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Securities And Exchange Commission
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
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VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 65-0949535
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
At May 14, 2002, Vector Group Ltd. had 33,257,284 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 March 31, 2002 and
December 31, 2001............................................................................. 2
Vector Group Ltd. Consolidated Statements of Operations for the three months
ended March 31, 2002 and March 31, 2001....................................................... 3
Vector Group Ltd. Consolidated Statement of Stockholders' Equity for the three
months ended March 31, 2002................................................................... 4
Vector Group Ltd. Consolidated Statements of Cash Flows for the three months ended
March 31, 2002 and March 31, 2001............................................................. 5
Notes to Consolidated Financial Statements.......................................................... 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................................. 26
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................... 37
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................................................. 38
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS...................................................... 38
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... 38
SIGNATURE.............................................................................................. 40
-1-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
March 31, December 31,
2002 2001
--------- ------------
ASSETS:
Current assets:
Cash and cash equivalents .............................................. $ 175,824 $ 217,761
Investment securities available for sale ............................... 174,440 173,697
Accounts receivable - trade ............................................ 11,597 34,380
Other receivables ...................................................... 4,093 1,234
Inventories ............................................................ 82,304 53,194
Restricted assets ...................................................... 3,204 20,054
Deferred income taxes .................................................. 5,535 6,294
Other current assets ................................................... 8,191 9,113
--------- ---------
Total current assets ................................................. 465,188 515,727
Property, plant and equipment, net ....................................... 122,733 102,185
Long-term investments, net ............................................... 10,044 10,044
Restricted assets ........................................................ 1,881 1,881
Deferred income taxes .................................................... 10,417 9,778
Other assets ............................................................. 49,431 49,288
--------- ---------
Total assets ......................................................... $ 659,694 $ 688,903
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of notes payable and long-term debt .................... $ 5,818 $ 4,808
Accounts payable ....................................................... 12,301 16,192
Accrued promotional expenses ........................................... 11,837 20,634
Accrued taxes payable .................................................. 24,172 33,992
Settlement accruals .................................................... 31,023 29,299
Deferred income taxes .................................................. 759 759
Accrued interest ....................................................... 2,998 6,799
Prepetition claims and restructuring accruals .......................... 2,693 2,700
Other accrued liabilities .............................................. 27,287 26,362
--------- ---------
Total current liabilities ............................................ 118,888 141,545
Notes payable, long-term debt and other obligations, less current portion 232,388 214,273
Noncurrent employee benefits ............................................. 15,205 14,749
Deferred income taxes .................................................... 133,640 132,528
Other liabilities ........................................................ 11,866 16,294
Minority interests ....................................................... 56,831 56,156
Commitments and contingencies ............................................
Stockholders' equity:
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 37,649,720 and outstanding 33,257,284 ................. 3,325 3,317
Additional paid-in capital ............................................. 299,192 309,849
Deficit ................................................................ (194,508) (182,645)
Accumulated other comprehensive income ................................. 1,200 1,170
Less: 4,392,436 shares of common stock in treasury, at cost ........... (18,333) (18,333)
--------- ---------
Total stockholders' equity ......................................... 90,876 113,358
--------- ---------
Total liabilities and stockholders' equity ......................... $ 659,694 $ 688,903
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
-------------------------------
March 31, March 31,
2002 2001
------------ ------------
Revenues:
Tobacco* ...................................................... $ 96,758 $ 75,042
Real estate leasing ........................................... 424 2,641
------------ ------------
Total revenues .............................................. 97,182 77,683
Expenses:
Cost of goods sold* ........................................... 61,002 40,764
Operating, selling, administrative and general expenses ....... 52,039 25,983
Settlement charges ............................................ (807) 9,765
------------ ------------
Operating (loss) income ..................................... (15,052) 1,171
Other income (expenses):
Interest and dividend income .................................. 2,820 2,182
Interest expense .............................................. (5,385) (1,258)
Gain on sale of investments, net .............................. 1,321 465
(Loss) gain on sale of assets ................................. (344) 1,492
Other, net .................................................... (157) 14
------------ ------------
(Loss) income from continuing operations before provision for income
taxes and minority interests ................................ (16,797) 4,066
(Benefit) provision for income taxes .......................... (4,262) 2,145
Minority interests ............................................ (672) (706)
------------ ------------
(Loss) income from continuing operations .......................... (11,863) 2,627
------------ ------------
Discontinued operations:
Loss from discontinued operations ................................. -- (97)
------------ ------------
Net (loss) income ................................................. $ (11,863) $ 2,530
============ ============
Per basic common share:
(Loss) income from continuing operations ...................... $ (0.36) $ 0.10
============ ============
Loss from discontinued operations ............................. -- (0.01)
Net (loss) income applicable to common shares ................. $ (0.36) $ 0.09
============ ============
Basic weighted average common shares outstanding .................. 33,242,737 26,950,369
============ ============
Per diluted common share:
(Loss) income from continuing operations ...................... $ (0.36) $ 0.08
============ ============
Loss from discontinued operations ............................. -- --
Net (loss) income applicable to common shares ................. $ (0.36) $ 0.08
============ ============
Diluted weighted average common shares outstanding ................ 33,242,737 31,449,587
============ ============
- ---------
* Revenues and Cost of goods sold include excise taxes of $38,444 and $27,124
for the three months ended March 31, 2002 and 2001, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Common Stock Additional Other
------------------------- Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Income Total
-------------- ----------- ---------- -------------- --------- -------------- -----------
Balance, December 31, 2001 ............... 33,171,847 $ 3,317 $ 309,849 $ (182,645) $ (18,333) $ 1,170 $ 113,358
Net loss.................................. -- -- -- (11,863) -- -- (11,863)
Unrealized gain on investment securities -- -- -- -- -- 30 30
----------
Total other comprehensive income ... -- -- -- -- -- -- 30
----------
Total comprehensive loss ................. -- -- -- -- -- -- (11,833)
----------
Distributions on common stock ............ -- -- (13,289) -- -- -- (13,289)
Exercise of options....................... 85,437 8 1,188 -- -- -- 1,196
Tax benefit of options exercised ......... -- -- 525 -- -- -- 525
Amortization of deferred compensation, net -- -- 919 -- -- -- 919
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance March 31, 2002 ................... 33,257,284 $ 3,325 $ 299,192 $ (194,508) $ (18,333) $ 1,200 $ 90,876
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended
---------------------
March 31, March 31,
2002 2001
--------- ---------
Net cash used in operating activities: ........... $ (17,995) $ (1,541)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net 1,822 11,981
Sale or maturity of investment securities ...... 3,040 3,166
Purchase of investment securities .............. -- (1,761)
Purchase of long-term investments .............. -- (300)
Purchase of real estate ........................ -- (565)
Increase (decrease) in restricted assets ....... (6) 2,556
Issuance of note receivable .................... (2,500) --
Repayment of note receivable ................... 1,000 --
Payment of prepetition claims .................. (7) (2,590)
New Valley purchase of common shares ........... -- (239)
Capital expenditures ........................... (22,897) (20,360)
--------- ---------
Net cash used in investing activities ............ (19,548) (8,112)
--------- ---------
Cash flows from financing activities:
Proceeds from debt ............................. 9,158 13,999
Repayments of debt ............................. (1,704) (10,610)
Borrowings under revolver ...................... 141,092 87,016
Repayments on revolver ......................... (141,092) (106,388)
Decrease in margin loan payable ................ -- (827)
Decrease in cash overdraft ..................... -- (42)
Distributions on common stock .................. (13,289) (10,267)
Proceeds from participating loan ............... -- 2,478
Proceeds from exercise of options and warrants . 1,441 --
--------- ---------
Net cash used in financing activities ............ (4,394) (24,641)
--------- ---------
Net cash used in discontinued operations ......... -- (3,089)
Net decrease in cash and cash equivalents ........ (41,937) (37,383)
Cash and cash equivalents, beginning of period ... 217,761 157,513
--------- ---------
Cash and cash equivalents, end of period ......... $ 175,824 $ 120,130
========= =========
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. ("VGR
Holding"), Vector Tobacco Inc. ("Vector Tobacco"), Liggett Group Inc.
("Liggett"), New Valley Corporation ("New Valley") and other less
significant subsidiaries. The Company owned 56.2% of New Valley's
common shares at March 31, 2002. All significant intercompany
balances and transactions have been eliminated.
Vector Tobacco is engaged in the development and marketing of new,
reduced carcinogen and nicotine-free cigarette products. Liggett is
engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. New Valley is currently engaged in
the real estate business through its New Valley Realty division and
is seeking to acquire additional operating companies.
As discussed more thoroughly in Note 7, New Valley's former
broker-dealer operations are presented for 2001 as discontinued
operations.
On April 1, 2002, a subsidiary of the Company acquired the stock of
The Medallion Company, Inc., and related assets from Medallion's
principal stockholder. The total purchase price consisted of $50,000
in cash and $60,000 in notes, with the notes guaranteed by the
Company and Liggett. Medallion, a discount cigarette manufacturer
headquartered in Richmond, Virginia, is a participant in the Master
Settlement Agreement ("MSA") between the state Attorneys General and
the tobacco industry. Medallion has no payment obligations under the
MSA unless its market share exceeds approximately 0.28% of total
cigarettes sold in the United States (approximately 1.15 billion
units in 2001).
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, 2001, as filed with the Securities and
Exchange Commission. The consolidated results of operations for
interim periods should not be regarded as necessarily indicative of
the results that may be expected for the entire year.
(b) ESTIMATES AND ASSUMPTIONS:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenues and
expenses. Significant estimates subject to material changes in the
-6-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 2001 consolidated financial statements have
been reclassified to conform to the 2002 presentation.
(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, 2001. In connection with the 5% dividend, the
Company increased the number of warrants and stock options by 5% and
reduced the exercise prices accordingly. All share amounts have been
presented as if the stock dividends had occurred on January 1, 2001.
