ..................................... 2,283 3,570
Accrued promotional expenses ........................................... 22,890 19,683
Accrued taxes payable .................................................. 27,445 32,133
Deferred income taxes .................................................. 2,438 2,587
Prepetition claims and restructuring accruals .......................... 5,315 10,229
Other accrued liabilities .............................................. 59,724 38,501
--------- ---------
Total current liabilities ............................................ 136,939 138,775
Notes payable, long-term debt and other obligations, less current portion 281,922 39,890
Noncurrent employee benefits ............................................. 15,333 7,313
Deferred income taxes .................................................... 135,728 129,887
Other liabilities ........................................................ 60,713 61,627
Minority interests ....................................................... 83,904 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 36,036,690 shares, outstanding 31,548,753 ............. 3,155 2,567
Additional paid-in capital ............................................. 280,029 184,807
Deficit ................................................................ (181,589) (148,789)
Accumulated other comprehensive income ................................. 556 1,337
Less: 4,487,937 shares of common stock in treasury, at cost ........... (18,761) (27,473)
--------- ---------
Total stockholders' equity ......................................... 83,390 12,449
--------- ---------
Total liabilities and stockholders' equity ......................... $ 797,929 $ 461,975
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
- 2 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Tobacco* .............................................. $ 193,881 $ 167,123 $ 511,550 $ 501,915
Broker-dealer transactions ............................ 18,297 13,009 58,593 61,605
Real estate leasing ................................... 2,538 778 7,604 2,369
----------- ----------- ----------- -----------
Total revenues ...................................... 214,716 180,910 577,747 565,889
Expenses:
Cost of goods sold* ................................... 68,391 58,862 165,774 213,004
Operating, selling, administrative and general expenses 137,737 114,696 386,878 325,610
----------- ----------- ----------- -----------
Operating income .................................... 8,588 7,352 25,095 27,275
Other income (expenses):
Interest and dividend income .......................... 3,558 3,833 7,777 7,015
Interest expense ...................................... (5,603) (6,073) (9,134) (29,643)
Foreign currency gain ................................. -- 550 -- 2,085
Income from joint venture ............................. -- 52,427 -- 52,580
(Loss) gain on sale of investments, net ............... (804) 108 (51) 6,299
Sale of assets ........................................ 665 193,779 2,187 193,929
Other, net ............................................ (823) 2,675 (672) 873
----------- ----------- ----------- -----------
Income from continuing operations before provision
for income taxes and minority interests ............. 5,581 254,651 25,202 260,413
Provision for income taxes ............................ 3,391 76,539 13,410 78,853
Minority interests .................................... 5,179 (19,423) 9,099 (19,279)
----------- ----------- ----------- -----------
Income from continuing operations ....................... 7,369 158,689 20,891 162,281
Gain on disposal of discontinued operations ............. -- -- 828 --
Loss on extraordinary items ............................. -- (2,422) -- (2,652)
----------- ----------- ----------- -----------
Net income .............................................. $ 7,369 $ 156,267 $ 21,719 $ 159,629
=========== =========== =========== ===========
Per basic common share:
Income from continuing operations ..................... $ 0.24 $ 6.31 $ 0.73 $ 6.61
=========== =========== =========== ===========
Gain from discontinued operations ..................... -- -- $ 0.03 --
=========== =========== =========== ===========
Loss from extraordinary items ......................... -- $ (0.09) -- $ (0.11)
=========== =========== =========== ===========
Net income applicable to common shares ................ $ 0.24 $ 6.22 $ 0.76 $ 6.50
=========== =========== =========== ===========
Basic weighted average common shares outstanding ........ 30,971,654 25,136,988 28,688,746 24,541,486
=========== =========== =========== ===========
Per diluted common share:
Income from continuing operations ..................... $ 0.20 $ 5.31 $ 0.60 $ 5.54
=========== =========== =========== ===========
Gain from discontinued operations ..................... -- -- $ 0.02 --
=========== =========== =========== ===========
Loss from extraordinary items ......................... -- $ (0.08) -- $ (0.09)
=========== =========== =========== ===========
Net income applicable to common shares ................ $ 0.20 $ 5.23 $ 0.62 $ 5.45
=========== =========== =========== ===========
Diluted weighted average common shares outstanding ...... 36,470,097 29,868,211 34,688,506 29,273,194
=========== =========== =========== ===========
* Tobacco revenues and Cost of goods sold include excise taxes of $41,496,
$30,923, $105,806 and $88,084, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
- 3 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Additional Other
Common Stock 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 .............................. -- -- -- 21,719 -- -- 21,719
Unrealized holding gain on investments,
net of income tax .................. -- -- -- -- -- 979 979
New Valley unrealized holding loss on
investments, net of income tax ..... -- -- -- -- -- (2,017) (2,017)
Effect of New Valley capital
transactions ....................... -- -- -- -- -- 257 257
--------
Total other comprehensive income .. -- -- -- -- -- -- (781)
--------
Total comprehensive income .............. -- -- -- -- -- -- 20,938
--------
Distributions on common stock ........... -- -- (34,024) -- -- -- (34,024)
Effect of stock dividend ................ 1,502,107 150 54,369 (54,519) -- -- --
Effect of New Valley acquisition of LTS,
net of income tax .................... -- -- 5,509 -- -- -- 5,509
Issuance of stock ....................... 1,669,344 167 41,974 -- 7,859 -- 50,000
Exercise of options and warrants ........ 2,710,284 271 14,918 -- 853 -- 16,042
Tax benefit of option exercises ......... -- -- 9,863 -- -- -- 9,863
Effect of repurchase of New Valley
common shares, net of income tax ..... -- -- 193 -- -- -- 193
Amortization of deferred compensation ... -- -- 2,420 -- -- -- 2,420
---------- ------ --------- --------- -------- ------- --------
Balance, September 30, 2001 ............. 31,548,753 $3,155 $ 280,029 $(181,589) $(18,761) $ 556 $ 83,390
========== ====== ========= ========= ======== ======= ========
The accompanying notes are an integral part
of the consolidated financial statements.
- 4 -
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended
Sept. 30, Sept. 30,
2001 2000
Net cash provided by (used in) operating activities......................... $ 14,753 $ (11,042)
--------- --------
Cash flows from investing activities:
Capital expenditures...................................................... (49,790) (26,636)
Proceeds from sale of businesses and assets, net.......................... 8,599 327,087
Sale or maturity of investment securities................................. 10,634 35,561
Purchase of investment securities......................................... (159,381) (24,059)
Sale of long-term investments............................................. 1,133 -
Purchase of long-term investments......................................... (5,747) (2,358)
Purchase of real estate................................................... (1,213) (2,668)
Proceeds from sale of real estate......................................... 10,172 -
Decrease in restricted assets............................................. 1,306 3,477
Payment of prepetition claims............................................. (2,634) (363)
Investment in joint venture............................................... - (1,916)
Repurchase by New Valley of common shares................................. (274) (954)
Cash acquired in acquisition of LTS....................................... 5,151 -
Purchase by New Valley of subsidiary common stock......................... (3,945) -
---------- -------
Net cash (used in) provided by investing activities......................... (185,989) 307,171
--------- -------
Cash flows from financing activities:
Proceeds from debt........................................................ 268,970 29,133
Repayments of debt........................................................ (22,368) (127,315)
Borrowings under revolvers................................................ 358,330 305,775
Repayments on revolvers................................................... (377,704) (287,066)
Deferred financing charges................................................ (9,201) -
Increase (decrease) in margin loan payable................................ (2,028) 5,212
Increase in cash overdraft................................................ 132 -
Proceeds (repayment) of participating loans and related amounts........... 2,478 (68,338)
Issuance of common stock.................................................. 50,000 -
Proceeds from exercise of options and warrants............................ 16,042 -
Expenses associated with the acquisition of LTS........................... (407) -
Distributions on common stock............................................. (34,024) (20,249)
Payment to Ladenburg minority stock holder................................ (1,990) -
--------- --------
Net cash provided by (used in) financing activities......................... 248,230 (162,848)
--------- --------
Effect of exchange rate changes on cash and cash equivalents................ - (110)
Net increase in cash and cash equivalents................................... 76,994 133,171
Cash and cash equivalents, beginning of period.............................. 157,513 20,123
--------- --------
Cash and cash equivalents, end of period.................................... $ 234,507 $153,294
========= =======
Supplemental non-cash investing and financing activities:
Issuance of stock dividends................................................. 54,519 20,852
The accompanying notes are an integral part
of the consolidated financial statements.
- 5 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
The consolidated financial statements of Vector Group Ltd. (the
"Company" or "Vector") include the accounts of VGR Holding Inc.
(formerly known as BGLS Inc.) ("VGR Holding"), Vector Tobacco, Inc.
("Vector Tobacco"), Liggett Group Inc. ("Liggett"), New Valley
Corporation ("New Valley"), Brooke (Overseas) Ltd. ("Brooke
(Overseas)"), through July 31, 2000 Liggett-Ducat Ltd.
("Liggett-Ducat"), and other less significant subsidiaries.
Vector Tobacco is engaged in the development and marketing of new,
less hazardous cigarette products. Liggett is engaged in the
manufacture and sale of cigarettes in the United States. Prior to its
sale in August 2000, Liggett-Ducat was engaged in the manufacture and
sale of cigarettes in Russia. New Valley is engaged primarily in the
investment banking and brokerage business through its 53.6% ownership
interest in Ladenburg Thalmann Financial Services Inc. and in the
real estate business.
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) 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.
(c) Reclassifications:
Certain amounts in the 2000 consolidated financial statements have
been reclassified to conform to the 2001 presentation.
- 6 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
(d) Earnings Per Share:
Information concerning the Company's common stock has been adjusted
to give effect to the 5% stock dividends paid to Company stockholders
on September 28, 2000 and September 28, 2001. In connection with each
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.
(e) Comprehensive Income:
Comprehensive income consists of net income and other comprehensive
income and is a component of stockholders' equity which includes such
items as the Company's proportionate interest in New Valley's capital
transactions, unrealized gains and losses on investment securities
and minimum pension liability adjustments. Total comprehensive income
was $20,938 for the nine months ended September 30, 2001 and $160,694
for the nine months ended September 30, 2000.
(f) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at
fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Vector
adopted SFAS No. 133 on January 1, 2001, the effect of which did not
have a material impact on its balance sheet since Vector is not
engaged in significant hedging activities.
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives". EITF Issue No. 00-14
addresses the recognition, measurement and statement of operations
classification for certain sales incentives and will be effective in
the first quarter of 2002. As a result, certain items previously
included in operating, selling, general and administrative expense in
the consolidated statement of operations will be recorded as a
reduction of operating revenues. Vector 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.
