10-K
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended
December 31, 2008
VECTOR
GROUP LTD.
(Exact name of registrant as
specified in its charter)
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Delaware
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1-5759
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65-0949535
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(State or other jurisdiction
of
incorporation or organization)
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Commission File Number
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(I.R.S. Employer Identification
No.)
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100 S.E. Second Street, Miami, Florida
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33131
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(Address of principal executive
offices)
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(Zip Code)
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(305) 579-8000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, par value $.10 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. o
Yes þ No
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. o
Yes þ No
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past
90 days. þ Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405
Regulation S-K
is not contained herein, and will not be contained, to the best
of the Registrants knowledge, in definitive proxy or
information statement incorporated by reference in Part III
of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do
not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
as defined in
Rule 12b-2
of the Exchange
Act. o Yes þ No
The aggregate market value of the common stock held by
non-affiliates of Vector Group Ltd. as of June 30, 2008 was
approximately $640 million.
At February 27, 2009, Vector Group Ltd. had
66,014,070 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III (Items 10, 11, 12, 13 and 14) from the
definitive Proxy Statement for the 2009 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the
Registrants fiscal year covered by this report.
VECTOR
GROUP LTD.
FORM 10-K
TABLE
OF CONTENTS
PART I
Overview
Vector Group Ltd., a Delaware corporation, is a holding company
and is engaged principally in:
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the manufacture and sale of cigarettes in the United States
through our subsidiary Liggett Group LLC,
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the development of reduced risk cigarette products through our
subsidiary Vector Tobacco Inc., and
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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.
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Financial information relating to our business segments can be
found in Note 18 to our consolidated financial statements.
For the purposes of this discussion and segment reporting in
this report, references to the Liggett segment encompass the
manufacture and sale of conventional cigarettes and includes the
former operations of The Medallion Company, Inc., whose
operations are held for legal purposes as part of Vector
Tobacco. References to the Vector Tobacco segment include 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 these purposes, exclude the
operations of Medallion.
Strategy
Our strategy is to maximize stockholder value by increasing the
profitability of our subsidiaries in the following ways:
Liggett
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Capitalize upon Liggetts cost advantage in the
U.S. cigarette market due to the favorable treatment that
it receives under the Master Settlement Agreement,
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Focus marketing and selling efforts on the discount segment,
continue to build volume and margin in core discount brands
(LIGGETT SELECT, GRAND PRIX and EVE) and utilize core brand
equity to selectively build distribution,
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Continue product development to provide the best quality
products relative to other discount products in the marketplace,
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Increase efficiency by developing and adopting an organizational
structure to maximize profit potential,
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Selectively expand the portfolio of private and control label
partner brands utilizing a pricing strategy that offers
long-term list price stability for customers,
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Identify, develop and launch relevant new cigarette brands and
other tobacco products to the market in the future, and
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Pursue strategic acquisitions of smaller tobacco manufacturers.
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Vector
Tobacco
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Take a measured approach to developing low nicotine and
nicotine-free cigarettes, and
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Continue to conduct appropriate studies relating to the
development of cigarettes that materially reduce risk to smokers.
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1
New
Valley
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Continue to grow Douglas Elliman Realty operations by utilizing
its strong brand name recognition and pursuing strategic and
financial opportunities,
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Continue to leverage our expertise as direct investors by
actively pursuing real estate investments in the United States
and abroad which we believe will generate above-market returns,
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Acquire operating companies through mergers, asset purchases,
stock acquisitions or other means, and
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Invest New Valleys excess funds opportunistically in
situations that we believe can maximize stockholder value.
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Liggett
Group LLC
General. Liggett is the operating successor to
Liggett & Myers Tobacco Company, which was founded in
1873. Liggett is currently the fifth-largest manufacturer of
cigarettes in the United States in terms of unit sales.
Liggetts manufacturing facilities are located in Mebane,
North Carolina. At the present time, Liggett has no foreign
operations.
Liggett manufactures and sells cigarettes in the United States.
According to data from Management Science Associates, Inc.,
Liggetts domestic shipments of approximately
8.6 billion cigarettes during 2008 accounted for 2.5% of
the total cigarettes shipped in the United States during such
year. Liggetts market share did not change in 2008 and
increased 0.1% in 2007 from 2006. Historically, Liggett produced
premium cigarettes as well as discount cigarettes (which include
among others, control label, private label, branded discount and
generic cigarettes). Premium cigarettes are generally marketed
under well-recognized brand names at higher retail prices to
adult smokers with a strong preference for branded products,
whereas discount cigarettes are marketed at lower retail prices
to adult smokers who are more cost conscious. In recent years,
the discounting of premium cigarettes has become far more
significant in the marketplace. This has led to some brands that
were traditionally considered premium brands to become more
appropriately categorized as branded discount, following list
price reductions. Liggetts EVE brand would fall into that
category. All of Liggetts unit sales volume in 2008, 2007
and 2006 were in the discount segment, which Liggetts
management believes has been the primary growth segment in the
industry for more than a decade.
Liggett produces cigarettes in approximately 180 combinations of
length, style and packaging. Liggetts current brand
portfolio includes:
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LIGGETT SELECT the third-largest brand in the deep
discount category,
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GRAND PRIX a growing brand in the deep discount
segment,
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EVE a leading brand of 120 millimeter cigarettes in
the branded discount category,
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PYRAMID the industrys first deep discount
product with a brand identity, and
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USA and various Partner Brands and private label brands.
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In 1980, Liggett was the first major domestic cigarette
manufacturer to successfully introduce discount cigarettes as an
alternative to premium cigarettes. In 1989, Liggett established
a new price point within the discount market segment by
introducing PYRAMID, a branded discount product which, at that
time, sold for less than most other discount cigarettes. In
1999, Liggett introduced LIGGETT SELECT, one of the leading
brands in the deep discount category. LIGGETT SELECT, which was
the largest seller in Liggetts family of brands in 2007,
comprised 32.9% in 2007 and 30.1% in 2008 of Liggetts unit
volume. In September 2005, Liggett repositioned GRAND PRIX to
distributors and retailers nationwide. GRAND PRIX is marketed as
the lowest price fighter to specifically compete
with brands which are priced at the lowest level of the deep
discount segment. GRAND PRIX, which represented 30.3% of
Liggetts unit volume in 2007, is now the largest seller in
Liggetts family of brands with 32.6% of Liggetts
unit volume in 2008. According to the data of Management Science
Associates, Liggett held a share of approximately 9.2% of the
overall discount market segment for 2008 compared to 9.3% for
2007 and 8.7% for 2006.
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Liggett Vector Brands has an agreement with Circle K Stores,
Inc., which operates more than 2,200 convenience stores in the
United States under the Circle K and Macs names, to supply
MONTEGO, a deep discount brand, exclusively for the Circle K and
Macs stores. The MONTEGO brand was the first to be offered
under Liggett Vector Brands Partner Brands
program which offers customers quality product with long-term
price stability. Liggett Vector Brands also has an agreement
with Sunoco Inc., which operates more than 800 Sunoco APlus
branded convenience stores in the United States, to manufacture
SILVER EAGLE. SILVER EAGLE, a deep discount brand, is exclusive
to Sunoco and was the second brand to be offered under Liggett
Vector Brands Partner Brands program. In April
2006, Liggett Vector Brands commenced shipments of BRONSON
cigarettes as part of a multi-year Partner Brands
agreement with QuikTrip, a convenience store chain with more
than 470 stores headquartered in Tulsa, Oklahoma.
In May 2008 Liggett introduced SNUS, a premium quality pouched
tobacco product. SNUS is currently manufactured in Sweden and is
available in three varieties.
Under the Master Settlement Agreement reached in November 1998
with 46 states and various territories, the three largest
cigarette manufacturers must make settlement payments to the
states and territories based on how many cigarettes they sell
annually. Liggett, however, is not required to make any payments
unless its market share exceeds approximately 1.65% of the
U.S. cigarette market. Additionally, Vector Tobacco
likewise has no payment obligation unless its market share
exceeds approximately 0.28% of the U.S. cigarette market.
We believe that Liggett has gained a sustainable cost advantage
over its competitors as a result of the settlement.
Liggetts and Vector Tobaccos payments under the
Master Settlement Agreement are based on each respective
companys incremental market share above the minimum
threshold applicable to each respective company. Thus, if
Liggetts total market share is 2.00%, the Master
Settlement Agreement payment is based on 0.35%, which is the
difference between 2.00% and Liggetts applicable
grandfathered share of 1.65%. We anticipate that both exemptions
will be fully utilized in the foreseeable future.
The source of industry data in this report is Management Science
Associates, Inc., an independent third-party database management
organization that collects wholesale shipment data from various
cigarette manufacturers and distributors and provides analysis
of market share, unit sales volume and premium versus discount
mix for individual companies and the industry as a whole.
Management Science Associates information relating to unit
sales volume and market share of certain of the smaller,
primarily deep discount, cigarette manufacturers is based on
estimates developed by Management Science Associates.
Business Strategy. Liggetts business
strategy is to capitalize upon its cost advantage in the United
States cigarette market due to the favorable treatment Liggett
receives under its settlement agreements with the states and the
Master Settlement Agreement. Liggetts long-term business
strategy is to continue to focus its marketing and selling
efforts on the discount segment of the market, to continue to
build volume and margin in its core discount brands (LIGGETT
SELECT, GRAND PRIX and EVE) and to utilize its core brand equity
to selectively build distribution. Liggett intends to continue
its product development to provide the best quality products
relative to other discount products in the market place. Liggett
will continue to seek to increase efficiency by developing and
adapting its organizational structure to maximize profit
potential. Liggett intends to expand the portfolio of its
private and control label and Partner Brands
utilizing a pricing strategy that offers long-term list price
stability for customers. In addition, Liggett may bring
niche-driven brands to the market in the future.
Sales, Marketing and
Distribution. Liggetts products are
distributed from a central distribution center in Mebane, North
Carolina to 18 public warehouses located throughout the United
States. These warehouses serve as local distribution centers for
Liggetts customers. Liggetts products are
transported from the central distribution center to the public
warehouses by third-party trucking companies to meet
pre-existing contractual obligations to its customers.
Liggetts customers are primarily tobacco and candy
distributors, the military, warehouse club chains, and large
grocery, drug and convenience store chains. Liggett offers its
customers prompt payment discounts, traditional rebates and
promotional incentives. Customers typically pay for purchased
goods within two weeks following delivery from Liggett, and
approximately 90% of customers pay more rapidly through
electronic funds transfer arrangements. Liggetts largest
single customer, Speedway SuperAmerica LLC, accounted for
approximately 8.8%
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of its revenues in 2008, 8.7% of its revenues in 2007, and 10.8%
of its revenues in 2006. Sales to this customer were primarily
in the private label discount segment. Liggetts contract
with Speedway SuperAmerica is through December 31, 2012.
Liggett Vector Brands coordinates and executes the sales and
marketing efforts, along with certain support functions, for all
of our tobacco operations.
Trademarks. All of the major trademarks used
by Liggett are federally registered or are in the process of
being registered in the United States and other markets.
Trademark registrations typically have a duration of ten years
and can be renewed at Liggetts option prior to their
expiration date.
In view of the significance of cigarette brand awareness among
consumers, management believes that the protection afforded by
these trademarks is material to the conduct of its business.
Liggett owns all of its domestic trademarks except for the JADE
trademark, which is licensed on a long-term exclusive basis from
a third-party for use in connection with cigarettes. These
trademarks are pledged as collateral for certain of our senior
secured debt.
Manufacturing. Liggett purchases and maintains
leaf tobacco inventory to support its cigarette manufacturing
requirements. Liggett believes that there is a sufficient supply
of tobacco within the worldwide tobacco market to satisfy its
current production requirements. Liggett stores its leaf tobacco
inventory in warehouses in North Carolina and Virginia. There
are several different types of tobacco, including flue-cured
leaf, burley leaf, Maryland leaf, oriental leaf, cut stems and
reconstituted sheet. Leaf components of American-style
cigarettes are generally the flue-cured and burley tobaccos.
While premium and discount brands use many of the same tobacco
products, input ratios of tobacco products may vary between
premium and discount products. Foreign flue-cured and burley
tobaccos, some of which are used in the manufacture of
Liggetts cigarettes, have historically been 30% to 35%
less expensive than comparable domestic tobaccos. Liggett
normally purchases all of its tobacco requirements from domestic
and foreign leaf tobacco dealers, much of it under long-term
purchase commitments. As of December 31, 2008, virtually
all of Liggetts commitments were for the purchase of
foreign tobacco.
Liggetts cigarette manufacturing facility was designed for
the execution of short production runs in a cost-effective
manner, which enable Liggett to manufacture and market a wide
variety of cigarette brand styles. Liggett produces cigarettes
in approximately 180 different brand styles as well as private
labels for other companies, typically retail or wholesale
distributors who supply supermarkets and convenience stores.
Liggetts facility currently produces approximately
8.6 billion cigarettes per year, but maintains the capacity
to produce approximately 16.0 billion cigarettes per year.
Vector Tobacco has contracted with Liggett to produce its
cigarettes at Liggetts manufacturing facility in Mebane.
While Liggett pursues product development, its total
expenditures for research and development on new products have
not been financially material over the past three years.
Competition. Liggetts competition is now
divided into two segments. The first segment is made up of the
three largest manufacturers of cigarettes in the United States:
Philip Morris USA Inc., Reynolds American Inc. and Lorillard
Tobacco Company as well as the fourth largest, Commonwealth
Brands, Inc. (which Imperial Tobacco PLC acquired in 2007). The
three largest manufacturers, while primarily premium cigarette
based companies, also produce and sell discount cigarettes.
The second segment of competition is comprised of a group of
smaller manufacturers and importers, most of which sell lower
quality, deep discount cigarettes. Although, historically, there
have been substantial barriers to entry into the cigarette
business, including extensive distribution organizations, large
capital outlays for sophisticated production equipment,
substantial inventory investment, costly promotional spending,
regulated advertising and, for premium brands, strong brand
loyalty, in recent years, a number of these smaller
manufacturers have been able to overcome these competitive
barriers due to excess production capacity in the industry and
the cost advantage for certain manufacturers and importers
resulting from the Master Settlement Agreement.
Many smaller manufacturers and importers that are not parties to
the Master Settlement Agreement have only recently started to be
impacted by the statutes enacted pursuant to the Master
Settlement Agreement and to see a resultant decrease in volume
after years of growth. Liggetts management believes, while
these companies still have significant market share through
competitive discounting in this segment, they are losing their
cost advantage as
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their payment obligations under these statutes increase and are
more effectively enforced by the states, through implementation
of allocable share legislation.
In the cigarette business, Liggett competes on a dual front. The
three major manufacturers compete among themselves for premium
brand market share advertising and promotional activities, and
trade rebates and incentives and compete with Liggett and others
for discount market share, on the basis of brand loyalty. These
three competitors have substantially greater financial resources
than Liggett and most of their brands have greater sales and
consumer recognition than Liggetts products.
Liggetts discount brands must also compete in the
marketplace with the smaller manufacturers and
importers deep discount brands.
According to Management Science Associates data, the unit
sales of Philip Morris, Reynolds American and Lorillard
accounted in the aggregate for approximately 85.6% of the
domestic cigarette market in 2008. Liggetts domestic
shipments of approximately 8.6 billion cigarettes during
2008 accounted for 2.5% of the approximately 346 billion
cigarettes shipped in the United States, compared to
9.0 billion cigarettes in 2007 (2.5%) and 8.9 billion
cigarettes (2.4%) during 2006.
Industry-wide shipments of cigarettes in the United States have
been generally declining for a number of years, with Management
Science Associates data indicating that domestic
industry-wide shipments decreased by approximately 3.3%
(approximately 11.5 billion units) in 2008. Liggetts
management believes that industry-wide shipments of cigarettes
in the United States will generally continue to decline as a
result of numerous factors. These factors include health
considerations, diminishing social acceptance of smoking, and a
wide variety of federal, state and local laws limiting smoking
in restaurants, bars and other public places, as well as
increases in federal and state excise taxes and
settlement-related expenses which have contributed to higher
cigarette prices in recent years.
Historically, because of their dominant market share, Philip
Morris and RJR Tobacco (which is now part of Reynolds American),
the two largest cigarette manufacturers, have been able to
determine cigarette prices for the various pricing tiers within
the industry. Market pressures have historically caused the
other cigarette manufacturers to bring their prices in line with
the levels established by these two major manufacturers.
Off-list price discounting and similar promotional activity by
manufacturers, however, has substantially affected the average
price differential at retail, which can be significantly less
than the manufacturers list price gap. Recent discounting
by manufacturers has been far greater than historical levels,
and the actual price gap between premium and deep-discount
cigarettes has changed accordingly. This has led to shifts in
price segment performance depending upon the actual price gaps
of products at retail.
Philip Morris and Reynolds American dominate the domestic
cigarette market with a combined market share of approximately
74.9% at December 31, 2008. This concentration of United
States market share could make it more difficult for Liggett and
Vector Tobacco to compete for shelf space in retail outlets and
could impact price competition in the market, either of which
could have a material adverse affect on their sales volume,
operating income and cash flows.
The Medallion Company, Inc. We acquired
Medallion, a discount cigarette manufacturer selling product in
the deep discount category, primarily under the USA brand name,
in April 2002. In connection with the acquisition of Medallion,
Vector Tobacco, a participating manufacturer under the Master
Settlement Agreement, acquired an exemption where it has no
payment obligations under the Master Settlement Agreement unless
its market share exceeds approximately 0.28% of total cigarettes
sold in the United States (approximately 1.0 billion
cigarettes in 2008). In connection with the acquisition of
Medallion, we recorded an intangible asset of
$107.5 million related to the exemption under the Master
Settlement Agreement because we believe Vector Tobacco will
continue to realize the benefit of the exemption for the
foreseeable future. Because the Master Settlement Agreement
states that payments will continue in perpetuity, the intangible
asset is not amortized.
For purposes of this discussion and segment reporting in this
report, references to the Liggett segment encompass the
manufacture and sale of conventional cigarettes and include the
former operations of Medallion (held for legal purposes as part
of Vector Tobacco).
5
Philip Morris Brand Transaction. In November
1998, we and Liggett granted Philip Morris options to purchase
interests in Trademarks LLC which holds three domestic cigarette
brands, L&M, CHESTERFIELD and LARK, formerly held by
Liggetts subsidiary, Eve Holdings Inc.
Under the terms of the Philip Morris agreements, Eve contributed
the three brands to Trademarks, a newly-formed limited liability
company, in exchange for 100% of two classes of Trademarks
interests, the Class A Voting Interest and the Class B
Redeemable Nonvoting Interest. Philip Morris acquired two
options to purchase the interests from Eve. In December 1998,
Philip Morris paid Eve a total of $150 million for the
options, $5 million for the option for the Class A
interest and $145 million for the option for the
Class B interest.
The Class A option entitled Philip Morris to purchase the
Class A interest for $10.1 million. On March 19,
1999, Philip Morris exercised the Class A option, and the
closing occurred on May 24, 1999.
On May 24, 1999, Trademarks borrowed $134.9 million
from a lending institution. The loan was guaranteed by Eve and
is collateralized by a pledge by Trademarks of the three brands
and Trademarks interest in the trademark license agreement
(discussed below) and by a pledge by Eve of its Class B
interest. In connection with the closing of the Class A
option, Trademarks distributed the loan proceeds to Eve as the
holder of the Class B interest. The cash exercise price of
the Class B option and Trademarks redemption price
were reduced by the amount distributed to Eve. Upon Philip
Morris exercise of the Class B option or
Trademarks exercise of its redemption right, Philip Morris
and Trademarks released Eve from its guaranty. The Class B
interest was entitled to a guaranteed payment of
$0.5 million each year with the Class A interest
allocated all remaining income or loss of Trademarks.
Trademarks granted Philip Morris an exclusive license of the
three brands for an
11-year term
expiring May 24, 2010 at an annual royalty based on sales
of cigarettes under the brands, subject to a minimum annual
royalty payment of not less than the annual debt service
obligation on the loan plus $1 million.
The Class B option became exercisable during the
90-day
period beginning December 2, 2008 and was exercised by
Philip Morris on February 19, 2009. This option entitled
Philip Morris to purchase the Class B interest for
$139.9 million, reduced by the amount previously
distributed to Eve of $134.9 million. In connection with
the exercise of the Class B option, Philip Morris paid to
Eve approximately $5.1 million (including a pro-rata share
of its guaranteed payment) and Eve was released from its
guaranty.
Upon the closing of the exercise of the Class A option and
the distribution of the loan proceeds on May 24, 1999,
Philip Morris obtained control of Trademarks, and we recognized
a pre-tax gain of $294.1 million in our consolidated
financial statements and established a deferred tax liability of
$103.1 million relating to the gain. As discussed in
Note 10 to our consolidated financial statements, in July
2006, we entered into a settlement agreement with the Internal
Revenue Service with respect to taxes allegedly owed on account
of the Philip Morris brand transaction.
Vector
Tobacco Inc.
Vector Tobacco, a wholly-owned subsidiary of VGR Holding, is
engaged in the development and marketing of low nicotine and
nicotine-free cigarette products and the development of reduced
risk cigarette products.
QUEST. In January 2003, Vector Tobacco
introduced QUEST, its brand of low nicotine and nicotine-free
cigarette products. QUEST brand cigarettes are currently
marketed to permit adult smokers, who wish to continue smoking,
to gradually reduce their intake of nicotine. The products are
not labeled or advertised for smoking cessation and Vector
Tobacco makes no claims that QUEST is safer than other cigarette
products.
Management believes that, based on testing at Vector
Tobaccos research facility, the QUEST 3 product will
contain trace levels of nicotine that have no discernible
physiological impact on the smoker, and that, consistent with
other products bearing free claims, QUEST 3 may
be labeled as nicotine-free with an appropriate
disclosure of the trace levels. The QUEST 3 product is similarly
referred to in this report as nicotine-free.
Expenditures by Vector Tobacco for research and development
activities were $3.0 million in 2008, $4.2 million in
2007, and $6.7 million in 2006.
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Manufacturing and Marketing. The QUEST brands
are priced as premium cigarettes and are marketed by the sales
representatives of Liggett Vector Brands, which coordinates and
executes the sales and marketing efforts for all our tobacco
operations. Liggett manufactures all of Vector Tobaccos
cigarette brands under contract at its Mebane, North Carolina
manufacturing facility.
Competition. Vector Tobaccos competitors
generally have substantially greater resources than it,
including financial, marketing and personnel resources. Other
major tobacco companies have stated that they are working on
reduced risk cigarette products and have made publicly available
at this time only limited additional information concerning
their activities. Philip Morris has announced that it is
developing products that potentially reduce smokers
exposure to harmful compounds in cigarette smoke and have been
pursuing patents for its technology. RJR Tobacco has disclosed
that a primary focus for its research and development activity
is the development of potentially reduced exposure products,
which may ultimately be recognized as products that present
reduced risks to health. RJR Tobacco has stated that it
continues to sell in limited distribution throughout the country
a brand of cigarettes that primarily heats rather than burns
tobacco, which it claims reduces the toxicity of its smoke.
There is a substantial likelihood that other companies will
continue to introduce new products that are designed to compete
directly with the low nicotine, nicotine-free and reduced risk
products that Vector Tobacco currently markets or may develop.
Intellectual Property. Vector Tobacco
currently has patents and pending patent applications that
encompass the reduction or elimination of nicotine and
carcinogens in tobacco and the use of this tobacco to prepare
reduced carcinogen tobacco products and smoking cessation kits.
Vector Tobacco currently has patents and pending patent
applications that encompass the use of palladium and other
compounds to reduce the presence of carcinogens and other
toxins. We recently entered into an agreement to sell certain of
the intellectual property for $325,000, which is expected to be
received in 2009, in connection with the resolution of a patent
infringement proceeding.
Research relating to the biological basis of tobacco-related
disease is being conducted at Vector Tobacco, together with
third party collaborators. This research is being directed by
Dr. Anthony P. Albino, Vector Tobaccos Senior Vice
President of Public Health Affairs. Vector Tobacco has pending
patent applications in the United States directed to technology
arising from this research and as this research progresses, it
may generate additional intellectual property.
Risks. Vector Tobaccos new product
initiatives are subject to substantial risks, uncertainties and
contingencies which include, without limitation, the challenges
inherent in new product development initiatives, the ability to
raise capital and manage the growth of its business, potential
disputes concerning Vector Tobaccos intellectual property,
intellectual property of third parties, potential extensive
government regulation or prohibition, uncertainty regarding
pending legislation providing for FDA regulation of cigarettes,
third party allegations that Vector Tobacco products are
unlawful or bear deceptive or unsubstantiated product claims,
potential delays in obtaining tobacco, other raw materials and
any technology needed to produce Vector Tobaccos products,
market acceptance of Vector Tobaccos products, competition
from companies with greater resources and the dependence on key
employees. See Item 1A. Risk Factors.
Legislation,
Regulation and Litigation
In the United States, tobacco products are subject to
substantial and increasing legislation, regulation and taxation,
which has a negative effect on revenue and profitability. See
Item 7. Management Discussion and Analysis of
Financial Condition and Results of Operations
Legislation and Regulation.
The cigarette industry continues to be challenged on numerous
fronts. The industry is facing increased pressure from
anti-smoking groups and continued smoking and health litigation,
including private class action litigation and health care cost
recovery actions brought by governmental entities and other
third parties, the effects of which, at this time, we are unable
to evaluate. As of December 31, 2008, there were
approximately 2,720 individual suits, seven purported class
actions or actions where class certification has been sought and
four governmental and other third-party payor health care
recovery actions pending in the United States in which Liggett
was a named defendant. See Item 3. Legal
Proceedings and Note 12 to our consolidated financial
statements, which contain a description of litigation.
7
It is possible that our consolidated financial position, results
of operations or cash flows could be materially adversely
affected by an unfavorable outcome in any smoking-related
litigation or as a result of additional federal or state
regulation relating to the manufacture, sale, distribution,
advertising or labeling of tobacco products.
Liggetts management believes that it is in compliance in
all material respects with the laws regulating cigarette
manufacturers.
The
Master Settlement Agreement and Other State Settlement
Agreements
In March 1996, March 1997 and March 1998, Liggett entered into
settlements of tobacco-related litigation with 45 states
and territories. The settlements released Liggett from all
tobacco-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 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 Master Settlement Agreement received final judicial approval
in each Settling State.
In the Settling States, the Master Settlement Agreement released
Liggett from:
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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
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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.
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The Master Settlement Agreement restricts tobacco product
advertising and marketing within the Settling States and
otherwise restricts the activities of Participating
Manufacturers. Among other things, the Master Settlement
Agreement 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 Master Settlement Agreement; 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 Master Settlement Agreement also requires Participating
Manufacturers to affirm corporate principles to comply with the
Master Settlement Agreement and to reduce underage usage of
tobacco products and imposes restrictions on lobbying activities
conducted on behalf of Participating Manufacturers.
Liggett has no payment obligations under the Master Settlement
Agreement 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 Master Settlement Agreement, except to the extent its
market share exceeds a market share exemption of approximately
0.28% of total cigarettes sold in the United States. According
to data from Management Science Associates, Inc., domestic
shipments by Liggett and Vector Tobacco accounted for
approximately 2.4% of the total cigarettes shipped in the United
States during 2006, 2.5% during 2007, and 2.5% during 2008. If
Liggetts or Vector Tobaccos market share exceeds
their respective market share exemption in a
8
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 2006,
Liggett and Vector Tobacco paid a total of approximately
$10.6 million for their 2005 Master Settlement Agreement
obligations. In April 2007, Liggett and Vector Tobacco paid
approximately $38.7 million for their 2006 Master
Settlement Agreement obligation. In April 2008, Liggett and
Vector Tobacco paid approximately $36.0 million for their
2007 Master Settlement Agreement obligation, having prepaid
$34.5 million of such amount in December 2007. Liggett and
Vector Tobacco have expensed approximately $49.8 million
for their estimated Master Settlement Agreement obligations for
2008 as part of cost of goods sold. Liggett and Vector Tobacco
paid approximately $34.0 million for their 2008 Master
Settlement obligations during 2008 and anticipate paying another
$9.8 million in April 2009, after withholding certain
disputed amounts.
Under the payment provisions of the Master Settlement Agreement,
the Participating Manufacturers are required to pay a base
amount of $9.0 billion in 2009 and each year thereafter
(subject to applicable adjustments, offsets and reductions).
These annual payments are allocated based on unit volume of
domestic cigarette shipments. The payment obligations under the
Master Settlement Agreement 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.
Liggett may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with
the states. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operation Recent Developments Tobacco
Settlement Agreements and Note 12 to our consolidated
financial statements.
New
Valley LLC
New Valley LLC, a Delaware limited liability company, is engaged
in the real estate business and is seeking to acquire additional
real estate properties and operating companies. New Valley owns
a 50% interest in Douglas Elliman Realty, LLC, which operates
the largest residential brokerage company in the New York City
metropolitan area. New Valley also holds, through its New Valley
Realty Division, a 50% interest in the Sheraton Keauhou Bay
Resort & Spa in Kailua-Kona, Hawaii as well as certain
other significant real estate related investments.
In December 2005, we completed an exchange offer and subsequent
short-form merger whereby we acquired the remaining 42.3% of the
common shares of New Valley Corporation that we did not already
own. As a result of these transactions, New Valley Corporation
became our wholly-owned subsidiary and approximately
5.8 million shares of our common stock were issued to the
New Valley Corporation shareholders in the transactions. The
surviving corporation in the short-form merger was subsequently
merged into a new Delaware limited liability company named New
Valley LLC, which conducts the business of the former New Valley
Corporation. Prior to these transactions, New Valley Corporation
was registered under the Securities Exchange Act of 1934 and
filed periodic reports and other information with the SEC.
Business
Strategy
The business strategy of New Valley is to continue to operate
its real estate business, to acquire additional real estate
properties and to acquire operating companies through merger,
purchase of assets, stock acquisition or other means, or to
acquire control of operating companies through one of such
means. New Valley may also seek from time to time to dispose of
such businesses and properties when favorable market conditions
exist. New Valleys cash and investments are available for
general corporate purposes, including for acquisition purposes.
Douglas
Elliman Realty, LLC
During 2000 and 2001, New Valley acquired for approximately
$1.7 million a 37.2% ownership interest in B&H
Associates of NY, which conducts business as Prudential Douglas
Elliman Real Estate, formerly known as Prudential Long Island
Realty, a residential real estate brokerage company on Long
Island, and a minority interest in an affiliated mortgage
company, Preferred Empire Mortgage Company. In December 2002,
New Valley and the other owners of Prudential Douglas Elliman
Real Estate contributed their interests in Prudential Douglas
Elliman Real Estate to Douglas Elliman Realty, LLC, formerly
known as Montauk Battery Realty, LLC, a newly formed entity. New
Valley acquired a 50% interest in Douglas Elliman Realty as a
result of an additional investment of
9
approximately $1.4 million by New Valley and the redemption
by Prudential Douglas Elliman Real Estate of various ownership
interests. As part of the transaction, Prudential Douglas
Elliman Real Estate renewed its franchise agreement with The
Prudential Real Estate Affiliates, Inc. for an additional
ten-year term. In October 2004, upon receipt of required
regulatory approvals, the former owners of Douglas Elliman
Realty contributed to Douglas Elliman Realty their interests in
the related mortgage company.
In March 2003, Douglas Elliman Realty purchased the New York
City based residential brokerage firm, Douglas
Elliman, LLC, formerly known as Insignia Douglas Elliman, and an
affiliated property management company, for $71.25 million.
With that acquisition, the combination of Prudential Douglas
Elliman Real Estate with Douglas Elliman created the largest
residential brokerage company in the New York metropolitan area.
Upon closing of the acquisition, Douglas Elliman entered into a
ten-year franchise agreement with The Prudential Real Estate
Affiliates, Inc. New Valley invested an additional
$9.5 million in subordinated debt and equity of Douglas
Elliman Realty to help fund the acquisition. The subordinated
debt, which had a principal amount of $9.5 million, bears
interest at 12% per annum and is due in March 2013. As part of
the Douglas Elliman acquisition, Douglas Elliman Realty acquired
Douglas Ellimans affiliate, Residential Management Group
LLC, which conducts business as Douglas Elliman Property
Management and is the New York metropolitan areas largest
manager of rental, co-op and condominium housing.
We account for our interest in Douglas Elliman Realty under the
equity method. We recorded income of $11.8 million in 2008,
$20.3 million in 2007, and $12.7 million in 2006
associated with Douglas Elliman Realty. Equity income from
Douglas Elliman Realty includes interest earned by New Valley on
the subordinated debt, purchase accounting adjustments and
management fees.
Douglas Elliman Realty has been negatively impacted by the
current downturn in the residential real estate market. The
residential real estate market is cyclical and is affected by
changes in the general economic conditions that are beyond
Douglas Elliman Realtys control. The U.S. residential
real estate market, including the market in the New York
metropolitan area where Douglas Elliman operates, is currently
in a significant downturn due to various factors including
downward pressure on housing prices, the impact of the recent
contraction in the subprime and mortgage markets generally and
an exceptionally large inventory of unsold homes at the same
time that sales volumes are decreasing. The New York
metropolitan area market is further impacted by the significant
downturn in the financial services industry. The depth and
length of the current downturn in the real estate industry has
proved exceedingly difficult to predict. We cannot predict
whether the downturn will worsen or when the market and related
economic forces will return the U.S. residential real
estate industry to a growth period.
Real Estate Brokerage Business. Douglas
Elliman Realty is engaged in the real estate brokerage business
through its subsidiaries Douglas Elliman and Prudential Douglas
Elliman Real Estate. The two brokerage companies have 59 offices
with approximately 3,800 real estate agents in the metropolitan
New York area. The companies achieved combined sales of
approximately $11.6 billion of real estate in 2008,
approximately $13.9 billion of real estate in 2007, and
approximately $11.7 billion of real estate in 2006. Douglas
Elliman Realty was ranked as the fourth largest residential
brokerage company in the United States in 2007 based on closed
sales volume by the Real Trends broker survey. Douglas
Elliman Realty had revenues of $352.7 million in 2008,
$405.6 million in 2007, and $347.2 million in 2006.
Douglas Elliman was founded in 1911 and has grown to be one of
Manhattans leading residential brokers by specializing in
the highest end of the sales and rental marketplaces. It has 14
New York City offices, with approximately 2,000 real estate
agents, and had sales volume of approximately $8.1 billion
of real estate in 2008, approximately $9.6 billion of real
estate in 2007, and approximately $7.2 billion of real
estate in 2006.
Prudential Douglas Elliman Real Estate is headquartered in
Huntington, New York and is the largest residential brokerage
company on Long Island with 45 offices and approximately 1,800
real estate agents. During 2008, Prudential Douglas Elliman Real
Estate closed approximately 5,900 transactions, representing
sales volume of approximately $3.5 billion of real estate.
This compared to approximately 6,600 transactions closed in
2007, representing approximately $4.3 billion of real
estate, and approximately 7,000 transactions closed in 2006,
representing approximately $4.5 billion of real estate.
Prudential Douglas Elliman Real Estate serves approximately 250
communities from Manhattan to Montauk.
10
Douglas Elliman and Prudential Douglas Elliman Real Estate both
act as a broker or agent in residential real estate
transactions. In performing these services, the companies have
historically represented the seller, either as the listing
broker, or as a co-broker in the sale. In acting as a broker for
the seller, their services include assisting the seller in
pricing the property and preparing it for sale, advertising the
property, showing the property to prospective buyers, and
assisting the seller in negotiating the terms of the sale and in
closing the transaction. In exchange for these services, the
seller pays to the companies a commission, which is generally a
fixed percentage of the sales price. In a co-brokered
arrangement, the listing broker typically splits its commission
with the other co-broker involved in the transaction. The two
companies also offer buyer brokerage services. When acting as a
broker for the buyer, their services include assisting the buyer
in locating properties that meet the buyers personal and
financial specifications, showing the buyer properties, and
assisting the buyer in negotiating the terms of the purchase and
closing the transaction. In exchange for these services a
commission is paid to the companies which also is generally a
fixed percentage of the purchase price and is usually, with the
consent of the listing broker, deducted from, and payable out
of, the commission payable to the listing broker. With the
consent of a buyer and seller, subject to certain conditions,
the companies may, in certain circumstances, act as a selling
broker and as a buying broker in the same transaction. Their
sales and marketing services are mostly provided by licensed
real estate sales associates who have entered into independent
contractor agreements with the companies. The companies
recognize revenue and commission expenses upon the consummation
of the real estate sale.
The two brokerage companies also offer relocation services to
employers, which provide a variety of specialized services
primarily concerned with facilitating the resettlement of
transferred employees. These services include sales and
marketing of transferees existing homes for their
corporate employer, assistance in finding new homes, moving
services, educational and school placement counseling,
customized videos, property marketing assistance, rental
assistance, area tours, international relocation, group move
services, marketing and management of foreclosed properties,
career counseling, spouse/partner employment assistance, and
financial services. Clients can select these programs and
services on a fee basis according to their needs.
As part of the brokerage companies franchise agreement
with Prudential, its subsidiaries have an agreement with
Prudential Relocation Services, Inc. to provide relocation
services to the Prudential network. The companies anticipate
that participation in Prudential network will continue to
provide new relocation opportunities with firms on a national
level.
Preferred Empire Mortgage Company is engaged in the residential
mortgage brokerage business, which involves the origination of
loans for one-to-four family residences. Preferred Empire
primarily originates loans for purchases of properties located
on Long Island and in New York City. Approximately one-half of
these loans are for home sales transactions in which Prudential
Douglas Elliman Real Estate acts as a broker. The term
origination refers generally to the process of
arranging mortgage financing for the purchase of property
directly to the purchaser or for refinancing an existing
mortgage. Preferred Empires revenues are generated from
loan origination fees, which are generally a percentage of the
original principal amount of the loan and are commonly referred
to as points, and application and other fees paid by
the borrowers. Preferred Empire recognizes mortgage origination
revenues and costs when the mortgage loan is consummated.
Marketing. As members of The Prudential Real
Estate Affiliates, Inc., Douglas Elliman and Prudential Douglas
Elliman Real Estate offer real estate sales and marketing and
relocation services, which are marketed by a multimedia program.
This program includes direct mail, newspaper, internet, catalog,
radio and television advertising and is conducted throughout
Manhattan and Long Island. In addition, the integrated nature of
the real estate brokerage companies services is designed to
produce a flow of customers between their real estate sales and
marketing business and their mortgage business.
Competition. The real estate brokerage
business is highly competitive. However, Douglas Elliman and
Prudential Douglas Elliman Real Estate believe that their
ability to offer their customers a range of inter-related
services and their level of residential real estate sales and
marketing help position them to meet the competition and improve
their market share.
In the two brokerage companies traditional business of
residential real estate sales and marketing, they compete
primarily with multi-office independent real estate
organizations and, to some extent with franchise real estate
organizations, such as Century-21, ERA, RE/MAX and Coldwell
Banker. The companies believe that their
11
major competitors in 2009 will also increasingly include
multi-office real estate organizations, such as GMAC Home
Services, NRT Inc. (whose affiliates include the New York
City-based Corcoran Group) and other privately owned companies.
Residential brokerage firms compete for sales and marketing
business primarily on the basis of services offered, reputation,
personal contacts, and, recently to a greater degree, price.
Both companies relocation businesses are fully integrated
with their residential real estate sales and marketing business.
Accordingly, their major competitors are many of the same real
estate organizations previously noted. Competition in the
relocation business is likewise based primarily on level of
service, reputation, personal contact and, recently to a greater
degree, price.
In its mortgage loan origination business, Preferred Empire
competes with other mortgage originators, such as mortgage
brokers, mortgage bankers, state and national banks, and thrift
institutions. Because Preferred Empire does not fund, sell or
service mortgage loans, many of Preferred Empires
competitors for mortgage services have substantially greater
resources than Preferred Empire.
Government Regulation. Several facets of real
estate brokerage businesses are subject to government
regulation. For example, their real estate sales and marketing
divisions are licensed as real estate brokers in the states in
which they conduct their real estate brokerage businesses. In
addition, their real estate sales associates must be licensed as
real estate brokers or salespersons in the states in which they
do business. Future expansion of the real estate brokerage
operations of Douglas Elliman and Prudential Douglas Elliman
Real Estate into new geographic markets may subject them to
similar licensing requirements in other states.
A number of states and localities have adopted laws and
regulations imposing environmental controls, disclosure rules,
zoning, and other land use restrictions, which can materially
impact the marketability of certain real estate. However,
Douglas Elliman and Prudential Douglas Elliman Real Estate do
not believe that compliance with environmental, zoning and land
use laws and regulations has had, or will have, a materially
adverse effect on their financial condition or operations.
In Preferred Empires mortgage business, mortgage loan
origination activities are subject to the Equal Credit
Opportunity Act, the Federal
Truth-in-Lending
Act, the Real Estate Settlement Procedures Act, and the
regulations promulgated thereunder which prohibit discrimination
and require the disclosure of certain information to borrowers
concerning credit and settlement costs. Additionally, there are
various state laws affecting Preferred Empires mortgage
operations, including licensing requirements and substantive
limitations on the interest and fees that may be charged. States
also have the right to conduct financial and regulatory audits
of the loans under their jurisdiction. Preferred Empire is
licensed as a mortgage broker in New York, and as a result,
Preferred Empire is required to submit annual audited financial
statements to the New York Commissioner of Banks and maintain a
minimum net worth of $50,000. As of December 31, 2008,
Preferred Empire was in compliance with these requirements.
Preferred Empire is also licensed as a mortgage broker in
Connecticut and New Jersey.
Neither Douglas Elliman nor Prudential Douglas Elliman Real
Estate is aware of any material licensing or other government
regulatory requirements governing its relocation business,
except to the extent that such business also involves the
rendering of real estate brokerage services, the licensing and
regulation of which are described above.
Franchises and Trade Names. In December 2002,
Prudential Douglas Elliman Real Estate renewed for an additional
ten-year term its franchise agreement with The Prudential Real
Estate Affiliates, Inc. and has an exclusive franchise, subject
to various exceptions and to meeting annual revenue thresholds,
in New York for the counties of Nassau and Suffolk on Long
Island. In addition, in June 2004, Prudential Douglas Elliman
Real Estate was granted an exclusive franchise, subject to
various exceptions and to meeting annual revenue thresholds,
with respect to the boroughs of Brooklyn and Queens. In March
2003, Douglas Elliman entered into a ten-year franchise
agreement with The Prudential Real Estate Affiliates, Inc. and
has an exclusive franchise, subject to various exceptions and to
meeting annual revenue thresholds, for Manhattan.
The Douglas Elliman trade name is a registered
trademark in the United States. The name has been synonymous
with the most exacting standards of excellence in the real
estate industry since Douglas Ellimans formation in 1911.
Other trademarks used extensively in Douglas Ellimans
business, which are owned by Douglas
12
Elliman Realty and registered in the United States, include
We are New York, Bringing People and Places
Together, If You Clicked Here Youd Be Home
Now and Picture Yourself in the Perfect Home.
The Prudential name and the tagline From
Manhattan to Montauk are used extensively in both the
Prudential Douglas Elliman Real Estate and Douglas Elliman
businesses. In addition, Prudential Douglas Elliman Real Estate
continues to use the trade names of certain companies that it
has acquired.
Residential Property Management
Business. Douglas Elliman Realty is also engaged
in the management of cooperatives, condominiums and apartments
though its subsidiary, Residential Management Group, LLC, which
conducts business as Douglas Elliman Property Management and is
one of the leading managers of apartments, cooperatives and
condominiums in the New York metropolitan area. Residential
Management Group provides full service third-party fee
management for approximately 250 properties, representing
approximately 45,000 units in New York City, Nassau County,
Northern New Jersey and Westchester County. Residential
Management Group is seeking to continue to expand its property
management business in the greater metropolitan New York area in
2009. Among the notable properties currently managed are the
Dakota, Museum Tower, Worldwide Plaza, London Terrace and West
Village Houses buildings in New York City. Residential
Management Group employs approximately 250 people, of whom
approximately 150 work at Residential Management Groups
headquarters and the remainder at remote offices in the New York
metropolitan area.
New
Valley Realty Division
Hawaiian Hotel. In July 2001, Koa Investors,
LLC, an entity owned by New Valley, developer Brickman
Associates and other investors, acquired the leasehold interests
in the former Kona Surf Hotel in Kailua-Kona, Hawaii in a
foreclosure proceeding. New Valley, which holds a 50% interest
in Koa Investors, had invested $13.575 million in the
project as of December 31, 2008. We accounted for our
investment in Koa Investors under the equity method and recorded
losses of $750,000 in 2007, and income of $867,000 in 2006
associated with the Kona Surf Hotel. The income in 2006 related
to the receipt of tax credits from the State of Hawaii of
$1.192 million offset by equity in the loss of Koa
Investors of $325,000. Koa Investors losses in 2007
primarily represented losses from operations.
The hotel is located on a
20-acre
tract, which is leased under two ground leases with Kamehameha
Schools, the largest private land owner in Hawaii. In December
2002, Koa Investors and Kamehameha amended the leases to provide
for significant rent abatements over the next ten years and
extended the remaining term of the leases from 33 years to
65 years. In addition, Kamehameha granted Koa Investors
various right of first offer opportunities to develop adjoining
resort sites.
A subsidiary of Koa Investors has entered into an agreement with
Sheraton Operating Corporation, a subsidiary of Starwood Hotels
and Resorts Worldwide, Inc., for Sheraton to manage the hotel.
Following a major renovation, the property reopened in the
fourth quarter 2004 as the Sheraton Keauhou Bay
Resort & Spa, a four star family resort with 521
rooms. The renovation of the property included comprehensive
room enhancements, construction of a fresh water
13,000 square foot fantasy pool, lobby and entrance
improvements, a new gym and spa, retail stores and new
restaurants. A 10,000 square foot convention center,
wedding chapel and other revenue producing amenities were also
restored. In April 2004, a subsidiary of Koa Investors closed on
a $57 million construction loan to fund the renovation.
In August 2005, a wholly-owned subsidiary of Koa Investors
borrowed $82 million, which is non-recourse to New Valley,
at an interest rate of LIBOR plus 2.45%. Koa Investors used the
proceeds of the loan to repay its $57 million construction
loan and distributed a portion of the proceeds to its members,
including $5.5 million to New Valley. As a result of the
refinancing, we suspended our recognition of equity losses in
Koa Investors to the extent such losses exceed our basis plus
any commitment to make additional investments, which totaled
$600,000 at the refinancing. In August 2006, New Valley
contributed $925,000 to Koa Investors in the form of $600,000 of
the required contributions and $325,000 of discretionary
contributions. Accordingly, we recognized in 2006 a $325,000
loss from New Valleys equity investment in Koa Investors.
Although New Valley was not obligated to fund any additional
amounts to Koa Investors at December 31, 2007 and 2006, New
Valley made a $750,000 capital contribution in February 2007.
13
New Valley and certain members in KOA Investors have chosen not
to fund discretionary capital calls in 2008 and KOA Investors
was not able to meet its financial obligations in the third
quarter of 2008. KOA has been informed by its lender that it is
in default on its $82 million loan, which is non-recourse
to New Valley. We have carried our investment in KOA at $0
throughout 2008.
St. Regis Hotel, Washington, D.C. In
June 2005, affiliates of New Valley and Brickman Associates
formed 16th & K Holdings LLC (Hotel LLC),
which acquired the St. Regis Hotel, a 193 room luxury hotel in
Washington, D.C., for $47 million in August 2005. In
connection with the purchase of the hotel, a subsidiary of Hotel
LLC entered into agreements to borrow up to $50 million of
senior and subordinated debt. In April 2006, Hotel LLC purchased
for approximately $3 million a building adjacent to the
hotel to house various administrative and sales functions. The
St. Regis Hotel, which was temporarily closed on August 31,
2006 for an extensive renovation, reopened in January 2008.
Hotel LLC capitalized all costs other than management fees
related to the renovation of the property during the renovation
phase. New Valley, which holds a 50% interest in Hotel LLC, had
invested $12.125 million in the project at
December 31, 2008. We account for our interest in Hotel LLC
under the equity method.
In the event that Hotel LLC makes distributions of cash, New
Valley is entitled to 50% of the cash distributions until it has
recovered its invested capital and achieved an annual 11%
internal rate of return (IRR), compounded quarterly. New Valley
is then entitled to 35% of subsequent cash distributions until
it has achieved an annual 22% IRR. New Valley is then entitled
to 30% of subsequent cash distributions until it has achieved an
annual 32% IRR. After New Valley has achieved an annual 35% IRR,
New Valley is then entitled to 25% of subsequent cash
distributions.
In September 2007, Hotel LLC entered into certain agreements to
sell 90% of the St. Regis Hotel. In October 2007, Hotel LLC
entered into an agreement to sell certain tax credits associated
with the 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 $16.406 million upon the sale of
the hotel. New Valley anticipates receiving an additional
$3.4 million in various installments between 2009 and 2012.
New Valley recorded equity losses of $3.796 million,
$2.344 million, and $2.147 million for the years ended
December 31, 2008, 2007, and 2006, respectively. New Valley
also recorded equity income of $16.363 million in
connection with the gain from the sale of the St. Regis because
the amount received from Hotel LLC exceeded our basis in the
investment and we have no legal obligation to make additional
investments to Hotel LLC.
Escena. 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 million face value
plus accrued interest and other costs of $1.445 million.
The loan is being accounted for under the cost recovery method
and the costs include the purchase price and additional
capitalized costs of $259,000. The borrowers are Escena-PSC, LLC
and Palm Springs Classic, LLC, a joint venture of Lennar Homes
of California, Inc and Empire Land, LLC. In April, 2008, Empire
Land filed a Chapter 11 bankruptcy petition which was
converted to Chapter 7 in December 2008. Lennar Homes is an
affiliate of Lennar Corporation. The loan collateral consists of
867 residential lots with site and public infrastructure, an
18-hole 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. In
January 2009 we obtained an 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 balance plus accrued interest as well as a
guarantee to complete the development of the property. In order
to calculate the fair market value of the investment, we
utilized the most recent as is appraised value of
the collateral and estimated the value of Lennars
completion and payment guaranties, less estimated costs to
enforce the guaranties and dispose of the property. Based on
these estimates, we determined that the fair market value was
less than the carrying amount of the mortgage receivable at
December 31, 2008 by approximately $4 million.
Accordingly, a reserve was established for the decline in value
and a charge of $4 million was recorded in 2008. We carried
the loan on our consolidated balance sheet at its net basis of
$17.704 million as of December 31, 2008. Litigation is
ongoing to enforce our rights under the loan documents. The
parties are currently involved in settlement discussions.
14
Aberdeen Townhomes LLC. In June 2008, a
subsidiary of New Valley purchased a preferred equity interest
in Aberdeen Townhomes LLC for $10 million. 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. 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, we are not the
primary beneficiary. Our maximum exposure to loss as a result of
our investment in Aberdeen is $10 million. This investment
is being accounted for under the cost method.
In January 2009 we obtained an appraisal of the five town home
residences and determined that the value of the properties, less
estimated disposal costs, was approximately $3.5 million
less than their carrying value and recorded an impairment charge
for $3.5 million. The reduction in value was attributed to
the overall real estate market conditions in New York City at
December 31, 2008.
Mortgages on four of the five Aberdeen town homes with a balance
of approximately $29.125 million matured on March 1,
2009 and have not been refinanced. The remaining mortgage with a
balance of approximately $11.5 million matures on
September 30, 2009. Additionally in February 2009, the
managing member of Aberdeen Townhomes gave notice that it is
resigning as managing member. A subsidiary of New Valley will
become the new managing member.
New Valley Oaktree Chelsea Eleven, LLC. In
September 2008, a subsidiary of New Valley purchased for
$12 million a 40% interest in New Valley Oaktree Chelsea
Eleven, LLC, which lent $29 million to Chelsea Eleven LLC
and contributed $1 million for 29% of the capital of
Chelsea Eleven LLC, which is developing a condominium project in
Manhattan, New York. The development consists of 72 luxury
residential units and one commercial unit. Approximately 75% of
the units are pre-sold and approximately $35 million in
deposits are held in escrow. The loan from New Valley Oaktree is
subordinate to a $110 million construction loan and a
$24 million mezzanine loan plus accrued interest. The loan
from New Valley Oaktree to Chelsea Eleven bears interest at
60.25% per annum, compounded monthly. An interest reserve of
$3.750 million was held by Chelsea Eleven LLC. This reserve
was liquidated in five monthly payments and New Valley received
$1.5 million in distributions from this interest reserve.
New Valley Chelsea is a variable interest entity; however, we
are not the primary beneficiary. Our maximum exposure to loss as
a result of our investment in Chelsea is $12 million. This
investment is being accounted for under the equity method.
Former
Broker-Dealer Operations
In May 1995, New Valley acquired Ladenburg Thalmann &
Co. Inc. for $25.8 million, net of cash acquired. Ladenburg
Thalmann & Co. is a full service broker-dealer, which
has been a member of the New York Stock Exchange since 1879. In
December 1999, New Valley sold 19.9% of Ladenburg
Thalmann & Co. to Berliner Effektengesellschaft AG, a
German public financial holding company. New Valley received
$10.2 million in cash and Berliner shares valued in
accordance with the purchase agreement.
In May 2001, GBI Capital Management Corp. acquired all of the
outstanding common stock of Ladenburg Thalmann & Co.,
and the name of GBI was changed to Ladenburg Thalmann Financial
Services Inc. (LTS). New Valley received
18,598,098 shares, $8.01 million in cash and
$8.01 million principal amount of senior convertible notes
due December 31, 2005. The notes issued to New Valley bore
interest at 7.5% per annum and were convertible into shares of
LTS common stock. Upon closing, New Valley also acquired an
additional 3,945,060 shares of LTS common stock from the
former Chairman of LTS for $1.00 per share. To provide the funds
for the acquisition of the common stock of Ladenburg
Thalmann & Co., LTS borrowed $10 million from
Frost-Nevada, Limited Partnership and issued to Frost-Nevada
$10 million principal amount of 8.5% senior
convertible notes due December 31, 2005. Following
completion of the transactions, New Valley owned 53.6% and 49.5%
of the common stock of LTS, on a
15
basic and fully diluted basis, respectively. LTS (AMEX: LTS) is
registered under the Securities Act of 1934 and files periodic
reports and other information with the SEC.
In December 2001, New Valley distributed its
22,543,158 shares of LTS common stock to holders of New
Valley common shares through a special dividend. At the same
time, we distributed the 12,694,929 shares of LTS common
stock, that we received from New Valley, to the holders of our
common stock as a special dividend. Our stockholders received
0.348 of a LTS share for each share of ours in 2001.
