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Securities And Exchange Commission
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
VECTOR GROUP LTD.
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(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 65-0949535
------------------------------- ---------------------- ------------------------------------
(State or other jurisdiction of Commission File Number (I.R.S. Employer Identification No.)
incorporation or organization)
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
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(Address, including zip code and telephone number, including area code,
of the principal executive offices)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
August 13, 2002, Vector Group Ltd. had 33,257,284 shares of common
stock outstanding.
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VECTOR GROUP LTD.
FORM 10-Q
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Vector Group Ltd. Consolidated Financial Statements:
Vector Group Ltd. Consolidated Balance Sheets as of June 30, 2002 and
December 31, 2001 ............................................................ 2
Vector Group Ltd. Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and June 30, 2001 ........................................ 3
Vector Group Ltd. Consolidated Statement of Stockholders' Equity for the six
months ended June 30, 2002 ................................................... 4
Vector Group Ltd. Consolidated Statements of Cash Flows for the six months ended
June 30, 2002 and June 30, 2001 .............................................. 5
Notes to Consolidated Financial Statements ......................................... 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ............................. 29
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................... 42
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................. 43
Item 2. Changes in Securities and Use of Proceeds ..................................... 43
Item 4. Submission of Matters to a Vote of Security Holders ........................... 43
Item 6. Exhibits and Reports On Form 8-K .............................................. 44
SIGNATURE ............................................................................. 45
-1-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
2002 2001
--------- --------------
ASSETS:
Current assets:
Cash and cash equivalents ............................................... $ 120,369 $ 217,761
Investment securities available for sale ................................ 165,050 173,697
Accounts receivable - trade ............................................. 18,927 34,380
Other receivables ....................................................... 6,224 1,234
Inventories ............................................................. 89,403 53,194
Restricted assets ....................................................... 3,199 20,054
Deferred income taxes ................................................... 7,148 6,294
Other current assets .................................................... 11,361 9,113
--------- ---------
Total current assets ................................................ 421,681 515,727
Property, plant and equipment, net ........................................ 127,457 102,185
Long-term investments, net ................................................ 10,794 10,044
Restricted assets ......................................................... 1,875 1,881
Deferred income taxes ..................................................... 10,418 9,778
Intangible asset .......................................................... 107,511 --
Pension assets ............................................................ 20,058 17,920
Other assets .............................................................. 17,661 31,368
--------- ---------
Total assets ........................................................ $ 717,455 $ 688,903
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of notes payable and long-term debt and other obligations $ 19,016 $ 4,808
Accounts payable ........................................................ 12,938 16,192
Accrued promotional expenses ............................................ 17,486 20,634
Accrued taxes payable ................................................... 29,650 33,992
Settlement accruals ..................................................... 20,254 29,299
Deferred income taxes ................................................... 543 759
Accrued interest ........................................................ 7,920 6,799
Prepetition claims and restructuring accruals ........................... 2,671 2,700
Other accrued liabilities ............................................... 26,177 26,362
--------- ---------
Total current liabilities ........................................... 136,655 141,545
Notes payable, long-term debt and other obligations, less current portion . 292,421 214,273
Noncurrent employee benefits .............................................. 15,687 14,749
Deferred income taxes ..................................................... 136,698 132,528
Other liabilities ......................................................... 2,331 16,294
Minority interests ........................................................ 58,227 56,156
Commitments and contingencies
Stockholders' equity:
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 37,649,720 and outstanding 33,257,284 .................. 3,325 3,317
Additional paid-in capital .............................................. 287,437 309,849
Deficit ................................................................. (197,850) (182,645)
Accumulated other comprehensive income .................................. 857 1,170
Less: 4,392,436 shares of common stock in treasury, at cost ............ (18,333) (18,333)
--------- ---------
Total stockholders' equity .......................................... 75,436 113,358
--------- ---------
Total liabilities and stockholders' equity .......................... $ 717,455 $ 688,903
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
---------------------------- ----------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Tobacco* ................................................ $ 139,813 $ 107,652 $ 236,571 $ 182,694
Real estate leasing ..................................... 237 2,425 661 5,066
------------ ------------ ------------ ------------
Total revenues ........................................ 140,050 110,077 237,232 187,760
Expenses:
Cost of goods sold* ..................................... 100,873 60,642 161,875 101,406
Operating, selling, administrative and general expenses . 44,021 30,015 96,060 55,998
Settlement charges ...................................... -- 32 (807) 9,797
------------ ------------ ------------ ------------
Operating (loss) income ............................... (4,844) 19,388 (19,896) 20,559
Other income (expenses):
Interest and dividend income ............................ 2,581 2,058 5,401 4,240
Interest expense ........................................ (6,920) (2,052) (12,305) (3,310)
Gain on sale of investments, net ........................ 68 288 1,389 753
Gain on sale of assets .................................. 9,028 280 8,684 1,772
Other, net .............................................. (6) (137) (163) (123)
------------ ------------ ------------ ------------
(Loss) income from continuing operations before provision for
income taxes and minority interests ................... (93) 19,825 (16,890) 23,891
Provision (benefit) for income taxes .................... 591 8,337 (3,671) 10,482
Minority interests ...................................... 2,658 (76) 1,986 (782)
------------ ------------ ------------ ------------
(Loss) income from continuing operations .................... (3,342) 11,564 (15,205) 14,191
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations ........................... -- (572) -- (670)
Gain on disposal of discontinued operations, net of
minority interests .................................... -- 828 -- 829
------------ ------------ ------------ ------------
Income from discontinued operations ......................... -- 256 -- 159
------------ ------------ ------------ ------------
Net (loss) income ........................................... $ (3,342) $ 11,820 $ (15,205) $ 14,350
============ ============ ============ ============
Per basic common share:
(Loss) income from continuing operations ................ $ (0.10) $ 0.41 $ (0.46) $ 0.51
============ ============ ============ ============
Income from discontinued operations ....................... -- $ 0.01 -- $ 0.01
============ ============ ============ ============
Net (loss) income applicable to common shares ........... $ (0.10) $ 0.42 $ (0.46) $ 0.52
============ ============ ============ ============
Basic weighted average common shares outstanding ............ 33,257,284 28,100,030 33,250,050 27,525,200
============ ============ ============ ============
Per diluted common share:
(Loss) income from continuing operations ................ $ (0.10) $ 0.34 $ (0.46) $ 0.43
============ ============ ============ ============
Income from discontinued operations ....................... -- $ 0.01 -- $ 0.01
============ ============ ============ ============
Net (loss) income applicable to common shares ........... $ (0.10) $ 0.35 $ (0.46) $ 0.44
============ ============ ============ ============
Diluted weighted average common shares outstanding .......... 33,257,284 33,788,561 33,250,050 32,616,594
============ ============ ============ ============
- ----------------------
* Revenues and Cost of goods sold include excise taxes of $54,926, $37,186,
$93,190 and $64,310, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Accumulated
Common Stock Additional Other
------------------- Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Income Total
---------- ------ --------- --------- -------- ------------- ---------
Balance, December 31, 2001 ................ 33,171,847 $3,317 $ 309,849 $(182,645) $(18,333) $ 1,170 $ 113,358
Net loss .................................. -- -- -- (15,205) -- -- (15,205)
Unrealized gain on investment securities -- -- -- -- -- (313) (313)
---------
Total other comprehensive income .... -- -- -- -- -- -- (313)
---------
Total comprehensive loss .................. -- -- -- -- -- -- (15,518)
---------
Effect of New Valley capital transactions.. -- -- 395 -- -- -- 395
Distributions on common stock ............. -- -- (26,604) -- -- -- (26,604)
Exercise of options ....................... 85,437 8 1,188 -- -- -- 1,196
Tax benefit of options exercised .......... -- -- 525 -- -- -- 525
Amortization of deferred compensation, net -- -- 2,084 -- -- -- 2,084
---------- ------ --------- --------- -------- ------- ---------
Balance, June 30, 2002 .................... 33,257,284 $3,325 $ 287,437 $(197,850) $(18,333) $ 857 $ 75,436
========== ====== ========= ========= ======== ======= =========
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
----------------------
June 30, June 30,
2002 2001
--------- ---------
Net cash (used in) provided by operating activities: . $ (43,738) $ 6,660
--------- ---------
Cash flows from investing activities:
Proceeds from sale of businesses and assets, net . 20,951 10,778
Sale or maturity of investment securities ........ 57,429 9,744
Purchase of investment securities ................ (39,940) (3,721)
Purchase of long-term investments ................ (50,853) (5,717)
Purchase of real estate .......................... (688) (1,378)
Increase (decrease) in restricted assets ......... (7) 1,306
Issuance of note receivable ...................... (2,500) --
Repayment of note receivable ..................... 1,000 --
Payment of prepetition claims .................... (29) (2,624)
Repurchase by New Valley of common shares ........ -- (274)
Cash acquired in acquisition of LTS .............. -- 8,010
New Valley purchase of common shares ............. -- (3,945)
Capital expenditures ............................. (32,763) (32,956)
--------- ---------
Net cash used in investing activities .............. (47,400) (20,777)
--------- ---------
Cash flows from financing activities:
Proceeds from debt ............................... 37,117 72,132
Repayments of debt ............................... (18,382) (13,041)
Borrowings under revolver ........................ 297,417 221,975
Repayments on revolver ........................... (297,417) (241,349)
Deferred financing charges ....................... (930) (3,214)
Decrease in margin loan payable .................. -- (2,315)
Increase (decrease) in cash overdraft ............ 1,349 (501)
Issuance of common stock ......................... -- 50,000
Distributions on common stock .................... (26,604) (21,998)
Proceeds from participating loan ................. -- 2,478
Proceeds from exercise of options and warrants ... 1,196 12,590
--------- ---------
Net cash (used in) provided by financing activities (6,254) 76,757
--------- ---------
Net cash provided by discontinued operations ....... -- 403
Net (decrease) increase in cash and cash equivalents (97,392) 63,043
Cash and cash equivalents, beginning of period ..... 217,761 157,513
--------- ---------
Cash and cash equivalents, end of period ........... $ 120,369 $ 220,556
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
The consolidated financial statements of Vector Group Ltd. (the
"Company" or "Vector") include the accounts of VGR Holding Inc.
("VGR Holding"), Vector Tobacco Inc. ("Vector Tobacco"), Liggett
Group Inc. ("Liggett"), New Valley Corporation ("New Valley") and
other less significant subsidiaries. The Company owned 56.2% of New
Valley's common shares at June 30, 2002. All significant
intercompany balances and transactions have been eliminated.
Vector Tobacco is engaged in the development and marketing of new,
reduced carcinogen and nicotine-free cigarette products. Liggett is
engaged primarily in the manufacture and sale of cigarettes,
principally in the United States. New Valley is currently engaged in
the real estate business through its New Valley Realty division and
is seeking to acquire additional operating companies.
As discussed in Note 3, a subsidiary of the Company acquired The
Medallion Company, Inc. on April 1, 2002.
As discussed in Note 9, New Valley's former broker-dealer
operations are presented for 2001 as discontinued operations.
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2001, as filed with the Securities
and Exchange Commission. The consolidated results of operations for
interim periods should not be regarded as necessarily indicative of
the results that may be expected for the entire year.
(b) Estimates and Assumptions:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant estimates subject to material
changes in the near term include deferred tax assets, allowance for
doubtful accounts, promotional accruals, sales returns and
allowances, actuarial assumptions of pension plans, settlement
accruals and litigation and defense costs. Actual results could
differ from those estimates.
-6-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
(c) Reclassifications:
Certain amounts in the 2001 consolidated financial statements have
been reclassified to conform to the 2002 presentation.
(d) Earnings Per Share:
Information concerning the Company's common stock has been adjusted
to give effect to the 5% stock dividend paid to Company
stockholders on September 28, 2001. In connection with the 5%
dividend, the Company increased the number of warrants and stock
options by 5% and reduced the exercise prices accordingly. All share
amounts have been presented as if the stock dividend had occurred
on January 1, 2001.
The Company had a net loss for the three and six months ending June
30, 2002. Therefore, the effect of the common stock equivalents
and convertible securities is excluded from the computation of
diluted net loss per share since the effect is anti-dilutive for
the three and six months ended June 30, 2002.
(e) Comprehensive Income:
Comprehensive income is a component of stockholders' equity and
includes such items as the Company's proportionate interest in New
Valley's capital transactions, unrealized gains and losses on
investment securities and minimum pension liability adjustments.
Total comprehensive loss was $15,518 for the six months ended June
30, 2002 and total comprehensive income was $14,978 for the six
months ended June 30, 2001.
(f) New Accounting Pronouncements:
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives". EITF Issue No. 00-14
addresses the recognition, measurement and statement of operations
classification for certain sales incentives and became effective in
the first quarter of 2002. As a result, certain items previously
included in operating, selling, general and administrative expense
in the consolidated statement of operations have been recorded as a
reduction of operating revenues. The Company has determined that the
impact of adoption and subsequent application of EITF Issue No.
00-14 did not have a material effect on its consolidated financial
position or results of operations. Upon adoption, prior period
amounts, which were not significant, have been reclassified to
conform to the new requirements.
In April 2001, the EITF reached a consensus on Issue No. 00-25,
"Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products." EITF Issue No. 00-25 requires
that certain expenses included in operating, selling, administrative
and general expenses be recorded as a reduction of operating
revenues and was effective in the first quarter of 2002. The
financial statements reflect adoption of this accounting treatment.
For comparative purposes, prior period amounts have been
reclassified from operating, selling, administrative and general
expenses to a reduction of revenues. The adoption of EITF 00-25 did
not impact the Company's consolidated financial position, operating
income or net income.
-7-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
In July 2001, the FASB issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, establishes
specific criteria for the recognition of intangible assets
separately from goodwill and requires unallocated negative goodwill
to be written off. SFAS No. 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their acquisition.
SFAS No. 141 is effective for all business combinations initiated
after June 30, 2001, and SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001.
In October 2001, FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", and
requires (i) the recognition and measurement of the impairment of
long-lived assets to be held and used and (ii) the measurement of
long-lived assets to be disposed of by sale. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001. The
adoption of this statement did not have any impact on the Company's
consolidated financial statements.