The Company had a net loss for the three months ending March 31,
2002. Therefore, the effect of the common stock equivalents and
convertible securities is excluded from the computation of diluted
net loss per share since the effect is anti-dilutive for the three
months ended March 31, 2002.
(e) COMPREHENSIVE INCOME:
Comprehensive income is a component of stockholders' equity and
includes such items as the Company's proportionate interest in New
Valley's capital transactions, unrealized gains and losses on
investment securities and minimum pension liability adjustments.
Total comprehensive loss was $11,833 for the three months ended March
31, 2002 and total comprehensive income was $2,600 for the three
months ended March 31, 2001.
(f) NEW ACCOUNTING PRONOUNCEMENTS:
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 became 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 have been recorded as a
reduction of operating revenues. The Company has determined that the
impact of adoption and subsequent application of EITF Issue No. 00-14
did not have a material effect on its consolidated financial position
or results of operations. Upon adoption, prior period amounts, which
were not significant, have been 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
-7-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
and was effective in the first quarter of 2002. The financial
statements reflect adoption of this accounting treatment. For
comparative purposes, prior period amounts have been reclassified
from operating, selling, administrative, and general expenses to a
reduction of revenue. The adoption of EITF 00-25 did not impact the
Company's consolidated financial position, operating income, or net
income.
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.
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 adoption of this statement did
not have any impact on the Company's consolidated financial
statements.
2. LIGGETT VECTOR BRANDS
In March 2002, the Company announced that the sales and marketing
functions of its Liggett and Vector Tobacco subsidiaries will be combined
into a new entity, Liggett Vector Brands Inc. The newly formed company
will coordinate and execute the sales and marketing efforts for all of the
Company's tobacco operations. With the combined resources of Liggett and
Vector Tobacco, Liggett Vector Brands initially will have 350 salesmen,
and enhanced distribution and marketing capabilities. In connection with
the creation of the new Liggett Vector Brands entity, the Company took a
charge of $3,460 in the first quarter of 2002, related to a reorganization
of its business to eliminate redundant positions, consolidate sales and
marketing operations and integrate systems.
-8-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
3. INVENTORIES
Inventories consist of:
March 31, December 31,
2002 2001
-------- -------------
Leaf tobacco ........................... $ 38,961 $ 26,364
Other raw materials .................... 6,168 6,764
Work-in-process ........................ 3,774 2,263
Finished goods ......................... 31,312 15,317
Replacement parts and supplies ......... 3,235 3,040
-------- --------
Inventories at current cost ............ 83,450 53,748
LIFO adjustments ....................... (1,146) (554)
-------- --------
$ 82,304 $ 53,194
======== ========
At March 31, 2002, Liggett had leaf tobacco purchase commitments of
approximately $29,786 and Vector Tobacco had leaf tobacco purchase
commitments of approximately $2,422.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
March 31, December 31,
2002 2001
--------- -------------
Land and improvements .................. $ 2,252 $ 2,252
Buildings .............................. 24,310 23,035
Machinery and equipment ................ 109,961 81,396
Leasehold improvements ................. 1,093 1,451
Construction-in-progress ............... 17,838 27,464
--------- ---------
155,454 135,598
Less accumulated depreciation .......... (32,721) (33,413)
--------- ---------
$ 122,733 $ 102,185
========= =========
-9-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
5. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
March 31, December 31,
2002 2001
--------- --------------
Vector:
6.25% Convertible Subordinated Notes due 2008 ............ $ 132,500 $ 132,500
VGR Holding:
10% Senior Secured Notes due 2006, net of
unamortized discount of $8,796 and $9,242 ............. 51,204 50,758
Liggett:
Revolving credit facility ................................ -- --
Term loan under credit facility .......................... 5,640 5,865
Other notes payable ...................................... 10,653 7,748
New Valley:
Notes payable - shopping centers ......................... 11,203 --
Vector Research:
Equipment loans........................................... 18,169 12,724
Vector Tobacco:
Note payable ............................................. 7,431 8,847
Equipment loans........................................... 1,406 389
Other .................................................... -- 250
--------- ---------
Total notes payable, long-term debt and other obligations 238,206 219,081
Less:
Current maturities ................................. (5,818) (4,808)
--------- ---------
Amount due after one year ................................ $ 232,388 $ 214,273
========= =========
6.25% CONVERTIBLE SUBORDINATED NOTES DUE JULY 15, 2008 - VECTOR:
In July 2001, Vector completed the sale of $172,500 (net proceeds of
approximately $166,400) of its 6.25% convertible subordinated notes due
2008 through a private offering to qualified institutional investors in
accordance with Rule 144A under the Securities Act of 1933. The notes pay
interest at 6.25% per annum and are convertible into Vector's common
stock, at the option of the holder, at a conversion price of $33.26 per
share at March 31, 2002. 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. Following the
conversion of $40,000 principal amount of the convertible notes in
December 2001, $132,500 principal amount of the convertible notes were
outstanding.
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
-10-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
price of 103.125% in the year beginning July 15, 2004, 102.083% in the
year beginning July 15, 2005, 101.042% in the year beginning July 15, 2006
and 100% in the year beginning July 15, 2007, together with accrued
interest. If a change of control occurs, Vector will be required to offer
to repurchase the notes at 101% of their principal amount, plus accrued
interest and, under certain circumstances, a "make whole" payment.
10% SENIOR SECURED NOTES DUE MARCH 31, 2006 - VGR HOLDING:
On May 14, 2001, VGR Holding issued at a discount $60,000 principal amount
of 10% senior secured notes due March 31, 2006 in a private placement. VGR
Holding received net proceeds from the placement of approximately $46,500.
On April 30, 2002, VGR Holding issued at a discount an additional $30,000
principal amount of 10% senior secured notes due March 31, 2006 in a
private placement and received net proceeds of approximately $25,000. The
notes were priced to provide the purchasers with a 15.75% yield to
maturity. The new notes are on the same terms as the $60,000 principal
amount of senior secured notes previously issued. All $90,000 principal
amount of the notes have been guaranteed by the Company and by Liggett.
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) Ltd.,
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 agreements for the notes contain
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 $75,000 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
agreements) for the trailing 12 months plus an additional amount of up to
$75,000 during the 12 month period ending March 31, 2003, 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 14, 2003, VGR Holding may redeem up to $31,500 of the notes
at a redemption price of 100% of the principal amount with proceeds from
one or more equity offerings. VGR Holding may redeem the notes, in whole
or in part, at a redemption price of 100% of the principal amount
beginning May 14, 2003. During the term of the notes, VGR Holding is
required to offer to repurchase all the notes at a purchase price of 101%
of the principal amount, in the event of a change of control, and to offer
to repurchase notes, at 100% of the principal amount, with the proceeds of
material asset sales.
REVOLVING CREDIT FACILITY - LIGGETT:
Liggett has a $40,000 credit facility, under which $0 was outstanding at
March 31, 2002. Availability under the credit facility was approximately
$26,176 based on eligible collateral at March 31, 2002. The facility is
collateralized by all inventories and receivables of Liggett. Borrowings
under the facility, whose interest is calculated at a rate equal to 1.0%
above Philadelphia National Bank's (the indirect parent of Congress
Financial Corporation, the lead lender) prime rate, bore a rate of 5.75%
at March 31, 2002. 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
-11-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
facility, as amended, imposes requirements with respect to Liggett's
adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of
$17,000 as computed in accordance with the agreement). At March 31, 2002,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $41,347 and net working capital was
$25,229, as computed in accordance with the agreement. The facility
expires on March 8, 2003 subject to automatic renewal for an additional
year unless a notice of termination is given by the lender at least 60
days prior to the anniversary date.
In November 1999, 100 Maple LLC, a new company formed by Liggett to
purchase its Mebane, North Carolina facility, borrowed $5,040 from the
lender under Liggett's credit facility. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $5,640 was outstanding at
March 31, 2002. In addition, the lender extended the term of the loan so
that it is payable in 59 monthly installments of $75 with a final payment
of $1,875. Interest is charged at the same rate as applicable to Liggett's
credit facility, and borrowings under the Maple loan reduce the maximum
availability under the credit facility. Liggett has guaranteed the loan,
and a first mortgage on the Mebane property collateralizes the Maple loan
and Liggett's credit facility. Liggett completed the relocation of its
manufacturing operations to this facility in October 2000.
EQUIPMENT LOANS - LIGGETT:
In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment
for $1,071 under two capital leases which are payable in 60 monthly
installments of $22 with an effective interest rate of 10.20%.
In October and December 2001, Liggett purchased equipment for $3,204 and
$3,200, respectively, through capital lease arrangements guaranteed by the
Company, each payable in 60 monthly installments of $61 with interest
calculated at the prime rate.
In March 2002, Liggett purchased equipment for $3,023 through a capital
lease arrangement, payable in 30 monthly installments of $62 and then 30
monthly installments of $51 with an effective annual interest rate of
4.68%.
NOTE PAYABLE - VECTOR TOBACCO:
In June 2001, Vector Tobacco purchased for $8,400 an industrial facility
in Timberlake, North Carolina. Vector Tobacco financed the purchase with
an $8,200 loan, payable in 60 monthly installments of $85, including
annual interest at 4.85% above LIBOR with a final payment of approximately
$3,160. The loan, which is collateralized by a mortgage and a letter of
credit of $1,750, is guaranteed by VGR Holding and Vector.
During December 2001, Vector Tobacco executed a second promissory note
with the same lender for approximately $1,159 to finance building
improvements. The second promissory note is payable in 30 monthly
installments of $39 plus accrued interest, with an annual interest rate of
LIBOR plus 5.12%.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
EQUIPMENT LOANS - VECTOR RESEARCH:
In February 2001, a subsidiary of Vector Research Ltd. purchased equipment
for $15,500 and borrowed $13,175 to fund the purchase. The loan, which is
collateralized by the equipment and a letter of credit from the Company
for $775, is guaranteed by Vector Research, VGR Holding and the Company.