In 2002, LTS borrowed a total of $5 million from New
Valley, due March 31, 2007, as extended. New Valley
evaluated its ability to collect its notes receivable and
related interest from LTS at September 30, 2002. These
notes receivable included the $5 million of notes issued in
2002 and the $8.01 million convertible note issued to New
Valley in May 2001. Management determined, based on the then
current trends in the broker-dealer industry and LTSs
operating results and liquidity needs, that a reserve for
uncollectibility should be established against these notes and
interest receivable. As a result, New Valley recorded a charge
of $13.2 million in the third quarter of 2002.
In November 2004, New Valley entered into a debt conversion
agreement with LTS and the other remaining holder of the
convertible notes. New Valley and the other holder agreed to
convert their notes, with an aggregate principal amount of
$18 million, together with the accrued interest, into
common stock of LTS. Pursuant to the debt conversion agreement,
the conversion price of the note held by New Valley was reduced
from the previous conversion price of approximately $2.08 to
$0.50 per share, and New Valley and the other holder each agreed
to purchase $5 million of LTS common stock at $0.45 per
share.
The note conversion transaction was approved by the LTS
shareholders in January 2005 and closed in March 2005. At the
closing, New Valleys note, representing approximately
$9.9 million of principal and accrued interest, was
converted into 19,876,358 shares of LTS common stock and
New Valley purchased 11,111,111 LTS shares.
In March 2005, New Valley distributed the 19,876,358 shares
of LTS common stock it acquired from the conversion of the notes
to holders of New Valley common shares through a special
dividend. On the same date, we distributed the
10,947,448 shares of LTS common stock that we received from
New Valley to the holders of our common stock as a special
dividend. Our stockholders of record on March 18, 2005
received approximately 0.24 of a LTS share for each share of
ours in 2005.
In February 2007, LTS entered into a Debt Exchange Agreement
with New Valley, the holder of $5 million principal amount
of its promissory notes due March 31, 2007. Pursuant to the
Exchange Agreement, New Valley agreed to exchange the principal
amount of its notes for LTS common stock at an exchange price of
$1.80 per share, representing the average closing price of the
LTS common stock for the 30 prior trading days ending on the
date of the Exchange Agreement. The debt exchange was
consummated on June 29, 2007 following approval by the LTS
shareholders at its annual meeting of shareholders. At the
closing, the $5 million principal amount of notes was
exchanged for 2,777,778 shares of LTSs common stock
and accrued interest on the notes of approximately
$1.7 million was paid in cash. In connection with the debt
exchange, we recorded a gain in 2007 of $8.1 million, which
consisted of the fair value of the 2,777,778 shares of LTS
common stock at June 29, 2007 (the transaction date) and
interest received in connection with the exchange. As a result,
New Valleys ownership of LTSs common stock increased
to 13,888,889 shares or approximately 8.0% of the
outstanding LTS shares as of December 31, 2008.
Four of our directors, Howard M. Lorber, Henry C. Beinstein,
Robert J. Eide and Jeffrey S. Podell, also serve as directors of
LTS. Mr. Lorber also serves as Vice Chairman of LTS.
Richard J. Lampen, who along with Mr. Lorber is an
executive officer of ours, also serves as a director of LTS and
has served as the President and Chief Executive Officer of LTS
since September 2006. In September 2006, we entered into an
agreement with LTS where we agreed to make available the
services of Mr. Lampen as well as other financial and
accounting services. LTS paid us $500,000, $400,000, and $83,000
for 2008, 2007, and 2006, respectively, related to the agreement
and pays us at a rate of $600,000 per year in 2009. These
amounts are recorded as a reduction to our operating, selling,
administrative and general expenses. For 2007 and 2008, LTS paid
compensation of $600,000 and $150,000, respectively, to each of
Mr. Lorber and Mr. Lampen in connection with their
services. See Note 14 to our consolidated financial
statements.
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Other
Investments
Castle Brands. In October 2008, we acquired
for $4 million an approximate 11% interest in Castle Brands
Inc. (AMEX:ROX), a publicly traded developer and importer of
premium branded spirits. Mr. Lampen is serving as the
interim President and Chief Executive Officer. In October 2008,
we entered into an agreement with Castle where we agreed to make
available the services of Mr. Lampen as well as other
financial and accounting services. Castle paid us $22,011 for
the year ended December 31, 2008 related to the agreement
and pays us at a rate of $100,000 per year in 2009.
Long-Term Investments. As of December 31,
2008, long-term investments consisted primarily of investments
in investment partnerships of approximately $51 million.
New Valley has committed to make an additional investment in one
of these investment partnerships of up to $112,000. In the
future, we may invest in other investments including limited
partnerships, real estate investments, equity securities, debt
securities and certificates of deposit depending on risk factors
and potential rates of return.
Employees
At December 31, 2008, we had approximately
430 employees, of which approximately 250 were employed at
Liggetts Mebane facility, approximately 12 were employed
at Vector Tobaccos research facility and approximately 150
were employed in sales and administrative functions at Liggett
Vector Brands. Approximately 43% of our employees are hourly
employees who are represented by unions. We have not experienced
any significant work stoppages since 1977, and we believe that
relations with our employees and their unions are satisfactory.
Available
Information
Our website address is www.vectorgroupltd.com. We make available
free of charge on the Investor Relations section of our website
(http://vectorgroupltd.com/invest.asp)
our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the
Securities and Exchange Commission. We also make available
through our website other reports filed with the SEC under the
Exchange Act, including our proxy statements and reports filed
by officers and directors under Section 16(a) of that Act.
Copies of our Code of Business Conduct and Ethics, Corporate
Governance Guidelines, Audit Committee charter, Compensation
Committee charter and Corporate Governance and Nominating
Committee charter have been posted on the Investor Relations
section of our website and are also available in print to any
shareholder who requests it. We do not intend for information
contained in our website to be part of this Annual Report on
Form 10-K.
Our business faces many risks. We have described below some of
the more significant risks which we and our subsidiaries face.
There may be additional risks that we do not yet know of or that
we do not currently perceive to be significant that may also
impact our business or the business of our subsidiaries. Each of
the risks and uncertainties described below could lead to events
or circumstances that have a material adverse effect on the
business, results of operations, cash flows, financial condition
or equity of us or one or more of our subsidiaries, which in
turn could negatively affect the value of our common stock. You
should carefully consider and evaluate all of the information
included in this report and any subsequent reports that we may
file with the Securities and Exchange Commission or make
available to the public before investing in any securities
issued by us.
We have
significant liquidity commitments
During 2009 and 2010, we have certain liquidity commitments that
could require the use of our existing cash resources. Our
corporate expenditures (exclusive of Liggett, Vector Research,
Vector Tobacco and New Valley) and other potential liquidity
requirements over the next 12 months include the following:
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cash interest expense of approximately $48.5 million,
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dividends on our outstanding common shares (currently at an
annual rate of approximately $115 million),
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a payment of a retirement benefit under our Supplemental
Retirement Plan in July 2009 to our former Executive Chairman of
approximately $20.75 million,
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the mandatory redemption by November 15, 2009 of
approximately $14 million of the outstanding principal
amount of our 5% Variable Interest Senior Convertible Notes, and
the possible redemption of an additional approximately
$98 million principal amount of Notes as a result of an
option by the holders to require us to repurchase some or all of
the remaining principal amount of Notes on November 15,
2009, and
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other corporate expenses and taxes, including a tax payment of
approximately $75.5 million in connection with the Philip
Morris brands transaction.
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In order to meet the above liquidity requirements as well as
other liquidity needs in the normal course of business, we will
be required to use cash flows from operations and existing cash
and cash equivalents. Should these resources be insufficient to
meet the upcoming liquidity needs, we may also be required to
liquidate investment securities available for sale and other
long-term investments, or, if available, draw on Liggetts
credit facility. While there are actions we can take to reduce
our liquidity needs, there can be no assurance that such
measures can be achieved.
We and
our subsidiaries have a substantial amount of indebtedness,
including indebtedness due in 2009.
We and our subsidiaries have significant indebtedness and debt
service obligations. At December 31, 2008, we and our
subsidiaries had total outstanding indebtedness (including the
embedded derivative liabilities related to our convertible
notes) of $385 million. We must redeem $14 million of
our 5% Variable Interest Senior Convertible Notes by
November 15, 2009. The holders of these Notes have the
option on November 15, 2009 to require us to repurchase
some or all of the remaining $97.9 million principal amount
of the Notes. In addition, subject to the terms of any future
agreements, we and our subsidiaries will be able to incur
additional indebtedness in the future. There is a risk that we
will not be able to generate sufficient funds to repay our debt.
If we cannot service our fixed charges, it would have a material
adverse effect on our business and results of operations.
We are a
holding company and depend on cash payments from our
subsidiaries, which are subject to contractual and other
restrictions, in order to service our debt and to pay dividends
on our common stock.
We are a holding company and have no operations of our own. We
hold our interests in our various businesses through our
wholly-owned subsidiaries, VGR Holding and New Valley. In
addition to our own cash resources, our ability to pay interest
on our debt and to pay dividends on our common stock depends on
the ability of VGR Holding and New Valley to make cash available
to us. VGR Holdings ability to pay dividends to us depends
primarily on the ability of Liggett, its wholly-owned
subsidiary, to generate cash and make it available to VGR
Holding. Liggetts revolving credit agreement with Wachovia
Bank, N.A. contains a restricted payments test that limits the
ability of Liggett to pay cash dividends to VGR Holding. The
ability of Liggett to meet the restricted payments test may be
affected by factors beyond its control, including
Wachovias unilateral discretion, if acting in good faith,
to modify elements of such test.
Our receipt of cash payments, as dividends or otherwise, from
our subsidiaries is an important source of our liquidity and
capital resources. If we do not have sufficient cash resources
of our own and do not receive payments from our subsidiaries in
an amount sufficient to repay our debts and to pay dividends on
our common stock, we must obtain additional funds from other
sources. There is a risk that we will not be able to obtain
additional funds at all or on terms acceptable to us. Our
inability to service these obligations and to continue to pay
dividends on our common stock would significantly harm us and
the value of our common stock.
Our
11% senior secured notes contain restrictive covenants that
limit our operating flexibility.
Our 11% senior secured notes due 2015 contain covenants
that, among other things, restrict our ability to take specific
actions, even if we believe them to be in our best interest,
including restrictions on our ability to:
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incur or guarantee additional indebtedness or issue preferred
stock;
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pay dividends or distributions on, or redeem or repurchase,
capital stock;
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create liens with respect to our assets;
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make investments, loans or advances;
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prepay subordinated indebtedness;
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enter into transactions with affiliates; and
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merge, consolidate, reorganize or sell our assets.
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In addition, Liggetts revolving credit agreement requires
us to meet specified financial ratios. These covenants may
restrict our ability to expand or fully pursue our business
strategies. Our ability to comply with these and other
provisions of the indenture governing the senior secured notes
and the Liggett revolving credit agreement may be affected by
changes in our operating and financial performance, changes in
general business and economic conditions, adverse regulatory
developments or other events beyond our control. The breach of
any of these covenants, including those contain in the indenture
governing the notes and the Liggetts credit agreement,
could result in a default under our indebtedness, which could
cause those and other obligations to become due and payable. If
any of our indebtedness is accelerated, we may not be able to
repay it.
The notes contain restrictive covenants, which, among other
things, restrict our ability to pay certain dividends or make
other restricted payments or enter into transactions with
affiliates if our Consolidated EBITDA, as defined in the
indenture, is less than $50 million for the four quarters
prior to such transaction.
Liggett
faces intense competition in the domestic tobacco
industry.
Liggett is considerably smaller and has fewer resources than its
major competitors and, as a result, has a more limited ability
to respond to market developments. Management Science Associates
data indicate that the three largest cigarette manufacturers
controlled approximately 85.6% of the United States cigarette
market during 2008. Philip Morris is the largest and most
profitable manufacturer in the market, and its profits are
derived principally from its sale of premium cigarettes. Philip
Morris had approximately 62.5% of the premium segment and 49.0%
of the total domestic market during 2008. During 2008, all of
Liggetts sales were in the discount segment, and its share
of the total domestic cigarette market was 2.5%. Philip Morris
and RJR Tobacco (which is now part of Reynolds American), the
two largest cigarette manufacturers, have historically, because
of their dominant market share, been able to determine cigarette
prices for the various pricing tiers within the industry. Market
pressures have historically caused the other cigarette
manufacturers to bring their prices into line with the levels
established by these two major manufacturers.
Philip Morris and Reynolds American dominate the domestic
cigarette market and had a combined market share of
approximately 74.9% at December 31, 2008. This
concentration of United States market share could make it more
difficult for Liggett and Vector Tobacco to compete for shelf
space in retail outlets and could impact price competition in
the market, either of which could have a material adverse affect
on their sales volume, operating income and cash flows, which in
turn could negatively affect the value of our common stock.
Liggetts
business is highly dependent on the discount cigarette
segment.
Liggett depends more on sales in the discount cigarette segment
of the market, relative to the full-price premium segment, than
its major competitors. All of Liggetts unit volume in 2008
and 2007 was generated in the discount segment. The discount
segment is highly competitive, with consumers having less brand
loyalty and placing greater emphasis on price. While the three
major manufacturers all compete with Liggett in the discount
segment of the market, the strongest competition for market
share has recently come from a group of smaller manufacturers
and importers, most of which sell low quality, deep discount
cigarettes. While Liggetts share of the discount market
decreased to 9.2% in 2008 from 9.3% in 2007, after increasing
from 8.7% in 2006, Management Science Associates data indicate
that the discount market share of these other smaller
manufacturers and importers was approximately 38.5% in 2008,
37.0% in 2007 and 36.3% in 2006. If pricing in the discount
market continues to be impacted by these smaller manufacturers
and importers, margins in Liggetts only current market
segment could be negatively affected, which in turn could
negatively affect the value of our common stock.
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Liggetts
market share is susceptible to decline.
In years prior to 2000, Liggett suffered a substantial decline
in unit sales and associated market share. Liggetts unit
sales and market share increased during each of 2000, 2001 and
2002, and its market share increased in 2003 while its unit
sales declined. Liggetts market share, which did not
change in 2008, increased compared to the prior years in 2007,
2006, 2005 and 2004. This earlier market share erosion resulted
in part from Liggetts highly leveraged capital structure
that existed until December 1998 and its limited ability to
match other competitors wholesale and retail trade
programs, obtain retail shelf space for its products and
advertise its brands. These declines also resulted from adverse
developments in the tobacco industry, intense competition and
changes in consumer preferences. According to Management Science
Associates data, Liggetts overall domestic market share
during 2008 was 2.5% compared to 2.5% during 2007 and 2.4%
during 2006. Liggetts share of the discount segment during
2008 was 9.2% compared to 9.3% in 2007, up from 8.7% in 2006. If
Liggetts market share declines, Liggetts sales
volume, operating income and cash flows could be materially
adversely affected, which in turn could negatively affect the
value of our common stock.
Liggett
has significant sales to a single customer.
During 2008, 8.8% of Liggetts total revenues and 8.8% of
our consolidated revenues were generated by sales to
Liggetts largest customer. Liggetts contract with
this customer currently expires on December 31, 2012. If
this customer discontinues its relationship with Liggett or
experiences financial difficulties, Liggetts results of
operations could be materially adversely affected.
Liggetts
cigarettes are subject to substantial and increasing regulation
and taxation, which has a negative effect on revenue and
profitability.
Tobacco products are subject to substantial federal and state
excise taxes in the United States. On February 4, 2009,
President Obama signed an increase of $0.617 in the federal
excise tax per pack of cigarettes, for a total of $1.01 per pack
of cigarettes, and significant tax increases on other tobacco
products, to fund expansion of the State Childrens Health
Insurance Program, referred to as the SCHIP. These tax increases
are effective on April 1, 2009.
The increases in federal excise tax under the SCHIP are
substantial, and, as a result, Liggett expects its volume will
be adversely impacted beginning in the second quarter of 2009.
In addition to federal and state excise taxes, certain city and
county governments also impose substantial excise taxes on
tobacco products sold. Increased excise taxes are likely to
result in declines in overall sales volume and shifts by
consumers to less expensive brands.
A wide variety of federal, state and local laws limit the
advertising, sale and use of cigarettes, and these laws have
proliferated in recent years. For example, many local laws
prohibit smoking in restaurants and other public places. Private
businesses also have adopted regulations that prohibit or
restrict, or are intended to discourage, smoking. Such laws and
regulations also are likely to result in a decline in the
overall sales volume of cigarettes.
The
proposed regulation of tobacco products by the Food and Drug
Administration may adversely affect Liggetts sales and
operating profit.
A bill that would grant the FDA, authority to regulate tobacco
products was introduced in Congress in February 2007. On
July 30, 2008, the U.S. House of Representatives
passed the bill by a vote of
326-102. The
U.S. Senate Health, Education, Labor and Pensions Committee
approved the FDA regulation bill on August 1, 2007, but the
Senate adjourned in 2008 without any further action on the bill.
In 2009, it is likely that Congress will again take up the issue
of FDA regulation of tobacco products.
It is anticipated that any proposed FDA regulation bill most
likely would:
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Require larger and more severe health warnings on packs and
cartons;
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Ban the use of descriptors on tobacco products, such as
low-tar and light;
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Require the disclosure of ingredients and additives to consumers;
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Require pre-market approval by the FDA for claims made with
respect to reduced risk or reduced exposure products;
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Allow the FDA to require the reduction of nicotine and the
reduction or elimination of any other compound in tobacco
products;
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Prohibit the use of foreign grown tobacco that has been grown or
processed with pesticides not approved under federal law for use
in domestic tobacco farming and processing;
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Allow the FDA to place more severe restrictions on the
advertising, marketing and sale of cigarettes;
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Permit inconsistent state regulation of labeling and advertising
and eliminate the existing federal preemption of such
regulation; and
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Grant the FDA the regulatory authority to impose broad
additional restrictions.
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It is possible that such additional regulation could result in a
decrease in cigarette sales in the United States and an increase
in costs which may have a material adverse effect on our results
of operations, cash flows and financial condition.
Over the years, various state and local governments have
continued to regulate tobacco products, including smokeless
tobacco products. These regulations relate to, among other
things, the imposition of significantly higher taxes, increases
in the minimum age to purchase tobacco products, sampling and
advertising bans or restrictions, ingredient and constituent
disclosure requirements and significant tobacco control media
campaigns. Additional state and local legislative and regulatory
actions will likely be considered in the future, including,
among other things, restrictions on the use of flavorings.
Additional federal or state regulation relating to the
manufacture, sale, distribution, advertising, labeling,
mandatory ingredients disclosure and nicotine yield information
disclosure of tobacco products could reduce sales, increase
costs and have a material adverse effect on our business.
The
domestic cigarette industry has experienced declining unit sales
in recent periods.
Industry-wide shipments of cigarettes in the United States have
been generally declining for a number of years, with published
industry sources estimating that domestic industry-wide
shipments decreased by approximately 3.3% in 2008. According to
Management Science Associates data, domestic industry-wide
shipments decreased by 5.0% in 2007 compared to 2006. We believe
that industry-wide shipments of cigarettes in the United States
will generally continue to decline as a result of numerous
factors. These factors include health considerations,
diminishing social acceptance of smoking, and a wide variety of
federal, state and local laws limiting smoking in restaurants,
bars and other public places, as well as increases in federal
and state excise taxes and settlement-related expenses which
have contributed to high cigarette price levels in recent years.
If this decline in industry-wide shipments continues and Liggett
is unable to capture market share from its competitors, or if
the industry as a whole is unable to offset the decline in unit
sales with price increases, Liggetts sales volume,
operating income and cash flows could be materially adversely
affected, which in turn could negatively affect the value of our
common stock.
Litigation
will continue to harm the tobacco industry.
Liggett could be subjected to substantial liabilities and
bonding requirements from litigation relating to cigarette
products. Adverse litigation outcomes could have a negative
impact on the Companys ability to operate due to their
impact on cash flows. We and our Liggett subsidiary, as well as
the entire cigarette industry, continue to be challenged on
numerous fronts. New cases continue to be commenced against
Liggett and other cigarette manufacturers. As of December 31,
2008, there were approximately 2,720 individual suits, including
2,680 Engle progeny cases described below, seven purported class
actions and four governmental and other third-party payor health
care reimbursement actions pending in the United States in which
Liggett
and/or us
were named defendants. It is likely that similar legal actions,
proceedings and claims will continue to be filed against
Liggett. Punitive damages, often in amounts ranging into the
billions of dollars, are specifically pled in these cases, in
addition to compensatory and other damages. It is possible that
there could be adverse developments in pending cases including
the certification of additional class actions. An unfavorable
outcome or settlement of pending tobacco-related litigation
could encourage the commencement of additional litigation. In
addition, an unfavorable outcome in any tobacco-related
litigation could have a material adverse effect on our
consolidated financial position, results of
21
operations or cash flows. Liggett could face difficulties in
obtaining a bond to stay execution of a judgment pending appeal.
A civil lawsuit was filed by the United States federal
government seeking disgorgement of approximately
$289 billion from various cigarette manufacturers,
including Liggett. 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 the following relief against the
non-Liggett defendants: (i) defendants are enjoined from
committing any act of racketeering concerning the manufacturing,
marketing, promotion, health consequences or sale of cigarettes
in the United States; (ii) defendants are enjoined from
making any material false, misleading, or deceptive statement or
representation concerning cigarettes that persuades people to
purchase cigarettes; and, (iii) defendants are permanently
enjoined from 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 as of January 1, 2007.
No monetary damages were awarded other than the
governments costs. In October 2006, the United States
Court of Appeals for the District of Columbia stayed the Final
Judgment pending appeal. The defendants filed amended notices of
appeal in March 2007. The government acknowledged in its
appellate brief that it was not appealing the district
courts decision to award no remedy against Liggett.
Therefore, 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, Liggetts sales
volume, operating income and cash flows could be materially
adversely affected, which in turn could negatively affect the
value of our common stock.
In December 2008, the United States Supreme Court, in Altria
Group Inc. v. Good, ruled that the Federal Cigarette
Labeling and Advertising Act did not preempt the state law
claims asserted by the plaintiffs and that they could proceed
with their claims under the Maine Unfair Trade Practices Act.
This ruling may result in additional class action cases in all
other states. Although Liggett is not a party in the Good case,
an adverse ruling or commencement of additional
lights related class actions could have a material
adverse impact on us.
There are currently five individual tobacco-related actions
pending where Liggett is the only tobacco company defendant. In
April 2004, in one of these cases, a jury in a Florida state
court action awarded compensatory damages of $540,000 against
Liggett. In addition, plaintiffs counsel was awarded legal
fees of $752,000. Liggett appealed both the verdict and the
legal fees award. In October 2007, the Fourth District Court of
Appeals affirmed the compensatory award. The legal fee award was
reversed and remanded to the trial court. We have accrued
$2.3 million for this case at December 31, 2008. Trial
commenced in February in another individual case where Liggett
is the only defendant.
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.
Individual
tobacco-related cases have increased as a result of the Florida
Supreme Courts ruling in Engle.
In May 2003, a Florida intermediate appellate court overturned a
$790 million punitive damages award against Liggett and
decertified the Engle v. R. J. Reynolds Tobacco
Co. smoking and health class action. In July 2006, the
Florida Supreme Court affirmed in part and reversed in part the
May 2003 intermediate appellate court decision. Among other
things, the Florida Supreme Court affirmed the decision
decertifying the class on a prospective basis and the order
vacating the punitive damages award, but preserved several of
the trial courts Phase I findings (including that:
(i) smoking causes lung cancer, among other diseases;
(ii) nicotine in cigarettes is addictive;
(iii) defendants placed cigarettes on the market that were
defective and unreasonably dangerous; (iv) the defendants
concealed material information; (v) all defendants sold or
supplied cigarettes that were defective; and (vi) all
defendants were negligent) and allowed plaintiffs 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 of the date
the courts decision became final on January 11, 2007,
the date of the courts mandate. In
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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.
In June 2002, the jury in a Florida state court action entitled
Lukacs v. R.J. Reynolds Tobacco Company, awarded
$37.5 million in compensatory damages, jointly and
severally, in a case involving Liggett and two other cigarette
manufacturers, which amount was subsequently reduced by the
Court. The jury found Liggett 50% responsible for the damages
incurred by the plaintiff. The Lukacs case was the first
case to be tried as an individual Engle class member suit
following entry of final judgment by the Engle trial
court. In November 2008, the court entered final judgment in the
amount of $24,835 (for which Liggett is 50% responsible), plus
interest from June 2002. The defendants appealed the final
judgment. Plaintiff has filed a motion seeking an award of
attorneys fees from Liggett based on their prior proposal
for settlement. Liggett may be required to bond the amount of
the judgment against it to perfect its appeal.
Pursuant to the Florida Supreme Courts July 2006 ruling in
Engle, former class members had one year from
January 11, 2007 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. As of December 31,
2008, there were approximately 2,680 Engle progeny cases
pending where either Liggett (or other cigarette manufacturers)
or us, or both, were named as defendants. These cases include
approximately 9,620 plaintiffs. Approximately 50 cases are
currently scheduled for trial in 2009.
It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments
in the Engle case. Liggett may enter into discussions in
an attempt to settle particular cases if it believes it is
appropriate to do so. We cannot predict the cash requirements
related to any future settlements and judgments, including cash
required to bond any appeals, and there is a risk that those
requirements will not be able to be met.
Regulation
and legislation may negatively impact sales of tobacco products
and our financial condition.
A wide variety of federal, state and local laws limit the
advertising, sale and use of cigarettes and these laws have
proliferated in recent years. For example, many local laws
prohibit smoking in restaurants and other public places, and
many employers have initiated programs restricting or
eliminating smoking in the workplace. There are various other
legislative efforts pending on the federal and state level which
seek to, among other things, eliminate smoking in public places,
further restrict displays and advertising of cigarettes, require
additional warnings, including graphic warnings, on cigarette
packaging and advertising, ban vending machine sales and curtail
affirmative defenses of tobacco companies in product liability
litigation. The trend has had, and is more likely to continue to
have, an adverse effect on us.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions from various federal
administrative bodies, including the United States Environmental
Protection Agency and the FDA. There have also been adverse
legislative and political decisions and other unfavorable
developments concerning cigarette smoking and the tobacco
industry. Recently, legislation was reintroduced in Congress
providing for regulation of cigarettes by the FDA. These
developments generally receive widespread media attention.
Additionally, a majority of states have passed legislation
providing for reduced ignition propensity standards for
cigarettes. 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. We are not able to evaluate
the effect of these developing matters on pending litigation or
the possible commencement of additional litigation, but our
consolidated financial position, results of operations or cash
flows could be materially adversely affected.
Liggett
may be adversely affected by the 2004 legislation to eliminate
the federal tobacco quota system.
In October 2004, federal legislation was enacted which
eliminated the federal tobacco quota system and price support
system through an industry funded buyout of tobacco growers and
quota holders. Pursuant to the legislation, manufacturers of
tobacco products will be assessed $10.14 billion over a
ten-year period to compensate tobacco
23
growers and quota holders for the elimination of their quota
rights. Cigarette manufacturers will initially be responsible
for 96.3% of the assessment (subject to adjustment in the
future), which will be allocated based on relative unit volume
of domestic cigarette shipments. Liggetts and Vector
Tobaccos assessment was $22.6 million in 2006,
$23.3 million in 2007 and $23.6 million in 2008. The
relative cost of the legislation to each of the three largest
cigarette manufacturers will likely be less than the cost to
smaller manufacturers, including Liggett and Vector Tobacco,
because one effect of the legislation is that the three largest
manufacturers will no longer be obligated to make certain
contractual payments, commonly known as Phase II payments,
they agreed in 1999 to make to tobacco-producing states. The
ultimate impact of this legislation cannot be determined, but
there is a risk that smaller manufacturers, such as Liggett and
Vector Tobacco, will be disproportionately affected by the
legislation, which could have a material adverse effect on us.
Excise
tax increases adversely affect cigarette sales.
Cigarettes are subject to substantial and increasing federal,
state and local excise taxes. In February 2009, Federal
legislation to reauthorize the State Childrens Health
Insurance Program (SCHIP), which includes funding provisions
that increase the federal cigarette excise tax from $0.39 to
$1.01 per pack, was enacted, effective April 1, 2009. State
excise taxes vary considerably and, when combined with sales
taxes, local taxes and the federal excise tax, may exceed $4.00
per pack. In 2008, seven states and the District of Colombia
enacted increases in excise taxes and various states and other
jurisdictions are considering, or have pending, legislation
proposing further state excise tax increases. Management
believes increases in excise and similar taxes have had, and
will continue to have, an adverse effect on sales of cigarettes.
Liggett
may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with
the states.
In October 2004, the independent auditor under the Master
Settlement Agreement notified Liggett and all other
participating manufacturers that their payment obligations under
the Master Settlement Agreement, dating from the
agreements execution in late 1998, had been recalculated
using net unit amounts, rather than
gross unit amounts (which had been used since 1999
to calculate market share on the allocation of the base annual
payment under the Master Settlement Agreement). The change in
the method of calculation could, among other things, require
additional payments by Liggett under the Master Settlement
Agreement of approximately $17.4 million, plus interest,
for the periods 2001 through 2007, require Liggett to pay an
additional amount of approximately $3.3 million for 2008
and require additional amounts in future periods because the
proposed change from gross to net would
serve to lower Liggetts market share exemption under the
Master Settlement Agreement. Liggett has objected to this
retroactive change and has disputed the change in methodology.
No amounts have been accrued in our consolidated financial
statements for any potential liability relating to the
gross versus net dispute.
In 2005, the independent auditor calculated that Liggett owed
$28.7 million for its 2004 sales. In April 2005, Liggett
paid $11.7 million and disputed the balance, as permitted
by the Master Settlement Agreement. Liggett subsequently paid an
additional $9.3 million of the disputed amount, although
Liggett continues to dispute that this amount is owed. This
$9.3 million 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. The remaining balance in dispute of
$7.7 million, which was withheld from payment, is comprised
of $5.3 million claimed for a 2004 NPM Adjustment and
$2.4 million relating to the Independent Auditors
retroactive change from gross to net
units in calculating Master Settlement Agreement payments, which
Liggett contends is improper, as discussed above. From its April
2006 payment, Liggett withheld $1.6 million claimed for the
2005 NPM Adjustment and $2.6 million relating to the
retroactive change from gross to net
units. Liggett and Vector Tobacco withheld approximately
$4.2 million from their April 2007 payments related to the
2006 NPM Adjustment and $3.0 million relating to the
retroactive change from gross to net
units. The following amounts have not been accrued in our
consolidated financial statements as they relate to
Liggetts claims for NPM Adjustments: $6.5 million for
2003, $3.8 million for 2004 and $0.8 million for 2005.
In 2004, the Attorneys General for each of Florida, Mississippi
and Texas advised Liggett that they believed that Liggett had
failed to make all required payments under the respective
settlement agreements with these states for the period 1998
through 2003 and that additional payments may be due for 2004
and subsequent years. Liggett
24
believes these allegations are without merit, based, among other
things, on the language of the most favored nation provisions of
the settlement agreements. In December 2004, Florida offered to
settle all amounts allegedly owed by Liggett for the period
through 2003 for the sum of $13.5 million. In November
2004, the State of Mississippi offered to settle all amounts
allegedly owed by Liggett for the period through 2003 for the
sum of $6.5 million. In 2005, Liggett was served with a
60 day notice to cure alleged defaults by each of Florida
and Mississippi. No specific monetary demand has been made by
Texas.
Except for $2.5 million accrued at December 31, 2008,
in connection with the foregoing matters, no other amounts have
been accrued in our 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 prevail in any of these
matters and that Liggett will not be required to make additional
material payments, which payments could materially adversely
affect our consolidated financial position, results of
operations or cash flows and the value of our common stock.
Vector
Tobacco is subject to risks inherent in new product development
initiatives.
We have made, and plan to continue to make, significant
investments in Vector Tobaccos development projects in the
tobacco industry. Vector Tobacco is in the business of
developing and marketing the low nicotine and nicotine-free
QUEST cigarette products and developing reduced risk cigarette
products. These initiatives are subject to high levels of risk,
uncertainties and contingencies, including the challenges
inherent in new product development. There is a risk that
continued investments in Vector Tobacco will harm our results of
operations, liquidity or cash flow.
The substantial risks facing Vector Tobacco include:
Risks of market acceptance of new products. In
November 2001, Vector Tobacco launched nationwide its reduced
carcinogen OMNI cigarettes. During 2002, acceptance of OMNI in
the marketplace was limited, with revenues of only approximately
$5.1 million on sales of 70.7 million units. Vector
Tobacco has not been actively marketing the OMNI product, and
the product is not currently in distribution. Vector Tobacco was
unable to achieve the anticipated breadth of distribution and
sales of the OMNI product due, in part, to the lack of success
of its advertising and marketing efforts in differentiating OMNI
from other conventional cigarettes with consumers through the
reduced carcinogen message. Over the next several
years, our in-house research program, together with third-party
collaborators, plans to conduct appropriate studies relating to
the development of cigarettes that materially reduce risk to
smokers and, based on these studies, we will evaluate whether,
and how, to further market the OMNI brand. OMNI has not been a
commercially successful product to date and is not currently
being manufactured by Vector Tobacco.
Vector Tobacco introduced its low nicotine and nicotine-free
QUEST cigarettes in an initial seven-state market in January
2003 and in Arizona in January 2004. During the second quarter
of 2004, based on an analysis of the market data obtained since
the introduction of the QUEST product, we determined to postpone
indefinitely the national launch of QUEST to be commercially
successful products. Adult smokers may decide not to purchase
cigarettes made with low nicotine and nicotine-free tobaccos due
to taste or other preferences or other product modifications.
Potential extensive government
regulation. Vector Tobaccos business may
become subject to extensive additional domestic and
international government regulation. Various proposals have been
made for federal, state and international legislation to
regulate cigarette manufacturers generally, and reduced
constituent cigarettes specifically. It is possible that laws
and regulations may be adopted covering matters such as the
manufacture, sale, distribution and labeling of tobacco products
as well as any health claims associated with reduced risk and
low nicotine and nicotine-free cigarette products. A system of
regulation by agencies such as the FDA, the FTC and the USDA may
be established. Recently, legislation was reintroduced in
Congress providing for the regulation of cigarettes by the FDA.
The outcome of any of the foregoing cannot be predicted, but any
of the foregoing could have a material adverse effect on Vector
Tobaccos business, operating results and prospects.
Competition from other cigarette manufacturers with greater
resources. Vector Tobaccos competitors
generally have substantially greater resources than Vector
Tobacco, including financial, marketing and personnel resources.
Other major tobacco companies have stated that they are working
on reduced risk cigarette products and
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have made publicly available at this time only limited
additional information concerning their activities. Philip
Morris has announced it is developing products that potentially
reduce smokers exposure to harmful compounds in cigarette
smoke. RJR Tobacco has disclosed that a primary focus for its
research and development activity is the development of
potentially reduced exposure products, which may ultimately be
recognized as products that present reduced risks to health. RJR
Tobacco has stated that it continues to sell in limited
distribution throughout the country a brand of cigarettes that
primarily heats rather than burns tobacco, which it claims
reduces the toxicity of its smoke. There is a substantial
likelihood that other major tobacco companies will continue to
introduce new products that are designed to compete directly
with the low nicotine, nicotine-free and reduced risk products
that Vector Tobacco currently markets or may develop.
Intellectual property rights, including Vector Tobaccos
patents involve complex legal and factual
issues. Any conflicts resulting from third party
patent applications and granted patents could significantly
limit Vector Tobaccos ability to obtain meaningful patent
protection or to commercialize its technology. If patents
currently exist or are issued to other companies that contain
claims which encompass Vector Tobaccos products or the
processes used by Vector Tobacco to manufacture or develop its
products, Vector Tobacco may be required to obtain licenses to
use these patents or to develop or obtain alternative
technology. Licensing agreements, if required, may not be
available on acceptable terms or at all. If licenses are not
obtained, Vector Tobacco could be delayed in, or prevented from,
pursuing the further development of marketing of its new
cigarette products. Any alternative technology, if feasible,
could take several years to develop.
Litigation, which could result in substantial cost, also may be
necessary to enforce any patents to which Vector Tobacco has
rights, or to determine the scope, validity and unenforceability
of other parties proprietary rights which may affect
Vector Tobaccos rights. Vector Tobacco also may have to
participate in interference proceedings declared by the
U.S. Patent and Trademark Office to determine the priority
of an invention or in opposition proceedings in foreign
countries or jurisdictions, which could result in substantial
costs. The mere uncertainty resulting from the institution and
continuation of any technology-related litigation or any
interference or opposition proceedings could have a material
adverse effect on Vector Tobaccos business, operating
results and prospects.
Vector Tobacco may also rely on unpatented trade secrets and
know-how to maintain its competitive position, which it seeks to
protect, in part, by confidentiality agreements with employees,
consultants, suppliers and others. There is a risk that these
agreements will be breached or terminated, that Vector Tobacco
will not have adequate remedies for any breach, or that its
trade secrets will otherwise become known or be independently
discovered by competitors.
Dependence on key scientific personnel. Vector
Tobaccos business depends on the continued services of key
scientific personnel for its continued development and growth.
The loss of Dr. Anthony Albino, Vector Tobaccos
Senior Vice President of Public Health Affairs, could have a
serious negative impact upon Vector Tobaccos business,
operating results and prospects.
Ability to raise capital and manage growth of
business. If Vector Tobacco succeeds in
introducing to market and increasing consumer acceptance for its
new cigarette products, Vector Tobacco will be required to
obtain significant amounts of additional capital and manage
substantial volume from its customers. There is a risk that
adequate amounts of additional capital will not be available to
Vector Tobacco to fund the growth of its business. To
accommodate growth and compete effectively, Vector Tobacco will
also be required to attract, integrate, motivate and retain
additional highly skilled sales, technical and other employees.
Vector Tobacco will face competition for these people. Its
ability to manage volume also will depend on its ability to
scale up its tobacco processing, production and distribution
operations. There is a risk that it will not succeed in scaling
its processing, production and distribution operations and that
its personnel, systems, procedures and controls will not be
adequate to support its future operations.
Potential delays in obtaining tobacco and other raw materials
needed to produce products. Vector Tobacco is
dependent on third parties to produce tobacco and other raw
materials that Vector Tobacco requires to manufacture its
products. In addition, the growing of new tobacco and new seeds
is subject to adverse weather conditions. The failure by such
third parties to supply Vector Tobacco with tobacco or other raw
materials on commercially reasonable terms, or at all, in the
absence of readily available alternative sources, would have a
serious negative impact on Vector Tobaccos business,
operating results and prospects. There is also a risk that
26
interruptions in the supply of these materials may occur in the
future. Any interruption in their supply could have a serious
negative impact on Vector Tobacco.
New
Valley is subject to risks relating to the industries in which
it operates.
Risks of real estate ventures. New Valley has
three significant real estate-related investments, Douglas
Elliman Realty, LLC (50% interest), New Valley Oaktree Chelsea
Eleven LLC (40% interest) and Aberdeen Townhomes LLC (15%
preferred return), where other partners hold significant
interests. New Valley must seek approval from these other
parties for important actions regarding these joint ventures.
Since the other parties interests may differ from those of
New Valley, a deadlock could arise that might impair the ability
of the ventures to function. Such a deadlock could significantly
harm the ventures.
The real estate, capital and credit markets have worsened in
recent years. Because the real estate, capital
and credit markets have continued to worsen, we will continue to
perform additional assessments to determine the impact of the
markets, if any, on our consolidated financial statements. Thus,
future impairment charges may occur.
Risks of litigation on mortgage
receivable. 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 and certain completion guarantees.
The loan is currently in foreclosure and litigation is ongoing
to enforce our rights under the loan documents. There is no
guarantee we will prevail in the litigation.
New Valley may pursue a variety of real estate development
projects. Development projects are subject to
special risks including potential increase in costs, changes in
market demand, inability to meet deadlines which may delay the
timely completion of projects, reliance on contractors who may
be unable to perform and the need to obtain various governmental
and third party consents.
Risks relating to the residential brokerage
business. Through New Valleys investment in
Douglas Elliman Realty, LLC, we are subject to the risks and
uncertainties endemic to the residential brokerage business.
Both Douglas Elliman and Prudential Douglas Elliman Real Estate
operate as franchisees of The Prudential Real Estate Affiliates,
Inc. Prudential Douglas Elliman operates each of its offices
under its franchisers brand name, but generally does not
own any of the brand names under which it operates. The
franchiser has significant rights over the use of the franchised
service marks and the conduct of the two brokerage
companies business. The franchise agreements require the
companies to:
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coordinate with the franchiser on significant matters relating
to their operations, including the opening and closing of
offices;
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make substantial royalty payments to the franchiser and
contribute significant amounts to national advertising funds
maintained by the franchiser;
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indemnify the franchiser against losses arising out of the
operations of their business under the franchise
agreements; and
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maintain standards and comply with guidelines relating to their
operations which are applicable to all franchisees of the
franchisers real estate franchise system.
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The franchiser has the right to terminate Douglas Ellimans
and Prudential Douglas Elliman Real Estates franchises,
upon the occurrence of certain events, including a bankruptcy or
insolvency event, a change in control, a transfer of rights
under the franchise agreement and a failure to promptly pay
amounts due under the franchise agreements. A termination of
Douglas Ellimans or Prudential Douglas Elliman Real
Estates franchise agreement could adversely affect our
investment in Douglas Elliman Realty.
The franchise agreements grant Douglas Elliman and Prudential
Douglas Elliman Real Estate exclusive franchises in New York for
the counties of Nassau and Suffolk on Long Island and for
Manhattan, Brooklyn and Queens, subject to various exceptions
and to meeting specified annual revenue thresholds. If the two
companies fail to achieve these levels of revenues for two
consecutive years or otherwise materially breach the franchise
agreements, the franchisor would have the right to terminate
their exclusivity rights. A loss of these rights could have a
material adverse on Douglas Elliman Realty.
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Real estate ventures and mortgage receivable have been
negatively impacted by the current downturn in the residential
real estate market. The U.S. residential
real estate market, including the New York metropolitan area
where Douglas Elliman Realty operates, is cyclical and is
affected by changes in the general economic conditions that are
beyond Douglas Elliman Realtys control. The
U.S. residential real estate market is currently in a
significant downturn due to various factors including downward
pressure on housing prices, credit constraints inhibiting new
buyers and an exceptionally large inventory of unsold homes at
the same time that sales volumes are decreasing. The depth and
length of the current downturn in the real estate industry has
proved exceedingly difficult to predict. We cannot predict
whether the downturn will worsen or when the market and related
economic forces will return the U.S. residential real
estate industry to a growth period.
Any of the following could have a material adverse effect on our
real estate ventures by causing a general decline in the number
of home sales
and/or
prices, which in turn, could adversely affect its revenues and
profitability:
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periods of economic slowdown or recession;
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rising interest rates;
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the general availability of mortgage financing, including:
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the impact of the recent contraction in the subprime and
mortgage markets generally; and
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the effect of more stringent lending standards for home
mortgages;
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adverse changes in economic and general business conditions in
the New York metropolitan area;
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a decrease in the affordability of homes;
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declining demand for real estate;
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a negative perception of the market for residential real estate;
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commission pressure from brokers who discount their commissions;
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acts of God, such as hurricanes, earthquakes and other natural
disasters, or acts or threats of war or terrorism; and/or
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an increase in the cost of homeowners insurance.
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The three major real estate ventures current operations
are located in the New York metropolitan
area. Local and regional economic and general
business conditions in this market could differ materially from
prevailing conditions in other parts of the country. Among other
things, the New York metropolitan area residential real estate
market has been impacted by the significant downturn in the
financial services industry. A continued downturn in the
residential real estate market or economic conditions in that
region could have a material adverse effect on these investments.
Potential
new investments we may make are unidentified and may not
succeed.
We currently hold a significant amount of marketable securities
and cash not committed to any specific investments. This
subjects a security holder to increased risk and uncertainty
because a security holder will not be able to evaluate how this
cash will be invested and the economic merits of particular
investments. There may be substantial delay in locating suitable
investment opportunities. In addition, we may lack relevant
management experience in the areas in which we may invest. There
is a risk that we will fail in targeting, consummating or
effectively integrating or managing any of these investments.
We depend
on our key personnel.
We depend on the efforts of our executive officers and other key
personnel. While we believe that we could find replacements for
these key personnel, the loss of their services could have a
significant adverse effect on our operations.
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We are
exposed to risks from legislation requiring companies to
evaluate their internal control over financial
reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our
management to assess, and our independent registered certified
public accounting firm to attest to, the effectiveness of our
internal control structure and procedures for financial
reporting. We completed an evaluation of the effectiveness of
our internal control over financial reporting for the fiscal
year ended December 31, 2008, and we have an ongoing
program to perform the system and process evaluation and testing
necessary to continue to comply with these requirements. We
expect to continue to incur increased expense and to devote
additional management resources to Section 404 compliance.
In the event that our chief executive officer, chief financial
officer or independent registered certified public accounting
firm determines that our internal control over financial
reporting is not effective as defined under Section 404,
investor perceptions and our reputation may be adversely
affected and the market price of our stock could decline.
The price
of our common stock may fluctuate significantly, and this may
make it difficult for you to resell the shares of our common
stock when you want or at prices you find attractive.
The trading price of our common stock has ranged between $10.82
and $19.45 per share over the past 52 weeks. We expect that
the market price of our common stock will continue to fluctuate.
The market price of our common stock may fluctuate in response
to numerous factors, many of which are beyond our control. These
factors include the following:
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actual or anticipated fluctuations in our operating results;
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changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
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the operating and stock performance of our competitors;
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announcements by us or our competitors of new products or
services or significant contract, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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the initiation or outcome of litigation;
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changes in interest rates;
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general economic, market and political conditions;
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additions or departures of key personnel; and
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future sales of our equity or convertible securities.
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We cannot predict the extent, if any, to which future sales of
shares of common stock or the availability of shares of common
stock for future sale, may depress the trading price of our
common stock or the value of the debentures.
In addition, the stock market in recent years has experienced
extreme price and trading volume fluctuations that often have
been unrelated or disproportionate to the operating performance
of individual companies. These broad market fluctuations may
adversely affect the price of our common stock, regardless of
our operating performance. Furthermore, stockholders may
initiate securities class action lawsuits if the market price of
our stock drops significantly, which may cause us to incur
substantial costs and could divert the time and attention of our
management. These factors, among others, could significantly
depress the price of our common stock.
We have
many potentially dilutive securities outstanding.
At December 31, 2008, we had outstanding options granted to
employees to purchase approximately 5,284,880 shares of our
common stock, with a weighted-average exercise price of $11.59
per share, of which options for 5,169,120 shares were
exercisable at December 31, 2008. We also have outstanding
convertible notes and debentures maturing in November 2011 and
June 2026, which are currently convertible into
12,932,556 shares of our common stock. The issuance of
these shares will cause dilution which may adversely affect the
market price
29
of our common stock. The availability for sale of significant
quantities of our common stock could adversely affect the
prevailing market price of the stock.
|
|
ITEM 1B.
|
UNRESOLVED
STAFF COMMENTS
|
None.
Our principal executive offices are located in Miami, Florida.
We lease 13,849 square feet of office space from an
unaffiliated company in an office building in Miami, which we
share with various of our subsidiaries. The lease expires in
November 2014.
We lease approximately 18,000 square feet of office space
in New York, New York under leases that expire in 2013.
Approximately 9,000 square feet of such space has been
subleased to unaffiliated third parties for the balance of the
term of the lease. New Valleys operating properties are
discussed above under the description of New Valleys
business.
Liggetts tobacco manufacturing facilities, and several of
the distribution and storage facilities, are currently located
in or near Mebane, North Carolina. Various of such facilities
are owned and others are leased. As of December 31, 2008,
the principal properties owned or leased by Liggett are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Total
|
|
Type
|
|
Location
|
|
|
Owned or Leased
|
|
|
Square Footage
|
|
|
Storage Facilities
|
|
|
Danville, VA
|
|
|
|
Owned
|
|
|
|
578,000
|
|
Office and Manufacturing Complex
|
|
|
Mebane, NC
|
|
|
|
Owned
|
|
|
|
240,000
|
|
Warehouse
|
|
|
Mebane, NC
|
|
|
|
Owned
|
|
|
|
60,000
|
|
Warehouse
|
|
|
Mebane, NC
|
|
|
|
Leased
|
|
|
|
50,000
|
|
Warehouse
|
|
|
Mebane, NC
|
|
|
|
Leased
|
|
|
|
30,000
|
|
Warehouse
|
|
|
Mebane, NC
|
|
|
|
Leased
|
|
|
|
22,000
|
|
Liggett Vector Brands leases approximately 20,000 square
feet of office space in Morrisville, North Carolina. The lease
expires in January 2014.
Liggetts management believes that its property, plant and
equipment are well maintained and in good condition and that its
existing facilities are sufficient to accommodate a substantial
increase in production.
|
|
ITEM 3.
|
LEGAL
PROCEEDINGS
|
Liggett and other United States cigarette manufacturers have
been named as defendants in numerous, direct, third-party and
class actions predicated on the theory that they should be
liable for damages from adverse health effects alleged to have
been caused by cigarette smoking or by exposure to secondary
smoke from cigarettes.
Reference is made to Note 12 to our consolidated financial
statements, which contains a general description of certain
legal proceedings to which the Company, Liggett, New Valley or
their subsidiaries are a party and certain related matters.
Reference is also made to Exhibit 99.1, Material Legal
Proceedings, incorporated herein, for additional information
regarding the pending tobacco-related legal proceedings to which
we or Liggett are parties. 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 Street, Miami,
Florida 33131, Attn: Investor Relations.
|
|
ITEM 4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
During the last quarter of 2008, no matter was submitted to
stockholders for their vote or approval, through the
solicitation of proxies or otherwise.
30
EXECUTIVE
OFFICERS OF THE REGISTRANT
The table below, together with the accompanying text, presents
certain information regarding all our current executive officers
as of March 2, 2009. Each of the executive officers serves
until the election and qualification of such individuals
successor or until such individuals death, resignation or
removal by the Board of Directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Individual
|
|
|
|
|
|
|
|
|
Became an
|
|
Name
|
|
Age
|
|
|
Position
|
|
Executive Officer
|
|
|
Howard M. Lorber
|
|
|
60
|
|
|
President and Chief Executive Officer
|
|
|
2001
|
|
Richard J. Lampen
|
|
|
55
|
|
|
Executive Vice President
|
|
|
1996
|
|
J. Bryant Kirkland III
|
|
|
43
|
|
|
Vice President, Chief Financial Officer and Treasurer
|
|
|
2006
|
|
Marc N. Bell
|
|
|
48
|
|
|
Vice President, General Counsel and Secretary
|
|
|
1998
|
|
Ronald J. Bernstein
|
|
|
55
|
|
|
President and Chief Executive Officer of Liggett
|
|
|
2000
|
|
Howard M. Lorber has been our President and Chief
Executive Officer since January 2006. He served as our President
and Chief Operating Officer from January 2001 to December 2005
and has served as a director of ours since January 2001. From
November 1994 to December 2005, Mr. Lorber served as
President and Chief Operating Officer of New Valley, where he
also served as a director. Mr. Lorber was Chairman of the
Board of Hallman & Lorber Assoc., Inc., consultants
and actuaries of qualified pension and profit sharing plans, and
various of its affiliates from 1975 to December 2004 and has
been a consultant to these entities since January 2005; a
stockholder and a registered representative of Aegis Capital
Corp., a broker-dealer and a member firm of the National
Association of Securities Dealers, since 1984; Chairman of the
Board of Directors since 1987 and Chief Executive Officer from
November 1993 to December 2006 of Nathans Famous, Inc., a
chain of fast food restaurants; a consultant to us and Liggett
from January 1994 to January 2001; a director of United Capital
Corp., a real estate investment and diversified manufacturing
company, since May 1991; and Chairman of the Board of Ladenburg
Thalmann Financial Services from May 2001 to July 2006 and Vice
Chairman since July 2006. He is also a trustee of Long Island
University.
Richard J. Lampen has served as our Executive Vice
President since July 1996. From October 1995 to December 2005,
Mr. Lampen served as the Executive Vice President and
General Counsel of New Valley, where he also served as a
director. Since September 2006, he has served as President and
Chief Executive Officer of Ladenburg Thalmann Financial
Services. Since November 1998, he has served as President and
Chief Executive Officer of CDSI Holdings Inc., an affiliate of
New Valley seeking acquisition or investment opportunities.
Since October 2008, Mr. Lampen has served as interim
President and Chief Executive Officer of Castle Brands Inc., a
publicly traded developer and importer of premium branded
spirits in which we held an approximate 11% equity interest at
December 31, 2008. From May 1992 to September 1995,
Mr. Lampen was a partner at Steel Hector & Davis,
a law firm located in Miami, Florida. From January 1991 to April
1992, Mr. Lampen was a Managing Director at Salomon
Brothers Inc, an investment bank, and was an employee at Salomon
Brothers Inc from 1986 to April 1992. Mr. Lampen is a
director of Castle, CDSI Holdings and Ladenburg Thalmann
Financial Services. Mr. Lampen has served as a director of
a number of other companies, including U.S. Can
Corporation, The International Bank of Miami, N.A. and
Specs Music Inc., as well as a court-appointed independent
director of Trump Plaza Funding, Inc.
J. Bryant Kirkland III has been our Vice
President, Chief Financial Officer and Treasurer since April
2006. Mr. Kirkland has served as a Vice President of ours
since January 2001 and served as New Valleys Vice
President and Chief Financial Officer from January 1998 to
December 2005. He has served since November 1994 in various
financial capacities with us and New Valley. Mr. Kirkland
has served as Vice President and Chief Financial Officer of CDSI
Holdings Inc. since January 1998 and as a director of CDSI
Holdings Inc. since November 1998.
Marc N. Bell has been our Vice President since January
1998, our General Counsel and Secretary since May 1994 and the
Senior Vice President and General Counsel of Vector Tobacco
since April 2002. From November 1994 to December 2005,
Mr. Bell served as Associate General Counsel and Secretary
of New Valley and from February 1998 to December 2005, as a Vice
President of New Valley. Prior to May 1994, Mr. Bell was
with the law firm of Zuckerman Spaeder LLP in Miami, Florida and
from June 1991 to May 1993, with the law firm of
Fischbein Badillo Wagner Harding
in New York, New York.
31
Ronald J. Bernstein has served as President and Chief
Executive Officer of Liggett since September 1, 2000 and of
Liggett Vector Brands since March 2002 and has been a director
of ours since March 2004. From July 1996 to December 1999,
Mr. Bernstein served as General Director and, from December
1999 to September 2000, as Chairman of Liggett-Ducat, our former
Russian tobacco business sold in 2000. Prior to that time,
Mr. Bernstein served in various positions with Liggett
commencing in 1991, including Executive Vice President and Chief
Financial Officer.