2. LIGGETT VECTOR BRANDS
In March 2002, the Company announced that the sales and marketing
functions of its Liggett and Vector Tobacco subsidiaries will be
combined into a new entity, Liggett Vector Brands Inc. The newly formed
company will coordinate and execute the sales and marketing efforts for
all of the Company's tobacco operations. With the combined resources of
Liggett and Vector Tobacco, Liggett Vector Brands anticipates that it
will have approximately 350 salesmen, and enhanced distribution
and marketing capabilities. In connection with the creation of the new
Liggett Vector Brands entity, the Company took a charge of $3,460 in the
first quarter of 2002, related to a reorganization of its business to
eliminate redundant positions, consolidate sales and marketing
operations and integrate systems.
3. MEDALLION ACQUISITION
On April 1, 2002, a subsidiary of the Company acquired 100% of the stock
of The Medallion Company, Inc. ("Medallion"), and related assets from
Medallion's principal stockholder. The total purchase price consisted of
$50,000 in cash and $60,000 in notes, with the notes guaranteed by the
Company and Liggett. Medallion, a discount cigarette manufacturer
headquartered in Richmond, Virginia, is a participant in the Master
Settlement Agreement between the state Attorneys General and the tobacco
industry. Medallion has no payment obligations under the Master
Settlement Agreement except to the extent its market share exceeds
approximately 0.28% of total cigarettes sold in the United States
(approximately 1.15 billion units in 2001). The results of operations of
Medallion are included in the Company's financial statements beginning
April 1, 2002.
-8-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
At April 1, 2002
----------------
Receivable from seller ................ $ 3,189
Inventory ............................. 1,019
Property, plant and equipment ......... 2,181
Intangible asset....................... 107,511
--------
Total assets acquired ............. 113,900
--------
Accrued merger costs .................. 300
Allowance for sales returns ........... 500
Accrued MSA liability ................. 3,100
--------
Total liabilities assumed ......... 3,900
--------
Net assets acquired ............... $110,000
========
The $107,511 intangible asset, which is not subject to amortization,
relates to Medallion's exemption under the Master Settlement Agreement and
has been assigned to the Liggett segment.
The following table presents unaudited pro forma results of operations as
if the Medallion acquisition had occurred immediately prior to January 1,
2001. These pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of what would have occurred had
these transactions been consummated as of such date.
THREE MONTHS ENDED SIX MONTHS ENDED
------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $140,050 $120,780 $252,093 $206,559
======== ======== ======== ========
Net (loss) income $ (3,342) $ 12,577 $(16,369) $ 15,352
======== ======== ======== ========
Net (loss) income per common share:
Basic $ (0.10) $ 0.45 $ (0.49) $ 0.56
======== ======== ======== ========
Diluted $ (0.10) $ 0.37 $ (0.49) $ 0.47
======== ======== ======== ========
4. INVENTORIES
Inventories consist of:
June 30, December 31,
2002 2001
-------- ------------
Leaf tobacco ................. $ 46,085 $ 26,364
Other raw materials .......... 7,297 6,764
Work-in-process .............. 3,781 2,263
Finished goods ............... 29,837 15,317
Replacement parts and supplies 3,833 3,040
-------- --------
Inventories at current cost .. 90,833 53,748
LIFO adjustments ............. (1,430) (554)
-------- --------
$ 89,403 $ 53,194
======== ========
At June 30, 2002, Liggett had leaf tobacco purchase commitments of
approximately $31,501 and Vector Tobacco had leaf tobacco purchase
commitments of approximately $16,791.
-9-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
June 30, December 31,
2002 2001
--------- -------------
Land and improvements ....... $ 2,382 $ 2,252
Buildings ................... 25,459 23,035
Machinery and equipment ..... 121,510 81,396
Leasehold improvements ...... 1,663 1,451
Construction-in-progress .... 12,071 27,464
--------- ---------
163,085 135,598
Less accumulated depreciation (35,628) (33,413)
--------- ---------
$ 127,457 $ 102,185
========= =========
6. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
June 30, December 31,
2002 2001
--------- -------------
Vector:
6.25% Convertible Subordinated Notes due 2008 ............ $ 132,500 $ 132,500
VGR Holding:
10% Senior Secured Notes due 2006, net of
unamortized discount of $13,028 and $9,242 ............ 76,972 50,758
Liggett:
Revolving credit facility ................................ -- --
Term loan under credit facility .......................... 5,415 5,865
Other notes payable ...................................... 13,250 7,748
Vector Research:
Equipment loans .......................................... 17,864 12,724
Vector Tobacco:
Note payable ............................................. 7,260 8,847
Equipment loans .......................................... 1,301 389
Notes for Medallion acquisition .......................... 56,875 --
Other .................................................... -- 250
--------- ----------
Total notes payable, long-term debt and other obligations 311,437 219,081
Less:
Current maturities ................................. (19,016) (4,808)
--------- ----------
Amount due after one year ................................ $ 292,421 $ 214,273
========= ==========
-10-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
6.25% Convertible Subordinated Notes Due July 15, 2008 - Vector:
----------------------------------------------------------------
In July 2001, Vector completed the sale of $172,500 (net proceeds of
approximately $166,400) of its 6.25% convertible subordinated notes due
2008 through a private offering to qualified institutional investors in
accordance with Rule 144A under the Securities Act of 1933. The notes pay
interest at 6.25% per annum and are convertible into Vector's common
stock, at the option of the holder, at a conversion price of $32.86 per
share at June 30, 2002. The conversion price is subject to adjustment for
various events, and any cash distribution on Vector's common stock will
result in a corresponding decrease in the conversion price. Following the
conversion of $40,000 principal amount of the convertible notes in
December 2001, $132,500 principal amount of the convertible notes were
outstanding.
The notes may be redeemed by Vector, in whole or in part, between July 15,
2003 and July 15, 2004, if the closing price of Vector's common stock
exceeds 150% of the conversion price then in effect for a period of at
least 20 trading days in any consecutive 30 day trading period, at a price
equal to 100% of the principal amount, plus accrued interest and a "make
whole" payment. Vector may redeem the notes, in whole or in part, at a
price of 103.125% in the year beginning July 15, 2004, 102.083% in the
year beginning July 15, 2005, 101.042% in the year beginning July 15, 2006
and 100% in the year beginning July 15, 2007, together with accrued
interest. If a change of control occurs, Vector will be required to offer
to repurchase the notes at 101% of their principal amount, plus accrued
interest and, under certain circumstances, a "make whole" payment.
10% Senior Secured Notes Due March 31, 2006 - VGR Holding:
----------------------------------------------------------
On May 14, 2001, VGR Holding issued at a discount $60,000 principal amount
of 10% senior secured notes due March 31, 2006 in a private placement. VGR
Holding received net proceeds from the placement of approximately $46,500.
On April 30, 2002, VGR Holding issued at a discount an additional $30,000
principal amount of 10% senior secured notes due March 31, 2006 in a
private placement and received net proceeds of approximately $25,000. The
notes were priced to provide the purchasers with a 15.75% yield to
maturity. The new notes are on the same terms as the $60,000 principal
amount of senior secured notes previously issued. All $90,000 principal
amount of the notes have been guaranteed by the Company and by Liggett.
The notes are collateralized by substantially all of VGR Holding's assets,
including a pledge of VGR Holding's equity interests in its direct
subsidiaries, including Brooke Group Holding, Brooke (Overseas) Ltd.,
Vector Tobacco and New Valley Holdings, Inc., as well as a pledge of the
shares of Liggett and all of the New Valley securities held by VGR Holding
and New Valley Holdings. The purchase agreements for the notes contain
covenants, which among other things, limit the ability of VGR Holding to
make distributions to Vector to 50% of VGR Holding's net income, unless
VGR Holding holds $75,000 in cash after giving effect to the payment of
the distribution, limit additional indebtedness of VGR Holding, Liggett
and Vector Tobacco to 250% of EBITDA (as defined in the purchase
agreements) for the trailing 12 months plus an additional amount of up to
$75,000 during the 12 month period ending March 31, 2003, restrict
transactions with affiliates subject to exceptions which include payments
to Vector not to exceed $9,500 per year for permitted operating expenses,
and limit the ability of VGR Holding to merge, consolidate or sell certain
assets.
-11-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
Prior to May 14, 2003, VGR Holding may redeem up to $31,500 of the notes
at a redemption price of 100% of the principal amount with proceeds from
one or more equity offerings. VGR Holding may redeem the notes, in whole
or in part, at a redemption price of 100% of the principal amount
beginning May 14, 2003. During the term of the notes, VGR Holding is
required to offer to repurchase all the notes at a purchase price of 101%
of the principal amount, in the event of a change of control, and to offer
to repurchase notes, at 100% of the principal amount, with the proceeds of
material asset sales.
Revolving Credit Facility - Liggett:
------------------------------------
Liggett has a $40,000 credit facility, under which $0 was outstanding at
June 30, 2002. Availability under the credit facility was approximately
$34,633 based on eligible collateral at June 30, 2002. The facility is
collateralized by all inventories and receivables of Liggett. Borrowings
under the facility, whose interest is calculated at a rate equal to 1.0%
above Philadelphia National Bank's (the indirect parent of Congress
Financial Corporation, the lead lender) prime rate, bore a rate of 5.75%
at June 30, 2002. The facility requires Liggett's compliance with certain
financial and other covenants including a restriction on the payment of
cash dividends unless Liggett's borrowing availability under the facility
for the 30-day period prior to the payment of the dividend, and after
giving effect to the dividend, is at least $5,000. In addition, the
facility, as amended, imposes requirements with respect to Liggett's
adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of
$17,000 as computed in accordance with the agreement). At June 30, 2002,
Liggett was in compliance with all covenants under the credit facility;
Liggett's adjusted net worth was $40,467 and net working capital was
$20,418, as computed in accordance with the agreement. The facility
expires on March 8, 2003 subject to automatic renewal for an additional
year unless a notice of termination is given by the lender at least 60
days prior to the anniversary date.
In November 1999, 100 Maple LLC, a new company formed by Liggett to
purchase its Mebane, North Carolina facility, borrowed $5,040 from the
lender under Liggett's credit facility. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $5,415 was outstanding at
June 30, 2002. In addition, the lender extended the term of the loan so
that it is payable in 59 monthly installments of $75 with a final payment
of $1,875. Interest is charged at the same rate as applicable to Liggett's
credit facility, and borrowings under the Maple loan reduce the maximum
availability under the credit facility. Liggett has guaranteed the loan,
and a first mortgage on the Mebane property collateralizes the Maple loan
and Liggett's credit facility.
Equipment Loans - Liggett:
--------------------------
In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment
for $1,071 under two capital leases which are payable in 60 monthly
installments of $22 with an effective interest rate of 10.20%.
-12-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
In October and December 2001, Liggett purchased equipment for $3,204 and
$3,200, respectively, through capital lease arrangements guaranteed by the
Company, each payable in 60 monthly installments of $61 with interest
calculated at the prime rate.
In March 2002, Liggett purchased equipment for $3,023 through the issuance
of a note, payable in 30 monthly installments of $62 and then 30 monthly
installments of $51 with an effective annual interest rate of 4.68%.
In May 2002, Liggett purchased equipment for $2,871 through the issuance
of a note, payable in 30 monthly installments of $59 and then 30 monthly
installments of $48 with an effective annual interest rate of 4.64%.
Equipment Loans - Vector Research:
----------------------------------
In February 2001, a subsidiary of Vector Research Ltd. purchased equipment
for $15,500 and borrowed $13,175 to fund the purchase. The loan, which is
collateralized by the equipment and a letter of credit from the Company
for $775, is guaranteed by Vector Research, VGR Holding and the Company.
The loan is payable in 120 monthly installments of $125, including annual
interest of 2.31% above the 30-day commercial paper rate with a final
payment of $6,125.
In February 2002, the Vector Research subsidiary purchased equipment for
$6,575 and borrowed $6,150 to fund the purchase. The loan, which is
collateralized by the equipment, is guaranteed by Vector Research and the
Company. The loan is payable in 120 monthly installments of $44, including
annual interest at a variable rate of 2.75% plus the 30-day average
commercial paper rate.
Note Payable - Vector Tobacco:
------------------------------
In June 2001, Vector Tobacco purchased for $8,400 an industrial facility
in Timberlake, North Carolina. Vector Tobacco financed the purchase with
an $8,200 loan, payable in 60 monthly installments of $85, including
annual interest at 4.85% above LIBOR with a final payment of approximately
$3,160. The loan, which is collateralized by a mortgage and a letter of
credit of $1,750, is guaranteed by VGR Holding and Vector.
During December 2001, Vector Tobacco executed a second promissory note
with the same lender for approximately $1,159 to finance building
improvements. The second promissory note is payable in 30 monthly
installments of $39 plus accrued interest, with an annual interest rate of
LIBOR plus 5.12%.
Notes for Medallion acquisition - Vector Tobacco:
-------------------------------------------------
The purchase price for the acquisition of Medallion included $60,000 in
notes of Vector Tobacco, guaranteed by the Company and Liggett. Of the
notes, $25,000 bear interest at a 9.0% annual rate and mature $3,125 per
quarter commencing June 30, 2002 and continuing through March 31, 2004.
The remaining $35,000 of notes bear interest at 6.5% per year and mature
on April 1, 2007.
-13-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
7. CONTINGENCIES
SMOKING-RELATED LITIGATION:
OVERVIEW. Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in numerous direct and
third-party actions predicated on the theory that cigarette manufacturers
should be liable for damages alleged to have been caused by cigarette
smoking or by exposure to secondary smoke from cigarettes. These cases are
reported here as though having been commenced against Liggett (without
regard to whether such cases were actually commenced against Brooke Group
Holding Inc., the Company's predecessor and a wholly-owned subsidiary of
VGR Holding, or Liggett). There has been a noteworthy increase in the
number of cases commenced against Liggett and the other cigarette
manufacturers in recent years. The cases generally fall into the following
categories: (i) smoking and health cases alleging injury brought on behalf
of individual plaintiffs ("Individual Actions"); (ii) smoking and health
cases alleging injury and purporting to be brought on behalf of a class of
individual plaintiffs ("Class Actions"); (iii) health care cost recovery
actions brought by various foreign and domestic governmental entities
("Governmental Actions"); and (iv) health care cost recovery actions
brought by third-party payors including insurance companies, union health
and welfare trust funds, asbestos manufacturers and others ("Third-Party
Payor Actions"). As new cases are commenced, defense costs and the risks
attendant to the inherent unpredictability of litigation continue to
increase. The future financial impact of the risks and expenses of
litigation and the effects of the tobacco litigation settlements discussed
below are not quantifiable at this time. For the six months ended June 30,
2002, Liggett incurred counsel fees and costs totaling approximately
$2,566 compared to $3,846 for the six months ended June 30, 2001.