The loan is payable in 120 monthly installments of $125, including annual
interest of 2.31% above the 30-day commercial paper rate with a final
payment of $6,125.
In February 2002, the Vector Research subsidiary purchased equipment for
$6,575 and borrowed $6,150 to fund the purchase. The loan, which is
collateralized by the equipment, is guaranteed by Vector Research and the
Company. The loan is payable in 120 monthly installments of $44, including
annual interest at a variable rate of 2.75% plus the 30-day average
commercial paper rate.
6. 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 three months ended March
31, 2002, Liggett incurred counsel fees and costs totaling approximately
$1,711 compared to $2,519 for the three months ended March 31, 2001.
INDIVIDUAL ACTIONS. As of March 31, 2002, there were approximately 291
cases pending against Liggett, and in most cases the other tobacco
companies, where one or more individual plaintiffs allege injury resulting
from cigarette smoking, addiction to cigarette smoking or exposure to
secondary smoke and seek compensatory and, in some cases, punitive
damages. Of these, 90 were pending in New York, 65 in Florida, 36 in
Maryland, 22 in Mississippi and 17 in California. The balance of the
individual cases were pending in 21 states. There are four individual
cases pending where Liggett is the only named defendant. In addition to
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
these cases, an action against cigarette manufacturers involving
approximately 1,250 named individual plaintiffs has been consolidated
before a single West Virginia state court. Liggett is a defendant in most
of the cases pending in West Virginia. In January 2002, the court severed
Liggett from the trial of the consolidated action, which is scheduled to
begin in September 2002.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence,
gross negligence, breach of special duty, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and
implied warranties, conspiracy, aiding and abetting, concert of action,
unjust enrichment, common law public nuisance, property damage, invasion
of privacy, mental anguish, emotional distress, disability, shock,
indemnity and violations of deceptive trade practice laws, the Federal
Racketeer Influenced and Corrupt Organization Act ("RICO"), state RICO
statutes and antitrust statutes. In many of these cases, in addition to
compensatory damages, plaintiffs also seek other forms of relief including
treble/multiple damages, medical monitoring, disgorgement of profits and
punitive damages. Defenses raised by defendants in these cases include
lack of proximate cause, assumption of the risk, comparative fault and/or
contributory negligence, lack of design defect, statute of limitations,
equitable defenses such as "unclean hands" and lack of benefit, failure to
state a claim and federal preemption.
Jury awards in California and Oregon have been entered against other
cigarette manufacturers. 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. In March 2002, a jury awarded $169 in compensatory damages
and $150,000 in punitive damages in an Oregon state court case also
involving Philip Morris. The punitive damages awards in both the
California and Oregon actions were subsequently reduced to $100,000 by the
trial courts. Both the verdict and damage awards in these cases are being
appealed. In November 2001, in another case, a $25,000 punitive damages
judgment against Philip Morris was affirmed by a California intermediate
appellate court. Philip Morris appealed the decision to the California
Supreme Court, which has accepted the case for review. During 2001, as a
result of a Florida Supreme Court decision upholding the award, another
cigarette manufacturer paid $1,100 in compensatory damages and interest to
a former smoker and his spouse for injuries they allegedly incurred as a
result of smoking. In June 2001, the United States Supreme Court declined
to review the case. In December 2001, in an individual action involving
another cigarette manufacturer, a Florida jury awarded a smoker $165 in
compensatory damages. The defendant has filed post-trial motions
challenging the verdict. In February 2002, a federal district court jury
in Kansas awarded a smoker $198 in compensatory damages from two other
cigarette manufacturers. A hearing on punitive damages is scheduled for
May 2002.
CLASS ACTIONS. As of March 31, 2002, there were approximately 31 actions
pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named
defendant. Many of these actions purport to constitute statewide class
actions and were filed after May 1996 when the Fifth Circuit Court of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Appeals, in the CASTANO case, reversed a Federal district court's
certification of a purported nationwide class action on behalf of persons
who were allegedly "addicted" to tobacco products.
The extent of the impact of the CASTANO decision on smoking-related class
action litigation is still uncertain. The CASTANO decision has had a
limited effect with respect to courts' decisions regarding narrower
smoking-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, a court in
Louisiana (Liggett is not a defendant in this proceeding) has certified
"addiction-as-injury" class actions that covered only citizens in those
states. Two other class actions, BROIN and ENGLE, were certified in state
court in Florida prior to the Fifth Circuit's decision. In April 2001, the
BROWN case was certified as a class action in California.
In May 1994, an action entitled ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO
COMPANY, ET AL., Circuit Court, Eleventh Judicial Circuit, Dade County,
Florida, was filed against Liggett and others. The class consists of all
Florida residents and citizens, and their survivors, who have suffered,
presently suffer or have died from diseases and medical conditions caused
by their addiction to cigarettes that contain nicotine. Phase I of the
trial commenced in July 1998 and in July 1999, the jury returned the Phase
I verdict. The Phase I verdict concerned certain issues determined by the
trial court to be "common" to the causes of action of the plaintiff class.
Among other things, the jury found that: smoking cigarettes causes 20
diseases or medical conditions, cigarettes are addictive or dependence
producing, defective and unreasonably dangerous, defendants made
materially false statements with the intention of misleading smokers,
defendants concealed or omitted material information concerning the health
effects and/or the addictive nature of smoking cigarettes and agreed to
misrepresent and conceal the health effects and/or the addictive nature of
smoking cigarettes, and defendants were negligent and engaged in extreme
and outrageous conduct or acted with reckless disregard with the intent to
inflict emotional distress. The jury also found that defendants' conduct
"rose to a level that would permit a potential award or entitlement to
punitive damages." The court decided that Phase II of the trial, which
commenced November 1999, would be a causation and damages trial for three
of the class representatives and a punitive damages trial on a class-wide
basis, before the same jury that returned the verdict in Phase I. In April
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. In July
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 in November 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 post-trial motions, including a motion for new trial and a motion
seeking reduction of the punitive damages award. Liggett intends to pursue
all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it
could have a material adverse effect on the Company. Phase III of the
trial will be conducted before separate juries to address absent class
members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages.
It is unclear how the ENGLE court's order regarding the determination of
punitive damages will be implemented. The order provides that the punitive
damage amount should be standard as to each class member and acknowledges
that the actual size of the class will not be known until the last case
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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.
In May 2001, Liggett, along with Philip Morris and Lorillard Tobacco Co.,
reached an agreement with the class in the ENGLE case, which will provide
assurance of Liggett's ability to appeal the jury's July 2000 verdict. As
required by the agreement, Liggett paid $6,273 into an escrow account to
be held for the benefit of the ENGLE class, and released, along with
Liggett's existing $3,450 statutory bond, to the court for the benefit of
the class upon completion of the appeals process, regardless of the
outcome of the appeal. As a result, the Company recorded a $9,723 pre-tax
charge to the consolidated statement of operations for the first quarter
of 2001. The agreement, which was approved by the court, assures that the
stay of execution, currently in effect pursuant to the Florida bonding
statute, will not be lifted or limited at any point until completion of
all appeals, including an appeal to the United States Supreme Court.
Class certification motions are pending in a number of putative class
actions. Classes remain certified against Liggett in Florida (ENGLE), in
West Virginia (BLANKENSHIP) and in California (BROWN). A number of class
certification denials are on appeal.
In August 2000, in BLANKENSHIP V. PHILIP MORRIS, INC., a West Virginia
state court conditionally certified (only to the extent of medical
monitoring) a class of present or former West Virginia smokers who desire
to participate in a medical monitoring plan. The trial of this case ended
on January 25, 2001, when the judge declared a mistrial. In an order
issued on March 23, 2001, the court reaffirmed class certification of this
medical monitoring action. In July 2001, the court issued an order
severing Liggett from the retrial of the case which began in September
2001. In November 2001, the jury returned a verdict in favor of the
defendants.
In April 2001, the California state court in the case of BROWN V. THE
AMERICAN TOBACCO COMPANY, INC., ET AL., granted in part plaintiff's motion
for class certification and certified a class comprised of adult residents
of California who smoked at least one of defendants' cigarettes "during
the applicable time period" and who were exposed to defendants' marketing
and advertising activities in California. Certification was granted as to
plaintiff's claims that defendants violated California's unfair business
practices statute. The court subsequently defined "the applicable class
period" for plaintiff's claims, pursuant to a stipulation submitted by the
parties, as June 10, 1993 through April 23, 2001. The California Court of
Appeals denied defendants' writ application, which sought review of the
trial court's class certification orders. Defendants filed a petition for
review with the California Supreme Court, which was subsequently denied.
Trial is scheduled to begin in October 2002. Liggett is a defendant in the
case.
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Approximately 38 purported state and federal class action complaints have
been filed against the cigarette manufacturers for alleged antitrust
violations, including Liggett. 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, in July 2000, plaintiffs in the federal consolidated action filed a
single consolidated complaint that did not name Liggett as a defendant,
although Liggett has complied with certain discovery requests. Fourteen
California actions have been consolidated and the consolidated complaint
did not name Liggett as a defendant. In Nevada, an amended complaint was
filed that did not name Liggett as a defendant. 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 March 31, 2002, there were approximately 40
Governmental Actions pending against Liggett. In these proceedings, both
foreign and domestic governmental entities seek reimbursement for Medicaid
and other health care expenditures. The claims asserted in these health
care cost recovery actions vary. In most of these cases, plaintiffs assert
the equitable claim that the tobacco industry was "unjustly enriched" by
plaintiffs' payment of health care costs allegedly attributable to smoking
and seek reimbursement of those costs. Other claims made by some but not
all plaintiffs include the equitable claim of indemnity, common law claims
of negligence, strict liability, breach of express and implied warranty,
breach of special duty, fraud, negligent misrepresentation, conspiracy,
public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false
advertising, and claims under RICO.