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Our common stock is listed and traded on the New York Stock
Exchange under the symbol VGR. The following table
sets forth, for the periods indicated, high and low sale prices
for a share of its common stock on the NYSE, as reported by the
NYSE, and quarterly cash dividends declared on shares of common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
High
|
|
|
Low
|
|
|
Cash Dividends
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
17.62
|
|
|
$
|
10.82
|
|
|
$
|
.40
|
|
Third Quarter
|
|
|
19.45
|
|
|
|
15.24
|
|
|
|
.38
|
|
Second Quarter
|
|
|
17.33
|
|
|
|
15.15
|
|
|
|
.38
|
|
First Quarter
|
|
|
19.28
|
|
|
|
15.81
|
|
|
|
.38
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
21.90
|
|
|
$
|
18.90
|
|
|
$
|
.38
|
|
Third Quarter
|
|
|
22.62
|
|
|
|
18.88
|
|
|
|
.36
|
|
Second Quarter
|
|
|
20.78
|
|
|
|
15.74
|
|
|
|
.36
|
|
First Quarter
|
|
|
17.35
|
|
|
|
15.40
|
|
|
|
.36
|
|
At February 17, 2009, there were approximately 2,088
holders of record of our common stock.
The declaration of future cash dividends is within the
discretion of our Board of Directors and is subject to a variety
of contingencies such as market conditions, earnings and our
financial condition as well as the availability of cash.
Liggetts revolving credit agreement currently permits
Liggett to pay dividends to VGR Holding only if Liggetts
borrowing availability exceeds $5 million for the
30 days prior to payment of the dividend, and so long as no
event of default has occurred under the agreement, including
Liggetts compliance with the covenants in the credit
facility, including maintaining minimum levels of EBITDA (as
defined) if its borrowing availability is below $20 million
and not exceeding maximum levels of capital expenditures (as
defined).
Our 11% Senior Secured Notes due 2015 prohibit our payment
of cash dividends or distributions on our common stock if at the
time of such payment our Consolidated EBITDA (as defined) for
the most recently completed four full fiscal quarters is less
than $50 million.
We paid 5% stock dividends on September 29, 2006,
September 28, 2007 and September 29, 2008 to the
holders of our common stock. All information presented in this
report is adjusted for the stock dividends.
32
Performance
Graph
The following graph compares the total annual return of our
Common Stock, the S&P 500 Index, the S&P MidCap 400
Index and the AMEX Tobacco Index for the five years ended
December 31, 2008. The graph assumes that $100 was invested
on December 31, 2003 in the Common Stock and each of the
indices, and that all cash dividends and distributions were
reinvested. Information for our Common Stock includes the value
of the March 30, 2005 distribution to our stockholders of
shares of Ladenburg Thalmann Financial Services common stock and
assumes such stock was held by the stockholders until the end of
each year.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/03
|
|
|
12/04
|
|
|
12/05
|
|
|
12/06
|
|
|
12/07
|
|
|
12/08
|
Vector Group Ltd.
|
|
|
|
100
|
|
|
|
|
118
|
|
|
|
|
148
|
|
|
|
|
168
|
|
|
|
|
216
|
|
|
|
|
168
|
|
S&P 500
|
|
|
|
100
|
|
|
|
|
111
|
|
|
|
|
116
|
|
|
|
|
135
|
|
|
|
|
142
|
|
|
|
|
90
|
|
S&P MidCap
|
|
|
|
100
|
|
|
|
|
116
|
|
|
|
|
131
|
|
|
|
|
145
|
|
|
|
|
156
|
|
|
|
|
100
|
|
AMEX Tobacco
|
|
|
|
100
|
|
|
|
|
130
|
|
|
|
|
145
|
|
|
|
|
204
|
|
|
|
|
224
|
|
|
|
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2008.
Issuer
Purchases of Equity Securities
No securities of ours were repurchased by us or our affiliated
purchasers during the three months ended December 31, 2008.
33
|
|
ITEM 6.
|
SELECTED
FINANCIAL DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1)
|
|
$
|
565,186
|
|
|
$
|
555,430
|
|
|
$
|
506,252
|
|
|
$
|
478,427
|
|
|
$
|
498,860
|
|
Income from continuing operations
|
|
|
60,504
|
|
|
|
73,803
|
|
|
|
42,712
|
|
|
|
42,585
|
|
|
|
4,462
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,034
|
|
|
|
2,689
|
|
Extraordinary item
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,766
|
|
|
|
|
|
Net income
|
|
|
60,504
|
|
|
|
73,803
|
|
|
|
42,712
|
|
|
|
52,385
|
|
|
|
7,151
|
|
Per basic common share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.90
|
|
|
$
|
1.10
|
|
|
$
|
0.66
|
|
|
$
|
1.02
|
|
|
$
|
0.14
|
|
Per diluted common share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.80
|
|
|
$
|
1.07
|
|
|
$
|
0.65
|
|
|
$
|
0.96
|
|
|
$
|
0.14
|
|
Cash distributions declared per common share(2)
|
|
$
|
1.54
|
|
|
$
|
1.47
|
|
|
$
|
1.40
|
|
|
$
|
1.33
|
|
|
$
|
1.27
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
355,283
|
|
|
$
|
395,626
|
|
|
$
|
303,156
|
|
|
$
|
319,099
|
|
|
$
|
242,124
|
|
Total assets
|
|
|
717,712
|
|
|
|
785,289
|
|
|
|
637,462
|
|
|
|
603,552
|
|
|
|
535,927
|
|
Current liabilities
|
|
|
296,159
|
|
|
|
109,337
|
|
|
|
168,786
|
|
|
|
128,100
|
|
|
|
119,835
|
|
Notes payable, embedded derivatives, long-term debt and other
obligations, less current portion
|
|
|
287,545
|
|
|
|
378,760
|
|
|
|
198,777
|
|
|
|
277,613
|
|
|
|
279,800
|
|
Non-current employee benefits, deferred income taxes, minority
interests and other long-term liabilities
|
|
|
100,403
|
|
|
|
196,340
|
|
|
|
174,922
|
|
|
|
168,773
|
|
|
|
225,509
|
|
Stockholders equity (deficit)
|
|
|
33,605
|
|
|
|
100,852
|
|
|
|
94,977
|
|
|
|
29,066
|
|
|
|
(89,217
|
)
|
|
|
|
(1) |
|
Revenues include federal excise taxes of $168,170, $176,269,
$174,339, $161,753 and $175,674, respectively. |
|
(2) |
|
Per share computations include the impact of 5% stock dividends
on September 29, 2008, September 28, 2007,
September 29, 2006, September 29, 2005 and
September 29, 2004. |
34
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
(Dollars
in Thousands, Except Per Share Amounts)
Overview
We are a holding company and are engaged principally in:
|
|
|
|
|
the manufacture and sale of cigarettes in the United States
through our subsidiary Liggett Group LLC,
|
|
|
|
the development and marketing 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.
|
All of Liggetts unit sales volume in 2006, 2007 and 2008
was in the discount segment, which Liggetts management
believes has been the primary growth segment in the industry for
over a decade. The significant discounting of premium cigarettes
in recent years has led to brands, such as EVE, that were
traditionally considered premium brands to become more
appropriately categorized as discount, following list price
reductions.
Liggetts cigarettes are produced in approximately 180
combinations of length, style and packaging. Liggetts
current brand portfolio includes:
|
|
|
|
|
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 industrys first deep discount
product with a brand identity, and
|
|
|
|
USA and various Partner Brands and private label brands.
|
In 1999, Liggett introduced LIGGETT SELECT, one of the leading
brands in the deep discount category. LIGGETT SELECT, which was
the largest seller in Liggetts family of brands in 2006
and 2007, comprised 37.5% in 2006, 32.9% in 2007 and 30.1% in
2008 of Liggetts unit volume. In September 2005, Liggett
repositioned GRAND PRIX to distributors and retailers
nationwide. GRAND PRIX is marketed as the lowest price
fighter to specifically compete with brands which are
priced at the lowest level of the deep discount segment. GRAND
PRIX, which represented 30.3% of Liggetts volume in 2007,
is now the largest seller in Liggetts family of brands
with 32.6% of Liggetts unit volume in 2008.
Under the Master Settlement Agreement reached in November 1998
with 46 states and various territories, the three largest
cigarette manufacturers must make settlement payments to the
states and territories based on how many cigarettes they sell
annually. Liggett, however, is not required to make any payments
unless its market share exceeds approximately 1.65% of the
U.S. cigarette market. Additionally, Vector Tobacco has no
payment obligation unless its market share exceeds approximately
0.28% of the U.S. market. Liggetts and Vector
Tobaccos payments under the Master Settlement Agreement
are based on each companys incremental market share above
the minimum threshold applicable to such company. We believe
that Liggett has gained a sustainable cost advantage over its
competitors as a result of the settlement.
The discount segment is a challenging marketplace, with
consumers having less brand loyalty and placing greater emphasis
on price. Liggetts competition is now divided into two
segments. The first segment is made up of the three largest
manufacturers of cigarettes in the United States, Philip Morris
USA Inc., Reynolds America Inc., and Lorillard Tobacco Company
as well as the fourth largest, Commonwealth Brands, Inc. (which
Imperial Tobacco PLC acquired in 2007). The three largest
manufacturers, while primarily premium cigarette based
companies, also produce and sell discount cigarettes. The second
segment of competition is comprised of a group of smaller
manufacturers and importers, most of which sell lower quality,
deep discount cigarettes.
35
In January 2003, Vector Tobacco introduced QUEST, its brand of
low nicotine and nicotine-free cigarette products. QUEST brand
cigarettes are currently marketed solely to permit adult
smokers, who wish to continue smoking, to gradually reduce their
intake of nicotine. The products are not labeled or advertised
for smoking cessation or as a safer form of smoking.
In November 2006, our Board of Directors determined to
discontinue the genetics operation of our subsidiary, Vector
Research Ltd., and, not to pursue, at that time, Food and Drug
Administration approval of QUEST as a smoking cessation aid, due
to the projected significant additional time and expense
involved in seeking such approval. In connection with this
decision, we eliminated 12 full-time positions effective
December 31, 2006.
As a result of these actions, we realized cost savings in excess
of $4,000 in each of 2008 and 2007. We recognized pre-tax
restructuring and inventory impairment charges of approximately
$2,664, primarily during the fourth quarter of 2006. The
restructuring charges include approximately $484 relating to
employee severance and benefit costs, $338 for contract
termination and other associated costs, approximately $952 for
asset impairment and $890 in inventory write-offs. Approximately
$1,840 of these charges represented non-cash items.
Recent
Developments
SNUS. In May 2008 Liggett introduced SNUS, a
premium quality pouched tobacco product. SNUS is currently
manufactured in Sweden and is available in three varieties.
Issuance of 11% Senior Secured Notes. In
August 2007, we sold $165,000 principal amount of our
11% Senior Secured Notes due August 15, 2015 in a
private offering to qualified institutional investors in
accordance with Rule 144A under the Securities Act. We
intend to use the net proceeds of the issuance for general
corporate purposes which may include working capital
requirements, the financing of capital expenditures, future
acquisitions, the repayment or refinancing of outstanding
indebtedness, payment of dividends and distributions and the
repurchase of all or any part of our outstanding convertible
notes.
LTS Debt Exchange Agreement. In February 2007,
Ladenburg Thalmann Financial Services Inc. (LTS)
entered into a Debt Exchange Agreement with New Valley, the
holder of $5,000 principal amount of its promissory notes due
March 31, 2007. Pursuant to the Exchange Agreement, New
Valley agreed to exchange the principal amount of its notes for
LTS common stock at an exchange price of $1.80 per share,
representing the average closing price of the LTS common stock
for the 30 prior trading days ending on the date of the Exchange
Agreement.
The debt exchange was consummated on June 29, 2007
following approval by the LTS shareholders at its annual meeting
of shareholders. At the closing, the $5,000 principal amount of
notes was exchanged for 2,777,778 shares of LTSs
common stock and accrued interest on the notes of approximately
$1,730 was paid in cash. In connection with the debt exchange,
we recorded a gain in the second quarter of 2007 of $8,121,
which consisted of the fair value of the 2,777,778 shares
of LTS common stock at June 29, 2007 (the transaction date)
and interest received in connection with the exchange.
As a result of the debt exchange, New Valleys ownership of
LTSs common stock increased to 13,888,889 shares or
approximately 8.1% of the then outstanding LTS shares.
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 Valleys former
Western Union satellite business. In March 2007, the parties
entered into a Stipulation for Entry of Judgment to settle New
Valleys 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.
Proposed and enacted excise tax increases. In
February 2009, Federal legislation to reauthorize the State
Childrens Health Insurance Program (SCHIP), which includes
funding provisions that increase the federal cigarette excise
tax from $0.39 to $1.01 per pack, was enacted, effective
April 1, 2009. Seven states and the District of Columbia
enacted increases to state excise taxes in 2008 and further
increases in states excise taxes are expected in 2009.
36
Tobacco Settlement Agreements. In October
2004, the independent auditor under the Master Settlement
Agreement notified Liggett and all other Participating
Manufacturers that their payment obligations under the Master
Settlement Agreement, dating from the agreements execution
in late 1998, had been recalculated using net unit
amounts, rather than gross unit amounts (which had
been used since 1999 to calculate market share and the
allocation of the base amount of payments under the Master
Settlement Agreement). The change in the method of calculation
could, among other things, require additional Master Settlement
Agreement payments by Liggett of approximately $17,541, plus
interest, 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
Liggetts market share exemption under the Master
Settlement Agreement. Liggett has objected to this retroactive
change and has disputed the change in methodology. No amounts
have been accrued or expensed in our consolidated financial
statements for any potential liability relating to the
gross versus net dispute because we do
not believe an unfavorable outcome is probable.
In 2005, the independent auditor under the Master Settlement
Agreement calculated that Liggett owed $28,668 for its 2004
sales. Liggett paid $11,678 and disputed the balance, as
permitted by the Master Settlement Agreement. 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 December 31, 2008, included in
Other assets on our consolidated balance sheet was a
receivable of $6,513 relating to such amount. The remaining
balance in dispute of $7,686 is comprised of $5,318 claimed for
a 2004 NPM Adjustment and $2,368 relating to the independent
auditors retroactive change from gross to
net units in calculating Master Settlement Agreement
payments, which Liggett contends is improper, as discussed
above. From its 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 related to the retroactive change from
gross to net units. Vector Tobacco paid
approximately $200 into the disputed payments account for the
2007 NPM Adjustment. Liggett and Vector Tobacco paid
approximately $34.0 million for their 2008 Master
Settlement obligations during 2008 and anticipate paying another
$9.8 million in April 2009, after withholding certain
disputed amounts.
The following amounts have not been expensed in our consolidated
financial statements as they relate to Liggetts and Vector
Tobaccos claim for an NPM Adjustment: $6,513 for 2003,
$3,789 for 2004 and $800 for 2005.
In March 2006, an economic consulting firm selected pursuant to
the Master Settlement Agreement rendered its final and
non-appealable decision that the Master Settlement Agreement was
a significant factor contributing to the loss of
market share of Participating Manufacturers for 2003. The
economic consulting firm subsequently rendered the same decision
with respect to 2004 and 2005. As a result, the manufacturers
are entitled to potential NPM Adjustments to their 2003, 2004
and 2005 Master Settlement Agreement 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 Master
Settlement Agreement requiring arbitration, litigation has been
filed in 49 Settling States and territories 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 Master Settlement Agreement
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 44 of these decisions are final. There
can be no assurance that Liggett or Vector Tobacco will receive
any adjustment as a result of these proceedings.
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 Tobaccos assessment is correct
and that additional payments under the MSA for QUEST 3 will not
be owed.
37
In 2003, in order to resolve any potential issues with Minnesota
as to Liggetts ongoing economic settlement obligations,
Liggett negotiated a $100 a year payment to Minnesota, to be
paid any year cigarettes manufactured by Liggett are sold in
that state. In 2004, the Attorneys General for each of Florida,
Mississippi and Texas advised Liggett that they believed that
Liggett has 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 amount of
$20,000 for the period 1998 through 2003. Further discussions
among the parties have not resulted in any resolutions 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 as of December 31, 2008, in
connection with the foregoing matters, no other amounts have
been accrued in the accompanying 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 and that Liggett will not be required
to make additional material payments, which payments could
adversely affect our consolidated financial position, results of
operations or cash flows.
Losses on Long-term Investments. We recorded a
loss of $21,900 in 2008 due to the performance of three of our
long-term investments in various investment funds in 2008.
During 2008, one of our long-term investments was impaired due
to a portion of its underlying assets being held in an account
with the European subsidiary of Lehman Brothers Holdings Inc.
while our other long-term investments were impaired as a result
of the funds performances in 2008. We record impairment
charges when it is determined an other-than-temporary decline in
fair value exists in any of our long-term investments. Thus,
future impairment charges may occur. In April 2008, we elected
to withdraw our investment in Jefferies Buckeye Fund, LLC
(Buckeye Fund), a privately managed investment
partnership, of which Jefferies Asset Management, LLC is the
portfolio manager. We recorded a loss of $567 during the first
quarter of 2008 associated with the Buckeye Funds
performance, which has been included as Other
expense on our consolidated statement of operations. We
received proceeds of $8,328 in May 2008 and received an
additional $900 of proceeds in the first quarter of 2009, which
has been included in Other current assets on our
consolidated balance sheet.
Real Estate Activities. New Valley accounts
for its 50% interests in Douglas Elliman Realty LLC, Koa
Investors LLC and 16th & K Holdings LLC and its 40%
interest in New Valley Oaktree Chelsea Eleven LLC on the equity
method. Douglas Elliman Realty operates the largest residential
brokerage company in the New York metropolitan area. Koa
Investors LLC owns the Sheraton Keauhou Bay Resort &
Spa in Kailua-Kona, Hawaii, which is a four star resort with 521
rooms. In 2008, KOA was informed by its lender that it is in
default on its $82 million loan. In August 2005,
16th & K Holdings LLC acquired the St. Regis Hotel, a
193 room luxury hotel in Washington, D.C. New Valley
Oaktree Chelsea Eleven lent $29 million and contributed
$1 million in capital to Chelsea Eleven LLC, which is
developing a condominium project in Manhattan, New York.
Sale of St. Regis Hotel. In March 2008,
16th and K Holdings LLC closed on the sale of 90% of the
St. Regis Hotel. In addition to retaining a 3% interest, net of
incentives, in the St. Regis Hotel, New Valley received $16,406
upon the sale of the hotel. New Valley anticipates receiving an
additional $3,400 in various installments between 2009 and 2012.
We recorded the $16,406 as an investing activity in the
consolidated statement of cash flows for the year ended
December 31, 2008. New Valley recorded equity losses of
$3,796, $2,344, and $2,147 for the years ended December 31,
2008, 2007, and 2006, respectively, associated with
16th and K Holdings LLC. For the year ended
December 31, 2008, New Valley also recorded equity income
of $16,363 in connection with the distributions received in
excess of the carrying amount of the investment in St. Regis and
we have no legal obligation to make additional investments to
the investment.
Escena. 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 costs
include the purchase price and additional capitalized costs of
$259. The borrowers are Escena-PSC, LLC and Palm Springs
Classic, LLC, a joint venture of Lennar Homes of California, Inc
and Empire Land, LLC. In April 2008, Empire Land filed a
Chapter 11
38
bankruptcy petition, which was converted to Chapter 7 in
December 2008. Lennar Homes is an affiliate of Lennar
Corporation. The project consists of 867 residential lots with
site and public infrastructure, an 18-hole 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. In
January 2009, we obtained an 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 balance plus accrued interest as well as a
guarantee to complete the development of the property. In order
to calculate the fair market value of the investment, we
utilized the most recent as is appraised value of
the collateral and estimated the value of Lennars
completion and payment guaranties, less estimated costs to
enforce the guaranties and dispose of the property. Based on
these estimates, we determined that the fair market value was
less than the carrying amount of the mortgage receivable at
December 31, 2008 by approximately $4,000. Accordingly, a
reserve was established for the decline in value and a charge of
$4,000 was recorded for the year ended December 31, 2008.
We carried the loan on our consolidated balance sheet at its net
basis of $17,704 as of December 31, 2008. Litigation is
ongoing to enforce our rights under the loan documents. The
parties are currently in settlement discussions.
Aberdeen Townhomes LLC. In June 2008, a
subsidiary of New Valley purchased a preferred equity interest
in Aberdeen Townhomes LLC 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. 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, we are not the
primary beneficiary. Our maximum exposure to loss as a result of
our investment in Aberdeen is $10,000. This investment is being
accounted for under the cost method.
In January 2009, we obtained an appraisal of the five town home
residences and determined that the value of the properties, less
estimated disposal costs, was approximately $3,500 less than
their carrying value and recorded an impairment charge for
$3,500. The reduction in value was attributed to the overall
real estate market conditions in New York City at
December 31, 2008. Four of the five notes related to the
project with a balance of approximately $29,125 matured on
March 1, 2009 and have not been refinanced. The remaining
mortgage with a balance of approximately $11,500 matures on
September 30, 2009. Additionally in February 2009, the
managing member of Aberdeen Townhomes gave notice that it is
resigning as managing member. A subsidiary of New Valley will
become the new managing member.
New Valley Oaktree Chelsea Eleven, LLC. In
September 2008, a subsidiary of New Valley purchased for $12,000
a 40% interest in New Valley Oaktree Chelsea Eleven, LLC, which
lent $29,000 and contributed $1,000 in capital to Chelsea Eleven
LLC, which is developing a condominium project in Manhattan, New
York. The development consists of 72 luxury residential units
and one commercial unit. Approximately 75% of the units are
pre-sold and approximately $35,000 in deposits are held in
escrow. The loan from New Valley Oaktree is subordinate to a
$110,000 construction loan and a $24,000 mezzanine loan plus
accrued interest. The loan from New Valley Oaktree to Chelsea
Eleven bears interest at 60.25% per annum, compounded monthly,
with $3,750 being held in an interest reserve, of which five
payments of $300 were paid to New Valley on a monthly basis.
New Valley Chelsea is a variable interest entity; however, we
are not the primary beneficiary. Our maximum exposure to loss as
a result of our investment in Chelsea is $12,000. This
investment is being accounted for under the equity method.
Recent
Developments in Tobacco-Related Litigation
The cigarette industry continues to be challenged on numerous
fronts. New cases continue to be commenced against Liggett and
other cigarette manufacturers. As of December 31, 2008,
there were approximately 2,720
39
individual suits (excluding approximately 100 individual cases
pending in West Virginia state court as part of a consolidated
action; Liggett has been severed from the trial of the
consolidated action), seven purported class actions and four
governmental and other third-party payor health care
reimbursement actions pending in the United States in which
Liggett or us, or both, were named as a defendant.
Class action suits have been filed in a number of states against
individual cigarette manufacturers, alleging, among other
things, that the use of the terms light and
ultralight constitutes unfair and deceptive trade
practices. One such suit (Schwab v. Philip Morris),
pending in federal court in New York since 2004, seeks to create
a nationwide class of light cigarette smokers and
includes Liggett as a defendant. The action asserts claims under
the Racketeer Influenced and Corrupt Organizations Act (RICO).
The proposed class is seeking as much as $200,000,000 in
damages, which could be trebled under RICO. In November 2005,
the court ruled that the plaintiffs would be permitted to
calculate damages on an aggregate basis and use fluid
recovery theories to allocate them among class members, if
the class is certified,. Fluid recovery would permit potential
damages to be paid out in ways other than merely giving cash
directly to plaintiffs, such as establishing a pool of money
that could be used for public purposes. In September 2006, the
court granted plaintiffs motion for class certification.
In April 2008, the United States Court of Appeals for the Second
Circuit decertified the class. The case was returned to the
trial court for further proceedings. Liggett is a defendant in
the Schwab case. We have accrued approximately
$2.3 million for this case at December 31, 2008.
There are currently five individual tobacco-related actions
pending where Liggett is the only tobacco company defendant. In
April 2004, in one of these cases, a jury in a Florida state
court action awarded compensatory damages of $540 against
Liggett, plus interest. This award is final. In addition,
plaintiffs counsel was awarded legal fees of $752. Liggett
appealed the legal fees award. In March 2008, the Fourth
District Court of Appeals reversed and remanded the legal fee
award for further proceedings in the trial court. In February
2009, trial commenced in another of these cases.
In May 2003, Floridas Third District Court of Appeal
reversed a $790,000 punitive damages award against Liggett and
decertified the Engle smoking and health class action. In
July 2006, the Florida Supreme Court affirmed in part and
reversed in part the May 2003 intermediate appellate court
decision. Among other things, the Florida Supreme Court affirmed
the decision vacating the punitive damages award and held that
the claim should be decertified prospectively, but preserved
several of the 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 plaintiffs 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 of the date
the courts decision became final on January 11, 2007,
the date of the courts 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. Class counsel
filed motions for attorneys fees and costs, which motions
are pending. There are approximately 2,680 Engle progeny
cases, in state and federal courts in Florida, where either
Liggett (and other cigarette manufacturers) or us, or both, were
named as defendants. These cases include approximately 9,620
plaintiffs. In June 2002, the jury in Lukacs v. R. J.
Reynolds Tobacco Company, an individual case brought under
the third phase of the Engle case, awarded $37,500, plus
interest, (subsequently reduced by the court to $24,835) of
compensatory damages, jointly and severally, against Liggett and
two other cigarette manufacturers and found Liggett 50%
responsible for the damages. In November 2008, the court entered
final judgment. The defendants have appealed. The plaintiffs are
seeking an award of attorneys fees from Liggett. Liggett
may be required to bond the amount of the judgment against it to
perfect its appeal. It is possible that additional cases could
be decided unfavorably and that there could be further adverse
developments in the Engle case. Liggett may enter into
discussions in an attempt to settle particular cases if it
believes it is appropriate to do so. We cannot predict the cash
requirements related to any future settlements and judgments,
including cash required to bond any appeals, and there is a risk
that those requirements will not be able to be met.
40
Critical
Accounting Policies
General. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses.
Significant estimates subject to material changes in the near
term include restructuring and impairment charges, inventory
valuation, deferred tax assets, allowance for doubtful accounts,
promotional accruals, sales returns and allowances, actuarial
assumptions of pension plans, the estimated fair value of
embedded derivative liabilities, settlement accruals
restructuring, valuation of investments, including other than
temporary impairments to such investments, accounting for
investments in equity securities, and litigation and defense
costs. Actual results could differ from those estimates.
Effective January 1, 2008, we adopted Statement of
Financial Accounting Standards No. 157, Fair Value
Measurements, (SFAS No. 157) for
financial assets and financial liabilities.
SFAS No. 157 does not require any new fair value
measurements but provides a definition of fair value,
establishes a framework for measuring fair value, and expands
disclosure about fair value measurements. We will adopt
SFAS No. 157 for nonfinancial assets and nonfinancial
liabilities on January 1, 2009. The adoption of
SFAS No. 157 on financial assets and financial
liabilities did not have a material impact on our consolidated
results of operations, financial position or cash flows. We are
currently assessing the impact of SFAS No. 157 for
nonfinancial assets and nonfinancial liabilities on our
consolidated results of operations, financial position or cash
flows.
On January 1, 2007 we adopted FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes
(an interpretation of FASB Statement No. 109). During
the fourth quarter of 2006, we adopted Statement of Financial
Accounting Standards (SFAS) No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans. SFAS 123(R),
Share-Based Payment, and Emerging Issues Task Force
(EITF) Issue
No. 05-8,
Income Tax Effects of Issuing Convertible Debt with a
Beneficial Conversion Feature were adopted on
January 1, 2006. There were no other accounting policies
adopted during 2008, 2007 and 2006 that had a material effect on
our financial condition or results of operations. Refer to
Note 1(y) of our consolidated financial statements for a
discussion of recent accounting pronouncements that may impact
our consolidated financial statements.
Revenue Recognition. Revenues from sales of
cigarettes are recognized upon the shipment of finished goods
when title and risk of loss have passed to the customer, there
is persuasive evidence of an arrangement, the sale price is
determinable and collectibility is reasonably assured. We
provide an allowance for expected sales returns, net of any
related inventory cost recoveries. In accordance with EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation), our
accounting policy is to include federal excise taxes in revenues
and cost of goods sold. Such revenues and cost of sales totaled
$168,170, $176,269 and $174,339 for the years ended
December 31, 2008, 2007 and 2006, respectively. Since our
primary line of business is tobacco, our financial position and
our results of operations and cash flows have been and could
continue to be materially adversely affected by significant unit
sales volume declines, litigation and defense costs, increased
tobacco costs or reductions in the selling price of cigarettes
in the near term.
Marketing Costs. We record marketing costs as
an expense in the period to which such costs relate. We do not
defer the recognition of any amounts on our consolidated balance
sheets with respect to marketing costs. We expense advertising
costs as incurred, which is the period in which the related
advertisement initially appears. We record consumer incentive
and trade promotion costs as a reduction in revenue in the
period in which these programs are offered, based on estimates
of utilization and redemption rates that are developed from
historical information.
Restructuring and Asset Impairment Charges. We
have recorded charges related to employee severance and
benefits, asset impairments, contract termination and other
associated exit costs during 2003, 2004 and 2006. The
calculation of severance pay requires management to identify
employees to be terminated and the timing of their severance
from employment. The calculation of benefits charges requires
actuarial assumptions including determination of discount rates.
The asset impairments were recorded in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which requires management
to estimate the fair value of assets to be disposed of. On
January 1, 2003, we adopted SFAS No. 146,
Accounting for Costs Associated with Exit
41
or Disposal Activities. Charges related to restructuring
activities initiated after this date were recorded when
incurred. Prior to this date, charges were recorded at the date
of an entitys commitment to an exit plan in accordance
with
EITF 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). These restructuring
charges are based on managements best estimate at the time
of restructuring. The status of the restructuring activities is
reviewed on a quarterly basis and any adjustments to the
reserve, which could differ materially from previous estimates,
are recorded as an adjustment to operating income.
Contingencies. We record Liggetts
product liability legal expenses and other litigation costs as
operating, selling, general and administrative expenses as those
costs are incurred. As discussed in Note 12 to our
consolidated financial statements and above under the heading
Recent Developments in Tobacco-Related Litigation,
legal proceedings are pending or threatened in various
jurisdictions against Liggett. A large number of individual
product liability cases have been filed in state and federal
courts in Florida as a result of the Florida Supreme
Courts decision in the Engle case. We record a
provision for loss in litigation in our consolidated financial
statements when we believe an unfavorable outcome is probable
and the amount of loss can be reasonably estimated. In all but
one of our pending legal proceedings, 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 pending
tobacco-related litigation or the costs of defending such cases,
and, except for the previously mentioned case, we have not
provided any amounts in our consolidated financial statements
for unfavorable outcomes, if any. You should not infer from the
absence of any such reserve in our consolidated financial
statements that Liggett will not be subject to significant
tobacco-related liabilities in the future. Litigation is subject
to many uncertainties, and it is possible that our consolidated
financial position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any
such tobacco-related litigation.
Settlement Agreements. As discussed in
Note 12 to our consolidated financial statements, Liggett
and Vector Tobacco are participants in the Master Settlement
Agreement, the 1998 agreement to settle governmental healthcare
cost recovery actions brought by various states. Liggett and
Vector Tobacco have no payment obligations under the Master
Settlement Agreement except to the extent their market shares
exceed approximately 1.65% and 0.28%, respectively, of total
cigarettes sold in the United States. Their obligations, and the
related expense charges under the Master Settlement Agreement,
are subject to adjustments based upon, among other things, the
volume of cigarettes sold by Liggett and Vector Tobacco, their
relative market shares and inflation. Since relative market
shares are based on cigarette shipments, the best estimate of
the allocation of charges under the Master Settlement Agreement
is recorded in cost of goods sold as the products are shipped.
Settlement expenses under the Master Settlement Agreement
recorded in the accompanying consolidated statements of
operations were $49,800 for 2008, $48,755 for 2007 and $32,635
for 2006. Adjustments to these estimates are recorded in the
period that the change becomes probable and the amount can be
reasonably estimated.
Derivatives; Beneficial Conversion Feature. We
measure all derivatives, including certain derivatives embedded
in other contracts, at fair value and recognize them in the
consolidated balance sheet as an asset or a liability, depending
on our rights and obligations under the applicable derivative
contract. In 2004, 2005 and 2006, we issued variable interest
senior convertible debt in a series of private placements where
a portion of the total interest payable on the debt is computed
by reference to the cash dividends paid on our common stock.
This portion of the interest payment is considered an embedded
derivative within the convertible debt, which we are required to
separately value. As a result, we have bifurcated this embedded
derivative and estimated the fair value of the embedded
derivative liability. The resulting discount created by
allocating a portion of the issuance proceeds to the embedded
derivative is then amortized to interest expense over the term
of the debt using the effective interest method.
At December 31, 2008 and 2007, the fair value of derivative
liabilities was estimated at $77,245 and $101,582, respectively.
Changes to the fair value of these embedded derivatives are
reflected on our consolidated statements of operations as
Changes in fair value of derivatives embedded within
convertible debt. The value of the embedded derivative is
contingent on changes in interest rates of debt instruments
maturing over the duration of the convertible debt as well as
projections of future cash and stock dividends over the term of
the debt. We recognized a gain of $24,337 in 2008, a loss of
$6,109 in 2007 and a gain of $112 in 2006 due to changes in the
fair value of the embedded derivatives.
42
After giving effect to the recording of embedded derivative
liabilities as a discount to the convertible debt, our common
stock had a fair value at the issuance date of the notes in
excess of the conversion price, resulting in a beneficial
conversion feature. The intrinsic value of the beneficial
conversion feature was recorded as additional paid-in capital
and as a further discount on the debt. The discount is then
amortized to interest expense over the term of the debt using
the effective interest rate method.
We recognized non-cash interest expense of $5,805, $3,768 and
$3,470 for the years ended December 31, 2008, 2007 and
2006, respectively, due to the amortization of the debt discount
attributable to the embedded derivatives and $2,963, $1,868 and
$1,818 in 2008, 2007 and 2006, respectively, due to the
amortization of the debt discount attributable to the beneficial
conversion feature.
Inventories. Tobacco inventories are stated at
lower of cost or market and are determined primarily by the
last-in,
first-out (LIFO) method at Liggett and the
first-in,
first-out (FIFO) method at Vector Tobacco. Although portions of
leaf tobacco inventories may not be used or sold within one year
because of time required for aging, they are included in current
assets, which is common practice in the industry. We estimate an
inventory reserve for excess quantities and obsolete items based
on specific identification and historical write-offs, taking
into account future demand and market conditions.
Stock-Based Compensation. Our stock-based
compensation is accounted for under SFAS No. 123(R),
Share-Based Payment, which uses a fair
value-based method to recognize non-cash compensation expense
for share-based transactions. Under the fair value recognition
provisions of SFAS No. 123(R), we recognize
stock-based compensation net of an estimated forfeiture rate and
only recognize compensation cost for those shares expected to
vest on a straight line basis over the requisite service period
of the award. Upon adoption, there was no cumulative adjustment
for the impact of the change in accounting principle because the
assumed forfeiture rate did not differ significantly from prior
periods. We recognized compensation expense of $186, $197 and
$470 for the years ended December 2008, 2007 and 2006,
respectively, as a result of adopting SFAS No. 123(R).
As of December 31, 2008 and 2007, there was $255 and $441,
respectively, of total unrecognized cost related to employee
stock options. See Note 11 to our consolidated financial
statements for a discussion of the adoption of this standard.
Employee Benefit Plans. The determination of
our net pension and other postretirement benefit income or
expense is dependent on our selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions
include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in
compensation and healthcare costs. We determine discount rates
by using a quantitative analysis that considers the prevailing
prices of investment grade bonds and the anticipated cash flow
from our two qualified defined benefit plans and our
postretirement medical and life insurance plans. These analyses
construct a hypothetical bond portfolio whose cash flow from
coupons and maturities match the annual projected cash flows
from our pension and retiree health plans. As of
December 31, 2008, our benefit obligations and service cost
were computed assuming a discount rate of 6.75% and 6.25%,
respectively. In determining our expected rate of return on plan
assets we consider input from our external advisors and
historical returns based on the expected long-term rate of
return is the weighted average of the target asset allocation of
each individual asset class. Our actual
10-year
annual rate of return on our pension plan assets was 2.5%, 6.7%
and 8.2% for the years ended December 31, 2008, 2007 and
2006, respectively, and our actual five-year annual rate of
return on our pension plan assets was 1.2%, 11.3% and 7.6% for
the years ended December 31, 2008, 2007 and 2006,
respectively. In computing expense for the year ended
December 31, 2009, we will use an assumption of a 7.5%
annual rate of return on our pension plan assets. In accordance
with accounting principles generally accepted in the United
States of America, actual results that differ from our
assumptions are accumulated and amortized over future periods
and therefore, generally affect our recognized income or expense
in such future periods. While we believe that our assumptions
are appropriate, significant differences in our actual
experience or significant changes in our assumptions may
materially affect our future net pension and other
postretirement benefit income or expense.
Net pension expense for defined benefit pension plans and other
postretirement benefit expense aggregated approximately $3,445,
$3,885 and $4,665 for 2008, 2007 and 2006, respectively, and we
currently anticipate such expense will be approximately $6,250
for 2009. In contrast, our funding obligations under the pension
plans are governed by the Employee Retirement Income Security
Act (ERISA). To comply with ERISAs minimum
funding requirements, we do not currently anticipate that we
will be required to make any funding to the tax
43
qualified pension plans for the pension plan year beginning on
January 1, 2009 and ending on December 31, 2009;
however, we do anticipate making a $20,760 payment under our
nonqualified Supplemental Retirement Plan in 2009. Any
additional funding obligation that we may have for subsequent
years is contingent on several factors and is not reasonably
estimable at this time.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R).
SFAS No. 158 requires an employer to recognize the
overfunded or underfunded status of their benefit plans as an
asset or liability in its balance sheet and to recognize changes
in that funded status in the year in which the changes occur as
a component of other comprehensive income. The funded status is
measured as the difference between the fair value of the
plans assets and its benefit obligation. The prospective
requirement to recognize the funded status of a benefit plan and
to provide the required disclosures became effective for us on
December 31, 2006. In addition, SFAS No. 158
requires an employer to measure benefit plan assets and
obligations that determine the funded status of a plan as of the
end of its fiscal year. Prior to the adoption of
SFAS No. 158, we measured the funded status of our
plans at September 30. The new measurement date
requirements became effective for us on December 31, 2008.
Long-Term Investments and Impairments. At
December 31, 2008, we had long-term investments of $51,118,
which consisted primarily of investment partnerships investing
in investment securities and real estate. The investments in
these investment partnerships are illiquid and the ultimate
realization of these investments is subject to the performance
of the underlying partnership and its management by the general
partners. The estimated fair value of the investment
partnerships is provided by the partnerships based on the
indicated market values of the underlying assets or investment
portfolio. Gains are recognized when realized in our
consolidated statement of operations. Losses are recognized as
realized or upon the determination of the occurrence of an
other-than-temporary decline in fair value. On a quarterly
basis, we evaluate our investments to determine whether an
impairment has occurred. If so, we also make a determination of
whether such impairment is considered temporary or
other-than-temporary. We believe that the assessment of
temporary or other-than-temporary impairment is facts and
circumstances driven. However, among the matters that are
considered in making such a determination are the period of time
the investment has remained below its cost or carrying value,
the severity of the decline, the likelihood of recovery given
the reason for the decrease in market value and our original
expected holding period of the investment.
Income Taxes. The application of income tax
law is inherently complex. Laws and regulations in this area are
voluminous and are often ambiguous. As such, we are required to
make many subjective assumptions and judgments regarding our
income tax exposures. Interpretations of and guidance
surrounding income tax laws and regulations change over time
and, as a result, changes in our subjective assumptions and
judgments may materially affect amounts recognized in our
consolidated financial statements. See Note 10 to our
consolidated financial statements for additional information
regarding our adoption of FIN 48 on January 1, 2007
and our uncertain tax positions.
Results
of Operations
The following discussion provides an assessment of our results
of operations, capital resources and liquidity and should be
read in conjunction with our consolidated financial statements
and related notes included elsewhere in this report. The
consolidated financial statements include the accounts of VGR
Holding, Liggett, Vector Tobacco, Liggett Vector Brands, New
Valley and other less significant subsidiaries.
For purposes of this discussion and other consolidated financial
reporting, our significant business segments for the three years
ended December 31, 2008 were Liggett and Vector Tobacco.
The Liggett segment consists of the manufacture and sale of
conventional cigarettes and, for segment reporting purposes,
includes the operations of The Medallion Company, Inc. (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.
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Liggett
|
|
$
|
562,660
|
|
|
$
|
551,687
|
|
|
$
|
499,468
|
|
Vector Tobacco
|
|
|
2,527
|
|
|
|
3,743
|
|
|
|
6,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
565,187
|
|
|
$
|
555,430
|
|
|
$
|
506,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Liggett
|
|
$
|
170,181
|
|
|
$
|
159,347
|
|
|
$
|
140,508
|
(1)
|
Vector Tobacco
|
|
|
(8,331
|
)
|
|
|
(9,896
|
)
|
|
|
(13,971
|
)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total tobacco
|
|
|
161,850
|
|
|
|
149,451
|
|
|
|
126,537
|
|
Corporate and other
|
|
|
(26,546
|
)
|
|
|
(23,947
|
)
|
|
|
(25,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
135,304
|
|
|
$
|
125,504
|
|
|
$
|
101,029
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes a gain on sale of assets at Liggett of $2,217 in 2006
and a loss on sale of assets of $7 at Vector Tobacco,
restructuring charges of $2,664 at Vector Tobacco and a reversal
of restructuring charges of $116 at Liggett. |
2008
Compared to 2007
Revenues. Total revenues were $565,187 for the
year ended December 31, 2008 compared to $555,430 for the
year ended December 31, 2007. This $9,757 (1.8%) increase
in revenues was due to a $10,973 (2.0%) increase in revenues at
Liggett offset by a decrease of $1,216 (32.5%) in revenues at
Vector Tobacco.
Tobacco Revenues. In April 2007, Liggett
increased the list price of Grand Prix by an additional $1.00
per carton. In September 2007, Liggett increased the list price
of LIGGETT SELECT, EVE and Grand Prix by an additional $0.70 per
carton. In April 2008, Liggett increased the list price of GRAND
PRIX by an additional $0.40 per carton. In addition, in April
2008, Liggett decreased the early payment terms on its
cigarettes from 2.75% to 2.25% of invoice amount. In August
2008, Liggett increased the list price of LIGGETT SELECT, EVE
and GRAND PRIX by an additional $1.00 per carton. These price
increases contributed to the increase in Liggetts revenues.
All of Liggetts sales for 2008 and 2007 were in the
discount category. For the year ended December 31, 2008,
net sales at Liggett totaled $562,660 compared to $551,687 for
2007. Revenues increased by 2.0% ($10,973) due to a favorable
price variance of $36,959 and sales of SNUS totaling $451 offset
by a decline in unit sales volume (approximately
399.4 million units) accounting for $24,478 in unfavorable
volume variance and a $1,959 in unfavorable sales mix. Net
revenues of the LIGGETT SELECT brand decreased $12,435 for the
year ended December 31, 2008 compared to the same period in
2007, and its unit volume decreased 12.5% in the 2008 period
compared to 2007. Net revenues of the GRAND PRIX brand increased
$22,832 in 2008 compared to the prior year period and its unit
volume increased by 2.7% in 2008 compared to 2007.
Revenues at Vector Tobacco were $2,527 for the year ended
December 31, 2008 compared to $3,743 for the year ended
December 31, 2007 due to decreased sales volume. Vector
Tobaccos revenues in both periods related primarily to
sales of QUEST.
Tobacco Gross Profit. Tobacco gross profit was
$229,887 for the year ended December 31, 2008 compared to
$218,351 for the year ended December 31, 2007. This
represented an increase of $11,536 (5.3%) when compared to the
prior year, due primarily to increased prices and decreased
promotional spending partially offset by higher manufacturing
expenses. Liggetts brands contributed 99.6% of the tobacco
gross profit and Vector Tobaccos brands contributed 0.4%
for the year ended December 31, 2008. In 2007,
Liggetts brands contributed 99.5% to tobacco gross profit
and Vector Tobaccos brands contributed 0.5%.
45
Liggetts gross profit of $228,982 for the year ended
December 31, 2008 increased $11,690 from gross profit of
$217,292 for the year ended December 31, 2007. As a percent
of revenues (excluding federal excise taxes), gross profit at
Liggett increased to 58.0% in 2008 compared to 57.8% in 2007.
Vector Tobaccos gross profit was $905 for the year ended
December 31, 2008 compared to gross profit of $1,059 for
the same period in 2007. The increase was due primarily
increased pricing.
Expenses. Operating, selling, general and
administrative expenses were $94,583 for the year ended
December 31, 2008 compared to $92,967 in 2007, an increase
of $1,616, or 1.7%. Expenses at Liggett were $58,801 for the
year ended December 31, 2008 compared to $57,996 in 2007,
an increase of $805 or 1.4%. The increase in expense at Liggett
in 2008 was due primarily to increased compensation accruals in
2008 offset by decreased product liability legal expenses and
other litigation costs. Liggetts product liability legal
expenses and other litigation costs were $8,800 in 2008 compared
to $7,800 in 2007. Expenses at Vector Tobacco for the year ended
December 31, 2008 were $9,236 compared to expenses of
$11,024 for the year ended December 31, 2007 primarily due
to reduced research related expenses. Expenses at corporate for
the year ended December 31, 2008 were $26,546 compared to
$23,947 in 2007 with the primary increase in expenses resulting
primarily from the recovery of insurance coverage in 2007. In
August 2007, New Valley received a favorable arbitral award in
connection with a dispute with its insurer over reimbursement of
legal fees paid in a previously resolved stockholders
derivative claim. New Valley and its insurer agreed to resolve
this claim, and certain other claims, for the payment to New
Valley of $2,788. This settlement resulted in the recognition of
a gain in 2007 of approximately $2,400, net of legal fees, which
was recorded as a reduction in corporate-level operating,
selling, administrative and general expenses.
For the year ended December 31, 2008, Liggetts
operating income increased to $170,181 compared to $159,347 in
2007 primarily due to increased gross profit discussed above.
For the year ended December 31, 2008, Vector Tobaccos
operating loss was $8,331 compared to $9,896 for the year ended
December 31, 2007 due to reduced employee expense and
decreased research costs partially offset by lower sales volume.
Other Income (Expenses). For the year ended
December 31, 2008, other expenses were $40,732 compared to
income of $1,099 for the year ended December 31, 2007. For
the year ended December 31, 2008, other expenses consisted
of interest expense of $62,335 and losses of $21,900 associated
with the performance of three investment partnerships, a decline
in value in the mortgage receivable of $4,000, $3,000 associated
with the performance of our investments securities available for
sale and $3,500 associated with our investment in Aberdeen,
which was offset by equity income from non-consolidated real
estate businesses of $24,399, changes in fair value of
derivatives embedded within convertible debt of $24,337, and
interest and dividend income of $5,864. For the year ended
December 31, 2007, other income consisted of $20,000 for
the NASA lawsuit settlement, equity income from non-consolidated
real estate businesses of $16,243, gain from the exchange of the
LTS notes of $8,121 and interest and dividend income of $9,897
and was offset by interest expense of $45,762, change in fair
value of derivatives embedded within convertible debt of $6,109
and a loss on investments of $1,216.
The equity income of $24,399 for the 2008 period resulted from
New Valleys investment in Douglas Elliman Realty which
contributed $11,833 and $12,566 from 16th and K, which
consisted of equity losses from the operations of the St. Regis
Hotel of $3,796 and income of $16,362 in connection with the
gain on the disposal of 16th and Ks interest in 90%
of the St. Regis Hotel in Washington, D.C. The equity
income from non-consolidated real estate businesses of $16,243
for the year ended December 31, 2007 resulted from income
of $20,290 related to New Valleys investment in Douglas
Elliman Realty offset by losses of $953 in Ceebraid, $750 in Koa
Investors, and $2,344 in 16th and K. As of
December 31, 2007, New Valley has suspended its recognition
of equity losses in Ceebraid and Koa Investors as such losses
exceed its basis plus any commitment to make additional
investments.
The value of the embedded derivative is contingent on changes in
interest rates of debt instruments maturing over the duration of
the convertible debt, our stock price as well as projections of
future cash and stock dividends over the term of the debt. The
gains from the embedded derivatives in the year ended
December 31, 2008 were primarily the result of interest
payments during the period and increasing spreads between
corporate convertible debt. The loss from the embedded
derivative for year ended December 31, 2007 was primarily
the result of decreasing long-term interest rates as compared to
December 31, 2006 offset by the payment of interest during
the period, which reduced the fair value of derivatives embedded
within convertible debt.
46
Income Before Income Taxes. Income before
income taxes was $94,572 and $126,603 for the years ended
December 31, 2008 and 2007, respectively.
Income Tax Provision. The income tax provision
was $34,068 for the year ended December 31, 2008. This
compared to a tax provision of $52,800 for the year ended
December 31, 2007.
Our income tax rate for the year ended December 31, 2008
did not bear a customary relationship to statutory income tax
rates as a result of the impact of nondeductible expenses and
state income taxes offset by the impact of the domestic
production activities deduction, a reduction of $3,102
associated with the reversal of unrecognized tax benefits as a
result of the expiration of state income tax statutes. The 2007
period income tax benefit resulted primarily from a reduction of
$3,227 associated with the reversal of unrecognized tax benefits
as a result of the expiration of state income tax statutes and a
$450 benefit from the settlement of a state tax assessment. The
reduction of valuation allowances occurred when deferred tax
assets were recognized from net operating losses which have
previously been limited.
2007
Compared to 2006
Revenues. Total revenues were $555,430 for the
year ended December 31, 2007 compared to $506,252 for the
year ended December 31, 2006. This $49,178 (9.7%) increase
in revenues was due to a $52,219 (10.5%) increase in revenues at
Liggett offset by a decrease of $3,041 (44.8%) in revenues at
Vector Tobacco.
Tobacco Revenues. In September 2006, Liggett
generally reduced its promotional pricing on LIGGETT SELECT and
EVE by $1.00 per carton and increased the list price of Grand
Prix by $1.00 per carton. In April 2007, Liggett increased the
list price of Grand Prix by an additional $1.00 per carton. In
September 2007, Liggett increased the list price of LIGGETT
SELECT, EVE and Grand Prix by an additional $0.70 per carton.
These price increases contributed to the increase in
Liggetts revenues.
All of Liggetts sales for 2007 and 2006 were in the
discount category. For the year ended December 31, 2007,
net sales at Liggett totaled $551,687 compared to $499,468 for
2006. Revenues increased by 10.5% ($52,219) due to a 1.8%
increase in unit sales volume (approximately 161.5 million
units) accounting for $9,127 in favorable volume variance and a
$56,604 increase in favorable pricing and decreased promotional
spending partially offset by $13,512 in unfavorable sales mix.
Net revenues of the LIGGETT SELECT brand decreased $6,913 for
the year ended December 31, 2007 compared to the same
period in 2006, and its unit volume decreased 10.9% in the 2007
period compared to 2006. Net revenues of the GRAND PRIX brand
increased $67,376 in 2007 compared to the prior year period and
its unit volume increased by 53.1% in 2007 compared to 2006.
Revenues at Vector Tobacco were $3,743 for the year ended
December 31, 2007 compared to $6,784 for the year ended
December 31, 2006 due to decreased sales volume. Vector
Tobaccos revenues in both periods related primarily to
sales of QUEST.
Tobacco Gross Profit. Tobacco gross profit was
$218,351 for the year ended December 31, 2007 compared to
$191,089 for the year ended December 31, 2006. This
represented an increase of $27,262 (14.3%) when compared to the
prior year, due primarily to higher volume and decreased
promotional spending partially offset by higher Master
Settlement Agreement expense. Liggetts brands contributed
99.5% of the tobacco gross profit and Vector Tobaccos
brands contributed 0.5% for the year ended December 31,
2007. In 2006, Liggetts brands contributed 99.8% to
tobacco gross profit and Vector Tobaccos brands
contributed 0.2%.
In recent years, industry shipment volume has declined at an
annual rate of approximately 2.5%. Industry shipment volume is a
major component of Liggetts expense under the Master
Settlement Agreement because Liggett is exempt from payments
under the Master Settlement Agreement unless its market share
exceeds approximately 1.65% and Vector Tobaccos market
share exceeds 0.28% of the U.S. cigarette market. In 2006,
industry shipment volume remained flat compared to shipment
volume for 2005 due to increased industry inventory levels,
which we believe occurred because in anticipation of an increase
in the Master Settlement Agreement rates in 2007. As a result,
our expense under the Master Settlement Agreement decreased by
approximately $2,000 in 2006 as compared to the normal annual
decline in industry volume.
47
Liggetts gross profit of $217,292 for the year ended
December 31, 2007 increased $26,537 from gross profit of
$190,755 for the year ended December 31, 2006. As a percent
of revenues (excluding federal excise taxes), gross profit at
Liggett decreased to 57.8% in 2007 compared to 58.4% in 2006.
This decrease in Liggetts gross profit percentage in the
2007 period was attributable to higher Master Settlement
Agreement expenses in 2007 due to increased units exceeding
Liggetts market share exemption.
Vector Tobaccos gross profit was $1,059 for the year ended
December 31, 2007 compared to gross profit of $334 for the
same period in 2006. The increase was due primarily to the
absence of $1,099 of non-cash restructuring charges in 2007
offset by reduced sales volume.
Expenses. Operating, selling, general and
administrative expenses were $92,967 for the year ended
December 31, 2007 compared to $90,833 in 2006, an increase
of $2,134, or 2.3%. Expenses at Liggett were $57,996 for the
year ended December 31, 2007 compared to $52,580 in 2006,
an increase of $5,416 or 10.3%. The increase in expense at
Liggett in 2007 was due primarily to increased product liability
legal expenses and other litigation costs and compensation
accruals in 2007. Liggetts product liability legal
expenses and other litigation costs were $7,800 in 2007 compared
to $4,465 in 2006. Expenses at Vector Tobacco for the year ended
December 31, 2007 were $11,024 compared to expenses of
$12,745 for the year ended December 31, 2006 primarily due
to reduced employee and related expenses. Expenses at corporate
for the year ended December 31, 2007 were $23,947 compared
to $25,508 in 2006, with the primary reduction in expenses
resulting primarily from the recovery of insurance coverage
relating to settlement costs and expenses associated with
previous stockholder litigation. In August 2007, New Valley
received a favorable arbitral award in connection with a dispute
with its insurer over reimbursement of legal fees paid in a
previously resolved stockholders derivative claim. New
Valley and its insurer agreed to resolve this claim, and certain
other claims, for the payment to New Valley of $2,788. This
settlement resulted in the recognition of a gain in 2007 of
approximately $2,400, net of legal fees, which has been recorded
as a reduction in operating, selling, administrative and general
expenses.
For the year ended December 31, 2007, Liggetts
operating income increased to $159,347 compared to $140,508 in
2006 primarily due to increased gross profit discussed above.
For the year ended December 31, 2007, Vector Tobaccos
operating loss was $9,896 compared to $13,971 for the year ended
December 31, 2006 due to the absence of restructuring
expenses in 2007, reduced employee expense and decreased
research costs partially offset by lower sales volume.
