| Delaware (State or other jurisdiction of incorporation or organization) |
1-5759 Commission File Number |
65-0949535 (I.R.S. Employer Identification No.) |
| Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
| (Do not check if a smaller reporting company) | ||||||
1
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 219,798 | $ | 238,117 | ||||
Investment securities available for sale |
37,508 | 45,875 | ||||||
Accounts receivable — trade |
8,607 | 3,113 | ||||||
Inventories |
91,102 | 86,825 | ||||||
Deferred income taxes |
17,760 | 18,336 | ||||||
Other current assets |
4,850 | 3,360 | ||||||
Total current assets |
379,625 | 395,626 | ||||||
Property, plant and equipment, net |
51,848 | 54,432 | ||||||
Mortgage receivable |
21,704 | — | ||||||
Long-term investments accounted for at cost |
73,018 | 72,971 | ||||||
Long-term investment accounted for under the equity method |
— | 10,495 | ||||||
Investments in non-consolidated real estate businesses |
43,857 | 35,731 | ||||||
Restricted assets |
9,025 | 8,766 | ||||||
Deferred income taxes |
27,417 | 26,637 | ||||||
Intangible asset |
107,511 | 107,511 | ||||||
Prepaid pension costs |
44,126 | 42,084 | ||||||
Other assets |
29,928 | 31,036 | ||||||
Total assets |
$ | 788,059 | $ | 785,289 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||
Current liabilities: |
||||||||
Current portion of notes payable and long-term debt |
$ | 18,946 | $ | 20,618 | ||||
Accounts payable |
3,008 | 6,980 | ||||||
Accrued promotional expenses |
10,479 | 9,210 | ||||||
Income taxes payable, net |
7,505 | 2,363 | ||||||
Accrued excise and payroll taxes payable, net |
4,728 | 5,327 | ||||||
Settlement accruals |
27,497 | 10,041 | ||||||
Deferred income taxes |
96,557 | 24,019 | ||||||
Accrued interest |
9,525 | 9,475 | ||||||
Other current liabilities |
17,167 | 21,304 | ||||||
Total current liabilities |
195,412 | 109,337 | ||||||
Notes payable, long-term debt and other obligations, less current portion |
278,246 | 277,178 | ||||||
Fair value of derivatives embedded within convertible debt |
94,267 | 101,582 | ||||||
Non-current employee benefits |
43,489 | 40,933 | ||||||
Deferred income taxes |
63,854 | 141,904 | ||||||
Other liabilities |
18,149 | 13,503 | ||||||
Total liabilities |
693,417 | 684,437 | ||||||
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,
65,811,262 and 63,307,020 shares issued and 62,865,310 and
and 60,361,068 shares outstanding |
6,286 | 6,036 | ||||||
Additional paid-in capital |
91,022 | 89,494 | ||||||
Retained earnings |
— | — | ||||||
Accumulated other comprehensive income |
10,191 | 18,179 | ||||||
Less: 2,945,952 shares of common stock in treasury, at cost |
(12,857 | ) | (12,857 | ) | ||||
Total stockholders’ equity |
94,642 | 100,852 | ||||||
Total liabilities and stockholders’ equity |
$ | 788,059 | $ | 785,289 | ||||
2
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues* |
$ | 142,960 | $ | 140,351 | $ | 275,165 | $ | 274,243 | ||||||||
Expenses: |
||||||||||||||||
Cost of goods sold* |
86,030 | 87,222 | 166,037 | 171,907 | ||||||||||||
Operating, selling, administrative and general expenses |
22,585 | 23,946 | 46,742 | 47,433 | ||||||||||||
Operating income |
34,345 | 29,183 | 62,386 | 54,903 | ||||||||||||
Other income (expenses): |
||||||||||||||||
Interest and dividend income |
1,375 | 1,561 | 3,346 | 3,417 | ||||||||||||
Interest expense |
(15,257 | ) | (9,520 | ) | (30,510 | ) | (18,654 | ) | ||||||||
Change in fair value of derivatives embedded within
convertible debt |
9,759 | 2,089 | 7,315 | 2,116 | ||||||||||||
Provision for loss on investments |
— | — | — | (1,158 | ) | |||||||||||
Gain from exchange of LTS notes |
— | 8,121 | — | 8,121 | ||||||||||||
Equity income from non-consolidated real
estate businesses |
4,184 | 6,927 | 17,504 | 9,337 | ||||||||||||
Income from lawsuit settlement |
— | — | — | 20,000 | ||||||||||||
Other, net |
(4 | ) | (31 | ) | (577 | ) | (36 | ) | ||||||||
Income before provision for income taxes |
34,402 | 38,330 | 59,464 | 78,046 | ||||||||||||
Income tax expense |
15,277 | 16,949 | 26,032 | 33,538 | ||||||||||||
Net income |
$ | 19,125 | $ | 21,381 | $ | 33,432 | $ | 44,508 | ||||||||
Per basic common share: |
||||||||||||||||
Net income applicable to common shares |
$ | 0.30 | $ | 0.33 | $ | 0.53 | $ | 0.70 | ||||||||
Per diluted common share: |
||||||||||||||||
Net income applicable to common shares |
$ | 0.25 | $ | 0.32 | $ | 0.51 | $ | 0.68 | ||||||||
Cash distributions and dividends declared per share |
$ | 0.40 | $ | 0.38 | $ | 0.80 | $ | 0.76 | ||||||||
| * | Revenues and Cost of goods sold include excise taxes of $43,201, $44,795, $83,723 and $89,280, respectively |
3
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-In | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income | Stock | Total | ||||||||||||||||||||||
Balance, December 31, 2007 |
60,361,068 | $ | 6,036 | $ | 89,494 | $ | — | $ | 18,179 | $ | (12,857 | ) | $ | 100,852 | ||||||||||||||
Net income |
— | — | — | 33,432 | — | — | 33,432 | |||||||||||||||||||||
Pension-related minimum liability adjustments,
net of taxes |
— | — | — | — | 390 | — | 390 | |||||||||||||||||||||
Forward contract adjustments, net of taxes |
— | — | — | — | 17 | — | 17 | |||||||||||||||||||||
Unrealized loss on long-term investments accounted for
under the equity method, net of taxes |
— | — | — | — | (399 | ) | — | (399 | ) | |||||||||||||||||||
Unrealized loss on investment securities,
net of taxes |
— | — | — | — | (7,996 | ) | — | (7,996 | ) | |||||||||||||||||||
Total other comprehensive income |
— | — | — | — | — | — | (7,988 | ) | ||||||||||||||||||||
Total comprehensive income |
— | — | — | — | — | — | 25,444 | |||||||||||||||||||||
Distributions and dividends on common stock |
— | — | (18,295 | ) | (33,432 | ) | — | — | (51,727 | ) | ||||||||||||||||||
Exercise of options, net of 1,375,895 shares delivered to
pay exercise price |
2,504,242 | 250 | (226 | ) | — | — | — | 24 | ||||||||||||||||||||
Excess tax benefit of options exercised |
— | — | 18,283 | — | — | — | 18,283 | |||||||||||||||||||||
Amortization of deferred compensation |
— | — | 1,766 | — | — | — | 1,766 | |||||||||||||||||||||
Balance, June 30, 2008 |
62,865,310 | $ | 6,286 | $ | 91,022 | $ | — | $ | 10,191 | $ | (12,857 | ) | $ | 94,642 | ||||||||||||||
4
| Six Months | Six Months | |||||||
| Ended | Ended | |||||||
| June 30, 2008 | June 30, 2007 | |||||||
Net cash provided by operating activities |
$ | 35,885 | $ | 57,360 | ||||
Cash flows from investing activities: |
||||||||
Purchase of investment securities |
(5,182 | ) | (6,032 | ) | ||||
Proceeds from sale or liquidation of long-term investments |
8,334 | 50 | ||||||
Purchase of long-term investments |
(51 | ) | (91 | ) | ||||
Purchase of mortgage receivable |
(21,704 | ) | — | |||||
Distributions from non-consolidated real estate businesses |
16,446 | 1,000 | ||||||
Investments in non-consolidated real estate businesses |
(10,000 | ) | (750 | ) | ||||
Increases in cash surrender value of life insurance policies |
(521 | ) | (524 | ) | ||||
Increase in non-current restricted assets |
(259 | ) | (313 | ) | ||||
Proceeds from sale of fixed assets |
373 | — | ||||||
Capital expenditures |
(2,456 | ) | (2,716 | ) | ||||
Net cash used in investing activities |
(15,020 | ) | (9,376 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from debt issuance |
— | 1,576 | ||||||
Repayments of debt |
(2,984 | ) | (38,205 | ) | ||||
Deferred financing charges |
(137 | ) | — | |||||
Borrowings under revolver |
255,118 | 275,062 | ||||||
Repayments on revolver |
(256,753 | ) | (258,419 | ) | ||||
Dividends and distributions on common stock |
(52,737 | ) | (50,360 | ) | ||||
Excess tax benefit of options exercised |
18,283 | — | ||||||
Proceeds from exercise of options |
26 | 1,978 | ||||||
Net cash used in financing activities |
(39,184 | ) | (68,368 | ) | ||||
Net decrease in cash and cash equivalents |
(18,319 | ) | (20,384 | ) | ||||
Cash and cash equivalents, beginning of period |
238,117 | 146,769 | ||||||
Cash and cash equivalents, end of period |
$ | 219,798 | $ | 126,385 | ||||
5
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
| (a) | Basis of Presentation: |
| (b) | Distributions and dividends on common stock: |
| (c) | Earnings Per Share (“EPS”): |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income |
$ | 19,125 | $ | 21,381 | $ | 33,432 | $ | 44,508 | ||||||||
Income attributable to
participating securities |
(871 | ) | (1,400 | ) | (1,553 | ) | (2,916 | ) | ||||||||
Net income available to
common stockholders |
$ | 18,254 | $ | 19,981 | $ | 31,879 | $ | 41,592 | ||||||||
6
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income |
$ | 19,125 | $ | 21,381 | $ | 33,432 | $ | 44,508 | ||||||||
(Income) expenses attributable
to 3.875% convertible
debentures |
(1,500 | ) | 1,578 | 2,527 | 3,903 | |||||||||||
Income attributable to
participating securities |
(803 | ) | (1,502 | ) | (1,670 | ) | (3,172 | ) | ||||||||
Net income available to
common stockholders |
$ | 16,822 | $ | 21,457 | $ | 34,289 | $ | 45,239 | ||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Weighted-average shares for
basic EPS |
60,472,973 | 59,474,807 | 60,223,014 | 59,420,061 | ||||||||||||
Plus incremental shares
related to stock options and
non-vested restricted stock. |
1,234,435 | 1,366,028 | 1,401,401 | 1,433,767 | ||||||||||||
Plus incremental shares related
to convertible debt |
5,641,026 | 5,641,026 | 5,641,026 | 5,641,026 | ||||||||||||
Weighted-average shares for
fully diluted EPS |
67,348,434 | 66,481,861 | 67,265,441 | 66,494,854 | ||||||||||||
7
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Number of stock options |
491,569 | 500,717 | 491,569 | 500,717 | ||||||||||||
Weighted-average exercise price |
$ | 20.21 | $ | 20.31 | $ | 20.21 | $ | 20.31 | ||||||||
Weighted-average shares of
non-vested restricted stock |
388,495 | 12,000 | 112,870 | 112,345 | ||||||||||||
Weighted-average expense per share |
$ | 17.94 | $ | 18.87 | $ | 18.47 | $ | 18.26 | ||||||||
Weighted-average number of shares
issuable upon conversion of debt |
