e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31,
2010
VECTOR
GROUP LTD.
(Exact name of registrant as
specified in its charter)
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Delaware
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1-5759
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65-0949535
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(State or other jurisdiction of
incorporation
incorporation or organization)
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Commission File Number
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(I.R.S. Employer Identification
No.)
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100 S.E. Second Street, Miami, Florida
(Address of principal
executive offices)
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33131
(Zip Code)
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(305) 579-8000
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, par value $.10 per share
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the Registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. þ Yes o No
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. o Yes þ No
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934, as amended (the
Exchange Act), during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past
90 days. þ Yes o No
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). þ Yes o No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405
Regulation S-K
is not contained herein, and will not be contained, to the best
of the Registrants knowledge, in definitive proxy or
information statement incorporated by reference in Part III
of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the Registrant is a shell company
as defined in
Rule 12b-2
of the Exchange
Act. o Yes þ No
The aggregate market value of the common stock held by
non-affiliates of Vector Group Ltd. as of June 30, 2010 was
approximately $649 million.
At February 25, 2011, Vector Group Ltd. had
74,997,348 shares of common stock outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Part III (Items 10, 11, 12, 13 and 14) from the
definitive Proxy Statement for the 2011 Annual Meeting of
Stockholders to be filed with the Securities and Exchange
Commission no later than 120 days after the end of the
Registrants fiscal year covered by this report.
VECTOR
GROUP LTD.
FORM 10-K
TABLE
OF CONTENTS
PART I
Overview
Vector Group Ltd., a Delaware corporation, is a holding company
and is principally engaged in:
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the manufacture and sale of cigarettes in the United States
through our Liggett Group LLC (Liggett) and Vector
Tobacco Inc. (Vector Tobacco) subsidiaries, and
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the real estate business through our New Valley LLC subsidiary,
which is seeking to acquire additional operating companies and
real estate properties. New Valley owns 50% of Douglas Elliman
Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
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Financial information relating to our business segments can be
found in Note 17 to our consolidated financial statements.
Our significant business segments for the year ended
December 31, 2010 were Tobacco and Real Estate. The Tobacco
segment consists of the manufacture and sale of cigarettes. The
Real Estate segment includes the Companys investment in
Escena and investments in non-consolidated real estate
businesses.
Strategy
Our strategy is to maximize stockholder value by increasing the
profitability of our subsidiaries in the following ways:
Liggett
and Vector Tobacco
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Capitalize upon our tobacco subsidiaries cost advantage in
the U.S. cigarette market due to the favorable treatment
that they receive under the Master Settlement Agreement,
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Focus marketing and selling efforts on the discount segment,
continue to build volume and margin in core discount brands
(PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and utilize core
brand equity to selectively build distribution,
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Continue product development to provide the best quality
products relative to other discount products in the marketplace,
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Increase efficiency by developing and adopting an organizational
structure to maximize profit potential,
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Selectively expand the portfolio of private and control label
partner brands utilizing a pricing strategy that offers
long-term list price stability for customers,
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Identify, develop and launch relevant new cigarette brands and
other tobacco products to the market in the future,
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Continue to conduct appropriate research relating to the
development of cigarettes that materially reduce risk to
smokers, and
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Pursue strategic acquisitions of smaller tobacco manufacturers.
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New
Valley
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Continue to grow Douglas Elliman Realty operations by utilizing
its strong brand name recognition and pursuing strategic and
financial opportunities,
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Continue to leverage our expertise as direct investors by
actively pursuing real estate investments in the United States
and abroad which we believe will generate above-market returns,
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Acquire operating companies through mergers, asset purchases,
stock acquisitions or other means, and
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Invest our excess funds opportunistically in situations that we
believe can maximize stockholder value.
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1
Tobacco
Operations
General. Liggett is the operating successor to
Liggett & Myers Tobacco Company, which was founded in
1873. In April 2002, we acquired Medallion, a discount cigarette
manufacturer selling product in the deep discount category,
primarily under the USA brand name. Vector Tobacco merged into
Medallion which then changed its name to Vector Tobacco Inc. In
this report, certain references to Liggett refer to
our tobacco operations, including the business of Liggett and
Vector Tobacco, unless otherwise specified.
For the three months ended December 31, 2010, Liggett was
the fourth-largest manufacturer of cigarettes in the United
States in terms of unit sales. Liggetts manufacturing
facilities are located in Mebane, North Carolina where it
manufactures most of Vector Tobaccos cigarettes pursuant
to a contract manufacturing agreement. At the present time,
Liggett and Vector Tobacco have no foreign operations.
Our tobacco subsidiaries manufacture and sell cigarettes in the
United States. According to data from Management Science
Associates, Inc., Liggetts domestic shipments of
approximately 10.7 billion cigarettes during 2010 accounted
for 3.5% of the total cigarettes shipped in the United States
during such year. Liggetts market share increased 0.8% in
2010 from 2.7% in 2009. Market share in 2008 was 2.5%.
Historically, Liggett produced premium cigarettes as well as
discount cigarettes (which include among others, control label,
private label, branded discount and generic cigarettes). Premium
cigarettes are generally marketed under well-recognized brand
names at higher retail prices to adult smokers with a strong
preference for branded products, whereas discount cigarettes are
marketed at lower retail prices to adult smokers who are more
cost conscious. In recent years, the discounting of premium
cigarettes has become far more significant in the marketplace.
This has led to some brands that were traditionally considered
premium brands becoming more appropriately categorized as
branded discount, following list price reductions.
Liggetts EVE brand falls into that category. All of
Liggetts unit sales volume in 2010, 2009 and 2008 were in
the discount segment, which Liggetts management believes
has been the primary growth segment in the industry for more
than a decade.
Liggett produces cigarettes in approximately 136 combinations of
length, style and packaging. Liggetts current brand
portfolio includes:
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PYRAMID the industrys first deep discount
product with a brand identity relaunched in the second quarter
of 2009,
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GRAND PRIX re-launched as a national brand in 2005,
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LIGGETT SELECT a leading brand in the deep discount
category,
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EVE a leading brand of 120 millimeter
cigarettes in the branded discount category, and
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USA and various Partner Brands and private label brands.
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In 1999, Liggett introduced LIGGETT SELECT, one of the leading
brands in the deep discount category. LIGGETT SELECT, which was
the largest seller in Liggetts family of brands in 2007,
comprised 30.1% in 2008, 21.5% in 2009 and 13.0% in 2010 of
Liggetts unit volume. In September 2005, Liggett
repositioned GRAND PRIX to distributors and retailers
nationwide. GRAND PRIX was marketed as the lowest price
fighter to specifically compete with brands which are
priced at the lowest level of the deep discount segment. GRAND
PRIXs unit volume was 32.6% in 2008, 27.9% in 2009, and
18.5% in 2010. In April 2009, Liggett repositioned PYRAMID as a
box-only brand with a new low price to specifically compete with
brands which are priced at the lowest level of the deep discount
segment. PYRAMID is now the largest seller in Liggetts
family of brands with 42.6% of Liggetts unit volume in
2010, 14.6% in 2009 and 0.6% in 2008. According to Management
Science Associates, Liggett held a share of approximately 11.9%
of the overall discount market segment for 2010 compared to 9.2%
for 2009 and 2008.
Liggett Vector Brands Inc., which coordinates our tobacco
subsidiaries sales and marketing efforts, along with
certain support functions, has an agreement with Circle K
Stores, Inc., which operates more than 3,500 convenience stores
in the United States under the Circle K and Macs names, to
supply MONTEGO, a deep discount brand, exclusively for the
Circle K and Macs stores. The MONTEGO brand was the first
to be offered under Liggett Vector Brands Partner
Brands program which offers customers quality product with
long-term price stability.
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Liggett Vector Brands also has an agreement with Sunoco Inc.,
which operates approximately 700 Sunoco APlus branded
convenience stores in the United States, to manufacture
SILVER EAGLE. SILVER EAGLE, a deep discount brand, is exclusive
to Sunoco and was the second brand to be offered under Liggett
Vector Brands Partner Brands program. Liggett
also manufactures BRONSON cigarettes as part of a multi-year
Partner Brands agreement with QuikTrip, a
convenience store chain with more than 500 stores headquartered
in Tulsa, Oklahoma.
Under the Master Settlement Agreement reached in November 1998
with 46 states and various territories, the three largest
cigarette manufacturers must make settlement payments to the
states and territories based on how many cigarettes they sell
annually. Liggett, however, is not required to make any payments
unless its market share exceeds approximately 1.65% of the
U.S. cigarette market. Additionally, Vector Tobacco has no
payment obligation unless its market share exceeds approximately
0.28% of the U.S. cigarette market. We believe our tobacco
subsidiaries have a sustainable cost advantage over their
competitors as a result of the settlement.
Liggetts and Vector Tobaccos payments under the
Master Settlement Agreement are based on each respective
companys incremental market share above the minimum
threshold applicable to each respective company. Thus, if
Liggetts total market share is 3.00%, the Master
Settlement Agreement payment is based on 1.35%, which is the
difference between 3.00% and Liggetts approximate
applicable grandfathered share of 1.65%. We anticipate that both
Liggetts and Vector Tobaccos exemptions will be
fully utilized in the foreseeable future.
The source of industry data in this report is Management Science
Associates, Inc., an independent third-party database management
organization that collects wholesale shipment data from various
cigarette manufacturers and distributors and provides analysis
of market share, unit sales volume and premium versus discount
mix for individual companies and the industry as a whole.
Management Science Associates information relating to unit
sales volume and market share of certain of the smaller,
primarily deep discount, cigarette manufacturers is based on
estimates developed by Management Science Associates.
Business Strategy. Liggetts business
strategy is to capitalize upon its cost advantage in the United
States cigarette market due to the favorable treatment our
tobacco subsidiaries receive under settlement agreements with
the states and the Master Settlement Agreement. Liggetts
long-term business strategy is to continue to focus its
marketing and selling efforts on the discount segment of the
market, to continue to build volume and margin in its core
discount brands (PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE)
and to utilize its core brand equity to selectively build
distribution. Liggett intends to continue its product
development to provide the best quality products relative to
other discount products in the market place. Liggett will
continue to seek to increase efficiency by developing and
adapting its organizational structure to maximize profit
potential. Liggett intends to expand the portfolio of its
private and control label and Partner Brands
utilizing a pricing strategy that offers long-term list price
stability for customers. In addition, Liggett may bring
niche-driven brands to the market in the future.
Sales, Marketing and
Distribution. Liggetts products are
distributed from a central distribution center in Mebane, North
Carolina to 17 public warehouses located throughout the United
States. These warehouses serve as local distribution centers for
Liggetts customers. Liggetts products are
transported from the central distribution center to the public
warehouses by third-party trucking companies to meet
pre-existing contractual obligations to its customers.
Liggetts customers are primarily tobacco and candy
distributors, the military, warehouse club chains, and large
grocery, drug and convenience store chains. Liggett offers its
customers prompt payment discounts, traditional rebates and
promotional incentives. Customers typically pay for purchased
goods within two weeks following delivery from Liggett, and
approximately 90% of customers pay more rapidly through
electronic funds transfer arrangements. No single retail
customer exceeded 10% of Liggetts revenues in 2010, 2009
or 2008.
Trademarks. All of the major trademarks used
by Liggett are federally registered or are in the process of
being registered in the United States and other markets.
Trademark registrations typically have a duration of ten years
and can be renewed at Liggetts option prior to their
expiration date.
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In view of the significance of cigarette brand awareness among
consumers, management believes that the protection afforded by
these trademarks is material to the conduct of its business.
Liggett owns all of its domestic trademarks except for the JADE
trademark, which is licensed on a long-term exclusive basis from
a third-party for use in connection with cigarettes. These
trademarks are pledged as collateral for certain of our senior
secured debt.
Manufacturing. Liggett purchases and maintains
leaf tobacco inventory to support its cigarette manufacturing
requirements. Liggett believes that there is a sufficient supply
of tobacco within the worldwide tobacco market to satisfy its
current production requirements. Liggett stores its leaf tobacco
inventory in warehouses in North Carolina and Virginia. There
are several different types of tobacco, including flue-cured
leaf, burley leaf, Maryland leaf, oriental leaf, cut stems and
reconstituted sheet. Leaf components of American-style
cigarettes are generally the flue-cured and burley tobaccos.
While premium and discount brands use many of the same tobacco
products, input ratios of tobacco products may vary between
premium and discount products. Foreign flue-cured and burley
tobaccos, some of which are used in the manufacture of
Liggetts cigarettes, have historically been 30% to 35%
less expensive than comparable domestic tobaccos. However,
during the last two years domestic and foreign tobacco prices
have begun to equalize. Liggett normally purchases all of its
tobacco requirements from domestic and foreign leaf tobacco
dealers, much of it under long-term purchase commitments. As of
December 31, 2010, the majority of Liggetts
commitments were for the purchase of domestic tobacco.
Liggetts cigarette manufacturing facility was designed for
the execution of short production runs in a cost-effective
manner, which enables Liggett to manufacture and market a wide
variety of cigarette brand styles. Liggett produces cigarettes
in approximately 136 different brand styles as well as private
labels for other companies, typically retail or wholesale
distributors who supply supermarkets and convenience stores.
Liggetts facility produced approximately 10.7 billion
cigarettes in 2010, but maintains the capacity to produce
approximately 18.3 billion cigarettes per year. Vector
Tobacco has contracted with Liggett to produce most of its
cigarettes at Liggetts manufacturing facility in Mebane.
Research. Expenditures by Liggett for research
and development activities were $1.058 million in 2010,
$933,000 in 2009 and $988,000 in 2008. Vector Tobacco has been
engaged in research relating to reduced risk cigarette products.
Expenditures by Vector Tobacco for research and development
activities were $524,000 in 2010, $1.6 million in 2009 and
$3.0 million in 2008.
Competition. Liggetts competition is now
divided into two segments. The first segment is made up of the
three largest manufacturers of cigarettes in the United States:
Philip Morris USA Inc., Reynolds American Inc. and Lorillard
Tobacco Company. These three manufacturers, while primarily
premium cigarette based companies, also produce and sell
discount cigarettes.
The second segment of competition is comprised of a group of
smaller manufacturers and importers, most of which sell deep
discount cigarettes. Our largest competitor in this segment is
Commonwealth Brands, Inc., which was acquired by Imperial
Tobacco in 2007.
Historically, there have been substantial barriers to entry into
the cigarette business, including extensive distribution
organizations, large capital outlays for sophisticated
production equipment, substantial inventory investment, costly
promotional spending, regulated advertising and, for premium
brands, strong brand loyalty. However, in recent years, a number
of smaller manufacturers have been able to overcome these
competitive barriers due to excess production capacity in the
industry and the cost advantage for certain manufacturers and
importers resulting from the Master Settlement Agreement.
Many smaller manufacturers and importers that are not parties to
the Master Settlement Agreement have been impacted in recent
years by the state statutes enacted pursuant to the Master
Settlement Agreement and have begun to see a decrease in volume
after years of growth. Liggetts management believes, while
these companies still have significant market share through
competitive discounting in this segment, they are losing their
cost advantage as their payment obligations under these statutes
increase.
In the cigarette business, Liggett competes on a dual front. The
three major manufacturers compete among themselves for premium
brand market share based on advertising and promotional
activities, and trade rebates and incentives and compete with
Liggett and others for discount market share, on the basis of
brand loyalty. These three
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competitors have substantially greater financial resources than
Liggett, and most of their brands have greater sales and
consumer recognition than Liggetts products.
Liggetts discount brands must also compete in the
marketplace with the smaller manufacturers and
importers deep discount brands.
According to Management Science Associates data, the unit
sales of Philip Morris, Reynolds American and Lorillard
accounted in the aggregate for approximately 84.3% of the
domestic cigarette market in 2010. Liggetts domestic
shipments of approximately 10.7 billion cigarettes during
2010 accounted for 3.5% of the approximately 304 billion
cigarettes shipped in the United States, compared to
8.6 billion cigarettes in 2009 (2.7%) and 8.6 billion
cigarettes in 2008 (2.5%).
Industry-wide shipments of cigarettes in the United States have
been generally declining for a number of years, with Management
Science Associates data indicating that domestic
industry-wide shipments decreased by approximately 3.8%
(approximately 12 billion units) in 2010. Liggetts
management believes that industry-wide shipments of cigarettes
in the United States will generally continue to decline as a
result of numerous factors. These factors include health
considerations, diminishing social acceptance of smoking, and a
wide variety of federal, state and local laws limiting smoking
in restaurants, bars and other public places, as well as
increases in federal and state excise taxes and
settlement-related expenses which have contributed to higher
cigarette prices in recent years.
Historically, because of their dominant market share, Philip
Morris and RJR Tobacco (which is now part of Reynolds American),
the two largest cigarette manufacturers, have been able to
determine cigarette prices for the various pricing tiers within
the industry. Market pressures have historically caused the
other cigarette manufacturers to bring their prices in line with
the levels established by these two major manufacturers.
Off-list price discounting and similar promotional activity by
manufacturers, however, has substantially affected the average
price differential at retail, which can be significantly less
than the manufacturers list price gap. Recent discounting
by manufacturers has been far greater than historical levels,
and the actual price gap between premium and deep-discount
cigarettes has changed accordingly. This has led to shifts in
price segment performance depending upon the actual price gaps
of products at retail.
Philip Morris and Reynolds American dominate the domestic
cigarette market with a combined market share of approximately
72% at December 31, 2010. This concentration of United
States market share makes it more difficult for Liggett to
compete for shelf space in retail outlets and could impact price
competition in the market, either of which could have a material
adverse affect on its sales volume, operating income and cash
flows.
There is a substantial likelihood that other companies will
continue to introduce new products that would compete directly
with any reduced risk products that Vector Tobacco may develop.
Vector Tobaccos competitors generally have substantially
greater resources than it, including financial, marketing and
personnel resources.
Legislation,
Regulation and Litigation
In the United States, tobacco products are subject to
substantial and increasing legislation, regulation and taxation,
which has a negative effect on revenue and profitability. In
June 2009, legislation was passed providing for regulation of
the tobacco industry by the United States Food and Drug
Administration. See Item 7. Management Discussion and
Analysis of Financial Condition and Results of
Operations Legislation and Regulation.
The cigarette industry continues to be challenged on numerous
fronts. The industry is facing increased pressure from
anti-smoking groups and continued smoking and health litigation,
including private class action litigation and health care cost
recovery actions brought by governmental entities and other
third parties, the effects of which, at this time, we are unable
to evaluate. As of December 31, 2010, there were
approximately 6,900 individual suits, six purported class
actions or actions where class certification has been sought and
four health care cost recovery actions pending in the United
States in which Liggett was a named defendant. See Item 3.
Legal Proceedings and Note 12 to our
consolidated financial statements, which contain a description
of litigation.
It is possible that our consolidated financial position, results
of operations or cash flows could be materially adversely
affected by an unfavorable outcome in any smoking-related
litigation or as a result of additional federal or state
regulation relating to the manufacture, sale, distribution,
advertising or labeling of tobacco products.
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Liggetts management believes that it is in compliance in
all material respects with the laws regulating cigarette
manufacturers.
The
Master Settlement Agreement and Other State Settlement
Agreements
In March 1996, March 1997 and March 1998, Liggett entered into
settlements of tobacco-related litigation with 46 states
and territories. The settlements released Liggett from all
tobacco-related claims within those states and territories,
including claims for health care cost reimbursement and claims
concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson,
R.J. Reynolds and Lorillard (the Original Participating
Manufacturers or OPMs) and Liggett (together
with any other tobacco product manufacturer that becomes a
signatory, the Subsequent Participating
Manufacturers or SPMs), (the OPMs and SPMs are
hereinafter referred to jointly as the Participating
Manufacturers) entered into the Master Settlement
Agreement with 46 states, the District of Columbia, Puerto
Rico, Guam, the United States Virgin Islands, American Samoa and
the Northern Mariana Islands (collectively, the Settling
States) to settle the asserted and unasserted health care
cost recovery and certain other claims of those Settling States.
The Master Settlement Agreement received final judicial approval
in each Settling State.
In the Settling States, the Master Settlement Agreement released
Liggett from:
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all claims of the Settling States and their respective political
subdivisions and other recipients of state health care funds,
relating to: (i) past conduct arising out of the use, sale,
distribution, manufacture, development, advertising and
marketing of tobacco products; (ii) the health effects of,
the exposure to, or research, statements or warnings about,
tobacco products; and
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all monetary claims of the Settling States and their respective
subdivisions and other recipients of state health care funds,
relating to future conduct arising out of the use of or exposure
to, tobacco products that have been manufactured in the ordinary
course of business.
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The Master Settlement Agreement restricts tobacco product
advertising and marketing within the Settling States and
otherwise restricts the activities of Participating
Manufacturers. Among other things, the Master Settlement
Agreement prohibits the targeting of youth in the advertising,
promotion or marketing of tobacco products; bans the use of
cartoon characters in all tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any
12-month
period; bans all outdoor advertising, with certain limited
exceptions; prohibits payments for tobacco product placement in
various media; bans gift offers based on the purchase of tobacco
products without sufficient proof that the intended recipient is
an adult; prohibits Participating Manufacturers from licensing
third parties to advertise tobacco brand names in any manner
prohibited under the Master Settlement Agreement; and prohibits
Participating Manufacturers from using as a tobacco product
brand name any nationally recognized non-tobacco brand or trade
name or the names of sports teams, entertainment groups or
individual celebrities.
The Master Settlement Agreement also requires Participating
Manufacturers to affirm corporate principles to comply with the
Master Settlement Agreement and to reduce underage usage of
tobacco products and imposes restrictions on lobbying activities
conducted on behalf of Participating Manufacturers.
Liggett has no payment obligations under the Master Settlement
Agreement except to the extent its market share exceeds a market
share exemption of approximately 1.65% of total cigarettes sold
in the United States. Vector Tobacco has no payment obligations
except to the extent its market share exceeds a market share
exemption of approximately 0.28% of total cigarettes sold in the
United States. For years ended December 31, 2010, 2009 and
2008, Liggett and Vector Tobaccos domestic shipments
accounted for approximately 3.5%, 2.7% and 2.5%, respectively,
of the total cigarettes sold in the United States. If
Liggetts or Vector Tobaccos market share exceeds
their respective market share exemption in a given year, then on
April 15 of the following year, Liggett
and/or
Vector Tobacco, as the case may be, must pay on each excess unit
an amount equal (on a
per-unit
basis) to that due from the OPMs for that year. On
December 31, 2010, Liggett and Vector Tobacco paid
$96.5 million of their approximately $140.4 million
2010 MSA payment obligations.
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Under the payment provisions of the Master Settlement Agreement,
the Participating Manufacturers are required to pay a base
amount of $9.0 billion in 2011 and each year thereafter
(subject to applicable adjustments, offsets and reductions).
These annual payments are allocated based on unit volume of
domestic cigarette shipments. The payment obligations under the
Master Settlement Agreement are the several, and not joint,
obligations of each Participating Manufacturer and are not the
responsibility of any parent or affiliate of a Participating
Manufacturer.
Liggett may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with
the states. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operation Recent Developments Tobacco
Settlement Agreements and Note 12 to our consolidated
financial statements.
New
Valley LLC
New Valley LLC, a Delaware limited liability company, is engaged
in the real estate business and is seeking to acquire additional
real estate properties and operating companies. New Valley owns
a 50% interest in Douglas Elliman Realty, LLC, which operates
the largest residential brokerage company in the New York City
metropolitan area. New Valley also holds an investment in a
450-acre
approved master planned community in Palm Springs, California
(Escena), a preferred equity interest in one
townhome residence in Manhattan, New York. New Valley also holds
an investment in an entity with a note receivable from, and a
minority interest, in a condominium project in Manhattan, New
York.
Business
Strategy
The business strategy of New Valley is to continue to operate
its real estate business, to acquire additional real estate
properties and to acquire operating companies through merger,
purchase of assets, stock acquisition or other means, or to
acquire control of operating companies through one of such
means. New Valley may also seek from time to time to dispose of
such businesses and properties when favorable market conditions
exist. New Valleys cash and investments are available for
general corporate purposes, including for acquisition purposes.
Douglas
Elliman Realty, LLC
During 2000 and 2001, New Valley acquired for approximately
$1.7 million a 37.2% ownership interest in B&H
Associates of NY, which currently conducts business as
Prudential Douglas Elliman Real Estate and was formerly known as
Prudential Long Island Realty, a residential real estate
brokerage company on Long Island, and a minority interest in an
affiliated mortgage company, Preferred Empire Mortgage Company.
In December 2002, New Valley and the other owners of Prudential
Douglas Elliman Real Estate contributed their interests in
Prudential Douglas Elliman Real Estate to Douglas Elliman
Realty, LLC, formerly known as Montauk Battery Realty, LLC, a
newly formed entity. New Valley acquired a 50% interest in
Douglas Elliman Realty as a result of an additional investment
of approximately $1.4 million by New Valley and the
redemption by Prudential Douglas Elliman Real Estate of various
ownership interests. As part of the transaction, Prudential
Douglas Elliman Real Estate renewed its franchise agreement with
The Prudential Real Estate Affiliates, Inc. for an additional
ten-year term. In October 2004, upon receipt of required
regulatory approvals, the former owners of Douglas Elliman
Realty contributed to Douglas Elliman Realty their interests in
the related mortgage company.
In March 2003, Douglas Elliman Realty purchased the New York
City-based residential brokerage firm, Douglas Elliman, LLC,
formerly known as Insignia Douglas Elliman, and an affiliated
property management company, for $71.25 million. With that
acquisition, the combination of Prudential Douglas Elliman Real
Estate with Douglas Elliman created the largest residential
brokerage company in the New York metropolitan area. Upon
closing of the acquisition, Douglas Elliman entered into a
ten-year franchise agreement with The Prudential Real Estate
Affiliates, Inc. New Valley invested an additional
$9.5 million in subordinated debt and equity of Douglas
Elliman Realty to help fund the acquisition. The balance of the
subordinated debt was repaid in 2010. As part of the
acquisition, Douglas Elliman Realty acquired Douglas
Ellimans affiliate, Residential Management Group LLC,
which conducts business as Douglas Elliman Property Management
and is the New York metropolitan areas largest manager of
rental, co-op and condominium housing.
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We account for our interest in Douglas Elliman Realty under the
equity method. We recorded income of $22.3 million in 2010,
$11.4 million in 2009, and $11.8 million in 2008
associated with Douglas Elliman Realty. Equity income from
Douglas Elliman Realty includes interest earned by New Valley on
the subordinated debt, purchase accounting adjustments and
management fees.
Douglas Elliman Realty was negatively impacted in recent years
by the downturn in the residential real estate market. The
residential real estate market is cyclical and is affected by
changes in the general economic conditions that are beyond the
control of Douglas Elliman Realty. The U.S. residential
real estate market, including some of the markets in the New
York metropolitan area where Douglas Elliman operates, has
experienced a significant downturn due to various factors
including downward pressure on housing prices, credit
constraints inhibiting new buyers and an exceptionally large
inventory of unsold homes at the same time that sales volumes
are decreasing. In 2008 and 2009, the New York metropolitan area
market was further impacted by the significant downturn in the
financial services industry. The depth and length of the current
downturn in the real estate industry has proved exceedingly
difficult to predict. We cannot predict whether the downturn
will worsen or when the market and related economic forces will
return the U.S. residential real estate industry to a
growth period.
Real Estate Brokerage Business. Douglas
Elliman Realty is engaged in the real estate brokerage business
through its two subsidiaries which conduct business as
Prudential Douglas Elliman Real Estate. The two brokerage
companies have 60 offices with approximately 3,700 real estate
agents in the metropolitan New York area. The companies achieved
combined sales of approximately $11.5 billion of real
estate in 2010, approximately $8.6 billion of real estate
in 2009 and approximately $11.6 billion of real estate in
2008. Douglas Elliman Realty was ranked as the fourth largest
residential brokerage company in the United States in 2009 based
on closed sales volume by the Real Trends broker survey.
Douglas Elliman Realty had revenues of $348.1 million in
2010, $283.9 million in 2009, and $352.7 million in
2008.
The New York City brokerage operation, formerly known as Douglas
Elliman, was founded in 1911 and has grown to be one of
Manhattans leading residential brokers by specializing in
the highest end of the sales and rental marketplaces. It has 20
New York City offices, with approximately 2,000 real estate
agents, and had sales volume of approximately $7.8 billion
of real estate in 2010, approximately $5.3 billion of real
estate in 2009, and approximately $8.1 billion of real
estate in 2008.
In December 2010, Douglas Elliman acquired substantially all of
the assets of Prudential Holmes & Kennedy, a small
regional residential real estate brokerage company which
operated for more than 40 years in Northern Westchester
County, a suburban area north of New York City. The acquisition
included six offices located in the towns of Chappaqua, Armonk,
Bedford, Sommers, Pleasantville and Katonah, with approximately
150 real estate agents. Douglas Ellimans franchise
agreement with Prudential Real Estate Affiliates was amended to
include these offices as additional locations.
The Long Island brokerage operation, formerly known as
Prudential Long Island Realty, is headquartered in Huntington,
New York and is the largest residential brokerage company on
Long Island with 40 offices and approximately 1,660 real estate
agents. During 2010, the Long Island brokerage operation closed
approximately 6,500 transactions, representing sales volume of
approximately $3.6 billion of real estate. This compared to
approximately 6,200 transactions, representing sales volume of
approximately $3.3 billion of real estate in 2009, and
approximately 5,900 transactions closed in 2008, representing
approximately $3.5 billion of real estate. Prudential
Douglas Elliman Real Estate serves approximately 250 communities
from Manhattan to Montauk.
Prudential Douglas Elliman Real Estate acts as a broker in
residential real estate transactions. In performing these
services, the company has historically represented the seller,
either as the listing broker, or as a co-broker in the sale. In
acting as a broker for the seller, their services include
assisting the seller in pricing the property and preparing it
for sale, advertising the property, showing the property to
prospective buyers, and assisting the seller in negotiating the
terms of the sale and in closing the transaction. In exchange
for these services, the seller pays to the company a commission,
which is generally a fixed percentage of the sales price. In a
co-brokered arrangement, the listing broker typically splits its
commission with the other co-broker involved in the transaction.
The company also offers buyer brokerage services. When acting as
a broker for the buyer, its services include assisting the buyer
in locating properties that meet the buyers personal and
financial specifications, showing the buyer properties, and
assisting the buyer in negotiating the terms of the purchase and
closing the transaction. In exchange for these
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services a commission is paid to the company which also is
generally a fixed percentage of the purchase price and is
usually, with the consent of the listing broker, deducted from,
and payable out of, the commission payable to the listing
broker. With the consent of a buyer and seller, subject to
certain conditions, the company may, in certain circumstances,
act as a selling broker and as a buying broker in the same
transaction. The companys sales and marketing services are
provided by licensed real estate sales associates, sales persons
or associate brokers who have entered into independent
contractor agreements with the company. The company recognizes
revenue and commission expenses upon the consummation of the
real estate sale.
Prudential Douglas Elliman Real Estate also offers relocation
services to employers, which provide a variety of specialized
services primarily concerned with facilitating the resettlement
of transferred employees. These services include sales and
marketing of transferees existing homes for their
corporate employer, assistance in finding new homes, moving
services, educational and school placement counseling,
customized videos, property marketing assistance, rental
assistance, area tours, international relocation, group move
services, marketing and management of foreclosed properties,
career counseling, spouse/partner employment assistance, and
financial services. Clients can select these programs and
services on a fee basis according to their needs.
As part of the brokerage companys franchise agreement with
Prudential, it has an agreement with Prudential Relocation
Services, Inc. to provide relocation services to the Prudential
network. The company anticipates that participation in the
Prudential network will continue to provide new relocation
opportunities with firms on a national level.
In 2009, Douglas Elliman Realty, through a subsidiary, entered
into a joint venture with Wells Fargo Ventures, LLC to create DE
Capital Mortgage LLC to carry on the business of residential
mortgage lending, as a mortgage broker. Wells Fargo Ventures is
the nations leading alliance lender, maintaining
long-standing relationships with top real estate companies,
builders and financial services institutions across the United
States. DE Capital Mortgage replaces the business of Preferred
Empire Mortgage Company, which was a mortgage broker,
wholly-owned by Douglas Elliman Realty.
DE Capital primarily originates loans for purchases of
properties located on Long Island and in New York City.
Approximately one-half of these loans are for home sales
transactions in which Prudential Douglas Elliman Real Estate
acts as a broker. The term origination refers
generally to the process of arranging mortgage financing for the
purchase of property directly to the purchaser or for
refinancing an existing mortgage. DE Capitals revenues are
generated from loan origination fees, which are generally a
percentage of the original principal amount of the loan and are
commonly referred to as points, and application and
other fees paid by the borrowers. DE Capital recognizes mortgage
origination revenues and costs when the mortgage loan is
consummated. As a mortgage broker, DE Capital funds and sells
mortgage loans through Wells Fargo, its joint venture partner.
Marketing. As members of The Prudential Real
Estate Affiliates, Inc., Prudential Douglas Elliman Real Estate
offer real estate sales and marketing and relocation services,
which are marketed by a multimedia program. This program
includes direct mail, newspaper, internet, catalog, radio and
television advertising and is conducted throughout Manhattan and
Long Island. In addition, the integrated nature of the real
estate brokerage companies services is designed to produce a
flow of customers between their real estate sales and marketing
business and their mortgage business.
Competition. The real estate brokerage
business is highly competitive. However, Prudential Douglas
Elliman Real Estate believes that its ability to offer their
customers a range of inter-related services and its level of
residential real estate sales and marketing help position them
to meet the competition and improve their market share.
In the brokerage companys traditional business of
residential real estate sales and marketing, it competes
primarily with multi-office independent real estate
organizations and, to some extent, with franchise real estate
organizations, such as Century-21, ERA, RE/MAX and Coldwell
Banker. The company believes that its major competitors in 2011
will also increasingly include multi-office real estate
organizations, such as GMAC Home Services, NRT LLC (whose
affiliates include the New York City-based Corcoran Group) and
other privately owned companies. Residential brokerage firms
compete for sales and marketing business primarily on the basis
of services offered, reputation, personal contacts, and,
recently to a greater degree, price.
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The companys relocation business is fully integrated with
its residential real estate sales and marketing business.
Accordingly, its major competitors are many of the same real
estate organizations previously noted. Competition in the
relocation business is likewise based primarily on level of
service, reputation, personal contact and, recently to a greater
degree, price.
In its mortgage loan origination business, DE Capital competes
with other mortgage originators. These include mortgage brokers,
mortgage bankers, state and national banks, and thrift
institutions.
Government Regulation. Several facets of real
estate brokerage businesses are subject to government
regulation. For example, their real estate sales and marketing
divisions are licensed as real estate brokers in the states in
which they conduct their real estate brokerage businesses. In
addition, their real estate sales associates must be licensed as
real estate brokers or salespersons in the states in which they
do business. Future expansion of the real estate brokerage
operations of Prudential Douglas Elliman Real Estate into new
geographic markets may subject it to similar licensing
requirements in other states.