INDIVIDUAL ACTIONS. As of June 30, 2002, there were approximately 310
cases pending against Liggett, and in most cases the other tobacco
companies, where one or more individual plaintiffs allege injury resulting
from cigarette smoking, addiction to cigarette smoking or exposure to
secondary smoke and seek compensatory and, in some cases, punitive
damages. Of these, 90 were pending in New York, 68 in Florida, 47 in
Maryland, 26 in Mississippi and 19 in California. The balance of the
individual cases were pending in 21 states. There are three individual
cases pending where Liggett is the only named defendant. In addition to
these cases, an action against cigarette manufacturers involving
approximately 1,250 named individual plaintiffs has been consolidated
before a single West Virginia state court. Liggett is a defendant in most
of the cases pending in West Virginia. In January 2002, the court severed
Liggett from the trial of the consolidated action, which is scheduled to
begin in June 2003.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including negligence,
gross negligence, breach of special duty, strict liability, fraud,
misrepresentation, design defect, failure to warn, breach of express and
implied warranties, conspiracy, aiding and abetting, concert of action,
unjust enrichment, common law public nuisance, property damage, invasion
of privacy, mental anguish, emotional distress, disability, shock,
indemnity and violations of deceptive trade practice laws, the Federal
Racketeer Influenced and Corrupt Organization Act ("RICO"), state RICO
statutes and antitrust statutes. In many of these cases, in addition to
-14-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
compensatory damages, plaintiffs also seek other forms of relief including
treble/multiple damages, medical monitoring, disgorgement of profits and
punitive damages. Defenses raised by defendants in these cases include
lack of proximate cause, assumption of the risk, comparative fault and/or
contributory negligence, lack of design defect, statute of limitations,
equitable defenses such as "unclean hands" and lack of benefit, failure to
state a claim and federal preemption.
Jury awards in California and Oregon have been entered against other
cigarette manufacturers. The awards in these individual actions are for
both compensatory and punitive damages and represent a material amount
of damages. In 1999, a jury awarded $800 in compensatory damages and
$79,500 in punitive damages in an Oregon state court case involving
Philip Morris. The trial court later determined that the punitive damage
award was excessive and reduced it to $32,000. In June 2002, an Oregon
intermediate appellate court reinstated the jury's punitive damages
award. Philip Morris has appealed the decision to the Oregon Supreme
Court. In June 2001, a jury awarded $5,500 in compensatory damages and
$3,000,000 in punitive damages in a California state court case
involving Philip Morris. In March 2002, a jury awarded $169 in
compensatory damages and $150,000 in punitive damages in an Oregon state
court case also involving Philip Morris. The punitive damages awards in
both the California and Oregon actions were subsequently reduced to
$100,000 by the trial courts. Both the verdict and damage awards in
these cases are being appealed. In November 2001, in another case, a
$25,000 punitive damages judgment against Philip Morris was affirmed by
a California intermediate appellate court. Philip Morris appealed the
decision to the California Supreme Court, which has accepted the case
for review. During 2001, as a result of a Florida Supreme Court decision
upholding the award, another cigarette manufacturer paid $1,100 in
compensatory damages and interest to a former smoker and his spouse for
injuries they allegedly incurred as a result of smoking. In December
2001, in an individual action involving another cigarette manufacturer,
a Florida jury awarded a smoker $165 in compensatory damages. The
defendant has appealed the verdict. In February 2002, a federal district
court jury in Kansas awarded a smoker $198 in compensatory damages from
two other cigarette manufacturers and, in June 2002, the trial court
assessed punitive damages of $15,000 against one of the defendants. The
defendant has filed its notice of appeal.
CLASS ACTIONS. As of June 30, 2002, there were approximately 30 actions
pending, for which either a class has been certified or plaintiffs are
seeking class certification, where Liggett, among others, was a named
defendant. Many of these actions purport to constitute statewide class
actions and were filed after May 1996 when the Fifth Circuit Court of
Appeals, in the Castano case, reversed a Federal district court's
certification of a purported nationwide class action on behalf of persons
who were allegedly "addicted" to tobacco products.
The extent of the impact of the Castano decision on smoking-related class
action litigation is still uncertain. The Castano decision has had a
limited effect with respect to courts' decisions regarding narrower
smoking-related classes or class actions brought in state rather than
federal court. For example, since the Fifth Circuit's ruling, a court in
Louisiana (Liggett is not a defendant in this proceeding) has certified
"addiction-as-injury" class actions that covered only citizens in those
states. Two other class actions, BROIN AND ENGLE, were certified in state
court in Florida prior to the Fifth Circuit's decision. In April 2001, the
BROWN case was certified as a class action in California.
-15-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
In May 1994, an action entitled ENGLE, ET AL. V. R.J. REYNOLDS TOBACCO
COMPANY, ET AL., Circuit Court, Eleventh Judicial Circuit, Miami-Dade
County, Florida, was filed against Liggett and others. The class consists
of all Florida residents and citizens, and their survivors, who have
suffered, presently suffer or have died from diseases and medical
conditions caused by their addiction to cigarettes that contain nicotine.
Phase I of the trial commenced in July 1998 and in July 1999, the jury
returned the Phase I verdict. The Phase I verdict concerned certain issues
determined by the trial court to be "common" to the causes of action of
the plaintiff class. Among other things, the jury found that: smoking
cigarettes causes 20 diseases or medical conditions, cigarettes are
addictive or dependence producing, defective and unreasonably dangerous,
defendants made materially false statements with the intention of
misleading smokers, defendants concealed or omitted material information
concerning the health effects and/or the addictive nature of smoking
cigarettes and agreed to misrepresent and conceal the health effects
and/or the addictive nature of smoking cigarettes, and defendants were
negligent and engaged in extreme and outrageous conduct or acted with
reckless disregard with the intent to inflict emotional distress. The jury
also found that defendants' conduct "rose to a level that would permit a
potential award or entitlement to punitive damages." The court decided
that Phase II of the trial, which commenced November 1999, would be a
causation and damages trial for three of the class representatives and a
punitive damages trial on a class-wide basis, before the same jury that
returned the verdict in Phase I. In April 2000, the jury awarded
compensatory damages of $12,704 to the three plaintiffs, to be reduced in
proportion to the respective plaintiff's fault. The jury also decided that
the claim of one of the plaintiffs, who was awarded compensatory damages
of $5,831, was not timely filed. In July 2000, the jury awarded
approximately $145,000,000 in the punitive damages portion of Phase II
against all defendants including $790,000 against Liggett. The court
entered a final order of judgment against the defendants in November 2000.
The court's final judgment, which provides for interest at the rate of 10%
per year on the jury's awards, also denied various post-trial motions,
including a motion for new trial and a motion seeking reduction of the
punitive damages award. Liggett intends to pursue all available post-trial
and appellate remedies. If this verdict is not eventually reversed on
appeal, or substantially reduced by the court, it could have a material
adverse effect on the Company. Phase III of the trial will be conducted
before separate juries to address absent class members' claims, including
issues of specific causation and other individual issues regarding
entitlement to compensatory damages.
It is unclear how the ENGLE court's order regarding the determination of
punitive damages will be implemented. The order provides that the punitive
damage amount should be standard as to each class member and acknowledges
that the actual size of the class will not be known until the last case
has withstood appeal. The order does not address whether defendants will
be required to pay the punitive damage award prior to a determination of
claims of all class members, a process that could take years to conclude.
In May 2000, legislation was enacted in Florida that limits the size of
any bond required, pending appeal, to stay execution of a punitive damages
verdict to the lesser of the punitive award plus twice the statutory rate
of interest, $100,000 or 10% of the net worth of the defendant, but the
limitation on the bond does not affect the amount of the underlying
verdict. Liggett has filed the $3,450 bond required by the Florida law in
order to stay execution of the ENGLE judgment. Similar legislation has
been enacted in Georgia, Indiana, Kentucky, Louisiana, Michigan, Nevada,
North Carolina, Ohio, Oklahoma, South Carolina, Virginia and West
Virginia.
-16-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
In May 2001, Liggett, along with Philip Morris and Lorillard Tobacco Co.,
reached an agreement with the class in the ENGLE case, which will provide
assurance of Liggett's ability to appeal the jury's July 2000 verdict. As
required by the agreement, Liggett paid $6,273 into an escrow account to
be held for the benefit of the ENGLE class, and released, along with
Liggett's existing $3,450 statutory bond, to the court for the benefit of
the class upon completion of the appeals process, regardless of the
outcome of the appeal. As a result, the Company recorded a $9,723 pre-tax
charge to the consolidated statement of operations for the first quarter
of 2001. The agreement, which was approved by the court, assures that the
stay of execution, currently in effect pursuant to the Florida bonding
statute, will not be lifted or limited at any point until completion
of all appeals, including an appeal to the United States Supreme Court.
If Liggett's balance sheet net worth falls below $33,781 (as determined
in accordance with generally accepted accounting principles in
effect as of July 14, 2000), the stay granted in favor of Liggett in the
agreement would terminate and the Engle class would be free to challenge
the Florida bonding statute.
In June 2002, the jury in a Florida state court action entitled LUKACS V.
PHILIP MORRIS, ET AL. awarded $37,500 in compensatory damages in a case
involving Liggett and two other tobacco manufacturers. The jury found
Liggett 50% responsible for the damages incurred by the plaintiff. The
LUKACS case was the first individual case to be tried as part of Phase III
of the ENGLE case; the claims of all other individuals who are members of
the class have been stayed pending resolution of the appeal of the ENGLE
verdict. The LUKACS verdict will be subject to the outcome of the ENGLE
appeal, and the plaintiff has agreed not to seek the entry of a final
judgment on the jury verdict until after completion of all review of the
ENGLE final judgment.
Class certification motions are pending in a number of putative class
actions. Classes remain certified against Liggett in Florida (ENGLE), in
West Virginia (BLANKENSHIP) and in California (BROWN). A number of class
certification denials are on appeal.
In August 2000, in BLANKENSHIP V. PHILIP MORRIS, INC., a West Virginia
state court conditionally certified (only to the extent of medical
monitoring) a class of present or former West Virginia smokers who desire
to participate in a medical monitoring plan. The trial of this case ended
in January 2001, when the judge declared a mistrial. In an order issued in
March 2001, the court reaffirmed class certification of this medical
monitoring action. In July 2001, the court issued an order severing
Liggett from the retrial of the case which began in September 2001. In
November 2001, the jury returned a verdict in favor of the defendants. In
January 2002, the trial court denied plantiffs' motion for a new trial,
and plantiffs have appealed.
In April 2001, the California state court in the case of BROWN V. THE
AMERICAN TOBACCO COMPANY, INC., ET AL., granted in part plaintiff's motion
for class certification and certified a class comprised of adult residents
of California who smoked at least one of defendants' cigarettes "during
the applicable time period" and who were exposed to defendants' marketing
and advertising activities in California. Certification was granted as to
plaintiff's claims that defendants violated California's unfair business
practices statute. The court subsequently defined "the applicable class
period" for plaintiff's claims, pursuant to a stipulation submitted by the
parties, as June 10, 1993 through April 23, 2001. The California Court of
Appeals denied defendants' writ application, which sought review of the
trial court's class certification orders. Defendants filed a petition for
review with the California Supreme Court, which was subsequently denied.
Trial is scheduled to begin in March 2003. Liggett is a defendant in the
case.
Approximately 38 purported state and federal class action complaints have
been filed against the cigarette manufacturers for alleged antitrust
-17-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
violations, including Liggett. The actions allege that the cigarette
manufacturers have engaged in a nationwide and international conspiracy to
fix the price of cigarettes in violation of state and federal antitrust
laws. Plaintiffs allege that defendants' price-fixing conspiracy raised
the price of cigarettes above a competitive level. Plaintiffs in the 31
state actions purport to represent classes of indirect purchasers of
cigarettes in 16 states; plaintiffs in the seven federal actions purport
to represent a nationwide class of wholesalers who purchased cigarettes
directly from the defendants. The federal actions have been consolidated
and, in July 2000, plaintiffs in the federal consolidated action filed a
single consolidated complaint that did not name Liggett as a defendant,
although Liggett has complied with certain discovery requests. The court
granted defendants' motion for summary judgment in the consolidated
federal cases in July 2002. Fourteen California actions have been
consolidated and the consolidated complaint did not name Liggett as a
defendant. In Nevada, an amended complaint was filed that did not name
Liggett as a defendant.
GOVERNMENTAL ACTIONS. As of June 30, 2002, there were approximately 40
Governmental Actions pending against Liggett. In these proceedings, both
foreign and domestic governmental entities seek reimbursement for Medicaid
and other health care expenditures. The claims asserted in these health
care cost recovery actions vary. In most of these cases, plaintiffs assert
the equitable claim that the tobacco industry was "unjustly enriched" by
plaintiffs' payment of health care costs allegedly attributable to smoking
and seek reimbursement of those costs. Other claims made by some but not
all plaintiffs include the equitable claim of indemnity, common law claims
of negligence, strict liability, breach of express and implied warranty,
breach of special duty, fraud, negligent misrepresentation, conspiracy,
public nuisance, claims under state and federal statutes governing
consumer fraud, antitrust, deceptive trade practices and false
advertising, and claims under RICO.
THIRD-PARTY PAYOR ACTIONS. As of June 30, 2002, there were approximately 7
Third-Party Payor Actions pending against Liggett. The claims in these
cases are similar to those in the Governmental Actions but have been
commenced by insurance companies, union health and welfare trust funds,
asbestos manufacturers and others. Eight United States Circuit Courts of
Appeal have ruled that Third-Party Payors did not have standing to bring
lawsuits against the tobacco companies. The United States Supreme Court
has denied petitions for certiorari in the cases decided by four of the
courts of appeal. However, a number of Third-Party Payor Actions,
including an action brought by 24 Blue Cross/Blue Shield Plans, remain
pending.