Other Income (Expenses). For the year ended
December 31, 2007, other income (expenses) was income of
$1,099 compared to an expense of $32,549 for the year ended
December 31, 2006. For the year ended December 31,
2007, other income consisted of $20,000 for the NASA lawsuit
settlement, equity income from non-consolidated real estate
businesses of $16,243, gain from the exchange of the LTS notes
of $8,121 and interest and dividend income of $9,897 and was
offset by interest expense of $45,762, change in fair value of
derivatives embedded within convertible debt of $6,109 and a
loss on investments of $1,216. The results for the 2006 period
included expenses of $16,166 associated with the issuance in
June 2006 of additional shares of our common stock in connection
with the conversion of our 6.25% convertible notes and the
redemption of the notes in August 2006, interest expense of
$37,776 primarily offset by a gain of $112 on changes in fair
value of embedded derivatives, equity income from
non-consolidated real estate businesses of $9,086, gains from
the sale of investments of $3,019 and interest and dividend
income of $9,000.
The equity income from non-consolidated real estate businesses
of $16,243 for the year ended December 31, 2007 resulted
from income of $20,290 related to New Valleys investment
in Douglas Elliman Realty offset by losses of $953 in Ceebraid,
$750 in Koa Investors, and $2,344 in 16th and K. As of
December 31, 2007, New Valley has suspended its recognition
of equity losses in Ceebraid and Koa Investors as such losses
exceed its basis plus any commitment to make additional
investments. The equity income of $9,086 for the 2006 period
resulted primarily from income of $12,662 related to New
Valleys investment in Douglas Elliman Realty and income of
$867 related to its investment in Koa Investors, which were
offset by losses of $2,147 from 16th and K and $2,296 from
Ceebraid.
The value of the embedded derivative is contingent on changes in
interest rates of debt instruments maturing over the duration of
the convertible debt, our stock price as well as projections of
future cash and stock dividends over the term of the debt. The
loss from the embedded derivative for year ended
December 31, 2007 was primarily the result of decreasing
long-term interest rates as compared to December 31, 2006
offset by the payment of interest
48
during the period, which reduced the fair value of derivatives
embedded within convertible debt. The gain from the embedded
derivative in the year ended December 31, 2006 was
primarily the result of interest payments and higher long-term
interest rates in 2006 as compared to December 31, 2005.
This was offset by declining long-term interest rates since the
issuance of our 3.875% convertible debentures on July 12,
2006.
Income Before Income Taxes. Income before
income taxes was $126,603 and $68,480 for the years ended
December 31, 2007 and 2006, respectively.
Income Tax Provision. The income tax provision
was $52,800 for the year ended December 31, 2007. This
compared to a tax provision of $25,768 for the year ended
December 31, 2006.
Our income tax rate for the year ended December 31, 2007
did not bear a customary relationship to statutory income tax
rates as a result of the impact of nondeductible expenses and
state income taxes offset by the impact of the domestic
production activities deduction, a reduction of $3,227
associated with the reversal of unrecognized tax benefits as a
result of the expiration of state income tax statutes and a $450
benefit from the settlement of a state tax assessment. The
reduction of valuation allowances occurred when deferred tax
assets were recognized from net operating losses which have
previously been limited. The 2006 period income tax benefit
resulted primarily from the reduction of a portion of our
previously established reserve in our consolidated financial
statements by $11,500 associated with the tax settlement with
the Internal Revenue Service in July 2006.
Liquidity
and Capital Resources
Net cash and cash equivalents decreased by $27,012 and $34,290
in 2008 and 2006, respectively, and increased by $91,348 in
2007. Net cash provided by operations was $91,265 in 2008,
$109,198 in 2007 and $46,015 in 2006.
The decrease in cash provided by operations in 2008 compared to
2007 relates primarily to the receipt of $19,590 in connection
with the NASA settlement in 2007.
The increase in cash provided by operating activities in 2007
compared to 2006 relates primarily to the receipt of the net
proceeds of $19,590 from the lawsuit settlement with NASA,
inventory decreases in the 2007 period related to increased
finished goods inventory as of December 31, 2006 associated
with the increase in the Master Settlement Agreement rate in
2007, decreases of accounts receivable in the 2007 period
related to the timing of sales, the absence of compensation
accrual payments at Liggett Vector Brands in the 2007 period and
the absence of $41,400 of payments in 2007 associated with the
IRS Settlement in 2006. The increase in cash provided by
operating activities was offset by payments of $34,500 in
connection with the Master Settlement Agreement in December 2007.
The decrease in net cash provided by operating activities in the
2006 period compared to the 2005 period primarily related to an
increases in inventory in 2006, lower net income in 2006,
increased payments of compensation accruals at Liggett Vector
Brands and income taxes in 2006 offset by a non-cash charge
related to the extinguishment of debt in 2006 and lower
increases in accounts receivables in 2006.
Cash used in investing activities was $33,895, $51,943 and
44,665 in 2008, 2007, and 2006, respectively. In 2008, cash was
used for the purchase of the mortgage receivable of $21,704, the
investment in Aberdeen for $10,000 and Chelsea for $12,000, the
purchase of investment securities of $6,411, capital
expenditures of $6,309, purchase of preferred stock in other
investments, including Castle Brands, of $4,250, an increase in
the cash surrender value of corporate-owned life insurance
policies of $938, an increase in restricted assets of $411 and
the purchase of long-term investments of $51 offset by the
distributions from non-consolidated real estate businesses of
$19,393 and from the proceeds from the liquidation of long-term
investments of $8,334, and the proceeds from the sale of fixed
assets of $452. In 2007, cash was used for the net purchase of
$40,091 of long-term investments, capital expenditures of
$5,189, the purchase of investment securities of $6,571,
investment in non-consolidated real estate businesses of $750,
increase in the cash surrender value of corporate-owned life
insurance policies of $838 and an increase in restricted assets
of $492 offset by the return of capital contributions from
non-consolidated real estate businesses of $1,000. In 2006, cash
was used for capital expenditures of $9,558, the net purchases
of long-term investments of $35,345, investments in
non-consolidated real estate businesses of $9,850 and increases
in restricted assets of $1,527 offset by the net sales of
investment securities of $10,701, proceeds from the sale of
assets of $1,486 and increases in the cash surrender value of
life insurance policies of $898.
49
In August 2006, we invested $25,000 in Icahn Partners, LP, a
privately managed investment partnership, of which Carl Icahn is
the portfolio manager and the controlling person of the general
partner and manager of the partnership. In September 2007, we
invested an additional $25,000 in Icahn Partners, LP. Based on
public filings, we believe affiliates of Mr. Icahn are the
beneficial owners of approximately 19.4% of our common stock. On
November 1, 2006, we invested $10,000 in Jefferies Buckeye
Fund, LLC, a privately managed investment partnership, of which
Jefferies Asset Management, LLC is the portfolio manager.
Affiliates of Jefferies Asset Management, LLC owned
approximately 5.3% of our common stock at December 31,
2007. We also invested an additional $15,000 in other investment
partnerships in 2007. In April 2008, we elected to withdraw our
investment in Jefferies Buckeye Fund, LLC. We recorded a loss of
$567 during the first quarter of 2008 associated with the
Buckeye Funds performance, which has been included as
Other expense on our consolidated statement of
operations. We received proceeds of $8,328 in May 2008 and
received an additional $900 of proceeds in the first quarter of
2009, which has been included in Other current
assets on our consolidated balance sheet.
Cash used in financing activities was $84,382 and $35,640 in
2008 and 2006 compared to cash provided from financing
activities of $34,093 in 2007. In 2008, cash was primarily used
for distributions on common stock of $103,870, repayments on
debt of $6,329 and deferred financing charges of $137, offset by
the excess tax benefit of options exercised of $18,304, net
borrowing under the revolver of $4,733, debt issuance of $2,831,
and the proceeds from the exercise of options of $86. In 2007,
cash was provided from the issuance of $165,000 of
11% Senior Secured Notes due 2105 discussed below, $8,000
of debt collateralized by Liggetts Mebane facility
discussed below, $1,576 of other equipment financing at Liggett,
$5,100 of proceeds from the exercise of options, $2,055
representing the tax benefit of options exercised offset by
distributions on common stock of $99,249, the repayment of
$35,000 of debt associated with the Medallion purchase and
$6,200 of other equipment debt, deferred financing costs of
$9,985 and net borrowings under the revolver of $2,796.
In 2006, cash was used for repayments of debt of $72,925,
distributions on common stock of $90,138, and deferred financing
charges of $5,280. Cash used was offset primarily by the
proceeds of debt of $118,146, net borrowings under the Liggett
credit facility of $11,986, and proceeds from the exercise of
options of $2,571.
In August 2007, we sold $165,000 principal amount of our
11% Senior Secured Notes due August 15, 2015 in a
private offering to qualified institutional investors in
accordance with Rule 144A under the Securities Act. We
intend to use the net proceeds of the issuance for general
corporate purposes which may include working capital
requirements, the financing of capital expenditures, future
acquisitions, the repayment or refinancing of outstanding
indebtedness, payment of dividends and distributions and the
repurchase of all or any part of our outstanding convertible
notes.
On April 2, 2007, the remaining $35,000 of notes issued in
connection with our April 2002 acquisition of Medallion were
retired upon maturity. Payment was made from our available
working capital.
Liggett. Liggett has a $50,000 credit facility
with Wachovia Bank, N.A. under which $19,515 was outstanding at
December 31, 2008. Availability as determined under the
facility was approximately $16,500 based on eligible collateral
at December 31, 2008. The facility is collateralized by all
inventories and receivables of Liggett and a mortgage on its
manufacturing facility. The facility requires Liggetts
compliance with certain financial and other covenants including
a restriction on Liggetts ability to pay cash dividends
unless Liggetts borrowing availability under the facility
for the
30-day
period prior to the payment of the dividend, and after giving
effect to the dividend, is at least $5,000 and no event of
default has occurred under the agreement, including
Liggetts compliance with the covenants in the credit
facility.
The term of the Wachovia facility expires on March 8, 2012,
subject to automatic renewal for additional one year periods
unless a notice of termination is given by Wachovia or Liggett
at least 60 days prior to such date or the anniversary of
such date. Prime rate loans under the facility bear interest at
a rate equal to the prime rate of Wachovia with Eurodollar rate
loans bearing interest at a rate of 2.0% above Wachovias
adjusted Eurodollar rate. The facility contains covenants that
provide that Liggetts earnings before interest, taxes,
depreciation and amortization, as defined under the facility, on
a trailing twelve-month basis, shall not be less than $100,000
if Liggetts excess availability, as defined, under the
facility is less than $20,000. The covenants also require that
annual capital expenditures, as defined under the facility,
(before a maximum carryover amount of $2,500) shall not exceed
$10,000 during any fiscal year. At December 31, 2008,
management believed that Liggett was in compliance
50
with all covenants under the credit facility; Liggetts
EBITDA, as defined, were approximately $153,000 and $143,000 for
the years ended December 31, 2008 and 2007, respectively.
In August 2007, Wachovia made an $8,000 term loan to 100 Maple
LLC, a subsidiary of Liggett, within the commitment under the
existing credit facility. The $8,000 term loan is collateralized
by the existing collateral securing the credit facility, and is
also collateralized by a lien on certain real property in
Mebane, NC owned by 100 Maple LLC. The Mebane Property also
secures the other obligations of Liggett under the credit
facility. The $8,000 term loan did not increase the $50,000
borrowing amount of the credit facility, but did increase the
outstanding amounts under the credit facility by the amount of
the term loan and proportionately reduces the maximum borrowing
availability under the facility.
In August 2007, Liggett and Wachovia amended the credit facility
to permit the guaranty of the Senior Secured Notes by each of
Liggett and Maple and the pledging of certain assets of Liggett
and Maple on a subordinated basis to secure their guarantees.
The credit facility was also amended to grant to Wachovia a
blanket lien on all the assets of Liggett and Maple, excluding
any equipment pledged to current or future purchase money or
other financiers of such equipment and excluding any real
property, other than the Mebane Property and other real property
to the extent its value is in excess of $5,000. In connection
with the amendment, Wachovia, Liggett, Maple and the collateral
agent for the holders of our Senior Secured Notes entered into
an intercreditor agreement, pursuant to which the liens of the
collateral agent on the Liggett and Maple assets will be
subordinated to the liens of Wachovia on the Liggett and Maple
assets.
In October 2005, Liggett purchased equipment for $4,441 through
a financing agreement, payable in 24 installments of $112 and
then 24 installments of $90. Interest is calculated at 4.89%.
Liggett was required to provide a security deposit equal to 25%
of the funded amount ($1,110).
In December 2005, Liggett purchased equipment for $2,273 through
a financing agreement, payable in 24 installments of $58 and
then 24 installments of $46. Interest is calculated at 5.03%.
Liggett was required to provide a security deposit equal to 25%
of the funded amount ($568).
In August 2006, Liggett purchased equipment for $7,922 through a
financing agreement, payable in 30 installments of $191 and then
30 installments of $103. Interest is calculated at 5.15%.
Liggett was required to provide a security deposit equal to 20%
of the funded amount ($1,584).
In May 2007, Liggett purchased equipment for $1,576 through a
financing agreement, payable in 60 installments of $32. Interest
is calculated at 7.99%.
In August 2008, Liggett purchased equipment for $2,745 through a
financing agreement, payable in 60 installments of $53. Interest
is calculated at 5.94%. Liggett was required to provide a
security deposit equal to approximately 15% of the funded amount
($428).
Each of these equipment loans is collateralized by the purchased
equipment.
Liggett and other United States cigarette manufacturers have
been named as defendants in a number of direct, third-party and
purported class actions predicated on the theory that they
should be liable for damages alleged to have been caused by
cigarette smoking or by exposure to secondary smoke from
cigarettes. We believe, and have been so advised by counsel
handling the respective cases, that Liggett has a number of
valid defenses to claims asserted against it, however,
litigation is subject to many uncertainties. In June 2002, the
jury in an individual case brought under the third phase of the
Engle case awarded $37,500 (subsequently reduced by the
court to $24,835) of compensatory damages against Liggett and
two other defendants and found Liggett 50% responsible for the
damages. It is possible that additional cases could be decided
unfavorably. There are approximately 2,680 Engle progeny
cases, in state and federal courts in Florida, where either
Liggett (and other cigarette manufacturers) or us, or both, were
named as defendants. These cases include approximately 9,620
plaintiffs. Approximately 50 cases are currently scheduled for
trial in 2009. 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 settlements and judgments, including cash required
to bond any appeals, and there is a risk that those requirements
will not be able to be met. An unfavorable outcome of a pending
smoking and health case could encourage the commencement of
additional similar litigation. In recent years, there have been
a number of adverse regulatory,
51
political and other developments concerning cigarette smoking
and the tobacco industry. These developments generally receive
widespread media attention. Neither we nor Liggett are able to
evaluate the effect of these developing matters on pending
litigation or the possible commencement of additional litigation
or regulation. See Note 12 to our consolidated financial
statements and Legislation and Regulation below for
a description of legislation, regulation and litigation.
Except in the case of one individual claim, management is unable
to make a reasonable estimate of 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. It
is possible that our consolidated financial position, results of
operations or cash flows could be materially adversely affected
by an unfavorable outcome in any such tobacco-related litigation.
V.T. Aviation. In February 2001, V.T. Aviation
LLC, a subsidiary of Vector Research Ltd., purchased an airplane
for $15,500 and borrowed $13,175 to fund the purchase. The loan,
which is collateralized by the airplane and a letter of credit
from us for $775, is guaranteed by Vector Research, VGR Holding
and us. The loan is payable in 119 monthly installments of
$125 including annual interest of 2.31% above the
30-day
commercial paper rate, with a final payment of $2,261 in 2011,
based on current interest rates.
VGR Aviation. In February 2002, V.T. Aviation
purchased an airplane for $6,575 and borrowed $5,800 to fund the
purchase. The loan is guaranteed by us. The loan is payable in
119 monthly installments of $40, including annual interest
at 2.75% above the
30-day
commercial paper rate, with a final payment of $2,909 in 2012
based on current interest rates. During the fourth quarter of
2003, this airplane was transferred to our direct subsidiary,
VGR Aviation LLC, which has assumed the debt.
Vector Tobacco. The purchase price for our
2002 acquisition of The Medallion Company, Inc. included $60,000
in notes of Vector Tobacco. Of the notes, $25,000 were repaid in
2004. The remaining $35,000 of notes bore interest at 6.5% per
year, payable semiannually, and were paid in full from our
available working capital on April 2, 2007.
Vector. We believe that we will continue to
meet our liquidity requirements through 2009. Our corporate
expenditures (exclusive of Liggett, Vector Research, Vector
Tobacco and New Valley) and other potential liquidity
requirements over the next 12 months include:
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cash interest expense of approximately $48,500,
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dividends on our outstanding common shares (currently at an
annual rate of approximately $115,000),
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a payment of a retirement benefit under our Supplemental
Retirement Plan in July 2009 to our former Executive Chairman of
approximately $20,750,
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the mandatory redemption by November 15, 2009 of
approximately $14,000 of the outstanding principal amount of our
5% Variable Interest Senior Convertible Notes, and the possible
redemption of an additional approximately $98,000 principal
amount of Notes as a result of an option by the holders to
require us to repurchase some or all of the remaining principal
amount of Notes on November 15, 2009, and
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other corporate expenses and taxes, including a tax payment of
approximately $75,500 in connection with the Philip Morris
brands transaction.
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In order to meet the above liquidity requirements as well as
other anticipated liquidity needs in the normal course of
business, we had cash and cash equivalents of approximately
$211,000, investment securities available for sale of
approximately $28,500, long-term investments with an estimated
value of approximately $55,000 and availability under
Liggetts credit facility of approximately $16,500 at
December 31, 2008. Management currently anticipates that
these amounts, as well as expected cash flows from our
operations, should be sufficient to meet our liquidity needs
during 2009.
Based on the recent market value of our 5% Variable Interest
Convertible Notes, we do not currently anticipate that the
holders of these Notes will exercise their right to require
redemption of the additional Notes on November 15, 2009.
However, no assurance can be provided that we will not be
required to redeem these Notes at that time.
52
In the event our existing cash and cash equivalents and cash
flows from operations are not sufficient to meet our 2009
liquidity needs, we have the ability to take other actions to
provide the liquidity needed in 2009. These actions may include,
among other things, debt or equity financing, which in the
current economic environment may not be available or may only be
available at an increased cost; incenting the holders of our 5%
Variable Interest Senior Convertible Notes, prior to
November 15, 2009, when the holders have the option to
require redemption of their Notes, to convert such Notes or to
modify the optional redemption terms, through issuance of
additional shares of our common stock or cash payments;
modifying our dividend policy (which would also reduce the
amount of cash interest due on our convertible debt); and
selling some or all of our investment securities and long-term
investments, the proceeds from which may be impacted by our
ability to liquidate such investments. However, no assurances
can be provided that all of the above measures can be achieved.
We currently anticipate funding our expenditures for current
operations and required principal payments with available cash
resources, proceeds from public
and/or
private debt and equity financing, the other actions described
above, management fees and other payments from subsidiaries. New
Valley may acquire or seek to acquire additional operating
businesses through merger, purchase of assets, stock acquisition
or other means, or to make other investments, which may limit
its ability to make such distributions.
On a quarterly basis, we evaluate our investments to determine
whether an impairment has occurred. If so, we also make a
determination if such impairment is considered temporary or
other-than-temporary. We believe that the assessment of
temporary or other-than-temporary impairment is facts and
circumstances driven. However, among the matters that are
considered in making such a determination are the period of time
the investment has remained below its cost or carrying value,
the likelihood of recovery given the reason for the decrease in
market value and our original expected holding period of the
investment.
In August 2007, we sold $165,000 of our 11% Senior Secured
Notes due 2015 in a private offering to qualified institutional
investors in accordance with Rule 144A of the Securities
Act of 1933. The Senior Secured Notes pay interest on a
semi-annual basis at a rate of 11% per year and mature on
August 15, 2015. We may redeem some or all of the Senior
Secured Notes at any time prior to August 15, 2011 at a
make-whole redemption price. On or after August 15, 2011 we
may redeem some or all of the Senior Secured Notes at a premium
that will decrease over time, plus accrued and unpaid interest
and liquidated damages, if any, to the redemption date. At any
time prior to August 15, 2010, we may on any one or more
occasions redeem up to 35% of the aggregate principal amount of
the Senior Secured Notes with the net proceeds of certain equity
offerings at 111% of the aggregate principal amount thereof,
plus accrued and unpaid interest and liquidated damages, if any,
to the redemption date. In the event of a change of control, as
defined in the indenture governing the Senior Secured Notes,
each holder of the Senior Secured Notes may require us to
repurchase some or all of its Senior Secured Notes at a
repurchase price equal to 101% of their aggregate principal
amount plus accrued and unpaid interest and liquidated damages,
if any to the date of purchase.
The Senior Secured Notes are fully and unconditionally
guaranteed on a joint and several basis by all of our
wholly-owned domestic subsidiaries that are engaged in the
conduct of our cigarette businesses. In addition, some of the
guarantees are collateralized by second priority or first
priority security interests in certain collateral of some of the
subsidiary guarantors pursuant to security and pledge agreements.
The indenture contains covenants that restrict the payment of
dividends by us if our consolidated earnings before interest,
taxes, depreciation and amortization, which is defined in the
indenture as Consolidated EBITDA, for the most recently ended
four full quarters is less than $50,000. The indenture also
restricts the incurrence of debt if our Leverage Ratio and our
Secured Leverage Ratio, as defined in the indenture, exceed 3.0
and 1.5, respectively. Our Leverage Ratio is defined in the
indenture as the ratio of our and our guaranteeing
subsidiaries total debt less the fair market value of our
cash, investments in marketable securities and long-term
investments to Consolidated EBITDA, as defined in the indenture.
Our Secured Leverage Ratio is defined in the indenture in the
same manner as
53
the Leverage Ratio, except that secured indebtedness is
substituted for indebtedness. The following table summarizes the
requirements of these financial covenants and the results of the
calculation, as defined by the indenture.
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Indenture
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December 31,
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December 31,
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Covenant
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Requirement
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2008
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2007
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Consolidated EBITDA, as defined
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$
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50,000
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$
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154,053
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$
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137,820
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Leverage ratio, as defined
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<3.0 to 1
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0.1 to 1
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Negative
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Secured leverage ratio, as defined
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<1.5 to 1
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Negative
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Negative
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In July 2006, we sold $110,000 of our 3.875% variable interest
senior convertible debentures due 2026 in a private offering to
qualified institutional buyers in accordance with Rule 144A
under the Securities Act of 1933. The debentures pay interest on
a quarterly basis at a rate of 3.875% per annum, with an
additional amount of interest payable on each interest payment
date. The additional amount is based on the amount of cash
dividends paid by us on our common stock during the prior
three-month period ending on the record date for such interest
payment multiplied by the total number of shares of our common
stock into which the debentures will be convertible on such
record date (together, the Debenture Total
Interest). Notwithstanding the foregoing, however, the
interest payable on each interest payment date shall be the
higher of (i) the Debenture Total Interest and
(ii) 5.75% per annum. The debentures are convertible into
our common stock, at the holders option. The conversion
price, which was $18.58 per share at December 31, 2008, is
subject to adjustment for various events, including the issuance
of stock dividends.
The debentures will mature on June 15, 2026. We must redeem
10% of the total aggregate principal amount of the debentures
outstanding on June 15, 2011. In addition to such
redemption amount, we will also redeem on June 15, 2011 and
at the end of each interest accrual period thereafter an
additional amount, if any, of the debentures necessary to
prevent the debentures from being treated as an Applicable
High Yield Discount Obligation under the Internal Revenue
Code. The holders of the debentures will have the option on
June 15, 2012, June 15, 2016 and June 15, 2021 to
require us to repurchase some or all of their remaining
debentures. The redemption price for such redemptions will equal
100% of the principal amount of the debentures plus accrued
interest. If a fundamental change occurs, we will be required to
offer to repurchase the debentures at 100% of their principal
amount, plus accrued interest and, under certain circumstances,
a make-whole premium.
Between November 2004 and April 2005, we sold $111,864 principal
amount of our 5% variable interest senior convertible notes due
November 15, 2011 in a private offering to qualified
institutional investors in accordance with Rule 144A under
the Securities Act of 1933. The notes pay interest on a
quarterly basis at a rate of 5% per year with an additional
amount of interest payable on the notes on each interest payment
date. This additional amount is based on the amount of cash
dividends actually paid by us per share on our common stock
during the prior three-month period ending on the record date
for such interest payment multiplied by the number of shares of
our common stock into which the notes are convertible on such
record date (together, the Notes Total Interest).
Notwithstanding the foregoing, however, during the period prior
to November 15, 2006, the interest payable on each interest
payment date is the higher of (i) the Notes Total Interest
and
(ii) 63/4%
per year. The notes are convertible into our common stock, at
the holders option. The conversion price, which was of
$15.96 at December 31, 2008, is subject to adjustment for
various events, including the issuance of stock dividends.
The notes will mature on November 15, 2011. We must redeem
12.5% of the total aggregate principal amount of the notes
outstanding on November 15, 2009. In addition to such
redemption amount, we will also redeem on November 15, 2009
and on each interest accrual period thereafter an additional
amount, if any, of the notes necessary to prevent the notes from
being treated as an Applicable High Yield Discount
Obligation under the Internal Revenue Code. The holders of
the notes will have the option on November 15, 2009 to
require us to repurchase some or all of their remaining notes.
The redemption price for such redemptions will equal 100% of the
principal amount of the notes plus accrued interest. If a
fundamental change occurs, we will be required to offer to
repurchase the notes at 100% of their principal amount, plus
accrued interest and, under certain circumstances, a
make-whole premium.
On July 20, 2006, we entered into a settlement with the
Internal Revenue Service with respect to the Philip Morris brand
transaction where a subsidiary of Liggett contributed three of
its premium cigarette brands to Trademarks LLC, a newly-formed
limited liability company. In such transaction, Philip Morris
acquired an option
54
to purchase the remaining interest in Trademarks for a
90-day
period commencing in December 2008, and we have an option to
require Philip Morris to purchase the remaining interest for a
90-day
period commencing in March 2010. We deferred for income tax
purposes, a portion of the gain on the transaction until such
time as the options were exercised. In connection with an
examination of our 1998 and 1999 federal income tax returns, the
Internal Revenue Service issued to us in September 2003 a notice
of proposed adjustment. The notice asserted that, for tax
reporting purposes, the entire gain should have been recognized
in 1998 and in 1999 in the additional amounts of $150,000 and
$129,900, respectively, rather than upon the exercise of the
options during the
90-day
periods commencing in December 2008 or in March 2010. As part of
the settlement, we agreed that $87,000 of the gain on the
transaction would be recognized by us as income for tax purposes
in 1999 and that the balance of the remaining gain, net of
previously capitalized expenses of $900, ($192,000) will be
recognized by us as income in 2009 upon exercise of the options.
We paid during the third and fourth quarters of 2006
approximately $41,400, including interest, with respect to the
gain recognized in 1999. As a result of the settlement, we
reduced, during the third quarter of 2006, the excess portion
($11,500) of a previously established reserve in our
consolidated financial statements, which resulted in a decrease
in such amount in reported income tax expense in our
consolidated statements of operations.
We adopted FIN 48 as of January 1, 2007. FIN 48
requires an entity to recognize the financial statement impact
of a tax position when it is more likely than not that the
position will be sustained upon examination. If the tax position
meets the more-likely-than-not recognition threshold, the tax
effect is recognized at the largest amount of the benefit that
is greater than 50% likely of being realized upon ultimate
settlement. FIN 48 requires that a liability created for
unrecognized deferred tax benefits shall be presented as a
liability and not combined with deferred tax liabilities or
assets. We did not recognize any adjustment in the liability for
unrecognized tax benefits, as a result of the adoption of
FIN 48 that impacted our accumulated deficit at
December 31, 2006. The total amount of unrecognized tax
benefits was $11,685 at January 1, 2007 and decreased
$1,080 during the year ended December 31, 2007. The total
amount of tax benefits that, if recognized, would impact the
effective tax rate was $11,685 and $10,605 at December 31,
2006 and December 31, 2007, respectively. The total amount
of unrecognized tax benefits was $10,605 at January 1, 2008
and decreased $3,102 during the year ended December 31,
2008. The total amount of tax benefits that, if recognized,
would impact the effective tax rate was $7,503 and $10,605 at
December 31, 2008 and December 31, 2007, respectively.
We or our subsidiaries file U.S. federal income tax returns
and returns with various state and local jurisdictions. With few
exceptions, we are no longer subject to state and local income
tax examinations by tax authorities for years ending before
2003. In July 2006, we entered into a settlement with the IRS
for taxable years ending on and before December 31, 1999.
The IRS has not audited our U.S. income tax returns for
years ending after December 31, 1999. We anticipate net
reductions to our total unrecognized tax benefits within the
next 12 months may potentially be approximately $2,300.
We continue to classify all interest and penalties as income tax
expense. As of the beginning of fiscal 2007, the liability for
tax-related interest and penalties amounted to approximately
$2,100. At December 31, 2008 and 2007, the liability for
tax-related interest and penalties amounted to approximately
$2,191 and $2,810, respectively.
Our consolidated balance sheets include deferred income tax
assets and liabilities, which represent temporary differences in
the application of accounting rules established by generally
accepted accounting principles and income tax laws. As of
December 31, 2008, our deferred income tax liabilities
exceeded our deferred income tax assets by $92,850. The largest
component of our deferred tax liabilities exists because of
differences that resulted from the Philip Morris brand
transaction discussed above.
55
Long-Term
Financial Obligations and Other Commercial Commitments
Our significant long-term contractual obligations as of
December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
|
Total
|
|
|
Long-term debt(1)
|
|
$
|
39,184
|
|
|
$
|
4,395
|
|
|
$
|
114,017
|
(8)
|
|
$
|
4,247
|
|
|
$
|
5,516
|
|
|
$
|
264,000
|
(9)
|
|
$
|
431,359
|
|
Operating leases(2)
|
|
|
4,069
|
|
|
|
2,718
|
|
|
|
2,654
|
|
|
|
2,587
|
|
|
|
999
|
|
|
|
|
|
|
|
13,027
|
|
Inventory purchase commitments(3)
|
|
|
8,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,658
|
|
Capital expenditure purchase commitments(4)
|
|
|
1,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,072
|
|
New Valley obligations under limited partnership agreements
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Interest payments(5)
|
|
|
50,816
|
|
|
|
51,355
|
|
|
|
49,161
|
|
|
|
33,474
|
|
|
|
34,037
|
|
|
|
306,910
|
|
|
|
525,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total(6),(7)
|
|
$
|
103,911
|
|
|
$
|
58,468
|
|
|
$
|
165,832
|
|
|
$
|
40,308
|
|
|
$
|
40,552
|
|
|
$
|
570,910
|
|
|
$
|
979,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Long-term debt is shown before discount and assumes that only
the mandatory redemption amounts will be retired on our 5%
Variable Interest Senior Convertible Notes due 2011 (12.5% and
87.5% of the principal balance in 2009 and 2011, respectively)
and our 3.875% Variable Interest Senior Convertible Debentures
due 2026 (10% and 90% of the principal balance in 2011 and 2026,
respectively). For more information concerning our long-term
debt, see Liquidity and Capital Resources above and
Note 7 to our consolidated financial statements. |
|
(2) |
|
Operating lease obligations represent estimated lease payments
for facilities and equipment. The amounts presented do not
include amounts scheduled to be received under non-cancelable
operating subleases of $1,028 in 2009, $946 in 2010, $965 in
2011, $965 in 2012, $402 in 2013 and $0 thereafter. See
Note 8 to our consolidated financial statements. |
|
(3) |
|
Inventory purchase commitments represent purchase commitments
under our leaf inventory management program. See Note 4 to
our consolidated financial statements. |
|
(4) |
|
Capital expenditure purchase commitments represent purchase
commitments for machinery and equipment at Liggett and Vector
Tobacco. See Note 5 to our consolidated financial
statements. |
|
(5) |
|
Interest payments are based on current interest rates at
December 31, 2008 and the assumption our current policy of
a cash dividend of $0.40 per quarter and an annual 5% stock
dividend will continue. In addition, interest payments have been
computed assuming that only the mandatory amounts will be
retired on our convertible debt as discussed in Note
(1) above. For more information concerning our long-term
debt, see Liquidity and Capital Resources above and
Note 7 to our consolidated financial statements. |
|
(6) |
|
Not included in the above table is approximately $92,850 of net
deferred tax liabilities and $7,503 of unrecognized income tax
benefits. |
|
(7) |
|
Because their future cash outflows are uncertain, the above
table excludes our pension and postretirement benefit plans,
which includes a $20,760 payment under our Supplemental
Retirement Plan in 2009, contractual guarantees, and net
deferred tax liabilities of $92,850. |
|
(8) |
|
We may be required to redeem up to approximately $97,881 of this
amount in 2009 in accordance with the terms of our 5% Variable
Interest Senior Convertible Notes due 2011. |
|
(9) |
|
We may be required to redeem $99,000 of this amount in 2011 in
accordance with the terms of our 3.875% Variable Interest Senior
Convertible Debentures due 2026. |
Payments under the Master Settlement Agreement, discussed in
Note 12 to our consolidated financial statements, and the
federal tobacco quota legislation, discussed in
Legislation and Regulation below, are
56
excluded from the table above, as the payments are subject to
adjustment for several factors, including inflation, overall
industry volume, our market share and the market share of
non-participating manufacturers.
Off-Balance
Sheet Arrangements
We have various agreements in which we may be obligated to
indemnify the other party with respect to certain matters.
Generally, these indemnification clauses are included in
contracts arising in the normal course of business under which
we customarily agree to hold the other party harmless against
losses arising from a breach of representations related to such
matters as title to assets sold and licensed or certain
intellectual property rights. Payment by us under such
indemnification clauses is generally conditioned on the other
party making a claim that is subject to challenge by us and
dispute resolution procedures specified in the particular
contract. Further, our obligations under these arrangements may
be limited in terms of time
and/or
amount, and in some instances, we may have recourse against
third parties for certain payments made by us. It is not
possible to predict the maximum potential amount of future
payments under these indemnification agreements due to the
conditional nature of our obligations and the unique facts of
each particular agreement. Historically, payments made by us
under these agreements have not been material. As of
December 31, 2008, we were not aware of any indemnification
agreements that would or are reasonably expected to have a
current or future material adverse impact on our financial
position, results of operations or cash flows.
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 tobacco distributors to secure, on
reasonable terms, tax stamp bonds required by state and local
governments for the distribution of cigarettes. 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 we believe the fair value of Liggett Vector
Brands obligation under the agreement was immaterial at
December 31, 2008.
At December 31, 2008, we had outstanding approximately
$2,415 of letters of credit, collateralized by certificates of
deposit. The letters of credit have been issued as security
deposits for leases of office space, to secure the performance
of our subsidiaries under various insurance programs and to
provide collateral for various subsidiary borrowing and capital
lease arrangements.
As of December 31, 2008, New Valley has committed to fund
up to $200 to a non-consolidated real estate business and up to
$112 to an investment partnership in which it is an investor. We
have agreed, under certain circumstances, to guarantee up to
$2,000 of debt of another non-consolidated real estate business.
We believe the fair value of our guarantee was negligible as of
December 31, 2008.
Market
Risk
We are exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity
prices. We seek to minimize these risks through our regular
operating and financing activities and our long-term investment
strategy. Our market risk management procedures cover all market
risk sensitive financial instruments.
As of December 31, 2008, approximately $36,124 of our
outstanding debt at face value had variable interest rates
determined by various interest rate indices, which increases the
risk of fluctuating interest rates. Our exposure to market risk
includes interest rate fluctuations in connection with our
variable rate borrowings, which could adversely affect our cash
flows. As of December 31, 2008, we had no interest rate
caps or swaps. Based on a hypothetical 100 basis point
increase or decrease in interest rates (1%), our annual interest
expense could increase or decrease by approximately $361.
In addition, as of December 31, 2008, approximately $98,306
($221,864 principal amount) of outstanding debt had a variable
interest rate determined by the amount of the dividends on our
common stock. Included in the
57
difference between the stated value of the debt and carrying
value are embedded derivatives, which were estimated at $77,245
at December 31, 2008.
Changes to the estimated fair value of these embedded
derivatives are reflected quarterly within our statements of
operations as Changes in fair value of derivatives
embedded within convertible debt. The value of the
embedded derivative is contingent on changes in interest rates
of debt instruments maturing over the duration of the
convertible debt as well as projections of future cash and stock
dividends over the term of the debt and changes in the closing
stock price at the end of each quarterly period. Based on a
hypothetical 100 basis point increase or decrease in
interest rates (1%), our annual Changes in fair value of
derivatives embedded within convertible debt could
increase or decrease by approximately $2,654 with approximately
$308 resulting from the embedded derivative associated with our
5% variable interest senior convertible notes due 2011 and the
remaining $2,346 resulting from the embedded derivative
associated with our 3.875% variable interest senior convertible
debentures due 2026. An increase in our quarterly dividend rate
by $0.10 per share would increase interest expense by
approximately $4,950 per year.
We have estimated the fair market value of the embedded
derivatives based principally on the results of a valuation
model. The estimated fair value of the derivatives embedded
within the convertible debt is based principally on the present
value of future dividend payments expected to be received by the
convertible debt holders over the term of the debt. The discount
rate applied to the future cash flows is estimated based on a
spread in yield of our debt when compared to risk-free
securities with the same duration; thus, a readily determinable
fair market value of the embedded derivatives is not available.
The valuation model assumes our future dividend payments 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 valuation
also considers items, including current and future dividends and
the volatility of Vectors stock price. The range of
estimated fair market values of our embedded derivatives was
between $75,990 and $78,544. We recorded the fair market value
of our embedded derivatives at the midpoint of the inputs at
$77,244 as of December 31, 2008. The estimated fair market
value of our embedded derivatives could change significantly
based on future market conditions.
We held investment securities available for sale totaling
$28,518 at December 31, 2008, which includes
13,888,889 shares of Ladenburg Thalmann Financial Services
Inc., which were carried at $10,000, and 5,057,110 shares
of Opko Health, Inc., which were carried at $8,193. In March
2008, we acquired 2,800,000 shares of Opko in a private
placement. These shares have not been registered for resale but
are expected to be freely tradable within one year. In 2008, we
acquired 2,259,796 shares of Cardo Medical, Inc. for $500.
The shares were carried at $3,277 as of December 31, 2008.
These shares have not been registered for resale but are
expected to be freely tradable within one year. See Note 3
to our consolidated financial statements. Adverse market
conditions could have a significant effect on the value of these
investments.
New Valley also holds long-term investments in various
investment partnerships. These investments are illiquid, and
their ultimate realization is subject to the performance of the
underlying entities. We recorded a loss of $21,900 in 2008 due
to the performance of three of our long-term investments in
various investment funds in 2008. During 2008, one of our
long-term investments was impaired due to a portion of its
underlying assets being held in an account with the European
subsidiary of Lehman Brothers Holdings Inc. while our other
long-term investments were impaired as a result of the
funds performances in 2008.
New
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, with early
adoption permitted provided the entity also elects to apply the
provisions of SFAS No. 157. We have not elected to use
the fair value option.
In December 2007, the FASB issued SFAS No. 141(R), a
revised version of SFAS No. 141, Business
Combinations. The revision is intended to simplify
existing guidance and converge rulemaking under
58
U.S. Generally Accepted Accounting Principles
(GAAP) with international accounting rules. This
statement applies prospectively to business combinations where
the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15,
2008. An entity may not apply it before that date. The new
standard also converges financial reporting under U.S. GAAP
with international accounting rules. We are currently assessing
the impact, if any, of SFAS No. 141(R) on its
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133.
SFAS No. 161 seeks qualitative disclosures about the
objectives and strategies for using derivatives, quantitative
data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent
features in hedged positions. SFAS No. 161 also seeks
enhanced disclosure around derivative instruments in financial
statements, accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and how hedges affect an entitys
financial position, financial performance and cash flows.
SFAS No. 161 is effective for us as of January 1,
2009 and we do not expect the adoption of SFAS No. 161
to have a material impact on our consolidated results of
operations, financial position or cash flows.
On May 9, 2008, the FASB issued FASB Staff Position
No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP No. APB
14-1).
We are currently assessing the impact of FSP No. APB
14-1 on our
consolidated financial statements.
On June 16, 2008, the FASB issued FASB Staff Position
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities, which
states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share under the
two-class method. The guidance is effective for financial
statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years.
We are currently assessing the impact of FSP
No. EITF 03-6-1
on our consolidated financial statements.
In October 2008, the FASB issued FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, which addresses the
application of SFAS 157 for illiquid financial instruments.
FSP
SFAS 157-3
clarifies that approaches to determining fair value other than
the market approach may be appropriate when the market for a
financial asset is not active.
Legislation
and Regulation
Reports with respect to the alleged harmful physical effects of
cigarette smoking have been publicized for many years and, in
the opinion of Liggetts management, have had and may
continue to have an adverse effect on cigarette sales. Since
1964, the Surgeon General of the United States and the Secretary
of Health and Human Services have released a number of reports
which state that cigarette smoking is a causative factor with
respect to a variety of health hazards, including cancer, heart
disease and lung disease, and have recommended various
government actions to reduce the incidence of smoking. In 1997,
Liggett publicly acknowledged that, as the Surgeon General and
respected medical researchers have found, smoking causes health
problems, including lung cancer, heart and vascular disease, and
emphysema.
Since 1966, federal law has required that cigarettes
manufactured, packaged or imported for sale or distribution in
the United States include specific health warnings on their
packaging. Since 1972, Liggett and the other cigarette
manufacturers have included the federally required warning
statements in print advertising and on certain categories of
point-of-sale display materials relating to cigarettes. The
Federal Cigarette Labeling and Advertising Act (FCLA
Act) requires that packages of cigarettes distributed in
the United States and cigarette advertisements in the United
States bear one of the following four warning statements:
SURGEON GENERALS WARNING: Smoking Causes Lung
Cancer, Heart Disease, Emphysema, And May Complicate
Pregnancy; SURGEON GENERALS WARNING: Quitting
Smoking Now Greatly Reduces Serious Risks to Your Health;
SURGEON GENERALS WARNING: Smoking By Pregnant Women
May Result in Fetal Injury, Premature Birth, And Low Birth
Weight; and SURGEON GENERALS WARNING:
Cigarette Smoke Contains Carbon Monoxide. The law also
requires that each person who manufactures, packages or imports
cigarettes annually provide to the Secretary of Health and Human
Services a list of ingredients added to tobacco in the
manufacture of
59
cigarettes. Annual reports to the United States Congress are
also required from the Secretary of Health and Human Services as
to current information on the health consequences of smoking and
from the Federal Trade Commission (FTC) on the
effectiveness of cigarette labeling and current practices and
methods of cigarette advertising and promotion. Both federal
agencies are also required annually to make such recommendations
as they deem appropriate with regard to further legislation. It
is possible that proposed legislation providing for regulation
of cigarettes by the Food and Drug Administration
(FDA), if enacted, could significantly change the
warning requirements currently mandated by the FCLA Act. In
addition, since 1997, Liggett has included the warning
Smoking is Addictive on its cigarette packages and
point-of-sale materials.
In January 1993, the Environmental Protection Agency
(EPA) released a report on the respiratory effect of
secondary smoke which concludes that secondary smoke is a known
human lung carcinogen in adults and in children, causes
increased respiratory tract disease and middle ear disorders and
increases the severity and frequency of asthma. In June 1993,
the two largest of the major domestic cigarette manufacturers,
together with other segments of the tobacco and distribution
industries, commenced a lawsuit against the EPA seeking a
determination that the EPA did not have the statutory authority
to regulate secondary smoke, and that given the scientific
evidence and the EPAs failure to follow its own guidelines
in making the determination, the EPAs classification of
secondary smoke was arbitrary and capricious. In July 1998, a
federal district court vacated those sections of the report
relating to lung cancer, finding that the EPA may have reached
different conclusions had it complied with relevant statutory
requirements. The federal government appealed the courts
ruling. In December 2002, the United States Court of Appeals for
the Fourth Circuit rejected the industry challenge to the EPA
report ruling that it was not subject to court review. Issuance
of the report may encourage efforts to limit smoking in public
areas.
In August 1996, the FDA published in the Federal Register a
Final rule classifying tobacco as a drug or
medical device, asserting jurisdiction over the
manufacture and marketing of tobacco products and imposing
restrictions on the sale, advertising and promotion of tobacco
products. Litigation was commenced challenging the legal
authority of the FDA to assert such jurisdiction, as well as
challenging the constitutionality of the rule. In March 2000,
the United States Supreme Court ruled that the FDA does not have
the power to regulate tobacco. Liggett supported the FDA rule
and began to phase in compliance with certain of the proposed
FDA regulations. Since the Supreme Court decision, various
proposals and recommendations have been made for additional
federal and state legislation to regulate cigarette
manufacturers. Congressional advocates of FDA regulation have
introduced legislation that would give the FDA authority to
regulate the manufacture, sale, distribution and labeling of
tobacco products, thereby allowing the FDA to reinstate its
prior regulations or adopt new or additional regulations. In
October 2004, the Senate passed a bill, which did not become
law, providing for FDA regulation of tobacco products. A
substantially similar bill was reintroduced in Congress in
February 2007. This legislation was approved in August 2007, by
the Senate Committee on Health, Education, Labor and Pensions,
but was not taken up by the full Senate prior to adjournment.
Companion legislation was approved by the House Committee on
Energy and Commerce in April 2008 and was passed by the full
House of Representatives in July 2008. The House legislation
includes a provision granting certain phase-in exemptions for
small manufacturers, which would not be applicable to us. While
we do not know whether FDA regulation over tobacco products will
be approved by this Congress and signed into law, we expect such
legislation will be introduced, and considered, in this
Congress. FDA regulation of tobacco products could have a
material adverse effect on us.
Liggett and Vector Tobacco provide ingredient information
annually, as required by law, to the states of Massachusetts,
Texas and Minnesota. Several other states are considering
ingredient disclosure legislation, and the proposed legislation
under consideration by Congress providing for FDA regulation
also calls for, among other things, ingredient disclosure.
In October 2004, the Fair and Equitable Tobacco Reform Act of
2004 (FETRA) was signed into law. FETRA provides for
the elimination of the federal tobacco quota and price support
program through an industry funded buyout of tobacco growers and
quota holders. Pursuant to the legislation, manufacturers of
tobacco products will be assessed $10,140,000 over a ten year
period to compensate tobacco growers and quota holders for the
elimination of their quota rights. Cigarette manufacturers will
initially be responsible for 96.3% of the assessment (subject to
adjustment in the future), which will be allocated based on
relative unit volume of domestic cigarette shipments. Management
currently estimates that Liggetts and Vector
Tobaccos assessment will be approximately $23,500 for
60
the fifth year of the program which began January 1, 2009.
The relative cost of the legislation to the three largest
cigarette manufacturers will likely be less than the cost to
smaller manufacturers, including Liggett and Vector Tobacco,
because one effect of the legislation is that the three largest
manufacturers will no longer be obligated to make certain
contractual payments, commonly known as Phase II payments,
that they agreed in 1999 to make to tobacco-producing states.
The ultimate impact of this legislation cannot be determined,
but there is a risk that smaller manufacturers, such as Liggett
and Vector Tobacco, will be disproportionately affected by the
legislation, which could have a material adverse effect on us.
Cigarettes are subject to substantial and increasing federal,
state and local excise taxes. In February 2009, Federal
legislation to reauthorize the State Childrens Health
Insurance Program (SCHIP), which includes funding provisions
that increase the federal cigarette excise tax from $0.39 to
$1.01 per pack, was enacted, effective April 1, 2009. State
excise taxes vary considerably and, when combined with sales
taxes, local taxes and the federal excise tax, may exceed $4.00
per pack. In 2008, seven states and the District of Colombia
enacted increases in excise taxes and various states and other
jurisdictions are considering, or have pending, legislation
proposing further state excise tax increases. Management
believes increases in excise and similar taxes have had, and
will continue to have, an adverse effect on sales of cigarettes.
Over the last several years a majority of states have enacted
virtually identical legislation requiring cigarettes to meet a
laboratory test standard for reduced ignition propensity.
Cigarettes that meet this standard are referred to as fire
standards compliant or FSC, and are sometimes
commonly called self-extinguishing. Effective
January 1, 2009, substantially all of the cigarettes that
Liggett and Vector Tobacco manufacture are fire standards
compliant. Compliance with such legislation could be burdensome
and costly and could harm the business of Liggett and Vector
Tobacco, particularly if there were to be varying standards from
state to state.
Federal or state regulators may object to Vector Tobaccos
low nicotine and nicotine-free cigarette products and reduced
risk cigarette products it may develop as unlawful or allege
they bear deceptive or unsubstantiated product claims, and seek
the removal of the products from the marketplace or significant
changes to advertising. Allegations by federal or state
regulators, public health organizations and other tobacco
manufacturers that Vector Tobaccos products are unlawful,
or that its public statements or advertising contain misleading
or unsubstantiated health claims or product comparisons, may
result in litigation or governmental proceedings. Various
proposals have been made for federal, state and international
legislation to regulate cigarette manufacturers generally, and
reduced constituent cigarettes specifically. It is possible that
laws and regulations may be adopted covering issues like the
manufacture, sale, distribution, advertising and labeling of
tobacco products as well as any express or implied health claims
associated with reduced risk, low nicotine and nicotine-free
cigarette products and the use of genetically modified tobacco.
A system of regulation by agencies such as the FDA, the FTC or
the United States Department of Agriculture may be established.
The FTC has expressed interest in the regulation of tobacco
products which bear reduced carcinogen claims. The ultimate
outcome of any of the foregoing cannot be predicted, but any of
the foregoing could have a material adverse effect on us.
In November 2008, the Federal Trade Commission rescinded
guidance it issued in 1966 that generally permitted statements
concerning cigarette tar and nicotine yields if they
were based on the Cambridge Filter Method, sometimes called the
FTC method. In its rescission notice, the FTC also indicated
that advertisers should no longer use terms suggesting the
FTCs endorsement or approval of any specific test method,
including terms such as per FTC Method or other
phrases that state or imply FTC endorsement or approval of the
Cambridge Filter Method or other machine-based methods for
measuring cigarette tar or nicotine yields. Also in
its rescission notice, the FTC indicated that cigarette
descriptors such as light and ultra
light have not been defined by the FTC, nor has the FTC
provided any guidance or authorization for their use. The FTC
indicated that to the extent descriptors are used in a manner
that convey an overall impression that is false, misleading, or
unsubstantiated, such use could be actionable. The FTC further
indicated that companies must ensure that any continued use of
descriptors does not convey an erroneous or unsubstantiated
message that a particular cigarette presents a reduced risk of
harm or is otherwise likely to mislead consumers. The impact of
the rescission of the FTC guidance is currently being evaluated
by us, but in response to the FTCs action, we have removed
all reference to tar and nicotine testing from our
point-of-sale advertising. To the extent descriptors are no
longer used to market or promote our cigarettes, this may have a
material adverse effect on us.
61
A wide variety of federal, state and local laws limit the
advertising, sale and use of cigarettes, and these laws have
proliferated in recent years. For example, many local laws
prohibit smoking in restaurants and other public places, and
many employers have initiated programs restricting or
eliminating smoking in the workplace. There are various other
legislative efforts pending on the federal and state level which
seek to, among other things, eliminate smoking in public places,
further restrict displays and advertising of cigarettes, require
additional warnings, including graphic warnings, on cigarette
packaging and advertising, ban vending machine sales and curtail
affirmative defenses of tobacco companies in product liability
litigation. This trend has had, and is likely to continue to
have, an adverse effect on us.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and
political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry. 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.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains
forward-looking statements within the meaning of the
federal securities law. Forward-looking statements include
information relating to our intent, belief or current
expectations, primarily with respect to, but not limited to:
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economic outlook,
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capital expenditures,
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cost reduction,
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new legislation,
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cash flows,
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operating performance,
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litigation,
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impairment charges and cost saving associated with
restructurings of our tobacco operations, and
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related industry developments (including trends affecting our
business, financial condition and results of operations).
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We identify forward-looking statements in this report by using
words or phrases such as anticipate,
believe, estimate, expect,
intend, may be, objective,
plan, seek, predict,
project and will be and similar words or
phrases or their negatives.
The forward-looking information involves important risks and
uncertainties that could cause our actual results, performance
or achievements to differ materially from our anticipated
results, performance or achievements expressed or implied by the
forward-looking statements. Factors that could cause actual
results to differ materially from those suggested by the
forward-looking statements include, without limitation, the
following:
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general economic and market conditions and any changes therein,
due to acts of war and terrorism or otherwise,
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impact of current crises in capital and credit markets,
including any continued worsening,
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governmental regulations and policies,
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effects of industry competition,
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impact of business combinations, including acquisitions and
divestitures, both internally for us and externally in the
tobacco industry,
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62
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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,
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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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impact of substantial increases in federal, state and local
excise taxes,
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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
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risks inherent in our new product development initiatives.
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Further information on risks and uncertainties specific to our
business include the risk factors discussed above under
Item 1A. Risk Factors and in
Managements Discussion and Analysis of Financial
Condition and Results of Operations.
Although we believe the expectations reflected in these
forward-looking statements are based on reasonable assumptions,
there is a risk that these expectations will not be attained and
that any deviations will be material. The forward-looking
statements speak only as of the date they are made.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The information under the caption Managements
Discussion and Analysis of Financial Condition and Results of
Operations Market Risk is incorporated herein
by reference.
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ITEM 8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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Our Consolidated Financial Statements and Notes thereto,
together with the report thereon of PricewaterhouseCoopers LLP
dated March 2, 2009, are set forth beginning on
page F-1
of this report.
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ITEM 9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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None.
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ITEM 9A.
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CONTROLS
AND PROCEDURES
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Conclusions
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we have evaluated the effectiveness
of our disclosure controls and procedures as of the end of the
period covered by this report, and, based on their evaluation,
our principal executive officer and principal financial officer
have concluded that these controls and procedures are effective.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2008.
The effectiveness of our internal control over financial
reporting as of December 31, 2008 has been audited by
PricewaterhouseCoopers LLP, an independent registered certified
public accounting firm, as stated in their report, which is
included herein.
63
Material
Changes in Internal Control
There were no changes in our internal control over financial
reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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ITEM 9B.
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OTHER
INFORMATION
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None.
PART III
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ITEM 10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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This information is contained in our definitive Proxy Statement
for our 2009 Annual Meeting of Stockholders, to be filed with
the SEC not later than 120 days after the end of our fiscal
year covered by this report pursuant to Regulation 14A
under the Securities Exchange Act of 1934, and incorporated
herein by reference.
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ITEM 11.
