Delaware (State or other jurisdiction of incorporation or organization) |
1-5759 Commission File Number |
65-0949535 (I.R.S. Employer Identification No.) |
þ Large accelerated filer | o Accelerated filer | o Non-accelerated filer
(Do not check if a smaller reporting company) |
o Smaller reporting company |
Page | ||||||||
PART I. FINANCIAL INFORMATION |
||||||||
Item 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited): |
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2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
51 | ||||||||
74 | ||||||||
74 | ||||||||
75 | ||||||||
75 | ||||||||
75 | ||||||||
76 | ||||||||
77 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 | ||||||||
EX-99.1 |
-1-
September 30, | December 31, | ||||||||
2009 | 2008 | ||||||||
ASSETS: |
|||||||||
Current assets: |
|||||||||
Cash and cash equivalents |
$ | 237,468 | $ | 211,105 | |||||
Investment securities available for sale |
62,094 | 28,518 | |||||||
Accounts receivable trade |
6,824 | 9,506 | |||||||
Inventories |
100,021 | 92,581 | |||||||
Deferred income taxes |
4,199 | 3,642 | |||||||
Restricted assets |
3,545 | 2,653 | |||||||
Other current assets |
3,114 | 7,278 | |||||||
Total current assets |
417,265 | 355,283 | |||||||
Property, plant and equipment, net |
45,851 | 50,691 | |||||||
Mortgage receivable |
| 17,704 | |||||||
Investment in real estate |
12,204 | | |||||||
Long-term investments accounted for at cost |
51,170 | 51,118 | |||||||
Investments in non-consolidated real estate businesses |
45,628 | 50,775 | |||||||
Restricted assets |
4,586 | 6,555 | |||||||
Deferred income taxes |
58,211 | 45,222 | |||||||
Intangible asset |
107,511 | 107,511 | |||||||
Prepaid pension costs |
3,171 | 2,901 | |||||||
Other assets |
29,783 | 29,952 | |||||||
Total assets |
$ | 775,380 | $ | 717,712 | |||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
|||||||||
Current liabilities: |
|||||||||
Current portion of notes payable and long-term debt |
$ | 20,892 | $ | 97,498 | |||||
Current portion of employee benefits |
1,051 | 21,840 | |||||||
Accounts payable |
9,769 | 6,104 | |||||||
Accrued promotional expenses |
12,081 | 10,131 | |||||||
Income taxes payable, net |
31,112 | 11,803 | |||||||
Accrued excise and payroll taxes payable, net |
568 | 7,004 | |||||||
Settlement accruals |
46,787 | 20,668 | |||||||
Deferred income taxes |
17,203 | 92,507 | |||||||
Accrued interest |
6,861 | 9,612 | |||||||
Other current liabilities |
12,215 | 18,992 | |||||||
Total current liabilities |
158,539 | 296,159 | |||||||
Notes payable, long-term debt and other obligations, less current portion |
334,502 | 210,301 | |||||||
Fair value of derivatives embedded within convertible debt |
142,850 | 77,245 | |||||||
Non-current employee benefits |
36,933 | 34,856 | |||||||
Deferred income taxes |
68,492 | 48,807 | |||||||
Other liabilities |
24,042 | 16,739 | |||||||
Total liabilities |
765,358 | 684,107 | |||||||
Commitments and contingencies |
| | |||||||
Stockholders equity: |
|||||||||
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized |
| | |||||||
Common stock, par value $0.10 per share, 150,000,000 shares authorized,
74,220,968 and 69,107,320 shares issued and 70,973,057 and
and 66,014,070 shares outstanding |
7,097 | 6,601 | |||||||
Additional paid-in capital |
30,293 | 65,103 | |||||||
Retained earnings |
| | |||||||
Accumulated other comprehensive loss |
(14,511 | ) | (25,242 | ) | |||||
Less: 3,247,911 and 3,093,250 shares of common stock in treasury, at cost |
(12,857 | ) | (12,857 | ) | |||||
Total stockholders equity |
10,022 | 33,605 | |||||||
Total liabilities and stockholders equity |
$ | 775,380 | $ | 717,712 | |||||
-2-
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Revenues* |
$ | 236,736 | $ | 145,601 | $ | 564,746 | $ | 420,766 | |||||||||
Expenses: |
|||||||||||||||||
Cost of goods sold* |
177,798 | 84,999 | 398,088 | 251,036 | |||||||||||||
Operating, selling, administrative and general expenses |
21,966 | 23,067 | 63,679 | 69,809 | |||||||||||||
Gain on brand transaction |
| | (5,000 | ) | | ||||||||||||
Restructuring charges |
| | 1,000 | | |||||||||||||
Operating income |
36,972 | 37,535 | 106,979 | 99,921 | |||||||||||||
Other income (expenses): |
|||||||||||||||||
Interest and dividend income |
51 | 1,094 | 277 | 4,440 | |||||||||||||
Interest expense |
(16,808 | ) | (15,515 | ) | (49,968 | ) | (46,025 | ) | |||||||||
Loss on extinguishment of debt |
| | (18,444 | ) | | ||||||||||||
Change in fair value of derivatives embedded within |
|||||||||||||||||
convertible debt |
(6,054 | ) | 522 | (25,845 | ) | 7,837 | |||||||||||
Impairment charges on investments |
| (7,000 | ) | (8,500 | ) | (7,000 | ) | ||||||||||
Equity income from non-consolidated real |
|||||||||||||||||
estate businesses |
4,712 | 5,202 | 5,528 | 22,706 | |||||||||||||
Other, net |
| (1 | ) | | (578 | ) | |||||||||||
Income before provision for income taxes |
18,873 | 21,837 | 10,027 | 81,301 | |||||||||||||
Income tax
expense (benefit) |
2,654 | 7,010 | (1,346 | ) | 33,042 | ||||||||||||
Net income |
$ | 16,219 | $ | 14,827 | $ | 11,373 | $ | 48,259 | |||||||||
Per basic common share: |
|||||||||||||||||
Net income applicable to common shares |
$ | 0.22 | $ | 0.21 | $ | 0.16 | $ | 0.68 | |||||||||
Per diluted common share: |
|||||||||||||||||
Net income applicable to common shares |
$ | 0.22 | $ | 0.20 | $ | 0.16 | $ | 0.67 | |||||||||
Cash distributions and dividends declared per share |
$ | 0.38 | $ | 0.36 | $ | 1.14 | $ | 1.09 | |||||||||
* | Revenues and Cost of goods sold include excise taxes of $119,643, $43,327, $256,813 and $127,050, respectively. |
-3-
Accumulated | |||||||||||||||||||||||||||||||||||
Additional | Other | ||||||||||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury | |||||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||||||||||||||
Balance, December 31, 2008 |
66,014,070 | $ | 6,601 | $ | 65,103 | $ | | $ | (25,242 | ) | $ | (12,857 | ) | $ | 33,605 | ||||||||||||||||||||
Net income |
| | | 11,373 | | | 11,373 | ||||||||||||||||||||||||||||
Pension-related minimum liability adjustments,
net of taxes |
| | | | 464 | | 464 | ||||||||||||||||||||||||||||
Forward contract adjustments, net of taxes |
| | | | (7 | ) | | (7 | ) | ||||||||||||||||||||||||||
Unrealized gain on investment securities,
net of taxes |
| | | | 10,274 | | 10,274 | ||||||||||||||||||||||||||||
Total other comprehensive income |
| | | | | | 10,731 | ||||||||||||||||||||||||||||
Total comprehensive income |
| | | | | | 22,104 | ||||||||||||||||||||||||||||
Distributions and dividends on common stock |
| | (72,427 | ) | (11,040 | ) | | | (83,467 | ) | |||||||||||||||||||||||||
Restricted stock grant |
500,000 | 50 | | | | | 50 | ||||||||||||||||||||||||||||
Effect of stock dividend |
3,326,623 | 333 | | (333 | ) | | |||||||||||||||||||||||||||||
Exercise of options, net of 2,120,479 shares delivered
to pay exercise price |
1,132,364 | 113 | 234 | | | | 347 | ||||||||||||||||||||||||||||
Excess tax benefit of options exercised |
| 6,944 | | | | 6,944 | |||||||||||||||||||||||||||||
Amortization of deferred compensation |
| | 3,097 | | | | 3,097 | ||||||||||||||||||||||||||||
Beneficial conversion feature of notes payable, net of taxes |
| | 27,342 | | | | 27,342 | ||||||||||||||||||||||||||||
Balance, September 30, 2009 |
70,973,057 | $ | 7,097 | $ | 30,293 | $ | | $ | (14,511 | ) | $ | (12,857 | ) | $ | 10,022 | ||||||||||||||||||||
-4-
Nine Months | Nine Months | ||||||||
Ended | Ended | ||||||||
September 30, 2009 | September 30, 2008 | ||||||||
Net cash provided by operating activities |
$ | 9,334 | $ | 70,435 | |||||
Cash flows from investing activities: |
|||||||||
Purchase of investment securities |
(12,300 | ) | (5,682 | ) | |||||
Proceeds from sale or liquidation of long-term investments |
1,407 | 8,334 | |||||||
Purchase of long-term investments |
(51 | ) | (51 | ) | |||||
Purchase of mortgage receivable |
| (21,704 | ) | ||||||
Distributions from non-consolidated real estate businesses |
5,548 | 17,628 | |||||||
Investment in non-consolidated real estate businesses |
(467 | ) | (22,000 | ) | |||||
Increase in cash surrender value of life insurance policies |
(839 | ) | (766 | ) | |||||
Decrease in non-current restricted assets |
1,969 | 838 | |||||||
Proceeds from sale of fixed assets |
| 403 | |||||||
Capital expenditures |
(3,005 | ) | (5,426 | ) | |||||
Net cash used in investing activities |
(7,738 | ) | (28,426 | ) | |||||
Cash flows from financing activities: |
|||||||||
Proceeds from debt issuance |
118,782 | 2,830 | |||||||
Repayments of debt |
(4,516 | ) | (4,666 | ) | |||||
Deferred financing charges |
(5,573 | ) | (137 | ) | |||||
Borrowings under revolver |
526,949 | 386,499 | |||||||
Repayments on revolver |
(530,766 | ) | (397,892 | ) | |||||
Dividends and distributions on common stock |
(87,451 | ) | (78,581 | ) | |||||
Excess tax benefit of options exercised |
6,944 | 18,304 | |||||||
Proceeds from exercise of options |
398 | 26 | |||||||
Net cash provided by (used in) financing activities |
24,767 | (73,617 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
26,363 | (31,608 | ) | ||||||
Cash and cash equivalents, beginning of period |
211,105 | 238,117 | |||||||
Cash and cash equivalents, end of period |
$ | 237,468 | $ | 206,509 | |||||
-5-
1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
(a) | Basis of Presentation: |
(b) | Distributions and Dividends on Common Stock: |
(c) | Earnings Per Share (EPS): |
-6-
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Net income |
$ | 16,219 | $ | 14,827 | $ | 11,373 | $ | 48,259 | |||||||||
Income attributable to
participating securities |
(740 | ) | (675 | ) | (519 | ) | (2,228 | ) | |||||||||
Net income available to
common stockholders |
$ | 15,479 | $ | 14,152 | $ | 10,854 | $ | 46,031 | |||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Net income |
$ | 16,219 | $ | 14,827 | $ | 11,373 | $ | 48,259 | |||||||||
Expenses attributable
to 5% convertible
debentures |
13 | | | | |||||||||||||
Income attributable to
participating securities |
(741 | ) | (675 | ) | (519 | ) | (2,228 | ) | |||||||||
Net income available to
common stockholders |
$ | 15,491 | $ | 14,152 | $ | 10,854 | $ | 46,031 | |||||||||
-7-
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Weighted-average shares for
basic EPS |
69,232,323 | 68,926,087 | 69,143,505 | 67,245,435 | |||||||||||||
Plus incremental shares
related to stock options and
non-vested restricted stock |
125,311 | 1,308,592 | 60,315 | 1,466,227 | |||||||||||||
Plus incremental shares related
to convertible debt |
60,183 | | | | |||||||||||||
Weighted-average shares for
fully diluted EPS |
69,417,817 | 70,234,679 | 69,203,820 | 68,711,662 | |||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Number of stock options |
509,442 | 540,472 | 546,489 | 540,472 | |||||||||||||
Weighted-average exercise price |
$ | 18.77 | $ | 18.30 | $ | 17.84 | $ | 18.30 | |||||||||
Weighted-average shares of
non-vested restricted stock |
177,784 | 85,134 | 196,789 | 237,073 | |||||||||||||
Weighted-average expense per share |
$ | 16.26 | $ | 16.78 | $ | 16.25 | $ | 16.33 | |||||||||
Weighted-average number of shares
issuable upon conversion of debt |
16,350,285 | 13,579,184 | 15,018,085 | 13,579,184 | |||||||||||||
Weighted-average conversion price |
$ | 16.38 | $ | 16.34 | $ | 16.29 | $ | 16.34 | |||||||||
-8-
(d) | Comprehensive Income: |
(e) | Fair Value of Derivatives Embedded within Convertible Debt: |
(f) | Capital and Credit Market Crisis |
(g) | Contingencies: |
-9-
(h) | New Accounting Pronouncements: |
-10-
-11-
2. | RESTRUCTURING |
3. | INVESTMENT SECURITIES AVAILABLE FOR SALE |
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
Cost | Gain | Loss | Value | |||||||||||||
Marketable equity securities |
$ | 41,255 | $ | 22,226 | $ | (1,387 | ) | $ | 62,094 | |||||||
4. | INVENTORIES |
September 30, | December 31, | ||||||||
2009 | 2008 | ||||||||
Leaf tobacco |
$ | 51,376 | $ | 48,880 | |||||
Other raw materials |
3,359 | 5,128 | |||||||
Work-in-process |
406 | 314 | |||||||
Finished goods |
59,526 | 46,202 | |||||||
Inventories at current cost |
114,667 | 100,524 | |||||||
LIFO adjustments |
(14,646 | ) | (7,943 | ) | |||||
$ | 100,021 | $ | 92,581 | ||||||
-12-
The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated requirements and are at prices, including carrying costs, established at the commitment date. At September 30, 2009, Liggett had leaf tobacco purchase commitments of approximately $15,513. There were no leaf tobacco purchase commitments at Vector Tobacco at that date. During 2007, the Company entered into a single source supply agreement for fire safe cigarette paper through 2012. | ||
The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in ending inventory. For the nine months ended September 30, 2009 and 2008, the Companys MSA expense was increased by approximately $650 for 2008 and reduced by approximately $1,300 for 2007, respectively, as a result of a change in estimate to the MSA assessment. | ||
LIFO inventories represent approximately 95% of total inventories at September 30, 2009 and December 31, 2008, respectively. |
5. | LONG-TERM INVESTMENTS |
Long-term investments consist of investments in the following: |
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Investment partnerships
accounted for at cost |
$ | 51,170 | $ | 69,987 | $ | 51,118 | $ | 54,997 |
The principal business of these investment partnerships is investing in investment securities and real estate. The estimated fair value of the investment partnerships was provided by the partnerships based on the indicated market values of the underlying assets or investment portfolio. The investments in these investment partnerships are illiquid and the ultimate realization of these investments is subject to the performance of the underlying partnership and its management by the general partners. |
The long-term investments are carried on the condensed consolidated balance sheet at cost. The fair value determination disclosed above would be classified as Level 3 under the fair value authoritative guidance hierarchy disclosed in Note 11 if such assets were recorded on the condensed consolidated balance sheet at fair value. The fair values were determined based on unobservable inputs and were based on company assumptions, and information obtained from the partnerships based on the indicated market values of the underlying assets of the investment portfolio. |
-13-
The changes in the fair value of these investments as of September 30, 2009 were as follows: |
Investment | ||||
Partnerships | ||||
Accounted for at Cost | ||||
Balance as of January 1, 2009 |
$ | 54,997 | ||
Unrealized loss on long-term investments |
(357 | ) | ||
Balance as of March 31, 2009 |
54,640 | |||
Unrealized gain on long-term investments |
8,432 | |||
Balance as of June 30, 2009 |
63,072 | |||
Contributions |
52 | |||
Unrealized gain on long-term investments |
6,863 | |||
Balance as of September 30, 2009 |
$ | 69,987 | ||
The changes in the fair value of these investments as of September 30, 2008 were as follows: |