In April 2001, the EITF reached a consensus on Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products." EITF Issue No. 00-25 requires
that certain expenses included in operating, selling, administrative
and general expenses be recorded as a reduction of operating revenues
and will be effective in the first quarter of 2002. The Company is
currently in the process of determining the impact of EITF Issue No.
00-25 which is expected to result in a significant reduction of
revenues.
- 7 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets separately
from goodwill and requires unallocated negative goodwill to be
written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS
No. 141 is effective for all business combinations initiated after
June 30, 2001, and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing
the impact, if any, of the adoption of these statements.
In October 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of", and requires (i) the
recognition and measurement of the impairment of long-lived assets to
be held and used and (ii) the measurement of long-lived assets to be
disposed of by sale. SFAS No. 144 is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing
the impact, if any, on the adoption of this statement.
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, New Valley's acquisition of Class A interests in Western Realty
Development LLC (refer to Note 4) and the acquisition by a New Valley
subsidiary of Ladenburg Thalmann Financial Services Inc. (refer to Note 3)
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.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
-------------- -------------- -------------- --------------
Revenues ............... $214,716 $194,670 $596,649 $567,488
======== ======== ======== ========
Income from continuing
operations ........... $ 7,369 $ 4,091 $ 19,164 $ 18,850
======== ======== ======== ========
Income from continuing
operations per diluted
common share ......... $ 0.20 $ 0.14 $ 0.55 $ 0.64
======== ======== ======== ========
- 8 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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
September 30, 2001, New Valley had repurchased 422,000 shares for
approximately $1,457. At September 30, 2001, the Company owned 56.3% of
New Valley's Common Shares.
On May 7, 2001, GBI Capital Management Corp. ("GBI") acquired all of the
outstanding common stock of New Valley's 80.1% subsidiary, Ladenburg
Thalmann & Co. Inc. ("Ladenburg"), for 23,218,599 shares, $10,000 cash and
$10,000 principal amount of senior convertible notes due December 31,
2005, and the name of GBI was changed to Ladenburg Thalmann Financial
Services Inc. ("LTS"). The notes bear interest at 7.5% per annum and are
convertible into 4,799,271 shares of LTS common stock. Upon closing, New
Valley also acquired an additional 3,945,060 shares of LTS from the former
Chairman of LTS for $1.00 per share. Following completion of the
transactions, New Valley owned 53.6% and 49.5% of the common stock of LTS,
an American Stock Exchange-listed company, on a basic and fully-diluted
basis, respectively.
To provide the funds for the acquisition of the common stock of Ladenburg,
LTS borrowed $10,000 from Frost-Nevada, Limited Partnership
("Frost-Nevada") and issued to Frost-Nevada $10,000 principal amount of
senior convertible notes due December 31, 2005. The notes bear interest at
8.5% per annum and are convertible into 6,497,475 shares of LTS common
stock. These notes, together with the notes issued to the Ladenburg
stockholders, are collateralized by a pledge of the Ladenburg stock. The
notes are recorded on New Valley's balance sheet at September 30, 2001 at
$11,990 (net of the $8,010 of notes issued to New Valley).
The actual number of shares of common stock may be further increased and
the conversion prices of the senior convertible notes may be further
decreased on or about May 7, 2003, pending a final resolution on LTS's
pre-closing litigation adjustments.
The transaction has been accounted for under the purchase method of
accounting as a reverse acquisition. For accounting purposes, Ladenburg
has been treated as the acquirer of LTS as Ladenburg's stockholders held a
majority of the LTS common stock following the closing of the transaction.
As of May 7, 2001, LTS is accounted for as a consolidated subsidiary of
New Valley.
Under the purchase method of accounting, the assets acquired and
liabilities assumed were recorded at estimated fair values as determined
by management based on information currently available and on current
assumptions as to future operations. Goodwill of $19,385 has been
recognized for the amount of the excess of the purchase price paid over
the fair market value of the net assets acquired and is amortized on the
straight line basis over 20 years. The purchase price has been allocated
to the individual assets acquired and liabilities assumed based upon
preliminary estimates of fair value. The actual allocation may be
different from preliminary allocation due to refinements in the estimate
of the fair values of assets acquired and accrued liabilities assumed;
however, such differences are not expected to be material.
- 9 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
The preliminary allocation of the purchase price has been summarized in
the following tables:
Calculation of Purchase Price:
Common stock..................................... $32,912
Stock options.................................... 1,422
Transaction costs................................ 407
-------
Total purchase price $34,741
=======
Preliminary Allocation of Purchase Price:
Assets:
LTS' assets.................................... $ 26,619
Goodwill....................................... 19,385
Liabilities:
LTS' liabilities............................... (11,263)
------
Total purchase price...................... $ 34,741
========
Pro forma information giving effect to the acquisition as if it had
occurred on January 1, 2000 is presented in Note 2.
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 (subsequently transferred to New
Valley). 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 collateralized 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
- 10 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 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 and nine months ended
September 30, 2000 for Western Realty Development follows:
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Revenues............................. $ 2,174 $ 7,558
Costs and expenses................... 2,197 6,655
Other income......................... 85,001 87,877
Net income........................... 84,978 88,780
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. The Kremlin
sites are expected to be developed as a residential and hotel complex,
subject to market conditions and the availability of financing. BrookeMil
owned 100% of both sites at September 30, 2001.
Through September 30, 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 to the extent BrookeMil
receives distributions. 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 September 30, 2001, BrookeMil had invested $35,679 in the Kremlin
sites and held $1,199 in cash and receivables from an affiliate, both of
which were restricted for future
- 11 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 $36,878 at
September 30, 2001 and the amount of the participating loan recorded in
the consolidated balance sheet is $38,605 at September 30, 2001. Pursuant
to the terms of the participating loan, at September 30, 2001, New Valley
would receive 37.5% of the first $23,509 from a disposition of the Kremlin
sites with the remaining 62.5% payable to Apollo, which is thereafter
entitled to the remainder of the proceeds.
The development of Ducat Place III and the Kremlin sites will require
significant amounts of debt and other financing. 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.
The Russian Federation continues to experience economic difficulties
following the financial crisis of August 1998. The country'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. In addition, laws
and regulations affecting businesses operating within the Russian
Federation continue to evolve.
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.
Gallaher Group Plc has agreed to purchase from a subsidiary of BrookeMil
land located outside Moscow, Russia for $1,500. Final closing of the sale,
scheduled for the fourth quarter of 2001, is subject to satisfaction of
various regulatory requirements.
Subsequent Event:
In October 2001, New Valley agreed to sell the shares of BrookeMil to an
unrelated third party for an aggregate purchase price of $23,000 (before
closing adjustments and expenses). The sole assets of BrookeMil at the
time of sale would be the two Kremlin sites. New Valley would receive
37.5% of the net proceeds of the sale, with the remaining 62.5% payable to
Apollo. Closing of the sale is
- 12 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
subject to various conditions, and there is a substantial risk that the
sale will not be completed. The Company may seek to dispose of other real
estate holdings in the future.
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 losses on
sales of investment securities available for sale of $804 and $51 for the
three and nine months ended September 30, 2001, and realized gains on
sales of investment securities available for sale of $108 and $6,299 for
the three and nine months ended September 30, 2000.
The components of investment securities available for sale at September
30, 2001 are as follows:
Gross Gross
Unrealized Unrealized Fair
Cost Gain Loss Value
Marketable equity securities $ 24,262 $ 2 $(5,852) $ 18,412
Marketable debt securities . 151,129 1,517 -- 152,646
Marketable warrants ........ -- 2,565 -- 2,565
-------- ------ ------- --------
Investment securities ...... $175,391 $4,084 $(5,852) $173,623
======== ====== ======= ========
6. INVENTORIES
Inventories consist of:
September 30, December 31,
2001 2000
-------- --------
Leaf tobacco ................. $ 18,987 $ 7,911
Other raw materials .......... 6,300 1,382
Work-in-process .............. 1,522 2,156
Finished goods ............... 18,141 18,924
Replacement parts and supplies 3,032 2,640
-------- --------
Inventories at current cost .. 47,982 33,013
LIFO adjustments ............. (105) (3,261)
-------- --------
$ 47,877 $ 29,752
======== ========
At September 30, 2001, the Company had leaf tobacco purchase commitments
of approximately $25,490.
- 13 -
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:
September 30, December 31,
2001 2000
--------- --------
Land and improvements ....... $ 1,560 $ 1,670
Buildings ................... 30,525 15,641
Machinery and equipment ..... 91,656 71,741
--------- --------
123,741 89,052
Less accumulated depreciation (38,159) (40,513)
--------- --------
$ 85,582 $ 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. In July
2001, the facility's owners purchased an option to terminate the lease,
resulting in an additional gain of $1,000.
Also in February 2001, Liggett contracted to purchase production machinery
for approximately $16,300 denominated in foreign currencies. The first
delivery of equipment occurred in October 2001 and was financed through a
$3,204 capital lease arrangement, guaranteed by the Company. The lease is
payable in 60 monthly installments with interest calculated at the prime
rate.
In July 2001, Liggett performed a like-kind exchange of equipment that
resulted in a loss of $516.
8. LONG-TERM INVESTMENTS
At September 30, 2001, long-term investments consisted primarily of
investments in limited partnerships of $10,080. The Company is an investor
in one limited partnership where it is required to make additional
investments of up to an aggregate of $8,300 at September 30, 2001. For the
nine months ended September 30, 2001, the Company recognized a gain of
$883 on the liquidation of an investment in a limited partnership. The
Company believes the fair value of the limited partnerships exceeds their
carrying amount by approximately $6,000 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.
- 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:
September 30, December 31,
2001 2000
--------- --------
Vector:
6.25% Convertible Subordinated Notes due 2008 ............ $ 172,500 $ --
VGR Holding:
10% Senior Secured Notes due 2006, net of
unamortized discount of $9,655 ........................ 50,345 --
Liggett:
Revolving credit facility ................................ -- 19,374
Term loan under credit facility .......................... 6,090 4,320
Equipment loans .......................................... 1,599 5,760
New Valley:
Notes payable - shopping centers ......................... 11,246 19,529
Notes payable - Russia ................................... 9,089 8,187
Notes payable - LTS ...................................... 15,490 --
Vector Research:
Equipment loan ........................................... 12,933 --
Vector Tobacco:
Note payable ............................................. 8,030 --
Other .................................................... 250 570
--------- --------
Total notes payable, long-term debt and other obligations 287,572 57,740
Less:
Current maturities ................................. (5,650) (17,850)
--------- --------
Amount due after one year ................................ $ 281,922 $ 39,890
========= ========
6.25% Convertible Subordinated Notes Due July 15, 2008 - Vector:
In July 2001, Vector completed the sale of $172,500 (net proceeds of
approximately $166,400) of its 6.25% convertible subordinated notes due
2008 through a private offering to qualified institutional investors in
accordance with Rule 144A under the Securities Act of 1933. The notes
accrue interest at 6.25% per annum and are convertible into Vector's
common stock, at the option of the holder, at a conversion price of $34.41
per share at September 30, 2001. The conversion price is subject to
adjustment for various events, and any cash distribution on Vector's
common stock will result in a corresponding decrease in the conversion
price. The initial conversion price of $36.531 per share has been adjusted
to reflect a cash dividend of $0.40 per share of common stock and a 5%
stock dividend paid by the Company on September 28, 2001.