In June 2001, a jury in a third party payor action brought by Empire Blue
Cross and Blue Shield in the Eastern District of New York rendered a
verdict awarding the plaintiff $17,800 in damages against the major
tobacco companies. As against Liggett, the jury awarded the plaintiff
damages of $89. In February 2002, the court awarded plaintiff's counsel
$37,800 in attorneys' fees, without allocating the fee award among the
several defendants. Liggett has appealed both the jury verdict and the
attorneys' fee award.
In other Third-Party Payor Actions claimants have set forth several
additional theories of relief sought: funding of corrective public
education campaigns relating to issues of smoking and health; funding for
clinical smoking cessation programs; disgorgement of profits from sales of
-18-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
cigarettes; restitution; treble damages; and attorneys' fees.
Nevertheless, no specific amounts are provided. It is understood that
requested damages against the tobacco company defendants in these cases
might be in the billions of dollars.
FEDERAL GOVERNMENT ACTION. In September 1999, the United States government
commenced litigation against Liggett and the other tobacco companies in
the United States District Court for the District of Columbia. The action
seeks to recover an unspecified amount of health care costs paid for and
furnished, and to be paid for and furnished, by the Federal Government for
lung cancer, heart disease, emphysema and other smoking-related illnesses
allegedly caused by the fraudulent and tortious conduct of defendants, to
restrain defendants and co-conspirators from engaging in fraud and other
unlawful conduct in the future, and to compel defendants to disgorge the
proceeds of their unlawful conduct. The complaint alleges that such costs
total more than $20,000,000 annually. The action asserts claims under
three federal statutes, the Medical Care Recovery Act ("MCRA"), the
Medicare Secondary Payer provisions of the Social Security Act ("MSP") and
RICO. In December 1999, Liggett filed a motion to dismiss the lawsuit on
numerous grounds, including that the statutes invoked by the government do
not provide the basis for the relief sought. In September 2000, the court
dismissed the government's claims based on MCRA and MSP, and the court
reaffirmed its decision in July 2001. In the September 2000 decision, the
court also determined not to dismiss the government's claims based on
RICO, under which the government continues to seek court relief to
restrain the defendant tobacco companies from allegedly engaging in fraud
and other unlawful conduct and to compel disgorgement.
In June 2001, the United States Attorney General assembled a team of three
Department of Justice ("DOJ") lawyers to work on a possible settlement of
the federal lawsuit. The DOJ lawyers met with representatives of the
tobacco industry, including Liggett, in July 2001. No settlement was
reached, and no further meetings are planned. Discovery in the case has
commenced, and trial has been scheduled for July 2003.
SETTLEMENTS. In March 1996, Brooke Group Holding and Liggett entered into
an agreement, subject to court approval, to settle the Castano class
action tobacco litigation. The Castano class was subsequently decertified
by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and Liggett
entered into settlements of smoking-related litigation with the Attorneys
General of 45 states and territories. The settlements released both Brooke
Group Holding and Liggett from all smoking-related claims, including
claims for health care cost reimbursement and claims concerning sales of
cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco Corporation,
R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (collectively,
the "Original Participating Manufacturers" or "OPMs") and Liggett
(together with the OPMs and any other tobacco product manufacturer that
becomes a signatory, the "Participating Manufacturers") entered into the
Master Settlement Agreement (the "MSA") with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American
Samoa and the Northern Marianas (collectively, the "Settling States") to
settle the asserted and unasserted health care cost recovery and certain
other claims of those Settling States. The MSA has received final judicial
approval in each of the 52 settling jurisdictions.
-19-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
The MSA restricts tobacco product advertising and marketing within the
Settling States and otherwise restricts the activities of Participating
Manufacturers. Among other things, the MSA prohibits the targeting of
youth in the advertising, promotion or marketing of tobacco products; bans
the use of cartoon characters in all tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any 12-month period; bans all outdoor advertising, with
the exception of signs, 14 square feet or less, at retail establishments
that sell tobacco products; prohibits payments for tobacco product
placement in various media; bans gift offers based on the purchase of
tobacco products without sufficient proof that the intended recipient is
an adult; prohibits Participating Manufacturers from licensing third
parties to advertise tobacco brand names in any manner prohibited under
the MSA; prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or trade
name or the names of sports teams, entertainment groups or individual
celebrities; and prohibits Participating Manufacturers from selling packs
containing fewer than 20 cigarettes.
The MSA also requires Participating Manufacturers to affirm corporate
principles to comply with the MSA and to reduce underage usage of tobacco
products and imposes requirements applicable to lobbying activities
conducted on behalf of Participating Manufacturers.
Liggett has no payment obligations under the MSA except to the extent its
market share exceeds a base share of 125% of its 1997 market share, or
approximately 1.65% of total cigarettes sold in the United States. Liggett
believes, based on published industry sources, that its domestic shipments
accounted for approximately 2.2% of the total cigarettes shipped in the
United States during 2001. On April 15 of any year following a year in
which Liggett's market share exceeds the base share, Liggett will pay on
each excess unit an amount equal (on a per-unit basis) to that due during
the same following year by the OPMs under the annual and strategic
contribution payment provisions of the MSA, subject to applicable
adjustments, offsets and reductions. In April 2002, Liggett and Vector
Tobacco paid a total of $31,130 for their 2001 MSA obligations. Liggett
and Vector Tobacco have expensed $18,006 for their estimated MSA
obligations for the first six months of 2002 as part of cost of goods
sold. Under the annual and strategic contribution payment provisions of
the MSA, the OPMs (and Liggett to the extent its market share exceeds the
base share) are required to pay the following annual amounts (subject to
certain adjustments):
Year Amount
---- ------
2002 - 2003 ..... $6,500,000
2004 - 2007 ..... $8,000,000
2008 - 2017 ..... $8,139,000
2018 and each
year thereafter $9,000,000
These annual payments will be allocated based on relative unit volume of
domestic cigarette shipments. The payment obligations under the MSA are
the several, and not joint, obligations of each Participating Manufacturer
and are not the responsibility of any parent or affiliate of a
Participating Manufacturer.
-20-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of
these states, prior to the effective date of the MSA, negotiated and
executed settlement agreements with each of the other major tobacco
companies separate from those settlements reached previously with Liggett.
Because these states' settlement agreements with Liggett provided for
"most favored nation" protection for both Brooke Group Holding and
Liggett, the payments due these states by Liggett (with certain possible
exceptions) have been eliminated. With respect to all non-economic
obligations under the previous settlements, both Brooke Group Holding and
Liggett are entitled to the most favorable provisions as between the MSA
and each state's respective settlement with the other major tobacco
companies. Therefore, Liggett's non-economic obligations to all states and
territories are now defined by the MSA.
In April 1999, a putative class action was filed on behalf of all firms
that directly buy cigarettes in the United States from defendant tobacco
manufacturers. The complaint alleges violation of antitrust law, based in
part on the MSA. Plaintiffs seek treble damages computed as three times
the difference between current prices and the price plaintiffs would have
paid for cigarettes in the absence of an alleged conspiracy to restrain
and monopolize trade in the domestic cigarette market, together with
attorneys' fees. Plaintiffs also seek injunctive relief against certain
aspects of the MSA.
In March 1997, Liggett, Brooke Group Holding and a nationwide class of
individuals that allege smoking-related claims filed a mandatory class
settlement agreement in an action entitled FLETCHER, ET AL. V. BROOKE
GROUP LTD., ET AL., Circuit Court of Mobile County, Alabama, where the
court granted preliminary approval and preliminary certification of the
class. In July 1998, Liggett, Brooke Group Holding and plaintiffs filed an
amended class action settlement agreement in FLETCHER which agreement was
preliminarily approved by the court in December 1998. In July 1999, the
court denied approval of the FLETCHER class action settlement. The
parties' motion for reconsideration is still pending. In May 2002, the
court scheduled for trial in August 2002 the claims of the four individual
plaintiffs against Liggett.
Copies of the various settlement agreements are filed as exhibits to the
Company's Form 10-K and the discussion herein is qualified in its entirety
by reference thereto.
TRIALS. Cases currently scheduled for trial during the next six months
include individual actions in Pennsylvania state court scheduled for
November 2002 and in New York state court scheduled for January 2003 and
an action consolidating the claims of four individuals in a Mississippi
state court scheduled for October 2002. In addition, the FLETCHER case is
scheduled for trial in Alabama state court in August 2002. Trial dates,
however, are subject to change.
Management is not able to predict the outcome of the litigation pending
against Brooke Group Holding or Liggett. Litigation is subject to many
uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In
July 2000, the jury awarded $790,000 in punitive damages against Liggett
in the second phase of the trial, and the court has entered an order of
final judgment. Liggett intends to pursue all available post-trial and
appellate remedies. If this verdict is not eventually reversed on appeal,
or substantially reduced by the court, it could have a material adverse
effect on the Company. Liggett has filed the $3,450 bond required under
recent Florida legislation which limits the size of any bond required,
pending appeal, to stay execution of a punitive damages verdict. On May 7,
2001, Liggett reached an agreement with the class in the ENGLE case, which
-21-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
will provide assurance to Liggett that the stay of execution, currently in
effect pursuant to the bonding statute enacted in 2000 by the Florida
legislature, will not be lifted or limited at any point until completion
of all appeals, including to the United States Supreme Court. As required
by the agreement, Liggett paid $6,273 into an escrow account to be held
for the benefit of the ENGLE class, and released, along with Liggett's
existing $3,450 statutory bond, to the court for the benefit of the class
upon completion of the appeals process, regardless of the outcome of the
appeal. As a result, the Company recorded a $9,723 pre-tax charge to the
consolidated statement of operations for the six months ended June 30,
2001. In June 2002, the jury in an individual case brought under the third
phase of the ENGLE case awarded $37,500 of compensatory damages against
Liggett and two other defendants and found Liggett 50% responsible for the
damages. The verdict will be subject to the outcome of the ENGLE appeal.
It is possible that additional cases could be decided unfavorably and that
there could be further adverse developments in the ENGLE case. Management
cannot predict the cash requirements related to any future settlements and
judgments, including cash required to bond any appeals, and there is a
risk that those requirements will not be able to be met. An unfavorable
outcome of a pending smoking and health case could encourage the
commencement of additional similar litigation. Management is unable to
make a meaningful estimate with respect to the amount or range of loss
that could result from an unfavorable outcome of the cases pending against
Brooke Group Holding or Liggett or the costs of defending such cases. The
complaints filed in these cases rarely detail alleged damages. Typically,
the claims set forth in an individual's complaint against the tobacco
industry pray for money damages in an amount to be determined by a jury,
plus punitive damages and costs. These damage claims are typically stated
as being for the minimum necessary to invoke the jurisdiction of the
court.
It is possible that the Company's consolidated financial position, results
of operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such smoking-related litigation.
Liggett's management is unaware of any material environmental conditions
affecting its existing facilities. Liggett's management believes that
current operations are conducted in material compliance with all
environmental laws and regulations and other laws and regulations
governing cigarette manufacturers. Compliance with federal, state and
local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the environment,
has not had a material effect on the capital expenditures, earnings or
competitive position of Liggett.
There are several other proceedings, lawsuits and claims pending against
the Company and certain of its consolidated subsidiaries unrelated to
smoking or tobacco product liability. Management is of the opinion that
the liabilities, if any, ultimately resulting from such other proceedings,
lawsuits and claims should not materially affect the Company's financial
position, results of operations or cash flows.
LEGISLATION AND REGULATION:
In January 1993, the Environmental Protection Agency ("EPA") released a
report on the respiratory effect of secondary smoke which concludes that
secondary smoke is a known human lung carcinogen in adults and in
children, causes increased respiratory tract disease and middle ear
disorders and increases the severity and frequency of asthma. In June
-22-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
1993, the two largest of the major domestic cigarette manufacturers,
together with other segments of the tobacco and distribution industries,
commenced a lawsuit against the EPA seeking a determination that the EPA
did not have the statutory authority to regulate secondary smoke, and that
given the current body of scientific evidence and the EPA's failure to
follow its own guidelines in making the determination, the EPA's
classification of secondary smoke was arbitrary and capricious. In July
1998, a federal district court vacated those sections of the report
relating to lung cancer, finding that the EPA may have reached different
conclusions had it complied with relevant statutory requirements. The
federal government has appealed the court's ruling. Whatever the ultimate
outcome of this litigation, issuance of the report may encourage efforts
to limit smoking in public areas.
In February 1996, the United States Trade representative issued an
"advance notice of rule making" concerning how tobacco is imported under a
previously established tobacco rate quota ("TRQ") should be allocated.
Currently, tobacco imported under the TRQ is allocated on a "first-come,
first-served" basis, meaning that entry is allowed on an open basis to
those first requesting entry in the quota year. Others in the cigarette
industry have suggested an "end-user licensing" system under which the
right to import tobacco under the quota would be initially assigned based
on domestic market share. Such an approach, if adopted, could have a
material adverse effect on the Company and Liggett.
In August 1996, the Food and Drug Administration (the "FDA") filed in the
Federal Register a Final Rule classifying tobacco as a "drug" or "medical
device", asserting jurisdiction over the manufacture and marketing of
tobacco products and imposing restrictions on the sale, advertising and
promotion of tobacco products. Litigation was commenced challenging the
legal authority of the FDA to assert such jurisdiction, as well as
challenging the constitutionality of the rules. In March 2000, the United
States Supreme Court ruled that the FDA does not have the power to
regulate tobacco. Liggett supported the FDA Rule and began to phase in
compliance with certain of the proposed FDA regulations.
Since the Supreme Court decision, various proposals have been made for
federal and state legislation to regulate cigarette manufacturers. In May
2001, a Presidential commission appointed by former President Clinton
issued a final report recommending that the FDA be given authority by
Congress to regulate the manufacture, sale, distribution and labeling of
tobacco products to protect public health. In addition, Congressional
advocates of FDA regulation have introduced such legislation for
consideration by the 107th Congress. The ultimate outcome of these
proposals cannot be predicted.