6,674,463 | 6,674,463 | 6,674,463 | 6,674,463 | ||||||||||||
Weighted-average conversion price |
$ | 16.76 | $ | 16.76 | $ | 16.76 | $ | 16.76 | ||||||||
| (d) | Comprehensive Income: |
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income |
$ | 19,125 | $ | 21,381 | $ | 33,432 | $ | 44,508 | ||||||||
Forward contract adjustments,
net of income taxes |
8 | (8 | ) | 17 | (7 | ) | ||||||||||
Pension related minimum liability
adjustments, net of income taxes |
195 | 298 | 390 | 597 | ||||||||||||
Net unrealized gains on long-term
investments accounted under
the equity method: |
||||||||||||||||
Change in net unrealized gains, net
of income taxes |
— | — | — | — | ||||||||||||
Net unrealized gains reclassified
into net income, net of income
taxes |
— | 33 | (399 | ) | 240 | |||||||||||
Change in unrealized gains, net
of income taxes |
— | 33 | (399 | ) | 240 | |||||||||||
Net unrealized gains on investment
securities available for sale: |
||||||||||||||||
Change in net unrealized gains, net
of income taxes |
(4,865 | ) | (2,254 | ) | (7,996 | ) | 11,369 | |||||||||
Net unrealized gains reclassified
into net income, net of income
taxes |
— | — | — | 684 | ||||||||||||
Change in unrealized gains, net
of income taxes |
(4,865 | ) | (2,254 | ) | (7,996 | ) | 12,053 | |||||||||
Total comprehensive income |
$ | 14,463 | $ | 19,450 | $ | 25,444 | $ | 57,391 | ||||||||
8
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
Net unrealized gains on investment securities
available for sale, net of income taxes of
$4,809 and $9,943, respectively |
$ | 6,370 | $ | 14,367 | ||||
Net unrealized gains on long-term
investments accounted for under
the equity method, net of income taxes of
$0 and $276, respectively |
— | 399 | ||||||
Forward contracts adjustment, net of income
taxes of $207 and $219, respectively |
(300 | ) | (317 | ) | ||||
Additional pension liability, net of income taxes
of $2,721 and $2,452 respectively |
4,121 | 3,730 | ||||||
Accumulated other comprehensive
income |
$ | 10,191 | $ | 18,179 | ||||
| (e) | Fair Value of Derivatives Embedded within Convertible Debt: |
| (f) | Contingencies: |
9
| (g) | New Accounting Pronouncements: |
10
| 2. | RESTRUCTURING |
| 3. | INVESTMENT SECURITIES AVAILABLE FOR SALE |
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Cost | Gain | Loss | Value | |||||||||||||
Marketable equity securities |
$ | 26,730 | $ | 11,303 | $ | (525 | ) | $ | 37,508 | |||||||
| 4. | INVENTORIES |
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
Leaf tobacco |
$ | 46,054 | $ | 41,502 | ||||
Other raw materials |
4,146 | 4,847 | ||||||
Work-in-process |
131 | 710 | ||||||
Finished goods |
47,853 | 45,331 | ||||||
Inventories at current cost |
98,184 | 92,390 | ||||||
LIFO adjustments |
(7,082 | ) | (5,565 | ) | ||||
| $ | 91,102 | $ | 86,825 | |||||
11
| 5. | LONG-TERM INVESTMENTS |
| June 30, 2008 | December 31, 2007 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Value | Value | Value | Value | |||||||||||||
Investment partnerships
accounted for at cost |
$ | 73,018 | $ | 83,267 | $ | 72,971 | $ | 89,007 | ||||||||
Investments accounted for
on the equity method |
$ | — | $ | — | $ | 10,495 | $ | 10,495 | ||||||||
| 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 | $ | — | ||||
12
| 6. | NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS |
| June 30, | December 31, | |||||||
| 2008 | 2007 | |||||||
Vector: |
||||||||
11% Senior Secured Notes due 2015 |
$ | 165,000 | $ | 165,000 | ||||
3.875% Variable Interest Senior Convertible Debentures due
2026, net of unamortized discount of $84,138 and $84,299* |
25,862 | 25,701 | ||||||
5% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $44,173 and $48,027* |
67,691 | 63,837 | ||||||
Liggett: |
||||||||
Revolving credit facility |
13,146 | 14,782 | ||||||
Term loan under credit facility |
7,556 | 7,822 | ||||||
Equipment loans |
7,737 | 9,660 | ||||||
V.T. Aviation: |
||||||||
Note payable |
5,895 | 6,470 | ||||||
VGR Aviation: |
||||||||
Note payable |
4,205 | 4,370 | ||||||
Other |
100 | 154 | ||||||
Total notes payable, long-term debt and other obligations |
297,192 | 297,796 | ||||||
Less: |
||||||||
Current maturities |
(18,946 | ) | (20,618 | ) | ||||
Amount due after one year |
$ | 278,246 | $ | 277,178 | ||||
| * | The fair value of the derivatives embedded within the 3.875% Variable Interest Senior Convertible Debentures ($65,029 at June 30, 2008 and and $67,911 at December 31, 2007) and the 5% Variable Interest Senior Convertible Notes ($29,238 at June 30, 2008 and $33,671 at December 31, 2007) is separately classified as a derivative liability in the condensed consolidated balance sheets. |
13
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
3.875% convertible debentures |
$ | 90 | $ | 73 | $ | 180 | $ | (168 | ) | |||||||
5% convertible notes |
1,293 | 940 | 2,481 | 1,648 | ||||||||||||
Interest expense associated with
embedded derivatives |
$ | 1,383 | $ | 1,013 | $ | 2,661 | $ | 1,480 | ||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
3.875% convertible debentures |
$ | 6,132 | $ | 785 | $ | 2,882 | $ | (106 | ) | |||||||
5% convertible notes |
3,627 | 1,304 | 4,433 | 2,222 | ||||||||||||
Gain on changes in fair value of
derivatives embedded within
convertible debt |
$ | 9,759 | $ | 2,089 | $ | 7,315 | $ | 2,116 | ||||||||
| 3.875% | 5% | |||||||||||
| Convertible | Convertible | |||||||||||
| Debentures | Notes | Total | ||||||||||
Balance at December 31, 2007 |
$ | 67,911 | $ | 33,671 | $ | 101,582 | ||||||
Loss (gain) from changes in fair
value of embedded derivatives |
3,250 | (806 | ) | 2,444 | ||||||||
Balance at March 31, 2008 |
71,161 | 32,865 | 104,026 | |||||||||
Gain from changes in fair
value of embedded derivatives |
(6,132 | ) | (3,627 | ) | (9,759 | ) | ||||||
Balance at June 30, 2008 |
$ | 65,029 | $ | 29,238 | $ | 94,267 | ||||||
14
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Amortization of beneficial
conversion feature: |
||||||||||||||||
3.875% convertible debentures |
$ | (11 | ) | $ | (12 | ) | $ | (19 | ) | $ | (180 | ) | ||||
5% convertible notes |
717 | 517 | 1,373 | 893 | ||||||||||||
Interest expense associated with
beneficial conversion feature |
$ | 706 | $ | 505 | $ | 1,354 | $ | 713 | ||||||||
| 3.875% | 5% | |||||||||||
| Convertible | Convertible | |||||||||||
| Debentures | Notes | Total | ||||||||||
Balance at December 31, 2007 |
$ | 84,299 | $ | 48,027 | $ | 132,326 | ||||||
Amortization of embedded derivatives |
(180 | ) | (2,481 | ) | (2,661 | ) | ||||||
Amortization of beneficial conversion feature |
19 | (1,373 | ) | (1,354 | ) | |||||||
Balance at June 30, 2008 |
$ | 84,138 | $ | 44,173 | $ | 128,311 | ||||||
| 7. | EMPLOYEE BENEFIT PLANS | |
| Defined Benefit and Postretirement Plans: | ||
| Net periodic benefit cost for the Company’s pension and other postretirement benefit plans for the three and six months ended June 30, 2008 and 2007 consists of the following: |
| Pension Benefits | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2008 | June 30, 2007 | June 30, 2008 | June 30, 2007 | |||||||||||||
Service cost — benefits earned
during the period |
$ | 1,035 | $ | 1,062 | $ | 2,070 | $ | 2,124 | ||||||||
Interest cost on projected benefit
obligation |
2,381 | 2,281 | 4,762 | 4,562 | ||||||||||||
Expected return on plan assets |
(3,036 | ) | (3,183 | ) | (6,072 | ) | (6,366 | ) | ||||||||
Amortization of prior service cost |
350 | 351 | 700 | 702 | ||||||||||||
Amortization of net loss |
25 | 176 | 50 | 352 | ||||||||||||
Net expense |
$ | 755 | $ | 687 | $ | 1,510 | $ | 1,374 | ||||||||
15
| Other | ||||||||||||||||
| Postretirement Benefits | ||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, 2008 | June 30, 2007 | June 30, 2008 | June 30, 2007 | |||||||||||||
Service cost
— benefits earned during the period |
$ | 4 | $ | 4 | $ | 8 | $ | 8 | ||||||||
Interest cost on projected benefit
obligation |
148 | 148 | 296 | 296 | ||||||||||||
Amortization of net loss |
(45 | ) | (26 | ) | (90 | ) | (52 | ) | ||||||||
Net expense |
$ | 107 | $ | 126 | $ | 214 | $ | 252 | ||||||||
| The Company did not make contributions to its pension benefits plans for the three and six months ended June 30, 2008 and does not anticipate making any contributions to such plans in 2008. The Company anticipates paying approximately $750 in other postretirement benefits in 2008. | ||
| 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 and purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); (iii) health care cost recovery actions brought by various foreign and domestic governmental entities (“Governmental Actions”); and (iv) health care cost recovery actions brought by third-party payors including insurance companies, union health and welfare trust funds, asbestos manufacturers and others (“Third-Party Payor Actions”). As new cases are commenced, 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 related costs totaling approximately $1,706 and $3,206, for the three months ended June 30, 2008 and 2007, respectively and $3,069 and $4,237 for the six months ended June 30, 2008 and 2007, respectively. |
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| Individual Actions | ||
| As of June 30, 2008, there were 35 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 2,150 Engle progeny cases (defined below) pending, 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 (excluding Engle progeny cases and the cases consolidated in West Virginia) or its affiliates as of June 30, 2008: |
| Number | ||||
| State | of Cases | |||
New York |
11 | |||
Florida |
9 | |||
Louisiana |
5 | |||
Maryland |
2 | |||
Mississippi |
2 | |||
West Virginia |
2 | |||
District of Columbia |
1 | |||
Missouri |
1 | |||
Ohio |
1 | |||
Pennsylvania |
1 | |||