The notes may be redeemed by Vector, in whole or in part, between July 15,
2003 and July 15, 2004, if the closing price of Vector's common stock
exceeds 150% of the conversion price then in effect for a period of at
least 20 trading days in any consecutive 30 day trading period, at a price
equal to 100% of the principal amount, plus accrued interest and a "make
whole" payment. Vector may redeem the notes, in whole or in part, at a
price of 103.125% in the year beginning July 15, 2004, 102.083% in the
year beginning July 15, 2005, 101.042% in the year beginning July 15, 2006
and 100% in the year beginning July 15, 2007, together with accrued
- 15 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
interest. If a change of control occurs, Vector will be required to offer
to repurchase the notes at 101% of their principal amount, plus accrued
interest and, under certain circumstances, a "make whole" payment.
10% Senior Secured Notes Due March 31, 2006 - VGR Holding
On May 14, 2001, VGR Holding issued at a discount $60,000 principal amount
of 10% senior secured notes due March 31, 2006 in a private placement. VGR
Holding received net proceeds from the offering of approximately $46,500.
The notes were priced to provide the purchasers with a 15.75% yield to
maturity.
The notes are collateralized by substantially all of VGR Holding's assets,
including a pledge of VGR Holding's equity interests in its direct
subsidiaries, including Brooke Group Holding, Brooke (Overseas), Vector
Tobacco and New Valley Holdings, Inc. ("NV Holdings"), as well as a pledge
of the shares of Liggett and all of the New Valley securities held by VGR
Holding and NV Holdings. The purchase agreement for the notes contains
covenants, which among other things, limit the ability of VGR Holding to
make distributions to the Company to 50% of VGR Holding's net income,
unless VGR Holding holds $50,000 in cash after giving effect to the
payment of the distribution, limit additional indebtedness of VGR Holding,
Liggett and Vector Tobacco to 250% of EBITDA for the trailing 12 months,
restrict transactions with affiliates subject to exceptions which include
payments to the Company not to exceed $9,500 per year for permitted
operating expenses, and limit the ability of VGR Holding to merge,
consolidate or sell certain assets.
Prior to May 24, 2003, VGR Holding may redeem up to $21,000 of the notes
at a redemption price of 105% of the accreted value with proceeds from one
or more equity offerings. VGR Holding may redeem the notes, in whole or in
part, at a redemption price of 103% of accreted value in the year
beginning May 14, 2003, 102% of accreted value in the year beginning May
14, 2004 and 100% of accreted value after May 14, 2005. During the term of
the notes, VGR Holding is required to offer to repurchase all the notes at
a purchase price of 101% of accreted value, in the event of a change of
control, and to offer to repurchase notes, at the redemption prices, with
the proceeds of material asset sales.
Revolving Credit Facility - Liggett:
Liggett has a $35,000 credit facility under which $0 was outstanding at
September 30, 2001. Availability under the credit facility was
approximately $29,003 based on eligible collateral at September 30, 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 7.5% at September 30, 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 September 30, 2001, Liggett was in compliance with all
covenants under the
- 16 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
credit facility; Liggett's adjusted net worth was $31,720 and net working
capital was $24,648, 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, In July 2001, Liggett
borrowed an additional $2,340 under the term loan, and a total of $6,090
was outstanding at September 30, 2001. In addition, the lender extended
the term of the loan so that it is payable in 59 monthly installments of
$75 including annual interest at 1% above the prime rate with a final
payment of $1,875. 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.
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 to fund the purchase from a third party. The loan, which was
collateralized by the equipment and guaranteed by VGR Holding and Vector,
was payable in 60 monthly installments of $56 including annual interest of
7.67% with a final payment of $2,550. The remaining amount of the loan was
repaid in July 2001 in connection with the sale of the equipment.
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 nine months ended September 30, 2001. Notes payable
relating to the shopping center with a balance of $8,226 at December 31,
2000 were repaid upon closing. New Valley may seek to dispose of other
real estate holdings in the future.
On May 31, 2001, Western Realty Development's Russian subsidiary entered
into a credit agreement with ZAO Raiffeisenbank Austria. The subsidiary
borrowed $8,700 in the third quarter of 2001 under the credit agreement,
and $8,265 was outstanding at September 30, 2001. The proceeds of the
borrowing were used to refinance the subsidiary's prior facility with a
Russian bank and to repay intercompany indebtedness. Borrowings under the
credit agreement bear interest at a rate of LIBOR plus 6% and are secured
by a mortgage on Ducat Place II. Principal payments are due under the
credit agreement in 20 equal quarterly installments of $435, with all
remaining amounts due on June 30, 2006. At September 30, 2001, Western
Realty Development had a loan outstanding of $824 to Apollo, repaid in
October 2001.
- 17 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
In connection with the LTS acquisition transaction, LTS issued $11,990
(net of the $8,010 of notes issued to New Valley) of its senior
convertible notes. The notes bear a weighted average interest rate of
8% and mature on December 31, 2005.
On August 31, 2001, LTS borrowed from New Valley and Frost-Nevada
$1,000 (net of the $1,000 of notes issued to New Valley). The loans,
which bear interest at 1% above the prime rate, mature on the earlier
of February 28, 2002 or the next business day after LTS receives its
federal income tax refund for the fiscal year ended September 30, 2001.
Ladenburg has a $2,500 junior subordinated revolving credit agreement
that extends through October 31, 2002 with its clearing broker under
which outstanding borrowings incur interest at LIBOR plus 2%. As of
September 30, 2001, borrowings of $2,500 were outstanding.
Equipment Loans - Vector Research:
In February 2001, a subsidiary of Vector Research Ltd. purchased
equipment for $15,500 and borrowed $13,175 to fund the purchase. The
loan, which is collateralized by the equipment and a letter of credit
from the Company for $775, is guaranteed by Vector Research Ltd., VGR
Holding 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.
Note Payable - Vector Tobacco:
In June 2001, Vector Tobacco purchased for $8,400 an industrial
facility in Roxboro, North Carolina. Vector Tobacco financed the
purchase with an $8,200 loan, payable in 60 monthly installments of
$85, including annual interest at 4.85% above LIBOR with a final
payment of approximately $3,160. The loan, which is collateralized by a
mortgage and a letter of credit of $1,750, is guaranteed by VGR Holding
and Vector.
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 787,500 shares of common stock at
an exercise price of $18.21 per share (the fair market value of a share
of common stock on the date of grant). Common stock dividend
equivalents are paid currently with respect to each share underlying
the unexercised portion of the options. The options have a ten-year
term and become exercisable on November 4, 2003. However, the options
will earlier vest and become immediately exercisable upon (i) the
occurrence of a change in control or (ii) the termination of the option
holder's employment with the Company due to death or disability.
During the nine months ended September 30, 2001, employees of the
Company or its subsidiaries were awarded a total of 972,925
non-qualified options to purchase shares of common stock at prices
ranging from $17.02 to $41.49, generally at the fair market value on
the dates of grant
- 18 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
under the Company's 1998 and 1999 Long-Term Incentive Plan. The Company
will recognize compensation expense of $1,183 over the vesting period.
On May 16, 2001, Vector entered into a stock purchase agreement with
High River Limited Partnership, an investment entity owned by Carl C.
Icahn, in which High River agreed to purchase for $50,000 1,721,311
shares of Vector's common stock at a price of $29.05 per share, the
market price when negotiations with Mr. Icahn were completed. The
closing of the purchase of the shares occurred on May 31, 2001.
On June 8, 2001, the Company granted 10,500 shares of the Company's
common stock to each of its three outside directors which will vest
over a period of three years. The Company will recognize compensation
expense of $1,017 over the vesting period.
During the nine months ended September 30, 2001, a total of 2,028,687
warrants to purchase Vector's common stock at $4.32 per share were
exercised. At September 30, 2001, Vector had outstanding 286,561 of the
$4.32 warrants which expire in 2003.
During the quarter ended September 30, 2001, 525,000 options to
purchase Vector common stock at $5.18 per share were exercised by a law
firm which represents the Company and Liggett. At September 30, 2001,
the law firm had options for an additional 591,281 shares at $5.18 per
share, which expire in 2003.
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 VGR Holding, or Liggett). There has been a
noteworthy increase in the number of cases commenced against Liggett
and the other cigarette manufacturers in recent years. The cases
generally fall into the following categories: (i) smoking and health
cases alleging injury brought on behalf of individual plaintiffs
("Individual Actions"); (ii) smoking and health cases alleging injury
and purporting to be brought on behalf of a class of individual
plaintiffs ("Class Actions"); (iii) health care cost recovery actions
brought by various foreign and domestic governmental entities
("Governmental Actions"); and (iv) health care cost recovery actions
brought by third-party payors including insurance companies, union
health and welfare trust funds, asbestos manufacturers and others
("Third-Party Payor Actions"). As new cases are commenced, defense
costs and the risks attendant to the inherent unpredictability of
litigation continue to increase. The future financial impact of the
risks and expenses of litigation and the effects of the tobacco
litigation settlements discussed below is not quantifiable at this
time. For the nine
- 19 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
months ended September 30, 2001, Liggett incurred counsel fees and
costs totaling approximately $4,911 compared to $4,342 for the nine
months ended September 30, 2000.
Individual Actions. As of September 30, 2001, there were approximately
318 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, 93 were pending in New York, 68 in Florida,
23 in California, 15 in Texas, 14 in Louisiana and 13 in each of
Massachusetts and Mississippi. 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 1,250 named individual plaintiffs has been
consolidated before a single West Virginia state court. Liggett is a
defendant in most of the cases pending in West Virginia.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including
negligence, gross negligence, breach of special duty, strict liability,
fraud, misrepresentation, design defect, failure to warn, breach of
express and implied warranties, conspiracy, aiding and abetting,
concert of action, unjust enrichment, common law public nuisance,
property damage, invasion of privacy, mental anguish, emotional
distress, disability, shock, indemnity and violations of deceptive
trade practice laws, the Federal Racketeer Influenced and Corrupt
Organization Act ("RICO"), state RICO statutes and antitrust statutes.
In many of these cases, in addition to compensatory damages, plaintiffs
also seek other forms of relief including treble/multiple damages,
medical monitoring, disgorgement of profits and punitive damages.
Defenses raised by defendants in these cases include lack of proximate
cause, assumption of the risk, comparative fault and/or contributory
negligence, lack of design defect, statute of limitations, equitable
defenses such as "unclean hands" and lack of benefit, failure to state
a claim and federal preemption.