THIRD-PARTY PAYOR ACTIONS. As of March 31, 2002, there were approximately
11 Third-Party Payor Actions pending against Liggett. The claims in these
cases are similar to those in the Governmental Actions but have been
commenced by insurance companies, union health and welfare trust funds,
asbestos manufacturers and others. Eight United States Circuit Courts of
Appeal have ruled that Third-Party Payors did not have standing to bring
lawsuits against the tobacco companies. In January 2000, the United States
Supreme Court denied petitions for certiorari filed by several of the
union health and welfare trust funds. However, a number of Third-Party
Payor Actions, including an action brought by 24 Blue Cross/Blue Shield
Plans, remain pending.
In June 2001, a jury in a third party payor action brought by Empire Blue
Cross and Blue Shield in the Eastern District of New York rendered a
verdict awarding the plaintiff $17,800 in damages against the major
tobacco companies. As against Liggett, the jury awarded the plaintiff
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
damages of $89. In February 2002, the court awarded plaintiff's counsel
$37,800 in attorneys' fees, without allocating the fee award among the
several defendants. Liggett has appealed both the jury verdict and the
attorneys' fee award.
In other Third-Party Payor Actions claimants have set forth several
additional theories of relief sought: funding of corrective public
education campaigns relating to issues of smoking and health; funding for
clinical smoking cessation programs; disgorgement of profits from sales of
cigarettes; restitution; treble damages; and attorneys' fees.
Nevertheless, no specific amounts are provided. It is understood that
requested damages against the tobacco company defendants in these cases
might be in the billions of dollars.
FEDERAL GOVERNMENT ACTION. In September 1999, the United States government
commenced litigation against Liggett and the other tobacco companies in
the United States District Court for the District of Columbia. The action
seeks to recover an unspecified amount of health care costs paid for and
furnished, and to be paid for and furnished, by the Federal Government for
lung cancer, heart disease, emphysema and other smoking-related illnesses
allegedly caused by the fraudulent and tortious conduct of defendants, to
restrain defendants and co-conspirators from engaging in fraud and other
unlawful conduct in the future, and to compel defendants to disgorge the
proceeds of their unlawful conduct. The complaint alleges that such costs
total more than $20,000,000 annually. The action asserts claims under
three federal statutes, the Medical Care Recovery Act ("MCRA"), the
Medicare Secondary Payer provisions of the Social Security Act ("MSP") and
RICO. In December 1999, Liggett filed a motion to dismiss the lawsuit on
numerous grounds, including that the statutes invoked by the government do
not provide the basis for the relief sought. In September 2000, the court
dismissed the government's claims based on MCRA and MSP, and the court
reaffirmed its decision in July 2001. In the September 2000 decision, the
court also determined not to dismiss the government's claims based on
RICO, under which the government continues to seek court relief to
restrain the defendant tobacco companies from allegedly engaging in fraud
and other unlawful conduct and to compel disgorgement.
In June 2001, the United States Attorney General assembled a team of three
Department of Justice ("DOJ") lawyers to work on a possible settlement of
the federal lawsuit. The DOJ lawyers met with representatives of the
tobacco industry, including Liggett, in July 2001. No settlement was
reached, and no further meetings are planned. Discovery in the case has
commenced, and trial has been scheduled for July 2003.
SETTLEMENTS. In March 1996, Brooke Group Holding and Liggett entered into
an agreement, subject to court approval, to settle the CASTANO class
action tobacco litigation. The CASTANO class was subsequently decertified
by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and Liggett
entered into settlements of smoking-related litigation with the Attorneys
General of 45 states and territories. The settlements released both Brooke
Group Holding and Liggett from all smoking-related claims, including
claims for health care cost reimbursement and claims concerning sales of
cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (collectively,
the "Original Participating Manufacturers" or "OPMs") and Liggett
(together with the OPMs and any other tobacco product manufacturer that
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
becomes a signatory, the "Participating Manufacturers") entered into the
Master Settlement Agreement (the "MSA") with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American
Samoa and the Northern Marianas (collectively, the "Settling States") to
settle the asserted and unasserted health care cost recovery and certain
other claims of those Settling States. The MSA has received final judicial
approval in each of the 52 settling jurisdictions.
The MSA restricts tobacco product advertising and marketing within the
Settling States and otherwise restricts the activities of Participating
Manufacturers. Among other things, the MSA prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products; bans
the use of cartoon characters in all tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any 12-month period; bans all outdoor advertising, with
the exception of signs 14 square feet or less in dimension at retail
establishments that sell tobacco products; prohibits payments for tobacco
product placement in various media; bans gift offers based on the purchase
of tobacco products without sufficient proof that the intended recipient
is an adult; prohibits Participating Manufacturers from licensing third
parties to advertise tobacco brand names in any manner prohibited under
the MSA; prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or trade
name or the names of sports teams, entertainment groups or individual
celebrities; and prohibits Participating Manufacturers from selling packs
containing fewer than 20 cigarettes.
The MSA also requires Participating Manufacturers to affirm corporate
principles to comply with the MSA and to reduce underage usage of tobacco
products and imposes requirements applicable to lobbying activities
conducted on behalf of Participating Manufacturers.
Liggett has no payment obligations under the MSA unless its market share
exceeds a base share of 125% of its 1997 market share, or approximately
1.65% of total cigarettes sold in the United States. During 1999 and 2000,
Liggett's market share did not exceed the base amount. Liggett believes,
based on published industry sources, that its domestic shipments accounted
for 2.2% of the total cigarettes shipped in the United States during 2001.
On April 15 of any year following a year in which Liggett's market share
exceeds the base share, Liggett will pay on each excess unit an amount
equal (on a per-unit basis) to that paid during such following year by the
OPMs under the annual and strategic contribution payment provisions of the
MSA, subject to applicable adjustments, offsets and reductions. Liggett
has expensed $24,606 for its estimated MSA obligations for 2001 and $2,980
for the first quarter of 2002 as part of cost of goods sold. Under the
annual and strategic contribution payment provisions of the MSA, the OPMs
(and Liggett to the extent its market share exceeds the base share) are
required to pay the following annual amounts (subject to certain
adjustments):
YEAR AMOUNT
---- ------
2002 - 2003 $6,500,000
2004 - 2007 $8,000,000
2008 - 2017 $8,139,000
2018 and each $9,000,000
year thereafter
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
These annual payments will be allocated based on relative unit volume of
domestic cigarette shipments. The payment obligations under the MSA are
the several, and not joint, obligations of each Participating Manufacturer
and are not the responsibility of any parent or affiliate of a
Participating Manufacturer.
The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of
these states, prior to the effective date of the MSA, negotiated and
executed settlement agreements with each of the other major tobacco
companies separate from those settlements reached previously with Liggett.
Because these states' settlement agreements with Liggett provided for
"most favored nation" protection for both Brooke Group Holding and
Liggett, the payments due these states by Liggett (with certain possible
exceptions) have been eliminated. With respect to all non-economic
obligations under the previous settlements, both Brooke Group Holding and
Liggett are entitled to the most favorable provisions as between the MSA
and each state's respective settlement with the other major tobacco
companies. Therefore, Liggett's non-economic obligations to all states and
territories are now defined by the MSA.
In April 1999, a putative class action was filed on behalf of all firms
that directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in
part on the MSA. Plaintiffs seek treble damages computed as three times
the difference between current prices and the price plaintiffs would have
paid for cigarettes in the absence of an alleged conspiracy to restrain
and monopolize trade in the domestic cigarette market, together with
attorneys' fees. Plaintiffs also seek injunctive relief against certain
aspects of the MSA.
In March 1997, Liggett, Brooke Group Holding and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the
class. In July 1998, Liggett, Brooke Group Holding and plaintiffs filed an
amended class action settlement agreement in FLETCHER which agreement was
preliminarily approved by the court in December 1998. In July 1999, the
court denied approval of the FLETCHER class action settlement. The
parties' motion for reconsideration is still pending.
Copies of the various settlement agreements are filed as exhibits to the
Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.
TRIALS. Cases currently scheduled for trial during the next six months
include an individual action in Florida state court scheduled for May 2002
and an action consolidating the claims of four individuals in a
Mississippi state court scheduled for June 2002. In addition, the BROWN
class action is scheduled for trial in California state court for October
2002. Trial dates, however, are subject to change.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In
July 2000, the jury awarded $790,000 in punitive damages against Liggett
in the second phase of the trial, and the court has entered an order of
final judgment. Liggett intends to pursue all available post-trial and
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VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
appellate remedies. If this verdict is not eventually reversed on appeal,
or substantially reduced by the court, it could have a material adverse
effect on the Company. Liggett has filed the $3,450 bond required under
recent Florida legislation which limits the size of any bond required,
pending appeal, to stay execution of a punitive damages verdict. On May 7,
2001, Liggett reached an agreement with the class in the ENGLE case, which
will provide assurance to Liggett that the stay of execution, currently in
effect pursuant to the bonding statute enacted in 2000 by the Florida
legislature, will not be lifted or limited at any point until completion
of all appeals, including to the United States Supreme Court. As required
by the agreement, Liggett paid $6,273 into an escrow account to be held
for the benefit of the ENGLE class, and released, along with Liggett's
existing $3,450 statutory bond, to the court for the benefit of the class
upon completion of the appeals process, regardless of the outcome of the
appeal. As a result, the Company recorded a $9,723 pre-tax charge to the
consolidated statement of operations for the three months ended March 31,
2001. It is possible that additional cases could be decided unfavorably
and that there could be further adverse developments in the ENGLE case.
Management cannot predict the cash requirements related to any future
settlements and judgments, including cash required to bond any appeals,
and there is a risk that those requirements will not be able to be met. An
unfavorable outcome of a pending smoking and health case could encourage
the commencement of additional similar litigation. Management is unable to
make a meaningful estimate with respect to the amount or range of loss
that could result from an unfavorable outcome of the cases pending against
Brooke Group Holding or Liggett or the costs of defending such cases. The
complaints filed in these cases rarely detail alleged damages. Typically,
the claims set forth in an individual's complaint against the tobacco
industry pray for money damages in an amount to be determined by a jury,
plus punitive damages and costs. These damage claims are typically stated
as being for the minimum necessary to invoke the jurisdiction of the
court.