| In April 2004, in Davis v. Liggett Group Inc., a Florida state court jury awarded compensatory damages of $540 against Liggett. In addition, plaintiff’s counsel was awarded legal fees of $752. Liggett appealed both the verdict and the legal fee award. In October 2007, the compensatory award was affirmed by the Fourth District Court of Appeal, but the court certified certain issues to the Florida Supreme Court. In April 2008, the Florida Supreme Court accepted jurisdiction of the certified issues for appeal. The parties have briefed the issues. In March 2008, the Fourth District Court of Appeal reversed and remanded the legal fee award for further proceedings in the trial court. No amounts have been expensed for this matter. There are three other individual actions where Liggett is the only tobacco company defendant, although all three cases 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, 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. | ||
| Jury awards representing material amounts of damages have been returned against other cigarette manufacturers in recent years. The awards in these individual actions are for both compensatory and punitive damages. Over the last several years, after conclusion of all appeals, damage awards have been paid to several individual plaintiffs, including an award of $5,500 in compensatory damages, $50,000 in punitive damages and $27,000 in interest in a case against another cigarette manufacturer. 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 Court’s July 2006 ruling in Engle, which decertified the class on a prospective basis, and affirmed the appellate court’s 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 mandate, are referred to as the “Engle progeny cases.” Liggett and/or the Company have been named in approximately 2,150 Engle progeny cases in both state and federal courts in Florida. Other cigarette manufacturers have also been named as defendants in these cases. These cases include approximately 9,570 plaintiffs. Although the total number of Engle plaintiffs will not increase, the number of cases will likely increase as the court may require multi-plaintiff cases to be severed into individual cases. For further information on the Engle case, see “—Class Actions —Engle Case,” below. |
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| Class Actions | ||
| As of June 30, 2008, there were 10 actions pending for which either a class has been certified or plaintiffs are seeking class certification, where Liggett is a named defendant. Other cigarette manufacturers are also named. Many of these actions purport to constitute statewide class actions and were filed after May 1996 when the Fifth Circuit Court of Appeals, in Castano v. American Tobacco Co., Inc., reversed a federal district court’s certification of a purported nationwide class action on behalf of persons who were allegedly “addicted” to tobacco products. | ||
| 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 plaintiff’s fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages against all defendants, including $790,000 against Liggett. | ||
| In May 2003, Florida’s Third District Court of Appeal reversed the trial court’s final judgment 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 court’s 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) the defendants concealed material information; (v) all defendants sold or supplied cigarettes that were defective; and (vi) all defendants were negligent) and allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they commence their individual lawsuits within one year from January 11, 2007, the date of the court’s mandate. 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 9,570 former Engle class members have commenced suit against Liggett and/or the Company as well as other cigarette manufacturers. | ||
| In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco Company, awarded $37,500 in compensatory damages in a case involving Liggett and two other cigarette manufacturers. In March 2003, the court reduced the amount of the compensatory damages to $24,860. 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 class member suit following entry of final judgment by the Engle trial court. After the issuance of the Florida Supreme Court’s opinion discussed above, the plaintiff filed a motion requesting that the trial court enter partial final judgment, tax costs and attorneys’ fees and schedule trial on the punitive damages claims. Defendants opposed the relief sought by plaintiff on the grounds that the reversal by the Florida Supreme Court of the Engle Phase I finding on fraud mandates the reversal of the jury verdict and precludes the entry of final judgment in plaintiff’s favor and, in January 2008, filed a submission asking the court to set aside the verdict and order a new trial. Oral argument was held in March 2007. A further hearing on the motion occurred on July 24, 2008. If the court enters judgment in plaintiff’s favor, plaintiff contends that interest on the judgment accrues from the date of the verdict. In the event the court enters judgment in plaintiff’s favor, Liggett intends to appeal, and may be required to post a bond. In addition, plaintiff filed a motion seeking an award of attorneys’ fees from Liggett based on plaintiff’s prior proposal for settlement. | ||
| Other Class Actions. Classes remain certified against Liggett in West Virginia (Blankenship), Kansas (Smith) and New Mexico (Romero). Blankenship is dormant. Smith v. Philip Morris and Romero v. Philip Morris are actions 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 certification was granted in Romero in April 2003 and was affirmed by the New Mexico Supreme Court in February 2005. In June 2006, the trial court granted defendants’ motions for summary judgment. Plaintiffs appealed to the New Mexico Court of Appeals. Briefing was completed in August 2007 and the parties are awaiting a decision. |
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| Class action suits have been filed in a number of states against cigarette manufacturers, alleging, among other things, that the use of the terms “light” and “ultra light” constitutes unfair and deceptive trade practices, among other things. One such suit, Schwab v. Philip Morris, pending in federal court in New York since 2004, sought to create a nationwide class of “light” cigarette smokers. The action asserted claims under RICO which could result in treble damages. The proposed class sought as much as $200,000,000 in damages. In September 2006, the court granted plaintiff’s motion for class certification. In April 2008, the United States Court of Appeals for the Second Circuit granted the defendants’ motions to decertify the class. Liggett is a defendant in the Schwab case. | ||
| In June 1998, in Cleary v. Philip Morris, Inc., a putative class action was brought in Illinois state court on behalf of persons who were allegedly injured by (i) the defendants’ purported conspiracy pursuant to which defendants allegedly concealed material facts regarding the addictive nature of nicotine; (ii) the defendants’ alleged acts of targeting their advertising and marketing to minors; and (iii) the defendants’ claimed breach of the public’s right to defendants’ compliance with laws prohibiting the distribution of cigarettes to minors. The plaintiffs request that the defendants be required to disgorge all profits unjustly received through their sale of cigarettes to plaintiffs, which in no event will be greater than $75 each, inclusive of punitive damages, interest and costs. 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. Liggett is a defendant in the Cleary case. | ||
| In April 2001, in Brown v. American Tobacco Co., Inc., 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 October 2006, the plaintiffs filed a petition for review with the California Supreme Court, which was granted in November 2006. Oral argument has not yet been scheduled. Liggett is a defendant in the Brown case. | ||
| 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. The consolidation was affirmed on appeal by the West Virginia Supreme Court. In February 2008, the United States Supreme Court denied the defendants’ petition for writ of certiorari asking the Court to review the trial plan. It is estimated that Liggett could be a defendant in approximately 100 of the cases. In February 2008, the court granted defendants’ motion to stay all proceedings pending United States Supreme Court review in Altria Group Inc. v. Good. | ||
| 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 v. American Tobacco Co., Inc. In this case, a Louisiana jury returned a $591,000 verdict (subsequently reduced by the court to $263,500) against other cigarette manufacturers to fund medical monitoring or smoking cessation programs for members of the class. The verdict is on appeal. | ||
| Governmental Actions | ||
| As of June 30, 2008, there were two Governmental Actions pending against Liggett, only one of which is active. 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. |
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| In December 1998, in City of St. Louis v. American Tobacco Company Inc., a case pending in Missouri state court, the City of St. Louis and approximately 50 hospitals brought suit against Liggett and other cigarette manufacturers seeking 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. A hearing has been scheduled for September 3, 2008 on motions for summary judgment filed by the parties. Trial is scheduled to commence in January 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 for and furnished, and to be paid for and furnished, by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. The action asserted claims under three federal statutes, the Medical Care Recovery Act (“MCRA”), the Medicare Secondary Payer provisions of the Social Security Act (“MSP”) and RICO. In September 2000, the court dismissed the government’s claims based on MCRA and MSP. | ||
| 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, ordered that the non-Liggett defendants are enjoined from: (i) committing any act of racketeering concerning the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) making any material false, misleading, or deceptive statement or representation concerning cigarettes that persuades people to purchase cigarettes; and (iii) utilizing “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, domestically and internationally. | ||