Jury awards in California and Oregon have been entered against other
companies in the tobacco industry. The awards in these individual
actions are for both compensatory and punitive damages and represent a
material amount of damages. In June 2001, a jury awarded $5,500 in
compensatory damages and $3,000,000 in punitive damages in a California
state court case involving Philip Morris. The punitive damages award
was subsequently reduced to $100,000 by the trial court. In each case,
both the verdict and damage awards are being appealed by the
defendants. In November 2001, in one of these cases, a $25,000 punitive
damages judgment against Philip Morris was affirmed by a California
intermediate appellate court. Philip Morris has announced their
interest to appeal the decision to the California Supreme Court. During
2001, as a result of a Florida Supreme Court decision upholding the
award, another cigarette manufacturer paid $1,100 in compensatory
damages and interest to a former smoker and his spouse for injuries
they allegedly incurred as a result of smoking. In June 2001, the U. S.
Supreme Court declined to review the case.
Class Actions. As of September 30, 2001, there were approximately 38
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
- 20 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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, 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
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
decided that Phase II of the trial, which commenced November 1999,
would be a causation and damages trial for three of the class
representatives and a punitive damages trial on a class-wide basis,
before the same jury that returned the verdict in Phase I. On April 7,
2000, the jury awarded compensatory damages of $12,704 to the three
plaintiffs, to be reduced in proportion to the respective plaintiff's
fault. The jury also decided that the claim of one of the plaintiffs,
who was awarded compensatory damages of $5,831, was not timely filed.
On July 14, 2000, the jury awarded approximately $145,000,000 in the
punitive damages portion of Phase II against all defendants including
$790,000 against Liggett. The court entered a final order of judgment
against the defendants on November 6, 2000. The court's final judgment,
which provides for interest at the rate of 10% per year on the jury's
awards, also denied various of defendants' post-trial motions, which
included a motion for new trial and a motion seeking reduction of the
punitive damages award. Liggett intends to pursue all available
post-trial and appellate remedies. If this verdict is not eventually
reversed on appeal, or substantially reduced by the court, it could
have a material adverse effect on the Company. Phase III of the trial
will be conducted before separate juries to address absent class
members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages.
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, Louisiana, Nevada, North Carolina,
Oklahoma, South Carolina, Virginia and West 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. As required by the agreement, Liggett paid
$6,273 into an escrow account to be held for the benefit of the Engle
class, and released, along with Liggett's existing $3,450 statutory
bond, to the court for the benefit of the class upon completion of the
appeals process, regardless of the outcome of the appeal. As a result,
the Company 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.
- 22 -
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.
In August 2000, in Blankenship v. Philip Morris, Inc., a West Virginia
state court conditionally certified (only to the extent of medical
monitoring) a class of present or former West Virginia smokers who
desire to participate in a medical monitoring plan. The trial of this
case ended on January 25, 2001, when the judge declared a mistrial. In
an order issued on March 23, 2001, the court reaffirmed class
certification of this medical monitoring action. In July 2001, the
court issued an order severing Liggett from the retrial of the case
which began in September 2001.
Approximately 38 purported state and federal class action complaints
have been filed against the cigarette manufacturers for alleged
antitrust violations, including Liggett and Brooke Holding. The actions
allege that the cigarette manufacturers have engaged in a nationwide
and international conspiracy to fix the price of cigarettes in
violation of state and federal antitrust laws. Plaintiffs allege that
defendants' price-fixing conspiracy raised the price of cigarettes
above a competitive level. Plaintiffs in the 31 state actions purport
to represent classes of indirect purchasers of cigarettes in 16 states;
plaintiffs in the seven federal actions purport to represent a
nationwide class of wholesalers who purchased cigarettes directly from
the defendants. The federal actions have been consolidated and, on July
28, 2000, plaintiffs in the federal consolidated action filed a single
consolidated complaint that did not name Liggett or Brooke Group
Holding as defendants, although Liggett has complied with certain
discovery requests. Fourteen California actions have been consolidated
and the consolidated complaint did not name Liggett or Brooke Group
Holding as defendants. In Nevada, an amended complaint was filed that
did not name Liggett or Brooke Group Holding as defendants. The Arizona
action was dismissed by the trial court, but the plaintiffs have
appealed that ruling.
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 September 30, 2001, there were
approximately 49 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 September 30, 2001, there were
approximately 55 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
- 23 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
and welfare trust funds, asbestos manufacturers and others. Eight
United States Circuit Courts of Appeal have ruled that Third-Party
Payors did not have standing to bring lawsuits against the tobacco
companies. In January 2000, the United States Supreme Court denied
petitions for certiorari filed by several of the union health and
welfare trust funds. However, a number of Third-Party Payor Actions,
including an action brought by 24 Blue Cross/Blue Shield Plans, remain
pending.
In June 2001, a jury in a third party payor action brought by Empire
Blue Cross and Blue Shield in the Eastern District of New York rendered
a verdict awarding the plaintiff $17,800 in damages against the major
tobacco companies. As against Liggett, the jury awarded the plaintiff
damages of $89. Liggett plans an appeal of the jury verdict.
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. In July 2001, the court reaffirmed its
decision that the government does not have a valid claim under MCRA or
MSP. In the September 2000 ruling, the court also determined not to
dismiss the government's claims based on RICO, under which the
government continues to seek court relief to restrain the defendant
tobacco companies from allegedly engaging in fraud and other unlawful
conduct and to compel disgorgement.
In June 2001, the United States Attorney General assembled a team of
three Department of Justice ("DOJ") lawyers to work on a possible
settlement of the federal lawsuit. The DOJ lawyers met with
representatives of the tobacco industry, including Liggett, on July 18,
2001. No settlement was reached, and no further meetings are planned.
Discovery in the case has commenced, and trial has been scheduled for
July 2003.
- 24 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Settlements. In March 1996, Brooke Group Holding and Liggett entered
into an agreement, subject to court approval, to settle the Castano
class action tobacco litigation. The Castano class was subsequently
decertified by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and
Liggett entered into settlements of smoking-related litigation with the
Attorneys General of 45 states and territories. The settlements
released both Brooke Group Holding and Liggett from all smoking-related
claims, including claims for health care cost reimbursement and claims
concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco
Corporation, R.J. Reynolds Tobacco Company and Lorillard Tobacco
Company (collectively, the "Original Participating Manufacturers" or
"OPMs") and Liggett (together with the OPMs and any other tobacco
product manufacturer that becomes a signatory, the "Participating
Manufacturers") entered into the Master Settlement Agreement (the
"MSA") with 46 states, the District of Columbia, Puerto Rico, Guam, the
United States Virgin Islands, American Samoa and the Northern Marianas
(collectively, the "Settling States") to settle the asserted and
unasserted health care cost recovery and certain other claims of those
Settling States. The MSA has received final judicial approval in each
of the 52 settling jurisdictions.
The MSA restricts tobacco product advertising and marketing within the
Settling States and otherwise restricts the activities of Participating
Manufacturers. Among other things, the MSA prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products;
bans the use of cartoon characters in all tobacco advertising and
promotion; limits each Participating Manufacturer to one tobacco brand
name sponsorship during any 12-month period; bans all outdoor
advertising, with the exception of signs 14 square feet or less in
dimension at retail establishments that sell tobacco products;
prohibits payments for tobacco product placement in various media; bans
gift offers based on the purchase of tobacco products without
sufficient proof that the intended recipient is an adult; prohibits
Participating Manufacturers from licensing third parties to advertise
tobacco brand names in any manner prohibited under the MSA; prohibits
Participating Manufacturers from using as a tobacco product brand name
any nationally recognized non-tobacco brand or trade name or the names
of sports teams, entertainment groups or individual celebrities; and
prohibits Participating Manufacturers from selling packs containing
fewer than 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. Based on
- 25 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
current sales volume, Liggett's management anticipates Liggett's market
share will exceed the base share during 2001. Liggett has expensed its
MSA obligations as part of cost of goods sold to the extent it is
estimated that such obligations will be due. Under the annual and
strategic contribution payment provisions of the MSA, the OPMs (and
Liggett to the extent its market share exceeds the base share) are
required to pay the following annual amounts (subject to certain
adjustments):
Year Amount
---- -----
2001 $5,000,000
2002 - 2003 $6,500,000
2004 - 2007 $8,000,000
2008 - 2017 $8,139,000
2018 and each $9,000,000
year thereafter
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
- 26 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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.
Copies of the various settlement agreements are filed as exhibits to
the Company's Form 10-K and the discussion herein is qualified in its
entirety by reference thereto.
Trials. Cases currently scheduled for trial during the next six months
include two individual actions in New York state courts scheduled for
January and March 2002. Trial dates, however, are subject to change.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict was returned in the first phase
of the Engle smoking and health class action trial pending in Florida.
In July 2000, the jury awarded $790,000 in punitive damages against
Liggett in the second phase of the trial, and the court has entered an
order of final judgment. Liggett intends to pursue all available
post-trial and appellate remedies. If this verdict is not eventually
reversed on appeal, or substantially reduced by the court, it could
have a material adverse effect on the Company. Liggett has filed the
$3,450 bond required under recent Florida legislation which limits the
size of any bond required, pending appeal, to stay execution of a
punitive damages verdict. On May 7, 2001, Liggett reached an agreement
with the class in the Engle case, which will provide assurance to
Liggett that the stay of execution, currently in effect pursuant to the
bonding statute enacted 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. As required by the
agreement, Liggett paid $6,273 into an escrow account to be held for
the benefit of the Engle class, and released, along with Liggett's
existing $3,450 statutory bond, to the court for the benefit of the
class upon completion of the appeals process, regardless of the outcome
of the appeal. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the
Engle case. Management cannot predict the cash requirements related to
any future settlements and judgments, including cash required to bond
any appeals, and there is a risk that those requirements will not be
able to be met. An unfavorable outcome of a pending smoking and health
case could encourage the commencement of additional similar litigation.
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.
- 27 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
It is possible that the Company's consolidated financial position,
results of operations or cash flows could be materially adversely
affected by an unfavorable outcome in any such smoking-related
litigation.
Liggett's management is unaware of any material environmental
conditions affecting its existing facilities. Liggett's management
believes that current operations are conducted in material compliance
with all environmental laws and regulations and other laws and
regulations governing cigarette manufacturers. Compliance with federal,
state and local provisions regulating the discharge of materials into
the environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital expenditures,
earnings or competitive position of Liggett.
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 tobacco is imported
under a previously established tobacco rate quota ("TRQ") should be
allocated. Currently, tobacco imported under the TRQ is allocated on a
"first-come, first-served" basis, meaning that entry is allowed on an
open basis to those first requesting entry in the quota year. Others in
the cigarette industry have suggested an "end-user licensing" system
under which the right to import tobacco under the quota would be
initially assigned based on domestic market share. Such an approach, if
adopted, could have a material adverse effect on the Company and
Liggett.