A number of states and localities have adopted laws and
regulations imposing environmental controls, disclosure rules,
zoning and other land use restrictions, which can materially
impact the marketability of certain real estate. However,
Prudential Douglas Elliman Real Estate does not believe that
compliance with environmental, zoning and land use laws and
regulations has had, or will have, a materially adverse effect
on its financial condition or operations.
In DE Capitals mortgage business, mortgage loan
origination and funding activities are subject to the Equal
Credit Opportunity Act, the Federal
Truth-in-Lending
Act, the Real Estate Settlement Procedures Act, and the
regulations promulgated thereunder which prohibit discrimination
and require the disclosure of certain information to borrowers
concerning credit and settlement costs. As an affiliate of Wells
Fargo Ventures, a wholly-owned subsidiary of Wells Fargo Bank,
N.A., DE Capital is not subject to regulation by state banking
departments, but rather by the Federal Office of Currency
Control.
Prudential Douglas Elliman Real Estate is not aware of any
material licensing or other government regulatory requirements
governing its relocation business, except to the extent that
such business also involves the rendering of real estate
brokerage services, the licensing and regulation of which are
described above.
Franchises and Trade Names. In December 2002,
Prudential Long Island Realty renewed for an additional ten-year
term its franchise agreement with The Prudential Real Estate
Affiliates, Inc. and has an exclusive franchise, subject to
various exceptions and to meeting annual revenue thresholds, in
New York for the counties of Nassau and Suffolk on Long Island.
In addition, in June 2004, Prudential Long Island Realty was
granted an exclusive franchise, subject to various exceptions
and to meeting annual revenue thresholds, with respect to the
boroughs of Brooklyn and Queens. In March 2003, Douglas Elliman
entered into a ten-year franchise agreement with The Prudential
Real Estate Affiliates, Inc. and has an exclusive franchise,
subject to various exceptions and to meeting annual revenue
thresholds, for Manhattan.
The Douglas Elliman trade name is a registered
trademark in the United States. The name has been synonymous
with the most exacting standards of excellence in the real
estate industry since Douglas Ellimans formation in 1911.
Other trademarks used extensively in Douglas Ellimans
business, which are owned by Douglas Elliman Realty and
registered in the United States, include We are New
York, Bringing People and Places Together,
If You Clicked Here Youd Be Home Now and
Picture Yourself in the Perfect Home.
The Prudential name and the tagline From
Manhattan to Montauk are used extensively in the
Prudential Douglas Elliman Real Estate business. In addition,
Prudential Douglas Elliman Real Estate continues to use the
trade names of certain companies that it has acquired.
Residential Property Management
Business. Douglas Elliman Realty is also engaged
in the management of cooperatives, condominiums and apartments
though its subsidiary, Residential Management Group, LLC, which
conducts business as Douglas Elliman Property Management and is
the leading manager of apartments, cooperatives and condominiums
in the New York metropolitan area according to a survey in the
September 2009 issue of The Real Deal. Residential
Management Group provides full service third-party fee
management for approximately 290 properties, representing
approximately 42,000 units in New York City, Nassau County,
Northern New Jersey and
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Westchester County. In January 2010, Residential Management
Group acquired the assets of Bellmarc Property Management, a
company which manages approximately 50 buildings in Manhattan
with approximately 5,000 units. Accordingly, Residential
Management Group now manages approximately 340 properties with
approximately 47,000 units. Residential Management Group is
seeking to continue to expand its property management business
in the greater metropolitan New York area in 2011. Among the
notable properties currently managed are the Dakota, Museum
Tower, Worldwide Plaza, London Terrace and West Village Houses
buildings in New York City. Residential Management Group employs
approximately 235 people, of whom approximately 150 work at
Residential Management Groups headquarters and the
remainder at remote offices in the New York metropolitan area.
New
Valley Realty Division
Escena. In March 2008, a subsidiary of New
Valley purchased a loan collateralized by a substantial portion
of a
450-acre
approved master planned community in Palm Springs, California
known as Escena. The loan, which was in foreclosure,
was purchased for its $20 million face value plus accrued
interest and other costs of approximately $1.45 million.
The collateral consisted of 867 residential lots with site and
public infrastructure and an 18-hole golf course with a
substantially completed clubhouse, and a
seven-acre
site approved for a 450-room hotel.
In April 2009, New Valleys subsidiary entered into a
settlement agreement with a guarantor of the loan, which
required the guarantor to satisfy its obligations under a
completion guaranty by completing improvements to the project in
settlement, among other things, of its payment guarantees. The
construction of these improvements to the project is
substantially complete.
In April 2009, New Valley completed the foreclosure process and
took title to the property. The property is classified as
Investment in Escena, net and was carried in our
consolidated balance sheet at $13.4 million as of
December 31, 2010.
Aberdeen Townhomes LLC. In June 2008, a
subsidiary of New Valley purchased a preferred equity interest
in Aberdeen Townhomes LLC (Aberdeen) for
$10 million. Aberdeen acquired five townhome residences
located in Manhattan, New York, which it was in the process of
rehabilitating and selling.
One of the townhomes was sold in September 2009 and the mortgage
was retired. Mortgages on the four remaining Aberdeen townhomes
with a balance of approximately $31.9 million as of
December 31, 2009 matured during 2009. These mortgages were
in default as of December 31, 2009. In each of January 2010
and August 2010, Aberdeen sold a townhome and the two respective
mortgages of approximately $14.4 million were retired. We
received a preferred return distribution of approximately
$1.0 million and $0.4 million from escrow in
connection with the sales.
In August 2010, we acquired the mortgage loans from Wachovia
Bank, N.A. on the two remaining townhomes for approximately
$13.5 million. In accordance with the accounting guidance
as to variable interest entities, we reassessed the primary
beneficiary status of the Aberdeen variable interest entity
(VIE) and determined that, in August 2010, we became
the primary beneficiary of this VIE because we obtained the
power to direct activities which significantly impact the
economic performance of the VIE; and, since we now own the
mortgages, we will absorb losses and returns of the VIE.
In February 2011, Aberdeen sold one of the two remaining
townhomes for approximately $12.5 million, before closing
costs. The property was carried at $8.5 million as of
December 31, 2010.
New Valley Oaktree Chelsea Eleven, LLC. In
September 2008, a subsidiary of New Valley purchased for
$12 million a 40% interest in New Valley Oaktree Chelsea
Eleven, LLC, which lent $29 million and contributed
$1 million in capital to Chelsea Eleven LLC, which is
developing a condominium project in Manhattan, New York. The
development consists of 54 luxury residential units and one
commercial unit. As of February 23, 2011, sales of
34 units have closed. On July 1, 2010, Chelsea Eleven
LLC borrowed $47.1 million, which is due July 1, 2012,
bearing interest at 14% per annum. The proceeds were used to
retire Chelsea Eleven LLCs then outstanding mezzanine debt
(approximately $37.2 million) and for other working capital
purposes. As of December 31, 2010, we received net
distributions of $1.0 million from New Valley Oaktree
Chelsea Eleven LLC.
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The loan from New Valley Oaktree is subordinate to the
$18.2 million loan due in July 2012. The loan from New
Valley Oaktree bears interest at 60.25% per annum, compounded
monthly, with $3.75 million initially being held in an
interest reserve, from which $1.5 million was paid to New
Valley.
New Valleys investment in New Valley Oaktree is being
accounted for under the equity method and was carried at
approximately $11.0 million on our consolidated balance
sheet at December 31, 2010 as a component of
Investments in non-consolidated real estate
businesses.
Fifty Third-Five Building LLC. In September
2010, New Valley, through its NV 955 LLC subsidiary, contributed
$2.5 million to a joint venture, Fifty Third-Five Building
LLC (JV), of which it owns 50%. The JV was formed
for the purposes of acquiring a defaulted real estate loan,
collateralized by real estate located in New York City. In
October 2010, New Valley contributed an additional
$15.5 million to the JV and the JV acquired the defaulted
loan for approximately $35.5 million. Litigation on the
defaulted real estate loan is pending.
Sesto Holdings S.r.l. In October 2010, New
Valley, through its NV Milan LLC subsidiary, acquired a 7.2%
interest in Sesto Holdings S.r.l. for $5.0 million. Sesto
holds a 42% interest in an entity that has purchased
approximately 322 acres in Milan, Italy. Sesto intends to
develop the land as a multi-parcel, multi-building mixed use
urban regeneration project.
Former
Broker-Dealer Operations
New Valley owned, as of December 31, 2010,
13,891,205 shares of Ladenburg Thalmann Financial Services
Inc. (NYSE Amex: LTS), which represents approximately 8% of the
LTS shares. LTS is the parent of New Valleys former
subsidiary, Ladenburg Thalmann & Co. Inc., which has
been a member of the New York Stock Exchange since 1879. LTS is
registered under the Securities Act of 1934 and files periodic
reports and other information with the SEC.
Four of our directors, Howard M. Lorber, Henry C. Beinstein,
Robert J. Eide and Jeffrey S. Podell, also serve as directors of
LTS. Mr. Lorber also serves as Vice Chairman of LTS.
Richard J. Lampen, who along with Mr. Lorber is an
executive officer of ours, also serves as a director of LTS and
has served as the President and Chief Executive Officer of LTS
since September 2006. In September 2006, we entered into an
agreement with LTS where we agreed to make available the
services of Mr. Lampen as well as other financial and
accounting services. LTS paid us $600,000 for 2010, $600,000 for
2009, and $500,000 for 2008 related to the agreement and pays us
at a rate of $600,000 per year in 2011. These amounts are
recorded as a reduction to our operating, selling,
administrative and general expenses. For 2010, 2009, and 2008,
LTS paid compensation of $200,000, $0, and $150,000,
respectively, to each of Mr. Lorber and Mr. Lampen in
connection with their services. See Note 14 to our
consolidated financial statements.
Other
Investments
Castle Brands. In October 2008, we acquired
for $4 million an approximate 11% interest in Castle Brands
Inc. (NYSE Amex: ROX), a publicly traded developer and importer
of premium branded spirits. Mr. Lampen is serving as the
interim President, Chief Executive Officer and a director of
Castle. In October 2008, we entered into an agreement with
Castle where we agreed to make available the services of
Mr. Lampen as well as other financial and accounting
services. We recognized management fees of $100,000 in 2010,
$100,000 for 2009 and $22,011 for 2008 and under the agreement
and Castle has agreed to pay us $100,000 in 2011. In December
2009, we were part of a consortium, which included
Dr. Phillip Frost, who is a beneficial owner of
approximately 11.8% of the our common stock, and
Mr. Lampen, that agreed to provide a line of credit to
Castle. The three-year line was for a maximum amount of
$2.5 million, bears interest at a rate of 11% per annum on
amounts borrowed, pays a 1% annual commitment fee and is
collateralized by Castles receivables and inventory. Our
commitment under the line is $1.1 million; all of which was
outstanding under the credit line as of December 31, 2010.
Long-Term Investments. As of December 31,
2010, long-term investments consisted primarily of investments
in investment partnerships of approximately $57.0 million.
In the future, we may invest in other investments including
limited partnerships, real estate investments, equity
securities, debt securities and certificates of deposit
depending on risk factors and potential rates of return.
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Employees
At December 31, 2010, we had 512 employees, of which
approximately 300 were employed at Liggetts Mebane
facility and approximately 192 were employed in sales and
administrative functions at Liggett Vector Brands. Approximately
46% of our employees are hourly employees, who are represented
by unions. We have not experienced any significant work
stoppages since 1977, and we believe that relations with our
employees and their unions are satisfactory.
Available
Information
Our website address is www.vectorgroupltd.com. We make available
free of charge on the Investor Relations section of our website
(http://vectorgroupltd.com/invest.asp)
our Annual Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with the
Securities and Exchange Commission. We also make available
through our website other reports filed with the SEC under the
Exchange Act, including our proxy statements and reports filed
by officers and directors under Section 16(a) of that Act.
Copies of our Code of Business Conduct and Ethics, Corporate
Governance Guidelines, Audit Committee charter, Compensation
Committee charter and Corporate Governance and Nominating
Committee charter have been posted on the Investor Relations
section of our website and are also available in print to any
shareholder who requests it. We do not intend for information
contained in our website to be part of this Annual Report on
Form 10-K.
Our business faces many risks. We have described below the known
material risks that we and our subsidiaries face. There may be
additional risks that we do not yet know of or that we do not
currently perceive to be significant that may also impact our
business or the business of our subsidiaries. Each of the risks
and uncertainties described below could lead to events or
circumstances that have a material adverse effect on the
business, results of operations, cash flows, financial condition
or equity of us or one or more of our subsidiaries, which in
turn could negatively affect the value of our common stock. You
should carefully consider and evaluate all of the information
included in this report and any subsequent reports that we may
file with the Securities and Exchange Commission or make
available to the public before investing in any securities
issued by us.
We have
significant liquidity commitments
During 2011, we have certain liquidity commitments that could
require the use of our existing cash resources. As of
December 31, 2010, our corporate expenditures (exclusive of
Liggett, Vector Tobacco and New Valley) and other potential
liquidity requirements over the next 12 months included the
following:
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cash interest expense of approximately $82.6 million,
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the retirement of $11 million of our 3.875% Variable
Interest Senior Convertible Debentures due June 15, 2011,
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dividends on our outstanding common shares (currently at an
annual rate of approximately $117 million), and
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other corporate expenses and taxes.
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In order to meet the above liquidity requirements as well as
other liquidity needs in the normal course of business, we will
be required to use cash flows from operations and existing cash
and cash equivalents. Should these resources be insufficient to
meet the upcoming liquidity needs, we may also be required to
liquidate investment securities available for sale and other
long-term investments, or, if available, draw on Liggetts
credit facility. While there are actions we can take to reduce
our liquidity needs, there can be no assurance that such
measures can be achieved.
We and
our subsidiaries have a substantial amount of
indebtedness.
We and our subsidiaries have significant indebtedness and debt
service obligations. At December 31, 2010, we and our
subsidiaries had total outstanding indebtedness (including the
embedded derivative liabilities related to our
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convertible notes) of $683 million. We must redeem
$11 million of our 3.875% Variable Interest Senior
Convertible Debentures by June 15, 2011 and may be required
to purchase $99 million of the debentures on June 15,
2012. Approximately $157.5 million of our 3.75% convertible
notes mature in 2014 and $415 million of our
11% senior secured notes matures in 2015. In addition,
subject to the terms of any future agreements, we and our
subsidiaries will be able to incur additional indebtedness in
the future. There is a risk that we will not be able to generate
sufficient funds to repay our debt. If we cannot service our
fixed charges, it would have a material adverse effect on our
business and results of operations.
We are a
holding company and depend on cash payments from our
subsidiaries, which are subject to contractual and other
restrictions, in order to service our debt and to pay dividends
on our common stock.
We are a holding company and have no operations of our own. We
hold our interests in our various businesses through our
wholly-owned subsidiaries, VGR Holding and New Valley. In
addition to our own cash resources, our ability to pay interest
on our debt and to pay dividends on our common stock depends on
the ability of VGR Holding and New Valley to make cash available
to us. VGR Holdings ability to pay dividends to us depends
primarily on the ability of Liggett, its wholly-owned
subsidiary, to generate cash and make it available to VGR
Holding. Liggetts revolving credit agreement with Wachovia
Bank, N.A. contains a restricted payments test that limits the
ability of Liggett to pay cash dividends to VGR Holding. The
ability of Liggett to meet the restricted payments test may be
affected by factors beyond its control, including
Wachovias unilateral discretion, if acting in good faith,
to modify elements of such test.
Our receipt of cash payments, as dividends or otherwise, from
our subsidiaries is an important source of our liquidity and
capital resources. If we do not have sufficient cash resources
of our own and do not receive payments from our subsidiaries in
an amount sufficient to repay our debts and to pay dividends on
our common stock, we must obtain additional funds from other
sources. There is a risk that we will not be able to obtain
additional funds at all or on terms acceptable to us. Our
inability to service these obligations and to continue to pay
dividends on our common stock would significantly harm us and
the value of our common stock.
Our
11% senior secured notes contain restrictive covenants that
limit our operating flexibility.
The indenture governing our 11% senior secured notes due
2015 contains covenants that, among other things, restrict our
ability to take specific actions, even if we believe them to be
in our best interest, including restrictions on our ability to:
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incur or guarantee additional indebtedness or issue preferred
stock;
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pay dividends or distributions on, or redeem or repurchase,
capital stock;
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create liens with respect to our assets;
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make investments, loans or advances;
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prepay subordinated indebtedness;
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enter into transactions with affiliates; and
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merge, consolidate, reorganize or sell our assets.
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In addition, Liggetts revolving credit agreement requires
us to meet specified financial ratios. These covenants may
restrict our ability to expand or fully pursue our business
strategies. Our ability to comply with these and other
provisions of the indenture governing the senior secured notes
and the Liggett revolving credit agreement may be affected by
changes in our operating and financial performance, changes in
general business and economic conditions, adverse regulatory
developments or other events beyond our control. The breach of
any of these covenants, including those contained in the
indenture governing the senior secured notes and the
Liggetts credit agreement, could result in a default under
our indebtedness, which could cause those and other obligations
to become due and payable. If any of our indebtedness is
accelerated, we may not be able to repay it.
14
The indenture governing the senior secured notes contain
restrictive covenants, which, among other things, restrict our
ability to pay certain dividends or make other restricted
payments or enter into transactions with affiliates if our
Consolidated EBITDA, as defined in the indenture, is less than
$50 million for the four quarters prior to such
transaction. Our Consolidated EBITDA for the four quarters ended
December 31, 2010 exceeded $50 million.
Changes
in respect of the debt ratings of our notes may materially and
adversely affect the availability, the cost and the terms and
conditions of our debt.
Both we and our 11% Senior Secured Notes have been publicly
rated by Moodys Investors Service, Inc., or Moodys,
and Standard & Poors Rating Services, or
S&P, independent rating agencies. In addition, future debt
instruments may be publicly rated. These debt ratings may affect
our ability to raise debt. Any future downgrading of the notes
or our other debt by Moodys and S&P may affect the
cost and terms and conditions of our financings and could
adversely affect the value and trading of the notes.
Liggett
faces intense competition in the domestic tobacco
industry.
Liggett is considerably smaller and has fewer resources than its
major competitors, and, as a result, has a more limited ability
to respond to market developments. Management Science
Associates data indicate that the three largest cigarette
manufacturers controlled approximately 84.3% of the United
States cigarette market during 2010. Philip Morris is the
largest and most profitable manufacturer in the market, and its
profits are derived principally from its sale of premium
cigarettes. Philip Morris had approximately 62.0% of the premium
segment and 46.4% of the total domestic market during 2010.
During 2010, all of Liggetts sales were in the discount
segment, and its share of the total domestic cigarette market
was 3.5%. Philip Morris and RJR Tobacco (which is now part of
Reynolds American), the two largest cigarette manufacturers,
have historically, because of their dominant market share, been
able to determine cigarette prices for the various pricing tiers
within the industry.
Philip Morris and Reynolds American dominate the domestic
cigarette market and had a combined market share of
approximately 72% at December 31, 2010. This concentration
of United States market share could make it more difficult for
Liggett and Vector Tobacco to compete for shelf space in retail
outlets and could impact price competition in the market, either
of which could have a material adverse affect on their sales
volume, operating income and cash flows, which in turn could
negatively affect the value of our common stock.
Liggetts
business is highly dependent on the discount cigarette
segment.
Liggett depends more on sales in the discount cigarette segment
of the market, relative to the full-price premium segment, than
its major competitors. Since 2004, all of Liggetts unit
volume was generated in the discount segment. The discount
segment is highly competitive, with consumers having less brand
loyalty and placing greater emphasis on price. While the three
major manufacturers all compete with Liggett in the discount
segment of the market, the strongest competition for market
share has recently come from a group of smaller manufacturers
and importers, most of which sell low quality, deep discount
cigarettes. While Liggetts share of the discount market
was 11.9% in 2010 and 9.2% in 2009 and 2008, Management Science
Associates data indicate that the discount market share of
these other smaller manufacturers and importers was
approximately 38.5% in 2010, 39.4% in 2009, and 38.5% in 2008.
If pricing in the discount market continues to be impacted by
these smaller manufacturers and importers, margins in
Liggetts only current market segment could be negatively
affected, which in turn could negatively affect the value of our
common stock.
Liggetts
market share is susceptible to decline.
For a number of years prior to 2000, Liggett suffered a
substantial decline in market share. Liggetts market share
increased during each of the years between 2000 and 2010 (except
for 2008, which was unchanged). This earlier market share
erosion resulted in part from Liggetts highly leveraged
capital structure that existed until December 1998 and its
limited ability to match other competitors wholesale and
retail trade programs, obtain retail shelf space for its
products and advertise its brands. These declines also resulted
from adverse developments in the tobacco industry, intense
competition and changes in consumer preferences which have
continued up to the current
15
time. According to Management Science Associates data,
Liggetts overall domestic market share during 2010 was
3.5% compared to 2.7% during 2009, and 2.5% during 2008.
Liggetts share of the discount segment was 11.9% during
2010, up from 9.2% during 2009 and 2008. If Liggetts
market share were to decline again, Liggetts sales volume,
operating income and cash flows could be materially adversely
affected, which in turn could negatively affect the value of our
common stock.
The
domestic cigarette industry has experienced declining unit sales
in recent periods.
Industry-wide shipments of cigarettes in the United States have
been generally declining for a number of years, with Management
Science Associates data indicating that domestic
industry-wide shipments decreased by approximately 3.8% in 2010
as compared to 2009, and by approximately 8.6% in 2009 as
compared to 2008. We believe that industry-wide shipments of
cigarettes in the United States will generally continue to
decline as a result of numerous factors. These factors include
health considerations, diminishing social acceptance of smoking,
and a wide variety of federal, state and local laws limiting
smoking in restaurants, bars and other public places, as well as
increases in federal and state excise taxes and
settlement-related expenses which have contributed to high
cigarette price levels in recent years. If this decline in
industry-wide shipments continues and Liggett is unable to
capture market share from its competitors, or if the industry as
a whole is unable to offset the decline in unit sales with price
increases, Liggetts sales volume, operating income and
cash flows could be materially adversely affected, which in turn
could negatively affect the value of our common stock.
Our
tobacco operations are subject to substantial and increasing
legislation, regulation and taxation, which has a negative
effect on revenue and profitability.
Tobacco products are subject to substantial federal and state
excise taxes in the United States. On February 4, 2009,
President Obama signed an increase of $0.617 in the federal
excise tax per pack of cigarettes, for a total of $1.01 per pack
of cigarettes, and significant tax increases on other tobacco
products, to fund expansion of the State Childrens Health
Insurance Program, referred to as the SCHIP. These tax increases
came into effect on April 1, 2009. The increases in federal
excise tax under the SCHIP are substantial, and, as a result,
Liggetts sales volume and profitability has been and may
continue to be adversely impacted.
In addition to federal and state excise taxes, certain city and
county governments also impose substantial excise taxes on
tobacco products sold. Increased excise taxes are likely to
result in declines in overall sales volume and shifts by
consumers to less expensive brands.
A wide variety of federal, state and local laws limit the
advertising, sale and use of cigarettes have proliferated in
recent years. For example, many local laws prohibit smoking in
restaurants and other public places. Private businesses also
have adopted regulations that prohibit or restrict, or are
intended to discourage, smoking. Such laws and regulations also
are likely to result in a decline in the overall sales volume of
cigarettes.
Furthermore, Liggett and Vector Tobacco provide ingredient
information annually, as required by law, to the states of
Massachusetts, Texas and Minnesota. Several other states are
considering ingredient disclosure legislation.
Over the years, various state and local governments have
continued to regulate tobacco products, including smokeless
tobacco products. These regulations relate to, among other
things, the imposition of significantly higher taxes, increases
in the minimum age to purchase tobacco products, sampling and
advertising bans or restrictions, ingredient and constituent
disclosure requirements and significant tobacco control media
campaigns. Additional state and local legislative and regulatory
actions will likely be considered in the future, including,
among other things, restrictions on the use of flavorings.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions from various federal
administrative bodies, including the United States Environmental
Protection Agency and the FDA. There have also been adverse
legislative and political decisions and other unfavorable
developments concerning cigarette smoking and the tobacco
industry. Recently, legislation was passed by Congress providing
for regulation of cigarettes by the FDA. These developments
generally receive widespread media attention. Additionally, a
majority of states have passed legislation providing for reduced
ignition propensity standards for cigarettes. These developments
may negatively affect the perception of potential triers of fact
with respect to the tobacco industry,
16
possibly to the detriment of certain pending litigation, and may
prompt the commencement of additional similar litigation or
legislation. We are not able to evaluate the effect of these
developing matters on pending litigation or the possible
commencement of additional litigation, but our consolidated
financial position, results of operations or cash flows could be
materially adversely affected.
Additional federal or state regulation relating to the
manufacture, sale, distribution, advertising, labeling, or
information disclosure of tobacco products could further reduce
sales, increase costs and have a material adverse effect on our
business.
The newly
enacted Family Smoking Prevention and Tobacco Control Act may
adversely affect our sales and operating profit.
On June 22, 2009, President Obama signed into law the
Family Smoking Prevention and Tobacco Control Act
(H.R. 1256). The law grants the United States Food and Drug
Administration (the FDA) broad authority over the
manufacture, sale, marketing and packaging of tobacco products,
although the FDA is prohibited from issuing regulations banning
all cigarettes or all smokeless tobacco products, or requiring
the reduction of nicotine yields of a tobacco product to zero.
Among other measures, the law (under various deadlines):
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increases the number of health warnings required on cigarette
and smokeless tobacco products, increases the size of warnings
on packaging and in advertising, requires the FDA to develop
graphic warnings for cigarette packages, and grants the FDA
authority to require new warnings;
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requires practically all tobacco product advertising to
eliminate color and imagery and instead consist solely of black
text on white background;
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imposes new restrictions on the sale and distribution of tobacco
products, including significant new restrictions on tobacco
product advertising and promotion as well as the use of brand
and trade names;
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bans the use of light, mild,
low or similar descriptors on tobacco products;
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bans the use of characterizing flavors in cigarettes
other than tobacco or menthol;
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gives the FDA the authority to impose tobacco product standards
that are appropriate for the protection of the public health
(by, for example, requiring reduction or elimination of the use
of particular constituents or components, requiring product
testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);
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requires manufacturers to obtain FDA review and authorization
for the marketing of certain new or modified tobacco products;
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requires pre-market approval by the FDA for tobacco products
represented (through labels, labeling, advertising, or other
means) as presenting a lower risk of harm or tobacco-related
disease;
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requires manufacturers to report ingredients and harmful
constituents and requires the FDA to disclose certain
constituent information to the public;
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mandates that manufacturers test and report on ingredients and
constituents identified by the FDA as requiring such testing to
protect the public health, and allows the FDA to require the
disclosure of testing results to the public;
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requires manufacturers to submit to the FDA certain information
regarding the health, toxicological, behavioral or physiologic
effects of tobacco products;
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prohibits use of tobacco containing a pesticide chemical residue
at a level greater than allowed under federal law;
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requires the FDA to establish good manufacturing
practices to be followed at tobacco manufacturing
facilities;
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requires tobacco product manufacturers (and certain other
entities) to register with the FDA;
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authorizes the FDA to require the reduction of nicotine
(although it may not require the reduction of nicotine yields of
a tobacco product to zero) and the potential reduction or
elimination of other constituents, including menthol;
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imposes (and allows the FDA to impose) various recordkeeping and
reporting requirements on tobacco product manufacturers; and
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grants the FDA the regulatory authority to impose broad
additional restrictions.
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The law also requires establishment, within the FDAs new
Center for Tobacco Products, of a Tobacco Products Scientific
Advisory Committee to provide advice, information and
recommendations with respect to the safety, dependence or health
issues related to tobacco products, including:
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a recommendation on modified risk applications;
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a recommendation on the effects of tobacco product nicotine
yield alteration and whether there is a threshold level below
which nicotine yields do not produce dependence;
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a report on the public health impact of the use of menthol in
cigarettes; and
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a report on the public health impact of dissolvable tobacco
products.
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The law imposes user fees on certain tobacco product
manufacturers in order to pay for the costs of regulation. User
fees will be allocated among tobacco product classes according
to a formula set out in the legislation, and then among
manufacturers and importers within each class based on market
share. The FDA user fees for Liggett and Vector Tobacco were
$10 million in 2010 and we estimate that they will be
significantly higher in the future.
The law also imposes significant new restrictions on the
advertising and promotion of tobacco products. For example, the
law requires the FDA to finalize certain portions of regulations
previously adopted by the FDA in 1996 (which were struck down by
the Supreme Court in 2000 as beyond the FDAs authority).
As written, these regulations would significantly limit the
ability of manufacturers, distributors and retailers to
advertise and promote tobacco products, by, for example,
restricting the use of color, graphics and sound effects in
advertising, limiting the use of outdoor advertising,
restricting the sale and distribution of non-tobacco items and
services, gifts, and sponsorship of events and imposing
restrictions on the use for cigarette or smokeless tobacco
products of trade or brand names that are used for non-tobacco
products. The law also requires the FDA to issue future
regulations regarding the promotion and marketing of tobacco
products sold through non-face-to-face transactions.
It is likely that the new tobacco law could result in a decrease
in cigarette sales in the United States, including sales of
Liggetts and Vector Tobaccos brands. Total
compliance and related costs are not possible to predict and
depend substantially on the future requirements imposed by the
FDA under the new tobacco law. Costs, however, could be
substantial and could have a material adverse effect on the
companies financial condition, results of operations, and
cash flows. In addition, failure to comply with the new tobacco
law and with FDA regulatory requirements could result in
significant financial penalties and could have a material
adverse effect on the business, financial condition and results
of operation of both Liggett and Vector Tobacco. It is possible
that Liggetts or Vector Tobaccos products could be
deemed new tobacco products under the legislation.
In that event, unless they are deemed to be substantially
equivalent to a preexisting tobacco product, the product
may not be able to be marketed in the United States.
Additionally, FDA is reviewing whether to ban menthol in tobacco
products. Either of these determinations by FDA could have a
material adverse effect on us. At present, we are not able to
predict whether the new tobacco law will impact Liggett and
Vector Tobacco to a greater degree than other companies in the
industry, thus affecting its competitive position.
Litigation
will continue to harm the tobacco industry.
Liggett could be subjected to substantial liabilities and
bonding requirements from litigation relating to cigarette
products. Adverse litigation outcomes could have a negative
impact on the Companys ability to operate due to their
impact on cash flows. We and our Liggett subsidiary, as well as
the entire cigarette industry, continue to be challenged on
numerous fronts. New cases continue to be commenced against
Liggett and other cigarette manufacturers. As of
December 31, 2010, there were approximately 6,900
individual suits, including the Engle
18
progeny cases described below, six purported class actions and
four health care cost recovery actions pending in the United
States in which Liggett
and/or us
were named defendants. It is likely that similar legal actions,
proceedings and claims will continue to be filed against
Liggett. Punitive damages, often in amounts ranging into the
billions of dollars, are specifically pled in these cases, in
addition to compensatory and other damages. It is possible that
there could be adverse developments in pending cases including
the certification of additional class actions. An unfavorable
outcome or settlement of pending tobacco-related litigation
could encourage the commencement of additional litigation. In
addition, an unfavorable outcome in any tobacco-related
litigation could have a material adverse effect on our
consolidated financial position, results of operations or cash
flows. Liggett could face difficulties in obtaining a bond to
stay execution of a judgment pending appeal.
A civil lawsuit was filed by the United States federal
government seeking disgorgement of approximately
$289 billion from various cigarette manufacturers,
including Liggett. In August 2006, the trial court entered a
Final Judgment and Remedial Order against each of the cigarette
manufacturing defendants, except Liggett. The Final Judgment,
among other things, ordered the following relief against the
non-Liggett defendants: (i) defendants are enjoined from
committing any act of racketeering concerning the manufacturing,
marketing, promotion, health consequences or sale of cigarettes
in the United States; (ii) defendants are enjoined from
making any material false, misleading, or deceptive statement or
representation concerning cigarettes that persuades people to
purchase cigarettes; and (iii) defendants are permanently
enjoined from utilizing lights, low tar,
ultra lights, mild or
natural descriptors, or conveying any other express
or implied health messages in connection with the marketing or
sale of cigarettes as of January 1, 2007. No monetary
damages were awarded other than the governments costs. To
the extent that the Final Judgment leads to a decline in
industry-wide shipments of cigarettes in the United States or
otherwise imposes regulations which adversely affect the
industry, Liggetts sales volume, operating income and cash
flows could be materially adversely affected, which in turn
could negatively affect the value of our common stock.
Liggett Only Cases. There are currently seven
cases pending where Liggett is the only tobacco company
defendant. Cases where Liggett is the only defendant could
increase substantially as a result of the Engle progeny
cases. In February 2009, in Ferlanti v. Liggett
Group, a Florida state court jury awarded compensatory
damages of $1.2 million as well as $96,000 in expenses, but
found that the plaintiff was 40% at fault. Therefore,
plaintiffs award was reduced to $720,000 in compensatory
damages. Punitive damages were not awarded. In February 2011,
the award was affirmed on appeal. In September 2010, the court
awarded plaintiffs attorneys fees of $996,000. In
Blitch v. R.J. Reynolds, an Engle progeny
case, trial is scheduled for March 7, 2011. In
ODwyer-Harkins v. R.J. Reynolds, an Engle
progeny case, trial is scheduled for August 8, 2011.
There has been no recent activity in Hausrath v. Philip
Morris, a case pending in New York state court, where two
individuals are suing. The other three individual actions, in
which Liggett is the only tobacco company defendant, are dormant.
As new cases are commenced, the costs associated with defending
these cases and the risks relating to the inherent
unpredictability of litigation continue to increase.
Individual
tobacco-related cases have increased as a result of the Florida
Supreme Courts ruling in Engle.
In May 2003, a Florida intermediate appellate court overturned a
$790 million punitive damages award against Liggett and
decertified the Engle v. R. J. Reynolds Tobacco
Co. smoking and health class action. In July 2006, the
Florida Supreme Court affirmed in part and reversed in part the
May 2003 intermediate appellate court decision. Among other
things, the Florida Supreme Court affirmed the decision
decertifying the class on a prospective basis and the order
vacating the punitive damages award, but preserved several of
the trial courts Phase I findings (including that:
(i) smoking causes lung cancer, among other diseases;
(ii) nicotine in cigarettes is addictive;
(iii) defendants placed cigarettes on the market that were
defective and unreasonably dangerous; (iv) the defendants
concealed material information; (v) all defendants sold or
supplied cigarettes that were defective; and (vi) all
defendants were negligent) and allowed plaintiffs to proceed to
trial on individual liability issues (using the above findings)
and compensatory and punitive damage issues, provided they
commence their individual lawsuits within one year of the date
the courts decision became final on January 11, 2007,
the date of the courts mandate. In December 2006, the
Florida Supreme Court added the finding that defendants sold or
supplied cigarettes that, at the time of sale or supply, did not
conform to the representations made by defendants.