It is possible that the Company's consolidated financial position, results
of operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such smoking-related litigation.
Liggett's management is unaware of any material environmental conditions
affecting its existing facilities. Liggett's management believes that
current operations are conducted in material compliance with all
environmental laws and regulations and other laws and regulations
governing cigarette manufacturers. Compliance with federal, state and
local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
has not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending against
the Company and certain of its consolidated subsidiaries unrelated to
smoking or tobacco product liability. Management is of the opinion that
the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect the Company's financial
position, results of operations or cash flows.
LEGISLATION AND REGULATION:
In January 1993, the Environmental Protection Agency ("EPA") released a
report on the respiratory effect of secondary smoke which concludes that
secondary smoke is a known human lung carcinogen in adults and in
children, causes increased respiratory tract disease and middle ear
-21-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 manufacture and marketing of
tobacco products and imposing restrictions on the sale, advertising and
promotion of tobacco products. Litigation was commenced challenging the
legal authority of the FDA to assert such jurisdiction, as well as
challenging the constitutionality of the rules. In March 2000, the United
States Supreme Court ruled that the FDA does not have the power to
regulate tobacco. Liggett supported the FDA Rule and began to phase in
compliance with certain of the proposed FDA regulations.
Since the Supreme Court decision, various proposals have been made for
federal and state legislation to regulate cigarette manufacturers. In May
2001, a Presidential commission appointed by former President Clinton
issued a final report recommending that the FDA be given authority by
Congress to regulate the manufacture, sale, distribution and labeling of
tobacco products to protect public health. In addition, Congressional
advocates of FDA regulation have introduced such legislation for
consideration by the 107th Congress. The ultimate outcome of these
proposals cannot be predicted.
In August 1996, Massachusetts enacted legislation requiring tobacco
companies to publish information regarding the ingredients in cigarettes
and other tobacco products sold in that state. In December 1997, the
United States District Court for the District of Massachusetts
preliminarily enjoined this legislation from going into effect on the
grounds that it is preempted by federal law. In November 1999, the United
States Court of Appeals for the First Circuit affirmed this ruling. In
September 2000, the federal district court permanently enjoined
enforcement of the law. In October 2001, the First Circuit reversed the
district court's decision, ruling that the ingredients disclosure
-22-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
provisions are valid. The entire court, however, agreed to re-hear the
appeal, reinstating the district court's injunction in the meantime. Oral
argument before the full court took place on January 7, 2002, and the
court has not yet issued its decision. Notwithstanding the foregoing, in
December 1997, Liggett began complying with this legislation by providing
ingredient information to the Massachusetts Department of Public Health.
Several other states have enacted, or are considering, legislation similar
to that enacted in Massachusetts.
As part of the 1997 budget agreement approved by Congress, federal excise
taxes on a pack of cigarettes, which are currently 39 cents, were
increased at the beginning of each of 2000 and 2002. In general, excise
taxes and other taxes on cigarettes have been increasing. These taxes vary
considerably and, when combined with sales taxes and the current federal
excise tax, may be as high as $2.33 per pack. Proposed further tax
increases in various jurisdictions are currently under consideration or
pending, and such tax increases may result in combined total taxes on a
pack of cigarettes of $3.89 or more in a given locality in the United
States. Congress has considered significant increases in the federal
excise tax or other payments from tobacco manufacturers, and increases in
excise and other cigarette-related taxes have been proposed at the state
and local levels.
In August 2000, the New York state legislature passed legislation charging
the state's Office of Fire Prevention and Control ("OFPC") with developing
standards for "fire safe" or self-extinguishing cigarettes. The OFPC has
until January 1, 2003 to issue final regulations. Six months from the
issuance of the standards, all cigarettes offered for sale in New York
state will be required to be manufactured to those standards. It is not
possible to predict the impact of this law on the Company until the
standards are published. Similar legislation is being considered by other
state governments and at the federal level.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning cigarette smoking
and the tobacco industry, the effects of which, at this time, management
is not able to evaluate. These developments may negatively affect the
perception of potential triers of fact with respect to the tobacco
industry, possibly to the detriment of certain pending litigation, and may
prompt the commencement of additional similar litigation.
OTHER MATTERS:
In March 1997, a stockholder derivative suit was filed in Delaware
Chancery Court against New Valley, as a nominal defendant, its directors
and Brooke Group Holding by a stockholder of New Valley. The suit alleges
that New Valley's purchase of the BrookeMil shares from Brooke (Overseas)
in January 1997 constituted a self-dealing transaction which involved the
payment of excessive consideration by New Valley. The plaintiff seeks a
declaration that New Valley's directors breached their fiduciary duties
and, Brooke Group Holding aided and abetted such breaches and that damages
be awarded to New Valley. In December 1999, another stockholder of New
Valley commenced an action in Delaware Chancery Court substantially
similar to the March 1997 action. This stockholder alleges, among other
things, that the consideration paid by New Valley for the BrookeMil shares
was excessive, unfair and wasteful, that the special committee of New
Valley's board lacked independence, and that the appraisal and fairness
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.
-23-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
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 March 31, 2002, New Valley had $2,693 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.
7. DISCONTINUED OPERATIONS
The consolidated financial statements of the Company have been
reclassified to reflect as discontinued operations New Valley's
broker-dealer operations, which were New Valley's primary source of
revenues since 1995. Accordingly, revenues, costs and expenses, and cash
flows of the discontinued operations have been excluded from the
respective captions in the consolidated statements of operations and
consolidated statements of cash flows. The net operating results of these
entities have been reported, net of minority interests and applicable
income taxes, as "Loss from discontinued operations," and the net cash
flows of these entities have been reported as "Net cash flows used in
discontinued operations."
On December 20, 2001, New Valley distributed its 53.6% interest
(22,543,158 shares) of Ladenburg Thalmann Financial Service Inc. ("LTS")
common stock to holders of New Valley common shares through a special
dividend. On the same date, Vector distributed the 12,694,929 shares of
LTS common stock that it received from New Valley to the holders of
Vector's common stock as a special dividend.
On March 27, 2002, LTS borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, is due on the earlier of June
30, 2002 or the completion of one or more equity financings where LTS
receives at least $5,000 in total proceeds.
-24-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - (CONTINUED)
(UNAUDITED)
Summarized operating results of the discontinued broker-dealer operations
for the three months ended March 31, 2001 are as follows:
March 31, 2001
--------------
Revenues............................. $ 19,064
Expenses............................. (19,386)
---------
Operating loss before minority
interests and income taxes........ $ (322)
========
8. SEGMENT INFORMATION
Financial information for the Company's continuing operations before taxes
and minority interest for the three months ended March 31, 2002 and 2001
follows:
VECTOR REAL CORPORATE(1)
LIGGETT TOBACCO ESTATE AND OTHER TOTAL
------- ------- ------ ------------ -----
THREE MONTHS ENDED MARCH 31, 2002:
Revenues ......................... $ 94,092 $ 2,666 $ 424 $ -- $ 97,182
Operating income (loss) .......... 18,478 (24,519) (316) (8,695) (15,052)
Identifiable assets .............. 170,180 87,254 12,580 389,680 659,694
Depreciation and amortization .... 1,246 967 123 491 2,827
Capital expenditures ............. 8,250 9,394 688 4,565 22,897
THREE MONTHS ENDED MARCH 31, 2001:
Revenues ......................... $ 75,042 $ -- $ 2,641 $ -- $ 77,683
Operating income (loss) .......... 9,704 (134) 81 (8,480) 1,171
Identifiable assets .............. 100,089 13,964 131,025 187,218 432,296
Depreciation and amortization .... 1,390 103 680 47 2,220
Capital expenditures ............. 1,376 3,484 565 14,935 20,360
(1) For 2001, the assets of the discontinued broker-dealer segment are included
in Corporate and Other.
-25-
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 our consolidated
results of operations, capital resources and liquidity and should be read in
conjunction with our consolidated financial statements and related notes
included elsewhere in this report. The consolidated financial statements include
the accounts of VGR Holding Inc., Liggett Group Inc., New Valley Corporation,
Vector Tobacco Inc. and other less significant subsidiaries. As of March 31,
2002, we owned 56.2% of New Valley's common shares.
We are a holding company for a number of businesses. We are engaged
principally in:
o the development of new reduced carcinogen and nicotine-free
cigarette products through our subsidiary Vector Tobacco, and
o the manufacture and sale of cigarettes in the United States through
our subsidiary Liggett.
Our majority-owned subsidiary, New Valley, completed in December 2001
the distribution to its stockholders of its shares in Ladenburg Thalmann
Financial Services, its former majority-owned subsidiary engaged in the
investment banking and brokerage business. The Ladenburg Thalmann Financial
Services shares received by us were, in turn, distributed to our stockholders.
Following the distribution of the shares, New Valley's broker-dealer operations,
which were its primary source of revenues since 1995, are accounted for as a
discontinued operation. New Valley is currently engaged in the real estate
business and is seeking to acquire additional operating companies.
RECENT DEVELOPMENTS
LIGGETT VECTOR BRANDS. In March 2002, we announced that the sales and
marketing functions of our Liggett and Vector Tobacco subsidiaries will be
combined into a new entity, Liggett Vector Brands Inc. The newly formed company
will coordinate and execute the sales and marketing efforts for all of our
tobacco operations. With the combined resources of Liggett and Vector Tobacco,
Liggett Vector Brands initially will have 350 salesmen, and enhanced
distribution and marketing capabilities. In connection with the creation of the
new Liggett Vector Brands entity, we took a charge of $3,460 in the first
quarter of 2002, related to a reorganization of our business to eliminate
redundant positions, consolidate sales and marketing operations and integrate
systems integration.