Investment | Investment | |||||||
Partnerships | Partnerships | |||||||
Accounted for at | Accounted for on | |||||||
Cost | the Equity Method | |||||||
Balance as of January 1, 2008 |
$ | 89,007 | $ | 10,495 | ||||
Unrealized loss on long-term investments |
(2,034 | ) | (675 | ) | ||||
Realized loss on long-term investments |
| (567 | ) | |||||
Balance as of March 31, 2008 |
86,973 | 9,253 | ||||||
Contributions (distributions) |
47 | (8,328 | ) | |||||
Unrealized loss on long-term investments |
(3,767 | ) | | |||||
Realized gain on long-term investments |
14 | | ||||||
Receivable classified as Other currents assets |
| (925 | ) | |||||
Balance as of June 30, 2008 |
83,267 | | ||||||
Unrealized loss on long-term investments |
(7,778 | ) | | |||||
Impairment loss on long-term investments |
(3,000 | ) | | |||||
Balance as of September 30, 2008 |
$ | 72,489 | $ | | ||||
The Company will continue to perform additional assessments of the investments and the current condition of capital and credit markets to determine the impact, if any, on the Companys condensed consolidated financial statements. Thus, future impairment charges may occur. |
The Company received a distribution of approximately $847 from one of the limited partnerships in the fourth quarter of 2009. |
In the future, the Company may invest in other investments, including limited partnerships, real estate investments, equity securities, debt securities, derivatives and certificates of deposit, depending on risk factors and potential rates of return. |
-14-
6. | NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS |
Notes payable, long-term debt and other obligations consist of: |
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Vector: |
||||||||
11% Senior Secured Notes due 2015, net of unamortized
discount of $5,037 and $0 |
$ | 244,963 | $ | 165,000 | ||||
6.75% Variable Interest Senior Convertible Note due
2014, net of unamortized discount of $39,999 and $0* |
10,001 | | ||||||
6.75% Variable Interest Senior Convertible Exchange Notes
due 2014, net of unamortized discount of $70,309 and $0* |
36,628 | | ||||||
3.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $83,687 and $83,993* |
26,313 | 26,007 | ||||||
5% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $246 and $39,565* |
669 | 72,299 | ||||||
Liggett: |
||||||||
Revolving credit facility |
15,698 | 19,515 | ||||||
Term loan under credit facility |
6,889 | 7,290 | ||||||
Equipment loans |
5,521 | 8,307 | ||||||
V.T. Aviation: |
||||||||
Note payable |
4,232 | 5,266 | ||||||
VGR Aviation: |
||||||||
Note payable |
3,781 | 4,053 | ||||||
Other |
699 | 62 | ||||||
Total notes payable, long-term debt and other obligations |
355,394 | 307,799 | ||||||
Less: |
||||||||
Current maturities |
(20,892 | ) | (97,498 | ) | ||||
Amount due after one year |
$ | 334,502 | $ | 210,301 | ||||
* | The fair value of the derivatives embedded within the 6.75% Variable Interest Senior Convertible Exchange Notes ($42,710 at September 30, 2009 and $0 at December 31, 2008), 6.75% Variable Interest Convertible Note ($23,783 at September 30, 2009 and $0 at December 31, 2008), 3.875% Variable Interest Senior Convertible Debentures ($76,187 at September 30, 2009 and $51,829 at December 31, 2008) and the 5% Variable Interest Senior Convertible Notes ($170 at September 30, 2009 and $25,416 at December 31, 2008) is separately classified as a derivative liability in the condensed consolidated balance sheets. |
11% Senior Secured Notes due 2015 Vector: |
In August 2007, the Company sold $165,000 of its 11% Senior Secured Notes due 2015 (the Senior Secured Notes) in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. On May 28, 2008, the Company completed an offer to exchange the Senior Secured Notes for an equal amount of newly issued 11% Senior Secured Notes due 2015. The new Senior Secured Notes have substantially the same terms as the original notes, except that the new Senior Secured Notes have been registered under the Securities Act. |
In September 2009, the Company sold an additional $85,000 principal amount of the Senior Secured Notes at 94% of face value in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. The Company received net proceeds from the offering of approximately $79,900. The Company will amortize the deferred costs and debt discount related to the additional Senior Secured Notes over the estimated life of the debt. In connection with the September 2009 offering, the Company agreed to consummate a registered exchange offer for these Senior Secured Notes within 360 days after the date of their initial issuance. |
-15-
If the Company fails to timely comply with its registration obligations, it will be required to pay additional interest on these Senior Secured Notes until it complies. |
The indenture contains covenants that restrict the payment of dividends by the Company if the Companys consolidated earnings before interest, taxes, depreciation and amortization (Consolidated EBITDA), as defined in the indenture, for the most recently ended four full quarters is less than $50,000. The indenture also restricts the incurrence of debt if the Companys Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively. The Companys Leverage Ratio is defined in the indenture as the ratio of the Companys and the guaranteeing subsidiaries total debt less the fair market value of the Companys cash, investments in marketable securities and long-term investments to Consolidated EBITDA, as defined in the indenture. The Companys Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. |
The following table summarizes the requirements of these financial covenants and the results of the calculation, as defined by the indenture. |
Indenture | September 30, | December 31, | ||||||||||
Covenant | Requirement | 2009 | 2008 | |||||||||
Consolidated EBITDA, as defined |
$ | 50,000 | $ | 160,232 | $ | 154,053 | ||||||
Leverage ratio, as defined |
<3.0 to 1 | Negative | 0.1 to 1 | |||||||||
Secured leverage ratio, as defined |
<1.5 to 1 | Negative | Negative |
Variable Interest Senior Convertible Debt Vector: |
Vector has issued four series of variable interest senior convertible debt. All four series of debt pay interest on a quarterly basis at a stated rate plus an additional amount of interest on each payment date. The additional amount is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt would be convertible on such record date. |
5% Variable Interest Senior Convertible Notes due November 2011: |
Between November 2004 and April 2005, the Company sold $111,864 principal amount of its 5% Variable Interest Senior Convertible Notes due November 15, 2011 (the 5% Notes). In May 2009, the holder of $11,005 principal amount of the 5% Notes exchanged its 5% Notes for $11,775 principal amount of the Companys 6.75% Variable Interest Senior Convertible Note due 2014 (the 6.75% Note) as discussed below. In June 2009, certain holders of $99,944 principal amount of the 5% Notes exchanged their 5% Notes for $106,940 principal amount of the Companys 6.75% Variable Interest Senior Convertible Exchange Notes due 2014 of the Company (the 6.75% Exchange Notes). As of September 30, 2009, a total of $915 principal amount of the 5% Notes remained outstanding after these exchanges. |
6.75% Variable Interest Senior Convertible Note due 2014: |
On May 11, 2009, the Company issued in a private placement the 6.75% Note in the principal amount of $50,000. The purchase price was paid in cash ($38,225) and by tendering $11,005 principal amount of the 5% Notes, valued at 107% of principal amount. The note pays interest (Total Interest) on a quarterly basis at a rate of 3.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt will be convertible on such record date. Notwithstanding the foregoing, however, the interest payable on each interest payment date shall be the higher of (i) the Total Interest and (ii) 6.75% per annum. The note is convertible into the Companys common stock at the holders option. The conversion price of $14.32 per share (approximately 69.8139 shares of common stock per $1,000 principal amount of the note) is |
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subject to adjustment for various events, including the issuance of stock dividends. The note will mature on November 15, 2014. The Company will redeem on May 11, 2014 and at the end of each interest accrual period thereafter an additional amount, if any, of the note necessary to prevent the note from being treated as an Applicable High Yield Discount Obligation under the Internal Revenue Code. If a fundamental change (as defined in the note) occurs, the Company will be required to offer to repurchase the note at 100% of its principal amount, plus accrued interest. |
The purchaser of the 6.75% Note is an entity affiliated with Dr. Phillip Frost, who reported, after the consummation of the sale, beneficial ownership of approximately 11.5% of the Companys common stock. |
6.75% Variable Interest Senior Convertible Exchange Notes due 2014: |
In June 2009, the Company entered into agreements with certain holders of the 5% Notes to exchange their 5% notes for the Companys 6.75% Exchange Notes. On June 30, 2009, the Company accepted for exchange $99,944 principal amount of the 5% Notes for $106,940 of its 6.75% Exchange Notes. The Company issued its 6.75% Exchange Notes to the holders in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, afforded by Section 3(a)(9) thereof. The notes pay interest (Total Interest) on a quarterly basis beginning August 15, 2009 at a rate of 3.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt will be convertible on such record date. Notwithstanding the foregoing, however, the interest payable on each interest payment date shall be the higher of (i) the Total Interest and (ii) 6.75% per annum. The notes are convertible into the Companys common stock at the holders option. The conversion price of $16.25 per share (approximately 61.5366 shares of common stock per $1,000 principal amount of notes) is subject to adjustment for various events, including the issuance of stock dividends. The notes will mature on November 15, 2014. The Company will redeem on June 30, 2014 and at the end of each interest accrual period thereafter an additional amount, if any, of the notes necessary to prevent the notes from being treated as an Applicable High Yield Discount Obligation under the Internal Revenue Code. If a fundamental change (as defined in the indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their principal amount, plus accrued interest and, under certain circumstances, a make whole payment. |
Embedded Derivatives on the Variable Interest Senior Convertible Debt: |
The portion of the interest on the Companys convertible debt which is computed by reference to the cash dividends paid on the Companys common stock is considered an embedded derivative within the convertible debt, which the Company is required to separately value. In accordance with authoritative guidance on accounting for derivatives and hedging, the Company has bifurcated these embedded derivatives and estimated the fair value of the embedded derivative liability including using a third party valuation. The resulting discount created by allocating a portion of the issuance proceeds to the embedded derivative is then amortized to interest expense over the term of the debt using the effective interest method. Changes to the fair value of these embedded derivatives are reflected quarterly in the Companys consolidated statements of operations as Change in fair value of derivatives embedded within convertible debt. The value of the embedded derivative is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt as well as projections of future cash and stock dividends over the term of the debt. |
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A summary of non-cash interest expense associated with the amortization of the debt discount created by the embedded derivative liability associated with the Companys variable interest senior convertible debt is as follows: |
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
6.75% Note |
$ | 131 | $ | | $ | 201 | $ | | |||||||||
6.75% exchange notes |
608 | | 608 | | |||||||||||||
3.875% convertible debentures |
114 | 89 | 339 | 269 | |||||||||||||
5% convertible notes |
16 | 1,423 | 3,385 | 3,904 | |||||||||||||
Interest expense associated with
embedded derivatives |
$ | 869 | $ | 1,512 | $ | 4,533 | $ | 4,173 | |||||||||
A summary of non-cash changes in fair value of derivatives embedded within convertible debt is as follows: |
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
6.75% Note |
$ | (407 | ) | $ | | $ | (2,216 | ) | $ | | |||||||
6.75% exchange notes |
1,360 | | 1,360 | | |||||||||||||
3.875% convertible debentures |
(7,029 | ) | 43 | (24,358 | ) | 2,925 | |||||||||||
5% convertible notes |
22 | 479 | (631 | ) | 4,912 | ||||||||||||
(Loss) gain on changes in fair value of
derivatives embedded within
convertible debt |
$ | (6,054 | ) | $ | 522 | $ | (25,845 | ) | $ | 7,837 | |||||||
The following table reconciles the fair value of derivatives embedded within convertible debt at September 30, 2009. |
6.75% | 3.875% | 5% | ||||||||||||||||||||||
6.75% | Exchange | Convertible | Convertible | |||||||||||||||||||||
Note | Notes | Debentures | Debentures | Total | ||||||||||||||||||||
Balance at December 31, 2008 |
$ | | $ | | $ | 51,829 | $ | 25,416 | $ | 77,245 | ||||||||||||||
Loss (gain) from changes in fair
value of embedded derivatives |
| | 1,752 | (1,449 | ) | 303 | ||||||||||||||||||
Balance at March 31, 2009 |
| | 53,581 | 23,967 | 77,548 | |||||||||||||||||||
Issuance of 6.75% Note |
21,567 | | | (2,485 | ) | 19,082 | ||||||||||||||||||
Issuance of 6.75% Exchange Notes |
| 44,070 | | (23,392 | ) | 20,678 | ||||||||||||||||||
Loss from changes in fair
value of embedded derivatives |
1,809 | | 15,577 | 2,102 | 19,488 | |||||||||||||||||||
Balance at June 30, 2009 |
23,376 | 44,070 | 69,158 | 192 | 136,796 | |||||||||||||||||||
Loss (gain) from changes in fair
value of embedded derivatives |
407 | (1,360 | ) | 7,029 | (22 | ) | 6,054 | |||||||||||||||||
Balance at September 30, 2009 |
$ | 23,783 | $ | 42,710 | $ | 76,187 | $ | 170 | $ | 142,850 | ||||||||||||||
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Beneficial Conversion Feature on Variable Interest Senior Convertible Debt: |
After giving effect to the recording of the embedded derivative liability as a discount to the convertible debt, the Companys common stock had a fair value at the issuance date of the debt in excess of the conversion price resulting in a beneficial conversion feature. The accounting guidance on debt with conversion and other options requires that the intrinsic value of the beneficial conversion feature be recorded to additional paid-in capital and as a discount on the debt. The discount is then amortized to interest expense over the term of the debt using the effective interest method. The beneficial conversion feature has been recorded, net of income taxes, as an increase to stockholders equity. |