19
In June 2002, the jury in a Florida state court action entitled
Lukacs v. R.J. Reynolds Tobacco Company, awarded
$37.5 million in compensatory damages, jointly and
severally, in a case involving Liggett and two other cigarette
manufacturers, which amount was subsequently reduced by the
Court. The jury found Liggett 50% responsible for the damages
incurred by the plaintiff. The Lukacs case was the first
case to be tried as an individual Engle class member suit
following entry of final judgment by the Engle trial
court. In November 2008, the court entered final judgment in the
amount of $24.835 million (for which Liggett was 50%
responsible), plus interest from June 2002. After the appellate
court affirmed the decision, Liggett paid its share of the award
including interest and attorneys fees ($14.361 million).
Pursuant to the Florida Supreme Courts July 2006 ruling in
Engle, former class members had one year from
January 11, 2007 to file individual lawsuits. In addition,
some individuals who filed suit prior to January 11, 2007,
and who claim they meet the conditions in Engle, are
attempting to avail themselves of the Engle ruling.
Lawsuits by individuals requesting the benefit of the Engle
ruling, whether filed before or after the January 11,
2007 mandate, are referred to as the Engle progeny
cases. As of December 31, 2010, there were 6,827
Engle progeny cases pending where Vector, Liggett, and
other cigarette manufacturers were named as defendants. These
cases include approximately 9,100 plaintiffs. There are 43
Engle progeny cases currently scheduled for trial in
2011. Through December 31, 2010, four adverse verdicts have
been entered against Liggett in Engle progeny cases.
These verdicts are on appeal.
It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments
in the Engle case. Liggett may enter into discussions in
an attempt to settle particular cases if it believes it is
appropriate to do so. We cannot predict the cash requirements
related to any future settlements and judgments, including cash
required to bond any appeals, and there is a risk that those
requirements will not be able to be met.
Liggett
may be adversely affected by the 2004 legislation to eliminate
the federal tobacco quota system.
In October 2004, federal legislation was enacted which
eliminated the federal tobacco quota system and price support
system through an industry funded buyout of tobacco growers and
quota holders. Pursuant to the legislation, manufacturers of
tobacco products will be assessed $10.14 billion over a
ten-year period to compensate tobacco growers and quota holders
for the elimination of their quota rights. Cigarette
manufacturers are currently responsible for 95% of the
assessment (subject to adjustment in the future), which will be
allocated based on relative unit volume of domestic cigarette
shipments. Liggetts and Vector Tobaccos assessment
was $31.1 million in 2010, $22.9 million in 2009, and
$23.6 million in 2008. The relative cost of the legislation
to each of the three largest cigarette manufacturers will likely
be less than the cost to smaller manufacturers, including
Liggett and Vector Tobacco, because one effect of the
legislation is that the three largest manufacturers will no
longer be obligated to make certain contractual payments,
commonly known as Phase II payments, they agreed in 1999 to
make to tobacco-producing states. The ultimate impact of this
legislation cannot be determined, but there is a risk that
smaller manufacturers, such as Liggett and Vector Tobacco, will
be disproportionately affected by the legislation, which could
have a material adverse effect on us. The parties, other than
Liggett have filed petitions for writ of certiorari to the
United States Supreme Court. The government is seeking
reinstatement of its claims for remedies, including disgorgement
of profits.
Excise
tax increases adversely affect cigarette sales.
Cigarettes are subject to substantial and increasing federal,
state and local excise taxes. In February 2009, Federal
legislation to reauthorize the SCHIP, which includes funding
provisions that increase the federal cigarette excise tax from
$0.39 to $1.01 per pack, was enacted, effective April 1,
2009. State excise taxes vary considerably and, when combined
with sales taxes, local taxes and the federal excise tax, may
exceed $4.00 per pack. In 2010, seven states enacted increases
in excise taxes and, in 2009, 14 states and the District of
Columbia enacted increases in excise taxes. Various states and
other jurisdictions are considering, or have pending,
legislation proposing further state excise tax increases.
Management believes increases in excise and similar taxes have
had, and will continue to have, an adverse effect on sales of
cigarettes.
20
Liggett
may have additional payment obligations under the Master
Settlement Agreement and its other settlement agreements with
the states.
NPM Adjustment. In March 2006, an economic
consulting firm selected pursuant to the MSA rendered its final
and non-appealable decision that the MSA was a significant
factor contributing to the loss of market share of
Participating Manufacturers for 2003. This is known as the
NPM Adjustment. The economic consulting firm
subsequently rendered the same decision with respect to 2004,
2005 and 2006. As a result, the manufacturers are entitled to
potential NPM Adjustments to their 2003, 2004, 2005 and 2006 MSA
payments. The Participating Manufacturers are also entitled to
potential NPM Adjustments to their 2007, 2008 and 2009 payments
pursuant to an agreement entered into in June 2009 between the
OPMs and the settling states under which the OPMs agreed to make
certain payments for the benefit of the settling states, in
exchange for which the settling states stipulated that the MSA
was a significant factor contributing to the loss of
market share of Participating Manufacturers in 2007, 2008 and
2009. A settling state that has diligently enforced its
qualifying escrow statute in the year in question may be able to
avoid application of the NPM Adjustment to the payments made by
the manufacturers for the benefit of that state or territory.
For 2003 through 2010 Liggett and Vector Tobacco disputed that
they owe the settling states the NPM Adjustments as calculated
by the Independent Auditor. As permitted by the MSA, Liggett and
Vector Tobacco withheld payment associated with these NPM
Adjustment amounts. The total amount withheld or paid into a
disputed payment account by Liggett and Vector Tobacco for 2003
through 2010 is $29.2 million. In 2003, Liggett and Vector
Tobacco paid the NPM adjustment amount of $9.3 million to
the settling states although both companies continue to dispute
this amount. At December 31, 2010 included in Other
assets on our consolidated balance sheet was a noncurrent
receivable of $6.5 million relating to such payment.
Arbitration of the 2003 NPM Adjustment is pending.
The following amounts have not been expensed by the Company as
they relate to Liggett and Vector Tobaccos NPM Adjustment
claims for 2003 through 2009: $6.5 million for 2003,
$3.8 million for 2004 and $800,000 for 2005.
Gross v. Net Calculations. In October
2004, the Independent Auditor notified Liggett and all other
Participating Manufacturers that their payment obligations under
the MSA, dating from the agreements execution in late
1998, had been recalculated using net unit amounts,
rather than gross unit amounts (which had been used
since 1999).
Liggett has objected to this retroactive change and has disputed
the change in methodology. Liggett contends that the retroactive
change from using gross to net unit
amounts is impermissible for several reasons, including:
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use of net unit amounts is not required by the MSA
(as reflected by, among other things, the use of
gross unit amounts through 2005);
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such a change is not authorized without the consent of affected
parties to the MSA;
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the MSA provides for four-year time limitation periods for
revisiting calculations and determinations, which precludes
recalculating Liggetts 1997 Market Share (and thus,
Liggetts market share exemption); and
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Liggett and others have relied upon the calculations based on
gross unit amounts since 1998.
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The change in the method of calculation could, among other
things, result in at least approximately $9.3 million, plus
interest, of additional MSA payments for prior years by Liggett,
because the proposed change from gross to
net units would serve to lower Liggetts market
share exemption under the MSA. The Company currently estimates
that future MSA payments would be a least $2.3 million
higher if the method of calculation is changed.
No amounts have been expensed or accrued in the accompanying
consolidated financial statements for any potential liability
relating to the gross versus net dispute.
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Liggett
may have additional payment obligations under its state
settlements
In 2004, the Attorneys General for each of Florida, Mississippi
and Texas advised Liggett that they believed that Liggett had
failed to make all required payments under the respective
settlement agreements with these states for the period 1998
through 2003 and that additional payments may be due for 2004
and subsequent years. Liggett believes these allegations are
without merit, based, among other things, on the language of the
most favored nation provisions of the settlement agreements and
no amounts have been accrued in our consolidated financial
statements for any additional amounts that may be payable by
Liggett under the settlement agreements with Mississippi and
Texas. Recently, Liggett settled the dispute with Florida and
agreed to, among other things, pay Florida $1.2 million
plus $250,000 per year for the next 21 years. The payment
in years
12-21 will
be subject to an inflation adjustment. There can be no assurance
that Liggett will prevail in the remaining matters and that
Liggett will not be required to make additional material
payments, which payments could materially adversely affect our
consolidated financial position, results of operations or cash
flows and the value of our common stock.
Vector
Tobacco is subject to risks inherent in new product development
initiatives.
We have made, significant investments in Vector Tobaccos
development projects in the tobacco industry. Vector Tobacco is
in the business of developing reduced risk cigarette products.
These initiatives are subject to high levels of risk,
uncertainties and contingencies, including the challenges
inherent in new product development and the increased regulation
following the enactment of the Family Smoking Prevention and
Tobacco Control Act. There is a risk that continued investments
in Vector Tobacco will harm our results of operations, liquidity
or cash flow.
The substantial risks facing Vector Tobacco include:
Potential extensive government
regulation. Vector Tobaccos business is
currently extensively regulated, and may become subject to
extensive additional domestic and international government
regulation. Various proposals have been made for federal, state
and international legislation to regulate cigarette
manufacturers generally, and reduced constituent cigarettes
specifically. It is possible that laws and regulations may be
adopted covering matters such as the manufacture, sale,
distribution and labeling of tobacco products as well as any
health claims associated with reduced risk and low nicotine and
nicotine-free cigarette products. There could be additional
regulation established by agencies such as the FDA (including
further regulation resulting from passage of the Family Smoking
Prevention and Tobacco Control Act in June 2009), the Federal
Trade Commission and the United States Department of
Agriculture. The outcome of any of the foregoing cannot be
predicted, but any of the foregoing could have a material
adverse effect on Vector Tobaccos business, operating
results and prospects.
Competition from other cigarette manufacturers with greater
resources. Vector Tobaccos competitors
generally have substantially greater resources than Vector
Tobacco, including financial, marketing and personnel resources.
Other major tobacco companies have stated that they are working
on reduced risk cigarette products and have made publicly
available at this time only limited additional information
concerning their activities. Philip Morris has announced it is
developing products that potentially reduce smokers
exposure to harmful compounds in cigarette smoke. RJR Tobacco
has disclosed that a primary focus for its research and
development activity is the development of potentially reduced
exposure products, which may ultimately be recognized as
products that present reduced risks to health. RJR Tobacco has
stated that it continues to sell in limited distribution
throughout the country a brand of cigarettes that primarily
heats rather than burns tobacco, which it claims reduces the
toxicity of its smoke. There is a substantial likelihood that
other major tobacco companies will continue to introduce new
products that would compete directly with any reduced risk
products that Vector Tobacco may develop.
New
Valley is subject to risks relating to the industries in which
it operates.
Risks of real estate ventures. New Valley has
three significant real estate-related investments, Douglas
Elliman Realty (50% interest), New Valley Oaktree Chelsea Eleven
LLC (40% interest) and Fifty Third-Five Building LLC (50%
interest), where other partners hold significant interests. New
Valley must seek approval from these other parties for important
actions regarding these joint ventures. Since the other
parties interests may differ from those of New Valley, a
deadlock could arise that might impair the ability of the
ventures to function. Such a deadlock could significantly harm
the ventures.
22
The volatility in the capital and credit markets has
increased in recent years. Because the volatility
in capital and credit markets may create additional risks in the
upcoming months and possibly years, the Company will continue to
perform additional assessments to determine the impact, if any,
on the Companys consolidated financial statements. Thus,
future impairment charges may occur.
New Valley may pursue a variety of real estate development
projects. Development projects are subject to
special risks including potential increase in costs, changes in
market demand, inability to meet deadlines which may delay the
timely completion of projects, reliance on contractors who may
be unable to perform and the need to obtain various governmental
and third party consents.
Risks relating to the residential brokerage
business. Through New Valleys investment in
Douglas Elliman Realty, we are subject to the risks and
uncertainties endemic to the residential brokerage business.
Douglas Elliman Realtys two subsidiaries, which conduct
business as Prudential Douglas Elliman Real Estate, operate as
franchisees of The Prudential Real Estate Affiliates, Inc.
Prudential Douglas Elliman Real Estate operates each of its
offices under its franchisers brand name, and the
franchiser has significant rights over the use of the franchised
service marks and the conduct of the two brokerage
companies business. The franchise agreements require the
companies to:
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coordinate with the franchiser on significant matters relating
to their operations, including the opening and closing of
offices;
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make substantial royalty payments to the franchiser and
contribute significant amounts to national advertising funds
maintained by the franchiser;
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indemnify the franchiser against losses arising out of the
operations of their business under the franchise
agreements; and
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maintain standards and comply with guidelines relating to their
operations which are applicable to all franchisees of the
franchisers real estate franchise system.
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The franchiser has the right to terminate Prudential Douglas
Elliman Real Estates franchises, upon the occurrence of
certain events, including a bankruptcy or insolvency event, a
change in control, a transfer of rights under the franchise
agreement and a failure to promptly pay amounts due under the
franchise agreements. A termination of Prudential Douglas
Elliman Real Estates franchise agreements could adversely
affect our investment in Douglas Elliman Realty.
The franchise agreements grant Prudential Douglas Elliman Real
Estate exclusive franchises in New York for the counties of
Nassau and Suffolk on Long Island and for Manhattan, Brooklyn
and Queens, subject to various exceptions and to meeting
specified annual revenue thresholds. If the company fails to
achieve these levels of revenues for two consecutive years or
otherwise materially breach the franchise agreements, the
franchiser would have the right to terminate its exclusivity
rights. A loss of these rights could have a material adverse on
Douglas Elliman Realty.
Real estate ventures and mortgage receivables have been
negatively impacted by the current downturn in the residential
real estate market. The U.S. residential real estate
market, including the New York metropolitan area where Douglas
Elliman Realty operates, is cyclical and is affected by changes
in the general economic conditions that are beyond the control
of Douglas Elliman Realty. The U.S. residential real estate
market is currently in a significant downturn due to various
factors including downward pressure on housing prices, credit
constraints inhibiting new buyers and an exceptionally large
inventory of unsold homes at the same time that sales volumes
are decreasing. The depth and length of the current downturn in
the real estate industry has proved exceedingly difficult to
predict. We cannot predict whether the downturn will worsen or
when the market and related economic forces will return the
U.S. residential real estate industry to a growth period.
Any of the following could have a material adverse effect on our
real estate ventures by causing a general decline in the number
of home sales
and/or
prices, which in turn, could adversely affect their revenues and
profitability:
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periods of economic slowdown or recession;
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23
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rising interest rates;
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the general availability of mortgage financing, including:
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the impact of the recent contraction in the subprime and
mortgage markets generally; and
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the effect of more stringent lending standards for home
mortgages;
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adverse changes in economic and general business conditions in
the New York metropolitan area;
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a decrease in the affordability of homes;
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declining demand for real estate;
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a negative perception of the market for residential real estate;
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commission pressure from brokers who discount their commissions;
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acts of God, such as hurricanes, earthquakes and other natural
disasters, or acts or threats of war or terrorism; and/or
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an increase in the cost of homeowners insurance.
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The three major real estate ventures current operations
are located in the New York metropolitan area. Local and
regional economic and general business conditions in this market
could differ materially from prevailing conditions in other
parts of the country. Among other things, the New York
metropolitan area residential real estate market has been
impacted by the significant downturn in the financial services
industry. A continued downturn in the residential real estate
market or economic conditions in that region could have a
material adverse effect on these investments.
Potential
new investments we may make are unidentified and may not
succeed.
We currently hold a significant amount of marketable securities
and cash not committed to any specific investments. This
subjects a security holder to increased risk and uncertainty
because a security holder will not be able to evaluate how this
cash will be invested and the economic merits of particular
investments. There may be substantial delay in locating suitable
investment opportunities. In addition, we may lack relevant
management experience in the areas in which we may invest. There
is a risk that we will fail in targeting, consummating or
effectively integrating or managing any of these investments.
We depend
on our key personnel.
We depend on the efforts of our executive officers and other key
personnel. While we believe that we could find replacements for
these key personnel, the loss of their services could have a
significant adverse effect on our operations.
We are
exposed to risks from legislation requiring companies to
evaluate their internal control over financial
reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our
management to assess, and our independent registered certified
public accounting firm to attest to, the effectiveness of our
internal control structure and procedures for financial
reporting. We completed an evaluation of the effectiveness of
our internal control over financial reporting for the fiscal
year ended December 31, 2010, and we have an ongoing
program to perform the system and process evaluation and testing
necessary to continue to comply with these requirements. We
expect to continue to incur expense and to devote management
resources to Section 404 compliance. In the event that our
chief executive officer, chief financial officer or independent
registered certified public accounting firm determines that our
internal control over financial reporting is not effective as
defined under Section 404, investor perceptions and our
reputation may be adversely affected and the market price of our
stock could decline.
24
The price
of our common stock may fluctuate significantly.
The trading price of our common stock has ranged between $12.90
and $19.81 per share over the past 52 weeks. We expect that
the market price of our common stock will continue to fluctuate.
The market price of our common stock may fluctuate in response
to numerous factors, many of which are beyond our control. These
factors include the following:
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actual or anticipated fluctuations in our operating results;
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changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
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the operating and stock performance of our competitors;
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announcements by us or our competitors of new products or
services or significant contract, acquisitions, strategic
partnerships, joint ventures or capital commitments;
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the initiation or outcome of litigation;
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changes in interest rates;
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general economic, market and political conditions;
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additions or departures of key personnel; and
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future sales of our equity or convertible securities.
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We cannot predict the extent, if any, to which future sales of
shares of common stock or the availability of shares of common
stock for future sale, may depress the trading price of our
common stock.
In addition, the stock market in recent years has experienced
extreme price and trading volume fluctuations that often have
been unrelated or disproportionate to the operating performance
of individual companies. These broad market fluctuations may
adversely affect the price of our common stock, regardless of
our operating performance. Furthermore, stockholders may
initiate securities class action lawsuits if the market price of
our stock drops significantly, which may cause us to incur
substantial costs and could divert the time and attention of our
management. These factors, among others, could significantly
depress the price of our common stock.
We have
many potentially dilutive securities outstanding.
At December 31, 2010, we had outstanding options granted to
employees to purchase approximately 2,795,179 shares of our
common stock, with a weighted-average exercise price of $11.57
per share, of which options for 1,014,298 shares were
exercisable at December 31, 2010. We also have outstanding
convertible notes and debentures maturing in November 2014 and
June 2026, which are currently convertible into
17,142,922 shares of our common stock. The issuance of
these shares will cause dilution which may adversely affect the
market price of our common stock. The availability for sale of
significant quantities of our common stock could adversely
affect the prevailing market price of the stock.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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None.
Our principal executive offices are located in Miami, Florida.
We lease 13,849 square feet of office space from an
unaffiliated company in an office building in Miami, which we
share with various of our subsidiaries. The lease expires in
November 2014.
We lease approximately 18,000 square feet of office space
in New York, New York under leases that expire in 2013.
Approximately 9,000 square feet of such space has been
subleased to unaffiliated third parties for the balance
25
of the term of the lease. New Valleys operating properties
are discussed above under the description of New Valleys
business.
Liggetts tobacco manufacturing facilities, and several of
the distribution and storage facilities, are currently located
in or near Mebane, North Carolina. Various of such facilities
are owned and others are leased. As of December 31, 2010,
the principal properties owned or leased by Liggett are as
follows:
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Approximate Total
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Type
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Location
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Owned or Leased
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Square Footage
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Storage Facilities
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Danville, VA
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Owned
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578,000
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Office and Manufacturing Complex
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Mebane, NC
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Owned
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240,000
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Warehouse
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Mebane, NC
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Owned
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60,000
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Warehouse
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Mebane, NC
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Leased
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125,000
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Warehouse
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Mebane, NC
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Leased
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22,000
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Liggett Vector Brands leases approximately 20,000 square
feet of office space in Morrisville, North Carolina. The lease
expires in January 2014.
Liggetts management believes that its property, plant and
equipment are well maintained and in good condition and that its
existing facilities are sufficient to accommodate a substantial
increase in production.
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ITEM 3.
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LEGAL
PROCEEDINGS
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Liggett and other United States cigarette manufacturers have
been named as defendants in numerous, direct, third-party and
class actions predicated on the theory that they should be
liable for damages from adverse health effects alleged to have
been caused by cigarette smoking or by exposure to secondary
smoke from cigarettes.
Reference is made to Note 12 to our consolidated financial
statements, which contains a general description of certain
legal proceedings to which the Company, Liggett, New Valley or
their subsidiaries are a party and certain related matters.
Reference is also made to Exhibit 99.1, Material Legal
Proceedings, incorporated herein, for additional information
regarding the pending tobacco-related legal proceedings to which
we or Liggett are parties. A copy of Exhibit 99.1 will be
furnished without charge upon written request to us at our
principal executive offices, 100 S.E. Second Street, Miami,
Florida 33131, Attn: Investor Relations.
26
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Our common stock is listed and traded on the New York Stock
Exchange under the symbol VGR. The following table
sets forth, for the periods indicated, high and low sale prices
for a share of its common stock on the NYSE, as reported by the
NYSE, and quarterly cash dividends declared on shares of common
stock:
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Year
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High
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Low
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Cash Dividends
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2010:
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Fourth Quarter
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$
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19.07
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$
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16.01
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$
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.40
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Third Quarter
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19.81
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15.78
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.38
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Second Quarter
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16.52
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13.22
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.38
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First Quarter
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15.15
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12.90
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.38
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2009:
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Fourth Quarter
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$
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15.04
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$
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12.85
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$
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.38
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Third Quarter
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15.22
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12.44
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.36
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Second Quarter
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14.00
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11.56
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.36
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First Quarter
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13.53
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9.74
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.36
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At February 18, 2011, there were approximately 1,972 holders of
record of our common stock.
The declaration of future cash dividends is within the
discretion of our Board of Directors and is subject to a variety
of contingencies such as market conditions, earnings and our
financial condition as well as the availability of cash.
Liggetts revolving credit agreement currently permits
Liggett to pay dividends to VGR Holding only if Liggetts
borrowing availability exceeds $5 million for the
30 days prior to payment of the dividend, and so long as no
event of default has occurred under the agreement, including
Liggetts compliance with the covenants in the credit
facility, including maintaining minimum levels of EBITDA (as
defined) if its borrowing availability is less than
$20 million and not exceeding maximum levels of capital
expenditures (as defined).
Our 11% Senior Secured Notes due 2015 prohibit our payment
of cash dividends or distributions on our common stock if at the
time of such payment our Consolidated EBITDA (as defined) for
the most recently completed four full fiscal quarters is less
than $50 million. Our Consolidated EBITDA for the four
quarters ended December 31, 2010 exceeded $50 million.
We paid 5% stock dividends on September 29, 2008,
September 29, 2009, and September 29, 2010 to the
holders of our common stock. All information presented in this
report is adjusted for the stock dividends.
27
Performance
Graph
The following graph compares the total annual return of our
Common Stock, the S&P 500 Index, the S&P MidCap 400
Index and the NYSE Arca Tobacco Index, formerly known as the
AMEX Tobacco Index, for the five years ended December 31,
2010. The graph assumes that $100 was invested on
December 31, 2005 in the Common Stock and each of the
indices, and that all cash dividends and distributions were
reinvested.
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12/05
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12/06
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12/07
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12/08
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12/09
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12/10
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Vector Group Ltd.
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100
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112
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144
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113
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136
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194
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S&P 500
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100
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116
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122
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77
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97
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112
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S&P MidCap
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100
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110
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119
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76
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104
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132
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NYSE Arca Tobacco
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100
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140
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154
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123
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173
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207
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Unregistered
Sales of Equity Securities and Use of Proceeds
On December 3, 2010, we sold an additional $90 million
principal amount of our 11% Senior Secured Notes due 2015
at 103% of face value in a private offering to qualified
institutional investors in accordance with Rule 144A of the
Securities Act of 1933. No other securities of ours which were
not registered under the Securities Act of 1933 were issued or
sold by us during the three months ended December 31, 2010.
Issuer
Purchases of Equity Securities
No other securities of ours which were not registered under the
Securities Act of 1933 were purchased by us during the three
months ended December 31, 2010.
28
EXECUTIVE
OFFICERS OF THE REGISTRANT
The table below, together with the accompanying text, presents
certain information regarding all our current executive officers
as of February 23, 2011. Each of the executive officers
serves until the election and qualification of such
individuals successor or until such individuals
death, resignation or removal by the Board of Directors.
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Year Individual
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Became an
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Name
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Age
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Position
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Executive Officer
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Howard M. Lorber
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62
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President and Chief Executive Officer
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2001
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Richard J. Lampen
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57
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Executive Vice President
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1996
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J. Bryant Kirkland III
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45
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Vice President, Chief Financial Officer and Treasurer
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2006
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Marc N. Bell
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50
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Vice President, General Counsel and Secretary
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1998
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Ronald J. Bernstein
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57
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President and Chief Executive Officer of Liggett
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2000
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Howard M. Lorber has been our President and Chief
Executive Officer since January 2006. He served as our President
and Chief Operating Officer from January 2001 to December 2005
and has served as a director of ours since January 2001. From
November 1994 to December 2005, Mr. Lorber served as
President and Chief Operating Officer of New Valley, where he
also served as a director. Mr. Lorber was Chairman of the
Board of Hallman & Lorber Assoc., Inc., consultants
and actuaries of qualified pension and profit sharing plans, and
various of its affiliates from 1975 to December 2004 and has
been a consultant to these entities since January 2005; Chairman
of the Board of Directors since 1987 and Chief Executive Officer
from November 1993 to December 2006 of Nathans Famous,
Inc., a chain of fast food restaurants; a director of United
Capital Corp., a real estate investment and diversified
manufacturing company, since May 1991; Chairman of the Board of
Ladenburg Thalmann Financial Services from May 2001 to July 2006
and Vice Chairman since July 2006; and a Director of Borders
Group Inc. since June 2010. He is also a trustee of Long Island
University.
Richard J. Lampen has served as our Executive Vice
President since July 1996. From October 1995 to December 2005,
Mr. Lampen served as the Executive Vice President and
General Counsel of New Valley, where he also served as a
director. Since September 2006, he has served as President and
Chief Executive Officer of Ladenburg Thalmann Financial
Services. Since November 1998, he has served as President and
Chief Executive Officer of CDSI Holdings Inc., an affiliate of
New Valley seeking acquisition or investment opportunities.
Since October 2008, Mr. Lampen has served as President and
Chief Executive Officer of Castle Brands Inc., a publicly traded
developer and importer of premium branded spirits in which we
held an approximate 11% equity interest at December 31,
2010. From May 1992 to September 1995, Mr. Lampen was a
partner at Steel Hector & Davis, a law firm located in
Miami, Florida. From January 1991 to April 1992, Mr. Lampen
was a Managing Director at Salomon Brothers Inc, an investment
bank, and was an employee at Salomon Brothers Inc from 1986 to
April 1992. Mr. Lampen is a director of Castle, CDSI
Holdings and Ladenburg Thalmann Financial Services.
J. Bryant Kirkland III has been our Vice
President, Chief Financial Officer and Treasurer since April
2006. Mr. Kirkland has served as a Vice President of ours
since January 2001 and served as New Valleys Vice
President and Chief Financial Officer from January 1998 to
December 2005. He has served since July 1992 in various
financial capacities with us, Liggett and New Valley.
Mr. Kirkland has served as Vice President, Treasurer and
Chief Financial Officer of CDSI Holdings Inc. since January 1998
and as a director of CDSI Holdings Inc. since November 1998.
Marc N. Bell has been our General Counsel and Secretary
since May 1994 and our Vice President since January 1998 and the
Senior Vice President and General Counsel of Vector Tobacco
since April 2002. From November 1994 to December 2005,
Mr. Bell served as Associate General Counsel and Secretary
of New Valley and from February 1998 to December 2005, as a Vice
President of New Valley. Prior to May 1994, Mr. Bell was
with the law firm of Zuckerman Spaeder LLP in Miami, Florida and
from June 1991 to May 1993, with the law firm of Fischbein
Badillo Wagner Harding in New York, New York.
Ronald J. Bernstein has served as President and Chief
Executive Officer of Liggett since September 1, 2000 and of
Liggett Vector Brands since March 2002 and has been a director
of ours since March 2004. From July 1996 to December 1999,
Mr. Bernstein served as General Director and, from December
1999 to September 2000, as
29
Chairman of Liggett-Ducat, our former Russian tobacco business
sold in 2000. Prior to that time, Mr. Bernstein served in
various positions with Liggett commencing in 1991, including
Executive Vice President and Chief Financial Officer.
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ITEM 6.
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SELECTED
FINANCIAL DATA
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(dollars in thousands, except per share amounts)
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1)
|
|
$
|
1,063,289
|
|
|
$
|
801,494
|
|
|
$
|
565,186
|
|
|
$
|
555,430
|
|
|
$
|
506,252
|
|
Net income
|
|
|
54,084
|
|
|
|
24,806
|
|
|
|
60,504
|
|
|
|
73,803
|
|
|
|
42,712
|
|
Per basic common
share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.71
|
|
|
$
|
0.32
|
|
|
$
|
0.81
|
|
|
$
|
1.00
|
|
|
$
|
0.60
|
|
Per diluted common
share(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.71
|
|
|
$
|
0.32
|
|
|
$
|
0.72
|
|
|
$
|
0.97
|
|
|
$
|
0.59
|
|
Cash distributions declared per common
share(2)
|
|
$
|
1.54
|
|
|
$
|
1.47
|
|
|
$
|
1.40
|
|
|
$
|
1.33
|
|
|
$
|
1.27
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
526,763
|
|
|
$
|
389,208
|
|
|
$
|
355,283
|
|
|
$
|
395,626
|
|
|
$
|
303,156
|
|
Total assets
|
|
|
949,595
|
|
|
|
735,542
|
|
|
|
717,712
|
|
|
|
785,289
|
|
|
|
637,462
|
|
Current liabilities
|
|
|
226,872
|
|
|
|
149,008
|
|
|
|
296,159
|
|
|
|
109,337
|
|
|
|
168,786
|
|
Notes payable, embedded derivatives, long-term debt and other
obligations, less current portion
|
|
|
647,064
|
|
|
|
487,936
|
|
|
|
287,545
|
|
|
|
378,760
|
|
|
|
198,777
|
|
Non-current employee benefits, deferred income taxes and other
long-term liabilities
|
|
|
121,893
|
|
|
|
103,280
|
|
|
|
100,403
|
|
|
|
196,340
|
|
|
|
174,922
|
|
Stockholders (deficiency) equity
|
|
|
(46,234
|
)
|
|
|
(4,682
|
)
|
|
|
33,605
|
|
|
|
100,852
|
|
|
|
94,977
|
|
|
|
|
(1) |
|
Revenues include federal excise taxes of $538,328, $377,771,
$168,170, $176,269 and $174,339, respectively. Effective
April 1, 2009, federal excises taxes increased from $0.39
per pack of cigarettes to $1.01 per pack of cigarettes. |
|
(2) |
|
Per share computations include the impact of 5% stock dividends
on September 29, 2010, September 29, 2009,
September 29, 2008, September 28, 2007 and
September 29, 2006. |
30
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
(Dollars
in Thousands, Except Per Share Amounts)
Overview
We are a holding company and are engaged principally in:
|
|
|
|
|
the manufacture and sale of cigarettes in the United States
through our Liggett Group LLC and Vector Tobacco Inc.
subsidiaries, and
|
|
|
|
the real estate business through our New Valley LLC subsidiary,
which is seeking to acquire additional operating companies and
real estate properties. New Valley owns 50% of Douglas Elliman
Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
|
All of our tobacco operations unit sales volume in 2010,
2009 and 2008 was in the discount segment, which management
believes has been the primary growth segment in the industry for
over a decade. The significant discounting of premium cigarettes
in recent years has led to brands, such as EVE, that were
traditionally considered premium brands to become more
appropriately categorized as discount, following list price
reductions.
Our tobacco subsidiaries cigarettes are produced in
approximately 136 combinations of length, style and packaging.
Liggetts current brand portfolio includes:
|
|
|
|
|
PYRAMID the industrys first deep discount
product with a brand identity re-launched in the second quarter
of 2009, and
|
|
|
|
GRAND PRIX re-launched as a national brand in 2005,
|
|
|
|
LIGGETT SELECT a leading brand in the deep discount
category,
|
|
|
|
EVE a leading brand of 120 millimeter cigarettes in
the branded discount category, and
|
|
|
|
USA and various Partner Brands and private label brands.
|
In 1999, Liggett introduced LIGGETT SELECT, one of the leading
brands in the deep discount category. LIGGETT SELECTs unit
volume was 13.0% of Liggetts unit volume in 2010, 21.5% in
2009 and 30.1% in 2008. In September 2005, Liggett repositioned
GRAND PRIX to distributors and retailers nationwide. GRAND
PRIXs unit volume was 18.5% of Liggetts unit volume
in 2010, 27.9% in 2009 and 32.6% in 2008. In April 2009, Liggett
repositioned PYRAMID as a box-only brand with a new low price to
specifically compete with brands which are priced at the lowest
level of the deep discount segment. PYRAMID is now the largest
seller in Liggetts family of brands with 42.6% of
Liggetts unit volume in 2010, 14.6% in 2009 and 0.6% in
2008.
Under the Master Settlement Agreement reached in November 1998
with 46 states and various territories, the three largest
cigarette manufacturers must make settlement payments to the
states and territories based on how many cigarettes they sell
annually. Liggett, however, is not required to make any payments
unless its market share exceeds approximately 1.65% of the
U.S. cigarette market. Additionally, Vector Tobacco has no
payment obligation unless its market share exceeds approximately
0.28% of the U.S. market. Liggetts and Vector
Tobaccos payments under the Master Settlement Agreement
are based on each companys incremental market share above
the minimum threshold applicable to such company. We believe
that our tobacco subsidiaries have gained a sustainable cost
advantage over their competitors as a result of the settlement.
The discount segment is a challenging marketplace, with
consumers having less brand loyalty and placing greater emphasis
on price. Liggetts competition is now divided into two
segments. The first segment is made up of the three largest
manufacturers of cigarettes in the United States, Philip Morris
USA Inc., Reynolds America Inc., and Lorillard Tobacco Company.
The three largest manufacturers, while primarily premium
cigarette based companies, also produce and sell discount
cigarettes. The second segment of competition is comprised of a
group of smaller manufacturers and importers, most of which sell
deep discount cigarettes. Our largest competitor in this segment
is Commonwealth Brands, Inc. (a wholly owned subsidiary of
Imperial Tobacco PLC).
31
Recent
Developments
Senior Secured Notes. We have outstanding
$415,000 principal amount of our 11% Senior Secured Notes
due 2015 (the Senior Secured Notes). The Senior
Secured Notes were sold in August 2007 ($165,000), September
2009 ($85,000), April 2010 ($75,000) and December 2010 ($90,000)
in private offerings to qualified institutional investors in
accordance with Rule 144A of the Securities Act of 1933.