In August 1996, Massachusetts enacted legislation requiring tobacco
companies to publish information regarding the ingredients in cigarettes
and other tobacco products sold in that state. In December 1997, the
United States District Court for the District of Massachusetts
preliminarily enjoined this legislation from going into effect on the
grounds that it is preempted by federal law. In November 1999, the United
States Court of Appeals for the First Circuit affirmed this ruling. In
September 2000, the federal district court permanently enjoined
enforcement of the law. In October 2001, the First Circuit reversed the
district court's decision, ruling that the ingredients disclosure
provisions are valid. The entire court, however, agreed to re-hear the
appeal, reinstating the district court's injunction in the meantime. Oral
argument before the full court took place on January 7, 2002, and the
court has not yet issued its decision. Notwithstanding the foregoing, in
-23-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
December 1997, Liggett began complying with this legislation by providing
ingredient information to the Massachusetts Department of Public Health.
Several other states have enacted, or are considering, legislation
similar to that enacted in Massachusetts.
Cigarettes are subject to substantial federal, state and local excise
taxes which, in general, have been increasing. The federal excise tax on
cigarettes is currently $0.39 per pack. State and local sales and excise
taxes vary considerably and, when combined with sales taxes, local taxes
and the current federal excise tax, may currently be as high as $4.03 per
pack. Proposed further tax increases in various jurisdictions are
currently under consideration or pending. Thus far in 2002, 18 states have
passed excise tax increases, ranging from $0.07 per pack in Tennessee to
as much as $1.81 per pack in New York City and New York State combined.
Congress has considered significant increases in the federal excise tax or
other payments from tobacco manufacturers, and significant increases in
excise and other cigarette-related taxes have been proposed or enacted at
the state and local levels. In the opinion of the Company, increases in
excise and similar taxes have had an adverse impact on sales of
cigarettes.
In August 2000, the New York state legislature passed legislation charging
the state's Office of Fire Prevention and Control ("OFPC") with developing
standards for "fire safe" or self-extinguishing cigarettes. The OFPC has
until January 1, 2003 to issue final regulations. Six months from the
issuance of the standards, all cigarettes offered for sale in New York
state will be required to be manufactured to those standards. It is not
possible to predict the impact of this law on the Company until the
standards are published. Similar legislation is being considered by other
state governments and at the federal level.
Federal or state regulators may object to Vector Tobacco's reduced
carcinogen and nicotine-free cigarette products 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
claims. Allegations by federal or state regulators, public health
organizations and other tobacco manufacturers that Vector Tobacco's
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. Vector
Tobacco's business may become subject to extensive 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 issues
like the manufacture, sale, distribution and labeling of tobacco products
as well as any health claims associated with reduced carcinogen and
nicotine-free cigarette products and the use of genetically modified
tobacco. A system of regulation by agencies like the Food and Drug
Administration, the Federal Trade Commission or the United States
Department of Agriculture may be established. In addition, a group of
public health organizations have submitted a petition to the Food and Drug
Administration, alleging that the marketing of the OMNI product is subject
to regulation by the FDA under existing law. Vector Tobacco has filed a
response in opposition to the petition. The Federal Trade Commission has
also expressed interest in the regulation of tobacco products made by
tobacco manufacturers, including Vector Tobacco, 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 impact
on the Company.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and political
decisions and other unfavorable developments concerning cigarette smoking
and the tobacco industry, the effects of which, at this time, management
-24-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
is not able to evaluate. These developments may negatively affect the
perception of potential triers of fact with respect to the tobacco
industry, possibly to the detriment of certain pending litigation, and may
prompt the commencement of additional similar litigation.
OTHER MATTERS:
In March 1997, a stockholder derivative suit was filed in Delaware
Chancery Court against New Valley, as a nominal defendant, its directors
and Brooke Group Holding by a stockholder of New Valley. The suit alleges
that New Valley's purchase of the BrookeMil Ltd. shares from Brooke
(Overseas) in January 1997 constituted a self-dealing transaction which
involved the payment of excessive consideration by New Valley. The
plaintiff seeks a declaration that New Valley's directors breached their
fiduciary duties and, Brooke Group Holding aided and abetted such breaches
and that damages be awarded to New Valley. In December 1999, another
stockholder of New Valley commenced an action in Delaware Chancery Court
substantially similar to the March 1997 action. This stockholder alleges,
among other things, that the consideration paid by New Valley for the
BrookeMil shares was excessive, unfair and wasteful, that the special
committee of New Valley's board lacked independence, and that the
appraisal and fairness opinion were flawed. By order of the court, both
actions were consolidated. In January 2001, the court denied a motion to
dismiss the consolidated action. Brooke Group Holding and New Valley
believe that the allegations in the case are without merit. Discovery in
the case has commenced.
In July 1999, a purported class action was commenced on behalf of New
Valley's former Class B preferred shareholders against New Valley, Brooke
Group Holding and certain directors and officers of New Valley in Delaware
Chancery Court. The complaint alleges that the recapitalization, approved
by a majority of each class of New Valley's stockholders in May 1999, was
fundamentally unfair to the Class B preferred shareholders, the proxy
statement relating to the recapitalization was materially deficient and
the defendants breached their fiduciary duties to the Class B preferred
shareholders in approving the transaction. The plaintiffs seek class
certification of the action and an award of compensatory damages as well
as all costs and fees. The Court has dismissed six of plaintiff's nine
claims alleging inadequate disclosure in the proxy statement. Brooke Group
Holding and New Valley believe that the remaining allegations are without
merit. Discovery in the case has commenced.
Although there can be no assurances, Brooke Group Holding and New Valley
believe, after consultation with counsel, that the ultimate resolution of
these matters will not have a material adverse effect on the Company's or
New Valley's consolidated financial position, results of operations or
cash flows.
As of June 30, 2002, New Valley had $2,671 of remaining prepetition
bankruptcy-related claims and restructuring accruals including claims for
unclaimed monies that certain states are seeking on behalf of money
transfer customers. The remaining claims may be subject to future
adjustments based on potential settlements or decisions of the court. On
August 8, 2002, New Valley paid $2,000 to settle the claim for unclaimed
monies, and its restructuring accrual will be reduced by a corresponding
amount in the third quarter of 2002.
In May 1999, in connection with the Philip Morris brand transaction, Eve
Holdings Inc., a subsidiary of Liggett, guaranteed a $134,900 bank loan to
Trademarks LLC. The loan is secured by Trademarks' three premium cigarette
brands and Trademarks' interest in the exclusive license of the three
brands by Philip Morris. The license provides for a minimum annual royalty
payment equal to the annual debt service on the loan plus $1,000.
-25-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
8. NEW VALLEY CORPORATION
On April 30, 2002, New Valley sold the shares of BrookeMil Ltd., a
wholly-owned subsidiary, for approximately $22,000 before closing
expenses. BrookeMil owned the two Kremlin sites in Moscow, which were New
Valley's remaining real estate holdings in Russia. Under the terms of the
Western Realty Repin LLC participating loan to BrookeMil, New Valley
received approximately $7,400 of the net proceeds from the sale and Apollo
Real Estate Investment Fund III, L.P. received approximately $12,400 of
the proceeds. These amounts are subject to adjustment based on final
closing expenses. New Valley recorded a gain on sale of real estate of
$8,484 for the three and six months ended June 30, 2002 in connection with
the sale. New Valley also recorded $767 in additional general and
administrative expenses in the second quarter of 2002 related on the
closing of its Russian operations. The expenses consisted principally of
employee severance.
9. DISCONTINUED OPERATIONS
The consolidated financial statements of the Company have been
reclassified to reflect as discontinued operations New Valley's
broker-dealer operations, which were New Valley's primary source of
revenues since 1995. Accordingly, revenues, costs and expenses, and cash
flows of the discontinued operations have been excluded from the
respective captions in the consolidated statements of operations and
consolidated statements of cash flows. The net operating results of these
entities have been reported, net of minority interests and applicable
income taxes, as "Loss from discontinued operations," and the net cash
flows of these entities have been reported as "Net cash flows provided
from discontinued operations."
On December 20, 2001, New Valley distributed its 53.6% interest
(22,543,158 shares) of Ladenburg Thalmann Financial Service Inc. ("LTS")
common stock to holders of New Valley common shares through a special
dividend. On the same date, Vector distributed the 12,694,929 shares of
LTS common stock that it received from New Valley to the holders of
Vector's common stock as a special dividend.
On March 27, 2002, LTS borrowed $2,500 from New Valley. The loan, which
bears interest at 1% above the prime rate, is due on the earlier of
December 31, 2003 or the completion of one or more equity financings
where LTS receives at least $5,000 in total proceeds. On July 16, 2002,
LTS borrowed an additional $2,500 from New Valley on the same terms.
-26-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
Summarized operating results of the discontinued broker-dealer operations
for the three and six months ended June 30, 2001 are as follows:
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
--------------------- --------------------
Revenues ..................... $ 21,258 $ 40,322
Expenses ..................... 24,687 44,073
-------- --------
Operating loss before minority
interests and income taxes $ (3,429) $ (3,751)
======== ========
10. SEGMENT INFORMATION
The Company's significant business segments for the six months ended June
30, 2002 and 2001 were Liggett, Vector Tobacco and real estate. The
Liggett segment consists of the manufacture and sale of conventional
cigarettes and includes the operations of Medallion acquired on April 1,
2002 (which operations are held for legal purposes as part of Vector
Tobacco). The Vector Tobacco segment includes the development and
marketing of new reduced carcinogen and nicotine-free cigarette products
and excludes the operations of Medallion.
Financial information for the Company's continuing operations before taxes
and minority interest for the three and six months ended June 30, 2002 and
2001 follows:
-27-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts) - (Continued)
(Unaudited)
Vector Real Corporate(1)
Liggett Tobacco Estate and Other Total
-------- --------- --------- ------------- ---------
THREE MONTHS ENDED JUNE 30, 2002:
Revenues ........................ $138,721 $ 1,092 $ 237 $ -- $ 140,050
Operating income (loss) ......... 24,917 (20,118) (766) (8,877) (4,844)
Depreciation and amortization ... 1,475 1,113 68 602 3,258
THREE MONTHS ENDED JUNE 30, 2001:
Revenues ........................ $107,652 $ -- $ 2,425 $ -- $ 110,077
Operating income (loss) ......... 33,139 (6,782) (481) (6,488) 19,388
Depreciation and amortization ... 1,049 232 648 793 2,722
SIX MONTHS ENDED JUNE 30, 2002:
Revenues ........................ $232,813 $ 3,758 $ 661 $ -- $ 237,232
Operating income (loss) ......... 43,395 (44,637) (838) (17,816) (19,896)
Identifiable assets ............. 278,549 119,164 1,458 318,284 717,455
Depreciation and amortization ... 2,721 2,080 191 1,093 6,085
Capital expenditures ............ 14,338 12,675 688 5,750 33,451
SIX MONTHS ENDED JUNE 30, 2001:
Revenues ........................ $182,694 $ -- $ 5,066 $ -- $ 187,760
Operating income (loss) ......... 42,843 (11,216) (400) (10,668) 20,559
Identifiable assets ............. 128,912 35,602 115,908 342,971 623,393
Depreciation and amortization ... 2,438 325 1,328 1,305 5,396
Capital expenditures ............ 3,023 14,433 1,378 14,122 32,956
- ----------------
(1) For 2001, the assets of the discontinued broker-dealer segment are included
in Corporate and Other.
-28-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INTRODUCTION
The following discussion provides an assessment of our consolidated
results of operations, capital resources and liquidity and should be read in
conjunction with our consolidated financial statements and related notes
included elsewhere in this report. The consolidated financial statements include
the accounts of VGR Holding Inc., Liggett Group Inc., New Valley Corporation,
Vector Tobacco Inc. and other less significant subsidiaries. As of June 30,
2002, we owned 56.2% of New Valley's common shares.
We are a holding company for a number of businesses. We are engaged
principally in:
o the development and marketing of new reduced carcinogen and
nicotine-free cigarette products through our subsidiary Vector
Tobacco, and
o the manufacture and sale of cigarettes in the United States through
our subsidiary Liggett.
Our majority-owned subsidiary, New Valley, completed in December 2001
the distribution to its stockholders of its shares in Ladenburg Thalmann
Financial Services, its former majority-owned subsidiary engaged in the
investment banking and brokerage business. The Ladenburg Thalmann Financial
Services shares received by us were, in turn, distributed to our stockholders.
Following the distribution of the shares, New Valley's broker-dealer operations,
which were its primary source of revenues since 1995, are accounted for as a
discontinued operation. New Valley is currently engaged in the real estate
business and is seeking to acquire additional operating companies.
RECENT DEVELOPMENTS
LIGGETT VECTOR BRANDS. In March 2002, we announced that the sales and
marketing functions of our Liggett and Vector Tobacco subsidiaries will be
combined into a new entity, Liggett Vector Brands Inc. The newly formed company
will coordinate and execute the sales and marketing efforts for all of our
tobacco operations. With the combined resources of Liggett and Vector Tobacco,
Liggett Vector Brands anticipates that it will have approximately 350 salesmen,
and enhanced distribution and marketing capabilities. In connection with the
creation of the new Liggett Vector Brands entity, we took a charge of $3,460 in
the first quarter of 2002, related to a reorganization of our business to
eliminate redundant positions, consolidate sales and marketing operations and
integrate systems.
ACQUISITION OF MEDALLION. On April 1, 2002, a subsidiary of ours
acquired the stock of The Medallion Company, Inc., and related assets from
Medallion's principal stockholder. The total purchase price consisted of
$50,000 in cash and $60,000 in notes, with the notes guaranteed by us and by
Liggett. Medallion, a discount cigarette manufacturer headquartered in
Richmond, Virginia, is a participant in the Master Settlement Agreement between
the state Attorneys General and the tobacco industry. Medallion has no payment
obligations under the Master Settlement Agreement except to the extent its
market share exceeds approximately 0.28% of total cigarettes sold in the United
States (approximately 1.15 billion units in 2001).
-29-
VGR HOLDING PRIVATE PLACEMENT. On April 30, 2002, VGR Holding issued at
a discount $30,000 principal amount of 10% senior secured notes due March 31,
2006 in a private placement to institutional investors. VGR Holding received net
proceeds from the placement of approximately $25,000.
RECENT DEVELOPMENTS IN LEGISLATION, REGULATION AND LITIGATION
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of June 30, 2002, there were approximately 310 individual
suits, 30 purported class actions and 47 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. In addition to these cases, an action against
cigarette manufacturers involving approximately 1,250 named individual
plaintiffs has been consolidated before a single West Virginia state court.