In August 1996, the Food and Drug Administration (the "FDA") filed in
the Federal Register a Final Rule classifying tobacco as a "drug" or
"medical device", asserting jurisdiction over the
- 28 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
manufacture and marketing of tobacco products and imposing restrictions
on the sale, advertising and promotion of tobacco products. Litigation
was commenced challenging the legal authority of the FDA to assert such
jurisdiction, as well as challenging the constitutionality of the
rules. In March 2000, the United States Supreme Court ruled that the
FDA does not have the power to regulate tobacco. Liggett supported the
FDA Rule and began to phase in compliance with certain of the proposed
FDA regulations.
Since the Supreme Court decision, various proposals have been made for
federal and state legislation to regulate cigarette manufacturers.
Recently, a Presidential commission appointed by former President
Clinton issued a final report recommending that the FDA be given
authority by Congress to regulate the manufacture, sale, distribution
and labeling of tobacco products to protect public health. In addition,
Congressional advocates of FDA regulation have introduced such
legislation for consideration by the 107th Congress. The ultimate
outcome of these proposals cannot be predicted.
In August 1996, Massachusetts enacted legislation requiring tobacco
companies to publish information regarding the ingredients in
cigarettes and other tobacco products sold in that state. In December
1997, the United States District Court for the District of
Massachusetts preliminarily enjoined this legislation from going into
effect on the grounds that it is preempted by federal law. In November
1999, the United States Court of Appeals for the First Circuit affirmed
this ruling. In September 2000, the federal district court permanently
enjoined enforcement of the law. In October 2001, the First Circuit
reversed the district court's decision, ruling that the ingredients
disclosure provisions are valid. The other manufacturers are seeking to
have this decision overturned. 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
$1.90 per pack in a given locality in the United States. Congress has
considered significant increases in the federal excise tax or other
payments from tobacco manufacturers, and increases in excise and other
cigarette-related taxes have been proposed at the state and local
levels.
In August 2000, the New York state legislature passed legislation
charging the state's Office of Fire Prevention and Control with
developing standards for "fire safe" or self-extinguishing cigarettes.
The OFPC has until January 1, 2003 to issue final regulations. Six
months from the issuance of the standards, all cigarettes offered for
sale in New York state will be required to be manufactured to those
standards. It is not possible to predict the impact of this law on the
Company until the standards are published. Similar legislation is being
considered by other state governments and at the federal level.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning
- 29 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
cigarette smoking and the tobacco industry, the effects of which, at
this time, management is not able to evaluate. These developments may
negatively affect the perception of potential triers of fact with
respect to the tobacco industry, possibly to the detriment of certain
pending litigation, and may prompt the commencement of additional
similar litigation.
OTHER MATTERS:
In March 1997, a stockholder derivative suit was filed in Delaware
Chancery Court against New Valley, as a nominal defendant, its
directors and Brooke Group Holding by a stockholder of New Valley. The
suit alleges that New Valley's purchase of the BrookeMil shares from
Brooke (Overseas) in January 1997 constituted a self-dealing
transaction which involved the payment of excessive consideration by
New Valley. The plaintiff seeks a declaration that New Valley's
directors breached their fiduciary duties and, Brooke Group Holding
aided and abetted such breaches and that damages be awarded to New
Valley. In December 1999, another stockholder of New Valley commenced
an action in Delaware Chancery Court substantially similar to the March
1997 action. This stockholder alleges, among other things, that the
consideration paid by New Valley for the BrookeMil shares was
excessive, unfair and wasteful, that the special committee of New
Valley's board lacked independence, and that the appraisal and fairness
opinion were flawed. By order of the court, both actions were
consolidated. In January 2001, the court denied a motion to dismiss the
consolidated action. Brooke Group Holding and New Valley believe that
the allegations in the case are without merit. Discovery in the case
has commenced.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley,
Brooke Group Holding and certain directors and officers of New Valley
in Delaware Chancery Court. The complaint alleges that the
recapitalization, approved by a majority of each class of New Valley's
stockholders in May 1999, was fundamentally unfair to the Class B
preferred shareholders, the proxy statement relating to the
recapitalization was materially deficient and the defendants breached
their fiduciary duties to the Class B preferred shareholders in
approving the transaction. The plaintiffs seek class certification of
the action and an award of compensatory damages as well as all costs
and fees. The Court has dismissed six of plaintiff's nine claims
alleging inadequate disclosure in the proxy statement. Brooke Group
Holding and New Valley believe that the remaining allegations are
without merit. Discovery in the case has commenced.
Although there can be no assurances, Brooke Group Holding and New
Valley believe, after consultation with counsel, that the ultimate
resolution of these matters will not have a material adverse effect on
the Company's or New Valley's consolidated financial position, results
of operations or cash flows.
As of September 30, 2001, New Valley had $5,315 of remaining
prepetition bankruptcy-related claims and restructuring accruals
including claims for unclaimed monies that certain states are seeking
on behalf of money transfer customers. The remaining claims may be
subject to future adjustments based on potential settlements or
decisions of the court.
- 30 -
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 is not expected to 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:
September 30, December 31,
2001 2000
------------- ------------
Note payable for Western Realty
Development Class A Interests............... $20,029 $19,968
Western Realty Repin participating loan......... 38,605 36,127
Other long-term liabilities..................... 2,079 5,532
------- -------
Total.................................... $60,713 $61,627
======= =======
- 31 -
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 and nine months ended September 30,
2001 and 2000 follows:
Liggett-(1) Vector Broker-(2) Real(3) Corporate(3)
Liggett Ducat Tobacco Dealer Estate and Other Total
------- ----------- ------- --------- ------- ------------ -----
Three Months Ended Sept. 30, 2001:
- ---------------------------------
Revenues ............................ $193,881 $ -- $ -- $ 18,297 $ 2,538 $ -- $214,716
Operating income (loss) ............. 33,592 -- (10,574) (8,412) (166) (5,852) 8,588
Depreciation and amortization ....... 1,025 -- 533 823 661 431 3,473
Three Months Ended Sept. 30, 2000:
- ---------------------------------
Revenues ............................ $149,190 $ 17,933 $ -- $ 13,009 $ 778 $ -- $180,910
Operating income (loss) ............. 24,878 55 (2,777) 80 (1,114) (13,770) 7,352
Depreciation and amortization ....... 1,156 1,254 -- 210 147 8 2,775
Nine Months Ended Sept. 30, 2001:
- --------------------------------
Revenues ............................ $511,550 $ -- $ -- $ 58,593 $ 7,604 $ -- $577,747
Operating income (loss) ............. 76,435 -- (21,790) (12,464) (796) (16,290) 25,095
Identifiable assets ................. 128,933 -- 51,066 85,344 131,993 400,593 797,929
Depreciation and amortization ....... 3,463 -- 870 1,643 1,989 904 8,869
Capital expenditures ................ 5,266 -- 25,362 2,433 1,213 16,729 51,003
Nine Months Ended Sept. 30, 2000:
- --------------------------------
Revenues ............................ $394,652 $107,263 $ -- $ 61,605 $ 2,369 $ -- $565,889
Operating income (loss) ............. 49,568 1,998 (5,971) 5,126 (5,210) (18,236) 27,275
Identifiable assets ................. 108,979 -- 369 49,051 59,195 226,306 443,900
Depreciation and amortization ....... 3,162 5,895 -- 647 679 25 10,408
Capital expenditures ................ 11,902 14,394 -- 340 2,668 -- 29,304
- -----------------------
(1) Russian tobacco is included for the three and nine months
ended September 30, 2000. Western Tobacco Investments was sold
on August 4, 2000.
(2) The acquired operations of LTS are included in the Company's
results of operations commencing May 7, 2001.
(3) New Valley's interest in Western Realty Development is
included in real estate operations for the 2001 periods and in
corporate and other for the 2000 periods when it was accounted
for on the equity method.
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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 VGR Holding Inc. (formerly known as BGLS Inc.) ("VGR
Holding"), Liggett Group Inc. ("Liggett"), New Valley Corporation ("New
Valley"), Brooke (Overseas) Ltd. ("Brooke Overseas"), Vector Tobacco Inc.
("Vector Tobacco"), through July 31, 2000 Liggett-Ducat Ltd. ("Liggett-Ducat"),
and other less significant subsidiaries. As of September 30, 2001, the Company
owned 56.3% of New Valley's common shares.
The Company is a holding company for a number of businesses. Vector
Tobacco is engaged in the development and marketing of new, less hazardous
cigarette products. Liggett is engaged in the manufacture and sale of cigarettes
in the United States. New Valley is engaged in the investment banking and
brokerage business and in the real estate business.
RECENT DEVELOPMENTS
OMNI Product Launch. On November 5, 2001, Vector announced the launch
by Vector Tobacco of OMNI, the first reduced carcinogen cigarette that tastes,
smokes and burns just like other premium cigarettes. OMNI cigarettes are
available in select retail stores nationwide and are priced comparable to other
premium cigarettes.
Convertible Note Offering. In July 2001, Vector completed the sale of
$172,500 (net proceeds of approximately $166,400) of its 6.25% Convertible
Subordinated Notes due 2008 through a private offering to qualified
institutional investors in accordance with Rule 144A under the Securities Act of
1933. The notes will accrue interest at 6.25% per annum and will be convertible
into Vector's common stock, at the option of the holder, at a conversion price
of $34.41 per share at September 30, 2001. The conversion price is subject to
adjustment for various events, and any cash distribution on Vector's common
stock will result in a corresponding decrease in the conversion price. The
initial conversion price of $36.531 per share has been adjusted to reflect a
cash dividend of $0.40 per share of common stock and a 5% stock dividend paid by
the Company on September 28, 2001.
Vector intends to use the net proceeds of the offering of notes,
together with the proceeds from the placement of VGR Holding's senior secured
notes and the investment in Vector's common stock by an entity affiliated with
Carl C. Icahn, for general corporate purposes, including to fund the planned
advertising and promotion of Vector Tobacco's new OMNI and OMNI Nicotine Free
cigarette products and to pursue strategic acquisitions by Liggett of smaller
tobacco manufacturers.
Sale of Stock to Icahn. On May 16, 2001, Vector entered into a stock
purchase agreement with High River Limited Partnership, an investment entity
owned by Carl C. Icahn, in which High River agreed to purchase for $50,000
1,721,311 shares of Vector's common stock at a price of $29.05 per share, the
market price when negotiations with Mr. Icahn were completed. The closing of the
purchase of the shares occurred on May 31, 2001.
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VGR Holding Private Placement. On May 14, 2001, VGR Holding issued at a
discount $60,000 principal amount of 10% senior secured notes due March 31, 2006
in a private placement to institutional investors. VGR Holding received net
proceeds from the offering of approximately $49,700 before fees and expenses of
$3,200.