A summary of non-cash interest expense associated with the amortization of the debt discount created by the beneficial conversion feature on the Companys variable interest senior convertible debt for the three and nine months ended September 30, 2009 and 2008 is as follows: |
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Amortization of beneficial
conversion feature: |
|||||||||||||||||
6.75% Note |
$ | 115 | $ | | $ | 175 | $ | | |||||||||
6.75% exchange notes |
375 | | 375 | | |||||||||||||
3.875% convertible debentures |
(16 | ) | (17 | ) | (33 | ) | (36 | ) | |||||||||
5% convertible notes |
8 | 789 | 1,878 | 2,162 | |||||||||||||
Interest expense associated with
beneficial conversion feature |
$ | 482 | $ | 772 | $ | 2,395 | $ | 2,126 | |||||||||
Unamortized Debt Discount on Variable Interest Senior Convertible Debt: |
The following table reconciles unamortized debt discount within convertible debt at September 30, 2009: |
6.75% | 3.875% | 5% | ||||||||||||||||||||||
6.75% | Exchange | Convertible | Convertible | |||||||||||||||||||||
Note | Notes | Debentures | Notes | Total | ||||||||||||||||||||
Balance at December 31, 2008 |
$ | | $ | | $ | 83,993 | $ | 39,565 | $ | 123,558 | ||||||||||||||
Amortization of embedded derivatives |
| | (112 | ) | (1,657 | ) | (1,769 | ) | ||||||||||||||||
Amortization of beneficial conversion feature |
| | 7 | (919 | ) | (912 | ) | |||||||||||||||||
Balance at March 31, 2009 |
83,888 | 36,989 | 120,877 | |||||||||||||||||||||
Issuance of convertible notes -
embedded derivative |
21,567 | 44,070 | | | 65,637 | |||||||||||||||||||
Issuance of convertible notes -
beneficial conversion feature |
18,808 | 27,222 | | | 46,030 | |||||||||||||||||||
Issuance of 6.75% Note write-off of unamortized
debt discount |
(3,311 | ) | (3,311 | ) | ||||||||||||||||||||
Issuance of 6.75% Exchange Notes write-off
of unamortized debt discount |
| | | (30,745 | ) | (30,745 | ) | |||||||||||||||||
Amortization of embedded derivatives |
(70 | ) | | (113 | ) | (1,712 | ) | (1,895 | ) | |||||||||||||||
Amortization of beneficial conversion feature |
(60 | ) | | 10 | (951 | ) | (1,001 | ) | ||||||||||||||||
Balance at June 30, 2009 |
40,245 | 71,292 | 83,785 | 270 | 195,592 | |||||||||||||||||||
Amortization of embedded derivatives |
(131 | ) | (608 | ) | (114 | ) | (16 | ) | (869 | ) | ||||||||||||||
Amortization of beneficial conversion feature |
(115 | ) | (375 | ) | 16 | (8 | ) | (482 | ) | |||||||||||||||
Balance at September 30, 2009 |
$ | 39,999 | $ | 70,309 | $ | 83,687 | $ | 246 | $ | 194,241 | ||||||||||||||
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Loss on Extinguishment of Debt: |
The exchange of the 5% Notes for the 6.75% Notes and the 6.75% Exchange Notes qualifies as extinguishment of debt due to the significant change in terms. The loss was $0 and $18,444 for the three and nine months ended September 30, 2009. A summary of the Companys loss on the extinguishment of the 5% Notes for the nine months ended September 30, 2009 is as follows: |
6.75% | ||||||||||||||
6.75% | Exchange | |||||||||||||
Note | Notes | Total | ||||||||||||
Issuance of additional notes payable |
$ | 770 | $ | 6,996 | $ | 7,766 | ||||||||
Termination of embedded derivative |
(2,485 | ) | (23,392 | ) | (25,877 | ) | ||||||||
Write-off of deferred finance costs |
257 | 2,242 | 2,499 | |||||||||||
Write-off of unamortized
debt discount, net |
3,311 | 30,745 | 34,056 | |||||||||||
Loss on extinguishment of debt |
$ | 1,853 | $ | 16,591 | $ | 18,444 | ||||||||
Revolving Credit Facility Liggett: |
Liggett has a $50,000 credit facility with Wachovia Bank, N.A. under which $15,698 was outstanding at September 30, 2009. Availability as determined under the facility was approximately $20,300 based on eligible collateral at September 30, 2009. |
Fair Value of Notes Payable and Long-term Debt: | ||
The estimated fair value of the Companys notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies described in Note 1. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein are not necessarily indicative of the amount that could be realized in a current market exchange. |
September 30, 2009 | December 31, 2008 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Value | Value | Value | Value | |||||||||||||
Notes payable and
long-term debt |
$ | 355,394 | $ | 568,034 | $ | 307,799 | $ | 447,520 |
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Scheduled Maturities: | ||
Scheduled maturities of long-term debt as of September 30, 2009 are as follows: |
Unamortized | ||||||||||||
Principal | Discount | Net | ||||||||||
Year Ending December 31: |
||||||||||||
2009 |
$ | 17,919 | $ | 246 | $ | 17,673 | ||||||
2010 |
4,499 | | 4,499 | |||||||||
2011 |
16,250 | 1,458 | 14,792 | |||||||||
2012 |
108,490 | 82,229 | 26,261 | |||||||||
2013 |
505 | | 505 | |||||||||
Thereafter |
407,009 | 115,345 | 291,664 | |||||||||
Total |
$ | 554,672 | $ | 199,278 | $ | 355,394 | ||||||
The scheduled maturities of $108,490 (principal amount) in 2012 reflect $99,000 (principal amount), which may be required to be redeemed in 2012 in accordance with the terms of its 3.875% Variable Interest Senior Convertible Debentures due 2026. |
7. | EMPLOYEE BENEFIT PLANS |
Defined Benefit and Postretirement Plans: |
Net periodic benefit cost for the Companys pension and other postretirement benefit plans consists of the following: |
Pension Benefits | |||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
September | September | September | September | ||||||||||||||
30, 2009 | 30, 2008 | 30, 2009 | 30, 2008 | ||||||||||||||
Service cost benefits earned
during the period |
$ | 330 | $ | 1,035 | $ | 990 | $ | 3,105 | |||||||||
Interest cost on projected benefit
obligation |
1,894 | 2,381 | 5,681 | 7,143 | |||||||||||||
Expected return on plan assets |
(1,954 | ) | (3,036 | ) | (5,862 | ) | (9,108 | ) | |||||||||
Amortization of prior service cost |
200 | 350 | 600 | 1,050 | |||||||||||||
Amortization of net loss |
534 | 25 | 1,602 | 75 | |||||||||||||
Net expense |
$ | 1,004 | $ | 755 | $ | 3,011 | $ | 2,265 | |||||||||
Other | |||||||||||||||||
Postretirement Benefits | |||||||||||||||||
Three Months Ended | Nine Months Ended | ||||||||||||||||
September | September | September | September | ||||||||||||||
30, 2009 | 30, 2008 | 30, 2009 | 30, 2008 | ||||||||||||||
Service cost benefits earned
during the period |
$ | 4 | $ | 4 | $ | 12 | $ | 12 | |||||||||
Interest cost on projected benefit
obligation |
142 | 148 | 426 | 444 | |||||||||||||
Amortization of net loss |
(41 | ) | (45 | ) | (123 | ) | (135 | ) | |||||||||
Net expense |
$ | 105 | $ | 107 | $ | 315 | $ | 321 | |||||||||
The increase of $249 in the Companys pension expense for the three months ended September 30, 2009 was the result of increased defined benefit expense at the Liggett segment of approximately $1,600 due primarily to the amortization of losses experienced in 2008 on the investment portfolio underlying Liggetts defined benefit |
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plans. The amount was offset by lower expenses of approximately $1,400 at the corporate segment due to the retirement of the Companys former Executive Chairman on December 30, 2008. The increase of $746 in the Companys pension expense for the nine months ended September 30, 2009 was the result of increased defined benefit expense at the Liggett segment of approximately $4,800 due primarily to the amortization of losses experienced in 2008 on the investment portfolio underlying Liggetts defined benefit plans. The amount was offset by lower expenses of approximately $4,000 at the corporate segment due to the retirement of the Executive Chairman on December 30, 2008. The Company did not make contributions to its pension benefits plans for the three and nine months ended September 30, 2009 and does not anticipate making any contributions to such plans in 2009. The Company anticipates paying approximately $750 in other postretirement benefits in 2009. | ||
In connection with the retirement of the Executive Chairman, he received in July 2009 a payment of $20,860 under the terms of the Companys Supplemental Retirement Plan. The payment was partially funded by approximately $1,554 held in a separate trust. |
8. | CONTINGENCIES |
Tobacco-Related Litigation: |
Overview |
Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. New cases continue to be commenced against Liggett and other cigarette manufacturers. The cases generally fall into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (Individual Actions); (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging the use of the terms lights and/or ultra lights constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (Class Actions); (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, the costs associated with defending these cases and the risks relating 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 are not quantifiable at this time. Liggett incurred legal expenses and other litigation costs totaling approximately $4,286 and $4,806, for the nine months ended September 30, 2009 and 2008 respectively. |
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are or can be significant. |
Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 43 states now limit the dollar amount of bonds or require no bond at all. Liggett has secured approximately $2,950 in bonds as of September 30, 2009. |
The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, |
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except as discussed elsewhere in this note: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be vigorously defended. However, Liggett may enter into settlement discussions in particular cases if it believes it is in the best interest of the Company to do so. | ||
Individual Actions | ||
As of September 30, 2009, there were 37 individual cases pending against Liggett and/or the Company, 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. In addition, there were approximately 3,300 Engle progeny cases (defined below) pending against Liggett and/or the Company, in state and federal courts in Florida, and approximately 100 individual cases pending in West Virginia state court as part of a consolidated action. The following table lists the number of individual cases by state that are pending against Liggett or its affiliates as of September 30, 2009 (excluding Engle progeny cases and the cases consolidated in West Virginia): |
Number | ||||
State | of Cases | |||
Florida |
15 | |||
New York |
9 | |||
Louisiana |
5 | |||
Maryland |
2 | |||
West Virginia |
2 | |||
Illinois |
1 | |||
Mississippi |
1 | |||
Missouri |
1 | |||
Ohio |
1 |
Liggett Only Cases. There are currently six cases pending where Liggett is the only tobacco company defendant. Cases where Liggett is the only defendant could increase substantially as a result of the Engle progeny cases. In April 2004, in Davis v. Liggett Group, a Florida state court jury awarded compensatory damages of $540 against Liggett, plus interest. In addition, the court awarded plaintiffs counsel legal fees of $752. Liggett appealed both the compensatory and the legal fee awards. In October 2007, the compensatory award was affirmed by the Fourth District Court of Appeal and, thereafter, was paid by Liggett. In March 2008, the Fourth District Court of Appeal reversed and remanded the legal fee award for further proceedings in the trial court. In July 2009, the trial court awarded approximately $1,650 in legal fees, inclusive of interest and costs, which has been paid by Liggett. In Ferlanti v. Liggett Group, in February 2009, a Florida state court jury awarded compensatory damages of $1,200 against Liggett, but found that the plaintiff was 40% at fault. Therefore, plaintiff was awarded $720 in compensatory damages plus $96 in expenses. Punitive damages were not awarded. Liggett has appealed the award. On May 1, 2009, the court granted plaintiffs motion for an award of attorneys fees but the amount has not yet been determined. In Hausrath v. Philip Morris, a case pending in New York state court, plaintiffs recently dismissed all defendants other than Liggett. The other three individual actions, in which Liggett is the only tobacco company defendant, are dormant. | ||
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, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, |
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indemnity and violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (RICO), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars. | ||
Defenses raised by defendants in individual 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. | ||
In addition to the awards against Liggett in Davis and Ferlanti (described above), jury awards in individual cases have also been returned against other cigarette manufacturers in recent years. The awards in these individual actions, often in excess of millions of dollars, are for both compensatory and punitive damages. There are several significant jury awards against other cigarette manufacturers which are currently on appeal. | ||
Engle Progeny Cases. In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co. rendered a $145,000,000 punitive damages verdict in favor of a Florida Class against certain cigarette manufacturers, including Liggett. Pursuant to the Florida Supreme Courts July 2006 ruling in Engle, which decertified the class on a prospective basis, and affirmed the appellate courts reversal of the punitive damages award, former class members had one year from January 11, 2007 in which to file individual lawsuits. In addition, some individuals who filed suit prior to January 11, 2007, and who claim they meet the conditions in Engle, are attempting to avail themselves of the Engle ruling. Lawsuits by individuals requesting the benefit of the Engle ruling, whether filed before or after the January 11, 2007 deadline, are referred to as the Engle progeny cases. Liggett and/or the Company have been named in approximately 3,200 Engle progeny cases in both state and federal courts in Florida. Other cigarette manufacturers have also been named as defendants in most of these cases. These cases include approximately 8,585 plaintiffs, approximately 3,300 of whom have claims pending in federal court. Duplicate cases were filed in federal and state court on behalf of approximately 660 plaintiffs. The majority of the cases pending in federal court are stayed pending the outcome of an appeal to the United States Court of Appeals for the Eleventh Circuit of several district court orders in which it was found that the Florida Supreme Courts decision in Engle was unconstitutional. The number of progeny cases will likely increase as the courts may require multi-plaintiff cases to be severed into individual cases. The total number of plaintiffs may also increase as a result of attempts by existing plaintiffs to add additional parties. As of September 30, 2009, there were approximately 43 Engle progeny cases scheduled for trial, or likely to be scheduled for trial, in 2009 and 2010. As of September 30, 2009, eight Engle progeny cases have been tried resulting in six plaintiff verdicts and two defense verdicts. In one of these cases, judgment was entered against Liggett for $156. For further information on the Engle case and on Engle progeny cases, see Class Actions Engle Case, below. | ||