| No monetary damages were awarded other than the government’s costs. The defendants appealed the Final Judgment in March 2007. In its appellate brief, the government acknowledged that it was not appealing the district court’s decision to award no remedy against Liggett. 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 imposes regulations which adversely affect the industry, Liggett’s sales volume, operating income and cash flows could be materially adversely affected. | ||
| Third-Party Payor Actions | ||
| As of June 30, 2008, there were two Third-Party Payor Actions pending against Liggett. Other cigarette manufacturers are also named. The Third-Party Payor Actions typically have been commenced 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 understood 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 did 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. |
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| 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 the defendants are pending before the Israel Supreme Court seeking appeal from a lower court’s decision granting leave to plaintiff for foreign service of process. | ||
| Upcoming Trials | ||
| There are nine individual actions in Florida, all Engle progeny cases, that have been set for trial in 2008 or early 2009 where Liggett and/or the Company are named defendants. 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 cost recovery and certain other claims of those Settling States. The MSA received final judicial approval in each Settling State. | ||
| In the Settling States, the MSA 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 usage of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amount of payments owed pursuant to the MSA. |
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| 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 2.2%, 2.4% and 2.5% of the total cigarettes shipped in the United States in 2005, 2006 and 2007, respectively. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, would pay on each excess unit an amount equal (on a per-unit basis) to that due by the OPMs for that year. In April 2005, 2006, and 2007, Liggett and Vector Tobacco paid $20,982, $10,637 and $38,743 for their 2004, 2005 and 2006 MSA obligations, respectively. Liggett and Vector Tobacco paid $35,995 for their 2007 MSA obligations, having prepaid $34,500 in 2007. | ||
| Under the payment provisions of the MSA, the Participating Manufacturers are required to pay a base annual amount of $9,000,000 in 2008 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. | ||
| 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 June 30, 2008, included in “Other assets” on the Company’s 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 auditor’s 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 $2,612 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 $3,000 relating to the retroactive change from “gross” to “net” units. From its April 2008 payment, Liggett withheld approximately $4,000 for the 2007 NPM Adjustment and approximately $3,300 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. | ||
| The following amounts have not been expensed in the accompanying condensed consolidated financial statements as they relate to Liggett’s and Vector Tobacco’s 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 rendered the same decision with respect to 2004 and 2005. As a result, the manufacturers are entitled to potential NPM Adjustments to their 2003, 2004 and 2005 MSA payments. 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 commenced 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. To date, all 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is arbitrable and 39 of those decisions are final. There can be no assurance that Liggett or Vector Tobacco will receive any adjustment as a result of these proceedings. |
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| 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 agreement’s execution in late 1998, had been recalculated using “net” unit amounts, rather than “gross” unit amounts (which had been used since 1999). The change in the method of calculation could, among other things, require additional MSA payments by Liggett of approximately $18,300 for 2001 through 2007, require an additional payment of approximately $3,300 for 2008 and require additional amounts in future periods because the proposed change from “gross” to “net” units would serve to lower Liggett’s 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” unit amounts 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 Liggett’s 1997 Market Share (and thus, Liggett’s 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 condensed consolidated financial statements for any potential liability relating to the “gross” versus “net” dispute. | ||
| QUEST 3. Vector Tobacco does not make 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. There can be no assurance that Vector Tobacco’s assessment is correct and that additional payments under the MSA for QUEST 3 will not be owed. | ||
| Litigation Challenging the MSA. In 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 United States Court of Appeals for the Second Circuit has held that plaintiffs have stated a claim for relief on antitrust grounds. In September 2004, the court denied plaintiffs’ motion to preliminarily enjoin the MSA and certain related New York statutes, but the court issued a preliminary injunction against an amendment repealing the “allocable share” provision of the New York escrow statute. The parties’ motions for summary judgment are pending. Additionally, in another proceeding pending in New York federal court, 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 plaintiffs stated a claim for relief and that the New York federal court had jurisdiction over the other defendant states. In October 2006, the United States Supreme Court denied the petition of the attorneys general for writ of certiorari. 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. | ||
| Other State Settlements. The MSA replaces Liggett’s 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. Liggett’s agreements with these states remain in full force and effect, and Liggett made various payments to these states during 1996, 1997 and 1998 under the agreements. These states’ settlement agreements with Liggett contained most favored nation provisions which could reduce Liggett’s payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on each of these four states’ settlements with United States Tobacco Company, Liggett’s 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 state’s respective settlement with the other major tobacco companies. Therefore, Liggett’s non-economic obligations to all states and territories are now defined by the MSA. In 2003, in order to resolve any potential issues with Minnesota as to Liggett’s 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. |
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| 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. In 2004, Florida and Mississippi proposed settlements to Liggett in the total amount of $20,000 for the period 1998 though 2003. Further discussions among the parties have not resulted in any resolution of the disputes. Liggett believes these 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 June 30, 2008, 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. 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 Company’s consolidated financial position, results of operations or cash flows. | ||
| 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 July 2006, the Florida Supreme Court affirmed the intermediate appellate court’s decision in the Engle case vacating the punitive damages award and held that the class should be decertified prospectively, but, preserved several of the trial court’s Phase I findings. In June 2002, the jury in the Lukacs case, an individual case brought under the third phase of the Engle case, awarded $37,500 (subsequently reduced by the court to $24,860) of compensatory damages against Liggett and two other defendants and found Liggett 50% responsible for the damages. If a final judgment is entered, Liggett may be required to bond the amount of the judgment to perfect its appeal. In April 2004, a jury in an individual action in a Florida state court awarded compensatory damages of $540 against Liggett and legal fees of $752. The legal fee award was reversed on appeal and remanded to the trial court for further proceedings. It is possible that additional cases could be decided unfavorably against Liggett. As a result of the Engle decision, approximately 9,570 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 appropriate 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 additional similar litigation, or could lead to multiple adverse decisions in the Engle progeny cases. 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 individual’s 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 Company’s 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. | ||
| Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco. |
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| 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 recently 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 June 30, 2008. | ||
| 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 Company’s financial position, results of operations or cash flows. | ||
| 9. | INCOME TAXES | |
| Vector’s income tax rates for the three and six months ended June 30, 2008 and 2007 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. | ||