Acquisition of Ladenburg Thalmann Financial Services Inc. On May 7,
2001, GBI Capital Management Corp. ("GBI") acquired all of the outstanding
common stock of New Valley's 80.1% subsidiary, Ladenburg Thalmann & Co. Inc.
("Ladenburg"), for 23,218,599 shares, $10,000 cash and $10,000 principal amount
of senior convertible notes due December 31, 2005, and the name of GBI was
changed to Ladenburg Thalmann Financial Services Inc. ("LTS"). The notes bear
interest at 7.5% per annum and are convertible into 4,799,271 shares of LTS
common stock. Upon closing, New Valley also acquired an additional 3,945,060
shares of LTS from the former Chairman of LTS for $1.00 per share. Following
completion of the transactions, New Valley owned 53.6% and 49.5% of the common
stock of LTS, an American Stock Exchange-listed company, on a basic and
fully-diluted basis.
To provide the funds for the acquisition of the common stock of
Ladenburg, LTS borrowed $10,000 from Frost-Nevada, Limited Partnership
("Frost-Nevada") and issued to Frost-Nevada $10,000 principal amount of senior
convertible notes due December 31, 2005. The notes bear interest at 8.5% per
annum and are convertible into 6,497,475 shares of LTS common stock. These
notes, together with the notes issued to the Ladenburg stockholders, are secured
by a pledge of the Ladenburg stock.
The actual number of shares of common stock may be further increased
and the conversion prices of the senior convertible notes may be further
decreased on or about May 7, 2003, pending a final resolution of LTS's
pre-closing litigation adjustments.
The transaction has been accounted for under the purchase method of
accounting as a reverse acquisition. For accounting purposes, Ladenburg has been
treated as the acquirer of LTS as Ladenburg's stockholders held a majority of
the LTS common stock following the closing of the transaction. As of May 7,
2001, LTS is accounted for as a consolidated subsidiary of New Valley.
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 September 30, 2001, there were approximately 318
individual suits, 38 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 2000,
an action against cigarette manufacturers involving approximately 1,250 named
individual plaintiffs was consolidated before a single West Virginia state
court. Liggett is a defendant in most of the cases pending in West Virginia.
Approximately 38 other purported class action complaints have been filed against
the cigarette manufacturers for alleged antitrust violations. As new cases are
commenced, the costs associated with defending these cases and the risks
relating to the inherent unpredictability of litigation continue to increase.
An unfavorable verdict was returned in the first phase of the Engle
smoking and health class action trial pending in Florida. In July 2000, the jury
awarded $790,000 in punitive damages against Liggett in the second phase of the
trial, and the court entered an order of final judgment. Liggett intends to
pursue all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it will
have a material adverse effect on Vector. Liggett has filed the $3,450 bond
required under recent Florida legislation which limits the size of any bond
required, pending appeal, to stay execution of a
-34-
punitive damages verdict. On May 7, 2001, Liggett reached an agreement with the
class in the Engle case, which will provide assurance to Liggett that the stay
of execution, currently in effect under the Florida bonding statute, will not be
lifted or limited at any point until completion of all appeals, including to the
United States Supreme Court. As required by the agreement, Liggett paid $6,273
into an escrow account to be held for the benefit of the Engle class, and
released, along with Liggett's existing $3,450 statutory bond, to the court for
the benefit of the class upon completion of the appeals process, regardless of
the outcome of the appeal. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the Engle
case. Management cannot predict the cash requirements related to any future
settlements and judgments, including cash required to bond any appeals, and
there is a risk that those requirements will not be able to be met.
In recent years, there have been a number of restrictive regulatory
actions from various Federal administrative bodies, including the United States
Environmental Protection Agency and the Food and Drug Administration. There have
also been adverse political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of
third-party payor actions. These developments generally receive widespread media
attention. 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
smoking-related litigation. See Part II, Item 1, "Legal Proceedings" and Note 11
to Vector's consolidated financial statements for a description of legislation,
regulation and litigation.
RESULTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
- --------
Liggett...................... $193,881 $149,190 $511,550 $394,652
Liggett-Ducat(1)............. -- 17,933 -- 107,263
-------- -------- -------- --------
Total tobacco............. 193,881 167,123 511,550 501,915
Broker-dealer(2)............. 18,297 13,009 58,593 61,605
Real estate(3)............... 2,538 778 7,604 2,369
-------- -------- -------- --------
Total revenues............ $214,716 $180,910 $577,747 $565,889
======== ======== ======== ========
Operating income:
- ----------------
Liggett...................... $ 33,592 $ 24,878 $ 76,435 $ 49,568
Liggett-Ducat(1)............. -- 55 -- 1,998
Vector Tobacco............... (10,574) (2,777) (21,790) (5,971)
-------- -------- -------- --------
Total tobacco............. 23,018 22,156 54,645 45,595
Broker-dealer(2)............. (8,412) 80 (12,464) 5,126
Real estate(3)............... (166) (1,114) (796) (5,210)
Corporate and other(3)....... (5,852) (13,770) (16,290) (18,236)
-------- -------- -------- --------
Total operating income.... $ 8,588 $ 7,352 $ 25,095 $ 27,275
======== ======== ======== ========
- ----------------
(1) Liggett-Ducat's revenues and operating income are included
through July 31, 2000.
(2) The acquired operations of LTS are included in the Company's
results of operations commencing May 7, 2001.
-35-
(3) New Valley's interest in Western Realty Development is
included in real estate operations for the 2001 periods and in
corporate and other for the 2000 periods when it was accounted
for on the equity method.
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Total revenues were $214,716 for the three months ended
September 30, 2001 compared to $180,910 for the three months ended September 30,
2000. This $33,806 or 18.7% increase in revenues was due to a $44,691 or 30.0%
increase in revenues at Liggett, an increase of $5,288 in broker-dealer revenues
and an increase of $1,760 in real estate revenues offset by the absence of
Liggett-Ducat revenues ($17,933 in the prior three-month period) due to the sale
of Western Tobacco Investments on August 4, 2000.
Tobacco Revenues. During 2000, the major cigarette manufacturers,
including Liggett, announced list price increases of $3.30 per carton. In April
2001, the major cigarette manufacturers, including Liggett, announced list price
increases of $1.40 per carton. In October 2001, the major cigarette
manufacturers, including Liggett, announced list price increases of $0.50 per
carton.
Total tobacco revenues were $193,881 for the three months ended
September 30, 2001 compared to $167,123 for the three months ended September 30,
2000. This $26,758 or 16.0% increase in revenues was due to an increase in
tobacco revenues at Liggett offset by the absence of revenues at Liggett-Ducat
due to the sale of Western Tobacco Investments in August 2000. Revenues at
Liggett increased by 30.0% ($44,691) for both the premium and discount segments
due to a 42.2% increase in unit sales volume (approximately 724.9 million
units), accounting for a $62,898 in positive volume variance, and price
increases of $8,178, partially offset by $26,385 in unfavorable sales mix.
Premium sales at Liggett for the third quarter of 2001 amounted to
$31,100 and represented 16.0% of Liggett's total sales, compared to $14,380 and
9.6% of total sales in the third quarter of 2000. In the premium segment,
revenues grew by 116.3% ($16,720) for the three months ended September 30, 2001,
compared to the prior year period, due to favorable volume variance in the third
quarter of 2001 of $12,828, reflecting an 89.2% increase in unit sales volume
(approximately 117.4 million units) corresponding with the Jade and Eve 100
product introductions in this quarter and to price increases of $3,892.
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 September 30, 2001 amounted to
$162,781 and represented 84.0% of Liggett's total sales, compared to $134,810
and 90.4% of total sales for the three months ended September 30, 2000. In the
discount segment, revenues grew by 20.7% ($27,971) for the three months ended
September 30, 2001 compared to the prior year period, due to a 38.3% increase in
unit sales volume (approximately 607.5 million units), accounting for $51,579 in
positive volume variance and to price increases of $4,286, partially offset by
an unfavorable product mix among the discount brand categories of $27,894.
For the three months ended September 30, 2001, fixed manufacturing
costs at Liggett on a basis comparable to the same period in 2000 were $50 lower
with costs of $1.99 per thousand units in the 2001 period, declining 27.1% over
costs of $2.73 in the prior year period against a 38.5% increase in production
volume. On a per-thousand-unit basis, fixed payroll expense and indirect labor
of $1.17 declined from $1.31 in the prior year period while fixed non-payroll
expenses declined to $0.82 from $1.42 in the prior year period with the
relocation of Liggett's manufacturing facility to Mebane, NC.
-36-
Tobacco Gross Profit. Tobacco gross profit was $125,490 for the three
months ended September 30, 2001 compared to $108,261 for the three months ended
September 30, 2000, an increase of $17,229 or 15.9% when compared to the same
period last year, reflecting an increase in gross profit at Liggett of $19,387
offset by the absence of Liggett-Ducat due to the sale of Western Tobacco
Investments. For the three months ended September 30, 2001, Liggett's premium
brands contributed 19.2% and discount brands contributed 80.8% to the Company's
gross tobacco profit. Over the same period in 2000, Liggett's premium brands
contributed 9.8%, Liggett's discount brands contributed 87.6% and Liggett-Ducat
contributed 2.5% to the Company's gross profit.
Gross profit at Liggett of $125,340 for the three months ended
September 30, 2001 increased $19,837 from gross profit of $105,503 for the third
quarter of 2000, due primarily to the price increases and manufacturing
efficiencies discussed above. As a percent of revenues (excluding federal excise
taxes), gross profit at Liggett decreased to 82.3% for the three months ended
September 30, 2001 compared to 87.5% for the same period in 2000, with gross
profit for the premium segment at 89.6% in the 2001 period compared to 88.0% in
the 2000 period. Gross profit for the discount segment decreased 80.7% for the
three months ended September 30, 2001 compared to 87.5% for the three months
ended September 30, 2000. This decrease is primarily due to the inclusion of the
payment obligation under the Master Settlement Agreement ("MSA") in cost of
goods sold which is based on management's estimate of current sales volume.
Broker-Dealer and Real Estate Revenues. For the three months ended
September 30, 2001, Ladenburg's revenues were $18,297 and real estate revenues
were $2,538 compared to revenues of $13,009 at Ladenburg and $778 from real
estate activities for the three months ended September 30, 2000. Ladenburg's
revenues increased due to the inclusion of the results of LTS acquired on May 7,
2001. Revenues from real estate increased primarily due to the inclusion of
rental revenue of $2,067 from Western Realty Development offset by lower
revenues as a result of the sale of one of New Valley's two U.S. shopping
centers.