Class Actions | ||
As of September 30, 2009, there were seven actions pending for which either a class had been certified or plaintiffs were seeking class certification, where Liggett is a named defendant, including one alleged price fixing case. Other cigarette manufacturers are also named in these actions. Many of these actions purport to constitute statewide class actions and were filed after May 1996 when the United States Court of Appeals for the Fifth Circuit, in Castano v. American Tobacco Co., Inc., reversed a federal district courts certification of a purported nationwide class action on behalf of persons who were allegedly addicted to tobacco products. | ||
Plaintiffs allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and |
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punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. | ||
Engle Case. In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking. In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be common to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants conduct rose to a level that would permit a potential award or entitlement to punitive damages. Phase II of the trial was a causation and damages trial for three of the class plaintiffs 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 class plaintiffs, to be reduced in proportion to the respective plaintiffs fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett. | ||
In May 2003, Floridas Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831, was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs. | ||
In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but preserved several of the trial courts Phase I findings, including that: (i) smoking causes lung cancer, among other diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) defendants sold or supplied cigarettes that were defective; and (vii) defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they file their individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. As a result of the decision, approximately 8,585 former Engle class members have suits pending against the Company and/or Liggett as well as other cigarette manufacturers. | ||
Three federal district courts (in the Merlob, Brown and Burr cases) have ruled that the findings in the first phase of the Engle proceedings cannot be used to satisfy elements of plaintiffs claims, and two of those rulings (Brown and Burr, which has since been dismissed for lack of prosecution) were certified by the trial court for interlocutory review. The certification was granted by the United States Court of Appeals for the Eleventh Circuit and oral argument is scheduled for January 2010. Engle progeny cases pending in the federal district courts in the Middle District of Florida have been stayed pending interlocutory review by the Eleventh Circuit. Several state trial court judges have issued contrary rulings that allowed plaintiffs to use the Engle findings to establish elements of their claims and required certain defenses to be stricken. | ||
In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco Co., awarded $37,500 in compensatory damages, jointly and severally, in a case involving Liggett and two other cigarette manufacturers, which amount was subsequently reduced by the court. The jury found Liggett 50% responsible for the damages incurred by the plaintiff. The Lukacs case was the first case to be tried as an individual Engle progeny case, but was tried almost five years prior to the Florida Supreme Courts final decision in Engle. In November 2008, the court entered final judgment in the amount of $24,835 (for which Liggett is 50% responsible), |
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plus interest from June 2002 which, as of September 30, 2009, was in excess of $13,000. Defendants filed a notice of appeal in December 2008. Briefing is underway. In addition, plaintiff filed a motion seeking an award of attorneys fees from Liggett based on plaintiffs prior proposal for settlement. All proceedings relating to the motion for attorneys fees are stayed pending a final resolution of appellate proceedings. | ||
Other Class Actions. Smith v. Philip Morris, a Kansas state court case, is an action in which plaintiffs allege that cigarette manufacturers conspired to fix cigarette prices in violation of antitrust laws. Class certification was granted in Smith in November 2001. Discovery is ongoing. | ||
Class action suits have been filed in a number of states against cigarette manufacturers, alleging, among other things, that use of the terms light and ultra light constitutes unfair and deceptive trade practices, among other things. One such suit, Schwab [McLaughlin] v. Philip Morris, pending in federal court in New York since 2004, sought to create a nationwide class of light cigarette smokers. In September 2006, the United States District Court for the Eastern District of New York certified the class. In April 2008, the United States Court of Appeals for the Second Circuit decertified the class. The case was returned to the trial court for further proceedings (see discussion of Cleary case below). In December 2008, the United States Supreme Court, in Altria Group v. Good, ruled that the Federal Cigarette Labeling and Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they could proceed with their claims under the Maine Unfair Trade Practices Act. This ruling may result in additional class action cases in other states. Although Liggett is not a party in the Good case, an adverse ruling or commencement of additional lights related class actions could have a material adverse effect on the Company. | ||
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, are alleged to have been exposed to secondhand smoke from cigarettes which were manufactured by the defendants, and who suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. In October 2004, the trial court stayed this case pending the outcome of the appeal in Scott v. American Tobacco Co. (see description below). | ||
In June 1998, in Cleary v. Philip Morris, a putative class action was brought in Illinois state court on behalf of persons who were allegedly injured by: (i) defendants purported conspiracy to conceal material facts regarding the addictive nature of nicotine; (ii) defendants alleged acts of targeting their advertising and marketing to minors; and (iii) defendants claimed breach of the publics right to defendants compliance with laws prohibiting the distribution of cigarettes to minors. Plaintiffs request that defendants be required to disgorge all profits unjustly received through their sale of cigarettes to plaintiffs and the class. In July 2006, the plaintiffs filed a motion for class certification. A class certification hearing occurred in September 2007 and the parties are awaiting a decision. Merits discovery is stayed pending a ruling by the court. In March 2009, plaintiffs filed a third amended complaint adding, among other things, allegations regarding defendants sale of light cigarettes. In April 2009, plaintiffs in 11 lights class actions, including Cleary and Schwab, moved to consolidate pretrial proceedings in these 11 cases in a Multidistrict Litigation. In September 2009, the court denied the motion to consolidate the Cleary and Schwab cases. |
In April 2001, in Brown v. Philip Morris USA, a California state court granted in part plaintiffs 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. In March 2005, the court granted defendants motion to decertify the class based on a recent change in California law. In June 2009, the California Supreme Court reversed and remanded. Defendants motion for rehearing was denied. In September 2009, plaintiffs advised the court that they intend to seek reconsideration of the courts order finding that plaintiffs allegations regarding lights cigarettes were preempted by federal law, in light of the recent United States Supreme Court decision in Altria Group v. Good. |
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Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases), a West Virginia state court consolidated approximately 750 individual smoker actions that were pending prior to 2001 for trial of certain common issues. In January 2002, the court severed Liggett from the trial of the consolidated action, which is scheduled for February 2010. If the case were to proceed against Liggett, it is estimated that Liggett could be a defendant in approximately 100 of the individual cases. | ||
Class certification motions are pending in a number of other cases and a number of orders denying class certification are on appeal. In addition to the cases described above, numerous class actions remain certified against other cigarette manufacturers, including Scott. In that case, a Louisiana jury returned a $591,000 verdict (subsequently reduced by the court to $263,500 plus interest from June 2004) against other cigarette manufacturers to fund medical monitoring or smoking cessation programs for members of the class. The case is on appeal. | ||
Governmental Actions | ||
As of September 30, 2009, there was one active Governmental Action pending against Liggett. The claims asserted in health care cost recovery actions vary. In these cases, the governmental entities typically assert equitable claims that the tobacco industry was unjustly enriched by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. 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. | ||
In City of St. Louis v. American Tobacco Company, a case pending in Missouri state court since December 1998, the City of St. Louis and approximately 40 hospitals seek recovery of costs expended by the hospitals on behalf of patients who suffer, or have suffered, from illnesses allegedly resulting from the use of cigarettes. In June 2005, the court granted defendants motion for summary judgment as to claims for damages which accrued prior to November 16, 1993. The claims for damages which accrued after November 16, 1993 are pending. Discovery is ongoing. In September 2008, the court heard argument on motions for summary judgment filed by the parties. A decision is pending. Trial is currently scheduled to commence June 7, 2010. | ||
DOJ Case. In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid 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 alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. Claims were asserted under RICO. | ||
In August 2006, the trial court entered a Final Judgment and Remedial Order against each of the cigarette manufacturing defendants, except Liggett. The Final Judgment, among other things, enjoined the non-Liggett defendants from using lights, low tar, ultra lights, mild, or natural descriptors, or conveying any other express or implied health messages in connection with the marketing or sale of cigarettes. In May 2009, the United States Court of Appeals for the District of Columbia Circuit affirmed most of the district courts decision. The defendants, other than Liggett, have appealed to the United States Supreme Court. Although this case has been concluded as to Liggett, it is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United States or otherwise results in restrictions that adversely affect the industry, Liggetts sales volume, operating income and cash flows could be materially adversely affected. |
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Third-Party Payor Actions | ||
As of September 30, 2009, there were two Third-Party Payor Actions pending against Liggett and other cigarette manufacturers. Third-Party Payor Actions typically have been filed by insurance companies, union health and welfare trust funds, asbestos manufacturers and others. In Third-Party Payor Actions, plaintiffs seek damages for 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. Although no specific amounts are provided, it is possible that requested damages against cigarette manufacturers in these cases might be in the billions of dollars. | ||
Several federal circuit courts of appeals and state appellate courts have ruled that Third-Party Payors do not have standing to bring lawsuits against cigarette manufacturers, relying primarily on grounds that plaintiffs claims were too remote. The United States Supreme Court has refused to consider plaintiffs appeals from the cases decided by five federal circuit courts of appeals. | ||
In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action commenced in 1998 by the largest private insurer in that country, General Health Services, against the major United States cigarette manufacturers. The plaintiff seeks to recover the past and future value of the total expenditures for health care services provided to residents of Israel resulting from tobacco related diseases, court ordered interest for past expenditures from the date of filing the statement of claim, increased and/or punitive and/or exemplary damages and costs. The court ruled that, although Liggett had not sold product in Israel since at least 1978, it might still have liability for cigarettes sold prior to that time. Motions filed by defendants are pending before the Israel Supreme Court seeking appeal from a lower courts decision granting leave to plaintiff for foreign service of process. | ||
In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris USA, a case pending in the United States District Court for the Eastern District of New York, plaintiffs commenced an action to recover twice the amount paid by Medicare for the health care services provided to Medicare beneficiaries to treat diseases allegedly attributable to smoking defendants cigarettes from May 21, 2002 to the present, for which treatment defendants allegedly were required to make payment under the Medicare Secondary Payer provisions of the Social Security Act . Defendants Motion to Dismiss and plaintiffs Motion for Partial Summary Judgment were filed in July 2008 and in March 2009, the court dismissed the case. Plaintiffs appealed the decision. | ||
Upcoming Trials | ||
As of September 30, 2009, there were approximately 43 Engle progeny cases that may be set for trial during 2009 or 2010. The Company and/or Liggett and other cigarette manufacturers are currently named as defendants in each of these cases. Trial dates are subject to change. | ||
MSA and Other State Settlement Agreements | ||
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims within those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors. | ||
In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs) (the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers) entered into the Master Settlement Agreement (the MSA) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted health care |