In May 2008 and June 2010, we completed offers to exchange the
Senior Secured Notes then outstanding for an equal amount of
newly issued 11% Senior Secured Notes due 2015. The new
Senior Secured Notes have substantially the same terms as the
original Notes, except that the new Senior Secured Notes have
been registered under the Securities Act. We agreed to
consummate a registered exchange offer for the additional Senior
Secured Notes issued in December 2010 within 360 days after
the date of their initial issuance. If we fail to timely comply
with our registration obligations, we will be required to pay
additional interest on these notes until we comply. We are
amortizing the deferred costs and debt discount related to the
Senior Secured Notes over the estimated life of the debt.
5% Variable Interest Senior Convertible Notes Due
November 2011. Between November 2004 and April
2005, we sold $111,864 principal amount of our 5% Variable
Interest Senior Convertible Notes due November 15, 2011
(the 5% Notes). In May 2009, the holder of
$11,005 principal amount of the 5% Notes exchanged its
5% Notes for $11,775 principal amount of our 6.75% Variable
Interest Senior Convertible Note due 2014 (the
6.75% Note) as discussed below. In June 2009,
certain holders of $99,944 principal amount of the 5% Notes
exchanged their 5% Notes for $106,940 principal amount of
our 6.75% Variable Interest Senior Convertible Exchange Notes
due 2014 (the 6.75% Exchange Notes). In November
2009, we retired $360 of the remaining $915 principal amount of
the 5% Notes for cash and exchanged approximately $555 of
the remaining 5% Notes for $593 principal amount of the
6.75% Exchange Notes. As of December 31, 2009, no
5% Notes remained outstanding after these exchanges.
We recorded a loss of $18,573 associated with the extinguishment
of the 5% Notes for the year ended December 31, 2009.
6.75% Variable Interest Senior Convertible Note due
2014. On May 11, 2009, we issued in a
private placement the 6.75% Note in the principal amount of
$50,000. The purchase price was paid in cash ($38,225) and by
tendering $11,005 principal amount of the 5% Notes, valued
at 107% of principal amount. The note pays interest (Total
Interest) on a quarterly basis at a rate of 3.75% per
annum plus additional interest, which is based on the amount of
cash dividends paid during the prior three-month period ending
on the record date for such interest payment multiplied by the
total number of shares of its common stock into which the debt
will be convertible on such record date. Notwithstanding the
foregoing, however, the interest payable on each interest
payment date shall be the higher of (i) the Total Interest
or (ii) 6.75% per annum. The note is convertible into our
common stock at the holders option. The conversion price
of $13.64 per share (approximately 73.3045 shares of common
stock per $1,000 principal amount of the note) is subject to
adjustment for various events, including the issuance of stock
dividends. The note matures on November 15, 2014. We will
redeem on May 11, 2014 and at the end of each interest
accrual period thereafter an additional amount, if any, of the
note necessary to prevent the note from being treated as an
Applicable High Yield Discount Obligation under the
Internal Revenue Code. If a fundamental change (as defined in
the note) occurs, we will be required to offer to repurchase the
note at 100% of its principal amount, plus accrued interest.
The purchaser of this 6.75% Note is an entity affiliated
with Dr. Phillip Frost, who reported, after the
consummation of the sale, beneficial ownership of approximately
11.7% of our common stock.
6.75% Variable Interest Senior Convertible Exchange Notes due
2014. On June 15, 2009, we entered into
agreements with certain holders of the 5% Notes to exchange
their 5% notes for our 6.75% Exchange Notes. On
June 30, 2009, we accepted for exchange $99,944 principal
amount of the 5% Notes for $106,940 principal amount of our
6.75% Exchange Notes. In November, 2009, we exchanged
approximately $555 of the remaining 5% Notes for $593
principal amount of our 6.75% Variable Interest Senior
Convertible Exchange Notes due 2014.
We issued the 6.75% Exchange Notes to the holders in reliance on
the exemption from the registration requirements of the
Securities Act of 1933 afforded by Section 3(a)(9) thereof.
The notes pay interest (Total
32
Interest) on a quarterly basis beginning August 15,
2009 at a rate of 3.75% per annum plus additional interest,
which is based on the amount of cash dividends paid during the
prior three-month period ending on the record date for such
interest payment multiplied by the total number of shares of its
common stock into which the debt will be convertible on such
record date. Notwithstanding the foregoing, however, the
interest payable on each interest payment date shall be the
higher of (i) the Total Interest or (ii) 6.75% per
annum. The notes are convertible into our common stock at the
holders option. The conversion price of $15.48 per share
(approximately 64.6135 shares of common stock per $1,000
principal amount of notes) is subject to adjustment for various
events, including the issuance of stock dividends. The notes
will mature on November 15, 2014. We will redeem on
June 30, 2014 and at the end of each interest accrual
period thereafter an additional amount, if any, of the notes
necessary to prevent the notes from being treated as an
Applicable High Yield Discount Obligation under the
Internal Revenue Code. If a fundamental change (as defined in
the indenture) occurs, we will be required to offer to
repurchase the notes at 100% of their principal amount, plus
accrued interest and, under certain circumstances, a make
whole payment.
Enacted and proposed excise tax increases. On
April 1, 2009, the federal cigarette excise tax was
increased from $3.90 per carton ($0.39 per pack) to $10.07 per
carton ($1.01 per pack). As of the financial statement issuance
date, seven states had enacted increases to state excise taxes
in 2010 and further increases in states excise taxes are
expected.
Philip Morris Brand Transaction. On
February 19, 2009, Philip Morris exercised the Class B
option to purchase interest in Trademarks LLC. This option
entitled Philip Morris to purchase the Class B redeemable
non-voting interest for $139,900, reduced by the amount
previously distributed to Eve of $134,900. In connection with
the exercise of the Class B option, Philip Morris paid to
Eve approximately $5,000 (including a pro-rata share of its
guaranteed payment) and Eve was released from its guaranty. We
recognized a gain of $5,000 in connection with the transaction
in 2009.
Investment in Real Estate. In March 2008, a
subsidiary of New Valley purchased a loan collateralized by a
substantial portion of a
450-acre
approved master planned community in Palm Springs, California
known as Escena. The loan, which was in foreclosure,
was purchased for its $20,000 face value plus accrued interest
and other costs of $1,445. The collateral consists of 867
residential lots with site and public infrastructure, an 18-hole
golf course, a substantially completed clubhouse, and a
seven-acre
site approved for a 450-room hotel.
In April 2009, New Valleys subsidiary entered into a
settlement agreement with a guarantor of the loan, which
requires the guarantor to satisfy its obligations under a
completion guaranty by completing improvements to the project in
settlement, among other things, of its payment guarantees. In
addition, the guarantor agreed to pay approximately $250 in
legal fees and $1,000 of delinquent taxes and penalties and post
a letter of credit to secure its construction obligations. As a
result of this settlement, we calculated the fair market value
of the investment as of March 31, 2009, utilizing the most
recent as is appraisal of the collateral and the
value of the completion guaranty less estimated costs to dispose
of the property. Based on these estimates, we determined that
the fair market value was less than the carrying amount of the
mortgage receivable at March 31, 2009, by approximately
$5,000. Accordingly, the reserve was increased and a charge of
$5,000 was recorded in the first quarter of 2009. On
April 15, 2009, New Valley completed the foreclosure
process and on April 16, 2009, took title to the property.
We reclassified the loan from Mortgage receivable at
March 31, 2009 to Investment in real estate at
June 30, 2009 on our consolidated balance sheet. It was
carried at $13,354 as of December 31, 2010.
We recorded a loss of $631 for the year ended December 31,
2010 from the Escena operations.
Real Estate Activities. New Valley accounts
for its 50% interest in Douglas Elliman Realty LLC and its 40%
interest in New Valley Oaktree Chelsea Eleven LLC on the equity
method. Douglas Elliman Realty operates the largest residential
brokerage company in the New York metropolitan area.
New Valley Oaktree Chelsea Eleven,
LLC. Chelsea Eleven LLC sold 25 condominium units
during 2010. As of February 23, 2011, 34 of the
54 units in the Chelsea Eleven LLC real estate development
had been sold.
As of December 31, 2010, Chelsea Eleven LLC had
approximately $54,053 of total assets and $24,142 of total
liabilities, excluding amounts owed to New Valley Oaktree
Chelsea Eleven LLC (approximately $103,757 at December 31,
2010).
33
Chelsea Eleven LLC retired its construction loan during the
second quarter of 2010 from the proceeds of the sales of units.
In addition, on July 1, 2010, Chelsea Eleven LLC borrowed
$47,100 (approximately $18,200 as of December 31, 2010),
which is due on July 1, 2012, bearing interest at 14% per
annum. The proceeds were used to retire Chelsea Eleven
LLCs then outstanding mezzanine debt (approximately
$37,200) and other working capital purposes.
As of December 31, 2010, we had received net distributions
of $1,042 from New Valley Oaktree Chelsea Eleven LLC ($4,905
before accounting for loans of $3,863). Our maximum exposure to
loss on our investment in New Valley Chelsea Eleven LLC is
$10,958 at December 31, 2010.
Aberdeen Townhomes LLC. In June 2008, a
subsidiary of New Valley purchased a preferred equity interest
in Aberdeen Townhomes LLC for $10,000. Aberdeen acquired five
townhome residences located in Manhattan, New York, which it is
in the process of rehabilitating and selling. We recorded an
impairment loss of $3,500 related to Aberdeen in each of 2008
and 2009.
In September 2009, one of the five townhomes was sold and the
mortgage of approximately $8,700 was retired. We received a
preferred return distribution of approximately $1,752. We did
not record a gain or loss on the sale.
Aberdeen sold a townhome in both January 2010 and August 2010
and the two respective mortgages of approximately $14,350 were
retired. We received a preferred return distribution of
approximately $970 in connection with the sales. In addition,
Aberdeen received $375 in August 2010 from escrow on the January
2010 sale.
In August 2010, we acquired the mortgage loans from Wachovia
Bank, N.A. on the two remaining townhomes for approximately
$13,500. In accordance with the accounting guidance as to
variable interest entities, we reassessed the primary
beneficiary status of the Aberdeen variable interest entity
(VIE) and determined that, in August 2010, we became
the primary beneficiary of this VIE because we obtained the
power to direct activities which significantly impact the
economic performance of the VIE; and since we now own the
mortgages, we will absorb losses and returns of the VIE.
We are the primary beneficiary of the VIE, and as a result, our
consolidated financial statements now include the account
balances of Aberdeen Townhomes LLC as of December 31, 2010.
These balances include:
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Cash
|
|
$
|
4
|
|
Restricted cash
|
|
|
351
|
|
Investment in townhomes
|
|
|
16,275
|
|
Accounts payable
|
|
|
1,401
|
|
The $16,275 investment in townhomes is based on September 2010
third-party appraisals, net of estimated selling expenses. We
recognized a gain of $760 primarily resulting from the
acquisition of mortgage loans and $352 of operating income after
consolidation.
In February 2011, Aberdeen sold one of the two remaining
townhomes for approximately $12,500 before closing costs.
The property was carried at $8,463 as of December 31, 2010.
Other recent investments in non-consolidated real estate
businesses. In 2010, New Valley, through its NV
955 LLC subsidiary, contributed $18,000 to a joint venture,
Fifty Third-Five Building LLC, which was formed for the purposes
of acquiring a defaulted real estate loan, collateralized by
real estate located in New York City. The loan was acquired for
approximately $35,500. Litigation on the defaulted real estate
loan is pending.
In October 2010, New Valley, through its NV Milan LLC
subsidiary, acquired a 7.2% interest in Sesto Holdings S.r.l.
for approximately $5,000. Sesto holds a 42% interest in an
entity that has purchased approximately 322 acres in Milan,
Italy. Sesto intends to develop the land as a multi-parcel,
multi-building mixed use urban regeneration project.
Losses on Long-term Investments. We recorded a
loss of $21,900 in 2008 due to the performance of three of our
long-term investments in various investment funds in 2008.
During 2008, one of our long-term investments was
34
impaired due to a portion of its underlying assets being held in
an account with the European subsidiary of Lehman Brothers
Holdings Inc. while our other long-term investments were
impaired as a result of the funds performances in 2008. We
record impairment charges when it is determined an
other-than-temporary
decline in fair value exists in any of our long-term
investments. Thus, future impairment charges may occur. In April
2008, we elected to withdraw our investment in Jefferies Buckeye
Fund, LLC (Buckeye Fund), a privately managed
investment partnership, of which Jefferies Asset Management, LLC
is the portfolio manager. We recorded a loss of $567 during the
first quarter of 2008 associated with the Buckeye Funds
performance, which has been included as Other
expense on our consolidated statement of operations. We
received proceeds of $8,328 in May 2008 and received an
additional $925 of proceeds in 2009, which was included in
Other current assets on our consolidated balance
sheet as of December 31, 2008. Another of our long-term
investments was liquidated in January 2011, and we received
proceeds of $8,886. This investment had a carrying value of
$4,750 as of December 31, 2010.
Recent
Developments in Tobacco-Related Litigation
The cigarette industry continues to be challenged on numerous
fronts. New cases continue to be commenced against Liggett and
other cigarette manufacturers. As of December 31, 2010,
there were approximately 6,900 individual suits, six purported
class actions and four healthcare cost recovery actions pending
in the United States in which Liggett or us, or both, were named
as a defendant. To date, adverse verdicts have been entered
against Liggett in four Engle progeny cases. As of
December 31, 2010, 43 alleged Engle progeny cases,
where Liggett is currently named as a defendant, were scheduled
for trial in 2011.
Liggett Only Cases. There are currently seven
cases pending where Liggett is the only tobacco company
defendant. Cases where Liggett is the only defendant could
increase substantially as a result of the Engle progeny
cases. In February 2009, in Ferlanti v. Liggett
Group, a Florida state court jury awarded compensatory
damages of $1,200 as well as $96 in expenses, but found that the
plaintiff was 40% at fault. Therefore, plaintiffs award
was reduced to $720 in compensatory damages. Punitive damages
were not awarded. In February 2011, the award was affirmed on
appeal. In September 2010, the court awarded plaintiffs
attorneys fees of $996. Liggett has accrued $2,000 for
this matter for the year ended December 31, 2010. In
Blitch v. R.J. Reynolds, an Engle progeny
case, trial is scheduled for March 7, 2011. In
ODwyer-Harkins v. R.J. Reynolds, an Engle
progeny case, trial is scheduled for August 8, 2011.
There has been no recent activity in Hausrath v. Philip
Morris, a case pending in New York state court, where two
individuals are suing. The other three individual actions, in
which Liggett is the only tobacco company defendant, are
dormant. In Davis v. Liggett Group, another Liggett
only case, judgment was entered against Liggett in the amount of
$540 plus attorneys fees. The judgment was paid by Liggett
and this matter is concluded.
Engle Progeny Cases. In 2000, a jury in
Engle v. R.J. Reynolds Tobacco
Co. rendered a $145,000,000 punitive damages
verdict in favor of a Florida Class against certain
cigarette manufacturers, including Liggett. Pursuant to the
Florida Supreme Courts July 2006 ruling in Engle,
which decertified the class on a prospective basis, and affirmed
the appellate courts reversal of the punitive damages
award, former class members had one year from January 11,
2007 in which to file individual lawsuits. In addition, some
individuals who filed suit prior to January 11, 2007, and
who claim they meet the conditions in Engle, are
attempting to avail themselves of the Engle ruling.
Lawsuits by individuals requesting the benefit of the Engle
ruling, whether filed before or after the January 11,
2007 deadline, are referred to as the Engle progeny
cases. Liggett and the Company have been named in 6,827
Engle progeny cases in both federal (3,735 cases) and
state (3,092 cases) courts in Florida. Other cigarette
manufacturers have also been named as defendants in these cases,
although as a case proceeds, one or more defendants may
ultimately be dismissed from the action. These cases include
approximately 9,100 plaintiffs, 671 of which represent
consortium claims. The number of state court Engle
progeny cases may increase as multi-plaintiff cases continue
to be severed into individual cases. The total number of
plaintiffs may also increase as a result of attempts by existing
plaintiffs to add additional parties.
Through December 31, 2010, there were 20 plaintiffs
verdicts against the industry in Engle progeny cases,
including four adverse verdicts against Liggett, above, and 11
defense verdicts. The plaintiffs verdicts are currently on
appeal. Several defense verdicts have also been appealed.
35
Critical
Accounting Policies
General. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses.
Significant estimates subject to material changes in the near
term include restructuring and impairment charges, inventory
valuation, deferred tax assets, allowance for doubtful accounts,
promotional accruals, sales returns and allowances, actuarial
assumptions of pension plans, the estimated fair value of
embedded derivative liabilities, settlement accruals,
restructuring, long-term investments and impairments, accounting
for investments in equity securities, 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
when title and risk of loss have passed to the customer, there
is persuasive evidence of an arrangement, the sale price is
determinable and collectibility is reasonably assured. We
provide an allowance for expected sales returns, net of any
related inventory cost recoveries. In accordance with
authoritative guidance on how taxes collected from customers and
remitted to governmental authorities should be presented in the
income statement (that is, gross versus net presentation),
our accounting policy is to include federal excise taxes in
revenues and cost of goods sold. Such revenues and cost of sales
totaled $538,328, $377,771, and $168,170 for the years ended
December 31, 2010, 2009 and 2008, respectively. Since our
primary line of business is tobacco, our financial position and
our results of operations and cash flows have been and could
continue to be materially adversely affected by significant unit
sales volume declines, litigation and defense costs, increased
tobacco costs or reductions in the selling price of cigarettes
in the near term.
Marketing Costs. We record marketing costs as
an expense in the period to which such costs relate. We do not
defer the recognition of any amounts on our consolidated balance
sheets with respect to marketing costs. We expense advertising
costs as incurred, which is the period in which the related
advertisement initially appears. We record consumer incentive
and trade promotion costs as a reduction in revenue in the
period in which these programs are offered, based on estimates
of utilization and redemption rates that are developed from
historical information.
Restructuring and Asset Impairment Charges. We
have recorded charges related to employee severance and
benefits, asset impairments, contract termination and other
associated exit costs during 2003, 2004, 2006 and 2009. The
calculation of severance pay requires management to identify
employees to be terminated and the timing of their severance
from employment. The calculation of benefits charges requires
actuarial assumptions including determination of discount rates.
The asset impairments were recorded in accordance with
authoritative guidance on accounting for the impairment or
disposal of long-lived assets, which requires management to
estimate the fair value of assets to be disposed of. These
restructuring charges are based on managements best
estimate at the time of restructuring. The status of the
restructuring activities is reviewed on a quarterly basis and
any adjustments to the reserve, which could differ materially
from previous estimates, are recorded as an adjustment to
operating income.
Contingencies. We record Liggetts
product liability legal expenses and other litigation costs as
operating, selling, general and administrative expenses as those
costs are incurred. As discussed in Note 12 to our
consolidated financial statements and above under the heading
Recent Developments in Tobacco-Related Litigation,
legal proceedings are pending or threatened in various
jurisdictions against Liggett. A large number of individual
product liability cases have been filed in state and federal
courts in Florida as a result of the Florida Supreme
Courts decision in the Engle case. We record a
provision for loss in litigation in our consolidated financial
statements when we believe an unfavorable outcome is probable
and the amount of loss can be reasonably estimated. In all our
pending legal proceedings, management is unable to make a
reasonable estimate with respect to the amount or range of loss
that could result from an unfavorable outcome of pending
tobacco-related litigation or the costs of defending such cases,
and, except as disclosed in Note 12 to our consolidated
financial statements, we have not provided any amounts in our
consolidated financial statements for unfavorable outcomes, if
any. You should not infer from the absence of any such reserve
in our consolidated financial statements that Liggett will not
be subject to significant tobacco-related liabilities in the
future. Litigation is subject to many uncertainties, and it is
possible that our consolidated financial position, results of
operations or cash flows could be materially adversely affected
by an unfavorable outcome in any such tobacco-related litigation.
36
Settlement Agreements. As discussed in
Note 12 to our consolidated financial statements, Liggett
and Vector Tobacco are participants in the Master Settlement
Agreement, the 1998 agreement to settle governmental healthcare
cost recovery actions brought by various states. Liggett and
Vector Tobacco have no payment obligations under the Master
Settlement Agreement except to the extent their market shares
exceed approximately 1.65% and 0.28%, respectively, of total
cigarettes sold in the United States. Their obligations, and the
related expense charges under the Master Settlement Agreement,
are subject to adjustments based upon, among other things, the
volume of cigarettes sold by Liggett and Vector Tobacco, their
relative market shares and inflation. Since relative market
shares are based on cigarette shipments, the best estimate of
the allocation of charges under the Master Settlement Agreement
is recorded in cost of goods sold as the products are shipped.
Settlement expenses under the Master Settlement Agreement
recorded in the accompanying consolidated statements of
operations were $135,684 for 2010, $67,158 for 2009 and $48,554
for 2008. Adjustments to these estimates are recorded in the
period that the change becomes probable and the amount can be
reasonably estimated.
Embedded Derivatives and Beneficial Conversion
Feature. We measure all derivatives, including
certain derivatives embedded in other contracts, at fair value
and recognize them in the consolidated balance sheet as an asset
or a liability, depending on our rights and obligations under
the applicable derivative contract. We have issued variable
interest senior convertible debt in a series of private
placements where a portion of the total interest payable on the
debt is computed by reference to the cash dividends paid on our
common stock. This portion of the interest payment is considered
an embedded derivative within the convertible debt, which we are
required to separately value. As a result, we have bifurcated
this embedded derivative and estimated the fair value of the
embedded derivative liability. The resulting discount created by
allocating a portion of the issuance proceeds to the embedded
derivative is then amortized to interest expense over the term
of the debt using the effective interest method.
At December 31, 2010 and 2009, the fair value of derivative
liabilities was estimated at $141,492 and $153,016,
respectively. The decrease is due to the gains on the changes in
fair value of convertible debt.
Changes to the fair value of these embedded derivatives are
reflected on our consolidated statements of operations as
Changes in fair value of derivatives embedded within
convertible debt. The value of the embedded derivative is
contingent on changes in interest rates of debt instruments
maturing over the duration of the convertible debt as well as
projections of future cash and stock dividends over the term of
the debt. We recognized a gain of $11,524 in 2010, a loss of
$35,925 in 2009 and a gain of $24,337 in 2008 due to changes in
the fair value of the embedded derivatives.
After giving effect to the recording of embedded derivative
liabilities as a discount to the convertible debt, our common
stock had a fair value at the issuance date of the notes in
excess of the conversion price, resulting in a beneficial
conversion feature. The intrinsic value of the beneficial
conversion feature was recorded as additional paid-in capital
and as a further discount on the debt. The discount is then
amortized to interest expense over the term of the debt using
the effective interest rate method.
We recognized non-cash interest expense of $4,437, $5,390 and
$5,805 in 2010, 2009 and 2008, respectively, due to the
amortization of the debt discount attributable to the embedded
derivatives and $2,531, $2,869, and $2,963 in 2010, 2009 and
2008, respectively, due to the amortization of the debt discount
attributable to the beneficial conversion feature.
Inventories. Tobacco inventories are stated at
lower of cost or market and are determined primarily by the
last-in,
first-out (LIFO) method at Liggett and Vector Tobacco. Although
portions of leaf tobacco inventories may not be used or sold
within one year because of time required for aging, they are
included in current assets, which is common practice in the
industry. We estimate an inventory reserve for excess quantities
and obsolete items based on specific identification and
historical write-offs, taking into account future demand and
market conditions.
Stock-Based Compensation. Our stock-based
compensation uses a fair value-based method to recognize
non-cash compensation expense for share-based transactions.
Under the fair value recognition provisions, we recognize
stock-based compensation net of an estimated forfeiture rate and
only recognize compensation cost for those shares expected to
vest on a straight line basis over the requisite service period
of the award. We recognized stock-based compensation expense of
$1,218, $292 and $186 in 2010, 2009 and 2008 related to the
amortization of stock option awards and $1,452, $3,350 and
$3,364 related to the amortization of restricted stock grants.
As of
37
December 31, 2010 and 2009, there was $4,057 and $5,171,
respectively, of total unrecognized cost related to employee
stock options and $5,086 and $5,705, respectively, of total
unrecognized cost related to restricted stock grants. See
Note 11 to our consolidated financial statements.
Employee Benefit Plans. The determination of
our net pension and other postretirement benefit income or
expense is dependent on our selection of certain assumptions
used by actuaries in calculating such amounts. Those assumptions
include, among others, the discount rate, expected long-term
rate of return on plan assets and rates of increase in
compensation and healthcare costs. We determine discount rates
by using a quantitative analysis that considers the prevailing
prices of investment grade bonds and the anticipated cash flow
from our two qualified defined benefit plans and our
postretirement medical and life insurance plans. These analyses
construct a hypothetical bond portfolio whose cash flow from
coupons and maturities match the annual projected cash flows
from our pension and retiree health plans. As of
December 31, 2010, our benefit obligations and service cost
were computed assuming a discount rate of 5.25% and 5.75%,
respectively. In determining our expected rate of return on plan
assets we consider input from our external advisors and
historical returns based on the expected long-term rate of
return is the weighted average of the target asset allocation of
each individual asset class. Our actual
10-year
annual rate of return on our pension plan assets was 4.8%, 3.0%
and 2.5% for the years ended December 31, 2010, 2009 and
2008, respectively, and our actual five-year annual rate of
return on our pension plan assets was 5.7%, 3.5% and 1.2% for
the years ended December 31, 2010, 2009 and 2008,
respectively. In computing expense for the year ended
December 31, 2011, we will use an assumption of a 7% annual
rate of return on our pension plan assets. In accordance with
accounting principles generally accepted in the United States of
America, actual results that differ from our assumptions are
accumulated and amortized over future periods and therefore,
generally affect our recognized income or expense in such future
periods. While we believe that our assumptions are appropriate,
significant differences in our actual experience or significant
changes in our assumptions may materially affect our future net
pension and other postretirement benefit income or expense.
Net pension expense for defined benefit pension plans and other
postretirement benefit expense was $5,001, $4,435 and $3,445 for
2010, 2009 and 2008, respectively, and we currently anticipate
such expense will be approximately $3,300 for 2011. In contrast,
our funding obligations under the pension plans are governed by
the Employee Retirement Income Security Act (ERISA).
To comply with ERISAs minimum funding requirements, we do
not currently anticipate that we will be required to make any
funding to the tax qualified pension plans for the pension plan
year beginning on January 1, 2011 and ending on
December 31, 2011.
Long-Term Investments and Impairments. At
December 31, 2010, we had long-term investments of $56,987,
which consisted primarily of investment partnerships investing
in investment securities and real estate. The investments in
these investment partnerships are illiquid and the ultimate
realization of these investments is subject to the performance
of the underlying partnership and its management by the general
partners. The estimated fair value of the investment
partnerships is provided by the partnerships based on the
indicated market values of the underlying assets or investment
portfolio. Gains are recognized when realized in our
consolidated statement of operations. Losses are recognized as
realized or upon the determination of the occurrence of an
other-than-temporary
decline in fair value. On a quarterly basis, we evaluate our
investments to determine whether an impairment has occurred. If
so, we also make a determination of whether such impairment is
considered temporary or
other-than-temporary.
We believe that the assessment of temporary or
other-than-temporary
impairment is facts and circumstances driven. However, among the
matters that are considered in making such a determination are
the period of time the investment has remained below its cost or
carrying value, the severity of the decline, the likelihood of
recovery given the reason for the decrease in market value and
our original expected holding period of the investment.
Income Taxes. The application of income tax
law is inherently complex. Laws and regulations in this area are
voluminous and are often ambiguous. As such, we are required to
make many subjective assumptions and judgments regarding our
income tax exposures. Interpretations of and guidance
surrounding income tax laws and regulations change over time
and, as a result, changes in our subjective assumptions and
judgments may materially affect amounts recognized in our
consolidated financial statements. See Note 10 to our
consolidated financial statements for additional information
regarding our accounting for income taxes and uncertain tax
positions.
38
Results
of Operations
The following discussion provides an assessment of our results
of operations, capital resources and liquidity and should be
read in conjunction with our consolidated financial statements
and related notes included elsewhere in this report. The
consolidated financial statements include the accounts of VGR
Holding, Liggett, Vector Tobacco, Liggett Vector Brands, New
Valley and other less significant subsidiaries.
As a result of our suspension of low nicotine and nicotine-free
cigarette products by Vector Tobacco and significant reductions
in Vector Tobaccos related research activities, we
reevaluated our operating segments and combined the Liggett and
Vector Tobacco businesses into a single Tobacco segment. For
purposes of this discussion and other consolidated financial
reporting, our significant business segments for the three years
ended December 31, 2010 were Tobacco and Real Estate. The
Tobacco segment consists of the manufacture and sale of
cigarettes and the research related to reduced risk products.
The Real Estate segment includes the Companys investment
in Escena and investments in non-consolidated real estate
businesses. The accounting policies of the segments are the same
as those described in the summary of significant accounting
policies and can be found in Note 1 to our consolidated
financial statements. Prior year segment information has been
recast to conform to the current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tobacco
|
|
$
|
1,063,289
|
|
|
$
|
801,494
|
|
|
$
|
565,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tobacco
|
|
|
130,157
|
(1)
|
|
|
160,915
|
(2)
|
|
|
161,850
|
|
Real estate
|
|
|
(631
|
)
|
|
|
(886
|
)
|
|
|
|
|
Corporate and other
|
|
|
(18,213
|
)
|
|
|
(16,862
|
)
|
|
|
(26,546
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
111,313
|
|
|
$
|
143,167
|
|
|
$
|
135,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Operating income includes litigation judgment expense of $16,161
and a $3,000 settlement charge. |
|
(2) |
|
Operating income includes a gain of $5,000 on the Philip Morris
brand transaction completed February 2009 and restructuring
costs of $900. |
2010
Compared to 2009
Revenues. All of our revenues were from the
Tobacco segment for the years ended December 31, 2010 and
2009, respectively. Liggett increased the list price of LIGGETT
SELECT and EVE by $0.90 per carton in February 2009 and an
additional $7.10 per carton in March 2009. Liggett increased the
list price of GRAND PRIX by $7.20 per carton in March 2009. In
June 2009, Liggett increased the list price of all brands by
$0.10 per carton in conjunction with the user fees imposed by
the passage of the bill granting the FDA jurisdiction over
tobacco. Liggett increased the list price of LIGGETT SELECT,
EVE, and GRAND PRIX by $0.60 per carton in January 2010, an
additional $0.65 per carton in May 2010, and an additional $0.75
per carton in October 2010. Liggett increased the list price of
PYRAMID by $1.30 per carton in January 2011.
All of our sales were in the discount category for the years
ended December 31, 2010 and 2009, respectively. Revenues
were $1,063,289 for the year ended December 31, 2010
compared to $801,494 in 2009. Revenues increased by 32.7%
($261,795) due to a favorable price variance of $93,510,
primarily related to increases in price of LIGGETT SELECT and
GRAND PRIX (primarily associated with the increase in federal
excise taxes on cigarettes) and a favorable sales volume
variance of $170,290 (approximately 2,133.3 million units
or a 24.9% increase in unit volume primarily related to PYRAMID)
offset by an unfavorable mix variance of $1,976.
Tobacco Gross Profit. Tobacco gross profit was
$218,183 for the year ended December 31, 2010 compared to
$224,109 in 2009. The $5,926 (2.6%) decrease was primarily due
to the sales mix. As a percent of revenues (excluding federal
excise taxes), Tobacco gross profit decreased to 41.6% for year
ended December 31, 2010
39
compared to gross profit of 52.9% for the same period in 2009
due to the sales mix and an increase in MSA expense due to
growth in market share offset by increased sales prices in 2010.
Expenses. Operating, selling, general and
administrative expenses were $90,709 for the year ended
December 31, 2010 compared to $85,041 for the same period
last year, an increase of $5,668 (6.7%). Tobacco expenses, not
including the $16,161 litigation judgment expense and a $3,000
settlement charge, were $68,865 for the year ended
December 31, 2010 compared to $68,194 for the same period
in 2009, an increase of $671 (1.0%) which was primarily the
result of an increase in personnel and freight costs associated
with increased unit sales in 2010 offset by a decrease of
pension expense of approximately $2,000 and a decrease in
research expenses of $951. Tobacco product liability legal
expenses and other litigation costs were $10,028 and $6,000 for
the year ended December 31, 2010 and 2009, respectively. In
addition, we recorded $16,161 of expense associated with a
litigation judgment paid in 2010. Expenses at the corporate
segment increased from $15,691 to $21,213 due primarily to
higher expenses associated with our Supplemental Retirement Plan
and professional fees in 2010. The real estate segment expenses
decreased from $886 in 2009 to $631 in 2010 related to expenses
incurred in connection with Escenas operations.
Operating income. Operating income was
$111,313 for the year ended December 31, 2010 compared to
$143,167 for the same period last year, a decrease of $31,854
(22.2%). Tobacco segment operating income decreased from
$160,915 for the year ended December 31, 2009 to $130,157
for the same period in 2010 primarily due to the $16,161
litigation judgment expense and the $3,000 settlement charge
recorded in 2010, the absence of a gain recorded in 2009 of
$5,000 from the Philip Morris brands transaction in 2010 and
lower margins on higher volume brands in 2010. The real estate
segments operating loss of $631 in 2010 related primarily
to Escenas operations. The operating loss at the corporate
segment was $18,213 for the year ended December 31, 2010
compared to $16,862 for the same period last year, an increase
of $1,351.
Other Income (Expenses). Other expenses were
$25,743 for the year ended December 31, 2010 compared to
$114,630 for the past year. For the year ended December 31,
2010, other expenses primarily consisted of interest expense of
$84,096 offset by other income of $11,524 for changes in fair
value of derivatives embedded within convertible debt, net
realized gains on investments held for sale of $19,869, equity
income on non-consolidated real estate businesses of $23,963,
equity income on a long-term investment of $1,489 and interest
and other income of $1,508. For the year ended December 31,
2009, other expenses primarily consisted of interest expense of
$68,490, a loss on the extinguishment of the 5% Notes of
$18,573, a loss of $35,925 for changes in fair value of
derivatives embedded within convertible debt, a loss of $8,500
associated with a decline in value in the Escena mortgage
receivable of $5,000 and the Aberdeen real estate investment of
$3,500, offset by equity income of $15,213 on non-consolidated
real estate businesses and other income of $1,645.
The fair value of the embedded derivatives is contingent on
changes in interest rates of debt instruments maturing over the
duration of the convertible debt, our stock price as well as
projections of future cash and stock dividends over the term of
the debt. The income of $11,524 from the embedded derivative for
the year ended December 31, 2010 was primarily the result
of increasing spreads between corporate convertible debt and
risk-free investments offset by interest payments during the
period. The loss of $35,925 for the year ended December 31,
2009, was primarily the result of declining spreads between
corporate convertible debt and risk-free investments offset by
interest payments during the period.