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EXECUTIVE
COMPENSATION
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This information is contained in the Proxy Statement and
incorporated herein by reference.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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This information is contained in the Proxy Statement and
incorporated herein by reference.
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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This information is contained in the Proxy Statement and
incorporated herein by reference.
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ITEM 14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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This information is contained in the Proxy Statement and
incorporated herein by reference.
PART IV
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a)(1) INDEX TO 2008 CONSOLIDATED FINANCIAL STATEMENTS:
Our consolidated financial statements and the notes thereto,
together with the report thereon of PricewaterhouseCoopers LLP
dated March 2, 2009, appear beginning on
page F-1
of this report.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
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Schedule II Valuation and Qualifying Accounts
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Page F-75
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64
(a)(3) EXHIBITS
(a) The following is a list of exhibits filed herewith as
part of this Annual Report on
Form 10-K:
INDEX
OF EXHIBITS
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Exhibit
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No.
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Description
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* 3
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.1
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Amended and Restated Certificate of Incorporation of Vector
Group Ltd. (formerly known as Brooke Group Ltd.)
(Vector) (incorporated by reference to
Exhibit 3.1 in Vectors
Form 10-Q
for the quarter ended September 30, 1999).
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* 3
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.2
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Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Vector (incorporated by reference to
Exhibit 3.1 in Vectors
Form 8-K
dated May 24, 2000).
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* 3
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.3
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Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Vector Group Ltd. (incorporated by reference
to Exhibit 3.1 in Vectors
Form 10-Q
for the quarter ended June 30, 2007).
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* 3
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.4
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Amended and restated By-Laws of Vector Group Ltd. (incorporated
by reference to Exhibit 3.4 in Vectors
Form 8-K
dated October 19, 2007).
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* 4
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.1
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Amended and Restated Loan and Security Agreement dated as of
April 14, 2004, by and between Wachovia Bank, N.A., as
lender, Liggett Group Inc., as borrower, 100 Maple LLC and Epic
Holdings Inc. (the Wachovia Loan Agreement)
(incorporated by reference to Exhibit 10.1 in Vectors
Form 8-K
dated April 14, 2004).
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* 4
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.2
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Amendment, dated as of December 13, 2005, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated December 13, 2005).
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* 4
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.4
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Amendment, dated as of January 31, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated February 2, 2007).
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* 4
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.5
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Amendment, dated as of August 10, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.6 in
Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.6
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Amendment, dated as of August 16, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.7 in
Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.7
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Intercreditor Agreement, dated as of August 16, 2007,
between Wachovia Bank, N.A., as ABL Lender, U.S. Bank National
Association, as Collateral Agent, Liggett Group LLC, as
Borrower, and 100 Maple LLC, as Loan Party (incorporated by
reference to Exhibit 99.1 in Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.8
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Indenture, dated as of November 18, 2004, between Vector
and Wells Fargo Bank, N.A., as Trustee, relating to the 5%
Variable Interest Senior Convertible Notes due 2011, including
the form of Note (incorporated by reference to Exhibit 10.1
in Vectors
Form 8-K
dated November 18, 2004).
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* 4
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.9
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Indenture, dated as of April 13, 2005, by and between
Vector and Wells Fargo Bank, N.A., relating to the 5% Variable
Interest Senior Convertible Notes due 2011 including the form of
Note (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated April 14, 2005).
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* 4
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.10
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Indenture, dated as of July 12, 2006, by and between Vector
and Wells Fargo Bank, N.A., relating to the
37/8%
Variable Interest Senior Convertible Debentures due 2026 (the
37/8% Debentures),
including the form of the
37/8% Debenture
(incorporated by reference to Exhibit 4.1 in Vectors
Form 8-K
dated July 11, 2006).
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* 4
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.11
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Indenture, dated as of August 16, 2007, between Vector
Group Ltd., the subsidiary guarantors named therein and U.S.
Bank National Association, as Trustee, relating to the
11% Senior Secured Notes due 2015, including the form of
Note (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.12
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First Supplemental Indenture dated as of July 15, 2008 to
the Indenture dated August 16, 2007 between Vector Group
Ltd., the subsidiary guarantors named therein and U.S. Bank
National Association, as Trustee (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated July 15, 2008).
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* 4
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.13
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Pledge Agreement, dated as of August 16, 2007, between VGR
Holding LLC, as Grantor, and U.S. Bank National Association, as
Collateral Agent (incorporated by reference to Exhibit 4.2
in Vectors
Form 8-K
dated August 16, 2007).
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65
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Exhibit
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No.
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Description
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* 4
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.14
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Security Agreement, dated as of August 16, 2007, between
Vector Tobacco Inc., as Grantor, and U.S. Bank National
Association, as Collateral Agent (incorporated by reference to
Exhibit 4.3 in Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.15
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Security Agreement, dated as of August 16, 2007, between
Liggett Group LLC and 100 Maple LLC, as Grantors, and U.S. Bank
National Association, as Collateral Agent (incorporated by
reference to Exhibit 4.4 in Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.16
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Registration Rights Agreement, dated as of August 16, 2007,
between Vector Group Ltd., the subsidiary guarantors named
therein and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 4.5 in Vectors
Form 8-K
dated August 16, 2007).
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* 10
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.1
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Corporate Services Agreement, dated as of June 29, 1990,
between Vector and Liggett (incorporated by reference to
Exhibit 10.10 in Liggetts Registration Statement on
Form S-1,
No. 33-47482).
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* 10
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.2
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Services Agreement, dated as of February 26, 1991, between
Brooke Management Inc. (BMI) and Liggett (the
Liggett Services Agreement) (incorporated by
reference to Exhibit 10.5 in VGR Holdings
Registration Statement on
Form S-1,
No. 33-93576).
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* 10
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.3
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First Amendment to Liggett Services Agreement, dated as of
November 30, 1993, between Liggett and BMI (incorporated by
reference to Exhibit 10.6 in VGR Holdings
Registration Statement on
Form S-1,
No. 33-93576).
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* 10
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.4
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Second Amendment to Liggett Services Agreement, dated as of
October 1, 1995, between BMI, Vector and Liggett
(incorporated by reference to Exhibit 10(c) in
Vectors
Form 10-Q
for the quarter ended September 30, 1995).
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* 10
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.5
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Third Amendment to Liggett Services Agreement, dated as of
March 31, 2001, by and between Vector and Liggett
(incorporated by reference to Exhibit 10.5 in Vectors
Form 10-K
for the year ended December 31, 2003).
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* 10
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.6
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Corporate Services Agreement, dated January 1, 1992,
between VGR Holding and Liggett (incorporated by reference to
Exhibit 10.13 in Liggetts Registration Statement on
Form S-1,
No. 33-47482).
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* 10
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.7
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Settlement Agreement, dated March 15, 1996, by and among
the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana, Brooke Group Holding and Liggett (incorporated by
reference to Exhibit 15 in the Schedule 13D filed by
Vector on March 11, 1996, as amended, with respect to the
common stock of RJR Nabisco Holdings Corp.).
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* 10
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.8
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|
Addendum to Initial States Settlement Agreement (incorporated by
reference to Exhibit 10.43 in Vectors
Form 10-Q
for the quarter ended March 31, 1997).
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* 10
|
.9
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|
Settlement Agreement, dated March 12, 1998, by and among
the States listed in Appendix A thereto, Brooke Group
Holding and Liggett (incorporated by reference to
Exhibit 10.35 in Vectors
Form 10-K
for the year ended December 31, 1997).
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* 10
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.10
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Master Settlement Agreement made by the Settling States and
Participating Manufacturers signatories thereto (incorporated by
reference to Exhibit 10.1 in Philip Morris Companies
Inc.s
Form 8-K
dated November 25, 1998, Commission File
No. 1-8940).
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* 10
|
.11
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General Liggett Replacement Agreement, dated as of
November 23, 1998, entered into by each of the Settling
States under the Master Settlement Agreement, and Brooke Group
Holding and Liggett (incorporated by reference to
Exhibit 10.34 in Vectors
Form 10-K
for the year ended December 31, 1998).
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* 10
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.12
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|
Stipulation and Agreed Order regarding Stay of Execution Pending
Review and Related Matters, dated May 7, 2001, entered into
by Philip Morris Incorporated, Lorillard Tobacco Co., Liggett
Group Inc. and Brooke Group Holding Inc. and the class counsel
in Engel, et. al., v. R.J. Reynolds Tobacco Co., et. al.
(incorporated by reference to Exhibit 99.2 in Philip Morris
Companies Inc.s
Form 8-K
dated May 7, 2001).
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* 10
|
.13
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|
Amended and Restated Employment Agreement (LeBow
Employment Agreement), dated as of September 27, 2005,
between Vector and Bennett S. LeBow (incorporated by reference
to Exhibit 10.1 in Vectors
Form 8-K
dated September 27, 2005).
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* 10
|
.14
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|
Amendment dated January 27, 2006 to LeBow Employment
Agreement (incorporated by reference to Exhibit 10.2 in
Vectors
Form 8-K
dated January 27, 2006).
|
66
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|
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|
|
Exhibit
|
|
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No.
|
|
Description
|
|
|
* 10
|
.15
|
|
Amended and Restated Employment Agreement dated as of
January 27, 2006, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 in Vectors
Form 8-K
dated January 27, 2006).
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* 10
|
.16
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|
Employment Agreement, dated as of January 27, 2006, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.3 in Vectors
Form 8-K
dated January 27, 2006).
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* 10
|
.17
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|
Amended and Restated Employment Agreement, dated as of
January 27, 2006, between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.4 in Vectors
Form 8-K
dated January 27, 2006).
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* 10
|
.18
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|
Employment Agreement, dated as of November 11, 2005,
between Liggett Group Inc. and Ronald J. Bernstein (incorporated
by reference to Exhibit 10.1 in Vectors
Form 8-K
dated November 11, 2005).
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* 10
|
.19
|
|
Employment Agreement, dated as of January 27, 2006, between
Vector and J. Bryant Kirkland III (incorporated by
reference to Exhibit 10.5 in Vectors
Form 8-K
dated January 27, 2006).
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* 10
|
.20
|
|
Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive
Plan (incorporated by reference to Appendix A in
Vectors Proxy Statement dated April 21, 2004).
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* 10
|
.21
|
|
Stock Option Agreement, dated November 4, 1999, between
Vector and Bennett S. LeBow (incorporated by reference to
Exhibit 10.59 in Vectors
Form 10-K
for the year ended December 31, 1999).
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* 10
|
.22
|
|
Stock Option Agreement, dated November 4, 1999, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.60 in Vectors
Form 10-K
for the year ended December 31, 1999).
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* 10
|
.23
|
|
Stock Option Agreement, dated November 4, 1999, between
Vector and Marc N. Bell (incorporated by reference to
Exhibit 10.61 in Vectors
Form 10-K
for the year ended December 31, 1999).
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* 10
|
.24
|
|
Stock Option Agreement, dated November 4, 1999, between
Vector and Howard M. Lorber (incorporated by reference to
Exhibit 10.63 in Vectors
Form 10-K
for the year ended December 31, 1999).
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* 10
|
.25
|
|
Stock Option Agreement, dated January 22, 2001, between
Vector and Howard M. Lorber (incorporated by reference to
Exhibit 10.2 in Vectors
Form 10-Q
for the quarter ended March 31, 2001).
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* 10
|
.26
|
|
Restricted Share Award Agreement, dated as of September 27,
2005, between Vector and Howard M. Lorber (incorporated by
reference to Exhibit 10.2 in Vectors
Form 8-K
dated September 27, 2005).
|
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* 10
|
.27
|
|
Restricted Share Award Agreement, dated as of November 11,
2005, between Vector and Ronald J. Bernstein (incorporated by
reference to Exhibit 10.2 in Vectors
Form 8-K
dated November 11, 2005).
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* 10
|
.28
|
|
Option Letter Agreement, dated as of November 11, 2005
between Vector and Ronald J. Bernstein (incorporated by
reference to Exhibit 10.3 in Vectors
Form 8-K
dated November 11, 2005)..
|
|
* 10
|
.29
|
|
Restricted Share Award Agreement, dated as of November 16,
2005, between Vector and Howard M. Lorber (incorporated by
reference to Exhibit 10.1 in Vectors
Form 8-K
dated November 16, 2005).
|
|
* 10
|
.30
|
|
Vector Senior Executive Annual Bonus Plan (incorporated by
reference to Exhibit 10.7 in Vectors
Form 8-K
dated January 27, 2006).
|
|
* 10
|
.31
|
|
Vector Supplemental Retirement Plan (as amended and restated
April 24, 2008) (incorporated by reference to
Exhibit 10.1 in Vectors
Form 10-Q
for the quarter ended June 30, 2008).
|
|
* 10
|
.32
|
|
Closing Agreement on Final Determination Covering Specific
Matters between Vector and the Commissioner of Internal Revenue
of the United States of America dated July 20, 2006
(incorporated by reference to Exhibit 10.3 in Vectors
Form 10-Q
for the quarter ended September 30, 2006).
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|
* 10
|
.33
|
|
Operating Agreement of Douglas Elliman Realty, LLC (formerly
known as Montauk Battery Realty LLC) dated
December 17, 2002 (incorporated by reference to
Exhibit 10.1 in New Valleys
Form 8-K
dated December 13, 2002).
|
|
* 10
|
.34
|
|
First Amendment to Operating Agreement of Douglas Elliman
Realty, LLC (formerly known as Montauk Battery Realty LLC),
dated as of March 14, 2003 (incorporated by reference to
Exhibit 10.1 in New Valleys
Form 10-Q
for the quarter ended March 31, 2003).
|
|
* 10
|
.35
|
|
Second Amendment to Operating Agreement of Douglas Elliman
Realty, LLC, dated as of May 19, 2003 (incorporated by
reference to Exhibit 10.1 in New Valleys
Form 10-Q
for the quarter ended June 30, 2003).
|
67
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
* 10
|
.37
|
|
Note and Equity Purchase Agreement, dated as of March 14,
2003 (the Note and Equity Purchase Agreement), by
and between Douglas Elliman Realty, LLC (formerly known as
Montauk Battery Realty LLC), New Valley Real Estate Corporation
and The Prudential Real Estate Financial Services of America,
Inc., including form of 12% Subordinated Note due
March 14, 2013 (incorporated by reference to
Exhibit 10.2 in New Valleys
Form 10-Q
for the quarter ended March 31, 2003).
|
|
* 10
|
.38
|
|
Amendment to the Note and Equity Purchase Agreement, dated as of
April 14, 2003 (incorporated by reference to
Exhibit 10.3 in New Valleys
Form 10-Q
for the quarter ended March 31, 2003).
|
|
* 10
|
.39
|
|
Stipulation for Entry of Judgment dated March 14, 2007
between New Valley Corporation and the United States of America
(incorporated by reference to Exhibit 10.2 in Vectors
Form 10-Q
for the quarter ended March 31, 2007).
|
|
21
|
|
|
Subsidiaries of Vector.
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
23
|
.3
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
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.
|
|
99
|
.2
|
|
Liggett Group LLCs Consolidated Financial Statements for
the three years ended December 31, 2008.
|
|
99
|
.3
|
|
Vector Tobacco Inc.s Consolidated Financial Statements for
the three years ended December 31, 2008.
|
|
|
|
* |
|
Incorporated by reference |
Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to
Item 14(c) is listed in exhibit nos. 10.13 through 10.31.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
VECTOR GROUP LTD.
(Registrant)
|
|
|
|
By:
|
/s/ J.
Bryant Kirkland III
|
J. Bryant Kirkland III
Vice President, Treasurer and Chief
Financial Officer
Date: March 2, 2009
POWER OF
ATTORNEY
The undersigned directors and officers of Vector Group Ltd.
hereby constitute and appoint Richard J. Lampen, J. Bryant
Kirkland III and Marc N. Bell, and each of them, with full
power to act without the other and with full power of
substitution and resubstitutions, our true and lawful
attorneys-in-fact with full power to execute in our name and
behalf in the capacities indicated below, this Annual Report on
Form 10-K
and any and all amendments thereto and to file the same, with
all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, and
hereby ratify and confirm all that such attorneys-in-fact, or
any of them, or their substitutes shall lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
March 2, 2009.
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Howard
M. Lorber
Howard
M. Lorber
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ J.
Bryant Kirkland III
J.
Bryant Kirkland III
|
|
Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
/s/ Henry
C. Beinstein
Henry
C. Beinstein
|
|
Director
|
|
|
|
/s/ Ronald
J. Bernstein
Ronald
J. Bernstein
|
|
Director
|
|
|
|
/s/ Robert
J. Eide
Robert
J. Eide
|
|
Director
|
|
|
|
/s/ Bennett
S. LeBow
Bennett
S. LeBow
|
|
Director
|
|
|
|
/s/ Jeffrey
S. Podell
Jeffrey
S. Podell
|
|
Director
|
|
|
|
/s/ Jean
E. Sharpe
Jean
E. Sharpe
|
|
Director
|
69
VECTOR
GROUP LTD.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2008
ITEMS 8, 15(a)(1) AND (2)
INDEX TO
FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules of the Registrant and its
subsidiaries required to be included in Items 8, 15(a)
(1) and (2) are listed below:
|
|
|
|
|
|
|
Page
|
|
|
FINANCIAL STATEMENTS:
|
|
|
|
|
Vector Group Ltd. Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-8
|
|
FINANCIAL STATEMENT SCHEDULE:
|
|
|
|
|
|
|
|
F-75
|
|
Financial Statement Schedules not listed above have been omitted
because they are not applicable or the required information is
contained in our consolidated financial statements or
accompanying notes.
Liggett
Group LLC
The consolidated financial statements of Liggett Group LLC for
the year ended December 31, 2008 are filed as
Exhibit 99.2 to this report and are incorporated by
reference.
Vector
Tobacco Inc.
The consolidated financial statements of Vector Tobacco Inc. for
the year ended December 31, 2008 are filed as
Exhibit 99.3 to this report and are incorporated by
reference.
F-1
Report of
Independent Registered Certified Public Accounting
Firm
To the Board of Directors and Stockholders
of Vector Group Ltd.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Vector Group Ltd. and its subsidiaries
at December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2008, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1(n), Note 1(o) and Note 10
to the consolidated financial statements, the Company changed
the manner in which it accounts for defined benefit and other
post retirement plans in 2006 and 2008, the manner in which it
accounts for share-based compensation in 2006 and the manner for
which it accounts for uncertain tax positions in 2007.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements. Because of its inherent limitations,
internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures
may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
Miami, Florida
March 2, 2009
F-2
VECTOR
GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
211,105
|
|
|
$
|
238,117
|
|
Investment securities available for sale
|
|
|
28,518
|
|
|
|
45,875
|
|
Accounts receivable trade
|
|
|
9,506
|
|
|
|
3,113
|
|
Inventories
|
|
|
92,581
|
|
|
|
86,825
|
|
Deferred income taxes
|
|
|
3,642
|
|
|
|
18,336
|
|
Other current assets
|
|
|
9,931
|
|
|
|
3,360
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
355,283
|
|
|
|
395,626
|
|
Property, plant and equipment, net
|
|
|
50,691
|
|
|
|
54,432
|
|
Mortgage receivable, net
|
|
|
17,704
|
|
|
|
|
|
Long-term investments accounted for at cost
|
|
|
51,118
|
|
|
|
72,971
|
|
Long-term investments accounted under the equity method
|
|
|
|
|
|
|
10,495
|
|
Investments in non-consolidated real estate businesses
|
|
|
50,775
|
|
|
|
35,731
|
|
Restricted assets
|
|
|
6,555
|
|
|
|
8,766
|
|
Deferred income taxes
|
|
|
45,222
|
|
|
|
26,637
|
|
Intangible asset
|
|
|
107,511
|
|
|
|
107,511
|
|
Prepaid pension costs
|
|
|
2,901
|
|
|
|
42,084
|
|
Other assets
|
|
|
29,952
|
|
|
|
31,036
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
717,712
|
|
|
$
|
785,289
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of notes payable and long-term debt
|
|
$
|
97,498
|
|
|
$
|
20,618
|
|
Current portion of employee benefits
|
|
|
21,840
|
|
|
|
1,298
|
|
Accounts payable
|
|
|
6,104
|
|
|
|
6,980
|
|
Accrued promotional expenses
|
|
|
10,131
|
|
|
|
9,210
|
|
Income taxes payable, net
|
|
|
11,803
|
|
|
|
2,363
|
|
Accrued excise and payroll taxes payable, net
|
|
|
7,004
|
|
|
|
5,327
|
|
Settlement accruals
|
|
|
20,668
|
|
|
|
10,041
|
|
Deferred income taxes
|
|
|
92,507
|
|
|
|
24,019
|
|
Accrued interest
|
|
|
9,612
|
|
|
|
9,475
|
|
Other current liabilities
|
|
|
18,992
|
|
|
|
20,006
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
296,159
|
|
|
|
109,337
|
|
Notes payable, long-term debt and other obligations, less
current portion
|
|
|
210,301
|
|
|
|
277,178
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
77,245
|
|
|
|
101,582
|
|
Non-current employee benefits
|
|
|
34,856
|
|
|
|
40,933
|
|
Deferred income taxes
|
|
|
48,807
|
|
|
|
141,904
|
|
Other liabilities
|
|
|
16,739
|
|
|
|
13,503
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
684,107
|
|
|
|
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, 69,107,320 and 63,307,020 shares issued and
66,014,070 and 60,361,068 shares outstanding
|
|
|
6,601
|
|
|
|
6,036
|
|
Additional paid-in capital
|
|
|
65,103
|
|
|
|
89,494
|
|
Retained earnings (accumulated deficit)
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
(25,242
|
)
|
|
|
18,179
|
|
Less: 3,093,250 and 2,945,952 shares of common stock in
treasury, at cost
|
|
|
(12,857
|
)
|
|
|
(12,857
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
33,605
|
|
|
|
100,852
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
717,712
|
|
|
$
|
785,289
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
VECTOR
GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Revenues*
|
|
$
|
565,186
|
|
|
$
|
555,430
|
|
|
$
|
506,252
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
335,299
|
|
|
|
337,079
|
|
|
|
315,163
|
|
Operating, selling, administrative and general expenses
|
|
|
94,583
|
|
|
|
92,967
|
|
|
|
90,833
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(2,210
|
)
|
Restructuring and impairment charges
|
|
|
|
|
|
|
(120
|
)
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
135,304
|
|
|
|
125,504
|
|
|
|
101,029
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
5,864
|
|
|
|
9,897
|
|
|
|
9,000
|
|
Interest expense
|
|
|
(62,335
|
)
|
|
|
(45,762
|
)
|
|
|
(37,776
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
24,337
|
|
|
|
(6,109
|
)
|
|
|
112
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(16,166
|
)
|
Gain on investments, net
|
|
|
|
|
|
|
|
|
|
|
3,019
|
|
Provision for loss on investments
|
|
|
(32,400
|
)
|
|
|
(1,216
|
)
|
|
|
|
|
Gain from conversion of LTS notes
|
|
|
|
|
|
|
8,121
|
|
|
|
|
|
Equity income from non-consolidated real estate businesses
|
|
|
24,399
|
|
|
|
16,243
|
|
|
|
9,086
|
|
Income from lawsuit settlement
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
Other, net
|
|
|
(597
|
)
|
|
|
(75
|
)
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
94,572
|
|
|
|
126,603
|
|
|
|
68,480
|
|
Income tax expense
|
|
|
(34,068
|
)
|
|
|
(52,800
|
)
|
|
|
(25,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
73,803
|
|
|
$
|
42,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.90
|
|
|
$
|
1.10
|
|
|
$
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.80
|
|
|
$
|
1.07
|
|
|
$
|
0.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share
|
|
$
|
1.54
|
|
|
$
|
1.47
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Revenues and cost of goods sold include federal excise taxes of
$168,170, $176,269 and $174,339 for the years ended
December 31, 2008, 2007 and 2006, respectively. |
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
VECTOR
GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Unearned
|
|
|
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, January 1, 2006
|
|
|
49,849,735
|
|
|
|
4,985
|
|
|
|
133,325
|
|
|
|
(11,681
|
)
|
|
|
(70,633
|
)
|
|
|
(10,610
|
)
|
|
|
(16,320
|
)
|
|
|
29,066
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,712
|
|
|
|
|
|
|
|
|
|
|
|
42,712
|
|
Pension related minimum liability adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,461
|
|
|
|
|
|
|
|
9,461
|
|
Forward contract adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254
|
|
|
|
|
|
|
|
254
|
|
Unrealized gain on long-term investments accounted for under the
equity method, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,772
|
|
|
|
|
|
|
|
4,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS No. 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,637
|
)
|
|
|
|
|
|
|
(6,637
|
)
|
Reclassifications in accordance with SFAS No. 123(R)
|
|
|
|
|
|
|
|
|
|
|
(11,681
|
)
|
|
|
11,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions on common stock
|
|
|
|
|
|
|
|
|
|
|
(92,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,359
|
)
|
Effect of stock dividend
|
|
|
2,708,295
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of options, net of 41,566 shares delivered to pay
exercise price
|
|
|
273,239
|
|
|
|
27
|
|
|
|
3,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(697
|
)
|
|
|
2,571
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
3,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,926
|
|
Note conversion
|
|
|
4,200,000
|
|
|
|
420
|
|
|
|
79,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,263
|
|
|
|
84,205
|
|
Beneficial conversion feature of convertible debt, net of taxes
|
|
|
|
|
|
|
|
|
|
|
16,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
57,031,269
|
|
|
|
5,703
|
|
|
|
132,807
|
|
|
|
|
|
|
|
(28,192
|
)
|
|
|
(2,587
|
)
|
|
|
(12,754
|
)
|
|
|
94,977
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,803
|
|
|
|
|
|
|
|
|
|
|
|
73,803
|
|
Change in net loss and prior service cost, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,545
|
|
|
|
|
|
|
|
11,545
|
|
Forward contract adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
28
|
|
Unrealized gain on long-term investments accounted for under the
equity method, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
226
|
|
Unrealized gain on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,967
|
|
|
|
|
|
|
|
8,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,766
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions and dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
(54,054
|
)
|
|
|
|
|
|
|
(45,324
|
)
|
|
|
|
|
|
|
|
|
|
|
(99,378
|
)
|
Effect of stock dividend
|
|
|
2,870,589
|
|
|
|
287
|
|
|
|
|
|
|
|
|
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants
|
|
|
40,000
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
Exercise of options, net of 7,627 shares delivered to pay
exercise price
|
|
|
419,210
|
|
|
|
42
|
|
|
|
5,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103
|
)
|
|
|
5,100
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
3,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
|
60,361,068
|
|
|
|
6,036
|
|
|
|
89,494
|
|
|
|
|
|
|
|
|
|
|
|
18,179
|
|
|
|
(12,857
|
)
|
|
|
100,852
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,504
|
|
|
|
|
|
|
|
|
|
|
|
60,504
|
|
Change in net loss and prior service cost, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,989
|
)
|
|
|
|
|
|
|
(30,989
|
)
|
Forward contract adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Unrealized gain on long-term investments accounted for under the
equity method, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399
|
)
|
|
|
|
|
|
|
(399
|
)
|
Unrealized gain on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,263
|
)
|
|
|
|
|
|
|
(12,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS No. 158 measurement date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509
|
)
|
|
|
195
|
|
|
|
|
|
|
|
(314
|
)
|
Distributions and dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
(46,081
|
)
|
|
|
|
|
|
|
(59,681
|
)
|
|
|
|
|
|
|
|
|
|
|
(105,762
|
)
|
Effect of stock dividend
|
|
|
3,142,760
|
|
|
|
314
|
|
|
|
|
|
|
|
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,304
|
|
Exercise of options, net of 1,375,895 shares delivered to
pay exercise price
|
|
|
2,510,242
|
|
|
|
251
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
66,014,070
|
|
|
$
|
6,601
|
|
|
$
|
65,103
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(25,242
|
)
|
|
$
|
(12,857
|
)
|
|
$
|
33,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
VECTOR
GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
73,803
|
|
|
$
|
42,712
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,057
|
|
|
|
10,202
|
|
|
|
9,888
|
|
Non-cash stock-based expense
|
|
|
3,550
|
|
|
|
3,529
|
|
|
|
3,926
|
|
Non-cash portion of restructuring and impairment charges
|
|
|
53
|
|
|
|
(120
|
)
|
|
|
1,437
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
16,166
|
|
Gain on sale of investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
(3,019
|
)
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(2,210
|
)
|
Deferred income taxes
|
|
|
432
|
|
|
|
44,656
|
|
|
|
(10,379
|
)
|
Gain from conversion of LTS notes
|
|
|
|
|
|
|
(6,388
|
)
|
|
|
|
|
Provision for loss on mortgage receivable
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Provision for loss on non-consolidated real estate businesses
|
|
|
3,500
|
|
|
|
|
|
|
|
|
|
Provision for loss on long-term investments accounted for at cost
|
|
|
21,900
|
|
|
|
|
|
|
|
|
|
Loss on long-term investments accounted under the equity method
|
|
|
568
|
|
|
|
|
|
|
|
|
|
Provision for loss on marketable securities
|
|
|
3,000
|
|
|
|
1,216
|
|
|
|
|
|
Equity income in non-consolidated real estate businesses
|
|
|
(24,399
|
)
|
|
|
(16,243
|
)
|
|
|
(9,086
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
8,462
|
|
|
|
8,878
|
|
|
|
7,311
|
|
Non-cash interest (income) expense
|
|
|
(11,907
|
)
|
|
|
13,912
|
|
|
|
5,176
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(6,393
|
)
|
|
|
12,367
|
|
|
|
(2,766
|
)
|
Inventories
|
|
|
(5,756
|
)
|
|
|
4,474
|
|
|
|
(20,904
|
)
|
Change in book overdraft.
|
|
|
198
|
|
|
|
(179
|
)
|
|
|
759
|
|
Accounts payable and accrued liabilities
|
|
|
11,850
|
|
|
|
(46,960
|
)
|
|
|
(2,881
|
)
|
Cash payments on restructuring liabilities
|
|
|
(154
|
)
|
|
|
(884
|
)
|
|
|
(1,284
|
)
|
Other assets and liabilities, net
|
|
|
11,800
|
|
|
|
6,935
|
|
|
|
11,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
91,265
|
|
|
|
109,198
|
|
|
|
46,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
VECTOR
GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
452
|
|
|
|
917
|
|
|
|
1,486
|
|
Proceeds from sale or maturity of investment securities
|
|
|
|
|
|
|
|
|
|
|
30,407
|
|
Purchase of investment securities
|
|
|
(6,411
|
)
|
|
|
(6,571
|
)
|
|
|
(19,706
|
)
|
Proceeds from sale or liquidation of long-term investments
|
|
|
8,334
|
|
|
|
71
|
|
|
|
326
|
|
Purchase of long-term investments
|
|
|
(51
|
)
|
|
|
(40,091
|
)
|
|
|
(35,345
|
)
|
Purchase of mortgage receivable
|
|
|
(21,704
|
)
|
|
|
|
|
|
|
|
|
Purchase of Castle Brands and other minority equity interests
|
|
|
(4,250
|
)
|
|
|
|
|
|
|
|
|
Increase in restricted assets
|
|
|
(411
|
)
|
|
|
(492
|
)
|
|
|
(1,527
|
)
|
Investments in non-consolidated real estate businesses
|
|
|
(22,000
|
)
|
|
|
(750
|
)
|
|
|
(9,850
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
19,393
|
|
|
|
1,000
|
|
|
|
|
|
Capital expenditures
|
|
|
(6,309
|
)
|
|
|
(5,189
|
)
|
|
|
(9,558
|
)
|
Increase in cash surrender value of life insurance policies
|
|
|
(938
|
)
|
|
|
(838
|
)
|
|
|
(898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(33,895
|
)
|
|
|
(51,943
|
)
|
|
|
(44,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
2,831
|
|
|
|
174,576
|
|
|
|
118,146
|
|
Repayments of debt
|
|
|
(6,329
|
)
|
|
|
(41,200
|
)
|
|
|
(72,925
|
)
|
Deferred financing charges
|
|
|
(137
|
)
|
|
|
(9,985
|
)
|
|
|
(5,280
|
)
|
Borrowings under revolver
|
|
|
531,251
|
|
|
|
537,746
|
|
|
|
514,739
|
|
Repayments on revolver
|
|
|
(526,518
|
)
|
|
|
(534,950
|
)
|
|
|
(502,753
|
)
|
Distributions on common stock
|
|
|
(103,870
|
)
|
|
|
(99,249
|
)
|
|
|
(90,138
|
)
|
Proceeds from exercise of Vector options and warrants
|
|
|
86
|
|
|
|
5,100
|
|
|
|
2,571
|
|
Tax benefit of options exercised
|
|
|
18,304
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(84,382
|
)
|
|
|
34,093
|
|
|
|
(35,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(27,012
|
)
|
|
|
91,348
|
|
|
|
(34,290
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
238,117
|
|
|
|
146,769
|
|
|
|
181,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
211,105
|
|
|
$
|
238,117
|
|
|
$
|
146,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a) Basis
of Presentation:
The consolidated financial statements of Vector Group Ltd. (the
Company or Vector) include the accounts
of VGR Holding LLC (VGR Holding), Liggett Group LLC
(Liggett), Vector Tobacco Inc. (Vector
Tobacco), Liggett Vector Brands Inc. (Liggett Vector
Brands), New Valley LLC (New Valley) and other
less significant subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Liggett is engaged in the manufacture and sale of cigarettes in
the United States. Vector Tobacco is engaged in the development
and marketing of low nicotine and nicotine-free cigarette
products and the development of reduced risk cigarette products.
New Valley is engaged in the real estate business and is seeking
to acquire additional operating companies and real estate
properties.
(b) Estimates
and Assumptions:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Significant estimates subject
to material changes in the near term include restructuring and
impairment charges, inventory valuation, deferred tax assets,
allowance for doubtful accounts, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans,
the estimated fair value of embedded derivative liabilities,
settlement accruals, restructuring, valuation of investments,
including other than temporary impairments to such investments,
accounting for investments in equity securities and litigation
and defense costs. Actual results could differ from those
estimates.
(c) Cash
and Cash Equivalents:
For purposes of the statements of cash flows, cash includes cash
on hand, cash on deposit in banks and cash equivalents,
comprised of short-term investments which have an original
maturity of 90 days or less. Interest on short-term
investments is recognized when earned. The Company places its
cash and cash equivalents with large commercial banks. The
Federal Deposit Insurance Corporation (FDIC) and
Securities Investor Protection Corporation (SIPC)
insure these balances, up to $250 and $500, respectively.
Substantially all of the Companys cash balances at
December 31, 2008 are uninsured.
(d) Financial
Instruments:
The carrying value of cash and cash equivalents, restricted
assets and short-term loans approximate their fair value.
The carrying amounts of short-term debt reported in the
consolidated balance sheets approximate fair value. The fair
value of long-term debt for the years ended December 31,
2008 and 2007 was estimated based on current market quotations.
As required by Statement of Financial Accounting Standards
(SFAS) No. 133, amended by SFAS No. 138,
derivatives embedded within the Companys convertible debt
are recognized on the Companys balance sheet and are
stated at estimated fair value at each reporting period. Changes
in the fair value of the embedded derivatives are reflected
quarterly as Changes in fair value of derivatives embedded
within convertible debt. The estimated fair values for
financial instruments presented herein are not necessarily
indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair values.
F-8
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(e) Investment
Securities:
The Company classifies investments in debt and marketable equity
securities as available for sale. Investments classified as
available for sale are carried at fair value, with net
unrealized gains and losses included as a separate component of
stockholders equity. The cost of securities sold is
determined based on average cost. Investments in marketable
equity securities represent less than a 20 percent interest
in the investees and the Company does not exercise significant
influence over such entities.
Gains are recognized when realized in the Companys
consolidated statements of operations. Losses are recognized as
realized or upon the determination of the occurrence of an
other-than-temporary decline in fair value. The Companys
policy is to review its securities on a periodic basis to
evaluate whether any security has experienced an
other-than-temporary decline in fair value. If it is determined
that an other-than-temporary decline exists in one of the
Companys marketable securities, it is the Companys
policy to record an impairment charge with respect to such
investment in the Companys consolidated statements of
operations. The Company recorded a loss related to
other-than-temporary declines in the fair value of its
marketable equity securities of $3,018, $1,216 for the years
ended December 31, 2008 and 2007, respectively.
(f) Significant
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents and trade receivables. The Company places its
temporary cash in money market securities (investment grade or
better) with what management believes are high credit quality
financial institutions.
Liggetts customers are primarily candy and tobacco
distributors, the military and large grocery, drug and
convenience store chains. One customer accounted for
approximately 8.8%, 8.7% and 10.8% of Liggetts revenues in
2008, 2007, and 2006, respectively, and accounts receivable of
approximately $3,169 and $26 at December 31, 2008 and 2007,
respectively. Sales to this customer were primarily in the
private label discount segment. Concentrations of credit risk
with respect to trade receivables are generally limited due to
the large number of customers, located primarily throughout the
United States, comprising Liggetts customer base. Ongoing
credit evaluations of customers financial condition are
performed and, generally, no collateral is required. Liggett
maintains reserves for potential credit losses and such losses,
in the aggregate, have generally not exceeded managements
expectations.
(g) Accounts
Receivable:
Accounts receivable-trade are recorded at their net realizable
value.
The allowance for doubtful accounts and cash discounts was $255
and $120 at December 31, 2008 and 2007, respectively.
(h) Inventories:
Tobacco inventories are stated at the lower of cost or market
and are determined primarily by the
last-in,
first-out (LIFO) method at Liggett and the
first-in,
first out (FIFO) method at Vector Tobacco. Although portions of
leaf tobacco inventories may not be used or sold within one year
because of the time required for aging, they are included in
current assets, which is common practice in the industry. It is
not practicable to determine the amount that will not be used or
sold within one year.
The Company recorded a charge to operations for LIFO layer
liquidations of $2,379 and $1,942 for the years ended
December 31, 2008 and 2007, respectively, and an increase
in income of $790 for LIFO layer increments for the year ended
December 31, 2006.
F-9
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(i) Restricted
Assets:
Long-term restricted assets of $6,555 and $8,766 at
December 31, 2008 and 2007, respectively, consist primarily
of certificates of deposit which collateralize letters of credit
and deposits on long-term debt. The certificates of deposit
mature at various dates from February 2009 to June 2010.
(j) Property,
Plant and Equipment:
Property, plant and equipment are stated at cost. Property,
plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets,
which are 20 to 30 years for buildings and 3 to
10 years for machinery and equipment.
Repairs and maintenance costs are charged to expense as
incurred. The costs of major renewals and betterments are
capitalized. The cost and related accumulated depreciation of
property, plant and equipment are removed from the accounts upon
retirement or other disposition and any resulting gain or loss
is reflected in operations.
(k) Investment
in Non-Consolidated Real Estate Businesses:
In accounting for its investment in non-consolidated real estate
businesses, the Company applies FASB Interpretation
No. 46(R) (FIN 46(R)), Consolidation of
Variable Interest Entities, which clarified the
application of Accounting Research Bulletin No. 51
(ARB No. 51), Consolidated Financial
Statements. FIN 46(R) requires the Company to
identify its participation in Variable Interest Entities
(VIE), which are defined as entities with a level of
invested equity insufficient to fund future activities to
operate on a stand-alone basis, or whose equity holders lack
certain characteristics typical to holders of equity interests,
such as voting rights. For entities identified as VIEs,
FIN 46(R) sets forth a model to evaluate potential
consolidation based on an assessment of which party, if any,
bears a majority of the exposure to the expected losses, or
stands to gain from a majority of the expected returns. FIN
46(R) also sets forth certain disclosures regarding interests in
VIEs that are deemed significant, even if consolidation is not
required.
New Valley accounts for its 50% interests in Douglas Elliman
Realty LLC, Koa Investors LLC and 16th & K Holdings
LLC, New Valley Oaktree Chelsea Eleven, LLC and, prior to the
fourth quarter of 2007, accounted for its interest in Ceebraid
Acquisition Corporation (Ceebraid) on the equity
method because the entities neither meet the definition of a VIE
nor is New Valley each respective entitys primary
beneficiary, as defined in FIN 46(R).
In addition, FIN 46(R) includes a scope exception for
certain entities that are deemed to be businesses
and meet certain other criteria. Entities that meet this scope
exception are not subject to the accounting and disclosure rules
of FIN 46(R), but are subject to the pre-existing
consolidation rules under ARB No. 51, which are based on an
analysis of voting rights. This scope exception applies to New
Valleys investment in Douglas Elliman Realty LLC and, as a
result, under the applicable ARB No. 51 rules, the Company
is not required to consolidate this business. Further, New
Valley is deemed to exert significant influence over these
entities.
(l) Intangible
Assets:
The Company is required to conduct an annual review of
intangible assets for potential impairment including the
intangible asset of $107,511, which is not subject to
amortization due to its indefinite useful life. This intangible
asset relates to the exemption of The Medallion Company
(Medallion), acquired in April 2002, under the
Master Settlement Agreement, which states payments under the MSA
continue in perpetuity. As a result, the Company believes it
will realize the benefit of the exemption for the foreseeable
future.
Other intangible assets, included in other assets, consisting of
trademarks and patent rights, are amortized using the
straight-line method over
10-12 years
and had a net book value of $45 and $53 at December 31,
2008 and 2007, respectively.
F-10
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(m) Impairment
of Long-Lived Assets:
The Company reviews long-lived assets for impairment annually or
whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully
recoverable. The Company performs undiscounted operating cash
flow analyses to determine if impairment exists. If impairment
is determined to exist, any related impairment loss is
calculated based on fair value of the asset on the basis of
discounted cash flow. Impairment losses on assets to be disposed
of, if any, are based on the estimated proceeds to be received,
less costs of disposal.
As discussed in Note 2, the Company recorded a $954 asset
impairment charge in 2006 related to the restructuring of Vector
Research Ltd. This amount has been included as a component of
Restructuring and impairment charges in the
Companys consolidated statement of operations for the year
ended December 31, 2006.
(n) Pension,
Postretirement and Postemployment Benefits
Plans:
The cost of providing retiree pension benefits, health care and
life insurance benefits is actuarially determined and accrued
over the service period of the active employee group. On
September 29, 2006, SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans was issued.
SFAS No. 158 requires, among other things, the
recognition of the funded status of each defined benefit pension
plan, retiree health care and other postretirement benefit plans
and postemployment benefit plans on the balance sheet. The
Company adopted SFAS No. 158 as of December 31,
2006 and, in accordance with SFAS No. 158, changed its
measurement date for the funded status of the plans from
September 30 to December 31 in 2008. (See Note 9.)
(o) Stock
Options:
The Company accounted for employee stock compensation plans
under SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123R), which
requires companies to measure compensation cost for share-based
payments at fair value. In June 2008, the Companys former
Executive Chairman delivered 1,375,895 shares of common
stock in payment of the exercise price in connection with the
exercise of an employee stock option for 3,878,317 shares.
The Company subsequently cancelled the shares delivered.
(p) Income
Taxes:
The Company adopted FIN 48, Accounting for
Uncertainty in Income Taxes (an interpretation of FASB Statement
No. 109), on January 1, 2007. FIN 48
requires an entity to recognize the financial statement impact
of a tax position when it is more likely than not that the
position will be sustained upon examination. If the tax position
meets the more-likely-than-not recognition threshold, the tax
effect is recognized at the largest amount of the benefit that
is greater than 50% likely of being realized upon ultimate
settlement. FIN 48 requires that a liability created for
unrecognized deferred tax benefits shall be presented as a
liability and not combined with deferred tax liabilities or
assets.
The Company accounts for income taxes under the liability method
and records deferred taxes for the impact of temporary
differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts
recognized for tax purposes as well as tax credit carryforwards
and loss carryforwards. These deferred taxes are measured by
applying currently enacted tax rates. A valuation allowance
reduces deferred tax assets when it is deemed more likely than
not that some portion or all of the deferred tax assets will not
be realized. A current tax provision is recorded for income
taxes currently payable.
(q) Distributions
and Dividends on Common Stock:
The Company records distributions on its common stock as
dividends in its consolidated statement of stockholders
equity to the extent of retained earnings. Any amounts exceeding
retained earnings are recorded as a
F-11
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
reduction to additional
paid-in-capital.
The Companys stock dividends are recorded as stock splits
and given retroactive effect to earnings per share for all years
presented.
(r) Revenue
Recognition:
Sales: Revenues from sales are recognized upon
the shipment of finished goods when title and risk of loss have
passed to the customer, there is persuasive evidence of an
arrangement, the sale price is determinable and collectibility
is reasonably assured. The Company provides an allowance for
expected sales returns, net of any related inventory cost
recoveries. Certain sales incentives, including buydowns, are
classified as reductions of net sales in accordance with the
FASBs Emerging Issues Task Force (EITF) Issue
No. 01-9,
Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendors
Products). In accordance with EITF Issue
No. 06-3,
How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation), the
Companys accounting policy is to include federal excise
taxes in revenues and cost of goods sold. Such revenues and cost
of goods sold totaled $168,170, $176,269 and $174,339 for the
years ended December 31, 2008, 2007 and 2006, respectively.
Since the Companys primary line of business is tobacco,
the Companys financial position and its results of
operations and cash flows have been and could continue to be
materially adversely affected by significant unit sales volume
declines, litigation and defense costs, increased tobacco costs
or reductions in the selling price of cigarettes in the near
term.
Shipping and Handling Fees and Costs:
Shipping and handling fees related to sales
transactions are neither billed to customers nor recorded as
revenue. Shipping and handling costs, which were $4,509 in 2008,
$4,717 in 2007 and $4,648 in 2006, are recorded as operating,
selling, administrative and general expenses.
(s) Advertising
and Research and Development:
Advertising costs, which are expensed as incurred and included
within operating, selling, administration and general expenses,
were $194, $175 and $172 for the years ended December 31,
2008, 2007 and 2006, respectively.
Research and development costs, primarily at Vector Tobacco, are
expensed as incurred and included within operating, selling,
administration and general expenses, and were $3,988, $4,220 and
$7,750 for the years ended December 31, 2008, 2007 and
2006, respectively.
(t) Earnings
Per Share:
Information concerning the Companys common stock has been
adjusted to give effect to the 5% stock dividends paid to
Company stockholders on September 29, 2008,
September 28, 2007, and September 29, 2006,
respectively. The dividends were recorded at par value of $314
in 2008, $287 in 2007, and $271 in 2006 since the Company did
not have retained earnings in each of the aforementioned years.
In connection with the 5% stock dividends, the Company increased
the number of shares subject to outstanding stock options by 5%
and reduced the exercise prices accordingly.
EITF Issue
No. 03-6,
Participating Securities and the Two-Class Method
under FASB Statement 128, which established standards
regarding the computation of earnings per share
(EPS) by companies that have issued securities other
than common stock that contractually entitle the holder to
participate in dividends and earnings of the company. For
purposes of calculating basic EPS, earnings available to common
stockholders for the period are reduced by the contingent
interest and the non-cash interest expense associated with the
discounts created by the beneficial conversion features and
embedded derivatives related to the Companys convertible
debt issued in 2004, 2005 and 2006. The convertible debt issued
by the Company in 2004, 2005 and 2006, which are participating
securities due to the contingent interest feature, had no impact
on EPS for the years ended December 31, 2008, 2007 and
2006, as the dividends on the common stock reduced earnings
available to common stockholders so there were no unallocated
earnings under EITF Issue
No. 03-6.
F-12
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As discussed in Note 11, the Company has stock option
awards which provide for common stock dividend equivalents at
the same rate as paid on the common stock with respect to the
shares underlying the unexercised portion of the options. These
outstanding options represent participating securities under
EITF Issue
No. 03-6.
Effective with the adoption of SFAS No. 123(R) on
January 1, 2006, the Company recognizes payments of the
dividend equivalent rights ($4,865, net of taxes of $2,144,
$6,475, net of taxes of $200, and $6,186, net of taxes of $227,
for the years ended December 31, 2008, 2007 and 2006,
respectively) on these options as reductions in additional
paid-in capital on the Companys consolidated balance
sheet. As a result, in its calculation of basic EPS for the
years ended December 31, 2008, 2007 and 2006, respectively,
the Company has adjusted its net income for the effect of these
participating securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
73,803
|
|
|
$
|
42,712
|
|
Income attributable to participating securities
|
|
|
(2,783
|
)
|
|
|
(4,817
|
)
|
|
|
(2,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
57,721
|
|
|
$
|
68,986
|
|
|
$
|
39,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS is computed by dividing net income available to common
stockholders by the weighted-average number of shares
outstanding, which includes vested restricted stock.
Diluted EPS includes the dilutive effect of stock options,
unvested restricted stock grants and convertible securities.
Diluted EPS is computed by dividing net income available to
common stockholders by the diluted weighted-average number of
shares outstanding, which includes dilutive non-vested
restricted stock grants, stock options and convertible
securities.
Basic and diluted EPS were calculated using the following shares
for the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average shares for basic EPS
|
|
|
64,484,281
|
|
|
|
62,594,700
|
|
|
|
59,817,129
|
|
Plus incremental shares related to stock options and warrants
|
|
|
717,217
|
|
|
|
1,748,850
|
|
|
|
1,573,502
|
|
Plus incremental shares related to convertible debt
|
|
|
5,923,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares for diluted EPS
|
|
|
71,125,031
|
|
|
|
64,343,550
|
|
|
|
61,390,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following stock options, non-vested restricted stock and
shares issuable upon the conversion of convertible debt were
outstanding during the years ended December 31, 2008, 2007
and 2006 but were not included in the computation of diluted EPS
because the exercise prices of the options and the per share
expense associated with the restricted stock were greater than
the average market price of the common shares during the
respective periods, and the impact of common shares issuable
under the convertible debt were anti-dilutive to EPS.
F-13
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Number of stock options
|
|
|
514,735
|
|
|
|
174,650
|
|
|
|
548,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
19.22
|
|
|
$
|
26.23
|
|
|
$
|
19.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of non- vested restricted stock
|
|
|
66,610
|
|
|
|
N/A
|
|
|
|
676,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average expense per share
|
|
$
|
17.63
|
|
|
|
N/A
|
|
|
$
|
16.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares
|
|
|
|
|
|
|
|
|
|
|
|
|
issuable upon conversion of debt
|
|
|
7,009,023
|
|
|
|
12,932,556
|
|
|
|
13,559,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average conversion price
|
|
$
|
15.96
|
|
|
$
|
17.16
|
|
|
$
|
17.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS are calculated by dividing income by the weighted
average common shares outstanding plus dilutive common stock
equivalents. The Companys convertible debt was
anti-dilutive in 2007 and 2006. As a result of the dilutive
nature in 2008 of the Companys 3.875% convertible
subordinated notes due 2026, the Company adjusted its net income
for the effect of these convertible securities for purposes of
calculating diluted EPS as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
73,803
|
|
|
$
|
42,712
|
|
Income attributable to 3.875% variable interest senior
convertible debentures due 2026
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
Income attributable to participating securities
|
|
|
(2,738
|
)
|
|
|
(4,817
|
)
|
|
|
(2,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted EPS
|
|
$
|
56,804
|
|
|
$
|
68,986
|
|
|
$
|
39,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(u) Comprehensive
Income:
Other comprehensive income is a component of stockholders
equity and includes such items as the unrealized gains and
losses on investment securities available for sale, forward
contracts and minimum pension liability adjustments. Total
comprehensive income for the years ended December 31, 2008,
2007 and 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
73,803
|
|
|
$
|
42,712
|
|
Net unrealized gains on investment securities available for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized (losses) gains, net of income taxes
|
|
|
(14,047
|
)
|
|
|
8,248
|
|
|
|
6,556
|
|
Net unrealized losses reclassified into net income, net of
income taxes
|
|
|
1,784
|
|
|
|
719
|
|
|
|
(1,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains on investment securities available
for sale, net of income taxes
|
|
|
(12,263
|
)
|
|
|
8,967
|
|
|
|
4,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized (losses) gains, net of income taxes
|
|
|
(674
|
)
|
|
|
226
|
|
|
|
173
|
|
Net unrealized losses (gains) reclassified into net income, net
of income taxes
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized (losses) gains on long-term investments accounted
for under the equity method
|
|
|
(399
|
)
|
|
|
226
|
|
|
|
173
|
|
Net change in forward contracts
|
|
|
35
|
|
|
|
28
|
|
|
|
254
|
|
Net change in pension related amounts, net of income
taxes
|
|
|
(30,989
|
)
|
|
|
11,545
|
|
|
|
9,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
16,888
|
|
|
$
|
94,569
|
|
|
$
|
57,372
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive (loss) income,
net of taxes, were as follows as of December 31, 2008 and
2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Net unrealized gains on investment securities available for
sale, net of income taxes of $1,456 and $9,943, respectively
|
|
$
|
2,104
|
|
|
$
|
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 $195 and
$219, respectively
|
|
|
(282
|
)
|
|
|
(317
|
)
|
Pension related amounts, net of income taxes of
$17,408 and $2,452, respectively
|
|
|
(27,064
|
)
|
|
|
3,730
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income
|
|
$
|
(25,242
|
)
|
|
$
|
18,179
|
|
|
|
|
|
|
|
|
|
|
(v) Fair
Value of Derivatives Embedded within Convertible
Debt:
The Company has estimated the fair market value of the embedded
derivatives based principally on the results of a valuation
model. The estimated fair value of the derivatives embedded
within the convertible debt is based principally on the present
value of future dividend payments expected to be received by the
convertible debt holders over the term of the debt. The discount
rate applied to the future cash flows is estimated based on a
spread in the yield of the Companys debt when compared to
risk-free securities with the same duration; thus, a readily
determinable fair market value of the embedded derivatives is
not available. The valuation model assumes future dividend
payments by the Company and utilizes interest rates and credit
spreads for secured to unsecured debt,
F-15
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unsecured to subordinated debt and subordinated debt to
preferred stock to determine the fair value of the derivatives
embedded within the convertible debt. The valuation also
considers other items, including current and future dividends
and the volatility of Vectors stock price. The range of
estimated fair market values of the Companys embedded
derivatives was between $75,990 and $78,544. The Company
recorded the fair market value of its embedded derivatives at
the midpoint of the inputs at $77,244 as of December 31,
2008. The estimated fair market value of the Companys
embedded derivatives could change significantly based on future
market conditions. (See Note 7.)
(w) Capital
and Credit Market Crisis:
As the capital and credit market crisis has worsened, the
Company has performed additional assessments to determine the
impact, if any, of recent market developments, on the
Companys consolidated financial statements. The
Companys additional assessments have included a review of
access to liquidity in the capital and credit markets,
counterparty creditworthiness, value of the Companys
investments (including long-term investments, mortgage
receivable and employee benefit plans) and macroeconomic
conditions. The recent unprecedented volatility in capital and
credit markets may create additional risks in the upcoming
months and possibly years and the Company will continue to
perform additional assessments to determine the impact, if any,
on the Companys consolidated financial statements. Thus,
future impairment charges may occur.