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cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State. | ||
As a result of the MSA, the Settling States released Liggett from: |
| all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and | ||
| all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business. |
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities. | ||
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA. | ||
Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco has no payment obligations under the MSA, except to the extent its market share exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United States. According to data from Management Science Associates, Inc., domestic shipments by Liggett and Vector Tobacco accounted for approximately 2.4%, 2.5% and 2.5% of the total cigarettes shipped in the United States in 2006, 2007 and 2008 respectively. If Liggetts or Vector Tobaccos market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. In April 2007, Liggett and Vector Tobacco paid $38,743 for their 2006 MSA obligations and in April 2008, paid $35,995 for their 2007 MSA obligations, having prepaid $34,500 of that amount in December 2007. In December 2008, Liggett and Vector Tobacco prepaid $34,000 of their 2008 MSA obligations and paid an additional $8,799 in April 2009 after withholding certain disputed amounts. | ||
Under the payment provisions of the MSA, the Participating Manufacturers are required to pay a base annual amount of $9,000,000 in 2009 and each year thereafter (subject to applicable adjustments, offsets and reductions). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligations of each Participating Manufacturer and are not the responsibility of any parent or affiliate of a Participating Manufacturer. |
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Certain MSA Disputes | ||
In 2005, the independent auditor under the MSA calculated that Liggett owed $28,668 for its 2004 sales. In April 2005, Liggett paid $11,678 and disputed the balance, as permitted by the MSA. Liggett subsequently paid $9,304 of the disputed amount, although Liggett continues to dispute that this amount is owed. This $9,304 relates to an adjustment to its 2003 payment obligation claimed by Liggett for the market share loss to non-participating manufacturers, which is known as the NPM Adjustment. At September 30, 2009, included in Other assets on the Companys consolidated balance sheet, was a noncurrent receivable of $6,513 relating to such amount. The remaining balance in dispute of $7,686 is comprised of $5,318 claimed for a 2004 NPM Adjustment and $2,368 relating to the independent auditors retroactive change from gross to net units in calculating MSA payments, which Liggett contends is improper, as discussed below. From their April 2006 payment, Liggett and Vector Tobacco withheld approximately $1,600 claimed for the 2005 NPM Adjustment and $2,949 relating to the retroactive change from gross to net units. Liggett and Vector Tobacco withheld approximately $4,200 from their April 2007 payments related to the 2006 NPM Adjustment and approximately $3,950 relating to the retroactive change from gross to net units. From their April 2008 payment, Liggett and Vector Tobacco withheld approximately $4,000 for the 2007 NPM Adjustment and approximately $3,696 relating to the retroactive change from gross to net units. Vector Tobacco paid approximately $200 into the disputed payments account for the 2007 NPM Adjustment. From their April 2009 payment, Liggett and Vector Tobacco withheld approximately $6,100 relating to the 2008 NPM adjustment and approximately $3,300 relating to the retroactive change from gross to net units. | ||
The following amounts have not been expensed by the Company as they relate to Liggetts and Vector Tobaccos claim for an NPM adjustment: $6,513 for 2003, $3,789 for 2004 and $800 for 2005. | ||
NPM Adjustment. In March 2006, an economic consulting firm selected pursuant to the MSA rendered its final and non-appealable decision that the MSA was a significant factor contributing to the loss of market share of Participating Manufacturers for 2003. The economic consulting firm subsequently rendered the same decision with respect to 2004, 2005 and 2006. As a result, the manufacturers are entitled to potential NPM Adjustments to their 2003, 2004, 2005 and 2006 MSA payments. The Participating Manufacturers are also entitled to potential NPM Adjustments to their 2007, 2008 and 2009 payments pursuant to an agreement entered into in June 2009 between the OPMs and the Settling States under which the OPMs agreed to make certain payments for the benefit of the Settling States, in exchange for which the Settling States stipulated that the MSA was a significant factor contributing to the loss of market share of Participating Manufacturers in 2007, 2008 and 2009. A Settling State that has diligently enforced its qualifying escrow statute in the year in question may be able to avoid application of the NPM Adjustment to the payments made by the manufacturers for the benefit of that state or territory. | ||
Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation has been filed in 49 Settling States over the issue of whether the application of the NPM Adjustment for 2003 is to be determined through litigation or arbitration. These actions relate to the potential NPM Adjustment for 2003, which the independent auditor under the MSA previously determined to be as much as $1,200,000 for all Participating Manufacturers. All but one of the 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana Supreme Court, ruled that Montanas claim of diligent enforcement must be litigated. In response to a proposal from the OPMs and many of the SPMs, 45 of the Settling States, representing approximately 90% of the allocable share of the Settling States, entered into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM Adjustment for 2003. The agreement provides for selection of the arbitration panel beginning November 1, 2009 and that the parties and the arbitrators will thereafter establish the schedule and procedures for the arbitration. Because states representing more than 80% of the allocable share signed the agreement, signing states will receive a 20% reduction of any potential 2003 NPM adjustment. It is anticipated that the arbitration will begin in 2010. There can be no assurance that Liggett or Vector Tobacco will receive any adjustment as a result of these proceedings. | ||
Gross v. Net Calculations. In October 2004, the independent auditor notified Liggett and all other Participating Manufacturers that their payment obligations under the MSA, dating from the agreements execution in late 1998, had been recalculated using net unit amounts, rather than gross unit amounts (which had been used since |
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1999). The change in the method of calculation could, among other things, require additional MSA payments by Liggett of approximately $26,200, including interest, for 2001 through 2008, and require additional amounts in future periods because the proposed change from gross to net units would serve to lower Liggetts market share exemption under the MSA. | ||
Liggett has objected to this retroactive change and has disputed the change in methodology. Liggett contends that the retroactive change from using gross to net unit amounts is impermissible for several reasons, including: |
| use of net unit amounts is not required by the MSA (as reflected by, among other things, the use of gross unit amounts through 2005); | ||
| such a change is not authorized without the consent of affected parties to the MSA; | ||
| the MSA provides for four-year time limitation periods for revisiting calculations and determinations, which precludes recalculating Liggetts 1997 Market Share (and thus, Liggetts market share exemption); and | ||
| Liggett and others have relied upon the calculations based on gross unit amounts since 1998. |
No amounts have been expensed or accrued in the accompanying consolidated financial statements for any potential liability relating to the gross versus net dispute. | ||
QUEST 3. Vector Tobacco has not made MSA payments on sales of its QUEST 3 product as Vector Tobacco believes that QUEST 3 does not fall within the definition of a cigarette under the MSA. Quest is no longer being sold by Vector Tobacco. There can be no assurance that additional payments under the MSA for QUEST 3 will not be owed. | ||
Litigation Challenging the MSA. In Freedom Holdings Inc. v. Cuomo, litigation pending in federal court in New York, certain importers of cigarettes allege that the MSA and certain related New York statutes violate federal antitrust and constitutional law. The district court granted New Yorks motion to dismiss the complaint for failure to state a claim. On appeal, the United States Court of Appeals for the Second Circuit held that if all of the allegations of the complaint were assumed to be true, plaintiffs had stated a claim for relief on antitrust grounds. In January 2009, the district court granted New Yorks motion for summary judgment, dismissing all claims brought by the plaintiffs, and dissolving the preliminary injunction. The plaintiffs have appealed. | ||
In Grand River Enterprises Six Nations, Ltd. v. Pryor, another proceeding pending in federal court in New York, plaintiffs seek to enjoin the statutes enacted by New York and other states in connection with the MSA on the grounds that the statutes violate the Commerce Clause of the United States Constitution and federal antitrust laws. In September 2005, the United States Court of Appeals for the Second Circuit held that if all of the allegations of the complaint were assumed to be true, plaintiffs had stated a claim for relief and that the New York federal court had jurisdiction over the other defendant states. On remand, the trial court held that plaintiffs are unlikely to succeed on the merits. Discovery is pending. Similar challenges to the MSA and MSA-related state statutes are pending in Kentucky, Arkansas, Kansas, Louisiana, Tennessee and Oklahoma. Liggett and the other cigarette manufacturers are not defendants in these cases. Litigation challenging the validity of the MSA, including claims that the MSA violates antitrust laws, has not been successful to date. | ||
In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (Vibo) commenced litigation in the United States District Court for the Western District of Kentucky against each of the Settling States and certain Participating Manufacturers. Vibo alleged, among other things, that the market share exemptions (i.e., grandfathered shares) provided to certain SPMs under the MSA, including Liggett and Vector Tobacco, violate federal antitrust and constitutional law. In January 2009, the court issued a memorandum opinion and order |
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granting the defendants motions and dismissing Vibos lawsuit. In December 2008, Vibo filed a second lawsuit, seeking declaratory relief under the MSA, in California state court against California and certain cigarette manufacturers, including Liggett and Vector Tobacco, seeking a determination that the proposed amendment to Vibos agreement to join the MSA, under which it would no longer have to make certain MSA payments, did not trigger the MSAs most favored nation provision. In March 2009, the OPMs and SPMs each filed motions for summary judgment. In July 2009, the trial court granted the OPMs and SPMs motions for summary judgment. Vibo appealed the final judgment. | ||
Other State Settlements. The MSA replaces Liggetts prior settlements with all states and territories except for Florida, Mississippi, Texas and Minnesota. Each of these four 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. Liggetts agreements with these states remain in full force and effect, and Liggett made various payments to these states under the agreements. These states settlement agreements with Liggett contained most favored nation provisions which could reduce Liggetts payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on each of these four states settlements with United States Tobacco Company, Liggetts payment obligations to those states had been eliminated. With respect to all non-economic obligations under the previous settlements, Liggett believes it is entitled to the most favorable provisions as between the MSA and each states respective settlement with the other major tobacco companies. Therefore, Liggetts non-economic obligations to all states and territories are now defined by the MSA. | ||
In 2003, in order to resolve any potential issues with Minnesota as to Liggetts ongoing economic settlement obligations, Liggett negotiated a $100 a year payment to Minnesota, to be paid any year cigarettes manufactured by Liggett are sold in that state. In 2004, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed that Liggett had failed to make all required payments under the respective settlement agreements with these states for the period 1998 through 2003 and that additional payments may be due for 2004 and subsequent years. Liggett believes the states allegations are without merit, based, among other things, on the language of the most favored nation provisions of the settlement agreements. | ||
Except for $2,500 accrued at September 30, 2009, in connection with the foregoing matters, no other amounts have been accrued in the accompanying condensed consolidated financial statements for any additional amounts that may be payable by Liggett under the settlement agreements with Florida, Mississippi and Texas. The previous settlement demands made by these states are substantially in excess of the $2,500 accrual. There can be no assurance that Liggett will resolve these matters or that Liggett will not be required to make additional material payments, which payments could adversely affect the Companys consolidated financial position, results of operations or cash flows. | ||
Cautionary Statement. Management is not able to predict the outcome of the litigation pending or threatened against Liggett. Litigation is subject to many uncertainties. For example, in addition to $540 awarded in the Davis case, plus legal fees, and $816 awarded in the Ferlanti case, plus legal fees, in June 2002, the jury in the Lukacs case, an individual case brought under the third phase of the Engle case, awarded compensatory damages against Liggett and two other defendants and found Liggett 50% responsible for the damages. In November 2008, the court entered final judgment in favor of the plaintiff for $24,835, plus interest from June 11, 2002 which, as of September 30, 2009, exceeded $13,000. Recently, Liggett was found liable in an Engle progeny case and its portion of the total award was $156. It is possible that additional cases could be decided unfavorably against Liggett. As a result of the Engle decision, approximately 8,585 former Engle class members commenced suit against Liggett and/or the Company and other cigarette manufacturers. Liggett may enter into discussions in an attempt to settle particular cases if it believes it is in its best interest to do so. | ||