Income before income taxes. Income before
income taxes for the year ended December 31, 2010 was
$85,570 compared to income before income taxes of $28,537 in
2009.
Income tax expense. The income tax expense was
$31,486 for the year ended December 31, 2010 compared to
$3,731 for the same period in 2009.
Vectors income tax rates for the years ended
December 31, 2010 and 2009 do not bear a customary
relationship to statutory income tax rates as a result of the
impact of nondeductible expenses, state income taxes and
interest and penalties accrued on unrecognized tax benefits
offset by the impact of the domestic production activities
deduction. In addition, we recorded a benefit of $6,166 for the
year ended December 31, 2009, resulting from the reduction
of a previously established valuation allowance of a deferred
tax asset. The net deferred tax asset has been recognized for
state tax net operating losses at Vector Tobacco Inc. after
evaluating the impact of the negative and positive evidence that
such asset would be realized.
40
2009
Compared to 2008
Revenues. All of our revenues were from the
Tobacco segment for the years ended December 31, 2009 and
2008, respectively. In April 2008, Liggett increased the list
price of GRAND PRIX by $0.40 per carton. In addition, in April
2008, Liggett decreased the early payment terms on its
cigarettes from 2.75% to 2.25% of invoice amount. In August
2008, Liggett increased the list price of LIGGETT SELECT, EVE
and GRAND PRIX by $1.00 per carton. Liggett increased the list
price of LIGGETT SELECT and EVE by $0.90 per carton in February
2009 and an additional $7.10 per carton in March 2009. Liggett
increased the list price of GRAND PRIX by $7.20 per carton in
March 2009. In June 2009, Liggett increased the list price of
all brands by $0.10 per carton in conjunction with the user fees
imposed by the passage of the bill granting the FDA jurisdiction
over tobacco.
All of our sales were in the discount category for the years
ended December 31, 2009 and 2008, respectively. Revenues
were $801,494 for the year ended December 31, 2009 compared
to $565,186 in 2008. Revenues increased by 41.8% ($236,308) due
to a favorable price variance of $227,112 and sales mix of
$14,401 primarily related to LIGGETT SELECT and GRAND PRIX
offset by an unfavorable volume variance of $4,837
(approximately 63.6 million units). The favorable price
variance was primarily attributable to increases of $209,601 in
federal excise taxes associated with the increase in tax rate
effective April 1, 2009. Net revenues of the LIGGETT SELECT
brand increased $7,661 for the year ended December 31, 2009
compared to 2008 from a favorable variance from pricing of
$60,304 ($29,024 attributable to the excise tax increase) offset
by a decrease in unit volume of 29.0% (751.1 million
units). Net revenues of the GRAND PRIX brand increased $45,366
for 2009 compared to 2008 from a favorable variance from pricing
of $71,332 ($48,048 attributable to the excise tax increase)
offset by a decrease in volume of 14.8% (416.5 million
units). Net revenues of Liggetts PYRAMID brand increased
$103,019 due to increased volume of 1,197.7 million units
following the brands repositioning in the second quarter
of 2009.
Tobacco Gross Profit. Tobacco gross profit was
$224,109 for the year ended December 31, 2009 compared to
$229,887 in 2008. The $5,778 (2.5%) decrease was primarily due
to decreased volume of LIGGETT SELECT and GRAND PRIX for the
year ended December 31, 2009. As a percent of revenues
(excluding federal excise taxes), gross profit decreased to
52.9% for the year ended December 31, 2009 compared to
gross profit of 58.2% for 2008. This decrease in Tobaccos
gross profit in the 2009 period was attributable primarily to
volume mix.
Expenses. Operating, selling, general and
administrative expenses were $85,041 for the year ended
December 31, 2009 compared to $94,583 in 2008, a decrease
of $9,542 (10.1%). Tobacco expenses were $68,194 for the year
ended December 31, 2009 compared to $68,037 in 2008, an
increase of $157 or 0.2%. The increase in Tobaccos expense
related to an increase in pension expense in the 2009 period
compared to the 2008 period offset by decreased product
liability and other litigation costs. Liggetts product
liability expenses and other litigation costs were approximately
$6,000 in 2009 compared to $8,800 in 2008. Expenses at the
corporate level decreased from $26,546 in 2008 to $15,961 in
2009 due primarily to lower compensation expense and expenses
associated with our Supplemental Retirement Plan in 2009 due to
the retirement of our former Executive Chairman on
December 30, 2008. The real estate segment expenses of $886
in 2009 related to expenses incurred in connection with
Escenas operations.
Operating income. Operating income was
$143,167 for the year ended December 31, 2009 compared to
$135,304 for the same period in 2008, an increase of $7,863
(5.8%). Tobacco segment operating income decreased from $161,850
for the year ended December 31, 2008 to $160,915 for the
same period in 2009 primarily due to the decline in gross profit
discussed above offset by the $5,000 gain from the brands
transaction and decreased research costs partially offset by
lower sales volume.
Other Income (Expenses). For the year ended
December 31, 2009, other expenses were $114,630 compared to
$40,732 for the year ended December 31, 2008. For the year
ended December 31, 2009, other expenses primarily consisted
of interest expense of $68,490, a loss on the extinguishment of
the 5% Notes of $18,573, a loss of $8,500 associated with a
decline in value of the former Escena mortgage receivable
($5,000) and the Aberdeen real estate investment ($3,500), a
loss of $35,925 for changes in fair value of derivatives
embedded within convertible debt, equity income of $15,213 on
non-consolidated real estate businesses, and interest income of
$492 and $1,153 of other income. The equity income of $15,213
for the 2009 period consisted of $11,429 from New Valleys
investment in Douglas Elliman Realty, $2,084 from 16th and
K, $1,500 from New Valley Oaktree Chelsea Eleven LLC and $200
from another non-consolidated real estate business. For the year
ended December 31, 2008, other
41
expenses consisted of interest expense of $62,335 and losses of
$21,900 associated with the performance of three investment
partnerships, a decline in value of the former mortgage
receivable of $4,000, a loss of $3,000 associated with the
performance of our investment securities available for sale and
a loss of $3,500 associated with our investment in Aberdeen,
which were offset by equity income from non-consolidated real
estate businesses of $24,399, a gain from changes in fair value
of derivatives embedded within convertible debt of $24,337, and
interest and dividend income of $5,864. The equity income of
$24,399 for the 2008 period resulted from New Valleys
investment in Douglas Elliman Realty which contributed $11,833
and $12,566 from 16th and K, which consisted of income of
$16,362 in connection with the sale of 16th and Ks
interest in 90% of the St. Regis Hotel in Washington, D.C.,
offset by equity losses of $3,796 from the operations of the
hotel.
The value of the embedded derivatives is contingent on changes
in interest rates of debt instruments maturing over the duration
of the convertible debt, our stock price as well as projections
of future cash and stock dividends over the term of the debt.
The losses for the changes in fair value of the embedded
derivatives in the year ended December 31, 2009 was
primarily the result of narrowing credit spreads in both the
United States corporate credit markets and the market for our
debt in the 2009 period offset by interest payments. The gain
from the embedded derivatives in 2008 was primarily the result
of interest payments during the period and increasing spreads
between corporate debt and convertible debt.
Income before income taxes. Income before
income taxes for the year ended December 31, 2009 was
$28,537 compared to income before income taxes of $94,572 in
2008.
Income tax provision. The income tax provision
was $3,731 for the year ended December 31, 2009 compared to
an expense of $34,068 for the same period in 2008.
Vectors income tax rates for the years ended
December 31, 2009 and 2008 differ from the statutory income
tax rates as a result of the impact of nondeductible expenses,
state income taxes and interest and penalties accrued on
unrecognized tax benefits offset by the impact of the domestic
production activities deduction. In addition, we recorded a
benefit of $6,166 for the year ended December 31, 2009
resulting from the reduction of a previously established
valuation allowance of a deferred tax asset.
Liquidity
and Capital Resources
Net cash and cash equivalents increased by $90,371 in 2010 and
decreased by $1,651 in 2009 and $27,012 in 2008.
Net cash provided by operations was $67,004, $5,667 and $91,265
in 2010, 2009 and 2008, respectively. The increase from 2009 to
2010 related primarily to lower income tax payments in the 2010
period due to higher taxable income in the 2009 period as a
result of the recognition of a previously deferred gain of
approximately $192,000, the $20,860 payment in 2009 to the
Executive Chairman upon his retirement in accordance with the
our Supplemental Retirement Plan and increased settlement
accruals under the Master Settlement Agreement in 2010 compared
to 2009. We accrue liabilities under the Master Settlement
Agreement when a sale is consummated; however, the payments
under the Master Settlement Agreement are generally not made
until the December in the year of the sale or the April after
the year of sale. The difference was offset by the absence of
the $5,000 payment received on the Philip Morris brands
transaction in 2009 and a $14,361 litigation judgment payment
made in 2010. The decrease from 2008 to 2009 was primarily due
to additional income tax payments in the 2009 period and the
payment to the Executive Chairman upon his retirement in
accordance with our Supplemental Retirement Plan offset by
increased operating income.
Cash used in investing activities was $45,132, $6,816 and
$33,895 in 2010, 2009 and 2008, respectively. In 2010, cash was
used for the purchase of an investment in a joint venture of
$18,000, Aberdeen mortgages of $13,462, investment securities of
$9,394, long-term investments of $5,062, investments in
non-consolidated real estate business of $6,645, a decrease in
non-current restricted assets of $1,100, an increase in cash
surrender value of life insurance policies of $936, the issuance
of notes receivable of $930, and capital expenditures of $23,391
offset by the proceeds from the sale or maturity of investment
securities of $28,587, distributions from non-consolidated real
estate businesses of $3,539, proceeds from the sale or
liquidation of long-term investments of $1,002, cash acquired in
Aberdeen consolidation of $473, and proceeds from the sale of
fixed assets of $187. In 2009, cash was
42
used for the purchase of investment securities of $12,427,
capital expenditures of $3,848, an increase in cash surrender
value of corporate-owned life insurance policies of $839, an
investment in non-consolidated real estate assets of $474, a
purchase of long-term investments of $51, offset by
distributions from non-consolidated real estate businesses of
$6,730, proceeds from the liquidation of long-term investments
of $2,254, proceeds from the sale or maturity of investment
securities of $78 and a decrease in restricted assets of $1,720.
In 2008, cash was used for the purchase of the mortgage
receivable of $21,704, the investment in Aberdeen for $10,000
and Chelsea for $12,000, the purchase of investment securities
of $6,411, capital expenditures of $6,309, purchase of preferred
stock in other investments, including Castle Brands, of $4,250,
an increase in the cash surrender value of corporate-owned life
insurance policies of $938, an increase in restricted assets of
$411 and the purchase of long-term investments of $51 offset by
the distributions from non-consolidated real estate businesses
of $19,393 and from the proceeds from the liquidation of
long-term investments of $8,334, and the proceeds from the sale
of fixed assets of $452.
Cash provided by financing activities was $68,499 in 2010 and
cash used in financing activities was $502 and $84,382 in 2009
and 2008, respectively. In 2010, cash provided by financing
activities was primarily from proceeds of debt issuance of
$185,714, net borrowings under the revolver of $18,326, proceeds
from the exercise of Vector options of $1,265 and excess of tax
benefit of options exercised of $269 offset by cash used for
distributions on common stock of $117,459, repayments of debt of
$14,539 and deferred finance charges of $4,932. Cash used in
financing activities in 2009 resulted from proceeds of debt
issuance of $118,805, excess tax benefit of options exercised of
$9,162, and the proceeds from exercise of stock options of
$1,194, offset by cash used for distributions on common stock of
$115,778, repayment of debt of $6,179, deferred financing
charges of $5,573, and net repayments over borrowings of debt
under the revolver of $2,133. In 2008, cash was primarily used
for distributions on common stock of $103,870, repayments on
debt of $6,329 and deferred financing charges of $137, offset by
the excess tax benefit of options exercised of $18,304, net
borrowing under the revolver of $4,733, debt issuance of $2,831,
and the proceeds from the exercise of options of $86.
Liggett. In 2010, Liggett entered into nine
financing agreements for a total of $16,634 related to the
purchase of equipment. The weighted average interest rate of the
outstanding debt is 5.28% per annum and the interest rate on the
notes ranges between 2.59% and 6.13%. The debt is payable over
30 to 60 months with an average term of 56 months.
Total monthly installments are $297.
Liggett also refinanced $3,575 of debt related to previous
equipment purchases. The refinanced debt has an interest rate of
5.95% and is payable in 36 installments of $109. Each of these
equipment loans is collateralized by the purchased equipment.
The majority of these equipment purchases are due to
Liggetts increased unit volume sales plus an increasing
proportion of sales in box style packaging versus soft pack.
Liggetts management expects capital expenditures of
approximately $10,000 in 2011, of which the majority will be
financed on terms similar to the previous 2010 financing
arrangements.
Liggett has a $50,000 credit facility with Wachovia Bank, N.A.
under which $35,710 was outstanding at December 31, 2010.
Availability as determined under the facility was approximately
$294 based on eligible collateral at December 31, 2010. The
facility contains covenants that provide that Liggetts
earnings before interest, taxes, depreciation and amortization,
as defined under the facility, on a trailing twelve-month basis,
shall not be less than $100,000 if Liggetts excess
availability, as defined, under the facility is less than
$20,000. The covenants also require that annual capital
expenditures, as defined under the facility, (before a maximum
carryover amount of $2,500) shall not exceed $10,000 during any
fiscal year except 2010, where Liggett is permitted capital
expenditures up to $33,000, as amended, as of August 31,
2010. At December 31, 2010, management believed that
Liggett was in compliance with all covenants under the credit
facility as amended; Liggetts EBITDA, as defined, were
approximately $114,720 for the twelve months ended
December 31, 2010.
In August 2007, Wachovia made an $8,000 term loan to 100 Maple
LLC, a subsidiary of Liggett, within the commitment under the
existing credit facility. The $8,000 term loan is collateralized
by the existing collateral securing the credit facility, and is
also collateralized by a lien on certain real property in
Mebane, NC owned by 100 Maple LLC. The Mebane Property also
secures the other obligations of Liggett under the credit
facility. The $8,000 term loan did not increase the $50,000
borrowing amount of the credit facility, but did increase the
outstanding
43
amounts under the credit facility by the amount of the term loan
and proportionately reduces the maximum borrowing availability
under the facility.
In August 2007, Liggett and Wachovia amended the credit facility
to permit the guaranty of our Senior Secured Notes by each of
Liggett and Maple and the pledging of certain assets of Liggett
and Maple on a subordinated basis to secure their guarantees.
The credit facility was also amended to grant to Wachovia a
blanket lien on all the assets of Liggett and Maple, excluding
any equipment pledged to current or future purchase money or
other financiers of such equipment and excluding any real
property, other than the Mebane Property and other real property
to the extent its value is in excess of $5,000. In connection
with the amendment, Wachovia, Liggett, Maple and the collateral
agent for the holders of our Senior Secured Notes entered into
an intercreditor agreement, pursuant to which the liens of the
collateral agent on the Liggett and Maple assets will be
subordinated to the liens of Wachovia on the Liggett and Maple
assets.
In June 2002, the jury in an individual case brought under the
third phase of the Engle case awarded $24,835 of
compensatory damages against Liggett and two other defendants
and found Liggett 50% responsible for the damages. Liggett paid
its share of the damages award and plaintiffs claim for
interest and attorneys fees ($14,361). To date, four other
verdicts have been entered in Engle progeny cases against
Liggett in the total amount of approximately $5,872. These
verdicts are on appeal. It is possible that additional cases
could be decided unfavorably. Liggett may enter into discussions
in an attempt to settle particular cases if it believes it is
appropriate to do so. 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 12 to our consolidated financial statements and
Legislation and Regulation below for a description
of legislation, regulation and litigation.
Management cannot predict the cash requirements related to any
future settlements or judgments, including cash required to bond
any appeals, and there is a risk that those requirements will
not be able to be met. Management is unable to make a reasonable
estimate of the amount or range of loss that could result from
an unfavorable outcome of the cases pending against Liggett or
the costs of defending such cases. It is possible that our
consolidated financial position, results of operations or cash
flows could be materially adversely affected by an unfavorable
outcome in any such tobacco-related litigation.
Vector. As described above under Recent
Developments, on May 11, 2009, we issued in a private
placement the 6.75% Note due 2014 in the principal amount
of $50,000. The purchase price was paid in cash ($38,225) and by
tendering $11,005 principal amount of the 5% Notes, valued
at 107% of principal amount. On June 30, 2009, we issued
$106,940 of our 6.75% Exchange Notes due 2014 in exchange for
$99,944 aggregate principal amount of the 5% Notes due
2011, valued at 107% principal amount. On November 16,
2009, we exchanged approximately $555 aggregate principal of the
5% Notes due 2011, valued at 107% principal amount, for
$593 aggregate principal of our 6.75% Exchange Notes due 2014
and retired the remaining $360 of the 5% Notes due 2011 for
cash.
In August 2007, we sold $165,000 of our 11% Senior Secured
Notes due 2015 in a private offering to qualified institutional
investors in accordance with Rule 144A of the Securities
Act of 1933. In September 2009, we sold at 94% of face value an
additional $85,000 principal amount of our 11% Senior
Secured Notes due 2015. We received net proceeds from the 2009
offering of approximately $80,400. In April 2010, we sold
another $75,000 principal amount of the Senior Secured Notes at
101% of face value and we received net proceeds of approximately
$73,500. In December 2010, we sold at 103% of face value an
additional $90,000 principal amount of the Senior Secured Notes
in a private offering to qualified institutional investors in
accordance with Rule 144A of the Securities Act of 1933. We
received net proceeds from the 2010 offering of approximately
$90,850.
The Senior Secured Notes pay interest on a semi-annual basis at
a rate of 11% per year and mature on August 15, 2015. We
may redeem some or all of the Senior Secured Notes at any time
prior to August 15, 2011 at a make-whole redemption price.
On or after August 15, 2011 we may redeem some or all of
the Senior Secured Notes at a premium that will decrease over
time, plus accrued and unpaid interest and liquidated damages,
if any, to the
44
redemption date. In the event of a change of control, as defined
in the indenture governing the Senior Secured Notes, each holder
of the Senior Secured Notes may require us to repurchase some or
all of its Senior Secured Notes at a repurchase price equal to
101% of their aggregate principal amount plus accrued and unpaid
interest and liquidated damages, if any to the date of purchase.
The Senior Secured Notes are fully and unconditionally
guaranteed on a joint and several basis by all of our
wholly-owned domestic subsidiaries that are engaged in the
conduct of our cigarette businesses. In addition, some of the
guarantees are collateralized by second priority or first
priority security interests in certain collateral of some of the
subsidiary guarantors pursuant to security and pledge agreements.
The indenture contains covenants that restrict the payment of
dividends by us if our consolidated earnings before interest,
taxes, depreciation and amortization, which is defined in the
indenture as Consolidated EBITDA, for the most recently ended
four full quarters is less than $50,000. The indenture also
restricts the incurrence of debt if our Leverage Ratio and our
Secured Leverage Ratio, as defined in the indenture, exceed 3.0
and 1.5, respectively. Our Leverage Ratio is defined in the
indenture as the ratio of our and our guaranteeing
subsidiaries total debt less the fair market value of our
cash, investments in marketable securities and long-term
investments to Consolidated EBITDA, as defined in the indenture.
Our Secured Leverage Ratio is defined in the indenture in the
same manner as the Leverage Ratio, except that secured
indebtedness is substituted for indebtedness. The following
table summarizes the requirements of these financial covenants
and the results of the calculation, as defined by the indenture.
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Indenture
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December 31,
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December 31,
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Covenant
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Requirement
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2010
|
|
|
2009
|
|
|
Consolidated EBITDA, as defined
|
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$
|
50,000
|
|
|
$
|
184,151
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|
|
$
|
174,158
|
|
Leverage ratio, as defined
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<3.0 to 1
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|
|
|
0.5 to 1
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|
|
|
0.3 to 1
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|
Secured leverage ratio, as defined
|
|
|
<1.5 to 1
|
|
|
|
0.1 to 1
|
|
|
|
Negative
|
|
We and our subsidiaries have significant indebtedness and debt
service obligations. At December 31, 2010, we and our
subsidiaries had total outstanding indebtedness (including the
embedded derivative liabilities related to our convertible
notes) of $682,530. We must redeem $11,000 of our 3.875%
Variable Interest Senior Convertible Debentures by June 15,
2011, and we may be required to purchase $99,000 of the
debentures on June 15, 2012. Approximately $157,500 of our
3.75% convertible debt matures in 2014 and $415,000 of our
11% senior secured notes matures in 2015. In addition,
subject to the terms of any future agreements, we and our
subsidiaries will be able to incur additional indebtedness in
the future. There is a risk that we will not be able to generate
sufficient funds to repay our debt. If we cannot service our
fixed charges, it would have a material adverse effect on our
business and results of operations.
We believe that our cigarette operations are positive cash flow
generating units and will continue to be able to sustain their
operations without any significant liquidity concerns.
In order to meet the above liquidity requirements as well as
other anticipated liquidity needs in the normal course of
business, we had cash and cash equivalents of approximately
$300,000, investment securities available for sale of
approximately $79,000, long-term investments with an estimated
value of approximately $83,000 and availability under
Liggetts credit facility of approximately $300 at
December 31, 2010. Management currently anticipates that
these amounts, as well as expected cash flows from our
operations, proceeds from public
and/or
private debt and equity financing, management fees and other
payments from subsidiaries should be sufficient to meet our
liquidity needs over the next 12 months. We 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 our liquidity otherwise
available.
On a quarterly basis, we evaluate our investments to determine
whether an impairment has occurred. If so, we also make a
determination if such impairment is considered temporary or
other-than-temporary.
We believe that the assessment of temporary or
other-than-temporary
impairment is facts and circumstances driven. However, among the
matters that are considered in making such a determination are
the period of time the investment has remained below its cost or
carrying value, the likelihood of recovery given the reason for
the decrease in market value and our original expected holding
period of the investment.
45
The total amount of unrecognized tax benefits was $10,216 at
January 1, 2010 and decreased $3,448 during the year ended
December 31, 2010 primarily from the favorable result from
a state income tax audit. The total amount of unrecognized tax
benefits was $7,503 at January 1, 2009 and increased $2,713
during the year ended December 31, 2009.
Long-Term
Financial Obligations and Other Commercial Commitments
Our significant long-term contractual obligations as of
December 31, 2010 were as follows:
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Contractual Obligations
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2011
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2012
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2013
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2014
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2015
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Thereafter
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Total
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Long-term debt(1)
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$
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51,345
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$
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105,793
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(8)
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$
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4,375
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|
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$
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161,158
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|
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$
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418,025
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|
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$
|
3,557
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(8)
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$
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744,253
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Operating leases(2)
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|
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4,739
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|
|
|
3,984
|
|
|
|
2,204
|
|
|
|
1,165
|
|
|
|
630
|
|
|
|
21
|
|
|
|
12,743
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Inventory purchase commitments(3)
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|
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41,896
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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41,896
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|
Capital expenditure purchase commitments(4)
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|
|
2,726
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|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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2,726
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Interest payments(5)
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|
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83,548
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|
|
|
83,839
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|
|
|
84,906
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|
|
|
86,173
|
|
|
|
60,985
|
|
|
|
212,691
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|
|
|
612,142
|
|
|
|
|
|
|
|
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|
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|
|
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|
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Total (6),(7)
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$
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184,254
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|
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$
|
193,616
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|
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$
|
91,485
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|
|
$
|
248,496
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|
|
$
|
479,640
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|
|
$
|
216,269
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|
|
$
|
1,413,760
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|
|
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|
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(1) |
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Long-term debt is shown before discount and assumes that only
the mandatory redemption amounts will be retired on our 3.875%
Variable Interest Senior Convertible Debentures due 2026 (10%
and 90% of the principal balance in 2011 and 2026,
respectively). For more information concerning our long-term
debt, see Liquidity and Capital Resources above and
Note 7 to our consolidated financial statements. |
|
(2) |
|
Operating lease obligations represent estimated lease payments
for facilities and equipment. The amounts presented do not
include amounts scheduled to be received under non-cancelable
operating subleases of $965 in 2011, $965 in 2012, $402 in 2013,
$0 in 2014, $0 in 2015 and $0 thereafter. See Note 8 to our
consolidated financial statements. |
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(3) |
|
Inventory purchase commitments represent purchase commitments
under our leaf inventory management program. See Note 4 to
our consolidated financial statements. |
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(4) |
|
Capital expenditure purchase commitments represent purchase
commitments for machinery and equipment at Liggett and Vector
Tobacco. See Note 5 to our consolidated financial
statements. |
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(5) |
|
Interest payments are based on current interest rates at
December 31, 2010 and the assumption our current policy of
a cash dividend of $0.40 per quarter and an annual 5% stock
dividend will continue. In addition, interest payments have been
computed assuming that only the mandatory amounts will be
retired on our convertible debt as discussed in Note
(1) above. For more information concerning our long-term
debt, see Liquidity and Capital Resources above and
Note 7 to our consolidated financial statements. |
|
(6) |
|
Not included in the above table is approximately $19,165 of net
deferred tax liabilities and $5,860 of unrecognized income tax
benefits. |
|
(7) |
|
Because their future cash outflows are uncertain, the above
table excludes our pension and postretirement benefit plans and
contractual guarantees. |
|
(8) |
|
We may be required to redeem $99,000 of this amount in 2012, in
accordance with the terms of our 3.875% Variable Interest Senior
Convertible Debentures due 2026. |
Payments under the Master Settlement Agreement, discussed in
Note 12 to our consolidated financial statements, and the
federal tobacco quota legislation, discussed in
Legislation and Regulation below, are excluded from
the table above, as the payments are subject to adjustment for
several factors, including inflation, overall industry volume,
our market share and the market share of non-participating
manufacturers.
46
Off-Balance
Sheet Arrangements
We have various agreements in which we may be obligated to
indemnify the other party with respect to certain matters.
Generally, these indemnification clauses are included in
contracts arising in the normal course of business under which
we customarily agree to hold the other party harmless against
losses arising from a breach of representations related to such
matters as title to assets sold and licensed or certain
intellectual property rights. Payment by us under such
indemnification clauses is generally conditioned on the other
party making a claim that is subject to challenge by us and
dispute resolution procedures specified in the particular
contract. Further, our obligations under these arrangements may
be limited in terms of time
and/or
amount, and in some instances, we may have recourse against
third parties for certain payments made by us. It is not
possible to predict the maximum potential amount of future
payments under these indemnification agreements due to the
conditional nature of our obligations and the unique facts of
each particular agreement. Historically, payments made by us
under these agreements have not been material. As of
December 31, 2010, we were not aware of any indemnification
agreements that would or are reasonably expected to have a
current or future material adverse impact on our financial
position, results of operations or cash flows.
In February 2004, Liggett Vector Brands and another cigarette
manufacturer entered into a five year agreement with a
subsidiary of the American Wholesale Marketers Association to
support a program to permit tobacco distributors to secure, on
reasonable terms, tax stamp bonds required by state and local
governments for the distribution of cigarettes. Under the
agreement, Liggett Vector Brands has agreed to pay a portion of
losses, if any, incurred by the surety under the bond program,
with a maximum loss exposure of $500 for Liggett Vector Brands.
To secure its potential obligations under the agreement, Liggett
Vector Brands has delivered to the subsidiary of the Association
a $100 letter of credit and agreed to fund up to an additional
$400. Liggett Vector Brands has incurred no losses to date under
this agreement, and we believe the fair value of Liggett Vector
Brands obligation under the agreement was immaterial at
December 31, 2010.
At December 31, 2010, we had outstanding approximately $341
of letters of credit, collateralized by certificates of deposit.
The letters of credit have been issued as security deposits for
leases of office space, to secure the performance of our
subsidiaries under various insurance programs and to provide
collateral for various subsidiary borrowing and capital lease
arrangements.
We committed to fund up to $900 in a credit line to our
investee, Castle Brands Inc. in 2009. In December 2010, we
increased our commitment to fund the credit line from $900 to
$1,100. We contributed our full commitment of $1,100 as of
December 31, 2010.
Market
Risk
We are exposed to market risks principally from fluctuations in
interest rates, foreign currency exchange rates and equity
prices. We seek to minimize these risks through our regular
operating and financing activities and our long-term investment
strategy. Our market risk management procedures cover all market
risk sensitive financial instruments.
As of December 31, 2010, approximately $41,900 of our
outstanding debt at face value had variable interest rates
determined by various interest rate indices, which increases the
risk of fluctuating interest rates. Our exposure to market risk
includes interest rate fluctuations in connection with our
variable rate borrowings, which could adversely affect our cash
flows. As of December 31, 2010, we had no interest rate
caps or swaps. Based on a hypothetical 100 basis point
increase or decrease in interest rates (1%), our annual interest
expense could increase or decrease by approximately $419.
In addition, as of December 31, 2010, approximately $81,405
($267,530 principal amount) of outstanding debt had a variable
interest rate determined by the amount of the dividends on our
common stock. The difference between the stated value of the
debt and carrying value is due principally to certain embedded
derivatives, which were separately valued and recorded upon
issuance.
Changes to the estimated fair value of these embedded
derivatives are reflected within our statements of operations as
Changes in fair value of derivatives embedded within
convertible debt. The value of the embedded derivative is
contingent on changes in interest rates of debt instruments
maturing over the duration of the convertible
47
debt as well as projections of future cash and stock dividends
over the term of the debt and changes in the closing stock price
at the end of each quarterly period. Based on a hypothetical
100 basis point increase or decrease in interest rates
(1%), our annual Changes in fair value of derivatives
embedded within convertible debt could increase or
decrease by approximately $5,491 with approximately $370
resulting from the embedded derivative associated with our
6.75% Note due 2014, $702 resulting from the embedded
derivative associated with our 6.75% exchange notes due 2014,
and the remaining $4,419 resulting from the embedded derivative
associated with our 3.875% variable interest senior convertible
debentures due 2026. An increase in our quarterly dividend rate
by $0.10 per share would increase interest expense by
approximately $6,750 per year.
We have estimated the fair market value of the embedded
derivatives based principally on the results of a valuation
model. The estimated fair value of the derivatives embedded
within the convertible debt is based principally on the present
value of future dividend payments expected to be received by the
convertible debt holders over the term of the debt. The discount
rate applied to the future cash flows is estimated based on a
spread in yield of our debt when compared to risk-free
securities with the same duration; thus, a readily determinable
fair market value of the embedded derivatives is not available.
The valuation model assumes our future dividend payments and
utilizes interest rates and credit spreads for secured to
unsecured debt, unsecured to subordinated debt and subordinated
debt to preferred stock to determine the fair value of the
derivatives embedded within the convertible debt. The valuation
also considers items, including current and future dividends and
the volatility of Vectors stock price. The range of
estimated fair market values of our embedded derivatives was
between $138,701 and $144,391. We recorded the fair market value
of our embedded derivatives at the midpoint of the inputs at
$141,492 as of December 31, 2010. The estimated fair market
value of our embedded derivatives could change significantly
based on future market conditions.
We held investment securities available for sale totaling
$78,754 at December 31, 2010, which includes
13,891,205 shares of Ladenburg Thalmann Financial Services
Inc. carried at $16,253.
See Note 3 to our consolidated financial statements.
Adverse market conditions could have a significant effect on the
value of these investments.
We and New Valley also hold long-term investments in various
investment partnerships. These investments are illiquid, and
their ultimate realization is subject to the performance of the
underlying entities.
New
Accounting Pronouncements
Refer to Note 1, Summary of Significant Accounting
Policies, to our financial statements for further
information on New Accounting Pronouncements.
Legislation
and Regulation
Reports with respect to the alleged harmful physical effects of
cigarette smoking have been publicized for many years and, in
the opinion of Liggetts management, have had and may
continue to have an adverse effect on cigarette sales. Since
1964, the Surgeon General of the United States and the Secretary
of Health and Human Services have released a number of reports
which state that cigarette smoking is a causative factor with
respect to a variety of health hazards, including cancer, heart
disease and lung disease, and have recommended various
government actions to reduce the incidence of smoking. In 1997,
Liggett publicly acknowledged that, as the Surgeon General and
respected medical researchers have found, smoking causes health
problems, including lung cancer, heart and vascular disease, and
emphysema.
On June 22, 2009, the President signed into law the
Family Smoking Prevention and Tobacco Control Act
(Public Law
111-31). The
law grants the Food and Drug Administration (FDA)
broad authority over the manufacture, sale, marketing and
packaging of tobacco products, although the FDA is prohibited
from issuing regulations banning all cigarettes or all smokeless
tobacco products, or requiring the reduction of nicotine yields
of a tobacco product to zero. Among other measures, the law
(under various deadlines):
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increases the number of health warnings required on cigarette
and smokeless tobacco products, increases the size of warnings
on packaging and in advertising, requires the FDA to develop
graphic warnings for cigarette packages, and grants the FDA
authority to require new warnings;
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48
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requires practically all tobacco product advertising to
eliminate color and imagery and instead consist solely of black
text on white background;
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imposes new restrictions on the sale and distribution of tobacco
products, including significant new restrictions on tobacco
product advertising and promotion, as well as the use of brand
and trade names;
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bans the use of light, mild,
low or similar descriptors on tobacco products;
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bans the use of characterizing flavors in cigarettes
other than tobacco or menthol;
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gives the FDA the authority to impose tobacco product standards
that are appropriate for the protection of the public health
(by, for example, requiring reduction or elimination of the use
of particular constituents or components, requiring product
testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);
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requires manufacturers to obtain FDA review and authorization
for the marketing of certain new or modified tobacco products;
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requires pre-market approval by the FDA for tobacco products
represented (through labels, labeling, advertising, or other
means) as presenting a lower risk of harm or tobacco-related
disease;
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requires manufacturers to report ingredients and harmful
constituents and requires the FDA to disclose certain
constituent information to the public;
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mandates that manufacturers test and report on ingredients and
constituents identified by the FDA as requiring such testing to
protect the public health, and allows the FDA to require the
disclosure of testing results to the public;
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requires manufacturers to submit to the FDA certain information
regarding the health, toxicological, behavioral or physiologic
effects of tobacco products;
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prohibits use of tobacco containing a pesticide chemical residue
at a level greater than allowed under federal law;
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requires the FDA to establish good manufacturing
practices to be followed at tobacco manufacturing
facilities;
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requires tobacco product manufacturers (and certain other
entities) to register with the FDA;
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authorizes the FDA to require the reduction of nicotine
(although it may not require the reduction of nicotine yields of
a tobacco product to zero) and the potential reduction or
elimination of other constituents, including menthol;
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imposes (and allows the FDA to impose) various recordkeeping and
reporting requirements on tobacco product manufacturers; and
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grants the FDA the regulatory authority to impose broad
additional restrictions.