Liggett is a defendant in most of the cases pending in West Virginia.
Approximately 38 other purported class action complaints have been filed against
the cigarette manufacturers for alleged antitrust violations. As new cases are
commenced, the costs associated with defending these cases and the risks
relating to the inherent unpredictability of litigation continue to increase.
An unfavorable verdict was returned in the first phase of the ENGLE
smoking and health class action trial pending in Florida. In July 2000, the jury
awarded $790,000 in punitive damages against Liggett in the second phase of the
trial, and the court entered an order of final judgment. Liggett intends to
pursue all available post-trial and appellate remedies. If this verdict is not
eventually reversed on appeal, or substantially reduced by the court, it will
have a material adverse effect on Vector. Liggett has filed the $3,450 bond
required under recent Florida legislation which limits the size of any bond
required, pending appeal, to stay execution of a punitive damages verdict. In
May 2001, Liggett reached an agreement with the class in the ENGLE case, which
will provide assurance to Liggett that the stay of execution, currently in
effect under the Florida bonding statute, will not be lifted or limited at any
point until completion of all appeals, including to the United States Supreme
Court. As required by the agreement, Liggett paid $6,273 into an escrow account
to be held for the benefit of the ENGLE class, and released, along with
Liggett's existing $3,450 statutory bond, to the court for the benefit of the
class upon completion of the appeals process, regardless of the outcome of the
appeal. In June 2002, the jury in an individual case brought under the third
phase of the ENGLE case awarded $37,500 of compensatory damages against Liggett
and two other defendants and found Liggett 50% responsible for the damages. The
verdict will be subject to the outcome of the ENGLE appeal. It is possible that
additional cases could be decided unfavorably and that there could be further
adverse developments in the ENGLE case. Management cannot predict the cash
requirements related to any future settlements and judgments, including cash
required to bond any appeals, and there is a risk that those requirements will
not be able to be met.
In recent years, there have been a number of restrictive regulatory
actions from various Federal administrative bodies, including the United States
Environmental Protection Agency and the Food and Drug Administration. There have
also been adverse political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry, including the
commencement and certification of class actions and the commencement of
third-party payor actions. These developments generally receive widespread media
attention. We are not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation, but
our consolidated financial position, results of operations or cash flows could
be materially adversely affected by an unfavorable outcome in any
smoking-related litigation. See Note 7 to our consolidated financial statements
for a description of legislation, regulation and litigation.
-30-
CRITICAL ACCOUNTING POLICIES
Financial Reporting Release No. 60, which was recently released by the
Securities and Exchange Commission, requires all companies to include a
discussion of critical accounting policies or methods used in the preparation of
financial statements. The following is a brief discussion of the more
significant accounting policies and methods used by us.
GENERAL. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses. Significant
estimates subject to material changes in the near term include deferred tax
assets, allowance for doubtful accounts, promotional accruals, sales returns and
allowances, actuarial assumptions of pension plans, settlement accruals and
litigation and defense costs. Actual results could differ from those estimates.
REVENUE RECOGNITION. Revenues from sales of cigarettes are recognized
upon the shipment of finished goods to customers. We provide an allowance for
expected sales returns, net of related inventory cost recoveries. Since our
primary line of business is tobacco, our financial position and our results of
operations and cash flows have been and could continue to be materially
adversely effected by significant unit sales volume declines, litigation and
defense costs, increased tobacco costs or reductions in the selling price of
cigarettes in the near term. As discussed in Note 1 to our consolidated
financial statements, effective January 1, 2002, we adopted new required
accounting standards mandating that certain sales incentives previously reported
as operating, selling, general and administrative expenses be shown as a
reduction of operating revenues. As a result, our previously reported revenues
have been reduced by approximately $134,975 for the six months ended June 30,
2001 and cost of goods sold increased by $6,037. The adoption of the new
accounting standards had no impact on our net earnings or basic or diluted
earnings per share.
MARKETING COSTS. We record marketing costs as an expense in the period
to which such costs relate. We do not defer the recognition of any amounts on
our consolidated balance sheets with respect to marketing costs. We expense
advertising costs as incurred, which is the period in which the related
advertisement initially appears. We record consumer incentive and trade
promotion costs as an expense in the period in which these programs are offered,
based on estimates of utilization and redemption rates that are developed from
historical information. As discussed above under "Revenue Recognition",
beginning January 1, 2002, we have adopted the previously mentioned revenue
recognition accounting standards that mandate that certain costs previously
reported as marketing expense be shown as a reduction of operating revenues. As
a result, previously reported amounts for operating, selling, general and
administrative expenses have been reduced by approximately $141,012 for the six
months ended June 30, 2001. The adoption of the new accounting standards had no
impact on our net earnings or basic or diluted earnings per share.
CONTINGENCIES. As discussed in Note 7 of our consolidated financial
statements and above under the heading "Recent Developments in Legislation,
Regulation and Litigation", legal proceedings covering a wide range of matters
are pending or threatened in various jurisdictions against Liggett. Management
is unable to make a meaningful estimate with respect to the amount or range of
loss that could result from an unfavorable outcome of pending smoking-related
litigation or the costs of defending such cases, and we have not provided any
amounts in our consolidated financial statements for unfavorable outcomes, if
any. Litigation is subject to many uncertainties, and it is possible that our
consolidated financial position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any such
smoking-related litigation.
EMPLOYEE BENEFIT PLANS. Since 1997, income from our defined benefit
pension plans, partially offset by the costs of postretirement medical benefits,
have contributed to our reported operating income. The determination of our net
pension and other postretirement benefit income or expense is dependent on our
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selection of certain assumptions used by actuaries in calculating such amounts.
Those assumptions include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in compensation and
healthcare costs. In accordance with accounting principles generally accepted in
the United States of America, actual results that differ from our assumptions
are accumulated and amortized over future periods and therefore, generally
affect our recognized income or expense in such future periods. While we believe
that our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our
future net pension and other postretirement benefit income or expense.
RESULTS OF OPERATIONS
For purposes of this discussion and other segment reporting, our
significant business segments for the six months ended June 30, 2002 and 2001
were Liggett, Vector Tobacco and real estate. The Liggett segment consists of
the manufacture and sale of conventional cigarettes and includes the operations
of Medallion acquired on April 1, 2002 (which operations are held for legal
purposes as part of Vector Tobacco). The Vector Tobacco segment includes the
development and marketing of new reduced carcinogen and nicotine-free cigarette
products and excludes the operations of Medallion.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES:
Liggett ................. $ 138,721 $ 107,652 $ 232,813 $ 182,694
Vector Tobacco .......... 1,092 -- 3,758 --
--------- --------- --------- ---------
Total tobacco ........ 139,813 107,652 236,571 182,694
Real estate ............. 237 2,425 661 5,066
--------- --------- --------- ---------
Total revenues ....... $ 140,050 $ 110,077 $ 237,232 $ 187,760
========= ========= ========= =========
OPERATING (LOSS) INCOME:
Liggett ................. $ 24,917 $ 33,139 $ 43,395 $ 42,843
Vector Tobacco .......... (20,118) (6,782) (44,637) (11,216)
--------- --------- --------- ---------
Total tobacco ........ 4,799 26,357 (1,242) 31,627
Real estate ............. (766) (481) (838) (400)
Corporate and other ..... (8,877) (6,488) (17,816) (10,668)
--------- --------- --------- ---------
Total operating (loss)income $ (4,844) $ 19,388 $ (19,896) $ 20,559
========= ========= ========= =========
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
REVENUES. Total revenues were $140,050 for the three months ended June
30, 2002 compared to $110,077 for the three months ended June 30, 2001. This
27.2% ($29,973) increase in revenues was due to a $31,069 or 28.9% increase in
revenues at Liggett, and $1,092 in revenues at Vector Tobacco offset by a
decrease of $2,188 in real estate revenues at New Valley.
TOBACCO REVENUES. During 2001, the major cigarette manufacturers,
including Liggett, announced list price increases of $1.90 per carton. On April
2, 2002, the major manufacturers announced list price increases of $1.20 per
carton. Liggett matched the increase on its premium brands only. During the
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second quarter 2002, Liggett announced list pricing was adjusted on various
discount brands.
Tobacco revenues at Liggett for the three months ended June 30, 2002
totaled $138,721, compared to $107,652 for the same period in 2001. Revenues
grew by 28.9% ($31,069) due to price increases of $10,609 and to a 26.6%
increase in unit sales volume (approximately 587.8 million units) accounting for
$28,638 in positive volume variance, partially offset by $8,178 in unfavorable
sales mix. Tobacco revenues at Vector Tobacco were $1,092 and relate to sales of
OMNI.
Premium sales at Liggett for the second quarter of 2002 amounted to
$12,626 and represented 9.1% of total Liggett sales, compared to $17,036 and
15.8% of total sales for the second quarter of 2001. In the premium segment,
revenues decreased by 25.9% ($4,410) for the three months ended June 30, 2002,
compared to the prior year second quarter, due to an unfavorable volume variance
of $3,607, reflecting a 21.2% decrease in unit sales volume (approximately 37.9
million units), and to an unfavorable price variance of $803, primarily
associated with promotional activities.
Discount sales at Liggett (comprising the brand categories of branded
discount, private label, control label, generic, international and contract
manufacturing) for the three months ended June 30, 2002 amounted to $126,095 and
represented 90.9% of total Liggett sales, compared to $90,616 and 84.2% of total
Liggett sales for the three months ended June 30, 2001. In the discount segment,
revenues grew by 39.2% ($35,479) for the three months ended June 30, 2002
compared to the prior year period, due to a 30.8% gain in unit sales volume
(approximately 625.7 million units) accounting for $27,920 in positive volume
variance and price increases of $11,396, partially offset by an unfavorable
product mix of $3,837.
For the three months ended June 30, 2002, fixed manufacturing costs at
Liggett on a basis comparable to 2001 were $244 higher with costs per thousand
units of $1.98 increasing 30.3% from the previous year's $1.52, concurrent with
a 2.4% increase in production volume. On a per-thousand unit basis, fixed
payroll expense and indirect labor of $1.06 for the three months ended June 30,
2002 increased from $0.71 in the prior year period (49.3%), while fixed
non-payroll expenses increased to $0.92 from $0.81 in the prior year period
(13.6%).
TOBACCO GROSS PROFIT. Tobacco gross profit was $38,790 for the three
months ended June 30, 2002 compared to $46,860 for the three months ended June
30, 2001, a decrease of $8,070 or 17.2% when compared to the same period last
year, due to inclusion of the higher estimated payment obligation under the
Attorneys General Master Settlement Agreement and to costs associated with the
start-up at Vector Tobacco. Liggett's brands contributed 112.6% and Vector
Tobacco's brand cost 12.6% for the three months ended June 30, 2002. Over the
same period in 2001, Liggett's brands contributed 100% to gross profit.
Liggett's gross profit of $43,658 for the three months ended June 30,
2002 decreased $3,202 from gross profit of $46,860 for the three months ended
June 30, 2001, due primarily to the higher estimated payment obligations under
the Attorneys General Master Settlement Agreement included in cost of goods sold
in addition to the steep rise in sales of discount brands, offset by volume and
price increases. As a percent of revenues (excluding federal excise taxes),
gross profit at Liggett decreased to 51.7% for the three months ended June 30,
2002 compared to 66.5% for the same period in 2001, with gross profit for the
premium segment decreasing to 47.4% for the three months ended June 30, 2002
compared to 87.1% in the same period in 2001 and gross profit for the discount
segment decreasing to 52.3% in the three months ended June 30, 2002 from 61.4%
in the same period in 2001. This decrease is due primarily to the inclusion of
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the estimated payment obligation ($14,183 in the second quarter of 2002 and
$2,013 in the second quarter of 2001) under the Attorneys General Master
Settlement Agreement within cost of goods sold and to the increase in
promotional spending offset by the overall growth in sales volume and the 2001
list price increases.
REAL ESTATE REVENUES. New Valley's real estate revenues were $237 for
the three months ended June 30, 2002. This compares to revenues of $2,425 from
real estate activities for the three months ended June 30, 2001, with the
decline primarily due to the absence of rental revenue of $2,100 from Western
Realty Investments, which was sold in December 2001, and from New Valley's two
U. S. shopping centers, one of which was sold in January 2001 and the other of
which was disposed of in May 2002.
EXPENSES. Operating, selling, general and administrative expenses were
$44,021 for the three months ended June 30, 2002 compared to $30,047 for the
same period last year which included settlement charges of $32 in 2001. The
increase of $13,974 was due primarily to an $8,468 increase in expenses at
Vector Tobacco related to expenses of product development and marketing for
Vector Tobacco's OMNI and new nicotine-free products, and to an increase of
$5,053 at Liggett related to a larger sales force and increased marketing
efforts. There were also increased expenses at corporate offset by lower
expenses at New Valley due to the absence of broker-dealer operations. Expenses
at Liggett were $18,741 for the three months ended June 30, 2002 compared to
$13,721, including settlement charges of $32, for the same period last year.
Expenses at Vector Tobacco for the three months ended June 30, 2002 were
$15,250, compared to expenses of $6,782 for the three months ended June 30,
2001.
For the quarter ended June 30, 2001, Liggett's operating income was
reduced by $8,222 to $24,917 compared to $33,139 in the prior year primarily due
to increased sales and marketing expenses. Vector Tobacco's operating loss
increased to $20,118 for the quarter ended June 30, 2002 when compared to the
operating loss of $6,782 for the same period in June 30, 2001.
OTHER INCOME. For the three months ended June 30, 2002, other income
was $4,751 compared to other income of $437 for the three months ended June 30,
2001. Interest and dividend income were $2,581 for the 2002 period and $2,058
for the 2001 period. Gain on sale of assets of $9,028 includes a gain of $8,484
related to the sale of BrookeMil in April 2002 and a gain of $425 on the
disposal of the remaining U.S. shopping center in May 2002.
Interest expense was $6,920 for the three months ended June 30, 2002
compared to $2,052 for the same period last year, primarily due to the issuance
of long-term debt at the corporate level, increased equipment financing when
compared to the prior period as well as the issuance of the notes relating to
the Medallion acquisition.