ACQUISITION OF MEDALLION. On April 1, 2002, a subsidiary of ours
acquired the stock of The Medallion Company, Inc., and related assets from
Medallion's principal stockholder. The total purchase price consisted of $50,000
in cash and $60,000 in notes, with the notes guaranteed by us and by Liggett.
Medallion, a discount cigarette manufacturer headquartered in Richmond,
Virginia, is a participant in the Master Settlement Agreement between the state
Attorneys General and the tobacco industry. Medallion has no payment obligations
under the Master Settlement Agreement unless its market share exceeds
approximately 0.28% of total cigarettes sold in the United States (approximately
1.15 billion units in 2001).
-26-
VGR HOLDING PRIVATE PLACEMENT. On April 30, 2002, VGR Holding issued at
a discount $30,000 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 placement of approximately $25,000.
RECENT DEVELOPMENTS IN LEGISLATION, REGULATION AND LITIGATION
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of March 31, 2002, there were approximately 291 individual
suits, 31 purported class actions and 51 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, 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.
Approximately 38 other purported class action complaints have been filed against
the cigarette manufacturers for alleged antitrust violations. As new cases are
commenced, the costs associated with defending these cases and the risks
relating to the inherent unpredictability of litigation continue to increase.
An unfavorable verdict was returned in the first phase of the ENGLE
smoking and health class action trial pending in Florida. In July 2000, the jury
awarded $790,000 in punitive damages against Liggett in the second phase of the
trial, and the court entered an order of final judgment. Liggett intends to
pursue all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it will
have a material adverse effect on Vector. Liggett has filed the $3,450 bond
required under recent Florida legislation which limits the size of any bond
required, pending appeal, to stay execution of a punitive damages verdict. In
May 2001, Liggett reached an agreement with the class in the ENGLE case, which
will provide assurance to Liggett that the stay of execution, currently in
effect under the Florida bonding statute, will not be lifted or limited at any
point until completion of all appeals, including to the United States Supreme
Court. As required by the agreement, Liggett paid $6,273 into an escrow account
to be held for the benefit of the ENGLE class, and released, along with
Liggett's existing $3,450 statutory bond, to the court for the benefit of the
class upon completion of the appeals process, regardless of the outcome of the
appeal. It is possible that additional cases could be decided unfavorably and
that there could be further adverse developments in the ENGLE case. Management
cannot predict the cash requirements related to any future settlements and
judgments, including cash required to bond any appeals, and there is a risk that
those requirements will not be able to be met.
In recent years, there have been a number of restrictive regulatory
actions from various Federal administrative bodies, including the United States
Environmental Protection Agency and the Food and Drug Administration. There have
also been adverse political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of
third-party payor actions. These developments generally receive widespread media
attention. We are not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation, but
our consolidated financial position, results of operations or cash flows could
be materially adversely affected by an unfavorable outcome in any
smoking-related litigation. See Note 6 to our consolidated financial statements
for a description of legislation, regulation and litigation.
-27-
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
GENERAL. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Significant
estimates subject to material changes in the near term include deferred tax
assets, allowance for doubtful accounts, promotional accruals, sales returns and
allowances, actuarial assumptions of pension plans and litigation and defense
costs. Actual results could differ from those estimates.
REVENUE RECOGNITION. Revenues from sales of cigarettes are recognized
upon the shipment of finished goods to customers. We provide an allowance for
expected sales returns, net of related inventory cost recoveries. Since our
primary line of business is tobacco, our financial position and our results of
operations and cash flows have been and could continue to be materially
adversely effected by significant unit sales volume declines, litigation and
defense costs, increased tobacco costs or reductions in the selling price of
cigarettes in the near term. As discussed in Note 1 to our consolidated
financial statements, effective January 1, 2002, we adopted new required
accounting standards mandating that certain sales incentives previously reported
as operating, selling, general and administrative expenses be shown as a
reduction of operating revenues. As a result, our previously reported revenues
have been reduced by approximately $62,094 for the quarter ended March 31, 2001.
The adoption of the new accounting standards had no impact on our net earnings
or basic or diluted earnings per share.
MARKETING COSTS. We record marketing costs as an expense in the period
to which such costs relate. We do not defer the recognition of any amounts on
our consolidated balance sheets with respect to marketing costs. We expense
advertising costs as incurred, which is the period in which the related
advertisement initially appears. We record consumer incentive and trade
promotion costs as an expense in the period in which these programs are offered,
based on estimates of utilization and redemption rates that are developed from
historical information. As discussed above under "Revenue Recognition",
beginning January 1, 2002, we have adopted the previously mentioned revenue
recognition accounting standards that mandate that certain costs previously
reported as marketing expense be shown as a reduction of operating revenues. As
a result, previously reported amounts for operating, selling, general and
administrative expenses have been reduced by approximately $62,094 for the
quarter ended March 31, 2001. The adoption of the new accounting standards had
no impact on our net earnings or basic or diluted earnings per share.
CONTINGENCIES. As discussed in Note 6 of our consolidated financial
statements and above under the heading "Recent Developments in Legislation,
Regulation and Litigation", legal proceedings covering a wide range of matters
are pending or threatened in various jurisdictions against Liggett. Management
is unable to make a meaningful estimate with respect to the amount or range of
loss that could result from an unfavorable outcome of pending smoking-related
litigation or the costs of defending such cases, and we have not provided any
amounts in our consolidated financial statements for unfavorable outcomes, if
any. Litigation is subject to many uncertainties, and it is possible that our
consolidated financial position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any such
smoking-related litigation.
-28-
EMPLOYEE BENEFIT PLANS. Since 1997, income from our defined benefit
pension plans, partially offset by the costs of postretirement medical benefits,
have contributed to our reported operating income. The determination of our net
pension and other postretirement benefit income or expense is dependent on our
selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in compensation and
healthcare costs. In accordance with accounting principles generally accepted in
the United States of America, actual results that differ from our assumptions
are accumulated and amortized over future periods and therefore, generally
affect our recognized income or expense in such future periods. While we believe
that our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our
future net pension and other postretirement benefit income or expense.
RESULTS OF OPERATIONS
THREE MONTHS ENDED
MARCH 31,
------------------------
2002 2001
-------- --------
REVENUES:
Liggett ................. $ 94,092 $ 75,042
Vector Tobacco .......... 2,666 --
--------
Total tobacco ........ 96,758 75,042
Real estate ............. 424 2,641
-------- --------
Total revenues ....... $ 97,182 $ 77,683
======== ========
OPERATING (LOSS) INCOME:
Liggett ................. $ 18,478 $ 9,704
Vector Tobacco .......... (24,519) (134)
-------- --------
Total tobacco ........ (6,041) 9,570
Real estate ............. (316) 81
Corporate and other ..... (8,695) (8,480)
-------- --------
Total operating (loss)
income ............. $(15,052) $ 1,171
======== ========
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
REVENUES. Total revenues were $97,182 for the three months ended March
31, 2002 compared to $77,683 for the three months ended March 31, 2001. This
25.1% ($19,499) increase in revenues was due to a $19,050 or 25.4% increase in
revenues at Liggett, and $2,666 in revenues at Vector Tobacco offset by a
decrease of $2,217 in real estate revenues at New Valley.
TOBACCO REVENUES. During 2001, the major cigarette manufacturers,
including Liggett, announced list price increases of $1.90 per carton.
Tobacco revenues at Liggett for the three months ended March 31, 2002
increased for both the premium and discount segments due to a 21.2% ($15,914)
gain in unit sales volume (approximately 341.5 million units) and price
increases of $4,772, discussed above, offset by $1,636 in unfavorable sales mix.
-29-
Premium sales at Liggett for the first quarter of 2002 amounted to
$10,035 and represented 10.7% of total Liggett sales, compared to $10,869 and
14.5% of total sales for the first quarter of 2001. In the premium segment,
revenues decreased by 7.7% ($834) for the three months ended March 31, 2002,
compared to the prior year first quarter, due to a favorable volume variance of
$3,541, reflecting a 32.6% increase in unit sales volume (approximately 39.0
million units), offset by an unfavorable price variance of $4,375, primarily
associated with promotional activities.
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the three months ended March 31, 2002 amounted to $84,057 and
represented 89.3% of total Liggett sales, compared to $64,173 and 85.5% of total
Liggett sales for the three months ended March 31, 2001. In the discount
segment, revenues grew by 31.0% ($19,884) for the three months ended March 31,
2002 compared to the prior year period, due to a 20.3% gain in unit sales volume
(approximately 302.5 million units) accounting for $13,023 in positive volume
variance and price increases of $9,147, partially offset by an unfavorable
product mix of $2,286.
For the three months ended March 31, 2002, fixed manufacturing costs at
Liggett on a basis comparable to 2001 were $447 higher with costs per thousand
units of $1.89 increasing 3.8% from the previous year's $1.82, concurrent with a
7.8% increase in production volume. On a per-thousand unit basis, fixed payroll
expense and indirect labor of $1.00 for the three months ended March 31, 2002
increased from $0.90 in the prior year period (11.1%), while fixed non-payroll
expenses decreased to $0.88 from $0.92 in the prior year period (4.3%).
TOBACCO GROSS PROFIT. Tobacco gross profit was $35,756 for the three
months ended March 31, 2002 compared to $34,278 for the three months ended March
31, 2001, an increase of $1,478 or 4.3% when compared to the same period last
year, due primarily to the volume and price increases discussed above at Liggett
offset by costs associated with the start-up at Vector Tobacco. Liggett's
premium brands contributed 14.5% to our gross profit, the discount segment
contributed 92.1% and Vector Tobacco cost 6.6% for the three months ended March
31, 2002. Over the same period in 2001, Liggett's premium brands contributed
22.2% and the discount segment contributed 77.8%.