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The law also requires establishment, within the FDAs new
Center for Tobacco Products, of a Tobacco Products Scientific
Advisory Committee (TPSAC) to provide advice,
information and recommendations with respect to the safety,
dependence or health issues related to tobacco products,
including:
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a recommendation on modified risk applications;
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a recommendation on the effects of tobacco product nicotine
yield alteration and whether there is a threshold level below
which nicotine yields do not produce dependence;
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a report on the public health impact of the use of menthol in
cigarettes; and
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a report on the public health impact of dissolvable tobacco
products.
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The TPSAC has initiated its review of the use of menthol in
cigarettes, so far holding several meetings to discuss the
impact of the use of menthol in cigarettes on the public health.
A subcommittee of the TPSAC has held
49
several meetings on this topic and provided the full TPSAC with
its recommendations and a draft initial list of harmful and
potentially harmful tobacco constituents, which the TPSAC
adopted. The TPSAC is expected to issue a report and
recommendations on this topic to FDA in March 2011.
The law imposes user fees on certain tobacco product
manufacturers in order to fund tobacco-related FDA activities.
User fees will be allocated among tobacco product classes
according to a formula set out in the legislation, and then
among manufacturers and importers within each class based on
market share. The FDA user fees for Liggett and Vector Tobacco
for 2010 were $10,083 and we estimate that they will be
significantly higher in the future.
The law also imposes significant new restrictions on the
advertising and promotion of tobacco products. For example, as
required under the law, FDA has finalized certain portions of
regulations previously adopted by the FDA in 1996 (which were
struck down by the Supreme Court in 2000 as beyond the
FDAs authority). Subject to limitations imposed by a
federal injunction (discussed below), these regulations took
effect on June 22, 2010. As written, these regulations
significantly limit the ability of manufacturers, distributors
and retailers to advertise and promote tobacco products, by, for
example, restricting the use of color and graphics in
advertising, limiting the use of outdoor advertising,
restricting the sale and distribution of non-tobacco items and
services, gifts, and sponsorship of events, and imposing
restrictions on the use for cigarette or smokeless tobacco
products of trade or brand names that are used for nontobacco
products.
In August 2009, several cigarette manufacturers filed a federal
lawsuit against FDA challenging the constitutionality of a
number of the restrictions imposed by these regulations,
including the ban on color and graphics, limits on the right to
make truthful statements regarding modified risk tobacco
products, restrictions on the placement of outdoor advertising,
and a ban on the distribution of product samples. On
January 4, 2010, a federal judge ruled that the
regulations ban on the use of color and graphics in
certain tobacco product advertising was unconstitutional and
prohibited FDA from enforcing that ban. The judge, however, let
stand numerous other advertising and promotion restrictions. In
March, 2010, both parties appealed this decision. We cannot
predict the future course or outcome of this lawsuit. In May,
2010, FDA issued a guidance document indicating that it intends
to exercise its enforcement discretion and not commence
enforcement actions based upon these provisions during the
pendency of the litigation.
In April 2010, a number of cigarette manufacturers filed a
federal lawsuit against FDA challenging the restrictions on
trade or brand names based upon First Amendment and other
grounds. In May 2010, FDA issued a guidance document indicating
that FDA is aware of concerns regarding the trade and brand name
restrictions and is considering what changes, if any, would be
appropriate to address those concerns. FDA also indicated that
while the agency is considering those issues, it intends to
exercise its enforcement discretion and not commence trade or
brand name enforcement actions for the duration of its
consideration where: (1) The trade or brand name of the
cigarettes or smokeless tobacco product was registered, or the
product was marketed, in the United States on or before
June 22, 2009; or (2) The first marketing or
registration in the United States of the tobacco product occurs
before the first marketing or registration in the United States
of the non-tobacco product bearing the same name; provided,
however, that the tobacco and non-tobacco product are not owned,
manufactured, or distributed by the same, related, or affiliated
entities (including as a licensee). The lawsuit was subsequently
stayed, at the request of the parties, while FDA is in the
process of evaluating these concerns. We cannot predict the
future course or outcome of FDAs deliberations or this
litigation.
The FDA law requires premarket review of new tobacco
products. A new tobacco product is one that
was not commercially marketed in the U.S. before
February 15, 2007 or that was modified after that date. In
general, before a company may commercially market a new
tobacco product, it must either (a) submit an
application and obtain an order from the FDA permitting the
product to be marketed; or (b) submit a report and receive
an FDA order finding the product to be substantially
equivalent to a predicate tobacco product that
was commercially marketed in the U.S. prior to
February 15, 2007. A substantially equivalent
tobacco product is one that has the same
characteristics as the predicate or one that has
different characteristics but does not raise
different questions of public health.
Manufacturers of products first introduced after
February 15, 2007 and before March 22, 2011 who submit
a substantial equivalence report to the FDA prior to
March 23, 2011 may continue to market the tobacco
product
50
unless FDA issues an order that the product is not substantially
equivalent. Failure to submit the report before March 23,
2011, or FDAs conclusion that such a new tobacco
product is not substantially equivalent, will cause the
product to be deemed misbranded
and/or
adulterated. After March 22, 2011, a new tobacco
product may not be marketed without an FDA substantial
equivalence determination.
In January 2011, FDA issued a guidance document along with a
proposed rule to establish the process and criteria for
requesting an exemption from substantial equivalence
requirements. We cannot predict how FDA will interpret and apply
these requirements, or whether FDA will deem our products to be
substantially equivalent to already marketed tobacco products.
Separately, the law also requires the FDA to issue future
regulations regarding the promotion and marketing of tobacco
products sold through non-face-to-face transactions.
The FDA has been acting quickly to implement the law and will
continue to implement various provisions over time. Liggett and
Vector Tobacco have been monitoring FDA tobacco initiatives and
have made various regulatory submissions to the FDA in order to
comply with new requirements.
It is likely that the new tobacco law could result in a decrease
in cigarette sales in the United States, including sales of
Liggetts and Vector Tobaccos brands. Total
compliance and related costs are not possible to predict and
depend substantially on the future requirements imposed by the
FDA under the new tobacco law. Costs, however, could be
substantial and could have a material adverse effect on the
companies financial condition, results of operations, and
cash flows. In addition, the FDA has a number of investigatory
and enforcement tools available to it. We are aware, for
example, that the FDA has already requested company-specific
information from competitors. FDA has also initiated a program
to award contracts to states to assist with compliance and
enforcement activities. Failure to comply with the new tobacco
law and with FDA regulatory requirements could result in
significant financial penalties and could have a material
adverse effect on the business, financial condition and results
of operation of both Liggett and Vector Tobacco. At present, we
are not able to predict whether the new tobacco law will impact
Liggett and Vector Tobacco to a greater degree than other
companies in the industry, thus affecting its competitive
position.
Liggett and Vector Tobacco provide ingredient information
annually, as required by law, to the states of Massachusetts,
Texas and Minnesota. Several other states are considering
ingredient disclosure legislation.
In October 2004, the Fair and Equitable Tobacco Reform Act of
2004 (FETRA) was signed into law. FETRA provides for
the elimination of the federal tobacco quota and price support
program through an industry funded buyout of tobacco growers and
quota holders. Pursuant to the legislation, manufacturers of
tobacco products have been assessed $10,140,000 over a ten year
period, commencing in 2005, to compensate tobacco growers and
quota holders for the elimination of their quota rights.
Cigarette manufacturers are currently responsible for 95% of the
assessment (subject to adjustment in the future), which is
allocated based on relative unit volume of domestic cigarette
shipments. Liggetts and Vector Tobaccos assessment
was $31,161 for 2010. Management anticipates that the assessment
will be higher for 2011. The relative cost of the legislation to
the three largest cigarette manufacturers will likely be less
than the cost to smaller manufacturers, including Liggett and
Vector Tobacco, because one effect of the legislation is that
the three largest manufacturers are no longer obligated to make
certain contractual payments, commonly known as Phase II
payments, that they agreed in 1999 to make to tobacco-producing
states. The ultimate impact of this legislation cannot be
determined, but there is a risk that smaller manufacturers, such
as Liggett and Vector Tobacco, will be disproportionately
affected by the legislation, which could have a material adverse
effect on us.
Cigarettes are subject to substantial and increasing federal,
state and local excise taxes. On April 1, 2009, the federal
cigarette excise tax increased from $0.39 to $1.01 per pack.
State excise taxes vary considerably and, when combined with
sales taxes, local taxes and the federal excise tax, may exceed
$4.00 per pack. Many states are considering, or have pending,
legislation proposing further state excise tax increases.
Management believes increases in excise and similar taxes have
had, and will continue to have, an adverse effect on sales of
cigarettes.
Over the last several years all 50 states and the District
of Columbia have enacted virtually identical legislation
requiring cigarettes to meet a laboratory test standard for
reduced ignition propensity. Cigarettes that meet this standard
are referred to as fire standards compliant or
FSC, and are sometimes commonly called self-
51
extinguishing. All of the cigarettes that Liggett and
Vector Tobacco manufacture are fire standards compliant.
Compliance with such legislation could be burdensome and costly
and could harm the business of Liggett and Vector Tobacco,
particularly if there were to be varying standards from state to
state.
In November 2008, the Federal Trade Commission (FTC)
rescinded guidance it issued in 1966 that generally permitted
statements concerning cigarette tar and nicotine
yields if they were based on the Cambridge Filter Method,
sometimes called the FTC method. In its rescission notice, the
FTC also indicated that advertisers should no longer use terms
suggesting the FTCs endorsement or approval of any
specific test method, including terms such as per FTC
Method or other phrases that state or imply FTC
endorsement or approval of the Cambridge Filter Method or other
machine-based methods for measuring cigarette tar or
nicotine yields. Also in its rescission notice, the FTC
indicated that cigarette descriptors such as light
and ultra light have not been defined by the FTC,
nor has the FTC provided any guidance or authorization for their
use. The FTC indicated that to the extent descriptors are used
in a manner that convey an overall impression that is false,
misleading, or unsubstantiated, such use could be actionable.
The FTC further indicated that companies must ensure that any
continued use of descriptors does not convey an erroneous or
unsubstantiated message that a particular cigarette presents a
reduced risk of harm or is otherwise likely to mislead
consumers. In response to the FTCs action, we have removed
all reference to tar and nicotine testing from our
point-of-sale
advertising. In addition, the new tobacco law imposes a
ban which took effect in June 2010 on
the use of light, mild, low
or similar descriptors on tobacco product labels and in labeling
or advertising. To the extent descriptors are no longer used to
market or promote our cigarettes, this may have a material
adverse effect on us.
A wide variety of federal, state and local laws limit the
advertising, sale and use of cigarettes, and these laws have
proliferated in recent years. For example, many local laws
prohibit smoking in restaurants and other public places, and
many employers have initiated programs restricting or
eliminating smoking in the workplace. There are various other
legislative efforts pending at the federal, state or local level
which seek to, among other things, eliminate smoking in public
places, curtail affirmative defenses of tobacco companies in
product liability litigation, and further restrict the sale,
marketing and advertising of cigarettes and other tobacco
products. This trend has had, and is likely to continue to have,
an adverse effect on us. It is not possible to predict what, if
any, additional legislation, regulation or other governmental
action will be enacted or implemented, or to predict what the
impact of the new FDA tobacco law will be on these pending
legislative efforts.
In addition to the foregoing, there have been a number of other
restrictive regulatory actions, adverse legislative and
political decisions and other unfavorable developments
concerning cigarette smoking and the tobacco industry. These
developments may negatively affect the perception of potential
triers of fact with respect to the tobacco industry, possibly to
the detriment of certain pending litigation, and may prompt the
commencement of additional similar litigation or legislation.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains
forward-looking statements within the meaning of the
federal securities law. Forward-looking statements include
information relating to our intent, belief or current
expectations, primarily with respect to, but not limited to:
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economic outlook,
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capital expenditures,
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cost reduction,
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new legislation,
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cash flows,
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operating performance,
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litigation,
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52
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impairment charges and cost saving associated with
restructurings of our tobacco operations, and
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related industry developments (including trends affecting our
business, financial condition and results of operations).
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We identify forward-looking statements in this report by using
words or phrases such as anticipate,
believe, estimate, expect,
intend, may be, objective,
plan, seek, predict,
project and will be and similar words or
phrases or their negatives.
The forward-looking information involves important risks and
uncertainties that could cause our actual results, performance
or achievements to differ materially from our anticipated
results, performance or achievements expressed or implied by the
forward-looking statements. Factors that could cause actual
results to differ materially from those suggested by the
forward-looking statements include, without limitation, the
following:
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general economic and market conditions and any changes therein,
due to acts of war and terrorism or otherwise,
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impact of current crises in capital and credit markets,
including any continued worsening,
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governmental regulations and policies,
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effects of industry competition,
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impact of business combinations, including acquisitions and
divestitures, both internally for us and externally in the
tobacco industry,
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impact of restructurings on our tobacco business and our ability
to achieve any increases in profitability estimated to occur as
a result of these restructurings,
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impact of new legislation on our competitors payment
obligations, results of operations and product costs, i.e. the
impact of recent federal legislation eliminating the federal
tobacco quota system and providing for regulation of tobacco
products by the FDA,
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impact of substantial increases in federal, state and local
excise taxes,
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uncertainty related to product liability litigation including
the Engle progeny cases pending in Florida; and,
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potential additional payment obligations for us under the Master
Settlement Agreement and other settlement agreements with the
states.
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Further information on the risks and uncertainties that we face
include the risks discussed above under Item 1A. Risk
Factors and in Managements Discussion and
Analysis of Financial Condition and Results of Operations.
Although we believe the expectations reflected in these
forward-looking statements are based on reasonable assumptions,
there is a risk that these expectations will not be attained and
that any deviations will be material. The forward-looking
statements speak only as of the date they are made.
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ITEM 7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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The information under the caption Managements
Discussion and Analysis of Financial Condition and Results of
Operations Market Risk is incorporated herein
by reference.
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ITEM 8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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Our Consolidated Financial Statements and Notes thereto,
together with the report thereon of PricewaterhouseCoopers LLP
dated February 25, 2011, are set forth beginning on
page F-1
of this report.
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ITEM 9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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None.
53
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ITEM 9A.
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CONTROLS
AND PROCEDURES
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Conclusions
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we have evaluated the effectiveness
of our disclosure controls and procedures as of the end of the
period covered by this report, and, based on their evaluation,
our principal executive officer and principal financial officer
have concluded that these controls and procedures are effective.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rule 13a-15(f).
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal
Control Integrated Framework, our management
concluded that our internal control over financial reporting was
effective as of December 31, 2010.
The effectiveness of our internal control over financial
reporting as of December 31, 2010 has been audited by
PricewaterhouseCoopers LLP, an independent registered certified
public accounting firm, as stated in their report, which is
included herein.
Material
Changes in Internal Control
There were no changes in our internal control over financial
reporting during the period covered by this report that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
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ITEM 9B.
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OTHER
INFORMATION
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None.
PART III
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ITEM 10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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The information contained under the following headings in our
definitive Proxy Statement for our 2011 Annual Meeting of
Stockholders (the 2011 Proxy Statement), to be filed
with the SEC not later than 120 days after the end of our
fiscal year covered by this report pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
is incorporated herein by reference: Board
Proposal 1 Nomination and Election of
Directors and Section 16(a) Beneficial
Ownership Compliance. See Item 5 of this report for
information regarding our executive officers.
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ITEM 11.
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EXECUTIVE
COMPENSATION
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The information contained under the headings Executive
Compensation and Compensation Committee Interlocks
and Insider Participation in our 2011 Proxy Statement is
incorporated herein by reference.
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ITEM 12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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The information contained under the headings Equity
Compensation Plan Information and Security Ownership
of Certain Beneficial Owners and Management in our 2011
Proxy Statement is incorporated herein by reference.
54
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ITEM 13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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The information contained under the headings Certain
Relationships and Related Party Transactions and
Board of Directors and Committees in our 2011 Proxy
Statement is incorporated herein by reference.
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ITEM 14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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The information contained under the headings Audit and
Non-Audit Fees and Pre-Approval Policies and
Procedures in our 2011 Proxy Statement is incorporated
herein by reference.
PART IV
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ITEM 15.
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EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
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(a)(1) INDEX TO 2010 CONSOLIDATED FINANCIAL STATEMENTS:
Our consolidated financial statements and the notes thereto,
together with the report thereon of PricewaterhouseCoopers LLP
dated February 25, 2011, appear beginning on
page F-1
of this report.
(a)(2) FINANCIAL STATEMENT SCHEDULES:
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Schedule II Valuation and Qualifying Accounts
Page
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F-72
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(c) OTHER FINANCIAL STATEMENTS REQUIRED BY
REGULATION S-X:
Liggett Group LLC
The consolidated financial statements of Liggett Group LLC for
the three years ended December 31, 2010 are filed as
Exhibit 99.2 to this report and are incorporated by
reference.
Vector Tobacco Inc.
The consolidated financial statements of Vector Tobacco Inc. for
the three years ended December 31, 2010 are filed as
Exhibit 99.3 to this report and are incorporated by
reference.
Douglas Elliman Realty LLC
The consolidated financial statements of Douglas Elliman Realty
LLC for the three years ended December 31, 2010 are filed
as Exhibit 99.4 to this report and are incorporated by
reference.
55
(a)(3) EXHIBITS
(a) The following is a list of exhibits filed herewith as
part of this Annual Report on
Form 10-K:
INDEX
OF EXHIBITS
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EXHIBIT
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NO.
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DESCRIPTION
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* 3
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.1
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Amended and Restated Certificate of Incorporation of Vector
Group Ltd. (formerly known as Brooke Group Ltd.)
(Vector) (incorporated by reference to
Exhibit 3.1 in Vectors
Form 10-Q
for the quarter ended September 30, 1999).
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* 3
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.2
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Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Vector (incorporated by reference to
Exhibit 3.1 in Vectors
Form 8-K
dated May 24, 2000).
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* 3
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.3
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Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Vector Group Ltd. (incorporated by reference
to Exhibit 3.1 in Vectors
Form 10-Q
for the quarter ended June 30, 2007).
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* 3
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.4
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Amended and Restated By-Laws of Vector Group Ltd. (incorporated
by reference to Exhibit 3.4 in Vectors
Form 8-K
dated October 19, 2007).
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* 4
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.1
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Amended and Restated Loan and Security Agreement dated as of
April 14, 2004, by and between Wachovia Bank, N.A., as
lender, Liggett Group Inc. (Liggett), as borrower,
100 Maple LLC and Epic Holdings Inc. (the Wachovia Loan
Agreement) (incorporated by reference to Exhibit 10.1
in Vectors
Form 8-K
dated April 14, 2004).
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* 4
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.2
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Amendment, dated as of December 13, 2005, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated December 13, 2005).
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* 4
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.3
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Amendment, dated as of January 31, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated February 2, 2007).
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* 4
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.4
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Amendment, dated as of August 10, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.6 in
Vectors
Form 8-K
dated August 16, 2007).
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* 4
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.5
|
|
Amendment, dated as of August 16, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.7 in
Vectors
Form 8-K
dated August 16, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.6
|
|
Intercreditor Agreement, dated as of August 16, 2007,
between the Wachovia Bank, N.A., as ABL Lender, U.S. Bank
National Association, as Collateral Agent, Liggett Group LLC, as
Borrower, and 100 Maple LLC, as Loan Party (incorporated by
reference to Exhibit 99.1 in Vectors
Form 8-K
dated August 16, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.7
|
|
Amendment, dated as of August 31, 2010, to Wachovia Loan
and Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated November 1, 2010).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.8
|
|
Indenture, dated as of July 12, 2006, by and between Vector
and Wells Fargo Bank, N.A., relating to the
37/8%
Variable Interest Senior Convertible Debentures due 2026 (the
37/8% Debentures),
including the form of the
37/8% Debenture
(incorporated by reference to Exhibit 4.1 in Vectors
Form 8-K
dated July 11, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.9
|
|
Indenture, dated as of August 16, 2007, between Vector
Group Ltd., the subsidiary guarantors named therein and U.S.
Bank National Association, as Trustee, relating to the
11% Senior Secured Notes due 2015, including the form of
Note (the Senior Notes Indenture) (incorporated by
reference to Exhibit 4.1 in Vectors
Form 8-K
dated August 16, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.10
|
|
First Supplemental Indenture, dated as of July 15, 2008, to
the Senior Notes Indenture (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated July 15, 2008).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.11
|
|
Second Supplemental Indenture, dated as of September 1,
2009, to the Senior Notes Indenture (incorporated by reference
to Exhibit 4.1 of Vectors
Form 8-K
dated September 1, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.12
|
|
Third Supplemental Indenture, dated as of April 20, 2010,
to the Senior Notes Indenture (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated April 20, 2010).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.13
|
|
Fourth Supplemental Indenture, dated as of December 3,
2010, to the Senior Notes Indenture (incorporated by reference
to Exhibit 4.1 of Vectors
Form 8-K
dated December 3, 2010).
|
|
|
|
|
|
56
|
|
|
|
|
EXHIBIT
|
|
|
NO.
|
|
DESCRIPTION
|
|
|
* 4
|
.14
|
|
Fifth Supplemental Indenture, dated as of December 16,
2010, to the Senior Notes Indenture (incorporated by reference
to Exhibit 4.1 of Vectors
Form 8-K
dated December 16, 2010).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.15
|
|
Pledge Agreement, dated as of August 16, 2007, between VGR
Holding LLC, as Grantor, and U.S. Bank National Association, as
Collateral Agent (incorporated by reference to Exhibit 4.2
in Vectors
Form 8-K
dated August 16, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.16
|
|
Security Agreement, dated as of August 16, 2007, between
Vector Tobacco Inc., as Grantor, and U.S. Bank National
Association, as Collateral Agent (incorporated by reference to
Exhibit 4.3 in Vectors
Form 8-K
dated August 16, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.17
|
|
Security Agreement, dated as of August 16, 2007, between
Liggett Group LLC and 100 Maple LLC, as Grantors, and U.S. Bank
National Association, as Collateral Agent (incorporated by
reference to Exhibit 4.4 in Vectors
Form 8-K
dated August 16, 2007).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.18
|
|
Note, dated May 11, 2009, by Vector Group Ltd. to Frost
Nevada Investments Trust (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated May 11, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.19
|
|
Purchase Agreement, dated as of May 11, 2009, between
Vector Group Ltd. and Frost Nevada Investments Trust
(incorporated by reference to Exhibit 4.2 of Vectors
Form 8-K
dated May 11, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.20
|
|
Form of Issuance and Exchange Agreement, dated as of
June 15, 2009, between Vector Group Ltd. and holders of its
5% Variable Interest Senior Convertible Notes due 2011
(incorporated by reference to Exhibit 4.1 of Vectors
Form 8-K
dated June 15, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 4
|
.21
|
|
Indenture, dated as of June 30, 2009, between Vector Group
Ltd. and Wells Fargo Bank, N.A. as trustee, relating to the
6.75% Variable Interest Senior Convertible Exchange Notes Due
2014, including the form of Note (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated June 30, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.1
|
|
Corporate Services Agreement, dated as of June 29, 1990,
between Vector and Liggett (incorporated by reference to
Exhibit 10.10 in Liggetts Registration Statement on
Form S-1,
No. 33-47482).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.2
|
|
Services Agreement, dated as of February 26, 1991, between
Brooke Management Inc. (BMI) and Liggett (the
Liggett Services Agreement) (incorporated by
reference to Exhibit 10.5 in VGR Holdings
Registration Statement on
Form S-1,
No. 33-93576).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.3
|
|
First Amendment to Liggett Services Agreement, dated as of
November 30, 1993, between Liggett and BMI (incorporated by
reference to Exhibit 10.6 in VGR Holdings
Registration Statement on
Form S-1,
No. 33-93576).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.4
|
|
Second Amendment to Liggett Services Agreement, dated as of
October 1, 1995, between BMI, Vector and Liggett
(incorporated by reference to Exhibit 10(c) in
Vectors
Form 10-Q
for the quarter ended September 30, 1995).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.5
|
|
Third Amendment to Liggett Services Agreement, dated as of
March 31, 2001, by and between Vector and Liggett
(incorporated by reference to Exhibit 10.5 in Vectors
Form 10-K
for the year ended December 31, 2003).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.6
|
|
Corporate Services Agreement, dated January 1, 1992,
between VGR Holding and Liggett (incorporated by reference to
Exhibit 10.13 in Liggetts Registration Statement on
Form S-1,
No. 33-47482).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.7
|
|
Settlement Agreement, dated March 15, 1996, by and among
the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana, Brooke Group Holding and Liggett (incorporated by
reference to Exhibit 15 in the Schedule 13D filed by
Vector on March 11, 1996, as amended, with respect to the
common stock of RJR Nabisco Holdings Corp.).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.8
|
|
Addendum to Initial States Settlement Agreement (incorporated by
reference to Exhibit 10.43 in Vectors
Form 10-Q
for the quarter ended March 31, 1997).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.9
|
|
Settlement Agreement, dated March 12, 1998, by and among
the States listed in Appendix A thereto, Brooke Group
Holding and Liggett (incorporated by reference to
Exhibit 10.35 in Vectors
Form 10-K
for the year ended December 31, 1997).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.10
|
|
Master Settlement Agreement made by the Settling States and
Participating Manufacturers signatories thereto (incorporated by
reference to Exhibit 10.1 in Philip Morris Companies
Inc.s
Form 8-K
dated November 25, 1998, Commission File
No. 1-8940).
|
|
|
|
|
|
57
|
|
|
|
|
EXHIBIT
|
|
|
NO.
|
|
DESCRIPTION
|
|
|
* 10
|
.11
|
|
General Liggett Replacement Agreement, dated as of
November 23, 1998, entered into by each of the Settling
States under the Master Settlement Agreement, and Brooke Group
Holding and Liggett (incorporated by reference to
Exhibit 10.34 in Vectors
Form 10-K
for the year ended December 31, 1998).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.12
|
|
Stipulation and Agreed Order regarding Stay of Execution Pending
Review and Related Matters, dated May 7, 2001, entered into
by Philip Morris Incorporated, Lorillard Tobacco Co., Liggett
and Brooke Group Holding Inc. and the class counsel in Engel,
et. al., v. R.J. Reynolds Tobacco Co., et. al.
(incorporated by reference to Exhibit 99.2 in Philip Morris
Companies Inc.s
Form 8-K
dated May 7, 2001).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.13
|
|
Amended and Restated Employment Agreement dated as of
January 27, 2006, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 in Vectors
Form 8-K
dated January 27, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.14
|
|
Employment Agreement, dated as of January 27, 2006, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.3 in Vectors
Form 8-K
dated January 27, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.15
|
|
Amended and Restated Employment Agreement, dated as of
January 27, 2006, between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.4 in Vectors
Form 8-K
dated January 27, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.16
|
|
Employment Agreement, dated as of November 11, 2005,
between Liggett Group Inc. and Ronald J. Bernstein (incorporated
by reference to Exhibit 10.1 in Vectors
Form 8-K
dated November 11, 2005).
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.17
|
|
Amendment to Employment Agreement, dated as of January 14,
2011, between Liggett and Ronald J. Bernstein.
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.18
|
|
Employment Agreement, dated as of January 27, 2006, between
Vector and J. Bryant Kirkland III (incorporated by
reference to Exhibit 10.5 in Vectors
Form 8-K
dated January 27, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.19
|
|
Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive
Plan (incorporated by reference to Appendix A in
Vectors Proxy Statement dated April 21, 2004).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.20
|
|
Stock Option Agreement, dated December 3, 2009, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.19 in Vectors
Form 10-K
dated December 31, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.21
|
|
Stock Option Agreement, dated December 3, 2009, between
Vector and Marc N. Bell (incorporated by reference to
Exhibit 10.20 in Vectors
Form 10-K
dated December 31, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.22
|
|
Stock Option Agreement, dated December 3, 2009, between
Vector and Howard M. Lorber (incorporated by reference to
Exhibit 10.22 in Vectors
Form 10-K
dated December 31, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.23
|
|
Stock Option Agreement, dated December 3, 2009, between
Vector and J. Bryant Kirkland III (incorporated by
reference to Exhibit 10.23 in Vectors
Form 10-K
dated December 31, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.24
|
|
Option Letter Agreement, dated as of November 11, 2005
between Vector and Ronald J. Bernstein (incorporated by
reference to Exhibit 10.3 in Vectors
Form 8-K
dated November 11, 2005).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.25
|
|
Restricted Share Award Agreement, dated as of April 7,
2009, between Vector Group Ltd. and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 of Vectors
Form 8-K
dated April 10, 2009).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.26
|
|
Stock Option Agreement, dated January 14, 2011, between
Vector and Howard M. Lorber (incorporated by reference to
Exhibit S to Schedule 13D, as amended, dated
January 21, 2011 filed by Howard M. Lorber).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.27
|
|
Vector Senior Executive Annual Bonus Plan (incorporated by
reference to Exhibit 10.7 in Vectors
Form 8-K
dated January 27, 2006).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.28
|
|
Vector Senior Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.1 in Vectors
Form 8-K
dated January 14, 2011).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.29
|
|
Vector Supplemental Retirement Plan (as amended and restated
April 24, 2008) (incorporated by reference to
Exhibit 10.1 in Vectors
Form 10-Q
for the quarter ended June 30, 2008).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.30
|
|
Operating Agreement of Douglas Elliman Realty, LLC (formerly
known as Montauk Battery Realty LLC) dated
December 17, 2002 (incorporated by reference to
Exhibit 10.1 in New Valleys
Form 8-K
dated December 13, 2002).
|
|
|
|
|
|
58
|
|
|
|
|
EXHIBIT
|
|
|
NO.
|
|
DESCRIPTION
|
|
|
* 10
|
.31
|
|
First Amendment to Operating Agreement of Douglas Elliman
Realty, LLC (formerly known as Montauk Battery Realty LLC),
dated as of March 14, 2003 (incorporated by reference to
Exhibit 10.1 in New Valleys
Form 10-Q
for the quarter ended March 31, 2003).
|
|
|
|
|
|
|
|
|
|
|
|
* 10
|
.32
|
|
Second Amendment to Operating Agreement of Douglas Elliman
Realty, LLC, dated as of May 19, 2003 (incorporated by
reference to Exhibit 10.1 in New Valleys
Form 10-Q
for the quarter ended June 30, 2003).
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
Subsidiaries of Vector.
|
|
|
|
|
|
|
|
|
|
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
|
|
|
|
|
|
23
|
.2
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
|
|
|
|
|
|
23
|
.3
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
|
|
|
|
|
|
23
|
.4
|
|
Consent of PricewaterhouseCoopers LLP.
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Certification of Chief Executive Officer, Pursuant to Exchange
Act
Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Certification of Chief Financial Officer, Pursuant to Exchange
Act
Rule 13a-14(a),
as Adopted Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Certification of Chief Executive Officer, Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Certification of Chief Financial Officer, Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
|
|
|
|
|
|
99
|
.1
|
|
Material Legal Proceedings.
|
|
|
|
|
|
|
|
|
|
|
|
99
|
.2
|
|
Liggett Group LLCs Consolidated Financial Statements for
the three years ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
99
|
.3
|
|
Vector Tobacco Inc.s Consolidated Financial Statements for
the three years ended December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
99
|
.4
|
|
Douglas Elliman Realty LLCs Consolidated Financial
Statements for the three years ended December 31, 2010.
|
|
|
|
* |
|
Incorporated by reference |
Each management contract or compensatory plan or arrangement
required to be filed as an exhibit to this report pursuant to
Item 14(c) is listed in exhibit nos. 10.13 through 10.29.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned
thereunto duly authorized.
VECTOR GROUP LTD.
(Registrant)
|
|
|
|
By:
|
/s/ J.
Bryant Kirkland III
|
J. Bryant Kirkland III
Vice President, Treasurer and Chief Financial
Officer
Date: February 25, 2011
POWER OF
ATTORNEY
The undersigned directors and officers of Vector Group Ltd.
hereby constitute and appoint Richard J. Lampen, J. Bryant
Kirkland III and Marc N. Bell, and each of them, with full
power to act without the other and with full power of
substitution and resubstitutions, our true and lawful
attorneys-in-fact with full power to execute in our name and
behalf in the capacities indicated below, this Annual Report on
Form 10-K
and any and all amendments thereto and to file the same, with
all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, and
hereby ratify and confirm all that such attorneys-in-fact, or
any of them, or their substitutes shall lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities indicated on
February 25, 2011.
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
|
|
|
/s/ Howard
M. Lorber
Howard
M. Lorber
|
|
President and Chief Executive Officer
(Principal Executive Officer)
|
|
|
|
/s/ J.
Bryant Kirkland III
J.
Bryant Kirkland III
|
|
Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
|
|
|
|
/s/ Henry
C. Beinstein
Henry
C. Beinstein
|
|
Director
|
|
|
|
/s/ Ronald
J. Bernstein
Ronald
J. Bernstein
|
|
Director
|
|
|
|
/s/ Robert
J. Eide
Robert
J. Eide
|
|
Director
|
|
|
|
/s/ Bennett
S. LeBow
Bennett
S. LeBow
|
|
Director
|
|
|
|
/s/ Jeffrey
S. Podell
Jeffrey
S. Podell
|
|
Director
|
|
|
|
/s/ Jean
E. Sharpe
Jean
E. Sharpe
|
|
Director
|
60
VECTOR
GROUP LTD.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
ITEMS 8, 15(a)(1) AND (2), 15(c)
INDEX TO
FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules of the Registrant and its
subsidiaries required to be included in Items 8, 15(a)
(1) and (2), 15(c) are listed below:
|
|
|
|
|
|
|
Page
|
|
FINANCIAL STATEMENTS:
|
|
|
|
|
Vector Group Ltd. Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-8
|
|
FINANCIAL STATEMENT SCHEDULE:
|
|
|
|
|
|
|
|
F-72
|
|
Financial Statement Schedules not listed above have been omitted
because they are not applicable or the required information is
contained in our consolidated financial statements or
accompanying notes.
Liggett
Group LLC
The consolidated financial statements of Liggett Group LLC for
the three years ended December 31, 2010 are filed as
Exhibit 99.2 to this report and are incorporated by
reference.
Vector
Tobacco Inc.
The consolidated financial statements of Vector Tobacco Inc. for
the three years ended December 31, 2010 are filed as
Exhibit 99.3 to this report and are incorporated by
reference.
Douglas
Elliman Realty LLC
The consolidated financial statements of Douglas Elliman Realty
LLC for the three years ended December 31, 2010 are filed
as Exhibit 99.4 to this report and are incorporated by
reference.