On a quarterly basis, the Company evaluates its investments to
determine whether an impairment has occurred. If so, the Company
also makes a determination of whether such impairment is
considered temporary or other-than-temporary. The Company
believes that the assessment of temporary or
other-than-temporary impairment is facts and circumstances
driven. However, among the matters that are considered in making
such a determination are the period of time the investment has
remained below its cost or carrying value, the likelihood of
recovery given the reason for the decrease in market value and
the Companys original expected holding period of the
investment.
(x) Contingencies:
The Company records Liggetts product liability legal
expenses and other litigation costs as operating, selling,
general and administrative expenses as those costs are incurred.
As discussed in Note 12, legal proceedings covering a wide
range of matters are pending or threatened in various
jurisdictions against Liggett.
The Company and its subsidiaries record provisions in their
consolidated financial statements for pending litigation when
they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. 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
pending tobacco-related litigation or the costs of defending
such cases, and, except in the case of one claim currently
pending against the Company, the Company has not provided any
amounts in its consolidated financial statements for unfavorable
outcomes, if any. Litigation is subject to many uncertainties,
and it is possible that the Companys consolidated
financial position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any
such tobacco-related litigation.
(y) New
Accounting Pronouncements:
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. SFAS No. 159 is effective for
fiscal years beginning after November 15, 2007, with early
adoption permitted provided the entity also elects to apply the
provisions of SFAS No. 157. The Company has not
elected to use the fair value option.
In December 2007, the FASB issued SFAS No. 141(R), a
revised version of SFAS No. 141, Business
Combinations. The revision is intended to simplify
existing guidance and converge rulemaking under
U.S. Generally Accepted Accounting Principles
(GAAP) with international accounting rules. This
statement applies
F-16
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
prospectively to business combinations where the acquisition
date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. An entity
may not apply it before that date. The new standard also
converges financial reporting under U.S. GAAP with
international accounting rules. The Company is currently
assessing the impact, if any, of SFAS No. 141(R) on
its consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities-an amendment of FASB Statement No. 133.
SFAS No. 161 seeks qualitative disclosures about the
objectives and strategies for using derivatives, quantitative
data about the fair value of and gains and losses on derivative
contracts, and details of credit-risk-related contingent
features in hedged positions. SFAS No. 161 also seeks
enhanced disclosure around derivative instruments in financial
statements, accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, and how hedges affect an entitys
financial position, financial performance and cash flows.
SFAS No. 161 is effective for the Company as of
January 1, 2009 and the Company does not expect the
adoption of SFAS No. 161 to have a material impact on
its consolidated results of operations, financial position or
cash flows.
On May 9, 2008, the FASB issued FASB Staff Position
No. APB
14-1,
Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash
Settlement) (FSP No. APB
14-1).
The Company is currently assessing the impact of FSP
No. APB
14-1 on its
consolidated financial statements.
On June 16, 2008, the FASB issued FASB Staff Position
No. EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions are Participating Securities, which
states that unvested share-based payment awards that contain
nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall
be included in the computation of earnings per share under the
two-class method. The guidance is effective for financial
statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those years.
The Company is currently assessing the impact of FSP
No. EITF 03-6-1
on its consolidated financial statements.
In October 2008, the FASB issued FSP
SFAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, which addresses the
application of SFAS 157 for illiquid financial instruments.
FSP
SFAS 157-3
clarifies that approaches to determining fair value other than
the market approach may be appropriate when the market for a
financial asset is not active.
2. RESTRUCTURINGS
Vector Research 2006 Restructuring. In
November 2006, the Companys Board of Directors determined
to discontinue the genetics operation of its subsidiary, Vector
Research, and, not to pursue, FDA approval of QUEST as a smoking
cessation aide, due to the projected significant additional time
and expense involved in seeking such approval. In connection
with this decision, Vector Research eliminated 12 full-time
positions effective December 31, 2006.
The Company recognized pre-tax restructuring and inventory
impairment charges of $2,664, during the fourth quarter of 2006.
The restructuring charges include $484 relating to employee
severance and benefit costs, $338 for contract termination and
other associated costs, approximately $954 for asset impairment
and $890 in inventory write-offs. Approximately $1,842 of these
charges represent non-cash items.
F-17
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the combined pre-tax restructuring charges
relating to the 2006 Vector Research Ltd. restructurings for the
years ended December 31, 2008, 2007 and 2006, respectively,
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Non-Cash
|
|
|
Contract
|
|
|
|
|
|
|
Severance
|
|
|
Asset
|
|
|
Termination/
|
|
|
|
|
|
|
and Benefits
|
|
|
Impairment
|
|
|
Exit Costs
|
|
|
Total
|
|
|
Balance, January 1, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring charges
|
|
|
484
|
|
|
|
1,842
|
|
|
|
338
|
|
|
|
2,664
|
|
Utilized
|
|
|
|
|
|
|
(1,842
|
)
|
|
|
|
|
|
|
(1,842
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
484
|
|
|
$
|
|
|
|
$
|
338
|
|
|
$
|
822
|
|
Change in estimate
|
|
|
(71
|
)
|
|
|
|
|
|
|
8
|
|
|
|
(63
|
)
|
Utilized
|
|
|
(343
|
)
|
|
|
|
|
|
|
(346
|
)
|
|
|
(689
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
70
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70
|
|
Change in estimate
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Utilized
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liggett Vector Brands Restructurings. During
April 2004, Liggett Vector Brands adopted a restructuring plan
in its continuing effort to adjust the cost structure of the
Companys tobacco business and improve operating
efficiency. As part of the plan, Liggett Vector Brands
eliminated 83 positions and consolidated operations, subletting
its New York office space and relocating several employees. As a
result of these actions, the Company recognized pre-tax
restructuring charges of $2,735 in 2004, including $798 relating
to employee severance and benefit costs and $1,937 for contract
termination and other associated costs. Approximately $503 of
these charges represented non-cash items.
On October 6, 2004, the Company announced an additional
plan to further restructure the operations of Liggett Vector
Brands, its sales, marketing and distribution agent for its
Liggett and Vector Tobacco subsidiaries. Liggett Vector Brands
has realigned its sales force and adjusted its business model to
more efficiently serve its chain and independent accounts
nationwide. Liggett Vector Brands is seeking to expand the
portfolio of private and control label partner brands by
utilizing a pricing strategy that offers long-term list price
stability for customers. In connection with the restructuring,
the Company eliminated approximately 330 full-time
positions and 135 part-time positions as of
December 15, 2004.
The Company recognized pre-tax restructuring charges of $10,583
in 2004, with approximately $5,659 of the charges related to
employee severance and benefit costs and approximately $4,924 to
contract termination and other associated costs. Approximately
$2,503 of these charges represented non-cash items.
Additionally, the Company incurred other charges in 2004 for
various compensation and related payments to employees which are
related to the restructuring. These charges of $1,670 were
included in selling, general and administrative expenses.
F-18
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The components of the combined pre-tax restructuring charges
relating to the 2004 Liggett Vector Brands restructurings for
the years ended December 31, 2008, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Non-Cash
|
|
|
Contract
|
|
|
|
|
|
|
Severance
|
|
|
Asset
|
|
|
Termination/
|
|
|
|
|
|
|
and Benefits
|
|
|
Impairment
|
|
|
Exit Costs
|
|
|
Total
|
|
|
Balance, January 1, 2006
|
|
$
|
713
|
|
|
$
|
|
|
|
$
|
1,403
|
|
|
$
|
2,116
|
|
Change in estimate
|
|
|
(103
|
)
|
|
|
|
|
|
|
(25
|
)
|
|
|
(128
|
)
|
Utilized
|
|
|
(610
|
)
|
|
|
|
|
|
|
(528
|
)
|
|
|
(1,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
|
|
|
$
|
|
|
|
$
|
850
|
|
|
$
|
850
|
|
Change in estimate
|
|
|
|
|
|
|
|
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Utilized
|
|
|
|
|
|
|
|
|
|
|
(195
|
)
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2007
|
|
$
|
|
|
|
$
|
|
|
|
$
|
598
|
|
|
$
|
598
|
|
Change in estimate
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
(39
|
)
|
Utilized
|
|
|
|
|
|
|
|
|
|
|
(98
|
)
|
|
|
(98
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
461
|
|
|
$
|
461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.
|
INVESTMENT
SECURITIES AVAILABLE FOR SALE
|
Investment securities classified as available for sale are
carried at fair value, with net unrealized gains or losses
included as a component of stockholders equity, net of
taxes and minority interests. For the year ended
December 31, 2006, net realized gains were $3,019. The
Company recorded a loss related to other-than-temporary declines
in the fair value of its marketable equity securities of $3,018
and $1,216 for the years ended December 31, 2008 and 2007,
respectively. (See Note 1.)
The components of investment securities available for sale at
December 31, 2008 and 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
24,958
|
|
|
$
|
5,024
|
|
|
$
|
(1,464
|
)
|
|
$
|
28,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
21,565
|
|
|
$
|
24,374
|
|
|
$
|
(64
|
)
|
|
$
|
45,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale as of December 31,
2008 and December 31, 2007 include New Valleys
13,888,889 shares, respectively, of Ladenburg Thalmann
Financial Services Inc. (LTS) common stock, which
were carried at $10,000 and $29,444, respectively (see
Note 17). Investment securities available for sale as of
December 31, 2008 and 2007 also include 5,057,110 and
2,257,110 shares, respectively, of Opko Health Inc.
(Opko) common stock, which were carried at $8,193
and $6,433, respectively. In February 2008, the Company
purchased an additional 2,800,000 shares of Opko in a
private placement for $5,040. These shares have not been
registered for resale but are expected to be freely tradable
within one year. In 2008, the Company acquired
2,259,796 shares of Cardo Medical, Inc. for $500. The
shares were carried at $3,277 as of December 31, 2008.
These shares have not been registered for resale but are
expected to be freely tradable within one year.
F-19
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Leaf tobacco
|
|
$
|
48,880
|
|
|
$
|
41,502
|
|
Other raw materials
|
|
|
5,128
|
|
|
|
4,847
|
|
Work-in-process
|
|
|
314
|
|
|
|
710
|
|
Finished goods
|
|
|
46,202
|
|
|
|
45,331
|
|
|
|
|
|
|
|
|
|
|
Inventories at current cost
|
|
|
100,524
|
|
|
|
92,390
|
|
LIFO adjustments
|
|
|
(7,943
|
)
|
|
|
(5,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
92,581
|
|
|
$
|
86,825
|
|
|
|
|
|
|
|
|
|
|
The Company has a leaf inventory management program whereby,
among other things, it is committed to purchase certain
quantities of leaf tobacco. The purchase commitments are for
quantities not in excess of anticipated requirements and are at
prices, including carrying costs, established at the commitment
date. At December 31, 2008, Liggett had leaf tobacco
purchase commitments of approximately $8,658. During 2007 the
Company entered into a single source supply agreement for fire
safe cigarette paper through 2012.
In connection with the Companys decision in November 2006
to discontinue the genetics operation of Vector Research Ltd.
and not to pursue, at this time, FDA approval of QUEST as a
smoking cessation aide, the Company recognized a non-cash charge
of $890 to adjust the carrying value of the remaining excess
QUEST leaf tobacco inventory in 2006. The charge was recorded in
cost of goods sold for the year ended December 31, 2006.
The Company capitalizes the incremental prepaid cost of the
Master Settlement Agreement in ending inventory.
LIFO inventories represent approximately 95% of total
inventories at December 31, 2008 and 2007, respectively.
|
|
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Land and improvements
|
|
$
|
1,418
|
|
|
$
|
1,418
|
|
Buildings
|
|
|
13,575
|
|
|
|
13,575
|
|
Machinery and equipment
|
|
|
105,645
|
|
|
|
103,416
|
|
Leasehold improvements
|
|
|
2,269
|
|
|
|
2,209
|
|
Construction-in-progress
|
|
|
730
|
|
|
|
1,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123,637
|
|
|
|
121,769
|
|
Less accumulated depreciation
|
|
|
(72,946
|
)
|
|
|
(67,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
50,691
|
|
|
$
|
54,432
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2008, 2007 and 2006 was $10,057, $10,202, and
$9,888, respectively. Future machinery and equipment purchase
commitments at Liggett were $1,072 and $3,657 at
December 31, 2008 and 2007, respectively.
F-20
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2006, Liggett Vector Brands recognized an impairment
charge of $324 associated with its decision to dispose of an
asset to an unrelated third party. The asset was sold in the
fourth quarter of 2006.
In February 2001, Liggett sold a warehouse facility in a
sale-leaseback arrangement which resulted in a deferred gain of
$1,139, to be amortized over the
15-year
lease term. The lease provided the owner an early termination
option which was exercisable for $1,500. The owner exercised
that option in April 2006, and Liggett vacated the premises
effective December 31, 2006. During December 2006, Liggett
recognized $2,476 of income related to recognition of the
unamortized portion of the original deferred gain on sale and
early termination option payments received by Liggett from the
owner.
Long-term investments consist of investments in the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Investment partnerships accounted for at cost
|
|
$
|
51,118
|
|
|
$
|
54,997
|
|
|
$
|
72,971
|
|
|
$
|
89,007
|
|
Investments accounted for on the equity method
|
|
$
|
|
|
|
$
|
|
|
|
$
|
10,495
|
|
|
$
|
10,495
|
|
The principal business of these investment partnerships is
investing in investment securities and real estate. The
estimated fair value of the investment partnerships was provided
by the partnerships based on the indicated market values of the
underlying assets or investment portfolio. New Valley is an
investor in real estate partnerships where it has committed to
make additional investments of up to an aggregate of $112 at
December 31, 2008. The investments in these investment
partnerships are illiquid and the ultimate realization of these
investments is subject to the performance of the underlying
partnership and its management by the general partners.
In August 2006, the Company invested $25,000 in Icahn Partners,
LP, a privately managed investment partnership, of which Carl
Icahn is the portfolio manager and the controlling person of the
general partner, and manager of the partnership. In September
2007, the Company invested an additional $25,000 in Icahn
Partners, LP. Based on information available in public filings,
the Company believes affiliates of Mr. Icahn are the
beneficial owners of approximately 19.4% of Vectors common
stock at December 31, 2008.
The Companys investments constituted less than 3% of the
invested funds in each of the other partnerships at
December 31, 2008 and 2007 and, in accordance with EITF
Topic
No. D-46,
Accounting for Limited Partnership Investments, the
Company has accounted for such investments using the cost method
of accounting.
On November 1, 2006, the Company invested $10,000 in
Jefferies Buckeye Fund, LLC (Buckeye Fund), a
privately managed investment partnership, of which Jefferies
Asset Management, LLC is the portfolio manager. The Company
believes affiliates of Jefferies Asset Management, LLC
beneficially owned approximately 5.3% of Vectors common
stock as of December 31, 2008. The Companys
investment in the Buckeye Fund represented approximately 13.4%
of the amounts invested in the Buckeye Fund at December 31,
2007. In accordance with EITF Issue
No. 03-16,
Accounting for Investments in Limited Liability
Companies, the Company accounted for its investment in
Buckeye Fund using the equity method of accounting and carried
its investment in the Buckeye Fund at $10,495 and $10,230 as of
December 31, 2007 and 2006, respectively. The amounts
include $675 ($399 net of income taxes) and $292
($173 net of income taxes) of unrealized gains on
investment securities at December 31, 2007 and 2006,
respectively. The Company recorded a loss of $118 and $62
associated with the Buckeye Fund for the years ended
December 31, 2007 and 2006, respectively.
In April 2008, the Company elected to withdraw its investment in
the Buckeye Fund. The Company recorded a loss of $567 during the
first quarter of 2008 associated with the Buckeye Funds
performance, which has been included as Other
expense on the Companys consolidated statement of
operations. The Company received
F-21
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
proceeds of $8,328 in May 2008 and received an additional $900
of proceeds in the first quarter of 2009, which has been
included in Other current assets on the
Companys consolidated balance sheet.
We recorded a loss of $21,900 in 2008 due to the performance of
three of our long-term investments in various investment funds
in 2008. During 2008, one of our long-term investments was
impaired due to a portion of its underlying assets being held in
an account with the European subsidiary of Lehman Brothers
Holdings Inc. while our other long-term investments were
impaired as a result of the funds performances in 2008.
The Company determined that an other-than-temporary impairment
had occurred during 2008 as a result of its quarterly evaluation
of long-term investments. If it is determined that an
other-than-temporary decline in fair value exists in long-term
investments, the Company records an impairment charge with
respect to such investment in its consolidated statements of
operations.
The long-term investments are carried on the consolidated
balance sheet at cost. The fair value determination disclosed
above would be classified as Level 3 under the
SFAS 157 hierarchy disclosed in Note 15 if such assets
were recorded on the consolidated balance sheet at fair value.
The fair values were determined based on unobservable inputs and
were based on company assumptions, and information obtained from
the partnerships based on the indicated market values of the
underlying assets of the investment portfolio.
The changes in the fair value of these investments as of
December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
Investment
|
|
|
|
Partnerships
|
|
|
Partnerships
|
|
|
|
Accounted for at
|
|
|
Accounted for on
|
|
|
|
Cost
|
|
|
the Equity Method
|
|
|
Balance as of January 1, 2008
|
|
$
|
89,007
|
|
|
$
|
10,495
|
|
Contributions (distributions)
|
|
|
47
|
|
|
|
(8,328
|
)
|
Receivable classified as Other currents assets
|
|
|
|
|
|
|
(925
|
)
|
Unrealized loss on long-term investments
|
|
|
(12,157
|
)
|
|
|
(675
|
)
|
Other than temporary impairment on long-term investments
|
|
|
(21,900
|
)
|
|
|
|
|
Realized loss on long-term investments
|
|
|
|
|
|
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
54,997
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Because the capital and credit market crisis has continued to
worsen, the Company will continue to perform additional
assessments to determine the impact, if any, on the
Companys consolidated financial statements. Thus, future
impairment charges may occur.
In the future, the Company may invest in other investments,
including limited partnerships, real estate investments, equity
securities, debt securities, derivatives and certificates of
deposit, depending on risk factors and potential rates of return.
F-22
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
7.
|
NOTES PAYABLE,
LONG-TERM DEBT AND OTHER OBLIGATIONS
|
Notes payable, long-term debt and other obligations consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
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 $83,993 and $84,299*
|
|
|
26,007
|
|
|
|
25,701
|
|
5% Variable Interest Senior Convertible Notes due 2011, net of
unamortized net discount of $39,565 and $48,027*
|
|
|
72,299
|
|
|
|
63,837
|
|
Liggett:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
19,515
|
|
|
|
14,782
|
|
Term loan under credit facility
|
|
|
7,290
|
|
|
|
7,822
|
|
Equipment loans
|
|
|
8,307
|
|
|
|
9,660
|
|
V.T. Aviation:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
5,266
|
|
|
|
6,470
|
|
VGR Aviation:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
4,053
|
|
|
|
4,370
|
|
Other
|
|
|
62
|
|
|
|
154
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, long-term debt and other obligations
|
|
|
307,799
|
|
|
|
297,796
|
|
Less:
|
|
|
|
|
|
|
|
|
Current maturities
|
|
|
(97,498
|
)
|
|
|
(20,618
|
)
|
|
|
|
|
|
|
|
|
|
Amount due after one year
|
|
$
|
210,301
|
|
|
$
|
277,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The fair value of the derivatives embedded within the 3.875%
Variable Interest Senior Convertible Debentures ($51,829 and
$67,911 at December 31, 2008 and December 31, 2007,
respectively) and the 5% Variable Interest Senior Convertible
Notes ($25,416 at December 31, 2008 and $33,671 at
December 31, 2007, respectively) is separately classified
as a derivative liability in the consolidated balance sheets. |
11% Senior
Secured Notes due 2015
Vector:
In August 2007, the Company sold $165,000 of its 11% Senior
Secured Notes due 2015 (the Senior Secured Notes) in
a private offering to qualified institutional investors in
accordance with Rule 144A of the Securities Act of 1933. On
May 28, 2008, the Company completed an offer to exchange
the Senior Secured Notes for an equal amount of newly issued
11% Senior Secured Notes due 2015. The new Senior Secured
Notes have substantially the same terms as the original notes,
except that the new Senior Secured Notes have been registered
under the Securities Act.
The Senior Secured Notes pay interest on a semi-annual basis at
a rate of 11% per year and mature on August 15, 2015. The
Company may redeem some or all of the Senior Secured Notes at
any time prior to August 15, 2011 at a make-whole
redemption price. On or after August 15, 2011 the Company
may redeem some or all of the Senior Secured Notes at a premium
that will decrease over time, plus accrued and unpaid interest
and liquidated damages, if any, to the redemption date. At any
time prior to August 15, 2010, the Company may on any one
or more occasions redeem up to 35% of the aggregate principal
amount of the Senior Secured Notes with the net proceeds of
certain equity offerings at 111% of the aggregate principal
amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the redemption date. In the event of a
change of control, as defined in the indenture
F-23
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
governing the Senior Secured Notes, each holder of the Senior
Secured Notes may require the Company to repurchase some or all
of its Senior Secured Notes at a repurchase price equal to 101%
of their aggregate principal amount plus accrued and unpaid
interest and liquidated damages, if any to the date of purchase.
The Senior Secured Notes are fully and unconditionally
guaranteed on a joint and several basis by all of the
wholly-owned domestic subsidiaries of the Company that are
engaged in the conduct of the Companys cigarette
businesses. In addition, some of the guarantees are
collateralized by second priority or first priority security
interests in certain collateral of some of the subsidiary
guarantors, including their common stock, pursuant to security
and pledge agreements.
The indenture contains covenants that restrict the payment of
dividends by the Company if the Companys consolidated
earnings before interest, taxes, depreciation and amortization
(Consolidated EBITDA), as defined in the indenture,
for the most recently ended four full quarters is less than
$50,000. The indenture also restricts the incurrence of debt if
the Companys Leverage Ratio and its Secured Leverage
Ratio, as defined in the indenture, exceed 3.0 and 1.5,
respectively. The Companys Leverage Ratio is defined in
the indenture as the ratio of the Companys and the
guaranteeing subsidiaries total debt less the fair market
value of the Companys cash, investments in marketable
securities and long-term investments to Consolidated EBITDA, as
defined in the indenture. The Companys Secured Leverage
Ratio is defined in the indenture in the same manner as the
Leverage Ratio, except that secured indebtedness is substituted
for indebtedness.
The following table summarizes the requirements of these
financial covenants and the results of the calculation, as
defined by the indenture.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indenture
|
|
|
December 31,
|
|
|
December 31,
|
|
Covenant
|
|
Requirement
|
|
|
2008
|
|
|
2007
|
|
|
Consolidated EBITDA, as defined
|
|
$
|
50,000
|
|
|
$
|
154,053
|
|
|
$
|
137,820
|
|
Leverage ratio, as defined
|
|
|
<3.0 to 1
|
|
|
|
0.1 to 1
|
|
|
|
Negative
|
|
Secured leverage ratio, as defined
|
|
|
<1.5 to 1
|
|
|
|
Negative
|
|
|
|
Negative
|
|
Variable
Interest Senior Convertible Debt
Vector:
Vector has issued two series of variable interest senior
convertible debt. Both series of debt pay interest on a
quarterly basis at a stated rate plus an additional amount of
interest on each payment date. The additional amount is based on
the amount of cash dividends paid during the prior three-month
period ending on the record date for such interest payment
multiplied by the total number of shares of its common stock
into which the debt will be convertible on such record date (the
Additional Interest).
3.875%
Variable Interest Senior Convertible Debentures due
2026:
In July 2006, the Company sold $110,000 of its 3.875% variable
interest senior convertible debentures due 2026 in a private
offering to qualified institutional buyers in accordance with
Rule 144A under the Securities Act of 1933.
The debentures pay interest on a quarterly basis at a rate of
3.875% per annum plus Additional Interest (the Debenture
Total Interest). Notwithstanding the foregoing, however,
the interest payable on each interest payment date shall be the
higher of (i) the Debenture Total Interest and
(ii) 5.75% per annum. The debentures are convertible into
the Companys common stock at the holders option. The
conversion price, which was $18.58 per share at
December 31, 2008, is subject to adjustment for various
events, including the issuance of stock dividends.
The debentures will mature on June 15, 2026. The Company
must redeem 10% of the total aggregate principal amount of the
debentures outstanding on June 15, 2011. In addition to
such redemption amount, the Company will also redeem on
June 15, 2011 and at the end of each interest accrual
period thereafter an additional amount, if any, of the
debentures necessary to prevent the debentures from being
treated as an Applicable High Yield Discount
F-24
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Obligation under the Internal Revenue Code. The holders of
the debentures will have the option on June 15, 2012,
June 15, 2016 and June 15, 2021 to require the Company
to repurchase some or all of their remaining debentures. The
redemption price for such redemptions will equal 100% of the
principal amount of the debentures plus accrued interest. If a
fundamental change (as defined in the Indenture) occurs, the
Company will be required to offer to repurchase the debentures
at 100% of their principal amount, plus accrued interest and,
under certain circumstances, a make-whole premium.
5%
Variable Interest Senior Convertible Notes Due November
2011:
Between November 2004 and April 2005, the Company sold $111,864
of its 5% variable interest senior convertible notes due
November 15, 2011 in a private offering to qualified
institutional investors in accordance with Rule 144A under
the Securities Act of 1933. The notes pay interest on a
quarterly basis at a rate of 5% per annum plus Additional
Interest (the Notes Total Interest). Notwithstanding
the foregoing, however, during the period prior to
November 15, 2006, the interest payable on each interest
payment date is the higher of (i) the Notes Total Interest
and (ii) 6.75% per year. The notes are convertible into the
Companys common stock at the holders option. The
conversion price, which was $15.96 at December 31, 2008, is
subject to adjustment for various events, including the issuance
of stock dividends.
The notes will mature on November 15, 2011. The Company
must redeem 12.5% of the total aggregate principal amount of the
notes outstanding on November 15, 2009. In addition to such
redemption amount, the Company will also redeem on
November 15, 2009 and at the end of each interest accrual
period thereafter an additional amount, if any, of the notes
necessary to prevent the notes from being treated as an
Applicable High Yield Discount Obligation under the
Internal Revenue Code. The holders of the notes will have the
option on November 15, 2009 to require the Company to
repurchase some or all of their remaining notes. The redemption
price for such redemptions will equal 100% of the principal
amount of the notes plus accrued interest. If a fundamental
change (as defined in the indenture) occurs, the Company will be
required to offer to repurchase the notes at 100% of their
principal amount, plus accrued interest and, under certain
circumstances, a make-whole premium.
Embedded
Derivatives on the Variable Interest Senior Convertible
Debt:
The portion of the Debenture Total Interest and the Notes Total
Interest which is computed by reference to the cash dividends
paid on the Companys common stock is considered an
embedded derivative within the convertible debt, which the
Company is required to separately value. Pursuant to SFAS
No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain
Hedging Activities, the Company has bifurcated these
embedded derivatives and estimated the fair value of the
embedded derivative liability. The resulting discount created by
allocating a portion of the issuance proceeds to the embedded
derivative is then amortized to interest expense over the term
of the debt using the effective interest method. Changes to the
fair value of these embedded derivatives are reflected quarterly
in the Companys consolidated statements of operations as
Changes in fair value of derivatives embedded within
convertible debt. The value of the embedded derivative is
contingent on changes in interest rates of debt instruments
maturing over the duration of the convertible debt as well as
projections of future cash and stock dividends over the term of
the debt.
The estimated initial fair values of the embedded derivates
associated with the 3.875% convertible debentures and the 5%
convertible notes were $56,214 and $42,041, respectively, at the
date of issuance.
F-25
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of non-cash interest expense associated with the
amortization of the discount created by the embedded derivative
liabilities for the years ended December 31, 2008, 2007 and
2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
3.875% convertible debentures
|
|
$
|
360
|
|
|
$
|
(28
|
)
|
|
$
|
414
|
|
5% convertible notes
|
|
|
5,445
|
|
|
|
3,796
|
|
|
|
3,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense associated with embedded derivatives
|
|
$
|
5,805
|
|
|
$
|
3,768
|
|
|
$
|
3,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of non-cash changes in fair value of derivatives
embedded within convertible debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
3.875% convertible debentures
|
|
$
|
16,082
|
|
|
$
|
(8,104
|
)
|
|
$
|
(3,593
|
)
|
5% convertible notes
|
|
|
8,255
|
|
|
|
1,995
|
|
|
|
3,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on changes in fair value of derivatives embedded
within convertible debt
|
|
$
|
24,337
|
|
|
$
|
(6,109
|
)
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table reconciles the fair value of derivatives
embedded within convertible debt at December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.875%
|
|
|
5%
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
Debentures
|
|
|
Notes
|
|
|
Total
|
|
|
Balance at January 1, 2006
|
|
|
|
|
|
|
39,371
|
|
|
|
39,371
|
|
Issuance of 3.875% convertible debentures
|
|
|
56,214
|
|
|
|
|
|
|
|
56,214
|
|
Loss (gain) from changes in fair value of embedded derivatives
|
|
|
3,593
|
|
|
|
(3,705
|
)
|
|
|
(112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
59,807
|
|
|
|
35,666
|
|
|
|
95,473
|
|
Loss (gain) from changes in fair value of embedded derivatives
|
|
|
8,104
|
|
|
|
(1,995
|
)
|
|
|
6,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
67,911
|
|
|
|
33,671
|
|
|
|
101,582
|
|
Gain from changes in fair value of embedded derivatives
|
|
|
(16,082
|
)
|
|
|
(8,255
|
)
|
|
|
(24,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
51,829
|
|
|
$
|
25,416
|
|
|
$
|
77,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature on Variable Interest Senior Convertible
Debt:
After giving effect to the recording of the embedded derivative
liability as a discount to the convertible debt, the
Companys common stock had a fair value at the issuance
date of the debt in excess of the conversion price resulting in
a beneficial conversion feature. EITF Issue
No. 98-5,
Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Convertible
Ratios, requires that the intrinsic value of the
beneficial conversion feature be recorded to additional paid-in
capital and as a discount on the debt. The discount is then
amortized to interest expense over the term of the debt using
the effective interest method.
The initial intrinsic value of the beneficial conversion feature
associated with the 3.875% convertible debentures and the 5%
convertible notes was $28,381 and $22,138, respectively, at the
date of issuance. In accordance with EITF Issue
No. 05-8,
the beneficial conversion feature has been recorded, net of
income taxes, as an increase to stockholders equity.
F-26
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Amortization of beneficial conversion feature:
|
|
|
|
|
|
|
|
|
|
|
|
|
3.875% convertible debentures
|
|
$
|
(54
|
)
|
|
$
|
(215
|
)
|
|
$
|
125
|
|
5% convertible notes
|
|
|
3,017
|
|
|
|
2,083
|
|
|
|
1,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense associated with beneficial conversion feature
|
|
$
|
2,963
|
|
|
$
|
1,868
|
|
|
$
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
Debt Discount:
The following table reconciles unamortized debt discount at
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.875%
|
|
|
5%
|
|
|
|
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
Debentures
|
|
|
Notes
|
|
|
Total
|
|
|
Balance at January 1, 2006
|
|
$
|
|
|
|
$
|
58,655
|
|
|
$
|
58,655
|
|
Issuance of 3.875% convertible debentures-embedded derivative
|
|
|
56,214
|
|
|
|
|
|
|
|
56,214
|
|
Issuance of 3.875% convertible debentures-beneficial conversion
feature
|
|
|
28,381
|
|
|
|
|
|
|
|
28,381
|
|
Amortization of embedded derivative
|
|
|
(414
|
)
|
|
|
(3,056
|
)
|
|
|
(3,470
|
)
|
Amortization of beneficial conversion feature
|
|
|
(125
|
)
|
|
|
(1,693
|
)
|
|
|
(1,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
84,056
|
|
|
|
53,906
|
|
|
|
137,962
|
|
Amortization of embedded derivative
|
|
|
28
|
|
|
|
(3,796
|
)
|
|
|
(3,768
|
)
|
Amortization of beneficial conversion feature
|
|
|
215
|
|
|
|
(2,083
|
)
|
|
|
(1,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
84,299
|
|
|
|
48,027
|
|
|
|
132,326
|
|
Amortization of embedded derivative
|
|
|
(360
|
)
|
|
|
(5,445
|
)
|
|
|
(5,805
|
)
|
Amortization of beneficial conversion feature
|
|
|
54
|
|
|
|
(3,017
|
)
|
|
|
(2,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
83,993
|
|
|
$
|
39,565
|
|
|
$
|
123,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
Liggett:
Liggett has a $50,000 credit facility with Wachovia Bank, N.A.
(Wachovia) under which $19,515 was outstanding at
December 31, 2008. Availability as determined under the
facility was approximately $16,500 based on eligible collateral
at December 31, 2008. The facility is collateralized by all
inventories and receivables of Liggett and a mortgage on
Liggetts manufacturing facility. The facility requires
Liggetts compliance with certain financial and other
covenants including a restriction on Liggetts ability to
pay cash dividends unless Liggetts borrowing availability,
as defined, under the facility for the
30-day
period prior to the payment of the dividend, and after giving
effect to the dividend, is at least $5,000 and no event of
default has occurred under the agreement, including
Liggetts compliance with the covenants in the credit
facility.
The term of the Wachovia facility expires on March 8, 2012,
subject to automatic renewal for additional one-year periods
unless a notice of termination is given by Wachovia or Liggett
at least 60 days prior to such date or the anniversary of
such date. Prime rate loans under the facility bear interest at
a rate equal to the prime rate of Wachovia with Eurodollar rate
loans bearing interest at a rate of 2.0% above Wachovias
adjusted Eurodollar rate. The facility contains covenants that
provide that Liggetts earnings before interest, taxes,
depreciation and amortization, as defined under the facility, on
a trailing twelve month basis, shall not be less than $100,000
if Liggetts excess availability, as defined, under the
facility, is less than $20,000. The covenants also require that
F-27
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
annual capital expenditures, as defined under the facility
(before a maximum carryover amount of $2,500), shall not exceed
$10,000 during any fiscal year.
In August 2007, Wachovia made an $8,000 term loan to 100 Maple
LLC (Maple), a subsidiary of Liggett, within the
commitment under the existing credit facility. The $8,000 term
loan is collateralized by the existing collateral securing the
credit facility, and is also collateralized by a lien on certain
real property (the Mebane Property) owned by Maple.
The Mebane Property also secures the other obligations of
Liggett under the credit facility. The $8,000 term loan did not
increase the $50,000 borrowing amount of the credit facility,
but did increase the outstanding amounts under the credit
facility by the amount of the term loan and proportionately
reduces the maximum borrowing availability under the facility.
In August 2007, Liggett and Wachovia amended the credit facility
to permit the guaranty of the Companys Senior Secured
Notes by each of Liggett and Maple and the pledging of certain
assets of Liggett and Maple on a subordinated basis to secure
their guarantees. The credit facility was amended to grant to
Wachovia a blanket lien on all the assets of Liggett and Maple,
excluding any equipment pledged to current or future purchase
money or other financiers of such equipment and excluding any
real property, other than the Mebane Property and other real
property to the extent its value is in excess of $5,000. In
connection with the amendment, Wachovia, Liggett, Maple and the
collateral agent for the holders of the Senior Secured Notes
entered into an intercreditor agreement, pursuant to which the
liens of the collateral agent on the Liggett and Maple assets
were subordinated to the liens of Wachovia on the Liggett and
Maple assets.
Equipment
Loans
Liggett:
In October 2005, Liggett purchased equipment for $4,441 through
a financing agreement, payable in 24 installments of $112 and
then 24 installments of $90. Interest is calculated at 4.89%.
Liggett was required to provide a security deposit equal to 25%
of the funded amount ($1,110).
In December 2005, Liggett purchased equipment for $2,273 through
a financing agreement, payable in 24 installments of $58 and
then 24 installments of $46. Interest is calculated at 5.03%.
Liggett was required to provide a security deposit equal to 25%
of the funded amount ($568).
In August 2006, Liggett purchased equipment for $7,922 through a
financing agreement, payable in 30 installments of $191 and then
30 installments of $103. Interest is calculated at 5.15%.
Liggett was required to provide a security deposit equal to 20%
of the funded amount ($1,584).
In May 2007, Liggett purchased equipment for $1,576 through a
financing agreement, payable in 60 installments of $32. Interest
is calculated at 7.99% per annum.
In August 2008, Liggett purchased equipment for $2,745 through a
financing agreement, payable in 60 installments of $53. Interest
is calculated at 5.94% per annum. Liggett was required to
provide a security deposit equal to approximately 15% of the
funded amount ($428).
Each of these equipment loans is collateralized by the purchased
equipment.
Note
Payable V.T.
Aviation:
In February 2001, V.T. Aviation LLC, a subsidiary of Vector
Research Ltd., purchased an airplane for $15,500 and borrowed
$13,175 to fund the purchase. The loan, which is collateralized
by the airplane and a letter of credit from the Company for
$775, is guaranteed by Vector Research, VGR Holding and the
Company. The loan is payable in 119 monthly installments of
$125, including annual interest of 2.31% above the
30-day
commercial paper rate, with a final payment of $2,261 based on
current interest rates.
F-28
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note
Payable VGR
Aviation:
In February 2002, V.T. Aviation purchased an airplane for $6,575
and borrowed $5,800 to fund the purchase. The loan is guaranteed
by the Company. The loan is payable in 119 monthly
installments of $40, including annual interest of 2.75% above
the 30-day
average commercial paper rate, with a final payment of $2,909
based on current interest rates. During the fourth quarter of
2003, this airplane was transferred to the Companys direct
subsidiary, VGR Aviation LLC, which assumed the debt.
Scheduled
Maturities:
Scheduled maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
137,063
|
|
|
|
39,565
|
|
|
|
97,498
|
|
2010
|
|
|
4,397
|
|
|
|
|
|
|
|
4,397
|
|
2011
|
|
|
115,136
|
|
|
|
83,993
|
|
|
|
31,143
|
|
2012
|
|
|
4,247
|
|
|
|
|
|
|
|
4,247
|
|
2013
|
|
|
5,514
|
|
|
|
|
|
|
|
5,514
|
|
Thereafter
|
|
|
165,000
|
|
|
|
|
|
|
|
165,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
431,357
|
|
|
$
|
123,558
|
|
|
$
|
307,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturities of $137,063 (principal amount) in 2009
include $97,881 (principal amount), which may be required to be
redeemed in 2009 in accordance with the terms of its 5% Variable
Interest Senior Convertible Notes due 2011. The scheduled
maturities of $196,142 (principal amount) in 2011 reflect
$99,000 (principal amount), which may be required to be redeemed
in 2011 in accordance with the terms of its 3.875% Variable
Interest Senior Convertible Debentures due 2026.
The Company believes that it will continue to meet its liquidity
requirements through 2009. The Companys corporate
expenditures (exclusive of Liggett, Vector Research, Vector
Tobacco and New Valley) and other potential liquidity
requirements over the next 12 months include cash interest
expense of approximately $48,500, dividends on its outstanding
common shares (currently at an annual rate of approximately
$115,000), a payment of a retirement benefit under its
Supplemental Retirement Plan (SERP) in July 2009 to
its former Executive Chairman of approximately $20,750, the
mandatory redemption by November 15, 2009 of approximately
$14,000 of the outstanding principal amount of its 5% Variable
Interest Senior Convertible Notes, and the possible redemption
of an additional approximately $98,000 principal amount of Notes
as a result of an option by the holders to require the Company
to repurchase some or all of the remaining principal amount of
Notes on November 15, 2009, and other corporate expenses
and taxes, including a tax payment of approximately $75,500 in
connection with the Philip Morris brands transaction.
In order to meet the above liquidity requirements as well as
other anticipated liquidity needs in the normal course of
business, the Company had cash and cash equivalents of
approximately $211,000, investment securities available for sale
of approximately $28,500, long-term investments with an
estimated value of approximately $55,000 and availability under
Liggetts credit facility of approximately $16,500 at
December 31, 2008. Management currently anticipates that
these amounts, as well as expected cash flows from its
operations, should be sufficient to meet the Companys
liquidity needs during 2009.
In the event the Companys existing cash and cash
equivalents and cash flows from operations are not sufficient to
meet its 2009 liquidity needs, the Company has the ability to
take other actions to provide the liquidity needed in 2009.
These actions may include, among other things, debt or equity
financing, which in the current economic
F-29
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
environment may not be available or may only be available at an
increased cost; incenting the holders of its 5% Variable
Interest Senior Convertible Notes, prior to November 15,
2009, when the holders have the option to require redemption of
their Notes, to convert such Notes or to modify the optional
redemption terms, through issuance of additional shares of its
common stock or cash payments; modifying its dividend policy
(which would also reduce the amount of cash interest due on the
Companys convertible debt); and selling some or all of its
investment securities and long-term investments, the proceeds
from which may be impacted by the Companys ability to
liquidate such investments. No assurances can be provided that
the above measures can be achieved.
Weighted-Average
Interest Rate on Current Maturities of Long-Term
Debt:
The weighted-average interest rate on the Companys current
maturities of long-term debt at December 31, 2008 was
approximately 13.02%.
Certain of the Companys subsidiaries lease facilities and
equipment used in operations under both month-to-month and
fixed-term agreements. The aggregate minimum rentals under
operating leases with non-cancelable terms of one year or more
as of December 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Sublease
|
|
|
|
|
|
|
Commitments
|
|
|
Rentals
|
|
|
Net
|
|
|
Year Ending December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
4,069
|
|
|
|
1,027
|
|
|
|
3,042
|
|
2010
|
|
|
2,718
|
|
|
|
946
|
|
|
|
1,772
|
|
2011
|
|
|
2,654
|
|
|
|
965
|
|
|
|
1,689
|
|
2012
|
|
|
2,587
|
|
|
|
965
|
|
|
|
1,622
|
|
2013
|
|
|
999
|
|
|
|
402
|
|
|
|
597
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
13,027
|
|
|
$
|
4,305
|
|
|
$
|
8,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2001, the Company entered into an operating sublease for
space in an office building in New York. The lease, as amended,
expires in 2013. Minimum rental expense over the entire period
is $10,584. A rent abatement received upon entering into the
lease is recognized on a straight line basis over the life of
the lease. The Company pays operating expense escalation ($40 in
2009) in monthly installments along with installments of
the base rent.
The Companys rental expense for the years ended
December 31, 2008, 2007 and 2006 was $3,825, $3,928 and
$4,506, respectively. The Company incurred royalty expense under
various agreements during the years ended December 31,
2008, 2007 and 2006 of $0, $114, and $1,275, respectively.
|
|
9.
|
EMPLOYEE
BENEFIT PLANS
|
Defined
Benefit Plans and Postretirement Plans:
Defined Benefit Plans. The Company sponsors
three defined benefit pension plans (two qualified and one
non-qualified) covering virtually all individuals who were
employed by Liggett on a full-time basis prior to 1994. Future
accruals of benefits under these three defined benefit plans
were frozen between 1993 and 1995. These benefit plans provide
pension benefits for eligible employees based primarily on their
compensation and length of service. Contributions are made to
the two qualified pension plans in amounts necessary to meet the
minimum funding requirements of the Employee Retirement Income
Security Act of 1974. The plans assets and benefit
obligations were measured at September 30, 2007 and
December 31, 2008.
F-30
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also sponsors a Supplemental Retirement Plan
(SERP) where the Company will pay supplemental
retirement benefits to certain key employees, including
executive officers of the Company. In January 2006, the Company
amended and restated its SERP (the Amended SERP),
effective January 1, 2005. The amendments to the plan were
intended, among other things, to cause the plan to meet the
applicable requirements of Section 409A of the Internal
Revenue Code. The Amended SERP is intended to be unfunded for
tax purposes, and payments under the Amended SERP will be made
out of the general assets of the Company except that, under the
terms of the Chairmans amended employment agreement, the
Company has agreed during 2006, 2007 and 2008 to pay $125 per
quarter into a separate trust for him that will be used to fund
a portion of his benefits under the Amended SERP. Under the
Amended SERP, the benefit payable to a participant at his normal
retirement date is a lump sum amount which is the actuarial
equivalent of a predetermined annual retirement benefit set by
the Companys board of directors. Normal retirement date is
defined as the January 1 following the attainment by the
participant of the later of age 60 or the completion of
eight years of employment following January 1, 2002 with
the Company or a subsidiary, except that, under the terms of the
Chairmans amended employment agreement, his normal
retirement date was accelerated by one year to December 30,
2008. In connection with his retirement, he will be entitled to
a payment of approximately $20,760 in July 2009, which will be
partially funded by the approximate $1,550 held in the separate
trust at December 31, 2008.
At December 31, 2008, the aggregate lump sum equivalents of
the annual retirement benefits payable under the Amended SERP at
normal retirement dates occurring during the following years is
as follows: 2009 $20,760; 2010 $12,359;
2011 $0; 2012 $8,816; 2013
$1,694 and 2014 to 2018 $7,202. In the case of a
participant who becomes disabled prior to his normal retirement
date or whose service is terminated without cause, the
participants benefit consists of a pro-rata portion of the
full projected retirement benefit to which he would have been
entitled had he remained employed through his normal retirement
date, as actuarially discounted back to the date of payment. A
participant who dies while working for the Company or a
subsidiary (and before becoming disabled or attaining his normal
retirement date) will be paid an actuarially discounted
equivalent of his projected retirement benefit; conversely, a
participant who retires beyond his normal retirement date will
receive an actuarially increased equivalent of his projected
retirement benefit.
In April 2008, the SERP was amended to provide the
Companys President and Chief Executive Officer with an
additional benefit under the SERP equal to a $736 lifetime
annuity beginning January 1, 2013. This additional benefit
vests in full on January 1, 2013, subject to his remaining
continuously employed by the Company through that date, subject
to partial vesting for termination of employment under certain
circumstances. In addition, in the event of a termination of his
employment under the circumstances where he is entitled to
severance payments under his employment agreement, he will be
credited with an additional 36 months of service towards
vesting under the SERP. As a result of the additional benefit
granted to him, the President and Chief Executive Officer will
be eligible to receive a total lump sum retirement benefit of
$20,546 in 2013, an increase of $7,122 over the benefit he would
have been entitled to receive under the SERP prior to the
amendment, assuming a January 1, 2013 retirement date. The
$7,122 increase will be recognized as an expense in the years
ended December 31, 2010, 2011 and 2012.
Postretirement Medical and Life Plans. The
Company provides certain postretirement medical and life
insurance benefits to certain employees. Substantially all of
the Companys manufacturing employees as of
December 31, 2008 are eligible for postretirement medical
benefits if they reach retirement age while working for Liggett
or certain affiliates. Retirees are required to fund 100%
of participant medical premiums and, pursuant to union
contracts, Liggett reimburses approximately 450 hourly
retirees, who retired prior to 1991, for Medicare Part B
premiums. In addition, the Company provides life insurance
benefits to approximately 225 active employees and 500 retirees
who reach retirement age and are eligible to receive benefits
under one of the Companys defined benefit pension plans.
The Companys postretirement liabilities are comprised of
Medicare Part B and life insurance premiums.
Computation of Defined Benefit and Postretirement Benefit
Plan Liabilities. On September 29, 2006,
SFAS No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans was
issued.
F-31
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 158 requires, among other things, the
recognition of the funded status of each defined pension benefit
plan, retiree health care and other postretirement benefit plans
and postemployment benefit plans on the Companys
consolidated balance sheet. Each overfunded plan is recognized
as an asset and each underfunded plan is recognized as a
liability. The initial impact of the standard due to
unrecognized prior service costs or credit and net actuarial
gains or losses as well as subsequent changes in the funded
status is recognized as a component of accumulated comprehensive
income (loss) in the Companys consolidated statement of
stockholders equity. Additional minimum pension
liabilities (AML) and related intangible assets are
also derecognized upon the adoption of SFAS No. 158,
which requires initial application for fiscal years ending after
December 15, 2006. The following table summarizes the
effect of the required changes in the AML as of
December 31, 2006 prior to the adoption of
SFAS No. 158 as well as the impact of the initial
adoption of SFAS No. 158 at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post AML
|
|
|
|
SFAS
|
|
|
and SFAS
|
|
|
|
No. 158
|
|
|
No. 158
|
|
|
|
Adjustment
|
|
|
Adjustments
|
|
|
Prepaid pension costs
|
|
$
|
(10,705
|
)
|
|
$
|
20,933
|
|
Intangible asset
|
|
|
(1,232
|
)
|
|
|
|
|
Current liabilities
|
|
|
1,142
|
|
|
|
1,142
|
|
Pension liabilities
|
|
|
(349
|
)
|
|
|
26,548
|
|
Postretirement liabilities
|
|
|
(1,450
|
)
|
|
|
9,502
|
|
Accumulated other comprehensive loss
|
|
|
11,280
|
|
|
|
12,891
|
|
The following table summarizes amounts in accumulated other
comprehensive loss that are expected to be recognized as
components of net periodic benefit cost for the year ending
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Post-
|
|
|
|
|
|
|
Benefit
|
|
|
Retirement
|
|
|
|
|
|
|
Pension Plans
|
|
|
Plans
|
|
|
Total
|
|
|
Prior service cost
|
|
$
|
801
|
|
|
$
|
|
|
|
$
|
801
|
|
Actuarial loss (gain)
|
|
|
2,136
|
|
|
|
(163
|
)
|
|
|
1,973
|
|
F-32
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table provides a reconciliation of benefit
obligations, plan assets and the funded status of the pension
plans and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
(159,776
|
)
|
|
$
|
(163,463
|
)
|
|
$
|
(9,836
|
)
|
|
$
|
(10,295
|
)
|
Service cost
|
|
|
(3,789
|
)
|
|
|
(3,896
|
)
|
|
|
(14
|
)
|
|
|
(18
|
)
|
Interest cost
|
|
|
(9,525
|
)
|
|
|
(9,122
|
)
|
|
|
(591
|
)
|
|
|
(591
|
)
|
Gap period cash flow
|
|
|
3,192
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
Gap period service and interest cost
|
|
|
(3,328
|
)
|
|
|
|
|
|
|
(151
|
)
|
|
|
|
|
Benefits paid
|
|
|
12,583
|
|
|
|
12,990
|
|
|
|
642
|
|
|
|
770
|
|
Plan amendment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time contractual termination benefits
|
|
|
|
|
|
|
(632
|
)
|
|
|
|
|
|
|
|
|
Actuarial gain
|
|
|
4,325
|
|
|
|
4,347
|
|
|
|
1,013
|
|
|
|
298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
$
|
(156,318
|
)
|
|
$
|
(159,776
|
)
|
|
$
|
(8,743
|
)
|
|
$
|
(9,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
169,465
|
|
|
$
|
157,499
|
|
|
$
|
|
|
|
$
|
|
|
Gap period cash flow
|
|
|
(3,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
(42,810
|
)
|
|
|
24,598
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
472
|
|
|
|
358
|
|
|
|
643
|
|
|
|
770
|
|
Benefits paid
|
|
|
(12,583
|
)
|
|
|
(12,990
|
)
|
|
|
(643
|
)
|
|
|
(770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
$
|
111,266
|
|
|
$
|
169,465
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31
|
|
$
|
(45,052
|
)
|
|
$
|
9,689
|
|
|
$
|
(8,743
|
)
|
|
$
|
(9,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension costs
|
|
$
|
2,901
|
|
|
$
|
42,084
|
|
|
$
|
|
|
|
$
|
|
|
Other accrued liabilities
|
|
|
(21,139
|
)
|
|
|
(530
|
)
|
|
|
(701
|
)
|
|
|
(768
|
)
|
Non-current employee benefit liabilities
|
|
|
(26,814
|
)
|
|
|
(31,865
|
)
|
|
|
(8,042
|
)
|
|
|
(9,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
(45,052
|
)
|
|
$
|
9,689
|
|
|
$
|
(8,743
|
)
|
|
$
|
(9,836
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Actuarial assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates benefit obligation
|
|
|
6.75
|
%
|
|
|
6.25
|
%
|
|
|
5.85
|
%
|
|
|
6.75
|
%
|
|
|
6.25
|
%
|
|
|
5.85
|
%
|
Discount rates service cost
|
|
|
6.25
|
%
|
|
|
5.85
|
%
|
|
|
5.68
|
%
|
|
|
6.25
|
%
|
|
|
5.85
|
%
|
|
|
5.68
|
%
|
Assumed rates of return on invested assets
|
|
|
7.50
|
%
|
|
|
8.50
|
%
|
|
|
8.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary increase assumptions
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
F-33
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Service cost benefits earned during the period
|
|
$
|
4,139
|
|
|
$
|
4,246
|
|
|
$
|
4,897
|
|
|
$
|
15
|
|
|
$
|
18
|
|
|
$
|
20
|
|
Interest cost on projected benefit obligation
|
|
|
9,525
|
|
|
|
9,122
|
|
|
|
9,012
|
|
|
|
591
|
|
|
|
591
|
|
|
|
598
|
|
Expected return on assets
|
|
|
(12,145
|
)
|
|
|
(12,726
|
)
|
|
|
(12,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
1,402
|
|
|
|
1,402
|
|
|
|
1,051
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time contractual termination benefits
|
|
|
|
|
|
|
632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss (gain)
|
|
|
98
|
|
|
|
705
|
|
|
|
1,689
|
|
|
|
(180
|
)
|
|
|
(105
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense
|
|
$
|
3,019
|
|
|
$
|
3,381
|
|
|
$
|
4,059
|
|
|
$
|
426
|
|
|
$
|
504
|
|
|
$
|
606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, current year accumulated other
comprehensive income, before income taxes, consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Post-
|
|
|
|
|
|
|
Benefit
|
|
|
Retirement
|
|
|
|
|
|
|
Pension Plans
|
|
|
Plans
|
|
|
Total
|
|
|
Prior year accumulated other comprehensive income
|
|
$
|
5,128
|
|
|
$
|
1,054
|
|
|
$
|
6,182
|
|
Amortization of prior service costs
|
|
|
1,402
|
|
|
|
|
|
|
|
1,402
|
|
Amortization of gain (loss)
|
|
|
99
|
|
|
|
(180
|
)
|
|
|
(81
|
)
|
Net (loss) gain arising during the year
|
|
|
(53,316
|
)
|
|
|
1,013
|
|
|
|
(52,303
|
)
|
Gap period adjustment
|
|
|
373
|
|
|
|
(45
|
)
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year accumulated other comprehensive income (loss)
|
|
$
|
(46,314
|
)
|
|
$
|
1,842
|
|
|
$
|
(44,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008, there was $46,314 of items not yet
recognized as a component of net periodic pension benefit, which
consisted of future pension expense of $801 associated with the
amortization of prior service cost and future pension benefits
of $45,513 associated with the amortization of net loss.
As of December 31, 2008, there was $1,842 of items not yet
recognized as a component of net periodic postretirement
benefit, which consisted of future benefits associated with the
amortization of net gains.