| The Company’s 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 in accordance with FIN 18, “Accounting for Income Taxes in Interim Periods—an interpretation of APB Opinion No. 28.” In 2008, the Company did not include the gain on the income of the Company’s investment in the St. Regis Hotel in 2008 in the computation of the effective annual income tax rate for 2007 from estimated pre-tax results from ordinary operations. In 2007, the Company did not include the benefit from the settlement of a state income tax assessment, the income from the lawsuit settlement with the United States government or the gain from the exchange of the LTS notes in the computation of the effective annual income tax rate for 2007 from estimated pre-tax results from ordinary operations. For the three months ended June 30, 2007, the gain from the exchange of the LTS notes reduced income tax expense by approximately $325 due to differences in the Company’s marginal tax rate of approximately 41% and its anticipated effective annual income tax rate from ordinary operations of approximately 45%. | ||
| For the six months ended June 30, 2008, the Company’s income tax provision was reduced because of the impact of the gain on the income from the Company’s investment in the St. Regis Hotel, which reduced income tax expense by $460 due to differences in the Company’s marginal tax rate of approximately 41% and its anticipated effective annual income tax rate from ordinary operations of approximately 45%. For the six months ended June 30, 2007, the Company did not include either the benefit from the settlement of a state income tax assessment in March 2007 or the income from the lawsuit settlement with the United States government in the computation of the effective annual income tax rate from estimated pre-tax results from ordinary operations. The benefit from the settlement of the state income tax assessment in March 2007 reduced income tax expense by approximately $450 and the income from the lawsuit settlement reduced income tax expense by approximately $800 due to differences in the Company’s marginal tax rate of approximately 41% and its anticipated effective annual income tax rate from ordinary operations of approximately 45% in 2007. Accordingly, the provision for income taxes for the six months ended June 30, 2007 has been computed by applying the discrete method in accordance with FIN 18 to account for these two items. |
25
| The Company’s current deferred income tax liabilities increased by approximately $75,500 during the six months ended June 30, 2008 as a result of the reclassification of a deferred tax liability from non-current to current liabilities. This reclassification resulted from the Company’s settlement with the Internal Revenue Service in July 2006, which required the Company to recognize taxable income of approximately $192,000 from the Philip Morris brand transaction by March 1, 2009. | ||
| 10. | NEW VALLEY | |
| Investments in non-consolidated real estate businesses. The components of “Investments in non-consolidated real estate businesses” were as follows as of June 30, 2008 and December 31, 2007: |
| June 30, 2008 | December 31, 2007 | |||||||
Douglas Elliman Realty LLC |
$ | 33,857 | $ | 31,893 | ||||
16th and K Holdings LLC |
— | 3,838 | ||||||
Koa Investors LLC |
— | — | ||||||
Aberdeen Townhomes LLC |
10,000 | — | ||||||
Investments in non-consolidated real
estate businesses |
$ | 43,857 | $ | 35,731 | ||||
| Residential Brokerage Business. New Valley recorded income of $4,184 and $6,986 for the three months ended June 30, 2008 and 2007, respectively, and income of $5,522 and $11,142 for the six months ended June 30, 2008 and 2007, respectively, associated with Douglas Elliman Realty. New Valley’s income includes 50% of Douglas Elliman’s net income, as well as interest income earned by New Valley on a subordinated loan to Douglas Elliman Realty, increases to income resulting from amortization of negative goodwill which resulted from purchase accounting, and management fees. New Valley received cash distributions from Douglas Elliman Realty LLC of $2,232 and $4,603 for the three months ended June 30, 2008 and 2007, respectively, and $3,557 and $4,848 for the six months ended June 30, 2008 and 2007, respectively. |
26
| Summarized financial information for Douglas Elliman Realty for the three and six months ended June 30, 2008 and 2007 and as of June 30, 2008 and December 31, 2007 is presented below. |
| June 30, 2008 | December 31, 2007 | |||||||
Cash |
$ | 19,375 | $ | 26,916 | ||||
Other current assets |
9,787 | 9,462 | ||||||
Property, plant and equipment, net |
17,298 | 18,394 | ||||||
Trademarks |
21,663 | 21,663 | ||||||
Goodwill |
38,309 | 38,294 | ||||||
Other intangible assets, net |
1,462 | 1,928 | ||||||
Other non-current assets |
924 | 850 | ||||||
Notes payable — current |
588 | 581 | ||||||
Current
portion of notes payable to member - Prudential Real Estate Financial Services Of America, Inc. |
4,730 | 4,373 | ||||||
Current portion of notes payable
to member — New Valley |
4,730 | 625 | ||||||
Other current liabilities |
22,936 | 26,579 | ||||||
Notes payable — long term |
846 | 2,402 | ||||||
Notes
payable to member — Prudential Real Estate Financial Services of America, Inc. |
4,037 | 15,115 | ||||||
Notes payable to member — New Valley |
4,037 | 8,583 | ||||||
Other long-term liabilities |
7,677 | 6,599 | ||||||
Members’ equity |
59,237 | 52,650 | ||||||
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues |
$ | 100,893 | $ | 111,446 | $ | 182,256 | $ | 203,295 | ||||||||
Costs and expenses |
91,010 | 95,632 | 168,239 | 177,065 | ||||||||||||
Depreciation expense |
1,357 | 1,452 | 2,707 | 3,052 | ||||||||||||
Amortization expense |
75 | 87 | 149 | 174 | ||||||||||||
Interest expense, net |
802 | 1,184 | 1,665 | 2,458 | ||||||||||||
Income tax expense |
231 | 80 | 346 | 190 | ||||||||||||
Net income |
$ | 7,418 | $ | 13,011 | $ | 9,150 | $ | 20,356 | ||||||||
| 16th and K Holdings LLC. In 2007, 16th and K Holdings LLC entered into certain agreements to sell 90% of the St. Regis Hotel. The sale closed in March 2008. In addition to retaining a 3% interest, net of incentives, in the St. Regis Hotel, New Valley received $15,822 in March 2008 and anticipates receiving an additional approximate $1,400 associated with the sale of the hotel in 2008 and approximately an additional $5,000 in various installments between 2009 and 2012. The Company recorded the $15,822 as an investing activity in the condensed consolidated statement of cash flows. New Valley recorded equity losses of $0 and $59 for the three months ended June 30, 2008 and 2007, respectively, and $3,796 and $102 for the six months ended June 30, 2008 and 2007, respectively, associated with 16th and K Holdings LLC. For the six months ended June 30, 2008, New Valley also recorded equity income of $15,779 in connection with the gain from the sale of the St. Regis because the amount received from 16th and K Holdings exceeded the Company’s basis in the investment and the Company has no legal obligation to make additional investments to 16th and K Holdings. | ||
| Hawaiian Hotel. KOA Investors LLC owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii. New Valley and certain members in KOA Investors have chosen not to fund discretionary capital calls in 2008 and KOA Investors may not be able to meet its financial obligations in the third quarter of 2008. The Company carried its investment in KOA at $0 at June 30, 2008. |
27
| 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. In the event that Aberdeen makes distributions of cash, New Valley is entitled to a priority preferred return of 15% per annum until it has recovered its invested capital. New Valley is entitled to 25% of subsequent cash distributions of profits until it has achieved an annual 18% internal rate of return (“IRR”). New Valley is then entitled to 20% of subsequent cash distributions of profits until it has achieved an annual 23% IRR. After New Valley has achieved an annual 23% IRR, it is then entitled to 10% of any remaining cash distributions of profits. Aberdeen is a variable interest entity; however, the Company is not the primary beneficiary. The Company’s maximum exposure to loss as a result of its investment in Aberdeen is $10,000. This investment is being accounted for under the cost method. | ||
| Mortgage receivable. In March 2008, a subsidiary of New Valley purchased a loan secured by a substantial portion of a 450-acre approved master planned community in Palm Springs, California known as “Escena.” The loan, which is currently in foreclosure, was purchased for its $20,000 face value plus accrued interest and other costs of $1,445. The loan is being accounted for under the cost recovery method and the cost includes the purchase price and additional capitalized acquisition costs of $259. At June 30, 2008, the Company carried the loan on its condensed consolidated balance sheet at its cost of $21,704. | ||
| The borrowers are Escena-PSC, LLC and Palm Springs Classic, LLC, a joint venture of Lennar Homes of California, Inc. and Empire Land, LLC. Empire Land recently filed a Chapter 11 bankruptcy petition. Lennar Homes is an affiliate of Lennar Corporation. The loan collateral consists of 867 residential lots with site and public infrastructure, an 18-hole Nicklaus Design golf course, a substantially completed clubhouse, and a seven-acre site approved for a 450-room hotel. | ||
| In October 2007, the “as is” value of the land was appraised in excess of the outstanding value of the loan. The Company recently obtained an updated appraisal that valued the property at substantially less than the outstanding loan balance. The reduction in value was attributed to the overall real estate market conditions in California. Among other things, Lennar Corporation has a payment guarantee of up to 50% of the outstanding loan as well as a guarantee to complete the development of the property. In order to calculate the fair market value of the investment, the Company utilized the most recent “as is” appraised value of the collateral and estimated the value of Lennar Corporation’s completion and payment guaranties, less estimated costs to enforce the guaranties and dispose of the property. Based on these estimates, the Company has determined that the fair market value approximates the carrying amount of the mortgage receivable at June 30, 2008. The Company has commenced legal action to exercise its rights under the loan documents. | ||