(LOSS) INCOME FROM CONTINUING OPERATIONS. The loss from continuing
operations before income taxes and minority interests for the three months ended
June 30, 2002 was $93 compared to income of $19,825 for the three months ended
June 30, 2001. Income tax expense was $591 and minority interests in income of
subsidiaries was $2,658 for the three months ended June 30, 2002. This compared
to tax expense of $8,337 and minority interests in losses of subsidiaries of
$76 for the three months ended June 30, 2001. The effective tax rates for the
three months ended June 30, 2002 do not bear a customary relationship to pre-tax
accounting income principally as a consequence of non-deductible expenses and
state income taxes.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
REVENUES. Total revenues were $237,232 for the six months ended June
30, 2002 compared to $187,760 for the six months ended June 30, 2001. This 26.3%
($49,472) increase in revenues was due to a $50,119 or 27.4% increase in
revenues at Liggett, and $3,758 in revenues at Vector Tobacco offset by a
decrease of $4,405 in real estate revenues at New Valley.
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TOBACCO REVENUES. During 2001, the major cigarette manufacturers,
including Liggett, announced list price increases of $1.90 per carton. On April,
2002, the major manufacturers announced list price increases of $1.20 per
carton. Liggett matched the increase on its premium brands only. On July 1,
2002, Liggett announced a list price increase of $.60 per carton on LIGGETT
SELECT.
For the six months ended June 30, 2002, net sales at Liggett totaled
$232,813, compared to $182,694 for the first half of 2001. Revenues increased by
27.4% ($50,119) due to price increases of $15,373 and a 24.3% increase in unit
sales volume (approximately 928.7 million units) accounting for $44,420 in
positive volume variance, partially offset by $9,674 in unfavorable sales mix.
Premium sales at Liggett for the second quarter of 2002 amounted to
$22,626 and represented 9.7% of total Liggett sales, compared to $27,906 and
15.3% of total sales for the same period of 2001. In the premium segment,
revenues decreased by 18.9% ($5,280) for the six months ended June 30, 2002,
compared to the prior year period, due to an unfavorable price variance of
$5,396, primarily associated with promotional activities.
Discount sales at Liggett for the six months ended June 30, 2002
amounted to $210,186 and represented 90.3% of total Liggett sales, compared to
$154,788 and 84.7% of total Liggett sales for the six months ended June 30,
2001. In the discount segment, revenues grew by 35.8% ($55,399) for the six
months ended June 30, 2002 compared to the prior year period, due to a 26.3%
gain in unit sales volume (approximately 927.5 million units) accounting for
$40,771 in positive volume variance and price increases of $20,767, partially
offset by an unfavorable product mix of $6,141.
For the six months ended June 30, 2002, fixed manufacturing costs at
Liggett on a basis comparable to 2001 were $1,387 higher with costs per thousand
units of $1.88 increasing 13.3% from the previous year's $1.66, concurrent with
a 5.0% increase in production volume. On a per-thousand unit basis, fixed
payroll expense and indirect labor of $1.00 for the six months ended June 30,
2002 increased from $0.80 in the prior year period (25.0%), while fixed
non-payroll expenses increased to $0.88 from $0.86 in the prior year period
(2.3%).
TOBACCO GROSS PROFIT. Tobacco gross profit was $74,396 for the six
months ended June 30, 2002 compared to $80,988 for the six months ended June 30,
2001, a decrease of $6,592 or 8.1% when compared to the same period last year,
due primarily to the volume and price increases discussed above at Liggett
offset by costs associated with the start-up at Vector Tobacco. Liggett's brands
contributed 109.7% to our gross profit and Vector Tobacco cost 9.7% for the six
months ended June 30, 2002. Over the same period in 2001, Liggett's brands
contributed 100% to tobacco gross profit.
Liggett's gross profit of $81,625 for the six months ended June 30,
2002 increased $637 from gross profit of $80,988 for the six months ended June
30, 2001, due primarily to the price and unit volume increases discussed above,
offset by the estimated payment obligations under the Attorneys General Master
Settlement Agreement. As a percent of revenues (excluding federal excise taxes),
gross profit at Liggett decreased to 58.1% for the six months ended June 30,
2002 compared to 68.4% for the same period in 2001, with gross profit for the
premium segment decreasing to 12.1% for the six months ended June 30, 2002
compared to 24.4% in the same period in 2001 and gross profit for the discount
segment increasing to 87.9% in the six months ended June 30, 2002 from 75.6% in
the same period in 2001. This decrease is due primarily to the inclusion of the
estimated payment obligation of $17,163 for the six-months ended June 30, 2002
period and $2,013 in the six-month 2001 period under the Attorneys General
Master Settlement Agreement within cost of goods sold and to the
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disproportionate rise in deep-discount sales offset by the overall growth in
sales volume and the 2001 and, to some extent, the April 2002 list price
increase.
REAL ESTATE REVENUES. New Valley's real estate revenues were $661 for
the six months ended June 30, 2002. This compares to revenues of $5,066 from
real estate activities for the six months ended June 30, 2001, with the decline
primarily due to the absence of rental revenue of $4,405 from Western Realty
Investments, which was sold in December 2001, and two of New Valley's U. S.
shopping centers, one of which was sold in January 2001 and the other disposed
of in May 2002.
EXPENSES. Operating, selling, general and administrative expenses and
settlement charges were $95,253 for the six months ended June 30, 2002 compared
to $65,795 for the same period last year. The increase of $29,458 was due
primarily to a $26,192 increase in expenses at Vector Tobacco related to
expenses of product development and marketing for Vector Tobacco's OMNI and new
nicotine-free products and increased expenses at corporate offset by lower
expenses at New Valley primarily due to the absence of broker-dealer operations.
Expenses at Liggett were $39,037 for the six months ended June 30, 2002 compared
to $28,348 for the same period last year. The increase in operating expense was
due primarily to expenses related to a larger sales force, increased marketing
efforts and a $3,460 restructuring charge taken in March 2002 in connection with
the creation of Liggett Vector Brands and used for reorganization of its
business to eliminate redundant positions, consolidate sales and marketing
operations and integrate systems. A settlement charge credit of $807 in 2002 and
settlement charge expense of $9,797 in 2001 represents a $10,604 decrease in
such charges in the 2002 period. Expenses at Vector Tobacco for the six months
ended June 30, 2002 were $37,408, compared to expenses of $11,216 for the six
months ended June 30, 2001.
For the six months ended June 30, 2002, Liggett's operating income
increased to $43,395 compared to $42,843 for the prior year period due to unit
sales volume price increases and the absence of $9,723 of expense relating to
the ENGLE class action. As discussed in Note 7 to our consolidated financial
statements, in May 2001, Liggett reached an agreement with the class in the
ENGLE case, which provides assurance to Liggett that the stay of execution,
currently in effect pursuant to the Florida bonding statute, will not be lifted
or limited at any point until completion of all appeals, including to the United
States Supreme Court. As required by the agreement, Liggett paid $6,273 into an
escrow account to be held for the benefit of the ENGLE class, and released,
along with Liggett's existing $3,450 statutory bond, to the court for the
benefit of the class upon completion of the appeals process, regardless of the
outcome of the appeal. As a result, we recorded a $9,723 pre-tax charge to the
consolidated statement of operations for the first quarter of 2001.
OTHER INCOME (EXPENSES). For the six months ended June 30, 2002, other
income was $3,006 compared to other income of $3,332 for the six months ended
June 30, 2001. Interest and dividend income of $5,401 and a gain on sale of
assets of $8,684 were offset primarily by interest expense.
Interest expense was $12,305 for the six months ended June 30, 2002
compared to $3,310 for the same period last year, due to the issuance of
long-term debt at the corporate level and increased equipment financing when
compared to the prior period as well as issuance of the notes relating to the
Medallion acquisition.
(LOSS) INCOME FROM CONTINUING OPERATIONS. The loss from continuing
operations before income taxes and minority interests for the six months ended
June 30, 2002 was $16,890 compared to income of $23,891 for the six months ended
June 30, 2001. Income tax benefit was $3,671 and minority interests in income of
subsidiaries was $1,986 for the six months ended June 30, 2002. This compared to
tax expense of $10,482 and minority interests in losses of subsidiaries of
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$782 for the six months ended June 30, 2001. The effective tax rates for the
six months ended June 30, 2002 do not bear a customary relationship to pre-tax
accounting income principally as a consequence of non-deductible expenses and
state income taxes.
CAPITAL RESOURCES AND LIQUIDITY
Net cash and cash equivalents decreased $97,392 for the six months
ended June 30, 2002 and increased $63,043 for the six months ended June 30,
2001.
Net cash used in operations for the six months ended June 30, 2002 was
$43,738 compared to net cash provided by operations of $6,660 for the comparable
period of 2001. Net cash used in operations for the six months ended June 30,
2002 resulted primarily from a net loss of $15,205, an increase in inventories
offset by a decrease in accounts receivable. Net cash provided by operations for
the comparable period in 2001 resulted from net income of $14,350, an increase
in accounts payable and accrued expenses and other current liabilities offset by
an increase in inventories and accounts receivable.
Cash used in investing activities of $47,400 in 2002 compares to cash
used of $20,777 in 2001. In 2002, cash was used principally for acquisition of
Medallion for $50,000 and for the purchase of machinery and equipment for
$32,763 as well as for the issuance of a note receivable at New Valley for
$2,500. These expenditures were offset primarily by net proceeds received from
the sale by New Valley of BrookeMil for $20,461, the net sale or maturity of
investment securities of $17,489 and repayment of a note receivable for $1,000.
In 2001, cash was used primarily for capital expenditures of $32,956, purchase
of long term investments for $5,717 and repurchase by New Valley of its common
shares for $3,945. These expenditures were offset primarily by $9,172 of
proceeds from the sale of one of New Valley's shopping centers and sales at
Liggett of a warehouse facility and machinery and equipment and by net sales or
maturity of investment securities of $6,023.
Cash used in financing activities was $6,254 for the six months ended
June 30, 2002 compared to cash provided of $76,757 in 2001. During the six
months ended June 30, 2002, cash was used primarily for dividends of $26,604 and
repayments of debt of $18,382 offset by proceeds from debt of $37,117 an
increase in cash overdraft of $1,349 and proceeds from the exercise of options
of $1,196. During the six months ended June 30, 2001, cash was provided
primarily by the net proceeds from debt of $59,091, the issuance of common stock
for $50,000 and proceeds from the sale of options and warrants for $12,590. Cash
was used primarily for net repayments on the revolving credit facilities of
$19,374 and for dividends of $21,998.
LIGGETT. Liggett has a $40,000 credit facility under which $0 was
outstanding at June 30, 2002. Availability under the facility was approximately
$34,633 based on eligible collateral at June 30, 2002. The facility is
collateralized by all inventories and receivables of Liggett. Borrowings under
the facility, whose interest is calculated at a rate equal to 1.0% above First
Union's (the indirect parent of Congress Financial Corporation, the lead lender)
prime rate, bore a rate of 5.75% at June 30, 2002. The facility requires
Liggett's compliance with certain financial and other covenants including a
restriction on the payment of cash dividends unless Liggett's borrowing
availability under the facility for the 30-day period prior to the payment of
the dividend, and after giving effect to the dividend, is at least $5,000. In
addition, the facility, as amended, imposes requirements with respect to
Liggett's adjusted net worth (not to fall below $8,000 as computed in accordance
with the agreement) and working capital (not to fall below a deficit of $17,000
as computed in accordance with the agreement). At June 30, 2002, Liggett was in
compliance with all covenants under the credit facility; Liggett's adjusted net
worth was $40,467 and net working capital was $20,418, as computed in accordance
with the agreement. The facility expires on March 8, 2003 subject to automatic
renewal for an additional year unless a notice of termination is given by the
lender at least 60 days prior to the anniversary date.
In November 1999, 100 Maple LLC, a new company formed by Liggett to
purchase an industrial facility in Mebane, North Carolina, borrowed $5,040 from
the lender under Liggett's credit facility. In July 2001, Liggett borrowed an
additional $2,340 under the loan, and a total of $5,415 was outstanding at June
30, 2002. In addition, the lender extended the term of the loan so that it is
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payable in 59 monthly installments of $75 including annual interest at 1% above
the prime rate with a final payment of $1,875. Interest is charged at the same
rate as applicable to Liggett's credit facility, and borrowings under the Maple
loan reduce the maximum availability under the credit facility. Liggett has
guaranteed the loan, and a first mortgage on the Mebane property and equipment
collateralizes the Maple loan and Liggett's credit facility. Liggett completed
the relocation of its manufacturing operations to this facility in October 2000.
In March 2000, Liggett purchased equipment for $1,000 under a capital
lease which is payable in 60 monthly installments of $21 with an effective
annual interest rate of 10.14%. In April 2000, Liggett purchased equipment for
$1,071 under two capital leases which are payable in 60 monthly installments of
$22 with an effective interest rate of 10.20%.
Liggett has upgraded the efficiency of its manufacturing operation at
Mebane with the addition of four new state-of-the-art cigarette makers and
packers, as well as related equipment. The total cost of these upgrades was
approximately $22,000. Liggett took delivery of the first two of the new lines
in the fourth quarter of 2001 and financed the purchase price of $6,404 through
capital lease arrangements guaranteed by us and payable in 60 monthly
installments of $61 with interest calculated at the prime rate. In March 2002,
the third line was delivered, and the purchase price of $3,023 was financed
through the issuance of a note, payable in 30 monthly installments of $62 and
then 30 monthly installments of $51 with an effective annual interest rate of
4.68%. In May 2002, the fourth line was delivered, and Liggett financed the
purchase price of $2,871 through the issuance of a note, payable in 30 monthly
installments of $59 and then 30 monthly installments of $48 with an effective
annual interest rate of 4.64%.
In May 1999, in connection with the Philip Morris brand transaction,
Eve Holdings Inc., a subsidiary of Liggett, guaranteed a $134,900 bank loan to
Trademarks LLC. The loan is secured by Trademarks' three premium cigarette
brands and Trademarks' interest in the exclusive license of the three brands by
Philip Morris. The license provides for a minimum annual royalty payment equal
to the annual debt service on the loan plus $1,000.