As of December 31, 2007, current year accumulated other
comprehensive income, before income taxes, consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Post-
|
|
|
|
|
|
|
Benefit
|
|
|
Retirement
|
|
|
|
|
|
|
Pension Plans
|
|
|
Plans
|
|
|
Total
|
|
|
Prior year accumulated other comprehensive income (loss)
|
|
$
|
(13,548
|
)
|
|
$
|
657
|
|
|
$
|
(12,891
|
)
|
Amortization of prior service costs
|
|
|
1,402
|
|
|
|
|
|
|
|
1,402
|
|
Amortization of gain (loss)
|
|
|
705
|
|
|
|
(105
|
)
|
|
|
600
|
|
Net gain arising during the year
|
|
|
16,569
|
|
|
|
502
|
|
|
|
17,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year accumulated other comprehensive income
|
|
$
|
5,128
|
|
|
$
|
1,054
|
|
|
$
|
6,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $5,128 of items not yet
recognized as a component of net periodic pension benefit, which
consisted of future pension expense of $2,553 associated with
the amortization of prior service cost and future pension
benefits of $7,681 associated with the amortization of net gains.
F-34
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2007, there was $1,054 of items not yet
recognized as a component of net periodic postretirement
benefit, which consisted of future benefits associated with the
amortization of net gains.
As of December 31, 2008, three of the Companys four
defined benefit plans experienced accumulated benefit
obligations in excess of plan assets, for which in the aggregate
the projected benefit obligation, accumulated benefit obligation
and fair value of plan assets were $105,677, $105,677 and
$57,723, respectively. As of December 31, 2007, two of the
Companys four defined benefit plans experienced
accumulated benefit obligations in excess of plan assets, for
which in the aggregate the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets
were $32,485, $32,485 and $0, respectively.
Discount rates were determined by a quantitative analysis
examining the prevailing prices of high quality bonds to
determine an appropriate discount rate for measuring obligations
under SFAS No. 87, Employers Accounting
for Pensions and SFAS No. 106,
Employers Accounting for Postretirement Benefits
Other Than Pensions. The aforementioned analysis analyzes
the cash flow from each of the Companys four benefit plans
as well as a separate analysis of the cash flows from the
postretirement medical and life insurance plans sponsored by
Liggett. The aforementioned analyses then construct a
hypothetical bond portfolio whose cash flow from coupons and
maturities match the
year-by-year,
projected benefit cash flow from the respective pension or
retiree health plans. The Company uses the lower discount rate
derived from the two independent analyses in the computation of
the benefit obligation and service cost for each respective
retirement liability. The Company uses the discount rate derived
from the analysis in the computation of the benefit obligation
and service cost for all the plans respective retirement
liability.
The Company considers input from its external advisors and
historical returns in developing its expected rate of return on
plan assets. The expected long-term rate of return is the
weighted average of the target asset allocation of each
individual asset class. The Companys actual
10-year
annual rate of return on its pension plan assets was 2.5%, 6.7%
and 8.2% for the years ended December 31, 2008, 2007 and
2006, respectively, and the Companys actual five-year
annual rate of return on its pension plan assets was 1.2%, 11.3%
and 7.6% for the years ended December 31, 2008, 2007 and
2006, respectively.
Gains and losses resulting from changes in actuarial assumptions
and from differences between assumed and actual experience,
including, among other items, changes in discount rates and
changes in actual returns on plan assets as compared to assumed
returns. These gains and losses are only amortized to the extent
that they exceed 10% of the greater of Projected Benefit
Obligation and the fair value of assets. For the year ended
December 31, 2008, Liggett used a 7.95-year period for its
Hourly Plan and a 4.56-year period for its Salaried Plan to
amortize pension fund gains and losses on a straight line basis.
Such amounts are reflected in the pension expense calculation
beginning the year after the gains or losses occur. The
amortization of deferred losses negatively impacts pension
expense in the future.
Plan assets are invested employing multiple investment
management firms. Managers within each asset class cover a range
of investment styles and focus primarily on issue selection as a
means to add value. Risk is controlled through a diversification
among asset classes, managers, styles and securities. Risk is
further controlled both at the manager and asset class level by
assigning excess return and tracking error targets. Investment
managers are monitored to evaluate performance against these
benchmark indices and targets.
Allowable investment types include equity, investment grade
fixed income, high yield fixed income, hedge funds and short
term investments. The equity fund is comprised of common stocks
and mutual funds of large, medium and small companies, which are
predominantly U.S. based. The investment grade fixed income
fund includes managed funds investing in fixed income securities
issued or guaranteed by the U.S. government, or by its
respective agencies, mortgage backed securities, including
collateralized mortgage obligations, and corporate debt
obligations. The high yield fixed income fund includes a fund
which invests in non-investment grade corporate debt securities.
The hedge funds invest in both equity, including common and
preferred stock, and debt obligations,
F-35
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
including convertible debentures, of private and public
companies. The Company generally utilizes its short term
investments, including interest-bearing cash, to pay benefits
and to deploy in special situations.
The target asset allocation percentage in 2007 was 50% equity
investments, 20% investment grade fixed income, 7% high yield
fixed income, 15% alternative investments (including hedge funds
and private equity funds) and 8% short-term investments, with a
rebalancing range of approximately plus or minus 5% around the
target asset allocations. In 2008, the Liggett Employee Benefits
Committee temporarily suspended its target asset allocation
percentages due to the volatility in the financial markets. Even
though such allocation percentages were suspended, investment
manager performance versus their respective benchmarks was still
monitored on a regular basis.
Vectors defined benefit retirement plan allocations at
December 31, 2008 and 2007, by asset category, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Asset category:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
44
|
%
|
|
|
52
|
%
|
Investment grade fixed income securities
|
|
|
26
|
%
|
|
|
18
|
%
|
High yield fixed income securities
|
|
|
5
|
%
|
|
|
8
|
%
|
Alternative investments
|
|
|
8
|
%
|
|
|
13
|
%
|
Short-term investments
|
|
|
17
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
For 2008 measurement purposes, annual increases in Medicare
Part B trends were assumed to equal rates between 0.0% and
6.6% between 2008 and 2017 and 4.5% after 2018. For 2007
measurement purposes, annual increases in Medicare Part B
trends were assumed to equal rates between 0.9% and 4.5% between
2007 and 2016 and 5.0% after 2017.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A 1% change
in assumed health care cost trend rates would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
|
1% Decrease
|
|
|
Effect on total of service and interest cost components
|
|
$
|
12
|
|
|
$
|
(11
|
)
|
Effect on benefit obligation
|
|
$
|
176
|
|
|
$
|
(163
|
)
|
To comply with ERISAs minimum funding requirements, the
Company does not currently anticipate that it will be required
to make any funding to the pension plans for the pension plan
year beginning on January 1, 2009 and ending on
December 31, 2009. Any additional funding obligation that
the Company may have for subsequent years is contingent on
several factors and is not reasonably estimable at this time.
Estimated future pension and postretirement medical benefits
payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension
|
|
|
Medical
|
|
|
2009
|
|
$
|
33,488
|
|
|
$
|
701
|
|
2010
|
|
|
24,792
|
|
|
|
685
|
|
2011
|
|
|
12,137
|
|
|
|
679
|
|
2012
|
|
|
13,469
|
|
|
|
678
|
|
2013
|
|
|
11,401
|
|
|
|
689
|
|
2014 2018
|
|
|
58,286
|
|
|
|
3410
|
|
F-36
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Profit
Sharing and Other
Plans:
The Company maintains 401(k) plans for substantially all
U.S. employees which allow eligible employees to invest a
percentage of their pre-tax compensation. The Company
contributed to the 401(k) plans and expensed $1,095, $828, and
$1,130 for the years ended December 31, 2008, 2007 and
2006, respectively.
The Company files a consolidated U.S. income tax return
that includes its more than
80%-owned
U.S. subsidiaries. The amounts provided for income taxes
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
25,747
|
|
|
$
|
5,035
|
|
|
$
|
27,982
|
|
State
|
|
|
7,889
|
|
|
|
3,109
|
|
|
|
8,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,636
|
|
|
$
|
8,144
|
|
|
$
|
36,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
5,170
|
|
|
$
|
40,575
|
|
|
$
|
(10,591
|
)
|
State
|
|
|
(4,738
|
)
|
|
|
4,081
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
432
|
|
|
|
44,656
|
|
|
|
(10,379
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
34,068
|
|
|
$
|
52,800
|
|
|
$
|
25,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effect of temporary differences which give rise to a
significant portion of deferred tax assets and liabilities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
Deferred Tax
|
|
|
Deferred Tax
|
|
|
Deferred Tax
|
|
|
Deferred Tax
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Excess of tax basis over book basis- non-consolidated entities
|
|
$
|
3,938
|
|
|
$
|
|
|
|
$
|
2,907
|
|
|
$
|
|
|
Deferral on Philip Morris brand transaction
|
|
|
|
|
|
|
75,466
|
|
|
|
|
|
|
|
75,466
|
|
Employee benefit accruals
|
|
|
18,803
|
|
|
|
|
|
|
|
16,543
|
|
|
|
15,234
|
|
Book/tax differences on fixed and Intangible assets
|
|
|
|
|
|
|
26,908
|
|
|
|
|
|
|
|
23,984
|
|
Impact of embedded derivatives on convertible debt
|
|
|
|
|
|
|
18,890
|
|
|
|
|
|
|
|
12,613
|
|
Impact of timing of settlement payments
|
|
|
|
|
|
|
7,854
|
|
|
|
|
|
|
|
16,293
|
|
Restricted U.S. tax loss carryforwards
|
|
|
|
|
|
|
|
|
|
|
873
|
|
|
|
|
|
U.S. tax credit carryforwards Vector
|
|
|
|
|
|
|
|
|
|
|
15,991
|
|
|
|
|
|
Various U.S. state tax loss carryforwards
|
|
|
15,211
|
|
|
|
|
|
|
|
15,962
|
|
|
|
|
|
Other
|
|
|
26,123
|
|
|
|
12,196
|
|
|
|
9,532
|
|
|
|
22,333
|
|
Valuation allowance
|
|
|
(15,211
|
)
|
|
|
|
|
|
|
(16,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
48,864
|
|
|
$
|
141,314
|
|
|
$
|
44,973
|
|
|
$
|
165,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provides a valuation allowance against deferred tax
assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized. The valuation
F-37
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
allowance of $15,211 and $16,835 at December 31, 2008 and
2007, respectively, consisted primarily of a reserve against
various state and local net operating loss carryforwards,
primarily resulting from Vector Tobaccos losses.
During 2007, the Company and its more than 80%-owned
subsidiaries, which included New Valley, utilized its remaining
U.S. net operating loss carryforwards. As of
December 31, 2007, the Company and its more than
80%-owned
subsidiaries, which included New Valley, had approximately
$15,485 of alternative minimum tax credit carryforwards, which
may be carried forward indefinitely under current U.S. tax
law, and $506 of general business credit carryforwards, which
expire in 2011.
Deferred federal income tax expense differs in 2008, 2007 and
2006 as a result of the utilization of net operating losses, and
reclassifications between current and deferred tax liabilities
resulting from the Companys settlement with the Internal
Revenue Service in 2006. The deferred federal tax expense in
2008 related to the deferred income tax expenses associated with
the utilization of net operating losses and the impact of a
change in accounting method for deductibility of accrued
settlement costs. The deferred federal tax expense in 2007
related to the deferred income tax expenses associated with the
utilization of net operating losses and the impact of a change
in accounting method for deductibility of accrued settlement
costs. The deferred federal tax benefit in 2006 related to the
reclassification between deferred and current income tax expense
associated with the Companys settlement with the Internal
Revenue Service and was offset by the utilization of net
operating losses. The consolidated balance sheets of the Company
include deferred income tax assets and liabilities, which
represent temporary differences in the application of accounting
rules established by generally accepted accounting principles
and income tax laws.
As of December 31, 2008, the Companys deferred income
tax liabilities exceeded its deferred income tax assets by
$92,450. As of December 31, 2007, the Companys
deferred income tax liabilities exceeded its deferred income tax
assets by $120,950. The largest component of the Companys
deferred tax liabilities exists because of differences that
resulted from a 1998 and 1999 transaction with Philip Morris
Incorporated where a subsidiary of Liggett contributed three of
its premium cigarette brands to Trademarks LLC, a newly-formed
limited liability company. Philip Morris exercised its option to
purchase the remaining interest in Trademarks on
February 19, 2009. (See Note 16.)
In connection with the transaction, the Company recognized in
1999 a pre-tax gain of $294,078 in its consolidated financial
statements and established a deferred tax liability of $103,100
relating to the gain. As a result of the exercise of the option,
the Company will be required to pay tax in the amount of the
deferred tax liability, which will be offset by the benefit of
any deferred tax assets available to the Company at that time.
In connection with an examination of the Companys 1998 and
1999 federal income tax returns, the Internal Revenue Service
issued to the Company in September 2003 a notice of proposed
adjustment. The notice asserted that, for tax reporting
purposes, the entire gain should have been recognized in 1998
and in 1999 in the additional amounts of $150,000 and $129,900,
respectively, rather than upon the exercise of the options. In
July 2006, the Company entered into a settlement with the
Internal Revenue Service with respect to the Philip Morris brand
transaction. As part of the settlement, the Company agreed that
$87,000 of the gain on the transaction would be recognized by
the Company as income for tax purposes in 1999 and that the
balance of the remaining gain, net of previously capitalized
expenses of $900, ($192,000) will be recognized by the Company
as income in 2009, upon exercise of the option. As a result of
the settlement, the Company reduced, during the third quarter of
2006, the excess portion ($11,500) of a previously established
reserve in its consolidated financial statements, which resulted
in a decrease in such amount in reported income tax expense in
the consolidated statements of operations.
F-38
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Differences between the amounts provided for income taxes and
amounts computed at the federal statutory tax rate are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income before income taxes
|
|
$
|
94,572
|
|
|
$
|
126,603
|
|
|
$
|
68,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense at statutory rate
|
|
|
33,100
|
|
|
|
44,311
|
|
|
|
23,969
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefits
|
|
|
2,048
|
|
|
|
4,674
|
|
|
|
5,445
|
|
Non-deductible expenses
|
|
|
1,771
|
|
|
|
2,950
|
|
|
|
3,188
|
|
Impact of domestic production deduction
|
|
|
(1,608
|
)
|
|
|
|
|
|
|
|
|
Non-deductible impact of conversion of debt
|
|
|
|
|
|
|
|
|
|
|
5,201
|
|
Equity and other adjustments
|
|
|
381
|
|
|
|
115
|
|
|
|
(293
|
)
|
Impact of tax audit settlements
|
|
|
|
|
|
|
(468
|
)
|
|
|
(11,500
|
)
|
Change in other tax contingencies
|
|
|
|
|
|
|
2,114
|
|
|
|
1,984
|
|
Changes in valuation allowance, net of equity and tax audit
adjustments
|
|
|
(1,624
|
)
|
|
|
(896
|
)
|
|
|
(2,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
34,068
|
|
|
$
|
52,800
|
|
|
$
|
25,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of January 1, 2007, the Company adopted the provisions
of FIN 48. The Company did not recognize any adjustment in
the liability for unrecognized tax benefits as a result of the
adoption of FIN 48 that impacted the January 1, 2007
accumulated deficit.
The following table summarizes the activity related to the
unrecognized tax benefits:
|
|
|
|
|
Balance at January 1, 2007
|
|
$
|
11,685
|
|
Additions based on tax positions related to current year
|
|
|
|
|
Additions based on tax positions related to prior years
|
|
|
2,242
|
|
Reductions based on tax positions related to prior years
|
|
|
(95
|
)
|
Settlements
|
|
|
|
|
Expirations of the statute of limitations
|
|
|
(3,227
|
)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
10,605
|
|
Additions based on tax positions related to current year
|
|
|
|
|
Additions based on tax positions related to prior years
|
|
|
747
|
|
Reductions based on tax positions related to prior years
|
|
|
(317
|
)
|
Settlements
|
|
|
|
|
Expirations of the statute of limitations
|
|
|
(3,532
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
7,503
|
|
|
|
|
|
|
In the event the unrecognized tax benefits of $7,503 and $10,605
at December 31, 2008 and 2007, respectively, were
recognized, such recognition would impact the annual effective
tax rates. During 2008, the accrual for potential penalties and
interest related to these unrecognized tax benefits was reduced
by $619, and in total, as of December 31, 2008, a liability
for potential penalties and interest of $2,191 has been
recorded. During 2007, the accrual for potential penalties and
interest related to these unrecognized tax benefits was reduced
by $881, and in total, as of December 31, 2007, a liability
for potential penalties and interest of $2,810 has been
recorded. The Company classifies all tax-related interest and
penalties as income tax expense.
F-39
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
It is reasonably possible the Company may recognize up to
approximately $2,300 of currently unrecognized tax benefits over
the next 12 months, pertaining primarily to expiration of
statutes of limitations of positions reported on U.S. and
state and local income tax returns. The Company files
U.S. and state and local income tax returns in
jurisdictions with varying statutes of limitations.
In March 2005, New Valley paid $1,589, including interest of
$885, under protest in connection with a state tax assessment.
In October 2005, New Valley filed a brief to challenge the
assessment. In March 2007, New Valley and the state taxing
authority agreed that the state taxing authority would refund
approximately $725, including $425 of interest, of the amount
paid in March 2005 to New Valley. New Valley received the refund
in May 2007. As a result, the Companys income tax
provision was reduced by approximately $450, net of income taxes
of approximately $275, for the year ended December 31, 2007.
The Company grants equity compensation under its Amended and
Restated 1999 Long-Term Incentive Plan (the 1999
Plan). As of December 31, 2008, there were
approximately 5,175,000 shares available for issuance under
the 1999 Plan.
Stock Options. The Company accounts for stock
compensation using SFAS No. 123(R), which requires the
Company to value unvested stock options granted prior to the
adoption of SFAS No. 123(R) under the fair value
method of accounting and expense this amount in the statement of
operations over the stock options remaining vesting
period. Upon adoption, there was no cumulative adjustment for
the impact of the change in accounting principles because the
assumed forfeiture rate did not differ significantly from prior
periods. The Company recognized compensation expense of $186
($110 net of income taxes), $197 ($116 net of income
taxes) and $470 ($279 net of income taxes) related to stock
options in the years ended December 31, 2008, 2007 and
2006, respectively, as a result of adopting
SFAS No. 123(R).
The terms of certain stock options awarded under the 1999 Plan
in January 2001 and November 1999 provide for common stock
dividend equivalents (at the same rate as paid on the common
stock) with respect to the shares underlying the unexercised
portion of the options. In accordance with
SFAS No. 123(R), the Company recognizes payments of
the dividend equivalent rights on these options as reductions in
additional paid-in capital on the Companys consolidated
balance sheet ($4,865, $6,475 and $6,186, net of taxes, for the
years ended December 31, 2008, 2007 and 2006,
respectively), which is included as Distributions on
common stock in the Companys consolidated statement
of changes in stockholders equity.
The fair value of option grants is estimated at the date of
grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including expected stock price characteristics which
are significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models
do not necessarily provide a reliable single measure of the fair
value of stock-based compensation awards.
The assumptions used under the Black-Scholes option pricing
model in computing fair value of options are based on the
expected option life considering both the contractual term of
the option and expected employee exercise behavior, the interest
rate associated with U.S. Treasury issues with a remaining
term equal to the expected
F-40
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
option life and the expected volatility of the Companys
common stock over the expected term of the option. The
assumptions used for grants in the year ended December 31,
2006 were as follows:
|
|
|
|
|
|
|
2006
|
|
|
Risk-free interest rate
|
|
|
4.9% 5.0%
|
|
Expected volatility
|
|
|
38.17% 40.52%
|
|
Dividend yield
|
|
|
9.96% 10.03%
|
|
Expected holding period
|
|
|
6 6.75 years
|
|
Weighted average fair value
|
|
$
|
2.14 $2.50
|
|
A summary of employee stock option transactions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value(1)
|
|
|
Outstanding on January 1, 2006
|
|
|
9,917,574
|
|
|
$
|
9.10
|
|
|
|
3.6
|
|
|
$
|
67,495
|
|
Granted
|
|
|
312,559
|
|
|
$
|
15.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(355,293
|
)
|
|
$
|
8.76
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(28,672
|
)
|
|
$
|
16.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2006
|
|
|
9,846,168
|
|
|
$
|
9.27
|
|
|
|
2.8
|
|
|
$
|
69,246
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(469,148
|
)
|
|
$
|
8.31
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(10,270
|
)
|
|
$
|
22.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2007
|
|
|
9,366,750
|
|
|
$
|
9.24
|
|
|
|
1.8
|
|
|
$
|
95,238
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,080,467
|
)
|
|
$
|
5.72
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,403
|
)
|
|
$
|
30.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2008
|
|
|
5,284,880
|
|
|
$
|
11.59
|
|
|
|
1.7
|
|
|
$
|
13,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
9,468,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
9,159,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
5,169,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value represents the amount by which the
fair value of the underlying common stock ($13.62, $19.10 and
$16.10 at December 31, 2008, 2007 and 2006, respectively)
exceeds the option exercise price. |
F-41
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Additional information relating to options outstanding at
December 31, 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
|
|
|
Exercisable
|
|
|
|
|
Range of
|
|
as of
|
|
|
Contractual Life
|
|
|
Weighted-Average
|
|
|
as of
|
|
|
Weighted-Average
|
|
Exercise Prices
|
|
12/31/2008
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
12/31/2008
|
|
|
Exercise Price
|
|
|
$0.00 9.28
|
|
|
|
10,554
|
|
|
|
4.0
|
|
|
$
|
8.98
|
|
|
|
10,554
|
|
|
$
|
8.98
|
|
$9.29 12.37
|
|
|
|
3,507,143
|
|
|
|
0.9
|
|
|
$
|
9.95
|
|
|
|
3,507,143
|
|
|
$
|
9.95
|
|
$12.38 15.47
|
|
|
|
1,541,854
|
|
|
|
3.3
|
|
|
$
|
13.49
|
|
|
|
1,452,138
|
|
|
$
|
13.40
|
|
$15.48 18.56
|
|
|
|
52,090
|
|
|
|
6.9
|
|
|
$
|
17.67
|
|
|
|
26,044
|
|
|
$
|
17.67
|
|
$18.57 21.65
|
|
|
|
5,612
|
|
|
|
3.1
|
|
|
$
|
19.69
|
|
|
|
5,612
|
|
|
$
|
19.69
|
|
$21.66 24.74
|
|
|
|
33,971
|
|
|
|
2.5
|
|
|
$
|
22.23
|
|
|
|
33,971
|
|
|
$
|
22.23
|
|
$24.75 27.84
|
|
|
|
53,465
|
|
|
|
2.6
|
|
|
$
|
26.29
|
|
|
|
53,465
|
|
|
$
|
26.29
|
|
$27.84 30.93
|
|
|
|
80,191
|
|
|
|
2.7
|
|
|
$
|
28.26
|
|
|
|
80,191
|
|
|
$
|
28.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,284,880
|
|
|
|
1.7
|
|
|
$
|
11.59
|
|
|
|
5,169,118
|
|
|
$
|
11.50
|
|
As of December 31, 2008, there was $255 of total
unrecognized compensation cost related to unvested stock
options. The cost is expected to be recognized over a
weighted-average period of approximately one year at
December 31, 2008.
As of December 31, 2007, there was $441 of total
unrecognized compensation cost related to unvested stock
options. The cost is expected to be recognized over a
weighted-average period of approximately one year at
December 31, 2007.
In accordance with SFAS No. 123(R), the Company
reflects the tax savings resulting from tax deductions in excess
of expense reflected in its financial statements as a component
of Cash Flows from Financing Activities.
Non-qualified options for 312,558 shares of common stock
were issued during 2006. The exercise price of the options
granted was $15.20 in 2006. The exercise prices of the options
granted in 2006 were at the fair value on the dates of the
grants, other than a grant of options for 289,406 shares in
2006 at $1.44 more than the fair value on the grant date. No
options were granted in 2008 and 2007.
In accordance with SFAS No. 123(R), the Company has
elected to use the long-form method under which each award grant
is tracked on an
employee-by-employee
basis and
grant-by-grant
basis to determine if there is a tax benefit or tax deficiency
for such award. The Company then compares the fair value expense
to the tax deduction received for each grant and aggregates the
benefits and deficiencies to establish its hypothetical APIC
Pool.
The Company recognizes windfall tax benefits associated with the
exercise of stock options directly to stockholders equity
only when realized. A windfall tax benefit occurs when the
actual tax benefit realized by the Company upon an
employees disposition of a share-based award exceeds the
deferred tax asset, if any, associated with the award that the
Company had recorded.
The total intrinsic value of options exercised during the years
ended December 31, 2008, 2007, and 2006 was $44,755,
$3,841, and $2,333, respectively. Tax benefits related to option
exercises of $18,304, $2,055, and $0 were recorded as increases
to stockholders equity for the years ended
December 31, 2008, 2007 and 2006, respectively. In
accordance with SFAS No. 123(R), tax benefits related
to option exercises for the year ended December 31, 2006
were not deemed to be realized as net operating loss
carryforwards were available to offset taxable income computed
without giving effect to the deductions related to option
exercises.
During 2008, 4,080,467 options, exercisable at prices ranging
from $5.99 to $12.69 per share, were exercised for $87 in cash
and the delivery to the Company of 1,375,895 shares of
common stock with a fair market value of $24,395, or $17.73, per
share on the date of exercise.
F-42
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2007, 469,148 options, exercisable at prices ranging from
$7.25 to $14.45 per share, were exercised for $5,100 in cash and
the delivery to the Company of 8,008 shares of common stock
with a fair market value of $168, or $20.98, per share on the
date of exercise.
During 2006, 355,293 options, exercisable at prices ranging from
$7.24 to $14.00 per share, were exercised for $2,571 in cash and
the delivery to the Company of 43,644 shares of common
stock with a fair market value of $760, or $17.40, per share on
the date of exercise.
Restricted Stock Awards. In 2005, the
President of the Company was awarded a restricted stock grant of
669,768 shares of the Companys common stock, pursuant
to the 1999 Plan. Pursuant to the restricted share agreements,
one-fourth of the shares vested on September 15, 2006, with
an additional one-fourth vesting on each of the three succeeding
one-year anniversaries of the first vesting date through
September 15, 2009. In the event his employment with the
Company is terminated for any reason other than his death, his
disability or a change of control (as defined in his restricted
share agreements) of the Company, any remaining balance of the
shares not previously vested will be forfeited by him. The
Company recorded deferred compensation of $11,340 representing
the fair market value of the total restricted shares on the
dates of grant. The deferred compensation will be amortized over
the vesting period as a charge to compensation expense. The
Company recorded an expense of $2,843, $2,835, and $2,987
associated with the grants for the years ended December 31,
2008, 2007 and 2006, respectively.
In November 2005, the President of Liggett and Liggett Vector
Brands was awarded a restricted stock grant of
57,881 shares of the Companys common stock pursuant
to the 1999 Plan. Pursuant to his restricted share agreement,
one-fourth of the shares vested on November 1, 2006, with
an additional one-fourth vesting on each of the three succeeding
one-year anniversaries of the first vesting date through
November 1, 2009. In the event his employment with the
Company is terminated for any reason other than his death, his
disability or a change of control (as defined in his restricted
share agreement) of the Company, any remaining balance of the
shares not previously vested will be forfeited by him. The
Company recorded deferred compensation of $1,018 representing
the fair market value of the restricted shares on the date of
grant. The Company recorded an expense of $254 associated with
the grant for each of the years ended December 31, 2008,
2007 and 2006, respectively.
On June 1, 2004, the Company granted 12,763 restricted
shares of the Companys common stock pursuant to the 1999
Plan to each of its four outside directors. The shares vested
over a period of three years. The Company recognized $644 of
expense over the vesting period, including $89 and $215 of
expense for the years ended December 31, 2007 and 2006,
respectively.
On June 4, 2007, the Company granted 11,025 restricted
shares of the Companys common stock pursuant to the 1999
Plan to each of its four outside directors. The shares will vest
over three years and the Company will recognize $792 of expense
over the vesting period. The Company recognized $264 and $154
for the years ended December 31, 2008 and 2007,
respectively, in connection with this restricted stock award.
As of December 31, 2008, there was $2,591 of total
unrecognized compensation costs related to unvested restricted
stock awards. The cost is expected to be recognized over a
weighted-average period of approximately one year at
December 31, 2008.
As of December 31, 2007, there was $5,952 of total
unrecognized compensation costs related to unvested restricted
stock awards. The cost is expected to be recognized over a
weighted-average period of approximately one year at
December 31, 2007.
The Companys accounting policy is to treat dividends paid
on unvested restricted stock as a reduction to additional
paid-in capital on the Companys consolidated balance sheet.
F-43
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 purporting to be
brought on behalf of a class of individual plaintiffs cases
primarily alleging personal injury or seeking court-supervised
programs for ongoing medical monitoring as well as cases
alleging the use of the terms lights
and/or
ultra lights constitutes a deceptive and unfair
trade practice, common law fraud or violation of federal law,
purporting to be brought on behalf of a class of individual
plaintiffs (Class Actions); (iii) health
care cost recovery actions brought by various foreign and
domestic governmental entities (Governmental
Actions); and (iv) health care cost recovery actions
brought by third-party payors including insurance companies,
union health and welfare trust funds, asbestos manufacturers and
others (Third-Party Payor Actions). As new cases are
commenced, the costs associated with defending these cases and
the risks relating to the inherent unpredictability of
litigation continue to increase. The future financial impact of
the risks and expenses of litigation and the effects of the
tobacco litigation settlements discussed below are not
quantifiable at this time. For the years ended December 31,
2008, 2007 and 2006, Liggett incurred legal expenses and other
litigation costs totaling approximately $8,800, $7,800 and
$5,353, respectively.
The Company and its subsidiaries record provisions in their
consolidated financial statements for pending litigation when
they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time,
while it is reasonably possible that an unfavorable outcome in a
case may occur, except as discussed elsewhere in this note:
(i) management has concluded that it is not probable that a
loss has been incurred in any of the pending tobacco-related
cases; (ii) management is unable to estimate the possible
loss or range of loss that could result from an unfavorable
outcome of any of the pending tobacco-related cases; and
(iii) accordingly, management has not provided any amounts
in the consolidated financial statements for unfavorable
outcomes, if any.
Individual
Actions
As of December 31, 2008, there were 36 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 2,680 Engle progeny cases (defined below)
pending against Liggett
and/or the
Company, in state and federal courts in Florida, and
approximately 100 individual cases pending in West Virginia
state court as part of a consolidated action. The following
table lists the number of individual cases by state that are
pending against
F-44
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Liggett or its affiliates as of December 31, 2008
(excluding Engle progeny cases and the cases consolidated
in West Virginia):
|
|
|
|
|
|
|
Number
|
|
State
|
|
of Cases
|
|
|
Florida
|
|
|
12
|
|
New York
|
|
|
10
|
|
Louisiana
|
|
|
5
|
|
Maryland
|
|
|
2
|
|
Mississippi
|
|
|
2
|
|
West Virginia
|
|
|
2
|
|
District of Columbia
|
|
|
1
|
|
Missouri
|
|
|
1
|
|
Ohio
|
|
|
1
|
|
Liggett Only Cases. There are currently five
cases pending where Liggett is the only tobacco company
defendant. In April 2004, in Davis v. Liggett Group,
a Florida state court jury awarded compensatory damages of
$540 against Liggett, plus interest. In addition, the court
awarded plaintiffs counsel legal fees of $752. Liggett
appealed both the compensatory and the legal fee awards. In
October 2007, the compensatory award was affirmed by the Fourth
District Court of Appeal. In March 2008, the Fourth District
Court of Appeal reversed and remanded the legal fee award for
further proceedings in the trial court. The Company has accrued
approximately $2,300 for the Davis case at
December 31, 2008. In Ferlanti v. Liggett
Group, an alleged Engle progeny case, trial commenced
in February 2009. This case was originally filed by plaintiff in
2003 as an individual case. Trial commenced in 2008 and, after
three days, the court declared a mistrial. Since that time,
plaintiff amended her complaint to assert her status as a
decertified Engle class member. The Engle progeny
cases are discussed below. The other three individual actions,
where Liggett is the only tobacco company defendant, are dormant.
The plaintiffs allegations of liability in those cases in
which individuals seek recovery for injuries allegedly caused by
cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty,
strict liability, fraud, concealment, misrepresentation, design
defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action,
unjust enrichment, common law public nuisance, property damage,
invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade
practice laws, the federal Racketeer Influenced and Corrupt
Organizations Act (RICO), state RICO statutes and
antitrust statutes. In many of these cases, in addition to
compensatory damages, plaintiffs also seek other forms of relief
including treble/multiple damages, medical monitoring,
disgorgement of profits and punitive damages. Although alleged
damages often are not determinable from a complaint, and the law
governing the pleading and calculation of damages varies from
state to state and jurisdiction to jurisdiction, compensatory
and punitive damages have been specifically pleaded in a number
of cases, sometimes in amounts ranging into the hundreds of
millions and even billions of dollars.
Defenses raised by defendants in individual cases include lack
of proximate cause, assumption of the risk, comparative fault
and/or
contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as unclean
hands and lack of benefit, failure to state a claim and
federal preemption.
In addition to the award against Liggett in Davis
(described above), jury awards have also been returned
against other cigarette manufacturers in recent years. The
awards in these individual actions, often in excess of millions
of dollars, are for both compensatory and punitive damages.
There are several significant jury awards against other
cigarette manufacturers which are currently on appeal.
Engle Progeny Cases. In 2000, a jury in
Engle v. R.J. Reynolds Tobacco Co. rendered a
$145,000,000 punitive damages verdict in favor of a
Florida Class against certain cigarette
manufacturers, including Liggett.
F-45
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pursuant to the Florida Supreme Courts July 2006 ruling in
Engle, which decertified the class on a prospective
basis, and affirmed the appellate courts reversal of the
punitive damages award, former class members had one year from
January 11, 2007 in which to file individual lawsuits. In
addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in
Engle, are attempting to avail themselves of the Engle
ruling. Lawsuits by individuals requesting the benefit of
the Engle ruling, whether filed before or after the
January 11, 2007 deadline, are referred to as the
Engle progeny cases. Liggett
and/or the
Company have been named in approximately 2,680 Engle
progeny cases in both state and federal courts in Florida.
Other cigarette manufacturers have also been named as defendants
in most of these cases. These cases include approximately 9,620
plaintiffs, although duplicate cases were filed in federal and
state court on behalf of approximately 660 plaintiffs. The
number of cases will likely increase as the courts may require
multi-plaintiff cases to be severed into individual cases. The
total number of plaintiffs may also increase as a result of
attempts by existing plaintiffs to add additional parties. For
further information on the Engle case, see
Class Actions Engle Case,
below.
Class Actions
As of December 31, 2008, there were seven actions pending
for which either a class had been certified or plaintiffs were
seeking class certification, where Liggett is a named defendant,
including two alleged price fixing cases. Other cigarette
manufacturers are also named in these actions. Many of these
actions purport to constitute statewide class actions and were
filed after May 1996 when the United States Court of Appeals for
the Fifth Circuit, in Castano v. American Tobacco
Co., Inc., reversed a federal district courts
certification of a purported nationwide class action on behalf
of persons who were allegedly addicted to tobacco
products.
Engle Case. In May 1994, Engle was
filed against Liggett and others in Miami-Dade County, Florida.
The class consisted of all Florida residents who, by
November 21, 1996, have suffered, presently suffer or
have died from diseases and medical conditions caused by their
addiction to cigarette smoking. In July 1999, after the
conclusion of Phase I of the trial, the jury returned a verdict
against Liggett and other cigarette manufacturers on certain
issues determined by the trial court to be common to
the causes of action of the plaintiff class. The jury made
several findings adverse to the defendants including that
defendants conduct rose to a level that would permit
a potential award or entitlement to punitive damages.
Phase II of the trial was a causation and damages trial for
three of the class plaintiffs and a punitive damages trial on a
class-wide
basis, before the same jury that returned the verdict in Phase
I. In April 2000, the jury awarded compensatory damages of
$12,704 to the three class plaintiffs, to be reduced in
proportion to the respective plaintiffs fault. In July
2000, the jury awarded approximately $145,000,000 in punitive
damages, including $790,000 against Liggett.
In May 2003, Floridas Third District Court of Appeal
reversed the trial court and remanded the case with instructions
to decertify the class. The judgment in favor of one of the
three class plaintiffs, in the amount of $5,831, was overturned
as time barred and the court found that Liggett was not liable
to the other two class plaintiffs.
In July 2006, the Florida Supreme Court affirmed the decision
vacating the punitive damages award and held that the class
should be decertified prospectively, but preserved several of
the trial courts Phase I findings, including that:
(i) smoking causes lung cancer, among other diseases;
(ii) nicotine in cigarettes is addictive;
(iii) defendants placed cigarettes on the market that were
defective and unreasonably dangerous; (iv) defendants
concealed material information; (v) all defendants sold or
supplied cigarettes that were defective; and (vi) all
defendants were negligent. The Florida Supreme Court decision
also allowed former class members to proceed to trial on
individual liability issues (using the above findings) and
compensatory and punitive damage issues, provided they file
their individual lawsuits within one year from January 11,
2007, the date of the courts 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 9,620 former Engle
class members filed suit against the Company
and/or
Liggett as well as other cigarette manufacturers.
In June 2002, the jury in a Florida state court action entitled
Lukacs v. R.J. Reynolds Tobacco Co., awarded $37,500
in compensatory damages, jointly and severally, in a case
involving Liggett and two other cigarette
F-46
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
manufacturers, which amount was subsequently reduced by the
court. The jury found Liggett 50% responsible for the damages
incurred by the plaintiff. The Lukacs case was the first
case to be tried as an individual Engle progeny case. In
October 2008, plaintiff withdrew her request for punitive
damages. In November 2008, the court entered final judgment in
the amount of $24,835 (for which Liggett is 50% responsible),
plus interest from June 2002 which as of December 31, 2008,
was in excess of $13,000. The defendants appealed the final
judgment and may be required to post a bond. In addition,
plaintiff filed a motion seeking an award of attorneys
fees from Liggett based on plaintiffs prior proposal for
settlement. All proceedings relating to the motions for
attorneys fees are stayed pending a final resolution of
appellate proceedings.
Other Class Actions. Smith v. Philip
Morris (Kansas) and Romero v. Philip Morris (New
Mexico) 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 motion for summary
judgment. Plaintiffs appealed to the New Mexico Court of Appeals
and, in November 2008, the appellate court upheld the decision
as to Liggett, but reversed as to certain other defendants. In
West Virginia, a jury verdict in a purported medical monitoring
class action was entered in favor of all tobacco company
defendants other than Liggett (Liggett was previously severed
from the trial). There has been no further activity in this case.
Class action suits have been filed in a number of states against
cigarette manufacturers, alleging, among other things, that use
of the terms light and ultra light
constitutes unfair and deceptive trade practices, among other
things. One such suit, Schwab v. Philip Morris,
pending in federal court in New York since 2004, sought to
create a nationwide class of light cigarette
smokers. In September 2006, the United States District Court for
the Eastern District of New York certified the class. In April
2008, the United States Court of Appeals for the Second Circuit
decertified the class. The case was returned to the trial court
for further proceedings. There has been no further activity.
In November 1997, in Young v. American Tobacco Co., a
purported personal injury class action was commenced on behalf
of plaintiff and all similarly situated residents in Louisiana
who, though not themselves cigarette smokers, are alleged to
have been exposed to secondhand smoke from cigarettes which were
manufactured by the defendants, and who suffered injury as a
result of that exposure. The plaintiffs seek to recover an
unspecified amount of compensatory and punitive damages. In
October 2004, the trial court stayed this case pending the
outcome of the appeal in Scott v. American Tobacco Co.
(see description below).
In June 1998, in Cleary v. Philip Morris, a putative
class action was brought in Illinois state court on behalf of
persons who were allegedly injured by: (i) defendants
purported conspiracy to conceal material facts regarding the
addictive nature of nicotine; (ii) defendants alleged
acts of targeting their advertising and marketing to minors; and
(iii) defendants claimed breach of the publics
right to defendants compliance with laws prohibiting the
distribution of cigarettes to minors. Plaintiffs request that
defendants be required to disgorge all profits unjustly received
through their sale of cigarettes to plaintiffs and the class,
which in no event will be greater than $75 per class member,
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. A status conference is scheduled for
October 2009.
In April 2001, in Brown v. American Tobacco Co., 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
is scheduled for March 3, 2009.
F-47
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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
review by the United States Supreme Court in Altria Group
Inc. v. Good, where the Supreme Court was asked to
determine whether certain state law claims are preempted by
federal law. In December 2008, the Supreme Court, in
Good, ruled that the Federal Cigarette Labeling and
Advertising Act did not preempt the state law claims asserted by
the plaintiffs and that they could proceed with their claims
under the Maine Unfair Trade Practices Act. This ruling may
result in additional class action cases in other states.
Although Liggett is not a party in the Good case, an
adverse ruling or commencement of additional lights
related class actions could have a material adverse effect on
the Company.
Class certification motions are pending in a number of other
cases and a number of orders denying class certification are on
appeal. In addition to the cases described above, numerous class
actions remain certified against other cigarette manufacturers,
including Scott. In that case, a Louisiana jury returned
a $591,000 verdict (subsequently reduced by the court to
$263,500 plus interest from June 2004) against other
cigarette manufacturers to fund medical monitoring or smoking
cessation programs for members of the class. The case is on
appeal.
Governmental
Actions
As of December 31, 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.
In City of St. Louis v. American Tobacco Company, a
case pending in Missouri state court since December 1998, the
City of St. Louis and approximately 40 hospitals seek
recovery of costs expended by the hospitals on behalf of
patients who suffer, or have suffered, from illnesses allegedly
resulting from the use of cigarettes. In June 2005, the court
granted defendants motion for summary judgment as to
claims for damages which accrued prior to November 16,
1993. The claims for damages which accrued after
November 16, 1993 are pending. Discovery is ongoing. In
September 2008, the court heard argument on motions for summary
judgment filed by the parties. A decision is pending. Trial is
currently scheduled to commence 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 and to be paid by
the federal government for lung cancer, heart disease, emphysema
and other smoking-related illnesses allegedly caused by the
fraudulent and tortious conduct of defendants, to restrain
defendants and co-conspirators from engaging in alleged fraud
and other allegedly unlawful conduct in the future, and to
compel defendants to disgorge the proceeds of their unlawful
conduct. 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 governments 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, enjoined the non-Liggett defendants from using
lights, low tar, ultra
lights, mild, or natural
descriptors, or conveying any other
F-48
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
express or implied health messages in connection with the
marketing or sale of cigarettes, domestically and
internationally. The Final Judgment was stayed pending appeal.
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. The decision is currently on
appeal by all parties other than Liggett. To the extent that the
Final Judgment leads to a decline in industry-wide shipments of
cigarettes in the United States or otherwise results in
restrictions that adversely affect the industry, Liggetts
sales volume, operating income and cash flows could be
materially adversely affected.
Third-Party
Payor Actions
As of December 31, 2008, there were two Third-Party Payor
Actions pending against Liggett and other cigarette
manufacturers. Third-Party Payor Actions typically have been
filed by insurance companies, union health and welfare trust
funds, asbestos manufacturers and others. In Third-Party Payor
Actions, plaintiffs seek damages for funding of corrective
public education campaigns relating to issues of smoking and
health; funding for clinical smoking cessation programs;
disgorgement of profits from sales of cigarettes; restitution;
treble damages; and attorneys fees. Although no specific
amounts are provided, it is possible that requested damages
against cigarette manufacturers in these cases might be in the
billions of dollars.
Several federal circuit courts of appeals and state appellate
courts have ruled that Third-Party Payors do not have standing
to bring lawsuits against cigarette manufacturers, relying
primarily on grounds that plaintiffs claims were too
remote. The United States Supreme Court has refused to consider
plaintiffs appeals from the cases decided by five federal
circuit courts of appeals.
In June 2005, the Jerusalem District Court in Israel added
Liggett as a defendant in an action commenced in 1998 by the
largest private insurer in that country, General Health
Services, against the major United States cigarette
manufacturers. The plaintiff seeks to recover the past and
future value of the total expenditures for health care services
provided to residents of Israel resulting from tobacco related
diseases, court ordered interest for past expenditures from the
date of filing the statement of claim, increased
and/or
punitive
and/or
exemplary damages and costs. The court ruled that, although
Liggett had not sold product in Israel since at least 1978, it
might still have liability for cigarettes sold prior to that
time. Motions filed by defendants are pending before the Israel
Supreme Court seeking appeal from a lower courts decision
granting leave to plaintiff for foreign service of process.
In May 2008, in National Committee to Preserve Social
Security and Medicare v. Philip Morris USA, a case
pending in the United States District Court for the Eastern
District of New York, plaintiffs commenced an action to recover
twice the amount paid by Medicare for the health care services
provided to Medicare beneficiaries to treat diseases allegedly
attributable to smoking defendants cigarettes from
May 21, 2002 to the present, for which treatment
defendants allegedly were required to make payment under
MSP. Defendants Motion to Dismiss and plaintiffs
Motion for Partial Summary Judgment were filed in July 2008. A
hearing on the motions was held in November 2008 and the parties
are awaiting a decision.
Upcoming
Trials
There are currently approximately 50 individual actions in
Florida that may be set for trial in 2009. The Company
and/or
Liggett and, in all but one of these cases, other cigarette
manufacturers are named as defendants. These cases are all
Engle progeny cases. In the case where Liggett is the
sole defendant, trial is scheduled for February 2009. In
addition, a trial has been scheduled for April 2009 in a
non-Engle individual action in Florida and for October
2009 in an individual action in Missouri, both, where Liggett
and other cigarette manufacturers are named as defendants. Trial
dates are subject to change.
F-49
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the Settling States. The MSA received final
judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett
from:
|
|
|
|
|
all claims of the Settling States and their respective political
subdivisions and other recipients of state health care funds,
relating to: (i) past conduct arising out of the use, sale,
distribution, manufacture, development, advertising and
marketing of tobacco products; (ii) the health effects of,
the exposure to, or research, statements or warnings about,
tobacco products; and
|
|
|
|
all monetary claims of the Settling States and their respective
subdivisions and other recipients of state health care funds
relating to future conduct arising out of the use of, or
exposure to, tobacco products that have been manufactured in the
ordinary course of business.
|
The MSA restricts tobacco product advertising and marketing
within the Settling States and otherwise restricts the
activities of Participating Manufacturers. Among other things,
the MSA prohibits the targeting of youth in the advertising,
promotion or marketing of tobacco products; bans the use of
cartoon characters in all tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any
12-month
period; bans all outdoor advertising, with certain limited
exceptions; prohibits payments for tobacco product placement in
various media; bans gift offers based on the purchase of tobacco
products without sufficient proof that the intended recipient is
an adult; prohibits Participating Manufacturers from licensing
third parties to advertise tobacco brand names in any manner
prohibited under the MSA; and prohibits Participating
Manufacturers from using as a tobacco product brand name any
nationally recognized non-tobacco brand or trade name or the
names of sports teams, entertainment groups or individual
celebrities.
The MSA also requires Participating Manufacturers to affirm
corporate principles to comply with the MSA and to reduce
underage use of tobacco products and imposes restrictions on
lobbying activities conducted on behalf of Participating
Manufacturers. In addition, the MSA provides for the appointment
of an independent auditor to calculate and determine the amounts
of payments owed pursuant to the MSA.
Liggett has no payment obligations under the MSA except to the
extent its market share exceeds a market share exemption of
approximately 1.65% of total cigarettes sold in the United
States. Vector Tobacco has no payment obligations under the MSA,
except to the extent its market share exceeds a market share
exemption of approximately 0.28% of total cigarettes sold in the
United States. According to data from Management Science
Associates, Inc., domestic shipments by Liggett and Vector
Tobacco accounted for approximately 2.4%, 2.5% and 2.5% of the
total cigarettes shipped in the United States in 2006, 2007 and
2008 respectively. If Liggetts or Vector Tobaccos
market share exceeds their respective market share exemption in
a given year, then on April 15 of the following year, Liggett
and/or
Vector Tobacco, as the case may be, must pay on each excess unit
an amount equal (on a
per-unit
basis) to that due from the OPMs for that year. In April 2007,
Liggett and Vector Tobacco paid $38,743 for their 2006 MSA
obligations and in April 2008, paid $35,995 for their 2007 MSA
obligations, having prepaid
F-50
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$34,500 of that amount in December 2007. In December 2008,
Liggett and Vector Tobacco prepaid $34,000 of their 2008 MSA
obligations.
Under the payment provisions of the MSA, the Participating
Manufacturers are required to pay a base annual amount of
$9,000,000 in 2009 and each year thereafter (subject to
applicable adjustments, offsets and reductions). These annual
payments are allocated based on unit volume of domestic
cigarette shipments. The payment obligations under the MSA are
the several, and not joint, obligations of each Participating
Manufacturer and are not the responsibility of any parent or
affiliate of a Participating Manufacturer.
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 December 31, 2008, included in
Other assets on the Companys consolidated
balance sheet, was a noncurrent receivable of $6,513 relating to
such amount. The remaining balance in dispute of $7,686 is
comprised of $5,318 claimed for a 2004 NPM Adjustment and $2,368
relating to the independent auditors retroactive change
from gross to net units in calculating
MSA payments, which Liggett contends is improper, as discussed
below. From their April 2006 payment, Liggett and Vector Tobacco
withheld approximately $1,600 claimed for the 2005 NPM
Adjustment and $2,949 relating to the retroactive change from
gross to net units. Liggett and Vector
Tobacco withheld approximately $4,200 from their April 2007
payments related to the 2006 NPM Adjustment and approximately
$3,950 relating to the retroactive change from gross
to net units. From its April 2008 payment, Liggett
and Vector Tobacco withheld approximately $4,000 for the 2007
NPM Adjustment and approximately $3,696 relating to the
retroactive change from gross to net
units. Vector Tobacco paid approximately $200 into the disputed
payments account for the 2007 NPM Adjustment.
The following amounts have not been expensed in the accompanying
consolidated financial statements as they relate to
Liggetts and Vector Tobaccos claim for an NPM
adjustment: $6,513 for 2003, $3,789 for 2004 and $800 for 2005.
NPM Adjustment. In March 2006, an economic
consulting firm selected pursuant to the MSA rendered its final
and non-appealable decision that the MSA was a significant
factor contributing to the loss of market share of
Participating Manufacturers for 2003. The economic consulting
firm subsequently rendered the same decision with respect to
2004 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 filed in 49 Settling
States over the issue of whether the application of the NPM
Adjustment for 2003 is to be determined through litigation or
arbitration. These actions relate to the potential NPM
Adjustment for 2003, which the independent auditor under the MSA
previously determined to be as much as $1,200,000 for all
Participating Manufacturers. To date, all 48 courts that have
decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable and 44 of those decisions are final. In
response to a proposal from each of the OPMs and many of the
SPMs, 45 of the Settling States have entered into an agreement
providing for a nationwide arbitration of the dispute with
respect to the NPM Adjustment for 2003. The agreement provides
for selection of the arbitration panel beginning October 1,
2009 and that the parties and the arbitrators will thereafter
establish the schedule and procedures for the arbitration. The
agreement also provides for a partial liability reduction for
the potential 2003 NPM adjustment of up to 20% for Settling
States that entered into the agreement by January 30, 2009.
It is
F-51
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
anticipated that the arbitration will begin in 2010. There can
be no assurance that Liggett or Vector Tobacco will receive any
adjustment as a result of these proceedings.
Gross v. Net Calculations. In October
2004, the independent auditor notified Liggett and all other
Participating Manufacturers that their payment obligations under
the MSA, dating from the agreements execution in late
1998, had been recalculated using net unit amounts,
rather than gross unit amounts (which had been used
since 1999). The change in the method of calculation could,
among other things, require additional MSA payments by Liggett
of approximately $25,300, including interest, for 2001 through
2008, and require additional amounts in future periods because
the proposed change from gross to net
units would serve to lower Liggetts market share exemption
under the MSA.
Liggett has objected to this retroactive change and has disputed
the change in methodology. Liggett contends that the retroactive
change from using gross to net unit
amounts is impermissible for several reasons, including:
|
|
|
|
|
use of net unit amounts is not required by the MSA
(as reflected by, among other things, the use of
gross unit amounts through 2005);
|
|
|
|
such a change is not authorized without the consent of affected
parties to the MSA;
|
|
|
|
the MSA provides for four-year time limitation periods for
revisiting calculations and determinations, which precludes
recalculating Liggetts 1997 Market Share (and thus,
Liggetts market share exemption); and
|
|
|
|
Liggett and others have relied upon the calculations based on
gross unit amounts since 1998.
|
No amounts have been expensed or accrued in the accompanying
consolidated financial statements for any potential liability
relating to the gross versus net dispute.
QUEST 3. Vector Tobacco 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
Tobaccos 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
district court granted New Yorks motion to dismiss the
complaint for failure to state a claim. On appeal, the United
States Court of Appeals for the Second Circuit held that if all
of the allegations of the complaint were assumed to be true,
plaintiffs had stated a claim for relief on antitrust grounds.
On remand to the district court, 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 to the
allocable share provision of the New York escrow
statute. In November 2008, the district court granted New
Yorks motion for summary judgment, dismissing all claims
brought by the plaintiffs, and dissolving the preliminary
injunction.
Additionally, in another proceeding pending in federal court in
New York, plaintiffs seek to enjoin the statutes enacted by New
York and other states in connection with the MSA on the grounds
that the statutes violate the Commerce Clause of the United
States Constitution and federal antitrust laws. In September
2005, the United States Court of Appeals for the Second Circuit
held that if all of the allegations of the complaint were
assumed to be true, plaintiffs had stated a claim for relief and
that the New York federal court had jurisdiction over the other
defendant states. 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.
In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco
(Vibo) commenced litigation in the United States
District Court for the Western District of Kentucky against each
of the Settling States and certain Participating Manufacturers.
Vibo alleged, among other things, that the market share
exemptions (i.e.:
F-52
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
grandfathered shares) provided to certain SPMs under the MSA,
including Liggett and Vector Tobacco, violate federal antitrust
and constitutional law. On December 8, 2008, the court
dismissed the complaint. On December 11, 2008, Vibo filed a
declaratory judgment action in state court in California seeking
a determination that the Amended Adherence Agreement it executed
in November 2007 is consistent with the MSA and that the
MSAs most favored nation provisions are not
triggered by the agreement. This matter is pending. Litigation
challenging the validity of the MSA, including claims that the
MSA violates antitrust laws, has not been successful to date.