Liggett's gross profit of $37,967 for the three months ended March 31,
2002 increased $3,839 from gross profit of $34,128 for the three months ended
March 31, 2001, due primarily to the price and unit volume increases discussed
above, offset by the estimated payment obligations under the Attorneys General
Master Settlement Agreement. As a percent of revenues (excluding federal excise
taxes), gross profit at Liggett decreased to 67.5% for the three months ended
March 31, 2002 compared to 71.2% for the same period in 2001, with gross profit
for the premium segment decreasing to 74.9% for the three months ended March 31,
2002 compared to 85.7% in the same period in 2001 and gross profit for the
discount segment decreasing to 66.6% in the three months ended March 31, 2002
from 68.0% in the same period in 2001. This decrease is due primarily to the
inclusion of the estimated payment obligation ($2,980) under the Attorneys
General Master Settlement Agreement within cost of goods sold and to the
disproportionate rise in deep-discount LIGGETT SELECT sales offset by the
overall growth in sales volume and the April 2001 list price increases.
REAL ESTATE REVENUES. New Valley's real estate revenues were $424 for
the three months ended March 31, 2002. This compares to revenues of $2,641 from
real estate activities for the three months ended March 31, 2001 with the
decline primarily due to the absence of rental revenue of $1,944 from Western
Realty Investments, which was sold in December 2001, and one of New Valley's two
U. S. shopping centers, which was sold in January 2001.
EXPENSES. Operating, selling, general and administrative expenses and
settlement charges were $51,232 for the three months ended March 31, 2002
compared to $35,748 for the same period last year. The increase of $15,484 was
due primarily to a $17,724 increase in expenses at Vector Tobacco related to
expenses of product development and marketing for Vector Tobacco's new OMNI and
nicotine-free products, an increase of $5,604 related to a larger sales force
-30-
and increased marketing efforts at Liggett and increased expenses at corporate
offset by lower expenses at New Valley due to the absence of broker-dealer
operations. Expenses at Liggett were $20,296 for the three months ended March
31, 2002 compared to $14,659 for the same period last year. Expenses at Vector
Tobacco for the three months ended March 31, 2002 were $22,158, compared to
expenses of $4,434 for the three months ended March 31, 2001. For the first
quarter of 2002, expenses at Liggett included $3,460 in connection with the
creation of Liggett Vector Brands, related to a reorganization of its business
to eliminate redundant positions, consolidate of sales and marketing operations
and integrate systems.
For the quarter ended March 31, 2001, Liggett's operating income was
reduced by $9,723 of expense relating to the ENGLE class action. As discussed in
Note 6 to our consolidated financial statements, in May 2001, Liggett reached an
agreement with the class in the ENGLE case, which will provide assurance to
Liggett that the stay of execution, currently in effect pursuant to the Florida
bonding statute, will not be lifted or limited at any point until completion of
all appeals, including to the United States Supreme Court. As required by the
agreement, Liggett paid $6,273 into an escrow account to be held for the benefit
of the ENGLE class, and released, along with Liggett's existing $3,450 statutory
bond, to the court for the benefit of the class upon completion of the appeals
process, regardless of the outcome of the appeal. As a result, we recorded a
$9,723 pre-tax charge to the consolidated statement of operations for the first
quarter of 2001.
OTHER INCOME (EXPENSES). For the three months ended March 31, 2002,
other expense was $1,745 compared to other income of $2,895 for the three months
ended March 31, 2001. Interest and dividend income of $2,820 and a gain on sale
of investments of $1,321 were offset primarily by interest expense and a loss on
the sale of real estate assets.
Interest expense was $5,385 for the three months ended March 31, 2002
compared to $1,258 for the same period last year, due to the issuance of
long-term debt at the corporate level.
(LOSS) INCOME FROM CONTINUING OPERATIONS. The loss from continuing
operations before income taxes and minority interests for the three months ended
March 31, 2002 was $16,797 compared to income of $4,066 for the three months
ended March 31, 2001. Income tax benefit was $4,262 and minority interests in
losses of subsidiaries were $672 for the three months ended March 31, 2002. This
compared to tax expense of $2,145 and minority interests in losses of
subsidiaries of $706 for the three months ended March 31, 2001. The effective
tax rates for the three months ended March 31, 2002 do not bear a customary
relationship to pre-tax accounting income principally as a consequence of
non-deductible expenses and state income taxes.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents decreased $41,937 for the three months
ended March 31, 2002 and decreased $37,383 for the three months ended March 31,
2001.
Net cash used in operations for the three months ended March 31, 2002
was $17,995 compared to net cash used in operations of $1,541 for the comparable
period of 2001. Cash used in operations in 2002 resulted primarily from the
first quarter operating loss, increased inventories and reduced receivables
offset by the non-cash impact of depreciation and amortization, non-cash
stock-based expense, losses on the sale of assets and minority interests. Cash
used in the 2001 period for operating activities related to an increase in
inventories and a decrease in
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current liabilities partially offset by non-cash expenses such as depreciation
and amortization and stock-based compensation expense and a decrease in
receivables.
Cash used in investing activities of $19,548 in 2002 compares to cash
used of $8,112 in 2001. In 2002, cash was used principally for acquisition of
machinery and equipment in the amount of $22,897 and issuance of a note
receivable for $2,500 at New Valley offset primarily by proceeds received upon
sale of investment securities and other assets of $4,862. In 2001, cash was used
primarily for capital expenditures of $20,360, payment of prepetition claims of
$2,590 and purchases of investment securities of $1,761. These expenditures were
offset primarily by $11,981 of proceeds from the sale of one of New Valley's
shopping centers and sales at Liggett of a warehouse facility and machinery and
equipment and by net sales of long-term investments.
Cash used in financing activities was $4,394 in 2002 compared to cash
used of $24,641 in 2001. In the first quarter of 2002, cash was used primarily
for dividends of $13,289 and repayments of debt of $1,704 offset by proceeds
from debt of $9,158 and proceeds from the exercise of options of $1,441. In the
first quarter of 2001, cash was used primarily for net repayments on the
revolving credit facilities of $19,372 slightly offset by net proceeds from debt
of $3,389. Further cash was used for dividends of $10,267 and decreases in
margin loans payable of $827.
LIGGETT. Liggett has a $40,000 credit facility under which $0 was
outstanding at March 31, 2002. Availability under the facility was approximately
$26,176 based on eligible collateral at March 31, 2002. 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 5.75% at March 31, 2002. The facility requires
Liggett's compliance with certain financial and other covenants including a
restriction on the payment of cash dividends unless Liggett's borrowing
availability under the facility for the 30-day period prior to the payment of
the dividend, and after giving effect to the dividend, is at least $5,000. In
addition, the facility, as amended, imposes requirements with respect to
Liggett's adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of $17,000
as computed in accordance with the agreement). At March 31, 2002, Liggett was in
compliance with all covenants under the credit facility; Liggett's adjusted net
worth was $41,347 and net working capital was $25,229, as computed in accordance
with the agreement. The facility expires on March 8, 2003 subject to automatic
renewal for an additional year unless a notice of termination is given by the
lender at least 60 days prior to the anniversary date.
In November 1999, 100 Maple LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed $5,040 from
the lender under Liggett's credit facility. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $5,640 was outstanding at March
31, 2002. 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. Interest is charged at the same
rate as applicable to Liggett's credit facility, and borrowings under the Maple
loan reduce the maximum availability under the credit facility. Liggett has
guaranteed the loan, and a first mortgage on the Mebane property and equipment
collateralizes the Maple loan and Liggett's credit facility. Liggett completed
the relocation of its manufacturing operations to this facility in October 2000.
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In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment for
$1,071 under two capital leases which are payable in 60 monthly installments of
$22 with an effective interest rate of 10.20%.
Liggett has been upgrading the efficiency of its manufacturing
operation at Mebane with the addition of four new state-of-the-art cigarette
makers and packers, as well as related equipment. The total cost of these
upgrades will be approximately $22,000. Liggett took delivery of the first two
of the new lines in the fourth quarter of 2001 and financed the purchase price
of $6,404 through capital lease arrangements guaranteed by us and payable in 60
monthly installments of $61 with interest calculated at the prime rate. In March
2002, the third line was delivered, and the purchase price of $3,023 was
financed through a capital lease arrangement, payable in 30 monthly installments
of $62 and then 30 monthly installments of $51 with an effective annual interest
rate of 4.68%.
Liggett (and, in certain cases, Brooke Group Holding, our predecessor
and a wholly-owned subsidiary of VGR Holding) and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke from cigarettes. We believe, and have been so advised by counsel
handling the respective cases, that Brooke Group Holding and Liggett have a
number of valid defenses to claims asserted against them. Litigation is subject
to many uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In July
2000, the jury awarded $790,000 in punitive damages against Liggett in the
second phase of the trial, and the court entered an order of final judgment.
Liggett intends to pursue all available post-trial and appellate remedies. If
this verdict is not eventually reversed on appeal, or substantially reduced by
the court, it will have a material adverse effect on Vector. Liggett has filed
the $3,450 bond required under recent Florida legislation which limits the size
of any bond required, pending appeal, to stay execution of a punitive damages
verdict. In May 2001, Liggett reached an agreement with the class in the ENGLE
case, which will provide assurance to Liggett that the stay of execution,
currently in effect pursuant to the Florida bonding statute, will not be lifted
or limited at any point until completion of all appeals, including to the United
States Supreme Court. As required by the agreement, Liggett paid $6,273 into an
escrow account to be held for the benefit of the ENGLE class, and released,
along with Liggett's existing $3,450 statutory bond, to the court for the
benefit of the class upon completion of the appeals process, regardless of the
outcome of the appeal. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the ENGLE
case. Management cannot predict the cash requirements related to any future
settlements and judgments, including cash required to bond any appeals, and
there is a risk that those requirements will not be able to be met. An
unfavorable outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. In recent years, there have been
a number of adverse regulatory, political and other developments concerning
cigarette smoking and the tobacco industry. These developments generally receive
widespread media attention. Neither we nor Liggett are able to evaluate the
effect of these developing matters on pending litigation or the possible
commencement of additional litigation or regulation. See Note 6 to our
consolidated financial statements.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against Brooke Group Holding or Liggett or the costs of defending such cases. It
is possible that our consolidated financial position, results of operations or
cash flows could be materially adversely affected by an unfavorable outcome in
any such tobacco-related litigation.