Liggett (and, in certain cases, Brooke Group Holding, our predecessor
and a wholly-owned subsidiary of VGR Holding) and other United States cigarette
manufacturers have been named as defendants in a number of direct and
third-party actions (and purported class actions) predicated on the theory that
they should be liable for damages from cancer and other adverse health effects
alleged to have been caused by cigarette smoking or by exposure to so-called
secondary smoke from cigarettes. We believe, and have been so advised by counsel
handling the respective cases, that Brooke Group Holding and Liggett have a
number of valid defenses to claims asserted against them. Litigation is subject
to many uncertainties. An unfavorable verdict was returned in the first phase of
the ENGLE smoking and health class action trial pending in Florida. In July
2000, the jury awarded $790,000 in punitive damages against Liggett in the
second phase of the trial, and the court entered an order of final judgment.
Liggett intends to pursue all available post-trial and appellate remedies. If
this verdict is not eventually reversed on appeal, or substantially reduced by
the court, it will have a material adverse effect on Vector. Liggett has filed
the $3,450 bond required under recent Florida legislation which limits the size
of any bond required, pending appeal, to stay execution of a punitive damages
verdict. In May 2001, Liggett reached an agreement with the class in the ENGLE
case, which will provide assurance to Liggett that the stay of execution,
currently in effect pursuant to the Florida bonding statute, will not be lifted
or limited at any point until completion of all appeals, including to the United
States Supreme Court. As required by the agreement, Liggett paid $6,273 into an
escrow account to be held for the benefit of the ENGLE class, and released,
along with Liggett's existing $3,450 statutory bond, to the court for the
benefit of the class upon completion of the appeals process, regardless of the
outcome of the appeal. In June 2002, the jury in an individual case brought
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under the third phase of the ENGLE case awarded $37,500 of compensatory damages
against Liggett and two other defendants and found Liggett 50% responsible for
the damages. The verdict will be subject to the outcome of the ENGLE appeal. It
is possible that additional cases could be decided unfavorably and that there
could be further adverse developments in the ENGLE case. Management cannot
predict the cash requirements related to any future settlements and judgments,
including cash required to bond any appeals, and there is a risk that those
requirements will not be able to be met. An unfavorable outcome of a pending
smoking and health case could encourage the commencement of additional similar
litigation. In recent years, there have been a number of adverse regulatory,
political and other developments concerning cigarette smoking and the tobacco
industry. These developments generally receive widespread media attention.
Neither we nor Liggett are able to evaluate the effect of these developing
matters on pending litigation or the possible commencement of additional
litigation or regulation. See Note 7 to our consolidated financial statements.
Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the cases pending
against Brooke Group Holding or Liggett or the costs of defending such cases. It
is possible that our consolidated financial position, results of operations or
cash flows could be materially adversely affected by an unfavorable outcome in
any such tobacco-related litigation.
VECTOR RESEARCH. In February 2001, a subsidiary of Vector Research Ltd.
purchased equipment for $15,500 and borrowed $13,175 to fund the purchase. The
loan, which is collateralized by the equipment and a letter of credit from us
for $775, is guaranteed by Vector Research, VGR Holding and us. The loan is
payable in 120 monthly installments of $125 including annual interest of 2.31%
above the 30-day commercial paper rate with a final payment of $6,125.
In February 2002, the Vector Research subsidiary purchased equipment
for $6,575 and borrowed $6,150 to fund the purchase. The loan, which is
collateralized by the equipment, is guaranteed by Vector Research and us. The
loan is payable in 120 monthly installments of $44, including annual interest at
2.75% above the 30-day commercial paper rate.
VECTOR TOBACCO. In June 2001, Vector Tobacco purchased for $8,400 an
industrial facility in Timberlake, North Carolina. Vector Tobacco financed the
purchase with an $8,200 loan. The loan is payable in 60 monthly installments of
$85, including annual interest at 4.85% above the LIBOR rate, with a final
payment of approximately $3,160. The loan, which is collateralized by a mortgage
and a letter of credit of $1,750, is guaranteed by VGR Holding and Vector.
During December 2001, Vector Tobacco executed a second promissory note
with the same lender for approximately $1,159 to finance building improvements.
The second promissory note is payable in 30 monthly installments of $39 plus
accrued interest, with an annual interest rate of LIBOR plus 5.12%.
On April 1, 2002, a subsidiary of ours acquired the stock of The
Medallion Company, Inc., and related assets from Medallion's principal
stockholder. Medallion is a discount cigarette manufacturer headquartered in
Richmond, Virginia.
Following the purchase of the Medallion stock, Vector Tobacco merged
into Medallion and Medallion changed its name to Vector Tobacco Inc. The total
purchase price for the Medallion shares and the related assets consisted of
$50,000 in cash and $60,000 in notes, with the notes guaranteed by us and by
Liggett. Of the notes, $25,000 bear interest at a 9.0% annual rate and mature
$3,125 per quarter commencing June 30, 2002 and continuing through March 31,
2004. The remaining $35,000 of notes bear interest at 6.5% per year and mature
on April 1, 2007.
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VGR HOLDING. On May 14, 2001, VGR Holding issued at a discount $60,000
principal amount of 10% senior secured notes due March 31, 2006 in a private
placement. VGR Holding received net proceeds from the offering of approximately
$46,500. On April 30, 2002, VGR Holding issued at a discount an additional
$30,000 principal amount of 10% senior secured notes due March 31, 2006 in a
private placement and received net proceeds of approximately $25,000. The notes
were priced to provide purchasers with a 15.75% yield to maturity. The notes are
on the same terms as the $60,000 principal amount of senior secured notes
previously issued. All $90,000 principal amount of the notes have been
guaranteed by us and by Liggett.
The notes are collateralized by substantially all of VGR Holding's
assets, including a pledge of VGR Holding's equity interests in its direct
subsidiaries, including Brooke Group Holding, Brooke (Overseas) Ltd., Vector
Tobacco and New Valley Holdings, Inc., as well as a pledge of the shares of
Liggett and all of the New Valley securities held by VGR Holding and New Valley
Holdings. The purchase agreements for the notes contain covenants, which among
other things, limit the ability of VGR Holding to make distributions to us to
50% of VGR Holding's net income, unless VGR Holding holds $75,000 in cash after
giving effect to the payment of the distribution, limit additional indebtedness
of VGR Holding, Liggett and Vector Tobacco to 250% of EBITDA (as defined in the
purchase agreements) for the trailing 12 months plus an additional amount of up
to $75,000 during the 12 month period ending March 31, 2003, restrict
transactions with affiliates subject to exceptions which include payments to us
not to exceed $9,500 per year for permitted operating expenses, and limit the
ability of VGR Holding to merge, consolidate or sell certain assets.
Prior to May 14, 2003, VGR Holding may redeem up to $31,500 of the
notes at a redemption price of 100% of the principal amount with proceeds from
one or more equity offerings. VGR Holding may redeem the notes, in whole or in
part, at a redemption price of 100% of the principal amount beginning May 14,
2003. During the term of the notes, VGR Holding is required to offer to
repurchase all the notes at a purchase price of 101% of the principal amount, in
the event of a change of control, and to offer to repurchase notes, at 100% of
the principal amount, with the proceeds of material asset sales.
VECTOR. We believe that we will continue to meet our liquidity
requirements through 2002, although the covenants in the purchase agreements for
VGR Holding's notes limit the ability of VGR Holding to make distributions to us
unless certain tests are met. Under the terms of these covenants, at June 30,
2002, VGR Holding was generally not permitted to pay distributions to us except
for tax sharing payments and specified amounts of operating expenses. Corporate
expenditures (exclusive of Liggett, Vector Research, Vector Tobacco and New
Valley) over the next twelve months for current operations include cash interest
expense of approximately $17,500, dividends on our outstanding shares (currently
at an annual rate of approximately $53,500) and corporate expenses. We
anticipate funding our expenditures for current operations with available cash
resources, proceeds from public and/or private debt and equity financing,
management fees from subsidiaries and tax sharing and other payments from
Liggett or New Valley. New Valley may acquire or seek to acquire additional
operating businesses through merger, purchase of assets, stock acquisition or
other means, or to make other investments, which may limit its ability to make
such distributions.
In July 2001, we completed the sale of $172,500 (net proceeds of
approximately $166,400) of our 6.25% convertible subordinated notes due 2008
through a private offering to qualified institutional investors in accordance
with Rule 144A under the Securities Act of 1933. The notes pay interest at 6.25%
per annum and are convertible into our common stock, at the option of the
holder. The conversion price, which was $32.86 at August 13, 2002, is subject to
adjustment for various events, and any cash distribution on our common stock
results in a corresponding decrease in the conversion price. Following the
conversion of $40,000 principal amount of our convertible notes in December
2001, $132,500 principal amount of the convertible notes were outstanding.
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MARKET RISK
We are exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity prices. We seek to
minimize these risks through our regular operating and financing activities and
our long-term investment strategy.
The market risk management procedures of us and New Valley cover all
market risk sensitive financial instruments. We held investment securities
available for sale totaling $165,050 at June 30, 2002. Adverse market conditions
could have a significant effect on the value of these investments.
New Valley also holds long-term investments in limited partnerships and
limited liability companies. These investments are illiquid, and their ultimate
realization is subject to the performance of the investee entities.
NEW ACCOUNTING PRONOUNCEMENTS
During 2000, the Emerging Issues Task Force issued EITF No. 00-14,
"Accounting for Certain Sales Incentives", EITF Issue No. 00-14 addresses the
recognition, measurement and statement of operations classification for certain
sales incentives and became effective in the first quarter of 2002. As a result,
certain items previously included in operating, selling, general and
administrative expense in the consolidated statement of operations have been
recorded as a reduction of operating revenues. We have determined that the
impact of adoption or subsequent application of EITF Issue No. 00-14 did not
have a material effect on our consolidated financial position or results of
operations. Upon adoption, prior period amounts, which were not significant,
have been reclassified to conform to the new requirements.
In April 2001, the EITF reached a consensus on Issue No. 00-25, "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF Issue No. 00-25 requires that certain expenses included
in operating, selling, administrative and general expenses be recorded as a
reduction of operating revenues and was effective in the first quarter of 2002.
As discussed above under "Critical Accounting Policies", adoption of EITF Issue
No. 00-25 has resulted in a significant reduction of revenues offset by a
corresponding reduction in operating, selling, administrative and general
expenses. For comparative purposes, prior period amounts have been reclassified
from operating, selling, administrative and general expenses to a reduction of
revenues. The adoption of EITF 00-25 did not impact the Company's consolidated
financial position, operating income or net income.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, establishes specific criteria for the recognition
of intangible assets separately from goodwill and requires unallocated negative
goodwill to be written off. SFAS No. 142 primarily addresses the accounting for
goodwill and intangible assets subsequent to their acquisition. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001, and SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of", and requires (i) the recognition and measurement of
the impairment of long-lived assets to be held and used and (ii) the measurement
of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for
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fiscal years beginning after December 15, 2001. The adoption of this statement
did not have an impact on our consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We and our representatives may from time to time make oral or written
"forward-looking statements" within the meaning of the Private Securities Reform
Act of 1995, including any statements that may be contained in the foregoing
discussion in "Management's Discussion and Analysis of Financial Condition and
Results of Operations", in this report and in other filings with the Securities
and Exchange Commission and in our reports to stockholders, which reflect our
expectations or beliefs with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties
and, in connection with the "safe-harbor" provisions of the Private Securities
Reform Act, we have identified under "Risk Factors" in Item 1 above important
factors that could cause actual results to differ materially from those
contained in any forward-looking statement made by or on behalf of us.
Results actually achieved may differ materially from expected results
included in these forward-looking statements as a result of these or other
factors. Due to such uncertainties and risks, readers are cautioned not to place
undue reliance on such forward-looking statements, which speak only as of the
date on which such statements are made. We do not undertake to update any
forward-looking statement that may be made from time to time by or on behalf of
us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Market Risk" is incorporated
herein by reference.
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PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Reference is made to Note 7, incorporated herein by reference, to
our consolidated financial statements included elsewhere in this
Report on Form 10-Q which contains a general description of
certain legal proceedings to which Brooke Group Holding, VGR
Holding, New Valley or their subsidiaries are a party and certain
related matters. Reference is also made to Exhibit 99.1 for
additional information regarding the pending smoking-related
material legal proceedings to which Brooke Group Holding and/or
Liggett are party. A copy of Exhibit 99.1 will be furnished to
holders of our securities and the securities of our subsidiaries
without charge upon written request to us at our principal
executive offices, 100 S.E. Second St., Miami, Florida 33131,
Attn. Investor Relations.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
No securities of ours which were not registered under the
Securities Act of 1933, as amended, have been issued or sold by us
during the three months ended June 30, 2002, except for grants of
stock options to purchase 5,000 shares of our common stock at
prices ranging between $19.94 and $25.26 per share to employees of
us and/or our subsidiaries. The grants of stock options were
effected in reliance on the exemption from registration afforded
by Section 4(2) of the Securities Act of 1933.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the second quarter of 2002, we submitted the following
matters to a vote of stockholders at our Annual Meeting of
Stockholders held on May 17, 2002. Proxies for the Annual Meeting
were solicited pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended.
The matters voted upon at the Annual Meeting were the election of
five directors and the following is a tabulation of the results:
Total shares of common stock outstanding as of April 10, 2002 (the
record date) - 33,257,284
Total shares of common stock voted in person or by proxy -
29,530,940
Election of Directors:
Withheld
For Authority
--- ---------
Robert J. Eide 29,483,530 47,410
Bennett S. LeBow 29,471,830 59,110
Howard M. Lorber 29,436,290 94,650
Jeffrey S. Podell 29,483,478 47,462
Jean E. Sharpe 29,481,640 49,300
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Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
99.1 Material Legal Proceedings.
*99.2 New Valley Corporation's Interim Consolidated
Financial Statements for the quarterly periods
ended June 30, 2002 and 2001 (incorporated by
reference to New Valley's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2002,
Commission File No. 1-2493).
99.3 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.
99.4 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.
----------------
* Incorporated by reference
(b) REPORTS ON FORM 8-K
The Company filed the following Reports on Form 8-K during
the second quarter of 2002:
FINANCIAL
DATE ITEMS STATEMENTS
---- ----- ----------
June 28, 2002 5, 7 None
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned thereunto duly authorized.
VECTOR GROUP LTD.
(REGISTRANT)
By: /s/ Joselynn D. Van Siclen
----------------------------
Joselynn D. Van Siclen
Vice President and Chief
Financial Officer
Date: August 14, 2002
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