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. An unfavorable outcome of a pending smoking and health case could encourage the commencement of |
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additional similar litigation, or could lead to multiple adverse decisions in the Engle progeny cases. Adverse verdicts have been rendered in six Engle progeny cases out of eight that have been tried. Management is unable to make a reasonable estimate with respect to the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its condensed consolidated financial statements for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages. Typically, the claims set forth in an individuals complaint against the tobacco industry seek money damages in an amount to be determined by a jury, plus punitive damages and costs. | ||
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation or legislation. | ||
It is possible that the Companys consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation. | ||
Liggetts and Vector Tobaccos management are unaware of any material environmental conditions affecting their existing facilities. Liggetts and Vector Tobaccos management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco. | ||
Other Matters: | ||
In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five year agreement with a subsidiary of the American Wholesale Marketers Association to support a program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the distribution of cigarettes. This agreement was extended through 2014. Under the agreement, Liggett Vector Brands has agreed to pay a portion of losses, if any, incurred by the surety under the bond program, with a maximum loss exposure of $500 for Liggett Vector Brands. To secure its potential obligations under the agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100 letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has incurred no losses to date under this agreement, and the Company believes the fair value of Liggett Vector Brands obligation under the agreement was immaterial at September 30, 2009. | ||
There may be several other proceedings, lawsuits and claims pending against the Company and certain of its consolidated subsidiaries unrelated to tobacco 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 Companys financial position, results of operations or cash flows. |
9. | INCOME TAXES | |
For the three and nine months ended September 30, 2009, the Companys income tax provision was an expense of $2,654 and a benefit of $1,346 compared to an expense of $7,010 and $33,042 for the three and nine months ended September 30, 2008. |
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The Companys provision for income taxes in interim periods is based on an estimated annual effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary operations. The annual effective income tax rate is reviewed and, if necessary, adjusted on a quarterly basis. | ||
Vectors income tax rates for the three and nine months ended September 30, 2009 and 2008 do not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes and interest and penalties accrued on unrecognized tax benefits offset by the impact of the domestic production activities deduction. In addition, the Company recorded a benefit of $6,166 for the three and nine months ended September 30, 2009 resulting from the reduction of a previously established valuation allowance of a deferred tax asset. The valuation allowance was reduced for the recognition of state tax net operating losses at Vector Tobacco Inc. after evaluating the impact of the negative and positive evidence that such asset would be realized. The Company based its conclusion on the fact that Vector Tobacco is anticipated to report state taxable income on a separate company basis for the second consecutive year in 2009. | ||
For the nine months ended September 30, 2009, the Companys tax provision was reduced because of the impact of the loss on extinguishment of debt and reduced income tax benefit by approximately $535 due to differences in the Companys marginal tax rate and its anticipated effective annual income tax rate from ordinary operations. | ||
For the three and nine months ended September 30, 2008, the Companys income tax provision was increased by approximately $240 because of the impact of the impairment charges. For the nine months ended September 30, 2008, the Companys income tax provision was reduced by approximately $370 because of the impact of the income from the Companys investment in the St. Regis Hotel. | ||
The Companys income tax (benefit) expense consists of the following: |
Three Months Ended | Nine Months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Income before provision for
income taxes |
$ | 18,873 | $ | 21,837 | $ | 10,027 | $ | 81,301 | |||||||||
Income tax expense using estimated
annual effective income tax rate |
8,210 | 9,608 | 4,362 | 35,772 | |||||||||||||
Changes in effective tax rates |
610 | (238 | ) | (77 | ) | | |||||||||||
Impact of discrete items, net |
| 240 | 535 | (130 | ) | ||||||||||||
Reduction of
valuation allowance |
(6,166 | ) | | (6,166 | ) | | |||||||||||
Reversal of unrecognized
tax benefits |
| (2,600 | ) | | (2,600 | ) | |||||||||||
Income tax
expense (benefit) |
$ | 2,654 | $ | 7,010 | $ | (1,346 | ) | $ | 33,042 | ||||||||
The Companys current portion of deferred income taxes payable decreased by approximately $75,500 as a result of taxable income of approximately $197,000 from exercise by Philip Morris of an option associated with the brands transaction. | ||
The Internal Revenue Service concluded an audit of the Companys income tax return for the year ended December 31, 2005. There was no material impact on the Companys condensed consolidated financial statements as a result of the audit. |
-34-
10. | NEW VALLEY | |
Investments in Non-Consolidated Real Estate Businesses: | ||
The components of Investments in non-consolidated real estate businesses were as follows: |
September 30, 2009 | December 31, 2008 | |||||||
Douglas Elliman Realty LLC |
$ | 33,657 | $ | 33,175 | ||||
Aberdeen Townhomes LLC |
1,248 | 6,500 | ||||||
New Valley Oaktree Chelsea Eleven LLC |
10,723 | 11,100 | ||||||
Investments in non-consolidated real
estate businesses |
$ | 45,628 | $ | 50,775 | ||||
Residential Brokerage Business. New Valley recorded income of $4,712 and $4,727 for the three months ended September 30, 2009 and 2008, respectively, and income of $5,328 and $10,249 for the nine months ended September 30, 2009 and 2008, respectively, associated with Douglas Elliman Realty. New Valleys income or loss includes 50% of Douglas Ellimans net income or loss, as well as interest income earned by New Valley on a subordinated loan to Douglas Elliman Realty, income resulting from management fees and other adjustments. New Valley received cash distributions from Douglas Elliman Realty LLC of $1,370 and $3,200 for the three months ended September 30, 2009 and 2008, respectively, and $4,846 and $5,757 for the nine months ended September 30, 2009 and 2008, respectively. | ||
Summarized financial information for Douglas Elliman Realty for the three and nine months ended September 30, 2009 and 2008 and as of September 30, 2009 and December 31, 2008 is presented below. |
September 30, 2009 | December 31, 2008 | |||||||
Cash |
$ | 22,334 | $ | 22,125 | ||||
Other current assets |
9,925 | 7,496 | ||||||
Property, plant and equipment, net |
12,793 | 15,868 | ||||||
Trademarks |
21,663 | 21,663 | ||||||
Goodwill |
38,342 | 38,325 | ||||||
Other intangible assets, net |
1,043 | 1,311 | ||||||
Other non-current assets |
2,759 | 904 | ||||||
Notes payable current |
1,175 | 1,413 | ||||||
Current portion of notes payable to member
Prudential Real Estate Financial Services
of America, Inc. |
3,589 | 4,729 | ||||||
Current portion of notes payable
to member New Valley |
3,589 | 4,729 | ||||||
Other current liabilities |
23,270 | 23,294 | ||||||
Notes payable long term |
627 | 1,805 | ||||||
Notes payable to member Prudential Real
Estate Financial Services of America, Inc. |
| 2,030 | ||||||
Notes payable to member New Valley |
| 2,030 | ||||||
Other long-term liabilities |
8,252 | 6,939 | ||||||
Members equity |
68,357 | 60,723 |
-35-
Three Months Ended | Nine months Ended | ||||||||||||||||
September 30, | September 30, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | ||||||||||||||
Revenues |
$ | 80,484 | $ | 99,259 | $ | 189,813 | $ | 281,515 | |||||||||
Costs and expenses |
71,271 | 88,564 | 177,597 | 256,803 | |||||||||||||
Depreciation expense |
1,075 | 1,373 | 3,408 | 4,080 | |||||||||||||
Amortization expense |
64 | 74 | 192 | 223 | |||||||||||||
Other income |
1,000 | | 1,000 | ||||||||||||||
Interest expense, net |
732 | 800 | 2,025 | 2,465 | |||||||||||||
Income tax expense (benefit) |
323 | 76 | (42 | ) | 422 | ||||||||||||
Net income |
$ | 8,019 | $ | 8,372 | $ | 7,633 | $ | 17,522 | |||||||||
Douglas Elliman Realty has been negatively impacted by the current downturn in the residential real estate market. The residential real estate market is cyclical and is affected by changes in the general economic conditions that are beyond Douglas Elliman Realtys control. Since 2008, the U.S. residential real estate market, including the market in the New York metropolitan area where Douglas Elliman operates, has been negatively impacted by various factors including downward pressure on housing prices, the impact of the recent contraction in the subprime and mortgage markets generally and an exceptionally large inventory of unsold homes at the same time that sales volumes are decreasing. The depth and length of the current downturn in the real estate industry has proved exceedingly difficult to predict. The Company cannot predict whether the downturn will worsen or when the market and related economic forces will return the U.S. residential real estate industry to a growth period. | ||
All of Douglas Elliman Realtys current operations are located in the New York metropolitan area. Local and regional economic and general business conditions in this market could differ materially from prevailing conditions in other parts of the country. Among other things, the New York metropolitan residential real estate market has been impacted by the significant decline in the financial services industry. A continued downturn in the residential real estate market or economic conditions in that region could have a material adverse effect on Douglas Elliman Realty. | ||
Aberdeen Townhomes LLC. In June 2008, a subsidiary of New Valley purchased a preferred equity interest in Aberdeen Townhomes LLC (Aberdeen) for $10,000. Aberdeen acquired five town home residences located in Manhattan, New York, which it is in the process of rehabilitating and selling. The Company had recorded an impairment loss of $3,500 related to Aberdeen at December 31, 2008. The Companys investment in Aberdeen Townhomes consists of the following: |
Balance as of January 1, 2009 |
$ | 6,500 | ||
Impairment loss recorded in
first quarter of 2009 |
(3,500 | ) | ||
Preferred return
distribution |
(1,752 | ) | ||
Balance as of September 30, 2009 |
$ | 1,248 | ||
In September 2009, one of the five townhomes was sold and the mortgage of approximately $8,700 was retired. The Company received a preferred return distribution of approximately $1,752. The Company did not record a gain or loss on the sale. | ||
Mortgages on three of the four Aberdeen town homes with a balance of approximately $27,400 matured on March 1, 2009 and have not been refinanced or paid and are in default. Aberdeen is currently in discussions with the lender. The remaining mortgage with a balance of approximately $4,550, which matured on September 30, 2009, was also in default as of that date due to non-payment of interest. |
-36-
-37-
Level 1
|
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities. | |
Level 2
|
Inputs other than quoted prices that are observable for the assets or liability, either directory or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active. | |
Level 3
|
Unobservable inputs in which there is little market data, which requires the reporting entity to develop their own assumptions |
-38-
Fair Value Measurements as of September 30, 2009 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 225,971 | $ | 225,971 | $ | | $ | | ||||||||
Certificates of deposit |
2,429 | | 2,429 | | ||||||||||||
Bonds |
2,947 | 2,947 | | | ||||||||||||
Investment securities
available for sale |
62,094 | 45,930 | 16,164 | | ||||||||||||
Total |
$ | 293,441 | $ | 274,848 | $ | 18,593 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Fair value of derivatives
embedded within
convertible debt |
$ | 142,850 | $ | | $ | | $ | 142,850 | ||||||||
Fair Value Measurements as of December 31, 2008 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 192,348 | $ | 192,348 | $ | | $ | | ||||||||
Investment
securities available for sale |
28,518 | 20,627 | 7,891 | | ||||||||||||
Total |
$ | 220,866 | $ | 212,975 | $ | 7,891 | $ | | ||||||||
Liabilities: |
||||||||||||||||
Fair value of derivatives
embedded within
convertible debt |
$ | 77,245 | $ | | $ | | $ | 77,245 | ||||||||
-39-
Fair Value Measurements as of September 30, 2009 | ||||||||||||||||||||
Nine months | Quoted Prices | |||||||||||||||||||
Ended | in Active | Significant | ||||||||||||||||||
September 30, | Markets for | Other | Significant | |||||||||||||||||
2009 | Identical | Observable | Unobservable | |||||||||||||||||
Impairment | Assets | Inputs | Inputs | |||||||||||||||||
Description | Charge | Total | (Level 1) | (Level 2) | (Level 3) | |||||||||||||||
Assets: |
||||||||||||||||||||
Investment in real estate |
$ | 5,000 | $ | 12,204 | $ | | $ | | $ | 12,204 | ||||||||||
Investment in non-consolidated
real estate businesses |
3,500 | 1,248 | | | 1,248 | |||||||||||||||
Total |
$ | 8,500 | $ | 13,452 | $ | | $ | | $ | 13,452 | ||||||||||
-40-
Vector | Real | Corporate | ||||||||||||||||||
Liggett | Tobacco | Estate | and Other | Total | ||||||||||||||||
Three months ended September 30, 2009 |
||||||||||||||||||||
Revenues |
$ | 236,335 | $ | 401 | | | $ | 236,736 | ||||||||||||
Operating income (loss) |
43,380 | (1,738 | ) | (194 | ) | (4,476 | ) | 36,972 | ||||||||||||
Depreciation and amortization |
1,969 | 22 | 25 | 634 | 2,650 | |||||||||||||||
Equity income from non-consolidated
real estate businesses |
| | 4,712 | | 4,712 | |||||||||||||||
Three months ended September 30, 2008 |
||||||||||||||||||||
Revenues |
$ | 144,841 | $ | 760 | | | $ | 145,601 | ||||||||||||
Operating income (loss) |
45,924 | (2,439 | ) | | (5,950 | ) | 37,535 | |||||||||||||
Depreciation and amortization |
1,910 | 30 | | 588 | 2,528 | |||||||||||||||
Equity income from non-consolidated
real estate businesses |