Expenses. Operating, selling, general and administrative expenses were
$137,737 for the three months ended September 30, 2001 compared to $114,696 for
the same period last year, an increase of $23,041 primarily due to increased
expenses at Liggett of $11,123, increased expenses at Vector Tobacco of $7,797,
an increase of $8,812 at New Valley and an increase in corporate of $4,650
partially offset by the absence of expenses at Liggett-Ducat. The increase in
operating expenses at Liggett was due primarily to higher spending for
promotional and marketing programs. Expenses at Vector Tobacco for the three
months ended September 30, 2001 were $10,574 compared to expenses of $2,777 in
the prior year period. The increase at Vector Tobacco was due to increased
expenses of product development and marketing for the planned new products, Omni
and Omni Nicotine Free. Increased expenses at New Valley were due primarily to
increases in brokerage and clearing expense and increased compensation
associated with the acquired operations of LTS.
Other Income (Expenses). For the three months ended September 30, 2001,
other expense was $3,007 compared to income of $247,299 for the period ended
September 30, 2000. Expense in the 2001 period consisted primarily of interest
expense of $5,603 offset by interest and dividend income of $3,558. Income in
the 2000 period consisted primarily of the gain of $193,077 recognized by the
Company on the sale of Western Tobacco Investments and the income of $52,427
recognized on the sale by New Valley through its joint venture, Western Realty
Development.
Income from Continuing Operations. The income from continuing
operations for the three months ended September 30, 2001 was $7,369 compared to
income of $158,689 for the three months ended September 30, 2000 and includes
income tax expense of $3,391 and minority interests in losses of subsidiaries of
$5,179 for the third quarter of 2001 compared to taxes of $76,539 and minority
interests in income of subsidiaries of $19,423 for the for the third quarter of
2000. The effective tax rates for the three months ended September 30, 2001 and
-37-
September 30, 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.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended September 30,
2000
Revenues. Total revenues were $577,747 for the nine months ended
September 30, 2001 compared to $565,889 for the nine months ended September 30,
2000. This 2.1% ($11,858) increase in revenues was due to a $116,898 or 29.6%
increase in revenues at Liggett and an increase of $2,223 in revenues from New
Valley offset by the loss in revenues of Liggett-Ducat ($107,263 in the prior
year period) due to the sale of Western Tobacco Investments on August 4, 2000.
Tobacco Revenues. Tobacco revenues at Liggett increased for both the
premium and discount segments due to a 38.0% ($149,945) gain in unit sales
volume (approximately 1,724.6 million units) and to price increases of $22,914,
discussed above, offset by $55,961 in unfavorable sales mix.
Premium sales at Liggett for the nine months ended September 30, 2001
amounted to $67,199 and represented 13.1% of total Liggett sales, compared to
$44,910 and 11.4% of total sales for the same period in 2000. In the premium
segment, revenues increased by 49.6% ($22,289) over the nine months ended
September 30, 2001, compared to the same period in 2000, due to a favorable
volume variance of $14,550, reflecting a 32.4% increase in unit sales volume
(approximately 134.0 million units), helped by the rollouts of Jade and Eve 100
in the third quarter, along with price increases of $7,739.
Liggett's discount sales over the nine-month period in 2001 amounted to
$444,351 and represented 86.9% of total Liggett sales, compared to $349,742 and
88.6% of total Liggett sales for the same period in 2000. In the discount
segment, revenues grew by 27.1% ($94,609) over the nine months ended September
30, 2001 compared to the same period in 2000, due to a 38.6% gain in unit sales
volume (approximately 1,590.6 million units) accounting for $134,844 in positive
volume variance and price increases of $15,175, partially offset by an
unfavorable product mix of $55,410.
For the nine months ended September 30, 2001, fixed manufacturing costs
on a basis comparable to the same period in 2000 were $372 lower with costs per
thousand units of $1.78 per thousand which declined by $0.84 (32.1%) from the
previous period's $2.62, concurrent with a 43.1% increase in production volume.
On a per-thousand unit basis, fixed payroll expense and indirect labor of $0.94
for the nine-month period ended September 30, 2001 decreased from $1.18 in the
prior year (20.3%), while fixed non-payroll expenses declined to $0.85 from
$1.44 in the prior year period (41.0%) with the relocation of the Liggett
manufacturing facility to Mebane, NC.
Tobacco Gross Profit. Gross profit was $345,776 for the nine months
ended September 30, 2001 compared to $288,911 for the nine months ended
September 30, 2000, an increase of $56,865 or 19.7% when compared to the same
period last year, due primarily to volume and price increases and manufacturing
efficiencies at Liggett offset by the absence of Liggett-Ducat due to its sale
discussed above. Liggett's premium brands contributed 15.1% to the Company's
gross profit and the discount segment contributed 84.9% for the nine months
ended September 30, 2001. Over the same period in 2000, Liggett's premium brands
contributed 11.4%, the discount segment contributed 83.3% and Liggett-Ducat
contributed 5.3%.
Liggett's gross profit of $345,326 for the nine months ended September
30, 2001 increased $71,794 from gross profit of $273,532 for the same period in
2000. As a percent of revenues (excluding federal excise taxes), gross profit at
Liggett decreased to 85.1% for the nine months
-38-
ended September 30, 2001 compared to 85.6% for the same period in 2000, with
gross profit for the premium segment at 89.9% and 86.7% in the nine months ended
September 30 of 2001 and 2000, respectively, and gross profit for the discount
segment at 84.3% and 85.5% in 2001 and 2000, respectively. This overall decrease
is due to the inclusion in cost of goods sold of the payment obligation under
the MSA based on management's estimate of current sales volume and the steep
rise in sales of Liggett Select, a deep-discount brand.
Broker-Dealer and Real Estate Revenues. New Valley's broker-dealer
revenues were $58,593 and real estate revenues were $7,604 for the nine months
ended September 30, 2001. This compares to revenues in the 2000 period of
$61,605 at Ladenburg and $2,369 from real estate activities.
Expenses. Operating, selling, general and administrative expenses were
$386,878 for the nine months ended September 30, 2001 compared to $325,610 for
the prior year period. The increase of $61,268 was due primarily to a $35,090
increase in expenses at Liggett, a $15,819 increase in expenses at Vector
Tobacco and additional expenses of $9,541 at New Valley offset by the absence of
expenses of Liggett-Ducat due to the sale of Western Tobacco Investments. The
increase in operating expenses at Liggett was due primarily to higher spending
for promotional and marketing programs. Expenses at Vector Tobacco for the nine
months ended September 30, 2001 were $21,790, compared to expenses of $5,971 for
the prior year period. The increase at Vector Tobacco was due to increased
expenses of product development and marketing for Vector Tobacco's planned new
Omni and Omni Nicotine Free products . Increased expenses at New Valley were due
primarily to increased brokerage and clearing expenses offset by decreased
employee compensation expense and to inclusion of expenses from Western Realty
Development offset by lower expenses as a result of the sale of the shopping
center and lower expenses for BrookeMil.
For the nine months ended September 30, 2001, Liggett operating income
was reduced by $9,723 of expense relating to the Engle class action. As
discussed in Note 11 to Vector's consolidated financial statements, on May 7,
2001, Liggett reached an agreement with the class in the Engle case, which will
provide assurance to Liggett that the stay of execution, currently in effect
pursuant to the Florida bonding statute, will not be lifted or limited at any
point until completion of all appeals, including to the United States Supreme
Court. As required by the agreement, Liggett paid $6,273 into an escrow account
to be held for the benefit of the Engle class, and released, along with
Liggett's existing $3,450 statutory bond, to the court for the benefit of the
class upon completion of the appeals process, regardless of the outcome of the
appeal. As a result, Vector recorded a $9,723 pre-tax charge to the consolidated
statement of operations for the first quarter of 2001.
Other Income (Expenses). Other income was $107 for the nine months ended
September 30, 2001 compared to other income of $233,138 for the nine months
ended September 30, 2000. Interest and dividend income of $7,777 and a gain on
sales of assets of $2,187 were offset primarily by interest expense. For the
nine months ended September 30, 2000, the Company recognized a gain of $193,077
on the sale of Western Tobacco Investments and New Valley recognized $52,512 on
the sale through its interest in the joint venture, Western Realty Development.
Interest expense was $9,134 for the nine months ended September 30, 2001
compared to $29,643 for the same period in the prior year. The overall decrease
of $20,509 was largely due to the repurchase of all of the VGR Holding 15.75%
senior secured notes in 2000.
Income from Continuing Operations. The income from continuing
operations for the nine months ended September 30, 2001 was $20,891 compared to
income of $162,281 for the nine months ended September 30, 2000. Income tax
expense was $13,410 and minority interests in losses of subsidiaries were $9,099
for the nine months ended September 30, 2001. This
-39-
compared to tax expense of $78,853 and minority interests in income of
subsidiaries of $19,279 for the nine months ended September 30, 2000. The
effective tax rates for the nine months ended September 30, 2001 and September
30, 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 increased $76,994 for the nine months
ended September 30, 2001 and increased $133,171 for the nine months ended
September 30, 2000. Net cash provided by operations for the nine months ended
September 30, 2001 was $14,753 compared to net cash used in operations of
$11,042 for the comparable period of 2000. Cash provided by operations for the
nine months ended September 30, 2001 resulted primarily from increased net
income at Liggett offset by product development costs at Vector Tobacco and a
loss at New Valley. Cash used in the 2000 period for operating activities
resulted principally from lower net income at Liggett and Liggett-Ducat and a
gain on the sale of securities at New Valley offset by a reduction in debt
service due to the Company's repurchase of $150,294 of the VGR Holding senior
secured notes.
Cash used in investing activities of $185,989 compares to cash provided
of $307,171 for the nine months ended September 30, 2001 and 2000, respectively.
For the nine months ended September 30, 2001, cash was used primarily for
investment in debt securities at Vector of $151,129 and investment in equity
securities at New Valley 8,252 and for capital expenditures, including purchase
of real estate, of $51,003, principally at Vector Tobacco. In addition, there
was a purchase of long-term investments of $5,747. These expenditures were
offset primarily by $8,599 of sales of businesses and assets including the
proceeds from the sale of one of New Valley's shopping centers, sales at Liggett
of a warehouse facility, machinery and equipment, the sale or maturity of
investments of $10,634 and cash acquired in the acquisition by New Valley of LTS
of $5,151. For the nine months ended September 30, 2000, the majority of the
proceeds, $366,125. were attributable to the sale of Western Tobacco Investments
and the sale or maturity of investment securities. This was offset primarily by
capital expenditures at Liggett of $11,902, Liggett-Ducat of $14,394 and New
Valley of $3,008 and the purchase of investment securities at New Valley of
$24,059.