| NASA Settlement. In 1994, New Valley commenced an action against the United States government seeking damages for breach of a launch services agreement covering the launch of one of the Westar satellites owned by New Valley’s former Western Union satellite business. In March 2007, the parties entered into a Stipulation for Entry of Judgment to settle New Valley’s claims and, pursuant to the settlement, $20,000 was paid in May 2007. In the first quarter of 2007, we recognized a pre-tax gain of $19,590, which consisted of other non-operating income of $20,000 and $410 of selling, general and administrative expenses, in connection with the settlement. | ||
| 11. | INVESTMENTS AND FAIR VALUE MEASUREMENTS | |
| On January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”, for financial assets and financial liabilities. SFAS No. 157 does not require any new fair value measurements but rather introduces a framework for measuring fair value and expands required disclosure about fair value measurements of assets and liabilities. | ||
| SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement clarifies that fair value is an exit price, representing amounts that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. | ||
| SFAS No. 157 utilizes a three-tier fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels: |
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. |
28
| This hierarchy requires the use of observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. | ||
| The Company’s population of recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows: |
| Fair Value Measurements as of June 30, 2008 | ||||||||||||||||
| Quoted Prices in | ||||||||||||||||
| Active Markets for | Significant other | Significant | ||||||||||||||
| Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
| Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets: |
||||||||||||||||
Money market funds |
$ | 212,175 | $ | 212,175 | $ | — | $ | — | ||||||||
Investment securities
available for sale |
37,508 | 33,174 | 4,334 | — | ||||||||||||
Total |
$ | 249,683 | $ | 245,349 | $ | 4,334 | $ | — | ||||||||
Liabilities: |
||||||||||||||||
Fair value of derivatives
embedded within
convertible debt |
$ | 94,267 | $ | — | $ | — | $ | 94,267 | ||||||||
| The fair value of investment securities available for sale included in Level 1 are based on quoted market prices from various stock exchanges. The $4,334 of the investments securities available for sale in Level 2 are not registered and therefore do not have direct market quotes. | ||
| The fair value of derivatives embedded within convertible debt were derived using a valuation model and have been classified as Level 3. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The changes in fair value of derivatives embedded within convertible debt as of June 30, 2008 are disclosed. (See Note 6.) | ||
| 12. | SEGMENT INFORMATION | |
| The Company’s significant business segments for the three months ended June 30, 2008 and 2007 were Liggett, Vector Tobacco and New Valley. The Liggett segment consists of the manufacture and sale of conventional cigarettes and, for segment reporting purposes, includes the operations of Medallion acquired on April 1, 2002 (which operations are held for legal purposes as part of Vector Tobacco). The Vector Tobacco segment includes the development and marketing of the low nicotine and nicotine-free cigarette products as well as the development of reduced risk cigarette products and, for segment reporting purposes, excludes the operations of Medallion. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The New Valley segment includes the Company’s equity income and investments in non-consolidated real estate businesses and mortgage receivable. |
29
| Financial information for the Company’s operations before taxes for the three and six months ended June 30, 2008 and 2007 follows: |
| Vector | New | Corporate | ||||||||||||||||||
| Liggett | Tobacco | Valley | and Other | Total | ||||||||||||||||
Three months ended June 30, 2008 |
||||||||||||||||||||
Revenues |
$ | 142,330 | $ | 630 | — | — | $ | 142,960 | ||||||||||||
Operating income (loss) |
43,692 | (1,926 | ) | — | (7,421 | ) | 34,345 | |||||||||||||
Depreciation and amortization |
1,919 | 29 | — | 584 | 2,532 | |||||||||||||||
Equity income from non-consolidated
real estate businesses |
— | — | 4,184 | — | 4,184 | |||||||||||||||
Three months ended June 30, 2007 |
||||||||||||||||||||
Revenues |
$ | 139,305 | $ | 1,046 | — | — | $ | 140,351 | ||||||||||||
Operating income (loss) |
37,463 | (2,102 | ) | — | (6,178 | ) | 29,183 | |||||||||||||
Depreciation and amortization |
1,844 | 25 | — | 587 | 2,456 | |||||||||||||||
Equity income from non-consolidated
real estate businesses |
— | — | 6,927 | — | 6,927 | |||||||||||||||
Six months ended June 30, 2008 |
||||||||||||||||||||
Revenues |
$ | 273,975 | $ | 1,190 | — | — | $ | 275,165 | ||||||||||||
Operating income (loss) |
81,036 | (4,336 | ) | — | (14,314 | ) | 62,386 | |||||||||||||
Equity income from non-consolidated
real estate businesses |
— | — | 17,504 | — | 17,504 | |||||||||||||||
Identifiable assets |
322,563 | 6,368 | 43,857 | 415,271 | 788,059 | |||||||||||||||
Depreciation and amortization |
3,772 | 59 | — | 1,169 | 5,000 | |||||||||||||||
Capital expenditures |
2,410 | 46 | — | — | 2,456 | |||||||||||||||
Six months ended June 30, 2007 |
||||||||||||||||||||
Revenues |
$ | 272,118 | $ | 2,125 | $ | — | $ | — | $ | 274,243 | ||||||||||
Operating income (loss) |
72,923 | (4,406 | ) | — | (13,614 | ) | 54,903 | |||||||||||||
Equity income from non-consolidated
real estate businesses |
— | — | 9,337 | — | 9,337 | |||||||||||||||
Identifiable assets |
307,797 | 4,496 | 32,855 | 274,978 | 620,126 | |||||||||||||||
Depreciation and amortization |
3,855 | 58 | — | 1,172 | 5,085 | |||||||||||||||
Capital expenditures |
2,632 | 84 | — | — | 2,716 | |||||||||||||||
30
| 13. | CONDENSED CONSOLIDATING FINANCIAL INFORMATION | |
| The accompanying condensed consolidating financial information has been prepared and presented pursuant to Securities and Exchange Commission Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered”. Each of the subsidiary guarantors are 100% owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. The Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting. | ||
| The 11% Senior Secured Notes due 2015, issued on August 16, 2007 by Vector, are fully and unconditionally guaranteed on a joint and several basis by all of the 100%-owned domestic subsidiaries of the Company that are engaged in the conduct of its cigarette businesses. (See Note 6.) The notes are not guaranteed by any of the Company’s subsidiaries engaged in the real estate businesses conducted through its subsidiary New Valley. Presented herein are unaudited condensed consolidating balance sheets as of June 30, 2008 and December 31, 2007, the related unaudited condensed consolidating statements of operations for the three and six months ended June 30, 2008 and 2007 and the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2008 and 2007 of the Company (Parent/Issuer), the guarantor subsidiaries (Subsidiary Guarantors) and the subsidiaries that are not guarantors (Subsidiary Non-Guarantors). | ||
| The indenture contains covenants that restrict the payment of dividends by the Company if the Company’s 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 Company’s Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively. The Company’s Leverage Ratio is defined in the indenture as the ratio of the Company’s and the guaranteeing subsidiaries’ total debt less the fair market value of the Company’s and the guaranteeing subsidiaries’ cash and cash equivalents, investments in securities and long-term investments to Consolidated EBITDA, as defined in the indenture. The Company’s Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. |
31
| June 30, 2008 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 208,856 | $ | 10,938 | $ | 4 | $ | — | $ | 219,798 | ||||||||||
Investment securities
available for sale |
37,430 | — | 78 | — | 37,508 | |||||||||||||||
Accounts receivable —
trade |
— | 8,607 | — | — | 8,607 | |||||||||||||||
Intercompany receivables |
448 | — | — | (448 | ) | — | ||||||||||||||
Inventories |
— | 91,102 | — | — | 91,102 | |||||||||||||||
Deferred income taxes |
17,410 | 350 | — | — | 17,760 | |||||||||||||||
Income taxes receivable |
15,598 | 262 | — | (15,860 | ) | — | ||||||||||||||
Other current assets |
1,561 | 3,289 | — | — | 4,850 | |||||||||||||||
Total current assets |
281,303 | 114,548 | 82 | (16,308 | ) | 379,625 | ||||||||||||||
Property, plant and equipment, net |
800 | 51,048 | — | — | 51,848 | |||||||||||||||
Mortgage receivable |
— | — | 21,704 | — | 21,704 | |||||||||||||||
Long-term investments accounted
for at cost |
72,233 | — | 785 | — | 73,018 | |||||||||||||||
Long-term investments accounted
under the equity method |
— | — | — | — | — | |||||||||||||||
Investments in non- consolidated
real estate businesses |
— | — | 43,857 | — | 43,857 | |||||||||||||||
Investments in consolidated
subsidiaries |
221,262 | — | — | (221,262 | ) | — | ||||||||||||||
Restricted assets |
4,091 | 4,934 | — | — | 9,025 | |||||||||||||||
Deferred income taxes |
22,293 | 908 | 4,216 | — | 27,417 | |||||||||||||||
Intangible asset |
— | 107,511 | — | — | 107,511 | |||||||||||||||
Prepaid pension costs |
— | 44,126 | — | — | 44,126 | |||||||||||||||
Other assets |
16,633 | 13,295 | — | — | 29,928 | |||||||||||||||
Total assets |
$ | 618,615 | $ | 336,370 | $ | 70,644 | $ | (237,570 | ) | $ | 788,059 | |||||||||
32
| June 30, 2008 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of notes
payable and long-term debt |
$ | — | $ | 18,946 | $ | — | $ | — | $ | 18,946 | ||||||||||
Accounts payable |
279 | 2,729 | — | — | 3,008 | |||||||||||||||
Intercompany payables |
— | 448 | — | (448 | ) | — | ||||||||||||||
Accrued promotional
expenses |
— | 10,479 | — | — | 10,479 | |||||||||||||||
Income taxes payable, net |
— | 309 | 23,056 | (15,860 | ) | 7,505 | ||||||||||||||
Accrued excise and payroll
taxes payable, net |
— | 4,728 | — | — | 4,728 | |||||||||||||||
Settlement accruals |
— | 27,497 | — | — | 27,497 | |||||||||||||||