| | 5,202 | | 5,202 | |||||||||||||||
Nine months ended September 30, 2009 |
||||||||||||||||||||
Revenues |
$ | 563,293 | $ | 1,453 | | | $ | 564,746 | ||||||||||||
Operating income (loss) |
125,100 | (1) | (5,885 | ) (2) | (194 | ) | (12,042 | ) | 106,979 | |||||||||||
Equity income from non-consolidated
real estate businesses |
| | 5,528 | | 5,528 | |||||||||||||||
Identifiable assets |
301,474 | 11,685 | 63,374 | 398,847 | 775,380 | |||||||||||||||
Depreciation and amortization |
5,927 | 75 | 25 | 1,741 | 7,768 | |||||||||||||||
Capital expenditures |
2,117 | 12 | 876 | | 3,005 | |||||||||||||||
Nine months ended September 30, 2008 |
||||||||||||||||||||
Revenues |
$ | 418,816 | $ | 1,950 | | | $ | 420,766 | ||||||||||||
Operating income (loss) |
126,960 | (6,775 | ) | | (20,264 | ) | 99,921 | |||||||||||||
Equity income from non-consolidated
real estate businesses |
| | 22,706 | | 22,706 | |||||||||||||||
Identifiable assets |
312,188 | 2,317 | 57,383 | 417,807 | 789,695 | |||||||||||||||
Depreciation and amortization |
5,682 | 89 | | 1,757 | 7,528 | |||||||||||||||
Capital expenditures |
5,341 | 85 | | | 5,426 |
(1) | Operating income includes a gain of $5,000 on the Philip Morris brand transaction completed February 2009. | |
(2) | Operating income includes restructuring costs of $1,000. |
-41-
-42-
September 30, 2009 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 230,020 | $ | 7,239 | $ | 209 | $ | | $ | 237,468 | ||||||||||
Investment securities
available for sale |
62,016 | | 78 | | 62,094 | |||||||||||||||
Accounts receivable
trade |
| 6,824 | | | 6,824 | |||||||||||||||
Intercompany receivables |
100 | | | (100 | ) | | ||||||||||||||
Inventories |
| 100,021 | | | 100,021 | |||||||||||||||
Deferred income taxes |
3,764 | 435 | | | 4,199 | |||||||||||||||
Income taxes receivable |
| 9,398 | | (9,398 | ) | | ||||||||||||||
Restricted assets |
| 3,545 | | | 3,545 | |||||||||||||||
Other current assets |
271 | 2,785 | 58 | | 3,114 | |||||||||||||||
Total current assets |
296,171 | 130,247 | 345 | (9,498 | ) | 417,265 | ||||||||||||||
Property, plant and equipment, net |
650 | 44,351 | 850 | | 45,851 | |||||||||||||||
Investment in real estate |
| | 12,204 | | 12,204 | |||||||||||||||
Long-term investments accounted
for at cost |
50,333 | | 837 | | 51,170 | |||||||||||||||
Investments in non- consolidated
real estate businesses |
| | 45,628 | | 45,628 | |||||||||||||||
Investments in consolidated subsidiaries |
163,603 | | | (163,603 | ) | | ||||||||||||||
Restricted assets |
2,428 | 2,158 | | | 4,586 | |||||||||||||||
Deferred income taxes |
41,514 | 7,073 | 9,624 | | 58,211 | |||||||||||||||
Intangible asset |
| 107,511 | | | 107,511 | |||||||||||||||
Prepaid pension costs |
| 3,171 | | | 3,171 | |||||||||||||||
Other assets |
15,634 | 14,149 | | | 29,783 | |||||||||||||||
Total assets |
$ | 570,333 | $ | 308,660 | $ | 69,488 | $ | (173,101 | ) | $ | 775,380 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of notes
payable and long-term debt |
$ | 670 | $ | 20,222 | $ | | $ | | $ | 20,892 | ||||||||||
Current portion of employee
benefits |
| 1,051 | | | 1,051 | |||||||||||||||
Accounts payable |
1,959 | 7,232 | 578 | | 9,769 | |||||||||||||||
Intercompany payables |
| 100 | | (100 | ) | | ||||||||||||||
Accrued promotional
expenses |
| 12,081 | | | 12,081 | |||||||||||||||
Income taxes payable, net |
20,311 | | 20,199 | (9,398 | ) | 31,112 | ||||||||||||||
Accrued excise and payroll
taxes payable, net |
| 568 | | | 568 | |||||||||||||||
Settlement accruals |
| 46,787 | | | 46,787 | |||||||||||||||
Deferred income taxes |
15,083 | 2,120 | | | 17,203 | |||||||||||||||
Accrued interest |
6,861 | | | | 6,861 | |||||||||||||||
Other current liabilities |
3,172 | 9,038 | 5 | | 12,215 | |||||||||||||||
Total current liabilities |
48,056 | 99,199 | 20,782 | (9,498 | ) | 158,539 | ||||||||||||||
Notes payable, long-term debt and
other obligations, less current
portion |
317,907 | 15,959 | 636 | | 334,502 | |||||||||||||||
Fair value of derivatives embedded
within convertible debt |
142,850 | | | | 142,850 | |||||||||||||||
Non-current employee
benefits |
12,034 | 24,899 | | | 36,933 | |||||||||||||||
Deferred income
taxes |
39,112 | 22,257 | 7,123 | | 68,492 | |||||||||||||||
Other liabilities |
352 | 22,793 | 897 | | 24,042 | |||||||||||||||
Total liabilities |
560,311 | 185,107 | 29,438 | (9,498 | ) | 765,358 | ||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Stockholders equity |
10,022 | 123,553 | 40,050 | (163,603 | ) | 10,022 | ||||||||||||||
Total liabilities and
stockholders equity |
$ | 570,333 | $ | 308,660 | $ | 69,488 | $ | (173,101 | ) | $ | 775,380 | |||||||||
-43-
December 31, 2008 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 200,066 | $ | 11,039 | $ | | $ | | $ | 211,105 | ||||||||||
Investment securities
available for sale |
28,440 | | 78 | | 28,518 | |||||||||||||||
Accounts receivable
trade |
| 9,506 | | | 9,506 | |||||||||||||||
Intercompany receivables |
1,938 | | | (1,938 | ) | | ||||||||||||||
Inventories |
| 92,581 | | | 92,581 | |||||||||||||||
Deferred income taxes |
3,304 | 338 | | | 3,642 | |||||||||||||||
Income taxes receivable |
25,125 | | | (25,125 | ) | | ||||||||||||||
Other current assets |
3,962 | 5,969 | | | 9,931 | |||||||||||||||
Total current assets |
262,835 | 119,433 | 78 | (27,063 | ) | 355,283 | ||||||||||||||
Property, plant and equipment, net |
735 | 49,956 | | | 50,691 | |||||||||||||||
Mortgage receivable |
| | 17,704 | | 17,704 | |||||||||||||||
Long-term investments accounted
for at cost |
50,332 | | 786 | | 51,118 | |||||||||||||||
Long-term investments accounted
under the equity method |
| | | | | |||||||||||||||
Investments in non- consolidated
real estate businesses |
| | 50,775 | | 50,775 | |||||||||||||||
Investments in consolidated subsidiaries |
164,917 | | | (164,917 | ) | | ||||||||||||||
Restricted assets |
3,845 | 2,710 | | | 6,555 | |||||||||||||||
Deferred income taxes |
37,177 | 870 | 7,175 | | 45,222 | |||||||||||||||
Intangible asset |
| 107,511 | | | 107,511 | |||||||||||||||
Prepaid pension costs |
| 2,901 | | | 2,901 | |||||||||||||||
Other assets |
16,295 | 13,657 | | | 29,952 | |||||||||||||||
Total assets |
$ | 536,136 | $ | 297,038 | $ | 76,518 | $ | (191,980 | ) | $ | 717,712 | |||||||||
LIABILITIES AND STOCKHOLDERS EQUITY: |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of notes
payable and long-term debt |
$ | 72,299 | $ | 25,199 | $ | | $ | | $ | 97,498 | ||||||||||
Current portion of employee
benefits |
20,789 | 1,051 | | | 21,840 | |||||||||||||||
Accounts payable |
3,219 | 2,885 | | | 6,104 | |||||||||||||||
Intercompany payables |
| 3 | | (3 | ) | | ||||||||||||||
Accrued promotional
expenses |
| 10,131 | | | 10,131 | |||||||||||||||
Income taxes payable, net |
| 10,754 | 26,174 | (25,125 | ) | 11,803 | ||||||||||||||
Accrued excise and payroll
taxes payable, net |
| 7,004 | | | 7,004 | |||||||||||||||
Settlement accruals |
| 20,668 | | | 20,668 | |||||||||||||||
Deferred income taxes |
81,961 | 10,546 | | | 92,507 | |||||||||||||||
Accrued interest |
9,612 | | | | 9,612 | |||||||||||||||
Other current liabilities |
| 20,017 | 910 | (1,935 | ) | 18,992 | ||||||||||||||
Total current liabilities |
187,880 | 108,258 | 27,084 | (27,063 | ) | 296,159 | ||||||||||||||
Notes payable, long-term debt and
other obligations, less current
portion |
191,007 | 19,294 | | | 210,301 | |||||||||||||||
Fair value of derivatives embedded
within convertible debt |
77,245 | | | | 77,245 | |||||||||||||||
Non-current employee
benefits |
17,388 | 17,468 | | | 34,856 | |||||||||||||||
Deferred income
taxes |
28,573 | 20,125 | 109 | | 48,807 | |||||||||||||||
Other liabilities |
438 | 15,219 | 1,082 | | 16,739 | |||||||||||||||
Total liabilities |
502,531 | 180,364 | 28,275 | (27,063 | ) | 684,107 | ||||||||||||||
Commitments and contingencies |
| | | | | |||||||||||||||
Stockholders equity |
33,605 | 116,674 | 48,243 | (164,917 | ) | 33,605 | ||||||||||||||
Total liabilities and
stockholders equity |
$ | 536,136 | $ | 297,038 | $ | 76,518 | $ | (191,980 | ) | $ | 717,712 | |||||||||
-44-
Three Months Ended September 30, 2009 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | | $ | 236,736 | $ | | $ | | $ | 236,736 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods sold |
| 177,798 | | | 177,798 | |||||||||||||||
Operating, selling,
administrative and
general expenses |
4,944 | 16,756 | 266 | | 21,966 | |||||||||||||||
Management fee expense |
| 2,055 | | (2,055 | ) | | ||||||||||||||
Operating income
(loss) |
(4,944 | ) | 40,127 | (266 | ) | 2,055 | 36,972 | |||||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest and dividend
income |
43 | 8 | | | 51 | |||||||||||||||
Interest expense |
(16,465 | ) | (332 | ) | (11 | ) | | (16,808 | ) | |||||||||||
Changes in fair value
of derivatives
embedded within
convertible debt |
(6,054 | ) | | | | (6,054 | ) | |||||||||||||
Equity income on
non-consolidated
real estate
businesses |
| | 4,712 | | 4,712 | |||||||||||||||
Equity income in consolidated subsidiaries |
33,308 | | | (33,308 | ) | | ||||||||||||||
Management fee income |
2,055 | | | (2,055 | ) | | ||||||||||||||
Other, net |
| | | | | |||||||||||||||
Income (loss) before
provision for income
taxes |
7,943 | 39,803 | 4,435 | (33,308 | ) | 18,873 | ||||||||||||||
Income tax
benefit (expense) |
8,276 | (9,238 | ) | (1,692 | ) | | (2,654 | ) | ||||||||||||
Net income (loss) |
$ | 16,219 | $ | 30,565 | $ | 2,743 | $ | (33,308 | ) | $ | 16,219 | |||||||||
-45-
Three Months Ended September 30, 2008 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | | $ | 145,601 | $ | | $ | | $ | 145,601 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods
sold |
| 84,999 | | | 84,999 | |||||||||||||||
Operating,
selling,
administrative
and general
expenses |
7,554 | 16,738 | (1,225 | ) | | 23,067 | ||||||||||||||
Management fee
expense |
| 1,984 | | (1,984 | ) | | ||||||||||||||
Operating
(loss) income |
(7,554 | ) | 41,880 | 1,225 | 1,984 | 37,535 | ||||||||||||||
Other income
(expenses): |
||||||||||||||||||||
Interest
and dividend
income |
977 | 117 | | | 1,094 | |||||||||||||||
Interest
expense |
(15,149 | ) | (366 | ) | | | (15,515 | ) | ||||||||||||
Changes in
fair value of
derivatives
embedded
within
convertible
debt |
522 | | | | 522 | |||||||||||||||
Provision for
loss on
investments |
(3,000 | ) | | (4,000 | ) | | (7,000 | ) | ||||||||||||
Equity income
from
non-consolidated
real estate
businesses |
| | 5,202 | | 5,202 | |||||||||||||||
Equity income
in consolidated
subsidiaries |
26,819 | | | (26,819 | ) | | ||||||||||||||
Management fee
income |
1,984 | | | (1,984 | ) | | ||||||||||||||
Other, net |
(1 | ) | | | | (1 | ) | |||||||||||||
Income before
provision for
income taxes |
4,598 | 41,631 | 2,427 | (26,819 | ) | 21,837 | ||||||||||||||
Income tax
benefit
(expense) |
10,229 | (16,224 | ) | (1,015 | ) | | (7,010 | ) | ||||||||||||
Net income |
$ | 14,827 | $ | 25,407 | $ | 1,412 | $ | (26,819 | ) | $ | 14,827 | |||||||||
-46-
Nine Months Ended September 30, 2009 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | | $ | 564,746 | $ | | $ | | $ | 564,746 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods sold |
| 398,088 | | | 398,088 | |||||||||||||||
Operating, selling, administrative and
general expenses |
14,596 | 48,616 | 467 | | 63,679 | |||||||||||||||
Gain on brand
transaction |
| (5,000 | ) | | | (5,000 | ) | |||||||||||||
Restructuring
charges |
| 1,000 | | | 1,000 | |||||||||||||||
Management fee expense |
| 6,167 | | (6,167 | ) | | ||||||||||||||
Operating income (loss) |
(14,596 | ) | 115,875 | (467 | ) | 6,167 | 106,979 | |||||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest and dividend income |
180 | 97 | | | 277 | |||||||||||||||
Interest expense |
(49,097 | ) | (860 | ) | (11 | ) | | (49,968 | ) | |||||||||||
Loss on
extinguishment of debt |
(18,444 | ) | | | | (18,444 | ) | |||||||||||||
Changes in fair value of derivatives
embedded within convertible debt |
(25,845 | ) | | | | (25,845 | ) | |||||||||||||
Impairment charges
on investments |
| | (8,500 | ) | | (8,500 | ) | |||||||||||||
Equity income from non-consolidated real
estate businesses |
| | 5,528 | | 5,528 | |||||||||||||||
Equity income in consolidated subsidiaries |
75,060 | | | (75,060 | ) | | ||||||||||||||
Management fee income |
6,167 | | | (6,167 | ) | | ||||||||||||||
Other, net |
| | | | | |||||||||||||||
Income (loss) before provision for income
taxes |
(26,575 | ) | 115,112 | (3,450 | ) | (75,060 | ) | 10,027 | ||||||||||||
Income tax benefit (expense) |
37,948 | (38,013 | ) | 1,411 | | 1,346 | ||||||||||||||
Net income (loss) |
$ | 11,373 | $ | 77,099 | $ | (2,039 | ) | $ | (75,060 | ) | $ | 11,373 | ||||||||
-47-
Nine Months Ended September 30, 2008 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | | $ | 420,766 | $ | | $ | | $ | 420,766 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods
sold |
| 251,036 | | | 251,036 | |||||||||||||||
Operating,
selling,
administrative
and
general
expenses |
22,725 | 47,610 | (526 | ) | | 69,809 | ||||||||||||||
Management
fee expense |
| 5,954 | | (5,954 | ) | | ||||||||||||||
Operating income
(loss) |
(22,725 | ) | 116,166 | 526 | 5,954 | 99,921 | ||||||||||||||
Other income
(expenses): |
||||||||||||||||||||
Interest
and dividend
income |
4,017 | 423 | | | 4,440 | |||||||||||||||
Interest expense |
(44,699 | ) | (1,326 | ) | | | (46,025 | ) | ||||||||||||
Changes in fair
value
of derivatives
embedded
within
convertible
debt |
7,837 | | | | 7,837 | |||||||||||||||
Provision for
loss on
investments |
(3,000 | ) | | (4,000 | ) | | (7,000 | ) | ||||||||||||
Equity income
from
non-consolidated real estate businesses |
| | 22,706 | | 22,706 | |||||||||||||||
Equity income
in consolidated
subsidiaries |
82,036 | | | (82,036 | ) | | ||||||||||||||
Management fee
income |
5,954 | | | (5,954 | ) | | ||||||||||||||
Other, net |
(574 | ) | | (4 | ) | | (578 | ) | ||||||||||||
Income before
provision for
income
taxes |
28,846 | 115,263 | 19,228 | (82,036 | ) | 81,301 | ||||||||||||||
Income tax
benefit (expense) |
19,413 | (44,568 | ) | (7,887 | ) | | (33,042 | ) | ||||||||||||
Net income |
$ | 48,259 | $ | 70,695 | $ | 11,341 | $ | (82,036 | ) | $ | 48,259 | |||||||||
-48-
Nine Months Ended September 30, 2009 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Net cash provided
by operating activities |
$ | 10,444 | $ | 78,046 | $ | 1,572 | $ | (80,728 | ) | $ | 9,334 | |||||||||
Cash flows from investing
activities: |
||||||||||||||||||||
Purchase of
investment
securities |
(12,300 | ) | | | | (12,300 | ) | |||||||||||||
Proceeds from
sale or liquidation
of long-term
investments |
1,407 | | | | 1,407 | |||||||||||||||
Purchase of
long-term
investments |
| | (51 | ) | | (51 | ) | |||||||||||||
Distributions
from
non-consolidated
real estate
businesses |
| | 5,548 | | 5,548 | |||||||||||||||
Investments in
non-consolidated
real estate
businesses |
| | (467 | ) | | (467 | ) | |||||||||||||
Investments in
subsidiaries |
(3,050 | ) | | | 3,050 | | ||||||||||||||
Increase in
cash surrender
value of life