Cash provided by financing activities was $248,230 for the nine months
ended September 30, 2001 compared to cash used of $162,848 for the nine months
ended September 30, 2000. In the 2001 period, proceeds from debt were $268,970
offset by repayments on debt of $22,368 and net repayments on the revolving
credit facilities of $19,374. In addition, cash was provided by the issuance of
common stock of $50,000 as well as the exercise of warrants and options of
$16,042. This was offset by distributions on common stock of $34,024, deferred
financing charges of $9,201 and decreases of $2,028 in margin loans payable.
Cash in the 2000 period was used primarily to redeem all outstanding VGR Holding
notes and to repay the participating loan and amounts related to the sale of
Western Tobacco Investments to Western Realty Development. In addition,
distributions on common stock were $20,249.
Liggett. Liggett has a $35,000 credit facility under which $0 was
outstanding at September 30, 2001. Availability under the facility was
approximately $29,003 based on eligible collateral at September 30, 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 7.5% at September 30, 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
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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 September 30, 2001, Liggett
was in compliance with all covenants under the credit facility; Liggett's
adjusted net worth was $31,720 and net working capital was $24,648, 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. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $6,090 was outstanding at
September 30, 2001. In addition, the lender extended the term of the loan so
that it is payable in 59 monthly installments of $75 including annual interest
at 1% above the prime rate with a final payment of $1,875. 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. The loan, which was collateralized by the equipment
and guaranteed by VGR Holding and the Company, was payable in 60 monthly
installments of $56 including annual interest of 7.67% with a final payment of
$2,550. The loan was repaid in July 2001 in connection with the sale of the
equipment. In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment for
$1,071 under two capital leases which are payable in 60 monthly installments of
$22 with an effective interest rate of 10.20%.
Liggett (and, in certain cases, Brooke Group Holding, Vector's
predecessor and a wholly-owned subsidiary of VGR Holding) and other United
States cigarette manufacturers have been named as defendants in a number of
direct and third-party actions (and purported class actions) predicated on the
theory that they should be liable for damages from cancer and other adverse
health effects alleged to have been caused by cigarette smoking or by exposure
to so-called secondary smoke from cigarettes. Vector 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 will have a material adverse effect on Vector. Liggett
has filed the $3,450 bond required under recent Florida legislation which limits
the size of any bond required, pending appeal, to stay execution of a punitive
damages verdict. On May 7, 2001, Liggett reached an agreement with the class in
the Engle case, which will provide assurance to Liggett that the stay of
execution, currently in effect pursuant to the Florida bonding statute, will not
be lifted or limited at any point until completion of all appeals, including to
the United States Supreme Court. As required by the agreement, Liggett paid
$6,273 into an escrow account to be held for the benefit of the Engle class, and
released, along with Liggett's existing $3,450 statutory bond, to the court for
the benefit of the class upon completion of the appeals process, regardless of
the outcome of the appeal. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the Engle
case. Management cannot predict the cash requirements related to any future
settlements and judgments, including cash required to bond any appeals, and
there is a risk that those requirements will not be able to be met. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement
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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 Vector 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 Vector'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 Vector'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. In February 2001, a subsidiary of Vector Research Ltd.
purchased equipment for $15,500 and borrowed $13,175 to fund the purchase, of
which $12,933 was outstanding at September 30, 2001. The loan, which is
collateralized by the equipment and a ~letter of credit from Vector for $775, is
guaranteed by Vector Research, VGR Holding and Vector. The loan is payable in
120 monthly installments of $125 including annual interest of 7.78% with a final
payment of $6,125.
Vector Tobacco. In June 2001, Vector Tobacco purchased for $8,400 an
industrial facility in Roxboro, North Carolina. Vector Tobacco financed the
purchase with an $8,200 loan, of which $8,030 was outstanding at September 30,
2001. The loan is payable in 60 monthly installments of $85, including annual
interest at 4.85% above the LIBOR rate, with a final payment of approximately
$3,160. The loan, which is collateralized by a mortgage and a letter of credit
of $1,750, is guaranteed by VGR Holding and Vector.
VGR Holding. On May 14, 2001, VGR Holding issued at a discount $60,000
principal amount of 10% senior secured notes due March 31, 2006 in a private
placement. VGR Holding received net proceeds from the offering of approximately
$46,500.
The notes are collateralized by substantially all of VGR Holding's
assets, including a pledge of VGR Holding's equity interests in its direct
subsidiaries, including Brooke Group Holding, Brooke (Overseas), Vector Tobacco
and New Valley Holdings, Inc., as well as a pledge of the shares of Liggett and
all of the New Valley securities held by VGR Holding and New Valley Holdings.
The purchase agreement for the notes contains covenants, which among other
things, limit the ability of VGR Holding to make distributions to Vector to 50%
of VGR Holding's net income, unless VGR Holding holds $50,000 in cash after
giving effect to the payment of the distribution, limit additional indebtedness
of VGR Holding, Liggett and Vector Tobacco to 250% of EBITDA (as defined in the
purchase agreement) for the trailing 12 months, restrict transactions with
affiliates subject to exceptions which include payments to Vector not to exceed
$9,500 per year for permitted operating expenses, and limit the ability of VGR
Holding to merge, consolidate or sell certain assets.
Prior to May 24, 2003, VGR Holding may redeem up to $21,000 of the
notes at a redemption price of 105% of the accreted value with proceeds from one
or more equity offerings. VGR Holding may redeem the notes, in whole or in part,
at a redemption price of 103% of accreted value in the year beginning May 14,
2003, 102% of accreted value in the year beginning May 14, 2004 and 100% of
accreted value after May 14, 2005. During the term of the notes, VGR Holding is
required to offer to repurchase all the notes at a purchase price of 101% of
accreted value, in the event of a change of control, and to offer to repurchase
notes, at the redemption prices, with the proceeds of material asset sales.
Vector. Vector 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 $17,000, dividends on Vector's
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shares (currently at an annual rate of approximately $51,000) and corporate
expenses. Vector 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.
During the second and third quarters of 2001, Vector issued
approximately 4,600,000 shares of its common stock in connection with the sale
of common stock to an investment entity owned by Carl C. Icahn and on exercise
of warrants and options by other persons and entities. Vector received proceeds
of approximately $66,500 from these issuances of common stock.
In July 2001, Vector completed the sale of $172,500 of its 6.25%
Convertible Subordinated Notes due 2008. Vector intends to use the net proceeds
of the offering of notes, together with the proceeds from the placement of VGR
Holding's senior secured notes and the $50 million investment in Vector's common
stock by an entity owned by Mr. Icahn, for general corporate purposes, including
the funding of the planned advertising and promotion of Vector Tobacco's new
OMNI and OMNI Nicotine Free cigarette products and the pursuit of strategic
acquisitions by Liggett of smaller tobacco manufacturers.
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.
Current and proposed underwriting, corporate finance, merchant banking
and other commitments at LTS are subject to due diligence reviews by LTS'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. LTS
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. LTS maintained inventories of trading securities at
September 30,
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2001 with fair values of $8,724 in long positions and $2,283 in short positions.
LTS 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 LTS's financial instruments at
September 30, 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
$20,975 at September 30, 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 Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Vector adopted
SFAS No. 133 on January 1, 2001, the effect of which did not have a material
impact on its balance sheet since Vector is not engaged in significant hedging
activities.
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives", EITF Issue No. 00-14 addresses the
recognition, measurement and statement of operations classification for certain
sales incentives and will be effective in the first quarter of 2002. As a
result, certain items previously included in operating, selling, general and
administrative expense in the consolidated statement of operations will be
recorded as a reduction of operating revenues. Vector 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.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF Issue No. 00-25 requires that certain expenses included
in operating, selling, administrative and general expenses be recorded as a
reduction of operating revenues and will be effective in the first quarter of
2002. The Company is currently in the process of determining the impact of EITF
Issue No. 00-25 which is expected to result in a significant reduction of
revenues.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative
goodwill to be written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001, and SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. The
Company is currently assessing the impact, if any, of the adoption of these
statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i)
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the recognition and measurement of the impairment of long-lived assets to be
held and used and (ii) the measurement of long-lived assets to be disposed of by
sale. SFAS No. 144 is effective for fiscal years beginning after December 15,
2001. The Company is currently assessing the impact, if any, on the adoption of
this statement.
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
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
Company's consolidated financial statements included elsewhere in this
Report on Form 10-Q which contains a general description of certain
legal proceedings to which Brooke Group Holding, VGR Holding, New
Valley or their subsidiaries are a party and certain related matters.
Reference is also made to Exhibit 99.1 for additional information
regarding the pending smoking-related material legal proceedings to
which Brooke Group Holding 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 September 30, 2001, except for
(i) the private offering of 6.25% convertible subordinated notes due
2008 to qualified institutional investors pursuant to Rule 144A under
the Securities Act of 1933, (ii) the grants of stock options to
employees of the Company and/or its subsidiaries as described in Note
10 to the Company's consolidated financial statements and (iii) the
issuance of shares in connection with the Company's 5% stock dividend
paid on September 28, 2001. The grants of stock options were effected
in reliance on the exemption from registration afforded by Section
4(2) of the Securities Act of 1933 and the issuance of the shares in
connection with the stock dividend did not involve a "sale" under the
Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
* 10.1 Indenture, dated as of July 5, 2001, between Vector Group Ltd. and U.S. Bank Trust National
Association, as Trustee, relating to the 6.25% Convertible Subordinated Notes due
2008 (the "Notes"), including the form of Note (incorporated by reference to Exhibit
10.1 in the Company's Form 8-K dated July 16, 2001).
* 10.2 Registration Rights Agreement, dated as of July 5, 2001, by and between Vector Group
Ltd. and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.2
in the Company's Form 8-K dated July 16, 2001).
10.3 First Amendment to Collateral Agency Agreement, dated as of September 4, 2001,
by and among VGR Holding Inc., Brooke Group Holding Inc., Vector Group Ltd., New Valley
Holdings, Inc. and The Bank of New York, as collateral agent.
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10.4 First Amendment to Note Purchase Agreement, dated as of November 6, 2001, by and
between VGR Holding Inc. and TCW Leveraged Income Trust, L.P., TCW Leveraged Income
Trust II, L.P., TCW Linc III CBO, Ltd., AIMCO CDO, Series 2000-A, POWRs 1997-2 and
Captiva II Finance Ltd.
99.1 Material Legal Proceedings.
* 99.2 New Valley Corporation's Interim Consolidated Financial Statements for the
quarterly periods ended September 30, 2001 and 2000 (incorporated by reference to New
Valley's Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2001, Commission File No. 1-2493).
- ---------
* Incorporated by reference
(b) Reports on Form 8-K
The Company filed the following Reports on Form 8-K during the third
quarter of 2001:
FINANCIAL
DATE ITEMS STATEMENTS
---- ----- ----------
July 2, 2001 5, 7 None
July 16, 2001 5, 7 None
July 25, 2001 5, 7 None
August 22, 2001 5, 7 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 and Chief
Financial Officer
Date: November 14, 2001
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