F-1
Report of
Independent Registered Certified Public Accounting
Firm
To the Board of Directors and Stockholders
of Vector Group Ltd.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of Vector Group Ltd. and its subsidiaries
at December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2010 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule listed in the accompanying index presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting appearing under
Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and
on the Companys internal control over financial reporting
based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material
misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1(n) to the consolidated financial
statements, the Company changed the manner in which it accounts
for defined benefit and other post retirement plans in 2008.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
Miami, Florida
February 25, 2011
F-2
VECTOR
GROUP LTD. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
299,825
|
|
|
$
|
209,454
|
|
Investment securities available for sale
|
|
|
78,754
|
|
|
|
51,743
|
|
Accounts receivable trade
|
|
|
1,849
|
|
|
|
8,098
|
|
Inventories
|
|
|
107,079
|
|
|
|
98,486
|
|
Deferred income taxes
|
|
|
31,786
|
|
|
|
14,154
|
|
Restricted assets
|
|
|
2,661
|
|
|
|
3,138
|
|
Other current assets
|
|
|
4,809
|
|
|
|
4,135
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
526,763
|
|
|
|
389,208
|
|
Property, plant and equipment, net
|
|
|
55,412
|
|
|
|
42,986
|
|
Investment in Escena, net
|
|
|
13,354
|
|
|
|
13,244
|
|
Long-term investments accounted for at cost
|
|
|
46,033
|
|
|
|
50,323
|
|
Long-term investments accounted for under the equity method
|
|
|
10,954
|
|
|
|
|
|
Investments in non-consolidated real estate businesses
|
|
|
80,416
|
|
|
|
49,566
|
|
Investments in townhomes
|
|
|
16,275
|
|
|
|
|
|
Restricted assets
|
|
|
8,694
|
|
|
|
4,835
|
|
Deferred income taxes
|
|
|
37,828
|
|
|
|
39,838
|
|
Intangible asset
|
|
|
107,511
|
|
|
|
107,511
|
|
Prepaid pension costs
|
|
|
13,935
|
|
|
|
8,994
|
|
Other assets
|
|
|
32,420
|
|
|
|
29,037
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
949,595
|
|
|
$
|
735,542
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Current portion of notes payable and long-term debt
|
|
$
|
51,345
|
|
|
$
|
21,889
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
480
|
|
|
|
|
|
Current portion of employee benefits
|
|
|
1,014
|
|
|
|
1,029
|
|
Accounts payable
|
|
|
9,027
|
|
|
|
4,355
|
|
Accrued promotional expenses
|
|
|
14,327
|
|
|
|
12,745
|
|
Income taxes payable, net
|
|
|
11,617
|
|
|
|
19,924
|
|
Accrued excise and payroll taxes payable, net
|
|
|
18,523
|
|
|
|
24,093
|
|
Settlement accruals
|
|
|
48,071
|
|
|
|
18,803
|
|
Deferred income taxes
|
|
|
36,963
|
|
|
|
17,254
|
|
Accrued interest
|
|
|
20,824
|
|
|
|
13,840
|
|
Other current liabilities
|
|
|
14,681
|
|
|
|
15,076
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
226,872
|
|
|
|
149,008
|
|
Notes payable, long-term debt and other obligations, less
current portion
|
|
|
506,052
|
|
|
|
334,920
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
141,012
|
|
|
|
153,016
|
|
Non-current employee benefits
|
|
|
38,742
|
|
|
|
34,247
|
|
Deferred income taxes
|
|
|
51,815
|
|
|
|
45,120
|
|
Other liabilities
|
|
|
31,336
|
|
|
|
23,913
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
995,829
|
|
|
|
740,224
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders deficiency:
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share,
10,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Common stock, par value $0.10 per share, 150,000,000 shares
authorized, 78,349,590 and 74,510,595 shares issued and
74,939,284 and 71,262,684 shares outstanding
|
|
|
7,494
|
|
|
|
7,126
|
|
Additional paid-in capital
|
|
|
|
|
|
|
15,928
|
|
Accumulated deficit
|
|
|
(45,327
|
)
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
|
4,456
|
|
|
|
(14,879
|
)
|
Less: 3,410,306 and 3,247,911 shares of common stock in
treasury, at cost
|
|
|
(12,857
|
)
|
|
|
(12,857
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders deficiency
|
|
|
(46,234
|
)
|
|
|
(4,682
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficiency
|
|
$
|
949,595
|
|
|
$
|
735,542
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-3
VECTOR
GROUP LTD. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Revenues*
|
|
$
|
1,063,289
|
|
|
$
|
801,494
|
|
|
$
|
565,186
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
845,106
|
|
|
|
577,386
|
|
|
|
335,299
|
|
Operating, selling, administrative and general expenses
|
|
|
90,709
|
|
|
|
85,041
|
|
|
|
94,583
|
|
Litigation judgment expense
|
|
|
16,161
|
|
|
|
|
|
|
|
|
|
Gain on brand transaction
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
Restructuring charges
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
111,313
|
|
|
|
143,167
|
|
|
|
135,304
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(84,096
|
)
|
|
|
(68,490
|
)
|
|
|
(62,335
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
11,524
|
|
|
|
(35,925
|
)
|
|
|
24,337
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
(18,573
|
)
|
|
|
|
|
Provision for loss on investments
|
|
|
|
|
|
|
(8,500
|
)
|
|
|
(32,400
|
)
|
Gain on sale of investment securities available for sale
|
|
|
19,869
|
|
|
|
|
|
|
|
|
|
Equity income from non-consolidated real estate businesses
|
|
|
23,963
|
|
|
|
15,213
|
|
|
|
24,399
|
|
Other, net
|
|
|
2,997
|
|
|
|
1,645
|
|
|
|
5,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
85,570
|
|
|
|
28,537
|
|
|
|
94,572
|
|
Income tax expense
|
|
|
(31,486
|
)
|
|
|
(3,731
|
)
|
|
|
(34,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,084
|
|
|
$
|
24,806
|
|
|
$
|
60,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.71
|
|
|
$
|
0.33
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.71
|
|
|
$
|
0.33
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash distributions declared per share
|
|
$
|
1.54
|
|
|
$
|
1.47
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Revenues and cost of goods sold include federal excise taxes of
$538,328, $377,771 and $168,170 for the years ended
December 31, 2010, 2009 and 2008, respectively. |
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
VECTOR
GROUP LTD. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, January 1, 2008
|
|
|
60,361,068
|
|
|
$
|
6,036
|
|
|
$
|
89,494
|
|
|
$
|
|
|
|
$
|
18,179
|
|
|
$
|
(12,857
|
)
|
|
$
|
100,852
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,504
|
|
|
|
|
|
|
|
|
|
|
|
60,504
|
|
Change in net loss and prior service cost, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,989
|
)
|
|
|
|
|
|
|
(30,989
|
)
|
Forward contract adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
|
|
|
|
|
|
|
|
35
|
|
Unrealized gain on long-term investments accounted for under the
equity method, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(399
|
)
|
|
|
|
|
|
|
(399
|
)
|
Unrealized gain on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,263
|
)
|
|
|
|
|
|
|
(12,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(43,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(509
|
)
|
|
|
195
|
|
|
|
|
|
|
|
(314
|
)
|
Distributions and dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
(46,081
|
)
|
|
|
(59,681
|
)
|
|
|
|
|
|
|
|
|
|
|
(105,762
|
)
|
Effect of stock dividend
|
|
|
3,142,760
|
|
|
|
314
|
|
|
|
|
|
|
|
(314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,304
|
|
Exercise of options, net of 1,375,895 shares delivered to
pay exercise price
|
|
|
2,510,242
|
|
|
|
251
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
66,014,070
|
|
|
|
6,601
|
|
|
|
65,103
|
|
|
|
|
|
|
|
(25,242
|
)
|
|
|
(12,857
|
)
|
|
|
33,605
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,806
|
|
|
|
|
|
|
|
|
|
|
|
24,806
|
|
Change in net loss and prior service cost, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,232
|
|
|
|
|
|
|
|
6,232
|
|
Forward contract adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
Unrealized gain on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,097
|
|
|
|
|
|
|
|
4,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions and dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
(88,110
|
)
|
|
|
(24,473
|
)
|
|
|
|
|
|
|
|
|
|
|
(112,583
|
)
|
Restricted stock grant
|
|
|
500,000
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50
|
|
Effect of stock dividend
|
|
|
3,326,623
|
|
|
|
333
|
|
|
|
|
|
|
|
(333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
|
|
|
|
9,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,162
|
|
Exercise of options, net of 2,814,866 shares delivered to
pay exercise price
|
|
|
1,582,074
|
|
|
|
158
|
|
|
|
986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,144
|
|
Surrender of shares in connection with option exercise
|
|
|
(160,083
|
)
|
|
|
(16
|
)
|
|
|
(2,298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,314
|
)
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
3,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,642
|
|
Beneficial conversion feature of notes payable, net of taxes
|
|
|
|
|
|
|
|
|
|
|
27,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
71,262,684
|
|
|
|
7,126
|
|
|
|
15,928
|
|
|
|
|
|
|
|
(14,879
|
)
|
|
|
(12,857
|
)
|
|
|
(4,682
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,084
|
|
|
|
|
|
|
|
|
|
|
|
54,084
|
|
Change in net loss and prior service cost, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,938
|
|
|
|
|
|
|
|
2,938
|
|
Forward contract adjustments, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
|
|
|
|
|
|
|
|
42
|
|
Unrealized gain on long-term investment securities accounted for
under the equity method, net of income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
669
|
|
|
|
|
|
|
|
669
|
|
Change in net unrealized gain on investment securities, net of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,607
|
|
|
|
|
|
|
|
27,607
|
|
Net unrealized gains reclassified into net income, net of income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,921
|
)
|
|
|
|
|
|
|
(11,921
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investment securities, net of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,686
|
|
|
|
|
|
|
|
15,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions and dividends on common stock
|
|
|
|
|
|
|
|
|
|
|
(19,081
|
)
|
|
|
(99,054
|
)
|
|
|
|
|
|
|
|
|
|
|
(118,135
|
)
|
Restricted stock grant
|
|
|
50,000
|
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Surrender of shares in connection with restricted stock vesting
|
|
|
(51,941
|
)
|
|
|
(5
|
)
|
|
|
(1,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,040
|
)
|
Effect of stock dividend
|
|
|
3,567,023
|
|
|
|
357
|
|
|
|
|
|
|
|
(357
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit of options exercised
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
Exercise of stock options
|
|
|
111,518
|
|
|
|
11
|
|
|
|
1,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,265
|
|
Amortization of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
|
74,939,284
|
|
|
$
|
7,494
|
|
|
$
|
|
|
|
$
|
(45,327
|
)
|
|
$
|
4,456
|
|
|
$
|
(12,857
|
)
|
|
$
|
(46,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
VECTOR
GROUP LTD. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
54,084
|
|
|
$
|
24,806
|
|
|
$
|
60,504
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
10,790
|
|
|
|
10,398
|
|
|
|
10,057
|
|
Non-cash stock-based expense
|
|
|
2,704
|
|
|
|
3,642
|
|
|
|
3,550
|
|
Non-cash portion of restructuring and impairment charges
|
|
|
|
|
|
|
100
|
|
|
|
53
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
18,573
|
|
|
|
|
|
Gain on sale of assets
|
|
|
74
|
|
|
|
127
|
|
|
|
|
|
Deferred income taxes
|
|
|
1,225
|
|
|
|
(110,183
|
)
|
|
|
432
|
|
Provision for loss on mortgage receivable
|
|
|
|
|
|
|
5,000
|
|
|
|
4,000
|
|
Provision for loss on non-consolidated real estate businesses
|
|
|
|
|
|
|
3,500
|
|
|
|
3,500
|
|
Provision for loss on long-term investments accounted for at cost
|
|
|
|
|
|
|
|
|
|
|
21,900
|
|
(Income) loss on long-term investments accounted under the
equity method
|
|
|
(2,604
|
)
|
|
|
|
|
|
|
568
|
|
Gain on sale of marketable securities
|
|
|
(19,869
|
)
|
|
|
|
|
|
|
|
|
Provision for loss on marketable securities
|
|
|
|
|
|
|
|
|
|
|
3,000
|
|
Equity income in non-consolidated real estate businesses
|
|
|
(23,963
|
)
|
|
|
(15,213
|
)
|
|
|
(24,399
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
12,212
|
|
|
|
6,466
|
|
|
|
8,462
|
|
Premium on issuance of debt
|
|
|
3,450
|
|
|
|
|
|
|
|
|
|
Non-cash interest expense (income)
|
|
|
1,082
|
|
|
|
51,209
|
|
|
|
(11,907
|
)
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
6,249
|
|
|
|
1,408
|
|
|
|
(6,393
|
)
|
Inventories
|
|
|
(8,593
|
)
|
|
|
(5,905
|
)
|
|
|
(5,756
|
)
|
Change in book overdraft
|
|
|
|
|
|
|
|
|
|
|
198
|
|
Accounts payable and accrued liabilities
|
|
|
35,560
|
|
|
|
4,035
|
|
|
|
11,850
|
|
Cash payments on restructuring liabilities
|
|
|
(179
|
)
|
|
|
(902
|
)
|
|
|
(154
|
)
|
Other assets and liabilities, net
|
|
|
(5,218
|
)
|
|
|
8,606
|
|
|
|
11,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
67,004
|
|
|
|
5,667
|
|
|
|
91,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-6
VECTOR
GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
Dollars in thousands, except per share amounts
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
187
|
|
|
|
41
|
|
|
|
452
|
|
Proceeds from sale or maturity of investment securities
|
|
|
28,587
|
|
|
|
78
|
|
|
|
|
|
Purchase of investment securities
|
|
|
(9,394
|
)
|
|
|
(12,427
|
)
|
|
|
(6,411
|
)
|
Proceeds from sale or liquidation of long-term investments
|
|
|
1,002
|
|
|
|
2,254
|
|
|
|
8,334
|
|
Purchase of long-term investments
|
|
|
(5,062
|
)
|
|
|
(51
|
)
|
|
|
(51
|
)
|
Purchase of mortgage receivable
|
|
|
(13,462
|
)
|
|
|
|
|
|
|
(21,704
|
)
|
Purchase of other minority equity interests
|
|
|
|
|
|
|
|
|
|
|
(4,250
|
)
|
(Increase) decrease in restricted assets
|
|
|
(1,100
|
)
|
|
|
1,720
|
|
|
|
(411
|
)
|
Investments in non-consolidated real estate businesses
|
|
|
(24,645
|
)
|
|
|
(474
|
)
|
|
|
(22,000
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
3,539
|
|
|
|
6,730
|
|
|
|
19,393
|
|
Issuance of notes receivable
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
Cash acquired in Aberdeen consolidation
|
|
|
473
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(23,391
|
)
|
|
|
(3,848
|
)
|
|
|
(6,309
|
)
|
Increase in cash surrender value of life insurance policies
|
|
|
(936
|
)
|
|
|
(839
|
)
|
|
|
(938
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(45,132
|
)
|
|
|
(6,816
|
)
|
|
|
(33,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt
|
|
|
185,714
|
|
|
|
118,805
|
|
|
|
2,831
|
|
Repayments of debt
|
|
|
(14,539
|
)
|
|
|
(6,179
|
)
|
|
|
(6,329
|
)
|
Deferred financing charges
|
|
|
(5,077
|
)
|
|
|
(5,573
|
)
|
|
|
(137
|
)
|
Borrowings under revolver
|
|
|
1,034,924
|
|
|
|
749,474
|
|
|
|
531,251
|
|
Repayments on revolver
|
|
|
(1,016,598
|
)
|
|
|
(751,607
|
)
|
|
|
(526,518
|
)
|
Distributions on common stock
|
|
|
(117,459
|
)
|
|
|
(115,778
|
)
|
|
|
(103,870
|
)
|
Proceeds from exercise of Vector options
|
|
|
1,265
|
|
|
|
1,194
|
|
|
|
86
|
|
Tax benefit of options exercised
|
|
|
269
|
|
|
|
9,162
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
68,499
|
|
|
|
(502
|
)
|
|
|
(84,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
90,371
|
|
|
|
(1,651
|
)
|
|
|
(27,012
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
209,454
|
|
|
|
211,105
|
|
|
|
238,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
299,825
|
|
|
$
|
209,454
|
|
|
$
|
211,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
VECTOR
GROUP LTD.
(Dollars
in Thousands, Except Per Share Amounts)
|
|
1.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
(a) Basis
of Presentation:
The consolidated financial statements of Vector Group Ltd. (the
Company or Vector) include the accounts
of VGR Holding LLC (VGR Holding), Liggett Group LLC
(Liggett), Vector Tobacco Inc. (Vector
Tobacco), Liggett Vector Brands Inc. (Liggett Vector
Brands), New Valley LLC (New Valley) and other
less significant subsidiaries. All significant intercompany
balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and
sale of cigarettes in the United States. New Valley is engaged
in the real estate business and is seeking to acquire additional
operating companies and real estate properties.
Certain reclassifications have been made to the 2008 and 2009
financial information to conform to the 2010 presentation.
(b) Estimates
and Assumptions:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses. Significant estimates subject
to material changes in the near term include restructuring and
impairment charges, inventory valuation, deferred tax assets,
allowance for doubtful accounts, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans,
the estimated fair value of embedded derivative liabilities,
settlement accruals, restructuring, valuation of investments,
including other than temporary impairments to such investments,
accounting for investments in equity securities, and litigation
and defense costs. Actual results could differ from those
estimates.
(c) Cash
and Cash Equivalents:
For purposes of the statements of cash flows, cash includes cash
on hand, cash on deposit in banks and cash equivalents,
comprised of short-term investments which have an original
maturity of 90 days or less. Interest on short-term
investments is recognized when earned. The Company places its
cash and cash equivalents with large commercial banks. The
Federal Deposit Insurance Corporation (FDIC) and
Securities Investor Protection Corporation (SIPC)
insure these balances, up to $250 and $500, respectively.
Substantially all of the Companys cash balances at
December 31, 2010 are uninsured.
(d) Financial
Instruments:
The carrying value of cash and cash equivalents, restricted
assets and short-term loans approximate their fair value.
The carrying amounts of short-term debt reported in the
consolidated balance sheets approximate fair value. The fair
value of long-term debt for the years ended December 31,
2010 and 2009 was estimated based on current market quotations.
As required by authoritative guidance, derivatives embedded
within the Companys convertible debt are recognized on the
Companys balance sheet and are stated at estimated fair
value at each reporting period. Changes in the fair value of the
embedded derivatives are reflected quarterly as Changes in
fair value of derivatives embedded within convertible debt.
F-8
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The estimated fair values for financial instruments presented
herein are not necessarily indicative of the amounts the Company
could realize in a current market exchange. The use of different
market assumptions
and/or
estimation methodologies may have a material effect on the
estimated fair values.
(e) Investment
Securities:
The Company classifies investments in debt and marketable equity
securities as available for sale. Investments classified as
available for sale are carried at fair value, with net
unrealized gains and losses included as a separate component of
stockholders equity. The cost of securities sold is
determined based on average cost. Investments in marketable
equity securities represent less than a 20 percent interest
in the investees and the Company does not exercise significant
influence over such entities.
Gains are recognized when realized in the Companys
consolidated statements of operations. Losses are recognized as
realized or upon the determination of the occurrence of an
other-than-temporary
decline in fair value. The Companys policy is to review
its securities on a periodic basis to evaluate whether any
security has experienced an
other-than-temporary
decline in fair value. If it is determined that an
other-than-temporary
decline exists in one of the Companys marketable
securities, it is the Companys policy to record an
impairment charge with respect to such investment in the
Companys consolidated statements of operations. The
Company recorded a loss related to
other-than-temporary
declines in the fair value of its marketable equity securities
of $500, $0 and $3,018 for the years ended December 31,
2010, 2009 and 2008, respectively.
(f) Significant
Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents and trade receivables. The Company places its
temporary cash in money market securities (investment grade or
better) with what management believes are high credit quality
financial institutions.
Liggetts customers are primarily candy and tobacco
distributors, the military and large grocery, drug and
convenience store chains. No single retail customer represented
more than 10% of Liggetts revenues in 2010, 2009 and 2008.
Concentrations of credit risk with respect to trade receivables
are generally limited due to the large number of customers,
located primarily throughout the United States, comprising
Liggetts customer base. Ongoing credit evaluations of
customers financial condition are performed and,
generally, no collateral is required. Liggett maintains reserves
for potential credit losses and such losses, in the aggregate,
have generally not exceeded managements expectations.
(g) Accounts
Receivable:
Accounts receivable-trade are recorded at their net realizable
value.
The allowance for doubtful accounts and cash discounts was $239
and $354 at December 31, 2010 and 2009, respectively.
(h) Inventories:
Tobacco inventories are stated at the lower of cost or market
and are determined primarily by the
last-in,
first-out (LIFO) method at Liggett and Vector Tobacco. Although
portions of leaf tobacco inventories may not be used or sold
within one year because of the time required for aging, they are
included in current assets, which is common practice in the
industry. It is not practicable to determine the amount that
will not be used or sold within one year.
(i) Restricted
Assets:
Current restricted assets of $2,661 and $3,138 at
December 31, 2010 and 2009, respectively, consist primarily
of certificates of deposits and supersedeas bonds. Long-term
restricted assets of $8,694 and $4,835 at December 31,
F-9
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2010 and 2009, respectively, consist primarily of certificates
of deposit which collateralize letters of credit, supersedeas
bonds and deposits on long-term debt. The certificates of
deposit mature at various dates from February 2011 to January
2012.
(j) Property,
Plant and Equipment:
Property, plant and equipment are stated at cost. Property,
plant and equipment are depreciated using the straight-line
method over the estimated useful lives of the respective assets,
which are 20 to 30 years for buildings and 3 to
10 years for machinery and equipment.
Repairs and maintenance costs are charged to expense as
incurred. The costs of major renewals and betterments are
capitalized. The cost and related accumulated depreciation of
property, plant and equipment are removed from the accounts upon
retirement or other disposition and any resulting gain or loss
is reflected in operations.
(k) Investment
in Non-Consolidated Real Estate Businesses:
In accounting for its investment in non-consolidated real estate
businesses, the Company identified its participation in Variable
Interest Entities (VIE), which are defined as
entities in which the equity investors have not provided enough
equity to finance its activities or the equity investors
(1) cannot directly or indirectly make decisions about the
entitys activities through their voting rights or similar
rights; (2) do not have the obligation to absorb the
expected losses of the entity; (3) do not have the right to
receive the expected residual returns of the entity; or
(4) have voting rights that are not proportionate to their
economic interests and the entitys activities involve or
are conducted on behalf of an investor with a disproportionately
small voting interest.
New Valley accounts for its interest in Douglas Elliman Realty
LLC on the equity method because the entity neither meets the
definition of a VIE nor is New Valley the entitys primary
beneficiary, as defined in authoritative guidance.
New Valley Oaktree Chelsea Eleven LLC, Sesto Holdings S.r.l. and
Fifty Third-Five meet the definition of a VIE, New Valley is not
the primary beneficiary of these entities, as defined in
authoritative guidance. In August 2010, New Valley became the
primary beneficiary of Aberdeen Townhomes LLC, and as a result,
the consolidated financial statements of the Company now include
the account balances of Aberdeen Townhomes LLC as of
December 31, 2010.
(l) Intangible
Assets:
The Company reviews intangible assets for impairment annually or
whenever events or changes in business circumstances indicate
that the carrying amount of the intangible assets may not be
fully recoverable. Indefinite life intangible assets as of
December 31, 2010 and 2009, consisted of $107,511. This
intangible asset relates to the exemption of The Medallion
Company (Medallion), acquired in April 2002, under
the Master Settlement Agreement, which states payments under the
MSA continue in perpetuity. As a result, the Company believes it
will realize the benefit of the exemption for the foreseeable
future.
Other intangible assets, included in other assets, consisting of
trademarks and patent rights, are amortized using the
straight-line method over
10-12 years
and had no net book value at December 31, 2010 and 2009,
respectively.
(m) Impairment
of Long-Lived Assets:
The Company reviews long-lived assets for impairment annually or
whenever events or changes in business circumstances indicate
that the carrying amount of the assets may not be fully
recoverable. The Company performs undiscounted operating cash
flow analyses to determine if impairment exists. If impairment
is determined to exist,
F-10
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
any related impairment loss is calculated based on fair value of
the asset on the basis of discounted cash flow. Impairment
losses on assets to be disposed of, if any, are based on the
estimated proceeds to be received, less costs of disposal.
(n) Pension,
Postretirement and Postemployment Benefits
Plans:
The cost of providing retiree pension benefits, health care and
life insurance benefits is actuarially determined and accrued
over the service period of the active employee group. The
Company recognizes the funded status of each defined benefit
pension plan, retiree health care and other postretirement
benefit plans and postemployment benefit plans on the balance
sheet. The Company changed its measurement date for the funded
status of the plans from September 30 to December 31 in 2008.
(See Note 9.)
(o) Stock
Options:
The Company accounts for employee stock compensation plans by
measuring compensation cost for share-based payments at fair
value. In September 2010, the Companys Chief Executive
Officer delivered 51,941 shares of common stock in payment
of income and payroll taxes in connection with the vesting of
restricted shares. In September 2009, the Companys
Chairman delivered 2,226,503 shares of common stock in
payment of the exercise price in connection with the exercise of
an employee stock option for 3,379,948 shares. In November
2009, four executive officers of the Company delivered
897,194 shares of common stock in payment of the exercise
price and income and payroll taxes in connection with the
exercise of employee stock options for 1,188,668 shares. In
June 2008, the Companys Chairman delivered
1,516,925 shares of common stock in payment of the exercise
price in connection with the exercise of an employee stock
option for 4,275,845 shares. The Company immediately
cancelled the shares delivered in these transactions.
(p) Income
Taxes:
The Company follows authoritative guidance for accounting for
uncertainty in income taxes which requires an entity to
recognize the financial statement impact of a tax position when
it is more likely than not that the position will be sustained
upon examination. If the tax position meets the
more-likely-than-not recognition threshold, the tax effect is
recognized at the largest amount of the benefit that is greater
than 50% likely of being realized upon ultimate settlement. The
guidance requires that a liability created for unrecognized
deferred tax benefits shall be presented as a liability and not
combined with deferred tax liabilities or assets.
The Company accounts for income taxes under the liability method
and records deferred taxes for the impact of temporary
differences between the amounts of assets and liabilities
recognized for financial reporting purposes and the amounts
recognized for tax purposes as well as tax credit carryforwards
and loss carryforwards. These deferred taxes are measured by
applying currently enacted tax rates. A valuation allowance
reduces deferred tax assets when it is deemed more likely than
not that some portion or all of the deferred tax assets will not
be realized. A current tax provision is recorded for income
taxes currently payable.
(q) Distributions
and Dividends on Common Stock:
The Company records distributions on its common stock as
dividends in its consolidated statement of stockholders
equity to the extent of retained earnings. Any amounts exceeding
retained earnings are recorded as a reduction to additional
paid-in-capital.
The Companys stock dividends are recorded as stock splits
and given retroactive effect to earnings per share for all years
presented.
(r) Revenue
Recognition:
Sales: Revenues from sales are recognized upon
the shipment of finished goods when title and risk of loss have
passed to the customer, there is persuasive evidence of an
arrangement, the sale price is determinable and
F-11
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
collectibility is reasonably assured. The Company provides an
allowance for expected sales returns, net of any related
inventory cost recoveries. Certain sales incentives, including
buydowns, are classified as reductions of net sales. The
Companys accounting policy is to include federal excise
taxes in revenues and cost of goods sold. Such revenues and cost
of goods sold totaled $538,328, $377,771 and $168,170 for the
years ended December 31, 2010, 2009 and 2008, respectively.
Since the Companys primary line of business is tobacco,
the Companys financial position and its results of
operations and cash flows have been and could continue to be
materially adversely affected by significant unit sales volume
declines, litigation and defense costs, increased tobacco costs
or reductions in the selling price of cigarettes in the near
term.
Shipping and Handling Fees and Costs: Shipping
and handling fees related to sales transactions are neither
billed to customers nor recorded as revenue. Shipping and
handling costs, which were $5,323 in 2010, $4,059 in 2009 and
$4,509 in 2008 are recorded as operating, selling,
administrative and general expenses.
(s) Advertising
and Research and Development:
Advertising costs, which are expensed as incurred and included
within operating, selling, administration and general expenses,
were $2,970, $3,159 and $3,282 for the years ended
December 31, 2010, 2009 and 2008, respectively.
Research and development costs are expensed as incurred and
included within operating, selling, administration and general
expenses, and were $1,582, $2,533 and $3,988 for the years ended
December 31, 2010, 2009 and 2008, respectively.
(t) Earnings
Per Share:
Information concerning the Companys common stock has been
adjusted to give effect to the 5% stock dividends paid to
Company stockholders on September 29, 2010, 2009 and 2008,
respectively. The dividends were recorded at par value of $357
in 2010, $333 in 2009 and $314 in 2008 since the Company did not
have retained earnings in each of the aforementioned years. In
connection with the 5% stock dividends, the Company increased
the number of shares subject to outstanding stock options by 5%
and reduced the exercise prices accordingly.
For purposes of calculating basic EPS, earnings available to
common stockholders for the period are reduced by the contingent
interest and the non-cash interest expense associated with the
discounts created by the beneficial conversion features and
embedded derivatives related to the Companys convertible
debt issued. The convertible debt issued by the Company are
participating securities due to the contingent interest feature
and had no impact on EPS for the years ended December 31,
2010, 2009 and 2008 as the dividends on the common stock reduced
earnings available to common stockholders so there were no
unallocated earnings.
As discussed in Note 11, the Company has stock option
awards which provide for common stock dividend equivalents at
the same rate as paid on the common stock with respect to the
shares underlying the unexercised portion of the options. These
outstanding options represent participating securities under
authoritative guidance. The Company recognizes payments of the
dividend equivalent rights ($2,480, net of taxes of $0, $4,342,
net of taxes of $1,725, and $4,865, net of taxes of $2,144, for
the years ended December 31, 2010, 2009 and 2008,
respectively) on these options as reductions in additional
paid-in capital on the Companys consolidated balance
sheet. As a result, in its calculation of basic EPS for the
years ended December 31, 2010, 2009 and 2008, respectively,
the Company has adjusted its net income for the effect of these
participating securities as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
54,084
|
|
|
$
|
24,806
|
|
|
$
|
60,504
|
|
Income attributable to participating securities
|
|
|
(1,146
|
)
|
|
|
(956
|
)
|
|
|
(2,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$
|
52,938
|
|
|
$
|
23,850
|
|
|
$
|
57,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-12
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Basic EPS is computed by dividing net income available to common
stockholders by the weighted-average number of shares
outstanding, which includes vested restricted stock.
Diluted EPS includes the dilutive effect of stock options,
unvested restricted stock grants and convertible securities.
Diluted EPS is computed by dividing net income available to
common stockholders by the diluted weighted-average number of
shares outstanding, which includes dilutive non-vested
restricted stock grants, stock options and convertible
securities.
Basic and diluted EPS were calculated using the following shares
for the years ended December 31, 2010, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted-average shares for basic EPS
|
|
|
74,330,955
|
|
|
|
72,989,289
|
|
|
|
71,093,920
|
|
Plus incremental shares related to stock options and warrants
|
|
|
362,904
|
|
|
|
69,748
|
|
|
|
790,732
|
|
Plus incremental shares related to convertible debt
|
|
|
|
|
|
|
|
|
|
|
6,530,696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares for diluted EPS
|
|
|
74,693,899
|
|
|
|
73,059,037
|
|
|
|
78,415,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following stock options, non-vested restricted stock and
shares issuable upon the conversion of convertible debt were
outstanding during the years ended December 31, 2010, 2009
and 2008 but were not included in the computation of diluted EPS
because the exercise prices of the options and the per share
expense associated with the restricted stock were greater than
the average market price of the common shares during the
respective periods, and the impact of common shares issuable
under the convertible debt were anti-dilutive to EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Number of stock options
|
|
|
158,411
|
|
|
|
1,710,914
|
|
|
|
567,496
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average exercise price
|
|
$
|
24.54
|
|
|
$
|
14.91
|
|
|
$
|
17.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares of non-vested restricted stock
|
|
|
|
|
|
|
166,872
|
|
|
|
73,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average expense per share
|
|
$
|
|
|
|
$
|
15.50
|
|
|
$
|
15.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares issuable upon conversion of
debt
|
|
|
17,143,180
|
|
|
|
15,765,854
|
|
|
|
7,727,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average conversion price
|
|
$
|
15.61
|
|
|
$
|
16.06
|
|
|
$
|
14.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS are calculated by dividing income by the weighted
average common shares outstanding plus dilutive common stock
equivalents. The Companys convertible debt was
anti-dilutive in 2009 and 2010. As a result of the dilutive
nature in 2008 of the Companys 3.875% variable interest
senior convertible debentures due 2026, the Company adjusted its
net income for the effect of these convertible securities for
purposes of calculating diluted EPS as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
54,084
|
|
|
$
|
24,806
|
|
|
$
|
60,504
|
|
Income attributable to 3.875% variable interest senior
convertible debentures due 2026
|
|
|
|
|
|
|
|
|
|
|
(962
|
)
|
Income attributable to participating securities
|
|
|
(1,146
|
)
|
|
|
(971
|
)
|
|
|
(2,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted EPS
|
|
$
|
52,938
|
|
|
$
|
23,835
|
|
|
$
|
56,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(u) Comprehensive
Income:
Other comprehensive income is a component of stockholders
equity and includes such items as the unrealized gains and
losses on investment securities available for sale, forward
contracts and minimum pension liability adjustments. Total
comprehensive income was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net income
|
|
$
|
54,084
|
|
|
$
|
24,806
|
|
|
$
|
60,504
|
|
Net unrealized gains (losses) on investment securities available
for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses), net of income taxes
|
|
|
27,607
|
|
|
|
4,097
|
|
|
|
(14,047
|
)
|
Net unrealized (gains) losses reclassified into net income, net
of income taxes
|
|
|
(11,921
|
)
|
|
|
|
|
|
|
1,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on investment securities available
for sale, net of income taxes
|
|
|
15,686
|
|
|
|
4,097
|
|
|
|
(12,263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses), net of income taxes
|
|
|
669
|
|
|
|
|
|
|
|
(674
|
)
|
Net unrealized losses reclassified into net income, net of
income taxes
|
|
|
|
|
|
|
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) on long-term investments accounted
for under the equity method
|
|
|
669
|
|
|
|
|
|
|
|
(399
|
)
|
Net change in forward contracts
|
|
|
42
|
|
|
|
34
|
|
|
|
35
|
|
Net change in pension-related amounts, net of income taxes
|
|
|
2,938
|
|
|
|
6,232
|
|
|
|
(30,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
73,419
|
|
|
$
|
35,169
|
|
|
$
|
16,888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of accumulated other comprehensive income (loss),
net of income taxes, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Net unrealized gains on investment securities available for
sale, net of income taxes of $14,591, $4,238 and $1,456,
respectively
|
|
$
|
21,887
|
|
|
$
|
6,201
|
|
|
$
|
2,104
|
|
Net unrealized gains on long-term investment accounted for under
the equity method, net of income taxes of $446, $0 and $0,
respectively
|
|
|
669
|
|
|
|
|
|
|
|
|
|
Forward contracts adjustment, net of income taxes of $140, $170
and $195, respectively
|
|
|
(206
|
)
|
|
|
(248
|
)
|
|
|
(282
|
)
|
Pension-related amounts, net of income taxes of $11,929, $13,513
and $17,408, respectively
|
|
|
(17,894
|
)
|
|
|
(20,832
|
)
|
|
|
(27,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss)
|
|
$
|
4,456
|
|
|
$
|
(14,879
|
)
|
|
$
|
(25,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(v) Fair
Value of Derivatives Embedded within Convertible
Debt:
The Company has estimated the fair market value of the embedded
derivatives based principally on the results of a valuation
model. The estimated fair value of the derivatives embedded
within the convertible debt is based principally on the present
value of future dividend payments expected to be received by the
convertible debt holders over the term of the debt. The discount
rate applied to the future cash flows is estimated based on a
spread in the yield of the Companys debt when compared to
risk-free securities with the same duration; thus, a readily
determinable fair market value of the embedded derivatives is
not available. The valuation model assumes future
F-14
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
dividend payments by the Company and utilizes interest rates and
credit spreads for secured to unsecured debt, unsecured to
subordinated debt and subordinated debt to preferred stock to
determine the fair value of the derivatives embedded within the
convertible debt. The valuation also considers other items,
including current and future dividends and the volatility of
Vectors stock price. At December 31, 2010, the range of
estimated fair market values of the Companys embedded
derivatives was between $138,701 and $144,391. The Company
recorded the fair market value of its embedded derivatives at
the midpoint of the inputs at $141,492 as of December 31,
2010. At December 31, 2009, the range of estimated fair market
values of the Companys embedded derivatives was between
$149,982 and $156,172. The Company recorded the fair market
value of its embedded derivatives at the midpoint of the inputs
at $153,016 as of December 31, 2009. The estimated fair
market value of the Companys embedded derivatives could
change significantly based on future market conditions. (See
Note 7.)