Deferred income taxes |
84,811 | 11,746 | — | — | 96,557 | |||||||||||||||
Accrued interest |
9,525 | — | — | — | 9,525 | |||||||||||||||
Other current liabilities |
4,850 | 11,542 | 775 | — | 17,167 | |||||||||||||||
Total current liabilities |
99,465 | 88,424 | 23,831 | (16,308 | ) | 195,412 | ||||||||||||||
Notes payable, long-term debt and
other obligations, less current
portion |
258,553 | 19,693 | — | — | 278,246 | |||||||||||||||
Fair value of derivatives embedded
within convertible debt |
94,267 | — | — | — | 94,267 | |||||||||||||||
Non-current employee
benefits |
28,374 | 15,115 | — | — | 43,489 | |||||||||||||||
Deferred income
taxes |
42,853 | 20,891 | 110 | — | 63,854 | |||||||||||||||
Other liabilities |
461 | 15,275 | 2,413 | — | 18,149 | |||||||||||||||
Total liabilities |
523,973 | 159,398 | 26,354 | (16,308 | ) | 693,417 | ||||||||||||||
Commitments and
contingencies |
— | — | — | — | — | |||||||||||||||
Stockholders’ equity |
94,642 | 176,972 | 44,290 | (221,262 | ) | 94,642 | ||||||||||||||
Total liabilities and
stockholders’ equity |
$ | 618,615 | $ | 336,370 | $ | 70,644 | $ | (237,750 | ) | $ | 788,059 | |||||||||
33
| December 31, 2007 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
ASSETS: |
||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash equivalents |
$ | 228,901 | $ | 9,216 | $ | — | $ | — | $ | 238,117 | ||||||||||
Investment securities
available for sale |
45,841 | — | 34 | — | 45,875 | |||||||||||||||
Accounts receivable —
trade |
— | 3,113 | — | — | 3,113 | |||||||||||||||
Intercompany receivables |
19 | — | — | (19 | ) | — | ||||||||||||||
Inventories |
— | 86,825 | — | — | 86,825 | |||||||||||||||
Deferred income taxes |
18,003 | 333 | — | — | 18,336 | |||||||||||||||
Income taxes receivable |
27,364 | — | — | (27,364 | ) | — | ||||||||||||||
Other current assets |
103 | 3,257 | — | — | 3,360 | |||||||||||||||
Total current assets |
320,231 | 102,744 | 34 | (27,383 | ) | 395,626 | ||||||||||||||
Property, plant and equipment, net |
867 | 53,565 | — | — | 54,432 | |||||||||||||||
Long-term investments accounted
for at cost |
72,233 | — | 738 | — | 72,971 | |||||||||||||||
Long-term investments accounted
under the equity method |
10,495 | — | — | — | 10,495 | |||||||||||||||
Investments in non- consolidated
real estate businesses |
— | — | 35,731 | — | 35,731 | |||||||||||||||
Investments in consolidated
subsidiaries |
190,354 | — | — | (190,354 | ) | — | ||||||||||||||
Restricted assets |
3,859 | 4,907 | — | — | 8,766 | |||||||||||||||
Deferred income taxes |
21,288 | 883 | 4,466 | — | 26,637 | |||||||||||||||
Intangible asset |
— | 107,511 | — | — | 107,511 | |||||||||||||||
Prepaid pension costs |
— | 42,084 | — | — | 42,084 | |||||||||||||||
Other assets |
18,066 | 12,970 | — | — | 31,036 | |||||||||||||||
Total assets |
$ | 637,393 | $ | 324,664 | $ | 40,969 | $ | (217,737 | ) | $ | 785,289 | |||||||||
34
| December 31, 2007 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||
Current portion of notes
payable and long-term debt |
$ | — | $ | 20,618 | $ | — | $ | — | $ | 20,618 | ||||||||||
Accounts payable |
2,194 | 4,786 | — | — | 6,980 | |||||||||||||||
Intercompany payables |
— | 19 | — | (19 | ) | — | ||||||||||||||
Accrued promotional
expenses |
— | 9,210 | — | — | 9,210 | |||||||||||||||
Income taxes payable, net |
— | 13,245 | 16,482 | (27,364 | ) | 2,363 | ||||||||||||||
Accrued excise and payroll
taxes payable, net |
— | 5,327 | — | — | 5,327 | |||||||||||||||
Settlement accruals |
— | 10,041 | — | — | 10,041 | |||||||||||||||
Deferred income taxes |
20,218 | 3,801 | — | — | 24,019 | |||||||||||||||
Accrued interest |
9,475 | — | — | — | 9,475 | |||||||||||||||
Other current liabilities |
6,486 | 14,118 | 700 | — | 21,304 | |||||||||||||||
Total current liabilities |
38,373 | 81,165 | 17,182 | (27,383 | ) | 109,337 | ||||||||||||||
Notes payable, long-term debt and
other obligations, less current
portion |
254,538 | 22,640 | — | — | 277,178 | |||||||||||||||
Fair value of derivatives embedded
within convertible debt |
101,582 | — | — | — | 101,582 | |||||||||||||||
Non-current employee
benefits |
25,983 | 14,950 | — | — | 40,933 | |||||||||||||||
Deferred income
taxes |
115,571 | 26,223 | 110 | — | 141,904 | |||||||||||||||
Other liabilities |
494 | 10,571 | 2,438 | — | 13,503 | |||||||||||||||
Total liabilities |
536,541 | 155,549 | 19,730 | (27,383 | ) | 684,437 | ||||||||||||||
Commitments and
contingencies |
— | — | — | — | — | |||||||||||||||
Stockholders’ equity |
100,852 | 169,115 | 21,239 | (190,354 | ) | 100,852 | ||||||||||||||
Total liabilities and
stockholders’ equity |
$ | 637,393 | $ | 324,664 | $ | 40,969 | $ | (217,737 | ) | $ | 785,289 | |||||||||
35
| Three Months Ended June 30, 2008 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | — | $ | 142,960 | $ | — | $ | — | $ | 142,960 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods sold |
— | 86,030 | — | — | 86,030 | |||||||||||||||
Operating, selling,
administrative and
general expenses |
7,977 | 14,304 | 304 | — | 22,585 | |||||||||||||||
Management fee
expense |
— | 1,985 | — | (1,985 | ) | — | ||||||||||||||
Operating
(loss) income |
(7,977 | ) | 40,641 | (304 | ) | 1,985 | 34,345 | |||||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest and dividend
income |
1,144 | 231 | — | — | 1,375 | |||||||||||||||
Interest expense |
(14,879 | ) | (378 | ) | — | — | (15,257 | ) | ||||||||||||
Changes in fair value
of derivatives
embedded within
convertible debt |
9,759 | — | — | — | 9,759 | |||||||||||||||
Equity income from
non-consolidated
real estate
businesses |
— | — | 4,184 | — | 4,184 | |||||||||||||||
Equity income in
consolidated
subsidiaries |
27,475 | — | — | (27,475 | ) | — | ||||||||||||||
Management fee income |
1,985 | — | — | (1,985 | ) | — | ||||||||||||||
Other, net |
(4 | ) | — | — | — | (4 | ) | |||||||||||||
Income before
provision for income
taxes |
17,503 | 40,494 | 3,880 | (27,475 | ) | 34,402 | ||||||||||||||
Income tax
benefit (expense) |
1,622 | (15,312 | ) | (1,587 | ) | — | (15,277 | ) | ||||||||||||
Net income |
$ | 19,125 | $ | 25,182 | $ | 2,293 | $ | (27,475 | ) | $ | 19,125 | |||||||||
36
| Three Months Ended June 30, 2007 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | — | $ | 140,351 | $ | — | $ | — | $ | 140,351 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods sold |
— | 87,222 | — | — | 87,222 | |||||||||||||||
Operating, selling,
administrative and
general expenses |
6,855 | 16,922 | 169 | — | 23,946 | |||||||||||||||
Management fee expense |
— | 1,918 | — | (1,918 | ) | — | ||||||||||||||
Operating (loss)
income |
(6,855 | ) | 34,289 | (169 | ) | 1,918 | 29,183 | |||||||||||||
Other income
(expenses): |
||||||||||||||||||||
Interest and dividend
income |
3,972 | 161 | — | (2,572 | ) | 1,561 | ||||||||||||||
Interest expense |
(8,961 | ) | (3,131 | ) | — | 2,572 | (9,520 | ) | ||||||||||||
Changes in fair value
of derivatives
embedded within
convertible debt |
2,089 | — | — | — | 2,089 | |||||||||||||||
Gain on conversion
on LTS note |
— | — | 8,121 | — | 8,121 | |||||||||||||||
Equity income from
non-consolidated
real estate
businesses |
— | — | 6,927 | — | 6,927 | |||||||||||||||
Equity income in
consolidated
subsidiaries |
26,918 | — | — | (26,918 | ) | — | ||||||||||||||
Management fee income |
1,918 | — | — | (1,918 | ) | — | ||||||||||||||
Other, net |
(57 | ) | — | 26 | — | (31 | ) | |||||||||||||
Income before
provision for income
taxes |
19,024 | 31,319 | 14,905 | (26,918 | ) | 38,330 | ||||||||||||||
Income tax
benefit (expense) |
2,357 | (13,210 | ) | (6,096 | ) | — | (16,949 | ) | ||||||||||||
Net income |
$ | 21,381 | $ | 18,109 | $ | 8,809 | $ | (26,918 | ) | $ | 21,381 | |||||||||
37
| Six Months Ended June 30, 2008 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | — | $ | 275,165 | $ | — | $ | — | $ | 275,165 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods sold |
— | 166,037 | — | — | 166,037 | |||||||||||||||
Operating, selling,
administrative and
general expenses |
15,171 | 30,872 | 699 | — | 46,742 | |||||||||||||||
Management fee
expense |
— | 3,970 | — | (3,970 | ) | — | ||||||||||||||
Operating
(loss) income |
(15,171 | ) | 74,286 | (699 | ) | 3,970 | 62,386 | |||||||||||||
Other income (expenses): |
||||||||||||||||||||
Interest and dividend
income |
3,040 | 306 | — | — | 3,346 | |||||||||||||||
Interest expense |
(29,550 | ) | (960 | ) | — | — | (30,510 | ) | ||||||||||||
Changes in fair value
of derivatives
embedded within
convertible debt |
7,315 | — | — | — | 7,315 | |||||||||||||||
Equity income from
non-consolidated
real estate
businesses |
— | — | 17,504 | — | 17,504 | |||||||||||||||
Equity income in
consolidated
subsidiaries |
55,217 | — | — | (55,217 | ) | — | ||||||||||||||
Management fee income |
3,970 | — | — | (3,970 | ) | — | ||||||||||||||
Other, net |
(573 | ) | — | (4 | ) | — | (577 | ) | ||||||||||||
Income before
provision for income
taxes |
24,248 | 73,632 | 16,801 | (55,217 | ) | 59,464 | ||||||||||||||
Income tax
benefit (expense) |
9,184 | (28,344 | ) | (6,872 | ) | — | (26,032 | ) | ||||||||||||
Net income |
$ | 33,432 | $ | 45,288 | $ | 9,929 | $ | (55,217 | ) | $ | 33,432 | |||||||||
38
| Six Months Ended June 30, 2007 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Revenues |
$ | — | $ | 274,243 | $ | — | $ | — | $ | 274,243 | ||||||||||
Expenses: |
||||||||||||||||||||
Cost of goods sold |
— | 171,907 | — | — | 171,907 | |||||||||||||||
Operating, selling,
administrative and
general expenses |
14,627 | 32,018 | 788 | — | 47,433 | |||||||||||||||
Management fee expense |
— | 3,835 | — | (3,835 | ) | — | ||||||||||||||
Operating (loss)
income |
(14,627 | ) | 66,483 | (788 | ) | 3,835 | 54,903 | |||||||||||||
Other income
(expenses): |
||||||||||||||||||||
Interest and dividend
income |
8,244 | 300 | — | (5,127 | ) | 3,417 | ||||||||||||||
Interest expense |
(17,099 | ) | (6,682 | ) | — | 5,127 | (18,654 | ) | ||||||||||||
Changes in fair value
of derivatives
embedded within
convertible debt |
2,116 | — | — | — | 2,116 | |||||||||||||||
Provision for loss on
Investments,
net |
2 | — | (1,160 | ) | — | (1,158 | ) | |||||||||||||