insurance policies |
(413 | ) | (426 | ) | | | (839 | ) | ||||||||||||
(Increase)
decrease in
non-current
restricted assets |
1,417 | 552 | | | 1,969 | |||||||||||||||
Capital expenditures |
| (2,129 | ) | (876 | ) | | (3,005 | ) | ||||||||||||
Net cash (used in)
provided by investing
activities |
(12,939 | ) | (2,003 | ) | 4,154 | 3,050 | (7,738 | ) | ||||||||||||
Cash flows from
financing activities: |
||||||||||||||||||||
Proceeds from
debt Issuance |
118,125 | 21 | 636 | | 118,782 | |||||||||||||||
Repayments of debt |
| (4,516 | ) | | | (4,516 | ) | |||||||||||||
Deferred financing charges |
(5,567 | ) | (6 | ) | | | (5,573 | ) | ||||||||||||
Borrowings under revolver |
| 526,949 | | | 526,949 | |||||||||||||||
Repayments on
revolver |
| (530,766 | ) | | | (530,766 | ) | |||||||||||||
Capital
contributions
received |
| 3,050 | | (3,050 | ) | | ||||||||||||||
Intercompany
dividends paid |
| (74,575 | ) | (6,153 | ) | 80,728 | | |||||||||||||
Dividends and
distributions on
common stock |
(87,451 | ) | | | | (87,451 | ) | |||||||||||||
Proceeds from
exercise of Vector
options and warrants |
398 | | | | 398 | |||||||||||||||
Tax benefit of
options exercised |
6,944 | | | | 6,944 | |||||||||||||||
Net cash (used in)
financing activities |
32,449 | (79,843 | ) | (5,517 | ) | 77,678 | 24,767 | |||||||||||||
Net increase
(decrease) in cash and
cash equivalents |
29,954 | (3,800 | ) | 209 | | 26,363 | ||||||||||||||
Cash and cash
equivalents, beginning of
period |
200,066 | 11,039 | | | 211,105 | |||||||||||||||
Cash and cash
equivalents, end of
period |
$ | 230,020 | $ | 7,239 | $ | 209 | $ | | $ | 237,468 | ||||||||||
-49-
Nine Months Ended September 30, 2008 | ||||||||||||||||||||
Subsidiary | Consolidated | |||||||||||||||||||
Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Net cash
provided by operating
activities |
$ | 54,155 | $ | 97,863 | $ | 4,167 | $ | (85,750 | ) | $ | 70,435 | |||||||||
Cash flows from
investing
activities: |
||||||||||||||||||||
Purchase
of investment
securities |
(5,682 | ) | | | | (5,682 | ) | |||||||||||||
Proceeds
from sale or
liquidation of
long-term
investments |
8,334 | | | | 8,334 | |||||||||||||||
Purchase
of long-term
investments |
| | (51 | ) | | (51 | ) | |||||||||||||
Purchase
of mortgage
receivable |
| | (21,704 | ) | | (21,704 | ) | |||||||||||||
Distributions
from non-consolidated real estate businesses |
| | 17,628 | | 17,628 | |||||||||||||||
Investment in
non-
consolidated
real estate
businesses |
| | (22,000 | ) | | (22,000 | ) | |||||||||||||
Increase
in cash
surrender value
of life
insurance
policies |
(386 | ) | (380 | ) | | | (766 | ) | ||||||||||||
Decrease
in non-current
restricted
assets |
154 | 684 | | | 838 | |||||||||||||||
Investments in
subsidiaries |
(26,060 | ) | | | 26,060 | | ||||||||||||||
Proceeds from
the sale
of fixed
assets |
| 403 | | | 403 | |||||||||||||||
Capital
expenditures |
| (5,426 | ) | | | (5,426 | ) | |||||||||||||
Net cash used
in investing
activities |
(23,640 | ) | (4,719 | ) | (26,127 | ) | 26,060 | (28,426 | ) | |||||||||||
Cash flows from
financing activities: |
||||||||||||||||||||
Proceeds from
debt |
| 2,830 | | | 2,830 | |||||||||||||||
Repayments of
debt |
| (4,666 | ) | | | (4,666 | ) | |||||||||||||
Deferred financing
charges |
(137 | ) | | | | (137 | ) | |||||||||||||
Borrowings under
revolver |
| 386,499 | | | 386,499 | |||||||||||||||
Repayments on
revolver |
| (397,892 | ) | | | (397,892 | ) | |||||||||||||
Capital
contributions
received |
| 4,100 | 21,960 | (26,060 | ) | | ||||||||||||||
Intercompany
dividends paid |
| (85,750 | ) | | 85,750 | | ||||||||||||||
Dividends
and
distributions on
common stock |
(78,581 | ) | | | | (78,581 | ) | |||||||||||||
Proceeds
from exercise of
Vector options
and warrants |
26 | | | | 26 | |||||||||||||||
Excess tax
benefit of
options
exercised |
18,304 | | | | 18,304 | |||||||||||||||
Net cash (used
in) provided by
financing activities |
(60,388 | ) | (94,879 | ) | 21,960 | 59,690 | (73,617 | ) | ||||||||||||
Net decrease in
cash and cash
equivalents |
(29,873 | ) | (1,735 | ) | | | (31,608 | ) | ||||||||||||
Cash and cash
equivalents,
beginning of period |
228,901 | 9,216 | | | 238,117 | |||||||||||||||
Cash and cash
equivalents, end of
period |
$ | 199,028 | $ | 7,481 | $ | | $ | | $ | 206,509 | ||||||||||
-50-
| the manufacture and sale of cigarettes in the United States through our subsidiary Liggett Group LLC, | ||
| the development of reduced risk cigarette products through our subsidiary Vector Tobacco Inc., and | ||
| the real estate business through our subsidiary, New Valley LLC, which is seeking to acquire additional operating companies and real estate properties. New Valley owns 50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage company in the New York metropolitan area. |
| LIGGETT SELECT a leading brand in the deep discount category, | ||
| GRAND PRIX re-launched as a national brand in 2005, | ||
| EVE a leading brand of 120 millimeter cigarettes in the branded discount category, | ||
| PYRAMID the industrys first deep discount product with a brand identity relaunched in the second quarter of 2009, and | ||
| USA and various Partner Brands and private label brands. |
-51-
-52-
-53-
-54-
-55-
-56-
-57-
-58-
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30 | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Liggett |
$ | 236,335 | $ | 144,841 | $ | 563,293 | $ | 418,816 | ||||||||
Vector Tobacco |
401 | 760 | 1,453 | 1,950 | ||||||||||||
Total revenues |
$ | 236,736 | $ | 145,601 | $ | 564,746 | $ | 420,766 | ||||||||
Operating income (loss): |
||||||||||||||||
Liggett |
$ | 43,380 | $ | 45,924 | $ | 125,100 | $ | 126,960 | ||||||||
Vector Tobacco |
(1,738 | ) | (2,439 | ) | (5,885 | ) | (6,775 | ) | ||||||||
Total tobacco |
41,642 | 43,485 | 119,215 | 120,185 | ||||||||||||
Real estate |
(194 | ) | | (194 | ) | | ||||||||||
Corporate and other |
(4,476 | ) | (5,950 | ) | (12,042 | ) | (20,264 | ) | ||||||||
Total operating income |
$ | 36,972 | $ | 37,535 | $ | 106,979 | $ | 99,921 | ||||||||
-59-
-60-
-61-
-62-
-63-
-64-
-65-
| cash interest expense of approximately $63,650, | ||
| dividends on our outstanding common shares (currently at an annual rate of approximately $115,000), and | ||
| other corporate expenses and taxes, including a tax payment of approximately $25,000 in connection with the Philip Morris brands transaction. |
-66-
-67-
-68-
| increases the number of health warnings required on cigarette and smokeless tobacco products, increases the size of warnings on packaging and in advertising, requires the FDA to develop graphic warnings for cigarette packages, and grants the FDA authority to require new warnings; | ||
| requires practically all tobacco product advertising to eliminate color and imagery and instead consist solely of black text on white background; | ||
| imposes new restrictions on the sale and distribution of tobacco products; | ||
| bans the use of light, mild, low or similar descriptors on tobacco products; | ||
| bans the use of characterizing flavors in cigarettes other than tobacco or menthol; | ||
| gives the FDA the authority to impose tobacco product standards that are appropriate for the protection of the public health (by, for example, requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling); | ||
| requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products; | ||
| requires pre-market approval by the FDA for tobacco products represented (through labels, labeling, advertising, or other means) as presenting a lower risk of harm or tobacco-related disease; | ||
| requires manufacturers to report ingredients and harmful constituents and requires the FDA to disclose certain constituent information to the public; | ||
| mandates that manufacturers test and report on ingredients and constituents identified by the FDA as requiring such testing to protect the public health, and allows the FDA to require the disclosure of testing results to the public; | ||
| requires manufacturers to submit to the FDA certain information regarding the health, toxicological, behavioral or physiologic effects of tobacco products; | ||
| prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal law; | ||
| requires the FDA to establish good manufacturing practices to be followed at tobacco manufacturing facilities; | ||
| requires tobacco product manufacturers (and certain other entities) to register with the FDA; | ||
| authorizes the FDA to require the reduction of nicotine (although it may not require the reduction of nicotine yields of a tobacco product to zero) and the reduction or elimination of other constituents; | ||
| imposes (and allows the FDA to impose) various recordkeeping and reporting requirements on tobacco product manufacturers; and | ||
| grants the FDA the regulatory authority to impose broad additional restrictions. |
-69-
| a recommendation on modified risk applications; | ||
| a recommendation on the effects of tobacco product nicotine yield alteration and whether there is a threshold level below which nicotine yields do not produce dependence; | ||
| a report on the public health impact of the use of menthol in cigarettes; and | ||
| a report on the public health impact of dissolvable tobacco products. |
-70-
-71-
| economic outlook, | ||
| capital expenditures, | ||
| cost reduction, | ||
| new legislation, | ||
| cash flows, | ||
| operating performance, | ||
| litigation, | ||
| impairment charges and cost savings associated with restructurings of our tobacco operations, and | ||
| related industry developments (including trends affecting our business, financial condition and results of operations). |
| general economic and market conditions and any changes therein, due to acts of war and terrorism or otherwise, | ||
| impact of current crises in capital and credit markets, including any continued worsening, | ||
| governmental regulations and policies, | ||
| effects of industry competition, | ||
| impact of business combinations, including acquisitions and divestitures, both internally for us and externally in the tobacco industry, | ||
| impact of restructurings on our tobacco business and our ability to achieve any increases in profitability estimated to occur as a result of these restructurings, | ||
| impact of new legislation on our competitors payment obligations, results of operations and product costs, i.e. the impact of recent federal legislation eliminating the federal tobacco quota system, | ||
| impact of substantial increases in federal, state and local excise taxes, |
-72-
| uncertainty related to litigation and potential additional payment obligations for us under the Master Settlement Agreement and other settlement agreements with the states, and | ||
| risks inherent in our new product development initiatives. |
-73-
-74-
Item 1. | Legal Proceedings | |
Reference is made to Note 8., incorporated herein by reference, to our condensed consolidated financial statements included elsewhere in this report which contains a general description of certain legal proceedings to which our company, VGR Holding, Liggett, Vector Tobacco, New Valley or their subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1 for additional information regarding the pending smoking-related material legal proceedings to which Liggett or us is a party. A copy of Exhibit 99.1 will be furnished without charge upon written request to us at our principal executive offices, 100 S.E. Second St., Miami, Florida 33131, Attn. Investor Relations. |
Item 1A. | Risk Factors | |
Except as set forth below, there are no material changes from the risk factors set forth in Item 1A, Risk Factors, of our Annual Report on 10-K for the year ended December 31, 2008. Please refer to that section for disclosures regarding the risks and uncertainties related to our business. The risk factors in the Annual Report on Form 10-K entitled Litigation will continue to harm the tobacco industry, Individual tobacco-related cases have increased as a result of the Florida Supreme Courts ruling in Engle and Liggett may have additional payment obligations under the Master Settlement Agreement and its other settlement agreements with the states are revised to reflect the updated information concerning the number and status of cases and other matters discussed under Note 8 to our condensed consolidated financial statements and in Managements Discussion and Analysis of Financial Condition Recent Developments Tobacco Settlement Agreements, Recent Developments in Legislation, Regulation and Tobacco-Related Litigation, and Legislation and Regulation. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Except for approximately 3,326,623 shares of our common stock issued as a stock dividend on September 29, 2009 and as discussed in our filing on Form 8-K dated September 1, 2009 related to an additional $85,000,000 principal amount of our 11% Senior Secured Notes, no securities of ours which were not registered under a private offering of the Securities Act of 1933 have been issued or sold by us during the three months ended September 30, 2009. | ||
Our purchases of our common stock during the three months ended September 30, 2009 were as follows: |
Total Number | Maximum Number | |||||||||||||||
of Shares | of Shares that | |||||||||||||||
Total | Purchased as | May Yet Be | ||||||||||||||
Number of | Average | Part of Publicly | Purchased Under | |||||||||||||
Shares | Price Paid | Announced Plans | the Plans | |||||||||||||
Period | Purchased | per Share | or Programs | or Programs | ||||||||||||
July 1 to July 31, 2009 |
| $ | | | | |||||||||||
August 1 to August 31, 2009 |
| | | | ||||||||||||
September 1 to September
30, 2009 |
2,120,479 | (1) | 15.43 | | | |||||||||||
Total |
2,120,479 | $ | 15.43 | | | |||||||||||
(1) | Delivery of shares to us in payment of exercise price in connection with exercise of an employee stock option for 3,218,998 shares on September 23, 2009. The shares were subsequently cancelled. |
-75-
Item 6. | Exhibits |
4.1 | Second Supplemental Indenture, dated as of September 1, 2009, among Vector Group Ltd., the subsidiary guarantors named therein and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.1 of Vectors Form 8-K dated September 1, 2009). | ||
4.2 | Registration Rights Agreement, dated as of September 1, 2009, between Vector Group Ltd., the subsidiary guarantors named therein and Jefferies & Company, Inc. (incorporated by reference to Exhibit 4.2 of Vectors Form 8-K dated September 1, 2009). | ||
31.1 | Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
31.2 | Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||
32.1 | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
32.2 | Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | ||
99.1 | Material Legal Proceedings |
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VECTOR GROUP LTD. (Registrant) |
||||
By: | /s/ J. Bryant Kirkland III | |||
J. Bryant Kirkland III | ||||
Vice President, Treasurer and Chief Financial Officer |
||||
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