Other State Settlements. The MSA replaces
Liggetts prior settlements with all states and territories
except for Florida, Mississippi, Texas and Minnesota. Each of
these four states, prior to the effective date of the MSA,
negotiated and executed settlement agreements with each of the
other major tobacco companies, separate from those settlements
reached previously with Liggett. Liggetts agreements with
these states remain in full force and effect, and Liggett made
various payments to these states during 1996, 1997 and 1998
under the agreements. These states settlement agreements
with Liggett contained most favored nation provisions which
could reduce Liggetts payment obligations based on
subsequent settlements or resolutions by those states with
certain other tobacco companies. Beginning in 1999, Liggett
determined that, based on each of these four states
settlements with United States Tobacco Company, Liggetts
payment obligations to those states had been eliminated. With
respect to all non-economic obligations under the previous
settlements, Liggett believes it is entitled to the most
favorable provisions as between the MSA and each states
respective settlement with the other major tobacco companies.
Therefore, Liggetts non-economic obligations to all states
and territories are now defined by the MSA. In 2003, in order to
resolve any potential issues with Minnesota as to Liggetts
ongoing economic settlement obligations, Liggett negotiated a
$100 a year payment to Minnesota, to be paid any year cigarettes
manufactured by Liggett are sold in that state.
In 2004, the Attorneys General for Florida, Mississippi and
Texas advised Liggett that they believed that Liggett had failed
to make all required payments under the respective settlement
agreements with these states for the period 1998 through 2003
and that additional payments may be due for 2004 and subsequent
years. In 2004, Florida and Mississippi proposed settlements to
Liggett in the total amount of approximately $20,000 for the
period 1998 though 2003. Subsequent discussions did not result
in a resolution of the issues. Liggett believes the states
allegations are without merit, based, among other things, on the
language of the most favored nation provisions of the settlement
agreements.
Except for $2,500 accrued at December 31, 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 Companys 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 addition to $540 awarded in
the Davis case, plus legal fees, in June 2002, the jury
in the Lukacs case, an individual case brought under the
third phase of the Engle case, awarded compensatory
damages against Liggett and two other defendants and found
Liggett 50% responsible for the damages. In November 2008, the
court entered final judgment in favor of the plaintiff for
$24,835, plus interest from June 11, 2002 which, as of
December 31, 2008, exceeded $13,000. It is possible that
additional cases could be decided unfavorably against Liggett.
As a result of the Engle decision, approximately 9,620
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
F-53
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is unable to make a reasonable estimate with respect to the
amount or range of loss that could result from an unfavorable
outcome of the cases pending against Liggett or the costs of
defending such cases and as a result has not provided any
amounts in its condensed consolidated financial statements for
unfavorable outcomes. The complaints filed in these cases rarely
detail alleged damages. Typically, the claims set forth in an
individuals complaint against the tobacco industry seek
money damages in an amount to be determined by a jury, plus
punitive damages and costs.
The tobacco industry is subject to a wide range of laws and
regulations regarding the marketing, sale, taxation and use of
tobacco products imposed by local, state and federal
governments. There have been a number of restrictive regulatory
actions, adverse legislative and political decisions and other
unfavorable developments concerning cigarette smoking and the
tobacco industry. These developments may negatively affect the
perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional
similar litigation or legislation.
It is possible that the Companys consolidated financial
position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any
of the smoking-related litigation.
Liggetts and Vector Tobaccos management are unaware
of any material environmental conditions affecting their
existing facilities. Liggetts and Vector Tobaccos
management believe that current operations are conducted in
material compliance with all environmental laws and regulations
and other laws and regulations governing cigarette
manufacturers. Compliance with federal, state and local
provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital
expenditures, results of operations or competitive position of
Liggett or Vector Tobacco.
Other
Matters:
In February 2004, Liggett Vector Brands and another cigarette
manufacturer entered into a five year agreement with a
subsidiary of the American Wholesale Marketers Association to
support a program to permit certain tobacco distributors to
secure, on reasonable terms, tax stamp bonds required by state
and local governments for the distribution of cigarettes. This
agreement was extended through 2014. Under the agreement,
Liggett Vector Brands has agreed to pay a portion of losses, if
any, incurred by the surety under the bond program, with a
maximum loss exposure of $500 for Liggett Vector Brands. To
secure its potential obligations under the agreement, Liggett
Vector Brands has delivered to the subsidiary of the association
a $100 letter of credit and agreed to fund up to an additional
$400. Liggett Vector Brands has incurred no losses to date under
this agreement, and the Company believes the fair value of
Liggett Vector Brands obligation under the agreement was
immaterial at December 31, 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 Companys financial
position, results of operations or cash flows.
|
|
13.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
I. Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
48,794
|
|
|
$
|
30,491
|
|
|
$
|
35,553
|
|
Income taxes
|
|
|
4,015
|
|
|
|
18,967
|
|
|
|
45,475
|
|
II. Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock dividend
|
|
|
314
|
|
|
|
287
|
|
|
|
271
|
|
Conversion of debt
|
|
|
|
|
|
|
|
|
|
|
70,000
|
|
F-54
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
RELATED
PARTY TRANSACTIONS
|
In connection with the Companys private offering of
convertible notes in November 2004, in order to permit hedging
transactions by the purchasers, the purchasers of the notes
required a principal stockholder of the Company, who serves as
the Chairman of the Company, to enter into an agreement granting
the placement agent for the offering the right, in its sole
discretion, to borrow up to 4,221,299 shares of common
stock from this stockholder or an entity affiliated with him
during a
30-month
period through May 2007, subject to extension under various
conditions, and that he agreed not to dispose of such shares
during this period, subject to limited exceptions. In
consideration for this stockholder agreeing to lend his shares
in order to facilitate the Companys offering and accepting
the resulting liquidity risk, the Company agreed to pay him or
an affiliate designated by him an annual fee, payable on a
quarterly basis in cash or, by mutual agreement of the Company
and this stockholder, shares of Common Stock, equal to 1% of the
aggregate market value of 4,020,285 shares of Common Stock.
In addition, the Company agreed to hold this stockholder
harmless on an after-tax basis against any increase, if any, in
the income tax rate applicable to dividends paid on the shares
as a result of the share loan agreement. For the years ended
December 31, 2008, 2007, and 2006, the Company recognized
expense of $41, $504, and $1,207 for amounts payable to an
entity affiliated with this stockholder under this agreement.
This stockholder had the right to assign to one of the
Companys other principal stockholders, who serves as the
Companys President, some or all of his obligation to lend
the shares under such agreement. In May 2006, this stockholder
assigned to the other stockholder the obligation to lend
619,996 shares of Common Stock under the agreement.
In connection with the April 2005 placement of additional
convertible notes, the Company entered into a similar agreement
through May 2007 with this other principal stockholder, who is
the President of the Company, with respect to
364,651 shares of common stock. For the years ended
December 31, 2008, 2007, and 2006, the Company recognized
expense of $0, $62, and $115, respectively, for amounts payable
to an entity affiliated with this stockholder under this
agreement and for the assigned obligation to lend shares.
In September 2006, the Company entered into an agreement with
Ladenburg Thalmann Financial Services Inc. (LTS)
pursuant to which the Company agreed to make available to LTS
the services of the Companys Executive Vice President to
serve as the President and Chief Executive Officer of LTS and to
provide certain other financial and accounting services,
including assistance with complying with Section 404 of the
Sarbanes-Oxley Act of 2002. In consideration for such services,
LTS had agreed to pay the Company an annual fee of $250 plus
reimbursement of expenses and indemnify the Company. The
agreement is terminable by either party upon 30 days
prior written notice. Various executive officers and directors
of the Company and New Valley serve as members of the Board of
Directors of LTS. In December 2007, LTS and Vector amended the
agreement to increase the amount of fees payable thereunder as
follows: (i) a special management fee payment of $150 for
2007 (resulting in a total payment of $400 for 2007),
(ii) an increase in the annual fee from $250 to $400,
effective January 1, 2008 and (iii) an increase in the
annual fee from $400 to $600, effective July 1, 2008
(payment of $500 for 2008). These amounts are recorded as a
reduction to the Companys operating, selling,
administrative and general expenses. LTS paid compensation of
$150 and $600 for 2008 and 2007, respectively, to each of the
President of the Company, who serves as Vice Chairman of LTS,
and to the Executive Vice President of the Company, who serves
as President and CEO of LTS. (See Note 17.)
The Companys President, a firm he serves as a consultant
to, and affiliates of that firm received ordinary and customary
insurance commissions aggregating approximately $221, $241, and
$273 in 2008, 2007 and 2006, respectively, on various insurance
policies issued for the Company and its subsidiaries and equity
investees.
In October 2008, the Company acquired for $4,000 an approximate
11% interest in Castle Brands Inc., a publicly traded developer
and importer of premium branded spirits. The Companys
Executive Vice President is serving as the interim President and
Chief Executive Officer. In October 2008, the Company entered
into an agreement with Castle where the Company agreed to make
available the services of the Executive Vice President as well
as other financial and accounting services. Castle paid the
Company $22 for the year ended December 31, 2008
F-55
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
related to the agreement and has agreed to pay the Company an
annual fee of $100 per year beginning January 1, 2009.
The Company is an investor in investment partnerships affiliated
with certain stockholders of the Company. (See Note 6.)
|
|
15.
|
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
|
This hierarchy requires the use of observable market data, when
available, and to minimize the use of unobservable inputs when
determining fair value.
The Companys population of recurring financial assets and
liabilities subject to fair value measurements and the necessary
disclosures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2008
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
192,348
|
|
|
$
|
192,348
|
|
|
$
|
|
|
|
$
|
|
|
Investment securities available for sale
|
|
|
28,518
|
|
|
|
20,627
|
|
|
|
7,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
220,866
|
|
|
$
|
212,975
|
|
|
$
|
7,891
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
77,245
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
77,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-56
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of investment securities available for sale
included in Level 1 are based on quoted market prices from
various stock exchanges. The $7,891 of investment 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 December 31, 2008 are disclosed.
(See Note 7.)
|
|
16.
|
PHILIP
MORRIS BRAND TRANSACTION
|
In November 1998, the Company and Liggett granted Philip Morris
options to purchase interests in Trademarks LLC which holds
three domestic cigarette brands, L&M, Chesterfield
and Lark, formerly held by Liggetts subsidiary,
Eve Holdings Inc.
Under the terms of the Philip Morris agreements, Eve contributed
the three brands to Trademarks, a newly-formed limited liability
company, in exchange for 100% of two classes of Trademarks
interests, the Class A Voting Interest and the Class B
Redeemable Nonvoting Interest. Philip Morris acquired two
options to purchase the interests from Eve. In December 1998,
Philip Morris paid Eve a total of $150,000 for the options,
$5,000 for the option for the Class A interest and $145,000
for the option for the Class B interest.
The Class A option entitled Philip Morris to purchase the
Class A interest for $10,100. On March 19, 1999,
Philip Morris exercised the Class A option, and the closing
occurred on May 24, 1999.
On May 24, 1999, Trademarks borrowed $134,900 from a
lending institution. The loan was guaranteed by Eve and is
collateralized by a pledge by Trademarks of the three brands and
Trademarks interest in the trademark license agreement
(discussed below) and by a pledge by Eve of its Class B
interest. In connection with the closing of the Class A
option, Trademarks distributed the loan proceeds to Eve as the
holder of the Class B interest. The cash exercise price of
the Class B option and Trademarks redemption price
were reduced by the amount distributed to Eve. Upon Philip
Morris exercise of the Class B option or
Trademarks exercise of its redemption right, Philip Morris
and Trademarks released Eve from its guaranty. The Class B
interest was entitled to a guaranteed payment of $500 each year
with the Class A interest allocated all remaining income or
loss of Trademarks.
Trademarks granted Philip Morris an exclusive license of the
three brands for an
11-year term
expiring May 24, 2010 at an annual royalty based on sales
of cigarettes under the brands, subject to a minimum annual
royalty payment of not less than the annual debt service
obligation on the loan plus $1,000.
The Class B option became exercisable during the
90-day
period beginning December 2, 2008 and was exercised by
Philip Morris on February 19, 2009. This option entitled
Philip Morris to purchase the Class B interest for
$139,900, reduced by the amount previously distributed to Eve of
$134,900. In connection with the exercise of the Class B
option, Philip Morris paid to Eve $5,067 (including a pro-rata
share of its guaranteed payment) and Eve was released from its
guaranty.
See Note 10 regarding the settlement with the Internal
Revenue Service relating to the Philip Morris brand transaction.
|
|
17.
|
NEW
VALLEY CORPORATION
|
Investments in non-consolidated real estate
businesses. New Valley accounts for its 50%
interests in Douglas Elliman Realty LLC, Koa Investors LLC,
16th & K Holdings LLC New Valley Oaktree Chelsea
Eleven LLC and, prior to the fourth quarter of 2007, accounted
for its approximate 20% interest in Ceebraid on the equity
method. (See Note 1(k).) New Valley accounts for its
investment in Aberdeen Townhomes LLC at cost. Douglas Elliman
F-57
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realty operates a residential real estate brokerage company in
the New York metropolitan area. Koa Investors owns the Sheraton
Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii.
16th and K Holdings acquired the St. Regis Hotel, a 193
room luxury hotel in Washington, D.C. in August 2005, of
which 90% was sold in March 2008.
The components of Investments in non-consolidated real
estate businesses were as follows as of December 31,
2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Douglas Elliman Realty LLC
|
|
$
|
33,175
|
|
|
$
|
31,893
|
|
16th and
K Holdings LLC
|
|
|
|
|
|
|
3,838
|
|
Koa Investors LLC
|
|
|
|
|
|
|
|
|
Aberdeen Townhomes LLC
|
|
|
6,500
|
|
|
|
|
|
New Valley Oaktree Chelsea Eleven LLC
|
|
|
11,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in non-consolidated real estate businesses
|
|
$
|
50,775
|
|
|
$
|
35,731
|
|
|
|
|
|
|
|
|
|
|
Residential Brokerage Business. New Valley
recorded income of $11,833, $20,290, and $12,662 for the years
ended December 31, 2008, 2007 and 2006, respectively,
associated with Douglas Elliman Realty. Summarized financial
information as of December 31, 2008 and 2007 and for the
three years ended December 31, 2008 for Douglas Elliman
Realty is presented below. New Valleys equity income from
Douglas Elliman Realty includes $1,465, $1,319, and $1,383,
respectively, of interest income earned by New Valley on a
subordinated loan to Douglas Elliman Realty, as well as
increases to income resulting from amortization of negative
goodwill which resulted from purchase accounting of $193, $316,
and $427 and management fees of $800, $1,300 and $1,100 earned
from Douglas Elliman for the years ended December 31, 2008,
2007, and 2006, respectively. New Valley received cash
distributions from Douglas Elliman Realty LLC of $10,550,
$8,878, and $6,119 for the years ended December 31, 2008,
2007 and 2006, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash
|
|
$
|
22,125
|
|
|
$
|
26,916
|
|
Other current assets
|
|
|
7,496
|
|
|
|
9,462
|
|
Property, plant and equipment, net
|
|
|
15,868
|
|
|
|
18,394
|
|
Trademarks
|
|
|
21,663
|
|
|
|
21,663
|
|
Goodwill
|
|
|
38,325
|
|
|
|
38,294
|
|
Other intangible assets, net
|
|
|
1,311
|
|
|
|
1,928
|
|
Other non-current assets
|
|
|
904
|
|
|
|
850
|
|
Notes payable current
|
|
|
1,413
|
|
|
|
581
|
|
Current portion of notes payable to member - Prudential Real
Estate Financial Services of America, Inc.
|
|
|
4,729
|
|
|
|
4,373
|
|
Current portion of notes payable to member New Valley
|
|
|
4,729
|
|
|
|
625
|
|
Other current liabilities
|
|
|
23,294
|
|
|
|
26,579
|
|
Notes payable long term
|
|
|
1,805
|
|
|
|
2,402
|
|
Notes payable to member Prudential Real Estate
Financial Services of America, Inc.
|
|
|
2,030
|
|
|
|
15,115
|
|
Notes payable to member New Valley
|
|
|
2,030
|
|
|
|
8,583
|
|
Other long-term liabilities
|
|
|
6,939
|
|
|
|
6,599
|
|
Members equity
|
|
|
60,723
|
|
|
|
52,650
|
|
F-58
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Revenues
|
|
$
|
352,681
|
|
|
$
|
405,595
|
|
|
$
|
347,244
|
|
Costs and expenses
|
|
|
324,645
|
|
|
|
359,334
|
|
|
|
315,347
|
|
Depreciation expense
|
|
|
5,507
|
|
|
|
6,047
|
|
|
|
5,138
|
|
Amortization expense
|
|
|
298
|
|
|
|
448
|
|
|
|
410
|
|
Interest expense, net
|
|
|
3,228
|
|
|
|
4,308
|
|
|
|
5,705
|
|
Income tax expense
|
|
|
253
|
|
|
|
748
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,750
|
|
|
$
|
34,710
|
|
|
$
|
19,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Elliman Realty has been negatively impacted by the
current downturn in the residential real estate market. The
residential real estate market is cyclical and is affected by
changes in the general economic conditions that are beyond
Douglas Elliman Realtys control. The U.S. residential
real estate market, including the market in the New York
metropolitan area where Douglas Elliman operates, is currently
in a significant downturn due to various factors including
downward pressure on housing prices, the impact of the recent
contraction in the subprime and mortgage markets generally and
an exceptionally large inventory of unsold homes at the same
time that sales volumes are decreasing. The depth and length of
the current downturn in the real estate industry has proved
exceedingly difficult to predict. The Company cannot predict
whether the downturn will worsen or when the market and related
economic forces will return the U.S. residential real
estate industry to a growth period.
All of Douglas Elliman Realtys current operations are
located in the New York metropolitan area. Local and regional
economic and general business conditions in this market could
differ materially from prevailing conditions in other parts of
the country. Among other things, the New York metropolitan
residential real estate market has been impacted by the
significant decline in the financial services industry. A
continued downturn in the residential real estate market or
economic conditions in that region could have a material adverse
effect on Douglas Elliman Realty.
Hawaiian Hotel. New Valley incurred a loss of
$750 for the year ended December 31, 2007, and income of
$867 for the year ended December 31, 2006, associated with
Koa Investors.
The income in the 2006 period related to the receipt of tax
credits of $1,192 from the State of Hawaii offset by equity in
the loss of Koa Investors of $325. New Valley received cash
distributions from Koa Investors of $0, $0, and $1,192 (in the
form of a tax credit) for the years ended December 31,
2008, 2007 and 2006, respectively.
In August 2005, a wholly-owned subsidiary of Koa Investors
borrowed $82,000, which is nonrecourse to New Valley, at an
interest rate of LIBOR plus 2.45%. Koa Investors used the
proceeds of the loan to repay its $57,000 construction loan and
distributed a portion of the proceeds to its members, including
$5,500 to New Valley. As a result of the refinancing, New Valley
suspended its recognition of equity losses in Koa Investors to
the extent such losses exceed its basis plus any commitment to
make additional investments, which totaled $600 at the
refinancing. In August 2006, New Valley contributed $925 to Koa
in the form of $600 of the required contributions and $325 of
discretionary contributions. Although New Valley was not
obligated to fund any additional amounts to Koa Investors at
December 31, 2006, New Valley made a $750 capital
contribution in February 2007.
New Valley and certain members in KOA Investors have chosen not
to fund discretionary capital calls in 2008 and KOA Investors
was not able to meet its financial obligations in the third
quarter of 2008. KOA has been informed by its lender that it is
in default on its $82,000 loan. The Company has carried its
investment in KOA at $0 throughout 2008.
St. Regis Hotel, Washington, D.C. In
June 2005, affiliates of New Valley and Brickman Associates
formed 16th & K Holdings LLC (Hotel LLC),
which acquired the St. Regis Hotel in Washington, D.C. for
$47,000 in August 2005. The Company, which holds a 50% interest
in Hotel LLC, had invested $12,125 in the project at
December 31, 2007. In connection with the purchase of the
hotel, a subsidiary of Hotel LLC entered into
F-59
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
agreements to borrow up to $50,000 of senior and subordinated
debt. In April 2006, Hotel LLC purchased for approximately
$3,000 a building adjacent to the hotel to house various
administrative and sales functions.
New Valley accounts for its interest in Hotel LLC under the
equity method and recorded losses of $3,796, $2,344, and $2,147
for the years ended December 31, 2008, 2007 and 2006,
respectively. The St. Regis Hotel, which was temporarily closed
on August 31, 2006 for an extensive renovation, reopened in
January 2008. Hotel LLC capitalized all costs other than
management fees related to the renovation of the property during
the renovation phase. New Valley received cash distributions
from Hotel LLC of $1,000 for the year ended December 31,
2007.
In the event that Hotel LLC makes distributions of cash, New
Valley is entitled to 50% of the cash distributions until it has
recovered its invested capital and achieved an annual 11% IRR,
compounded quarterly. New Valley is then entitled to 35% of
subsequent cash distributions until it has achieved an annual
22% IRR. New Valley is then entitled to 30% of subsequent cash
distributions until it has achieved an annual 32% IRR. After New
Valley has achieved an annual 35% IRR, it is then entitled to
25% of subsequent cash distributions.
In September 2007, Hotel LLC entered into an agreement to sell
90% of the St. Regis Hotel. In October 2007, Hotel LLC entered
into an agreement to sell certain tax credits associated with
the 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 $16,406 in 2008 associated with the
sale of the hotel. The Company anticipates receiving an
additional $3,400 in various installments between 2009 and 2012.
The Company recorded the $16,406 as an investing activity in the
consolidated statement of cash flows. New Valley also recorded
equity income of $16,363 in connection with the gain from the
sale of the St. Regis because the amount received from
16th and K Holdings exceeded the Companys basis in
the investment and the Company has no legal obligation to make
785,289 additional investments to 16th and K Holdings.
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 Companys 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.
In January 2009 the Company obtained an appraisal of the five
town home residences and determined that the value of the
properties, less estimated disposal costs, was approximately
$3,500 less than their carrying value and recorded an impairment
charge for $3,500. The reduction in value was attributed to the
overall real estate market conditions in New York City at
December 31, 2008.
Mortgages on four of the five Aberdeen town homes with a balance
of approximately $29,125 matured on March 1, 2009 and have
not been refinanced. The remaining mortgage with a balance of
approximately $11,500 matures on September 30, 2009.
Additionally in February 2009, the managing member of Aberdeen
Townhomes gave notice that it is resigning as managing member. A
subsidiary of New Valley will become the new managing member.
New Valley Oaktree Chelsea Eleven, LLC. In
September 2008, a subsidiary of New Valley purchased for $12,000
a 40% interest in New Valley Oaktree Chelsea Eleven, LLC
(New Valley Oaktree). New Valley Oaktree lent
$29,000 and contributed $1,000 for 29% of the capital in Chelsea
Eleven LLC (Chelsea), which is developing a
condominium project in Manhattan, New York. The development
consists of 72 luxury residential units and one
F-60
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
commercial unit. Approximately 75% of the units are pre-sold and
approximately $35,000 in deposits are held in escrow. The loan
from New Valley Oaktree loan is subordinate to a $110,000
construction loan and a $24,000 mezzanine loan plus accrued
interest. The loan from New Valley Oaktree to Chelsea bears
interest at 60.25% per annum, compounded monthly, with $3,750
being held in an interest reserve, of which five payments of
$300 were paid to New Valley on a monthly basis.
New Valley Chelsea is a variable interest entity; however, the
Company is not the primary beneficiary. The Companys
maximum exposure to loss as a result of its investment in
Chelsea is $12,000. This investment is being accounted for under
the equity method. New Valley Chelsea operates as an investment
vehicle for the Chelsea real estate development project. As of
December 31, 2008, Chelsea had approximately $206,778 of
total assets and $185,665 of total liabilities. No income has
been recorded as all amounts have been capitalized in the
construction project.
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. 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 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 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 guaranty of up to 50% of the
outstanding loan balance plus accrued interest as well as a
guaranty 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, December 31, 2008, and estimated
the value of Lennar Corporations completion and payment
guaranties, less estimated costs to enforce the guaranties and
dispose of the property. The Company applied a discount rate of
25% and a default rate of approximately 5.4% to the
guarantors debt in valuing the guaranties. The Company
believes that both rates approximated market conditions at
December 31, 2008. Based on these estimates, the Company
determined that the fair market value was less than the carrying
amount of the mortgage receivable at December 31, 2008 by
approximately $4,000. This determination was made because real
estate values in Palm Springs declined significantly in 2008.
Accordingly, a reserve was established for the decline in value
and a charge of $4,000 was recorded for the year ended
December 31, 2008 as a component of Provision for
loss on investments in the Companys consolidated
statement of operations. The Company carried the loan on its
consolidated balance sheet at its net basis of $17,704 as of
December 31, 2008. Litigation is ongoing to enforce the
Companys rights under the loan documents. The parties are
currently involved in settlement discussions.
Real Estate Market Conditions. Because the
real estate, capital and credit markets have continued to
worsen, the Company will continue to perform additional
assessments to determine the impact of the markets, if any, on
the Companys consolidated financial statements. Thus,
future impairment charges may occur.
Ladenburg Thalmann Financial Services. In
February 2007, LTS entered into a Debt Exchange Agreement (the
Exchange Agreement) with New Valley, the holder of
$5,000 principal amount of its promissory notes due
March 31, 2007. Pursuant to the Exchange Agreement, New
Valley agreed to exchange the principal amount of its notes for
LTS common stock at an exchange price of $1.80 per share,
representing the average closing price of the LTS common stock
for the 30 prior trading days ending on the date of the Exchange
Agreement.
F-61
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The debt exchange was consummated on June 29, 2007
following approval by the LTS shareholders of the transaction at
its annual meeting of shareholders. At the closing, the $5,000
principal amount of notes was exchanged for
2,777,778 shares of LTSs common stock, and accrued
interest on the notes of approximately $1,730 was paid in cash.
As a result of the debt exchange, New Valleys ownership of
LTS common stock increased to 13,888,889 shares or
approximately 8.6% of the outstanding LTS shares.
New Valley provided a full reserve against the LTS notes in 2002
and carried the notes on its consolidated balance sheet at $0
prior to the exchange. In connection with the debt exchange, the
Company recorded a gain of $8,121, which consisted of the fair
value of the 2,777,778 shares of LTS common stock at
June 29, 2007 (the transaction date) and interest received
in connection with the exchange, in the second quarter of 2007.
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 Valleys former
Western Union satellite business. In March 2007, the parties
entered into a Stipulation for Entry of Judgment to settle New
Valleys claims and, pursuant to the settlement, $20,000
was paid in May 2007. In the first quarter of 2007, the Company
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.
The Companys significant business segments for each of the
three years ended December 31, 2008 were Liggett and Vector
Tobacco. The Liggett segment consists of the manufacture and
sale of conventional cigarettes and, for segment reporting
purposes, includes the operations of Medallion, which 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.
Financial information for the Companys continuing
operations before taxes and minority interests for the years
ended December 31, 2008, 2007 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vector
|
|
|
Real
|
|
|
Corporate
|
|
|
|
|
|
|
Liggett
|
|
|
Tobacco
|
|
|
Estate
|
|
|
and Other
|
|
|
Total
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
562,660
|
|
|
$
|
2,526
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
565,186
|
|
Operating income (loss)
|
|
|
170,181
|
|
|
|
(8,331
|
)
|
|
|
|
|
|
|
(26,546
|
)
|
|
|
135,304
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
23,899
|
|
|
|
|
|
|
|
23,899
|
|
Identifiable assets
|
|
|
277,532
|
|
|
|
13,730
|
|
|
|
70,979
|
|
|
|
355,471
|
|
|
|
717,712
|
|
Depreciation and amortization
|
|
|
7,601
|
|
|
|
118
|
|
|
|
|
|
|
|
2,338
|
|
|
|
10,057
|
|
Capital expenditures
|
|
|
6,220
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
6,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
551,687
|
|
|
$
|
3,743
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
555,430
|
|
Operating income (loss)
|
|
|
159,347
|
|
|
|
(9,896
|
)
|
|
|
|
|
|
|
(23,947
|
)
|
|
|
125,504
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
16,243
|
|
|
|
|
|
|
|
16,243
|
|
Identifiable assets
|
|
|
314,242
|
|
|
|
2,459
|
|
|
|
35,731
|
|
|
|
432,857
|
|
|
|
785,289
|
|
Depreciation and amortization
|
|
|
7,723
|
|
|
|
134
|
|
|
|
|
|
|
|
2,345
|
|
|
|
10,202
|
|
Capital expenditures
|
|
|
4,997
|
|
|
|
192
|
|
|
|
|
|
|
|
|
|
|
|
5,189
|
|
F-62
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vector
|
|
|
Real
|
|
|
Corporate
|
|
|
|
|
|
|
Liggett
|
|
|
Tobacco
|
|
|
Estate
|
|
|
and Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
499,468
|
|
|
$
|
6,784
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
506,252
|
|
Operating income (loss)
|
|
|
140,508
|
(1)
|
|
|
(13,971
|
)(1)
|
|
|
|
|
|
|
(25,508
|
)
|
|
|
101,029
|
(1)
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
9,086
|
|
|
|
|
|
|
|
9,086
|
|
Identifiable assets
|
|
|
316,165
|
|
|
|
3,122
|
|
|
|
28,416
|
|
|
|
289,759
|
|
|
|
637,462
|
|
Depreciation and amortization
|
|
|
7,344
|
|
|
|
317
|
|
|
|
|
|
|
|
2,227
|
|
|
|
9,888
|
|
Capital expenditures
|
|
|
9,439
|
|
|
|
100
|
|
|
|
|
|
|
|
19
|
|
|
|
9,558
|
|
|
|
|
(1) |
|
Includes a gain on sale of assets at Liggett of $2,217 and a
loss on sale of assets of $7 at Vector Tobacco, restructuring
and inventory impairment charges of $2,664 at Vector Tobacco and
a reversal of restructuring charges of $116 at Liggett. |
19. QUARTERLY
FINANCIAL RESULTS (UNAUDITED)
Unaudited quarterly data for the years ended December 31,
2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2008(1)
|
|
|
2008(2)
|
|
|
2008
|
|
|
2008(3)
|
|
|
Revenues
|
|
$
|
144,420
|
|
|
$
|
145,601
|
|
|
$
|
142,960
|
|
|
$
|
132,205
|
|
Operating income
|
|
|
35,383
|
|
|
|
37,535
|
|
|
|
34,345
|
|
|
|
28,041
|
|
Net income applicable to common shares
|
|
$
|
12,245
|
|
|
$
|
14,827
|
|
|
$
|
19,125
|
|
|
$
|
14,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.18
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.09
|
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fourth quarter 2008 net income applicable to common shares
includes pre-tax impairment charges of $24,400 on long-term
investments, $3,000 on investments held for sale and $3,500 on
investments in non-consolidated real estate businesses. |
|
(2) |
|
Third quarter 2008 net income applicable to common shares
includes pre-tax impairment charges on a mortgage receivable of
$4,000 and long-term investments of $3,000. |
|
(3) |
|
First quarter 2008 net income applicable to common shares
includes $12,000 of pre-tax income from the Companys
investment in the St. Regis hotel, which was sold in March 2008. |
|
(4) |
|
Per share computations include the impact of a 5% stock dividend
paid on September 29, 2008. Quarterly basic and diluted net
income per common share were computed independently for each
quarter and do not necessarily total to the year to date basic
and diluted net income per common share. |
F-63
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007(1)
|
|
|
2007(2)
|
|
|
Revenues
|
|
$
|
145,134
|
|
|
$
|
136,053
|
|
|
$
|
140,351
|
|
|
$
|
133,892
|
|
Operating income
|
|
|
36,894
|
|
|
|
33,707
|
|
|
|
29,183
|
|
|
|
25,720
|
|
Net income applicable to common shares
|
|
$
|
14,231
|
|
|
$
|
15,064
|
|
|
$
|
21,381
|
|
|
$
|
23,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.21
|
|
|
$
|
0.22
|
|
|
$
|
0.32
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.21
|
|
|
$
|
0.22
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Second quarter 2007 net income applicable to common shares
included an $8,121 pre-tax gain from the exchange of LTS notes. |
|
(2) |
|
First quarter of 2007 net income applicable to common
shares included a $19,590 pre-tax gain from lawsuit settlement. |
|
(3) |
|
Per share computations include the impact of a 5% stock
dividends paid on September 29, 2008 and September 28,
2007. Quarterly basic and diluted net income per common share
were computed independently for each quarter and do not
necessarily total to the year to date basic and diluted net
income per common share. |
|
|
20.
|
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 Companys
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 7.) The
notes are not guaranteed by any of the Companys
subsidiaries engaged in the real estate businesses conducted
through its subsidiary New Valley LLC. Presented herein are
Condensed Consolidating Balance Sheets as of December 31,
2008 and 2007 and the related Condensed Consolidating Statements
of Operations and Cash Flows for the years ended
December 31, 2008, 2007 and 2006 of Vector Group Ltd.
(Parent/issuer), the guarantor subsidiaries (Subsidiary
Guarantors) and the subsidiaries that are not guarantors
(Subsidiary Non-Guarantors). The Company does not believe that
the separate financial statements and related footnote
disclosures concerning the Guarantors would provide any
additional information that would be material to investors
making an investment decision.
The indenture contains covenants that restrict the payment of
dividends by the Company if the Companys consolidated
earnings before interest, taxes, depreciation and amortization
(Consolidated EBITDA), as defined in the indenture,
for the most recently ended four full quarters is less than
$50,000. The indenture also restricts the incurrence of debt if
the Companys Leverage Ratio and its Secured Leverage
Ratio, as defined in the indenture, exceed 3.0 and 1.5,
respectively. The Companys Leverage Ratio is defined in
the indenture as the ratio of the Companys and the
guaranteeing subsidiaries total debt less the fair market
value of the Companys cash, investments in marketable
securities and long-term investments to Consolidated EBITDA, as
defined in the indenture. The Companys Secured Leverage
Ratio is defined in the indenture in the same manner as the
Leverage Ratio, except that secured indebtedness is substituted
for indebtedness.
F-64
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
200,066
|
|
|
$
|
11,039
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
211,105
|
|
Investment securities available for sale
|
|
|
28,440
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
28,518
|
|
Accounts receivable trade
|
|
|
|
|
|
|
9,506
|
|
|
|
|
|
|
|
|
|
|
|
9,506
|
|
Intercompany receivables
|
|
|
1,938
|
|
|
|
|
|
|
|
|
|
|
|
(1,938
|
)
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
92,581
|
|
|
|
|
|
|
|
|
|
|
|
92,581
|
|
Deferred income taxes
|
|
|
3,304
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
3,642
|
|
Income taxes receivable
|
|
|
25,125
|
|
|
|
|
|
|
|
|
|
|
|
(25,125
|
)
|
|
|
|
|
Other current assets
|
|
|
3,962
|
|
|
|
5,969
|
|
|
|
|
|
|
|
|
|
|
|
9,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
263,835
|
|
|
|
119,433
|
|
|
|
78
|
|
|
|
(27,063
|
)
|
|
|
355,283
|
|
Property, plant and equipment, net
|
|
|
735
|
|
|
|
49,956
|
|
|
|
|
|
|
|
|
|
|
|
50,691
|
|
Mortgage receivable
|
|
|
|
|
|
|
|
|
|
|
17,704
|
|
|
|
|
|
|
|
17,704
|
|
Long-term investments accounted for at cost
|
|
|
50,332
|
|
|
|
|
|
|
|
786
|
|
|
|
|
|
|
|
51,118
|
|
Long-term investments accounted under the equity method
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in non- consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
50,775
|
|
|
|
|
|
|
|
50,775
|
|
Investments in consolidated subsidiaries
|
|
|
164,917
|
|
|
|
|
|
|
|
|
|
|
|
(164,917
|
)
|
|
|
|
|
Restricted assets
|
|
|
3,845
|
|
|
|
2,710
|
|
|
|
|
|
|
|
|
|
|
|
6,555
|
|
Deferred income taxes
|
|
|
37,177
|
|
|
|
870
|
|
|
|
7,175
|
|
|
|
|
|
|
|
45,222
|
|
Intangible asset
|
|
|
|
|
|
|
107,511
|
|
|
|
|
|
|
|
|
|
|
|
107,511
|
|
Prepaid pension costs
|
|
|
|
|
|
|
2,901
|
|
|
|
|
|
|
|
|
|
|
|
2,901
|
|
Other assets
|
|
|
16,295
|
|
|
|
13,657
|
|
|
|
|
|
|
|
|
|
|
|
29,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
536,136
|
|
|
$
|
297,038
|
|
|
$
|
76,518
|
|
|
$
|
(191,980
|
)
|
|
$
|
717,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
72,299
|
|
|
$
|
25,199
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
97,498
|
|
Current portion of employee Benefits
|
|
|
28,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,420
|
|
Accounts payable
|
|
|
2,168
|
|
|
|
3,936
|
|
|
|
|
|
|
|
|
|
|
|
6,104
|
|
Intercompany payables
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
Accrued promotional expenses
|
|
|
|
|
|
|
10,131
|
|
|
|
|
|
|
|
|
|
|
|
10,131
|
|
Income taxes payable, net
|
|
|
|
|
|
|
10,754
|
|
|
|
26,174
|
|
|
|
(25,125
|
)
|
|
|
11,803
|
|
Accrued excise and payroll taxes payable, net
|
|
|
|
|
|
|
7,004
|
|
|
|
|
|
|
|
|
|
|
|
7,004
|
|
Settlement accruals
|
|
|
|
|
|
|
20,668
|
|
|
|
|
|
|
|
|
|
|
|
20,668
|
|
Deferred income taxes
|
|
|
81,961
|
|
|
|
10,546
|
|
|
|
|
|
|
|
|
|
|
|
92,507
|
|
Accrued interest
|
|
|
9,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,612
|
|
Other current liabilities
|
|
|
|
|
|
|
20,017
|
|
|
|
910
|
|
|
|
(1,935
|
)
|
|
|
18,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
194,460
|
|
|
|
108,258
|
|
|
|
27,084
|
|
|
|
(27,063
|
)
|
|
|
302,739
|
|
Notes payable, long-term debt and other obligations, less
current portion
|
|
|
191,007
|
|
|
|
19,294
|
|
|
|
|
|
|
|
|
|
|
|
210,301
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
77,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,245
|
|
Non-current employee benefits
|
|
|
10,808
|
|
|
|
17,468
|
|
|
|
|
|
|
|
|
|
|
|
28,276
|
|
Deferred income taxes
|
|
|
28,573
|
|
|
|
20,125
|
|
|
|
109
|
|
|
|
|
|
|
|
48,807
|
|
Other liabilities
|
|
|
438
|
|
|
|
15,219
|
|
|
|
1,082
|
|
|
|
|
|
|
|
16,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
502,531
|
|
|
|
180,876
|
|
|
|
28,275
|
|
|
|
(27,575
|
)
|
|
|
684,107
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
33,605
|
|
|
|
116,674
|
|
|
|
48,243
|
|
|
|
(164,917
|
)
|
|
|
33,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
536,136
|
|
|
$
|
297,038
|
|
|
$
|
77,118
|
|
|
$
|
(192,580
|
)
|
|
$
|
717,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-68
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
565,186
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
565,186
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
335,299
|
|
|
|
|
|
|
|
|
|
|
|
335,299
|
|
Operating, selling, administrative and general expenses
|
|
|
29,577
|
|
|
|
65,135
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
94,583
|
|
Management fee expense
|
|
|
|
|
|
|
7,940
|
|
|
|
|
|
|
|
(7,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(29,577
|
)
|
|
|
156,812
|
|
|
|
129
|
|
|
|
7,940
|
|
|
|
135,304
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
4,911
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
5,864
|
|
Interest expense
|
|
|
(60,172
|
)
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
|
(62,335
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
24,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,337
|
|
Provision for loss on investments
|
|
|
(24,900
|
)
|
|
|
|
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
(32,400
|
)
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
24,399
|
|
|
|
|
|
|
|
24,399
|
|
Equity income in consolidated subsidiaries
|
|
|
108,539
|
|
|
|
|
|
|
|
|
|
|
|
(108,539
|
)
|
|
|
|
|
Management fee income
|
|
|
7,940
|
|
|
|
|
|
|
|
|
|
|
|
(7,940
|
)
|
|
|
|
|
Other, net
|
|
|
(593
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
30,485
|
|
|
|
155,602
|
|
|
|
17,024
|
|
|
|
(108,539
|
)
|
|
|
94,572
|
|
Income tax benefit (expense)
|
|
|
30,019
|
|
|
|
(57,056
|
)
|
|
|
(7,031
|
)
|
|
|
|
|
|
|
(34,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
98,546
|
|
|
$
|
9,993
|
|
|
$
|
(108,539
|
)
|
|
$
|
60,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-69
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
555,430
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
555,430
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
337,079
|
|
|
|
|
|
|
|
|
|
|
|
337,079
|
|
Operating, selling, administrative and general expenses
|
|
|
25,974
|
|
|
|
65,835
|
|
|
|
1,158
|
|
|
|
|
|
|
|
92,967
|
|
Management fee expense
|
|
|
|
|
|
|
7,669
|
|
|
|
|
|
|
|
(7,669
|
)
|
|
|
|
|
Restructuring and impairment charges
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(25,974
|
)
|
|
|
144,967
|
|
|
|
(1,158
|
)
|
|
|
7,669
|
|
|
|
125,504
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
13,618
|
|
|
|
1,406
|
|
|
|
|
|
|
|
(5,127
|
)
|
|
|
9,897
|
|
Interest expense
|
|
|
(43,217
|
)
|
|
|
(7,672
|
)
|
|
|
|
|
|
|
5,127
|
|
|
|
(45,762
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
(6,109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,109
|
)
|
Provision for loss on investments, net
|
|
|
|
|
|
|
|
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
(1,216
|
)
|
Gain from conversion of LTS notes
|
|
|
|
|
|
|
|
|
|
|
8,121
|
|
|
|
|
|
|
|
8,121
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
16,243
|
|
|
|
|
|
|
|
16,243
|
|
Income from lawsuit settlement
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
20,000
|
|
Equity income in consolidated subsidiaries
|
|
|
111,400
|
|
|
|
|
|
|
|
|
|
|
|
(111,400
|
)
|
|
|
|
|
Management fee income
|
|
|
7,669
|
|
|
|
|
|
|
|
|
|
|
|
(7,669
|
)
|
|
|
|
|
Other, net
|
|
|
(107
|
)
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
57,280
|
|
|
|
138,701
|
|
|
|
42,022
|
|
|
|
(111,400
|
)
|
|
|
126,603
|
|
Income tax benefit (expense)
|
|
|
16,523
|
|
|
|
(52,604
|
)
|
|
|
(16,719
|
)
|
|
|
|
|
|
|
(52,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
73,803
|
|
|
$
|
86,097
|
|
|
$
|
25,303
|
|
|
$
|
(111,400
|
)
|
|
$
|
73,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-70
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
506,252
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
506,252
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
315,163
|
|
|
|
|
|
|
|
|
|
|
|
315,163
|
|
Operating, selling, administrative and general expenses
|
|
|
27,901
|
|
|
|
62,064
|
|
|
|
868
|
|
|
|
|
|
|
|
90,833
|
|
Management fee expense
|
|
|
|
|
|
|
7,338
|
|
|
|
|
|
|
|
(7,338
|
)
|
|
|
|
|
Gain on sale of assets
|
|
|
|
|
|
|
(2,210
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,210
|
)
|
Restructuring and impairment charges
|
|
|
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
1,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(27,901
|
)
|
|
|
122,460
|
|
|
|
(868
|
)
|
|
|
7,338
|
|
|
|
101,029
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
18,132
|
|
|
|
965
|
|
|
|
|
|
|
|
(10,097
|
)
|
|
|
9,000
|
|
Interest expense
|
|
|
(33,206
|
)
|
|
|
(14,667
|
)
|
|
|
|
|
|
|
10,097
|
|
|
|
(37,776
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
|
|
Loss on extinguishment of Debt
|
|
|
(16,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,166
|
)
|
Gain on investments, Net
|
|
|
2,869
|
|
|
|
|
|
|
|
150
|
|
|
|
|
|
|
|
3,019
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
9,086
|
|
|
|
|
|
|
|
9,086
|
|
Equity income in consolidated subsidiaries
|
|
|
74,278
|
|
|
|
|
|
|
|
|
|
|
|
(74,278
|
)
|
|
|
|
|
Management fee income
|
|
|
7,338
|
|
|
|
|
|
|
|
|
|
|
|
(7,338
|
)
|
|
|
|
|
Other, net
|
|
|
131
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
25,587
|
|
|
|
108,758
|
|
|
|
8,413
|
|
|
|
(74,278
|
)
|
|
|
68,480
|
|
Income tax benefit (expense)
|
|
|
17,125
|
|
|
|
(39,452
|
)
|
|
|
(3,441
|
)
|
|
|
|
|
|
|
(25,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
42,712
|
|
|
$
|
69,306
|
|
|
$
|
4,972
|
|
|
$
|
(74,278
|
)
|
|
$
|
42,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Net cash provided by operating activities
|
|
$
|
82,821
|
|
|
$
|
125,279
|
|
|
$
|
7,415
|
|
|
$
|
(124,250
|
)
|
|
$
|
91,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
Purchase of investment securities
|
|
|
(6,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,411
|
)
|
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
|
)
|
Purchase of Castle Brands equity
|
|
|
(4,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,250
|
)
|
Investment in non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
(22,000
|
)
|
|
|
|
|
|
|
(22,000
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
19,393
|
|
|
|
|
|
|
|
19,393
|
|
Increase in cash surrender value of life insurance policies
|
|
|
(500
|
)
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
(938
|
)
|
Decrease in non-current restricted assets
|
|
|
(1,465
|
)
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
(411
|
)
|
Investments in subsidiaries
|
|
|
(21,747
|
)
|
|
|
|
|
|
|
|
|
|
|
21,747
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(6,309
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(26,039
|
)
|
|
|
(5,241
|
)
|
|
|
(24,362
|
)
|
|
|
21,747
|
|
|
|
(33,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
|
|
|
|
2,831
|
|
|
|
|
|
|
|
|
|
|
|
2,831
|
|
Repayments of debt
|
|
|
|
|
|
|
(6,329
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,329
|
)
|
Deferred financing charges
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137
|
)
|
Borrowings under revolver
|
|
|
|
|
|
|
531,251
|
|
|
|
|
|
|
|
|
|
|
|
531,251
|
|
Repayments on revolver
|
|
|
|
|
|
|
(526,518
|
)
|
|
|
|
|
|
|
|
|
|
|
(526,518
|
)
|
Capital contributions received
|
|
|
|
|
|
|
4,800
|
|
|
|
16,947
|
|
|
|
(21,747
|
)
|
|
|
|
|
Intercompany dividends paid
|
|
|
|
|
|
|
(124,250
|
)
|
|
|
|
|
|
|
124,250
|
|
|
|
|
|
Dividends and distributions on common stock
|
|
|
(103,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,870
|
)
|
Proceeds from exercise of Vector options and warrants
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Excess tax benefit of options exercised
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(85,617
|
)
|
|
|
(118,215
|
)
|
|
|
16,947
|
|
|
|
102,503
|
|
|
|
(84,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(28,835
|
)
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
(27,012
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
228,901
|
|
|
|
9,216
|
|
|
|
|
|
|
|
|
|
|
|
238,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
200,066
|
|
|
$
|
11,039
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
211,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
115,616
|
|
|
$
|
80,376
|
|
|
$
|
30,549
|
|
|
$
|
(117,343
|
)
|
|
$
|
109,198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
|
|
|
|
917
|
|
|
|
|
|
|
|
|
|
|
|
917
|
|
Purchase of investment securities
|
|
|
(6,571
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,571
|
)
|
Proceeds from sale or liquidation of long-term investments
|
|
|
|
|
|
|
|
|
|
|
71
|
|
|
|
|
|
|
|
71
|
|
Purchase of long-term investments
|
|
|
(40,000
|
)
|
|
|
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
(40,091
|
)
|
(Increase) decrease in restricted assets
|
|
|
(521
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
(492
|
)
|
Investments in non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
|
|
(750
|
)
|
Investments in subsidiaries
|
|
|
(39,150
|
)
|
|
|
|
|
|
|
|
|
|
|
39,150
|
|
|
|
|
|
Distributions from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
Receipt of repayment of notes receivable
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(5,189
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,189
|
)
|
Increase in cash surrender value of life insurance policies
|
|
|
(460
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
(838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(82,702
|
)
|
|
|
(4,621
|
)
|
|
|
230
|
|
|
|
35,150
|
|
|
|
(51,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
165,000
|
|
|
|
9,576
|
|
|
|
|
|
|
|
|
|
|
|
174,576
|
|
Repayments of debt
|
|
|
|
|
|
|
(45,200
|
)
|
|
|
|
|
|
|
4,000
|
|
|
|
(41,200
|
)
|
Deferred financing charges
|
|
|
(9,863
|
)
|
|
|
(122
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,985
|
)
|
Borrowings under revolver
|
|
|
|
|
|
|
537,746
|
|
|
|
|
|
|
|
|
|
|
|
537,746
|
|
Repayments on revolver
|
|
|
|
|
|
|
(534,950
|
)
|
|
|
|
|
|
|
|
|
|
|
(534,950
|
)
|
Capital contributions received
|
|
|
|
|
|
|
39,150
|
|
|
|
|
|
|
|
(39,150
|
)
|
|
|
|
|
Intercompany dividends paid
|
|
|
|
|
|
|
(86,536
|
)
|
|
|
(30,807
|
)
|
|
|
117,343
|
|
|
|
|
|
Dividends and distributions on common stock
|
|
|
(99,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(99,249
|
)
|
Proceeds from exercise of Vector options and warrants
|
|
|
5,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,100
|
|
Tax benefit of options exercised
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
63,043
|
|
|
|
(80,336
|
)
|
|
|
(30,807
|
)
|
|
|
82,193
|
|
|
|
34,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
95,957
|
|
|
|
(4,581
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
91,348
|
|
Cash and cash equivalents, beginning of year
|
|
|
132,944
|
|
|
|
13,797
|
|
|
|
28
|
|
|
|
|
|
|
|
146,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
228,901
|
|
|
$
|
9,216
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
238,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-73
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
137,372
|
|
|
$
|
76,515
|
|
|
$
|
6,415
|
|
|
$
|
(174,287
|
)
|
|
$
|
46,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
|
|
|
|
1,486
|
|
|
|
|
|
|
|
|
|
|
|
1,486
|
|
Proceeds from sale or maturity of investment securities
|
|
|
29,725
|
|
|
|
|
|
|
|
682
|
|
|
|
|
|
|
|
30,407
|
|
Purchase of investment securities
|
|
|
(19,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,706
|
)
|
Proceeds from sale or liquidation of long-term investments
|
|
|
|
|
|
|
|
|
|
|
326
|
|
|
|
|
|
|
|
326
|
|
Purchase of long-term investments
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
(345
|
)
|
|
|
|
|
|
|
(35,345
|
)
|
(Increase) decrease in restricted assets
|
|
|
94
|
|
|
|
(1,621
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,527
|
)
|
Investments in non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
(9,850
|
)
|
|
|
|
|
|
|
(9,850
|
)
|
Receipt of repayment of notes receivable
|
|
|
5,825
|
|
|
|
|
|
|
|
|
|
|
|
(5,825
|
)
|
|
|
|
|
Investments in subsidiaries
|
|
|
(7,435
|
)
|
|
|
|
|
|
|
|
|
|
|
7,435
|
|
|
|
|
|
Capital expenditures
|
|
|
(19
|
)
|
|
|
(9,539
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,558
|
)
|
Increase in cash surrender value of life insurance policies
|
|
|
(520
|
)
|
|
|
(378
|
)
|
|
|
|
|
|
|
|
|
|
|
(898
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(27,036
|
)
|
|
|
(10,052
|
)
|
|
|
(9,187
|
)
|
|
|
1,610
|
|
|
|
(44,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
110,000
|
|
|
|
8,146
|
|
|
|
|
|
|
|
|
|
|
|
118,146
|
|
Repayments of debt
|
|
|
(63,143
|
)
|
|
|
(15,607
|
)
|
|
|
|
|
|
|
5,825
|
|
|
|
(72,925
|
)
|
Deferred financing charges
|
|
|
(5,180
|
)
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,280
|
)
|
Borrowings under revolver
|
|
|
|
|
|
|
514,739
|
|
|
|
|
|
|
|
|
|
|
|
514,739
|
|
Repayments on revolver
|
|
|
|
|
|
|
(502,753
|
)
|
|
|
|
|
|
|
|
|
|
|
(502,753
|
)
|
Distributions on common stock
|
|
|
(90,138
|
)
|
|
|
(79,533
|
)
|
|
|
(94,754
|
)
|
|
|
174,287
|
|
|
|
(90,138
|
)
|
Capital contributions received
|
|
|
|
|
|
|
4,662
|
|
|
|
2,773
|
|
|
|
(7,435
|
)
|
|
|
|
|
Proceeds from exercise of options and warrants
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(45,890
|
)
|
|
|
(70,446
|
)
|
|
|
(91,981
|
)
|
|
|
172,677
|
|
|
|
(35,640
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
64,446
|
|
|
|
(3,983
|
)
|
|
|
(94,753
|
)
|
|
|
|
|
|
|
(34,290
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
68,498
|
|
|
|
17,780
|
|
|
|
94,781
|
|
|
|
|
|
|
|
181,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
132,944
|
|
|
$
|
13,797
|
|
|
$
|
28
|
|
|
$
|
|
|
|
$
|
146,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
at End
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
of Period
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
51
|
|
Cash discounts
|
|
|
69
|
|
|
|
14,797
|
|
|
|
14,662
|
|
|
|
204
|
|
Deferred tax valuation allowance
|
|
|
16,835
|
|
|
|
|
|
|
|
896
|
|
|
|
15,939
|
|
Sales returns
|
|
|
3,700
|
|
|
|
2,364
|
|
|
|
2,064
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,655
|
|
|
$
|
17,161
|
|
|
$
|
17,622
|
|
|
$
|
20,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
$
|
55
|
|
|
$
|
|
|
|
$
|
4
|
|
|
$
|
51
|
|
Cash discounts
|
|
|
556
|
|
|
|
18,470
|
|
|
|
18,957
|
|
|
|
69
|
|
Deferred tax valuation allowance
|
|
|
17,731
|
|
|
|
|
|
|
|
896
|
|
|
|
16,835
|
|
Sales returns
|
|
|
3,651
|
|
|
|
1,806
|
|
|
|
1,757
|
|
|
|
3,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,993
|
|
|
$
|
20,276
|
|
|
$
|
21,614
|
|
|
$
|
20,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
$
|
105
|
|
|
$
|
|
|
|
$
|
50
|
|
|
$
|
55
|
|
Cash discounts
|
|
|
369
|
|
|
|
22,093
|
|
|
|
21,906
|
|
|
|
556
|
|
Deferred tax valuation allowance
|
|
|
19,957
|
|
|
|
|
|
|
|
2,226
|
|
|
|
17,731
|
|
Sales returns
|
|
|
5,194
|
|
|
|
398
|
|
|
|
1,941
|
|
|
|
3,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,625
|
|
|
$
|
22,491
|
|
|
$
|
26,123
|
|
|
$
|
21,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-75