Gain from conversion
of LTS notes |
— | — | 8,121 | — | 8,121 | |||||||||||||||
Equity income from
non-consolidated
real estate
businesses |
— | — | 9,337 | — | 9,337 | |||||||||||||||
Income from lawsuit
settlement |
— | — | 20,000 | — | 20,000 | |||||||||||||||
Equity income in
consolidated
subsidiaries |
56,035 | — | — | (56,035 | ) | — | ||||||||||||||
Management fee income |
3,835 | — | — | (3,835 | ) | — | ||||||||||||||
Other, net |
(61 | ) | 1 | 24 | — | (36 | ) | |||||||||||||
Income before
provision for income
taxes |
38,445 | 60,102 | 35,534 | (56,035 | ) | 78,046 | ||||||||||||||
Income tax
benefit (expense) |
6,063 | (25,536 | ) | (14,065 | ) | — | (33,538 | ) | ||||||||||||
Net income |
$ | 44,508 | $ | 34,566 | $ | 21,469 | $ | (56,035 | ) | $ | 44,508 | |||||||||
39
| Six Months Ended June 30, 2008 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Net cash provided by
operating activities |
$ | 26,962 | $ | 46,368 | $ | 2,255 | $ | (39,700 | ) | $ | 35,885 | |||||||||
Cash flows from investing
activities: |
||||||||||||||||||||
Purchase of investment
securities |
(5,182 | ) | — | — | — | (5,182 | ) | |||||||||||||
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 |
— | — | 16,446 | — | 16,446 | |||||||||||||||
Investment in non-
consolidated real
estate businesses |
— | — | (10,000 | ) | — | (10,000 | ) | |||||||||||||
Increase in cash surrender
value of life insurance
policies |
(254 | ) | (267 | ) | — | — | (521 | ) | ||||||||||||
Increase
in non-current restricted
assets |
(232 | ) | (27 | ) | — | — | (259 | ) | ||||||||||||
Investments in
subsidiaries |
(15,108 | ) | — | — | 15,108 | — | ||||||||||||||
Proceeds from the sale
of fixed assets |
— | 373 | — | — | 373 | |||||||||||||||
Capital expenditures |
— | (2,456 | ) | — | — | (2,456 | ) | |||||||||||||
Net cash used in
investing activities |
(12,442 | ) | (2,377 | ) | (15,309 | ) | 15,108 | (15,020 | ) | |||||||||||
40
Cash flows from
financing activities: |
||||||||||||||||||||
Repayments of debt |
— | (2,984 | ) | — | — | (2,984 | ) | |||||||||||||
Deferred financing charges |
(137 | ) | — | — | — | (137 | ) | |||||||||||||
Borrowings under revolver |
— | 255,118 | — | — | 255,118 | |||||||||||||||
Repayments on revolver |
— | (256,753 | ) | — | — | (256,753 | ) | |||||||||||||
Capital contributions received |
— | 2,050 | 13,058 | (15,108 | ) | — | ||||||||||||||
Intercompany dividends paid |
— | (39,700 | ) | — | (39,700 | ) | — | |||||||||||||
Dividends and distributions
on common stock |
(52,737 | ) | — | — | — | (52,737 | ) | |||||||||||||
Proceeds from exercise of
Vector options and warrants |
26 | — | — | — | 26 | |||||||||||||||
Excess tax benefit of options
exercised |
18,283 | — | — | — | 18,283 | |||||||||||||||
Net cash (used in) provided by
financing activities |
(34,565 | ) | (42,269 | ) | 13,058 | 24,592 | (39,184 | ) | ||||||||||||
Net (decrease) increase in cash and cash
equivalents |
(20,045 | ) | 1,722 | 4 | — | (18,319 | ) | |||||||||||||
Cash and cash equivalents,
beginning of year |
228,901 | 9,216 | — | — | 238,117 | |||||||||||||||
Cash and cash equivalents, end of
year |
$ | 208,856 | $ | 10,938 | $ | 4 | $ | — | $ | 219,798 | ||||||||||
41
| Six Months Ended June 30, 2007 | ||||||||||||||||||||
| Subsidiary | Consolidated | |||||||||||||||||||
| Parent/ | Subsidiary | Non- | Consolidating | Vector Group | ||||||||||||||||
| Issuer | Guarantors | Guarantors | Adjustments | Ltd. | ||||||||||||||||
Net cash provided by
operating activities |
$ | 67,743 | $ | 39,347 | $ | 25,760 | $ | (75,490 | ) | $ | 57,360 | |||||||||
Cash flows from investing
activities: |
||||||||||||||||||||
Purchase of investment
securities |
(6,032 | ) | — | — | — | (6,032 | ) | |||||||||||||
Proceeds from sale or
liquidation of long-term
investments |
— | — | 50 | — | 50 | |||||||||||||||
Purchase of long-term
investments |
— | — | (91 | ) | — | (91 | ) | |||||||||||||
Distributions from
non-consolidated real estate
businesses |
— | — | 1,000 | — | 1,000 | |||||||||||||||
Investment in non-
consolidated real
estate businesses |
— | — | (750 | ) | — | (750 | ) | |||||||||||||
Increase in cash surrender
value of life insurance
policies |
(225 | ) | (299 | ) | — | — | (524 | ) | ||||||||||||
Receipt of repayment
of notes receivable |
4,000 | — | — | (4,000 | ) | — | ||||||||||||||
(Increase) decrease
in non-current restricted
assets |
(316 | ) | 3 | — | — | (313 | ) | |||||||||||||
Investments in
subsidiaries |
(37,350 | ) | — | — | 37,350 | — | ||||||||||||||
Capital expenditures |
— | (2,716 | ) | — | — | (2,716 | ) | |||||||||||||
Net cash (used in) provided by
investing activities |
(39,923 | ) | (3,012 | ) | 209 | 33,350 | (9,376 | ) | ||||||||||||
42
Cash flows from
financing activities: |
||||||||||||||||||||
Proceeds from debt
issuance |
— | 1,576 | — | — | 1,576 | |||||||||||||||
Repayments of debt |
— | (42,205 | ) | — | 4,000 | (38,205 | ) | |||||||||||||
Borrowings under revolver |
— | 275,062 | — | — | 275,062 | |||||||||||||||
Repayments on revolver |
— | (258,419 | ) | — | — | (258,419 | ) | |||||||||||||
Capital contributions received |
— | 37,350 | — | (37,350 | ) | — | ||||||||||||||
Intercompany dividends paid |
— | (49,500 | ) | (25,990 | ) | 75,490 | — | |||||||||||||
Dividends and distributions
on common stock |
(50,360 | ) | — | — | — | (50,360 | ) | |||||||||||||
Proceeds from exercise of
Vector options and warrants |
1,978 | — | — | — | 1,978 | |||||||||||||||
Net cash used in
financing activities |
(48,382 | ) | (36,136 | ) | (25,990 | ) | 42,140 | (68,368 | ) | |||||||||||
Net (decrease) increase in cash and cash
equivalents |
(20,562 | ) | 199 | (21 | ) | — | (20,384 | ) | ||||||||||||
Cash and cash equivalents,
beginning of year |
132,942 | 13,797 | 30 | — | 146,769 | |||||||||||||||
Cash and cash equivalents, end of
year |
$ | 112,380 | $ | 13,996 | $ | 9 | $ | — | $ | 126,385 | ||||||||||
43
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
| • | the manufacture and sale of cigarettes in the United States through our subsidiary Liggett Group LLC, | ||
| • | the development and marketing of the low nicotine and nicotine-free QUEST cigarette products and 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 — the third largest brand in the deep discount category, | ||
| • | GRAND PRIX — a growing brand in the deep discount segment, | ||
| • | EVE — a leading brand of 120 millimeter cigarettes in the branded discount category, | ||
| • | PYRAMID — the industry’s first deep discount product with a brand identity, and | ||
| • | USA and various Partner Brands and private label brands. |
44
45
46
47
48
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30 | June 30, | June 30, | |||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues: |
||||||||||||||||
Liggett |
$ | 142,330 | $ | 139,305 | $ | 273,975 | $ | 272,118 | ||||||||
Vector Tobacco |
630 | 1,046 | 1,190 | 2,125 | ||||||||||||
Total revenues |
$ | 142,960 | $ | 140,351 | $ | 275,165 | $ | 274,243 | ||||||||
Operating income (loss): |
||||||||||||||||
Liggett |
$ | 43,692 | $ | 37,463 | $ | 81,036 | $ | 72,923 | ||||||||
Vector Tobacco |
(1,926 | ) | (2,102 | ) | (4,336 | ) | (4,406 | ) | ||||||||
Total tobacco |
41,766 | 35,361 | 76,700 | 68,517 | ||||||||||||
Corporate and other |
(7,421 | ) | (6,178 | ) | (14,314 | ) | (13,614 | ) | ||||||||
Total operating income |
$ | 34,345 | $ | 29,183 | $ | 62,386 | $ | 54,903 | ||||||||
49
50
51
52
53
54
55
56
57
58
59
60
| • | 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, | ||
| • | 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, |
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| • | 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. |
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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 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, 2007. 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 Court’s 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 “Management’s 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 | |
| No securities of ours which were not registered under the Securities Act of 1933 have been issued or sold by us during the three months ended June 30, 2008. | ||
| Our purchases of our common stock during the three months ended June 30, 2008 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 | ||||||||||||
April 1 to April 30, 2008 |
— | $ | — | — | — | |||||||||||
May 1 to May 31, 2008 |
— | — | — | — | ||||||||||||
June 1 to June 30, 2008 |
1,375,895 | (1) | 17.73 | — | — | |||||||||||
Total |
1,375,895 | $ | 17.73 | — | — | |||||||||||
| (1) | Delivery of shares to us in payment of exercise price in connection with exercise of an employee stock option for 3,878,317 shares on June 12, 2008. |
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Item 4.
|
Submission of Matters to a Vote of Security Holders | |
| We held our 2008 annual meeting of stockholders on May 27, 2008. The matters submitted to our stockholders for a vote at the meeting were to elect the following seven director nominees to serve for the ensuing year and until their successors are elected. The votes cast and withheld for the election of directors were as follows: |
| Nominee | For | Withheld | ||||||
Bennett S. LeBow
|
36,848,233 | 14,031,189 | ||||||
Howard M. Lorber
|
36,760,438 | 14,118,984 | ||||||
Ronald J. Bernstein
|
38,061,162 | 12,818,260 | ||||||
Henry C. Beinstein
|
36,823,806 | 14,055,616 | ||||||
Robert J. Eide
|
38,165,457 | 12,713,965 | ||||||
Jeffrey S. Podell
|
38,164,853 | 12,714,569 | ||||||
Jean E. Sharpe
|
38,170,191 | 12,709,231 | ||||||
| Based on these voting results, each of the directors nominated was elected. |
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| Item 6. | Exhibits | |||||
| 10.1 | Vector Supplemental Retirement Plan (as amended and restated April 24, 2008) | |||||
| 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 | |||||
| * | Incorporated by reference. |
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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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