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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 us
for $775, is guaranteed by Vector Research, VGR Holding and us. The loan is
payable in 120 monthly installments of $125 including annual interest of 2.31%
above the 30-day commercial paper rate with a final payment of $6,125.
In February 2002, the Vector Research subsidiary purchased equipment
for $6,575 and borrowed $6,150 to fund the purchase. The loan, which is
collateralized by the equipment, is guaranteed by Vector Research and us. The
loan is payable in 120 monthly installments of $44, including annual interest at
2.75% above the 30-day commercial paper rate.
VECTOR TOBACCO. In June 2001, Vector Tobacco purchased for $8,400 an
industrial facility in Timberlake, North Carolina. Vector Tobacco financed the
purchase with an $8,200 loan. The loan is payable in 60 monthly installments of
$85, including annual interest at 4.85% above the LIBOR rate, with a final
payment of approximately $3,160. The loan, which is collateralized by a mortgage
and a letter of credit of $1,750, is guaranteed by VGR Holding and Vector.
During December 2001, Vector Tobacco executed a second promissory note
with the same lender for approximately $1,159 to finance building improvements.
The second promissory note is payable in 30 monthly installments of $39 plus
accrued interest, with an annual interest rate of LIBOR plus 5.12%.
On April 1, 2002, a subsidiary of ours acquired the stock of The
Medallion Company, Inc., and related assets from Medallion's principal
stockholder. Medallion is a discount cigarette manufacturer headquartered in
Richmond, Virginia.
Following the purchase of the Medallion stock, Vector Tobacco merged
into Medallion and Medallion changed its name to Vector Tobacco Inc. The total
purchase price for the Medallion shares and the related assets consisted of
$50,000 in cash and $60,000 in notes, with the notes guaranteed by us and by
Liggett. Of the notes, $25,000 bear interest at a 9.0% annual rate and mature
$3,125 per quarter commencing July 1, 2002 and continuing through April 1, 2004.
The remaining $35,000 of notes bear interest at 6.5% per year and mature on
April 1, 2007.
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. On April 30, 2002, VGR Holding issued at a discount an additional
$30,000 principal amount of 10% senior secured notes due March 31, 2006 in a
private placement and received net proceeds of approximately $25,000. The notes
were priced to provide purchasers with a 15.75% yield to maturity. The notes are
on the same terms as the $60,000 principal amount of senior secured notes
previously issued. All $90,000 principal amount of the notes have been
guaranteed by us and by Liggett.
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) Ltd., 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 agreements for the notes contain 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 $75,000 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 agreements) for the trailing 12 months plus an
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additional amount of up to $75,000 during the 12 month period ending March 31,
2003, restrict transactions with affiliates subject to exceptions which include
payments to us not to exceed $9,500 per year for permitted operating expenses,
and limit the ability of VGR Holding to merge, consolidate or sell certain
assets.
Prior to May 14, 2003, VGR Holding may redeem up to $31,500 of the
notes at a redemption price of 100% of the principal amount with proceeds from
one or more equity offerings. VGR Holding may redeem the notes, in whole or in
part, at a redemption price of 100% of the principal amount beginning May 14,
2003. During the term of the notes, VGR Holding is required to offer to
repurchase all the notes at a purchase price of 101% of the principal amount, in
the event of a change of control, and to offer to repurchase notes, at 100% of
the principal amount, with the proceeds of material asset sales.
VECTOR. We believe that we will continue to meet our liquidity
requirements through 2002. Corporate expenditures (exclusive of Liggett, Vector
Research, Vector Tobacco and New Valley) over the next twelve months for current
operations include cash interest expense of approximately $17,500, dividends on
our outstanding shares (currently at an annual rate of approximately $53,500)
and corporate expenses. We anticipate funding our expenditures for current
operations with available cash resources, proceeds from public and/or private
debt and equity financing, management fees from subsidiaries and tax sharing and
other payments from Liggett or New Valley. New Valley may acquire or seek to
acquire additional operating businesses through merger, purchase of assets,
stock acquisition or other means, or to make other investments, which may limit
its ability to make such distributions.
In July 2001, we completed the sale of $172,500 (net proceeds of
approximately $166,400) of our 6.25% convertible subordinated notes due 2008
through a private offering to qualified institutional investors in accordance
with Rule 144A under the Securities Act of 1933. The notes pay interest at 6.25%
per annum and are convertible into our common stock, at the option of the
holder. The conversion price, which was $33.26 at May 14, 2002, is subject to
adjustment for various events, and any cash distribution on our common stock
results in a corresponding decrease in the conversion price. Following the
conversion of $40,000 principal amount of our convertible notes in December
2001, $132,500 principal amount of the convertible notes were outstanding.
MARKET RISK
We are exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity prices. We seek to
minimize these risks through our regular operating and financing activities and
our long-term investment strategy.
The market risk management procedures of us and New Valley cover all
market risk sensitive financial instruments. We held investment securities
available for sale totaling $174,440 at March 31, 2002. Adverse market
conditions could have a significant effect on the value of these investments.
New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.
NEW ACCOUNTING PRONOUNCEMENTS
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 became effective in the first quarter of 2002. As a result,
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certain items previously included in operating, selling, general and
administrative expense in the consolidated statement of operations have been
recorded as a reduction of operating revenues. We have determined that the
impact of adoption or subsequent application of EITF Issue No. 00-14 did not
have a material effect on our consolidated financial position or results of
operations. Upon adoption, prior period amounts, which were not significant,
have been 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 was effective in the first quarter of 2002.
As discussed above under "Critical Accounting Policies", adoption of EITF Issue
No. 00-25 has resulted in a significant reduction of revenues offset by a
corresponding reduction in operating, selling, administrative and general
expenses. For comparative purposes, prior period amounts have been reclassified
from operating, selling, administrative, and general expenses to a reduction of
revenues. The adoption of EITF 00-25 did not impact the Company's consolidated
financial position, operating income, or net income.
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.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
fiscal years beginning after December 15, 2001. The adoption of this statement
did not have an impact on our consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the foregoing
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in our reports to stockholders, which reflect our
expectations or beliefs with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
and, in connection with the "safe-harbor" provisions of the Private Securities
Reform Act, we have identified under "Risk Factors" in Item 1 above important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
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factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
us.
ITEM 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 6, incorporated herein by reference, to
our 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, Material
Legal Proceedings, for additional information regarding the
pending smoking-related material legal proceedings to which Brooke
Group Holding and/or Liggett are party. A copy of Exhibit 99.1
will be furnished to holders of our securities and the securities
of subsidiaries without charge upon written request to us at our
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 ours which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by us
during the three months ended March 31, 2002, except for grants of
stock options to employees of us and/or our subsidiaries. The
foregoing transactions were effected in reliance on the exemption
from registration afforded by Section 4(2) of the Securities Act
of 1933.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.1 Second Amendment to Note Purchase Agreement and New Note
Purchase Agreement, dated as of April 30, 2002, between
VGR Holding Inc. and TCW High Income Partners, Ltd., TCW
High Income Partners II, Ltd., Pioneer High Yield Cayman
Unit Trust, TCW Shared Opportunity Fund III, L.P., TCW
Leveraged Income Trust IV, L.P., TCW Leveraged Income
Trust, L.P., TCW Leveraged Income Trust II, L.P., TCW
LINC III CBO Ltd., POWRs 1997-2, Captiva II Finance Ltd.
and AIMCO CDO, Series 2000-A (the "Purchasers"),
relating to the 10% Senior Secured Notes due March 31,
2006 (the "Notes"), including the amended form of Note
(the "Amended Note Purchase Agreement").
10.2 Second Amendment to Collateral Agency Agreement, dated
as of April 30, 2002, by and among VGR Holding Inc.,
Brooke Group Holding Inc., Vector Group Ltd., New Valley
Holdings, Inc., Liggett Group Inc., The Bank of New
York, as collateral agent for the benefit of the holders
of the Notes pursuant to the Amended Note Purchase
Agreement (the "Collateral Agent"), and the Purchasers.
10.3 Amendment to Pledge and Security Agreement, dated as of
April 30, 2002, between VGR Holding Inc. and the
Collateral Agent.
10.4 Amendment to Pledge and Security Agreement, dated as of
April 30, 2002, between New Valley Holdings, Inc. and
the Collateral Agent.
10.5 Amendment to Pledge and Security Agreement, dated as of
April 30, 2002, between Brooke Group Holding Inc. and
the Collateral Agent.
10.6 Amended and Restated Guarantee, Acknowledgment and
Pledge Agreement, dated as of April 30, 2002, between
Vector Group Ltd., the Collateral Agent and the Holders.
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10.7 Guarantee, dated as of April 30, 2002, by Liggett Group
Inc. in favor of the Collateral Agent.
10.8 Vector Group Ltd. Supplemental Executive Retirement
Plan.
99.1 Material Legal Proceedings.
*99.2 New Valley Corporation's Interim Consolidated Financial
Statements for the quarterly periods ended March 31,
2002 and 2001 (incorporated by reference to New Valley's
Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2002, Commission File No. 1-2493).
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* Incorporated by reference
(b) REPORTS ON FORM 8-K
The Company filed the following Reports on Form 8-K during the
first quarter of 2002:
FINANCIAL
DATE ITEMS STATEMENTS
---- ----- ----------
January 4, 2002 2, 5, 7 None
February 21, 2002 5, 7 None
March 11, 2002 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: May 15, 2002
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