(w) Capital
and Credit Markets:
The Company has performed additional assessments to determine
the impact, if any, of market developments, on the
Companys consolidated financial statements. The
Companys additional assessments have included a review of
access to liquidity in the capital and credit markets,
counterparty creditworthiness, value of the Companys
investments (including long-term investments, mortgage
receivable and employee benefit plans) and macroeconomic
conditions. The volatility in capital and credit markets may
create additional risks in the upcoming months and possibly
years and the Company will continue to perform additional
assessments to determine the impact, if any, on the
Companys consolidated financial statements. Thus, future
impairment charges may occur.
On a quarterly basis, the Company evaluates its investments to
determine whether an impairment has occurred. If so, the Company
also makes a determination of whether such impairment is
considered temporary or
other-than-temporary.
The Company believes that the assessment of temporary or
other-than-temporary impairment is facts and circumstances
driven. However, among the matters that are considered in making
such a determination are the period of time the investment has
remained below its cost or carrying value, the likelihood of
recovery given the reason for the decrease in market value and
the Companys original expected holding period of the
investment.
(x) Contingencies:
The Company records Liggetts product liability legal
expenses and other litigation costs as operating, selling,
general and administrative expenses as those costs are incurred.
As discussed in Note 12, legal proceedings covering a wide
range of matters are pending or threatened in various
jurisdictions against Liggett and the Company.
The Company and its subsidiaries record provisions in their
consolidated financial statements for pending litigation when
they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time,
while it is reasonably possible that an unfavorable outcome in a
case may occur, except as disclosed in Note 12,
(i) management has concluded that it is not probable that a
loss has been incurred in any of the pending tobacco-related
cases; (ii) management is unable to estimate the possible
loss or range of loss that could result from an unfavorable
outcome in any of the pending tobacco-related cases; and
(iii) accordingly, management has not provided any amounts
in the consolidated financial statements for unfavorable
outcomes, if any. Legal defense costs are expensed as incurred.
(y) New
Accounting Pronouncements:
In June 2009, the Financial Accounting Standards Board (the
FASB) issued an amendment to the accounting and
disclosure requirements for transfers of financial assets. The
guidance requires additional disclosures for transfers of
financial assets and changes the requirements for derecognizing
financial assets. The Company adopted this guidance for interim
and annual reporting periods beginning on January 1, 2010.
The adoption of this guidance did not impact the Companys
consolidated financial statements.
F-15
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In June 2009, the FASB issued an amendment to the accounting and
disclosure requirements for the consolidation of variable
interest entities. The amended guidance eliminates exceptions to
consolidating qualifying special purpose entities, contains new
criteria for determining the primary beneficiary, and increases
the frequency of required reassessments to determine whether a
company is the primary beneficiary of a variable interest
entity. This guidance also contains a new requirement that any
term, transaction, or arrangement that does not have a
substantive effect on an entitys status as a variable
interest entity, a companys power over a variable interest
entity, or a companys obligation to absorb losses or its
right to receive benefits of an entity must be disregarded. The
elimination of the qualifying special-purpose entity concept and
its consolidation exception means more entities will be subject
to consolidation assessments and reassessments. The Company
adopted this guidance for interim and annual reporting periods
beginning on January 1, 2010. The adoption of this guidance
did not impact the Companys consolidated financial
statements.
In January 2010, the FASB issued authoritative guidance intended
to improve disclosure about fair value measurements. The
guidance requires entities to disclose significant transfers in
and out of fair value hierarchy levels and the reasons for the
transfers and to present information about purchases, sales,
issuances, and settlements separately in the reconciliation of
fair value measurements using significant unobservable inputs
(Level 3). Additionally, the guidance clarifies that a
reporting entity should provide fair value measurements for each
class of assets and liabilities and disclose the inputs and
valuation techniques used for fair value measurements using
significant other observable inputs (Level 2) and
significant unobservable inputs (Level 3). This guidance is
effective for interim and annual periods beginning after
December 15, 2009 except for the disclosure about
purchases, sales, issuances and settlements in the Level 3
reconciliation, which will be effective for interim and annual
periods beginning after December 15, 2010. The Company
adopted this authoritative guidance, with the exception of the
disclosures about purchases, sales, issuances and settlements in
the Level 3 reconciliation. The adoption of this guidance
did not impact the Companys 2010 consolidated financial
statements. The remaining disclosures will be added to the
Companys future filings when applicable.
In March 2009, Vector Tobacco eliminated nine full-time
positions. Vector Tobacco recognized pre-tax restructuring
charges of $900 in 2009. The restructuring charges primarily
related to employee severance and benefit costs.
The components of the combined pre-tax restructuring charges
relating to the Vector Tobaccos 2006 and 2009
restructurings for the years ended December 31, 2010, 2009
and 2008, respectively, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
|
|
|
Non-Cash
|
|
|
Contract
|
|
|
|
|
|
|
Severance
|
|
|
Asset
|
|
|
Termination/
|
|
|
|
|
|
|
and Benefits
|
|
|
Impairment
|
|
|
Exit Costs
|
|
|
Total
|
|
|
Balance, January 1, 2008
|
|
$
|
70
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
70
|
|
Change in estimate
|
|
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
(14
|
)
|
Utilized
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
738
|
|
|
|
30
|
|
|
|
232
|
|
|
|
1,000
|
|
Change in estimate
|
|
|
(47
|
)
|
|
|
(3
|
)
|
|
|
(50
|
)
|
|
|
(100
|
)
|
Utilized
|
|
|
(586
|
)
|
|
|
(27
|
)
|
|
|
(167
|
)
|
|
|
(780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2009
|
|
|
105
|
|
|
|
|
|
|
|
15
|
|
|
|
120
|
|
Change in estimate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilized
|
|
|
(105
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
(120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
During 2004, Liggett Vector Brands adopted a restructuring plan
in its continuing effort to adjust the cost structure of the
Companys tobacco business and improve operating
efficiency. The remaining pre-tax restructuring liability of
$280 as of December 31, 2010, relates to the subletting of
its New York office.
|
|
3.
|
INVESTMENT
SECURITIES AVAILABLE FOR SALE
|
Investment securities classified as available for sale are
carried at fair value, with net unrealized gains or losses
included as a component of stockholders equity, net of
taxes and non-controlling interests. The Company received
proceeds of $28,587 and realized gains on the sale of marketable
equity securities of $19,869 for the year ended
December 31, 2010. (See Note 1(e).)
The components of investment securities available for sale at
December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Gain
|
|
|
Loss
|
|
|
Value
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
42,277
|
|
|
$
|
36,477
|
|
|
$
|
|
|
|
$
|
78,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
$
|
41,304
|
|
|
$
|
13,051
|
|
|
$
|
(2,613
|
)
|
|
$
|
51,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale as of December 31,
2010 and 2009 include New Valleys 13,891,205 shares
of Ladenburg Thalmann Financial Services Inc. (LTS)
common stock, which were carried at $16,253 and $8,890,
respectively.
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Leaf tobacco
|
|
$
|
54,479
|
|
|
$
|
48,942
|
|
Other raw materials
|
|
|
4,073
|
|
|
|
3,497
|
|
Work-in-process
|
|
|
2,067
|
|
|
|
2,388
|
|
Finished goods
|
|
|
67,773
|
|
|
|
59,293
|
|
|
|
|
|
|
|
|
|
|
Inventories at current cost
|
|
|
128,392
|
|
|
|
114,120
|
|
LIFO adjustments
|
|
|
(21,313
|
)
|
|
|
(15,635
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
107,079
|
|
|
$
|
98,485
|
|
|
|
|
|
|
|
|
|
|
The Company has a leaf inventory management program whereby,
among other things, it is committed to purchase certain
quantities of leaf tobacco. The purchase commitments are for
quantities not in excess of anticipated requirements and are at
prices, including carrying costs, established at the commitment
date. At December 31, 2010, Liggett had leaf tobacco
purchase commitments of approximately $41,896. During 2007 the
Company entered into a single source supply agreement for fire
safe cigarette paper through 2012.
The Company capitalizes the incremental prepaid cost of the
Master Settlement Agreement in ending inventory.
All of the Companys inventories at December 31, 2010
and 2009 have been reported under the LIFO method.
F-17
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
5.
|
PROPERTY,
PLANT AND EQUIPMENT
|
Property, plant and equipment consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and improvements
|
|
$
|
1,418
|
|
|
$
|
1,418
|
|
Buildings
|
|
|
13,575
|
|
|
|
13,575
|
|
Machinery and equipment
|
|
|
127,371
|
|
|
|
107,492
|
|
Leasehold improvements
|
|
|
2,205
|
|
|
|
2,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144,569
|
|
|
|
124,700
|
|
Less accumulated depreciation
|
|
|
(89,157
|
)
|
|
|
(81,714
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,412
|
|
|
$
|
42,986
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended
December 31, 2010, 2009 and 2008 was $10,790, $10,324 and
$10,057, respectively. Future machinery and equipment purchase
commitments at Liggett were $2,726 and $9,077 at
December 31, 2010 and 2009, respectively.
Long-term investments consist of investments in the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Investment partnerships
|
|
$
|
45,134
|
|
|
$
|
70,966
|
|
|
$
|
49,486
|
|
|
$
|
68,679
|
|
Real estate partnership
|
|
|
899
|
|
|
|
1,136
|
|
|
|
837
|
|
|
|
1,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,033
|
|
|
$
|
72,102
|
|
|
$
|
50,323
|
|
|
$
|
69,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal business of these investment partnerships is
investing in investment securities and real estate. The
estimated fair value of the investment partnerships was provided
by the partnerships based on the indicated market values of the
underlying assets or investment portfolio. The investments in
these investment partnerships are illiquid and the ultimate
realization of these investments is subject to the performance
of the underlying partnership and its management by the general
partners. In the future, the Company may invest in other
investments, including limited partnerships, real estate
investments, equity securities, debt securities, derivatives and
certificates of deposit, depending on risk factors and potential
rates of return.
The Company has invested $50,000 in Icahn Partners, LP, a
privately managed investment partnership, of which Carl Icahn is
the portfolio manager and the controlling person of the general
partner, and manager of the partnership. Based on information
available in public filings, the Company believes affiliates of
Mr. Icahn are the beneficial owners of approximately 18.8%
of Vectors common stock at December 31, 2010.
Except for one partnership accounted for on the equity method,
the Companys investments constituted less than 5% of the
invested funds in each of the partnerships at December 31,
2010 and 2009. In accordance with authoritative guidance for
accounting for limited partnership investments, the Company has
accounted for such investments using the cost method of
accounting.
If it is determined that an
other-than-temporary
decline in fair value exists in long-term investments, the
Company records an impairment charge with respect to such
investment in its consolidated statements of operations. The
carrying value of the Companys long-term investments
reflects a loss of $21,900 recognized
F-18
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
in 2008 related to the performance of three of the
Companys long-term investments. The Company will continue
to perform additional assessments to determine the impact, if
any, on the Companys consolidated financial statements.
Thus, future impairment charges may occur.
The Company received cash distributions of approximately $1,002
and $847 from one limited partnership in 2010 and 2009,
respectively.
Another of the Companys long-term investments was
liquidated in January 2011. This investment had a carrying value
of $4,750 as of December 31, 2010 and the Company received
proceeds of $8,886 in January 2011.
The long-term investments are carried on the consolidated
balance sheet at cost. The fair value determination disclosed
above would be classified as Level 3 under fair value
hierarchy disclosed in Note 15 if such assets were recorded
on the consolidated balance sheet at fair value. The fair values
were determined based on unobservable inputs and were based on
company assumptions, and information obtained from the
partnerships based on the indicated market values of the
underlying assets of the investment portfolio.
The changes in the fair value of these investments were as
follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance as of January 1
|
|
$
|
69,940
|
|
|
$
|
54,997
|
|
Contributions
|
|
|
62
|
|
|
|
52
|
|
Distributions
|
|
|
(1,002
|
)
|
|
|
(847
|
)
|
Revision for partnership now accounted for under the equity
method
|
|
|
(5,790
|
)
|
|
|
|
|
Unrealized gain on long-term investments
|
|
|
8,892
|
|
|
|
15,738
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
72,102
|
|
|
$
|
69,940
|
|
|
|
|
|
|
|
|
|
|
The Company accounts for one of its long-term investments under
the equity method and recorded equity income of $1,489 related
to a limited partnership for the year ended December 31,
2010. Included in this amount was the impact of an error
identified by the Company, which resulted in an
out-of-period
adjustment of approximately $1,650 (approximately $980 after
taxes) for the year ended December 31, 2010. The error
occurred because the Companys ownership in the limited
partnership increased from a nominal percentage to more than 10%
during the fourth quarter of 2008 (due to significant
withdrawals from other partners); thus, the Companys
investment should have been accounted for under the equity
method for all previous periods in which the investment was
held. The Company assessed the materiality of this error on all
previously issued financial statements in accordance with the
SECs Staff Accounting Bulletin (SAB)
No. 99 and concluded that the error was immaterial to all
previously issued financial statements. The impact of correcting
this error in the current year was not material to the
Companys 2010 consolidated financial statements. This
adjustment was recognized within other income in the
consolidated statements of operations. The carrying value of
this investment was approximately $10,950 as of
December 31, 2010 which approximated its fair value because
the underlying securities are classified as available for sale.
F-19
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
7.
|
NOTES PAYABLE,
LONG-TERM DEBT AND OTHER OBLIGATIONS
|
Notes payable, long-term debt and other obligations consist of:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Vector:
|
|
|
|
|
|
|
|
|
11% Senior Secured Notes due 2015, net of unamortized
discount of $730 and $4,849
|
|
$
|
414,270
|
|
|
$
|
245,151
|
|
6.75% Variable Interest Senior Convertible Note due 2014, net of
unamortized discount of $38,353 and $39,755*
|
|
|
11,647
|
|
|
|
10,245
|
|
6.75% Variable Interest Senior Convertible Exchange Notes due
2014, net of unamortized discount of $64,713 and $69,749*
|
|
|
42,817
|
|
|
|
37,781
|
|
3.875% Variable Interest Senior Convertible Debentures due 2026,
net of unamortized discount of $83,060 and $83,589*
|
|
|
26,940
|
|
|
|
26,411
|
|
Liggett:
|
|
|
|
|
|
|
|
|
Revolving credit facility
|
|
|
35,710
|
|
|
|
17,382
|
|
Term loan under credit facility
|
|
|
6,222
|
|
|
|
6,755
|
|
Equipment loans
|
|
|
19,030
|
|
|
|
4,852
|
|
V.T. Aviation:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
|
|
|
|
3,882
|
|
VGR Aviation:
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
|
|
|
|
3,687
|
|
Other
|
|
|
761
|
|
|
|
663
|
|
|
|
|
|
|
|
|
|
|
Total notes payable, long-term debt and other obligations
|
|
|
557,397
|
|
|
|
356,809
|
|
Less:
|
|
|
|
|
|
|
|
|
Current maturities
|
|
|
(51,345
|
)
|
|
|
(21,889
|
)
|
|
|
|
|
|
|
|
|
|
Amount due after one year
|
|
$
|
506,052
|
|
|
$
|
334,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The fair value of the derivatives embedded within the 6.75%
Variable Interest Convertible Note ($20,219 at December 31,
2010 and $23,890 at December 31, 2009, respectively), the
6.75% Variable Interest Senior Convertible Exchange Notes
($38,324 at December 31, 2010 and $47,552 at
December 31, 2009, respectively), and the 3.875% Variable
Interest Senior Convertible Debentures ($82,949 at
December 31, 2010 and $81,574 at December 31, 2009,
respectively) is separately classified as a derivative liability
in the condensed consolidated balance sheets. |
11% Senior
Secured Notes due 2015
Vector:
The Company has outstanding $415,000 principal amount of its
11% Senior Secured Notes due 2015 (the Senior Secured
Notes). The Senior Secured Notes were sold in August 2007
($165,000), September 2009 ($85,000), April 2010 ($75,000) and
December 2010 ($90,000) in private offerings to qualified
institutional investors in accordance with Rule 144A of the
Securities Act of 1933.
In May 2008 and June 2010, the Company completed offers to
exchange the Senior Secured Notes then outstanding for an equal
amount of newly issued 11% Senior Secured Notes due 2015.
The new Senior Secured Notes have substantially the same terms
as the original Notes, except that the new Senior Secured Notes
have been registered under the Securities Act. The Company
agreed to consummate a registered exchange offer for the
additional Senior Secured Notes issued in December 2010 within
360 days after the date of their initial issuance. If
F-20
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the Company fails to timely comply with its registration
obligations, it will be required to pay additional interest on
these notes until it complies. The Company is amortizing the
deferred costs and debt discount related to the Senior Secured
Notes over the estimated life of the debt.
The Senior Secured Notes pay interest on a semi-annual basis at
a rate of 11% per year and mature on August 15, 2015. The
Company may redeem some or all of the Senior Secured Notes at
any time prior to August 15, 2011 at a make-whole
redemption price. On or after August 15, 2011 the Company
may redeem some or all of the Senior Secured Notes at a premium
that will decrease over time, plus accrued and unpaid interest
and liquidated damages, if any, to the redemption date. In the
event of a change of control, as defined in the indenture
governing the Senior Secured Notes, each holder of the Senior
Secured Notes may require the Company to repurchase some or all
of its Senior Secured Notes at a repurchase price equal to 101%
of their aggregate principal amount plus accrued and unpaid
interest and liquidated damages, if any to the date of purchase.
The Senior Secured Notes are fully and unconditionally
guaranteed on a joint and several basis by all of the 100% owned
domestic subsidiaries of the Company that are engaged in the
conduct of the Companys cigarette businesses. In addition,
some of the guarantees are collateralized by second priority or
first priority security interests in certain collateral of some
of the subsidiary guarantors, including their common stock,
pursuant to security and pledge agreements.
Variable
Interest Senior Convertible Debt
Vector:
Vector has outstanding three series of variable interest senior
convertible debt. All three series of debt pay interest on a
quarterly basis at a stated rate plus an additional amount of
interest on each payment date. The additional amount is based on
the amount of cash dividends paid during the prior three-month
period ending on the record date for such interest payment
multiplied by the total number of shares of its common stock
into which the debt would be convertible on such record date
(the Additional Interest).
5%
Variable Interest Senior Convertible Notes due November
2011:
Between November 2004 and April 2005, the Company sold $111,864
principal amount of its 5% Variable Interest Senior Convertible
Notes due November 15, 2011 (the
5% Notes). In May 2009, the holder of $11,005
principal amount of the 5% Notes exchanged its
5% Notes for $11,775 principal amount of the Companys
6.75% Variable Interest Senior Convertible Note due 2014 (the
6.75% Note) as discussed below. In June 2009,
certain holders of $99,944 principal amount of the 5% Notes
exchanged their 5% Notes for $106,940 principal amount of
the Companys 6.75% Variable Interest Senior Convertible
Exchange Notes due 2014 (the 6.75% Exchange Notes).
In November 2009, the Company retired $360 of the remaining $915
principal amount of the 5% Notes for cash and exchanged
approximately $555 of the remaining 5% Notes for $593
principal amount of the 6.75% Exchange Notes. As of
December 31, 2009, no 5% Notes remained outstanding
after these exchanges.
6.75%
Variable Interest Senior Convertible Note due
2014:
On May 11, 2009, the Company issued in a private placement
the 6.75% Note in the principal amount of $50,000. The
purchase price was paid in cash ($38,225) and by tendering
$11,005 principal amount of the 5% Notes, valued at 107% of
principal amount. The note pays interest (Total
Interest) on a quarterly basis at a rate of 3.75% per
annum plus additional interest, which is based on the amount of
cash dividends paid during the prior three-month period ending
on the record date for such interest payment multiplied by the
total number of shares of its common stock into which the debt
will be convertible on such record date. Notwithstanding the
foregoing, however, the interest payable on each interest
payment date shall be the higher of (i) the Total Interest
and (ii) 6.75% per annum. The note is convertible into the
Companys common stock at the holders option. The
conversion price as of December 31, 2010 of $13.64 per
share (approximately 73.3045 shares of common stock per
$1,000 principal amount of the note) is subject to adjustment
for various events, including the issuance of stock dividends.
The note will mature on November 15, 2014. The Company will
redeem on May 11, 2014 and at the end of each interest
F-21
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
accrual period thereafter an additional amount, if any, of the
note necessary to prevent the note from being treated as an
Applicable High Yield Discount Obligation under the
Internal Revenue Code. If a fundamental change (as defined in
the note) occurs, the Company will be required to offer to
repurchase the note at 100% of its principal amount, plus
accrued interest.
The purchaser of the 6.75% Note is an entity affiliated
with Dr. Phillip Frost, who reported, after the
consummation of the sale, beneficial ownership of approximately
11.7% of the Companys common stock.
6.75%
Variable Interest Senior Convertible Exchange Notes due
2014:
In June 2009, the Company entered into agreements with certain
holders of the 5% Notes to exchange their 5% Notes for
the Companys 6.75% Exchange Notes. In June 2009, certain
holders of $99,944 principal amount of the 5% Notes
exchanged their 5% Notes for $106,940 of the 6.75% Exchange
Notes. In November 2009, certain holders of $555 of the
5% Notes exchanged their 5% Notes for $593 of the
Companys 6.75% Exchange Notes.
The Company issued its 6.75% Exchange Notes to the holders in
reliance on the exemption from the registration requirements of
the Securities Act of 1933, as amended, afforded by Section
3(a)(9) thereof. The notes pay interest (Total
Interest) on a quarterly basis beginning August 15,
2009 at a rate of 3.75% per annum plus additional interest,
which is based on the amount of cash dividends paid during the
prior three-month period ending on the record date for such
interest payment multiplied by the total number of shares of its
common stock into which the debt will be convertible on such
record date. Notwithstanding the foregoing, however, the
interest payable on each interest payment date shall be the
higher of (i) the Total Interest and (ii) 6.75% per
annum. The notes are convertible into the Companys common
stock at the holders option. The conversion price as of
December 31, 2010 of $15.48 per share (approximately
64.6135 shares of common stock per $1,000 principal amount
of notes) is subject to adjustment for various events, including
the issuance of stock dividends. The notes will mature on
November 15, 2014. The Company will redeem on June 30,
2014 and at the end of each interest accrual period thereafter
an additional amount, if any, of the notes necessary to prevent
the notes from being treated as an Applicable High Yield
Discount Obligation under the Internal Revenue Code. If a
fundamental change (as defined in the indenture) occurs, the
Company will be required to offer to repurchase the notes at
100% of their principal amount, plus accrued interest and, under
certain circumstances, a make whole payment.
3.875%
Variable Interest Senior Convertible Debentures due
2026:
In July 2006, the Company sold $110,000 of its 3.875% variable
interest senior convertible debentures due 2026 in a private
offering to qualified institutional buyers in accordance with
Rule 144A under the Securities Act of 1933.
The debentures pay interest on a quarterly basis at a rate of
3.875% per annum plus Additional Interest (the Debenture
Total Interest). Notwithstanding the foregoing, however,
the interest payable on each interest payment date shall be the
higher of (i) the Debenture Total Interest and
(ii) 5.75% per annum. The debentures are convertible into
the Companys common stock at the holders option. The
conversion price at December 31, 2010 was $16.85 per share
(approximately 59.3619 shares of common stock per $1,000
principal amount of the note), is subject to adjustment for
various events, including the issuance of stock dividends.
The debentures will mature on June 15, 2026. The Company
must redeem 10% of the total aggregate principal amount of the
debentures outstanding on June 15, 2011. In addition to
such redemption amount, the Company will also redeem on
June 15, 2011 and at the end of each interest accrual
period thereafter an additional amount, if any, of the
debentures necessary to prevent the debentures from being
treated as an Applicable High Yield Discount
Obligation under the Internal Revenue Code. The holders of
the debentures will have the option on June 15, 2012,
June 15, 2016 and June 15, 2021 to require the Company
to repurchase some or all of their remaining debentures. The
redemption price for such redemptions will equal 100% of the
principal amount of the debentures plus accrued interest. If a
fundamental change (as defined in the Indenture) occurs, the
Company will be required to offer to
F-22
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
repurchase the debentures at 100% of their principal amount,
plus accrued interest and, under certain circumstances, a
make-whole premium.
Embedded
Derivatives on the Variable Interest Senior Convertible
Debt:
The portion of the interest on the Companys convertible
debt which is computed by reference to the cash dividends paid
on the Companys common stock is considered an embedded
derivative within the convertible debt, which the Company is
required to separately value. In accordance with authoritative
guidance on accounting for derivatives and hedging, the Company
has bifurcated these embedded derivatives and estimated the fair
value of the embedded derivative liability including using a
third party valuation. The resulting discount created by
allocating a portion of the issuance proceeds to the embedded
derivative is then amortized to interest expense over the term
of the debt using the effective interest method. Changes to the
fair value of these embedded derivatives are reflected quarterly
in the Companys consolidated statements of operations as
Change in fair value of derivatives embedded within
convertible debt. The value of the embedded derivative is
contingent on changes in interest rates of debt instruments
maturing over the duration of the convertible debt as well as
projections of future cash and stock dividends over the term of
the debt.
A summary of non-cash interest expense associated with the
amortization of the debt discount created by the embedded
derivative liability associated with the Companys variable
interest senior convertible debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
6.75% note
|
|
$
|
749
|
|
|
$
|
331
|
|
|
$
|
|
|
6.75% exchange notes
|
|
|
3,113
|
|
|
|
1,210
|
|
|
|
|
|
3.875% convertible debentures
|
|
|
575
|
|
|
|
455
|
|
|
|
360
|
|
5% convertible notes
|
|
|
|
|
|
|
3,394
|
|
|
|
5,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense associated with embedded derivatives
|
|
$
|
4,437
|
|
|
$
|
5,390
|
|
|
$
|
5,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of non-cash changes in fair value of derivatives
embedded within convertible debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
6.75% note
|
|
$
|
3,671
|
|
|
$
|
(2,323
|
)
|
|
$
|
|
|
6.75% exchange notes
|
|
|
9,228
|
|
|
|
(3,237
|
)
|
|
|
|
|
3.875% convertible debentures
|
|
|
(1,375
|
)
|
|
|
(29,745
|
)
|
|
|
16,082
|
|
5% convertible notes
|
|
|
|
|
|
|
(620
|
)
|
|
|
8,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on changes in fair value of derivatives embedded
within convertible debt
|
|
$
|
11,524
|
|
|
$
|
(35,925
|
)
|
|
$
|
24,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-23
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table reconciles the fair value of derivatives
embedded within convertible debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75%
|
|
|
3.875%
|
|
|
5%
|
|
|
|
|
|
|
6.75%
|
|
|
Exchange
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
Note
|
|
|
Notes
|
|
|
Debentures
|
|
|
Notes
|
|
|
Total
|
|
|
Balance at January 1, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
67,911
|
|
|
$
|
33,671
|
|
|
$
|
101,582
|
|
Gain from changes in fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
value of embedded derivatives
|
|
|
|
|
|
|
|
|
|
|
(16,082
|
)
|
|
|
(8,255
|
)
|
|
|
(24,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
51,829
|
|
|
|
25,416
|
|
|
|
77,245
|
|
Issuance of 6.75% Note
|
|
|
21,567
|
|
|
|
|
|
|
|
|
|
|
|
(2,485
|
)
|
|
|
19,082
|
|
Issuance of 6.75% Exchange Notes
|
|
|
|
|
|
|
44,315
|
|
|
|
|
|
|
|
(23,551
|
)
|
|
|
20,764
|
|
Loss from changes in fair value of embedded derivatives
|
|
|
2,323
|
|
|
|
3,237
|
|
|
|
29,745
|
|
|
|
620
|
|
|
|
35,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
23,890
|
|
|
|
47,552
|
|
|
|
81,574
|
|
|
|
|
|
|
|
153,016
|
|
(Gain) loss from changes in fair value of embedded derivatives
|
|
|
(3,671
|
)
|
|
|
(9,228
|
)
|
|
|
1,375
|
|
|
|
|
|
|
|
(11,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
20,219
|
|
|
$
|
38,324
|
|
|
$
|
82,949
|
|
|
$
|
|
|
|
$
|
141,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
Conversion Feature on Variable Interest Senior Convertible
Debt:
After giving effect to the recording of the embedded derivative
liability as a discount to the convertible debt, the
Companys common stock had a fair value at the issuance
date of the debt in excess of the conversion price resulting in
a beneficial conversion feature. The accounting guidance on debt
with conversion and other options requires that the intrinsic
value of the beneficial conversion feature be recorded to
additional paid-in capital and as a discount on the debt. The
discount is then amortized to interest expense over the term of
the debt using the effective interest method. The beneficial
conversion feature has been recorded, net of income taxes, as an
increase to stockholders equity.
A summary of non-cash interest expense associated with the
amortization of the debt discount created by the beneficial
conversion feature on the Companys variable interest
senior convertible debt is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Amortization of beneficial conversion feature:
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75% note
|
|
$
|
653
|
|
|
$
|
289
|
|
|
$
|
|
|
6.75% exchange notes
|
|
|
1,923
|
|
|
|
748
|
|
|
|
|
|
3.875% convertible debentures
|
|
|
(46
|
)
|
|
|
(51
|
)
|
|
|
(54
|
)
|
5% convertible notes
|
|
|
|
|
|
|
1,883
|
|
|
|
3,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense associated with beneficial conversion feature
|
|
$
|
2,530
|
|
|
$
|
2,869
|
|
|
$
|
2,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-24
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Unamortized
Debt Discount on Variable Interest Senior Convertible
Debt:
The following table reconciles unamortized debt discount within
convertible debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75%
|
|
|
3.875%
|
|
|
5%
|
|
|
|
|
|
|
6.75%
|
|
|
Exchange
|
|
|
Convertible
|
|
|
Convertible
|
|
|
|
|
|
|
Note
|
|
|
Notes
|
|
|
Debentures
|
|
|
Notes
|
|
|
Total
|
|
|
Balance at January 1, 2008
|
|
$
|
|
|
|
$
|
|
|
|
$
|
84,299
|
|
|
$
|
48,027
|
|
|
$
|
132,326
|
|
Amortization of embedded derivatives
|
|
|
|
|
|
|
|
|
|
|
(360
|
)
|
|
|
(5,445
|
)
|
|
|
(5,805
|
)
|
Amortization of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
(3,017
|
)
|
|
|
(2,963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
83,993
|
|
|
|
39,565
|
|
|
|
123,558
|
|
Issuance of convertible notes - embedded derivative
|
|
|
21,567
|
|
|
|
44,315
|
|
|
|
|
|
|
|
|
|
|
|
65,882
|
|
Issuance of convertible notes - beneficial conversion feature
|
|
|
18,808
|
|
|
|
27,392
|
|
|
|
|
|
|
|
|
|
|
|
46,200
|
|
Issuance of 6.75% Note-write-off of unamortized debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,311
|
)
|
|
|
(3,311
|
)
|
Issuance of 6.75% Exchange Notes-write-off of unamortized debt
discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,977
|
)
|
|
|
(30,977
|
)
|
Amortization of embedded derivatives
|
|
|
(331
|
)
|
|
|
(1,210
|
)
|
|
|
(455
|
)
|
|
|
(3,394
|
)
|
|
|
(5,390
|
)
|
Amortization of beneficial conversion feature
|
|
|
(289
|
)
|
|
|
(748
|
)
|
|
|
51
|
|
|
|
(1,883
|
)
|
|
|
(2,869
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
39,755
|
|
|
|
69,749
|
|
|
|
83,589
|
|
|
|
|
|
|
|
193,093
|
|
Amortization of embedded derivatives
|
|
|
(749
|
)
|
|
|
(3,113
|
)
|
|
|
(575
|
)
|
|
|
|
|
|
|
(4,437
|
)
|
Amortization of beneficial conversion feature
|
|
|
(653
|
)
|
|
|
(1,923
|
)
|
|
|
46
|
|
|
|
|
|
|
|
(2,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
38,353
|
|
|
$
|
64,713
|
|
|
$
|
83,060
|
|
|
$
|
|
|
|
$
|
186,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
on Extinguishment of Debt:
The exchange of the 5% Notes for the 6.75% Notes and
the 6.75% Exchange Notes qualifies as extinguishment of debt due
to the significant change in terms. The loss was $18,573 for the
year ended December 31, 2009. A summary of the
Companys loss on the extinguishment of the 5% Notes
for the year ended December 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.75%
|
|
|
|
|
|
|
6.75%
|
|
|
Exchange
|
|
|
|
|
|
|
Note
|
|
|
Notes
|
|
|
Total
|
|
|
Issuance of additional notes payable
|
|
$
|
770
|
|
|
$
|
7,034
|
|
|
$
|
7,804
|
|
Termination of embedded derivative
|
|
|
(2,485
|
)
|
|
|
(23,551
|
)
|
|
|
(26,036
|
)
|
Write-off of deferred finance costs
|
|
|
257
|
|
|
|
2,260
|
|
|
|
2,517
|
|
Write-off of unamortized debt discount, net
|
|
|
3,311
|
|
|
|
30,977
|
|
|
|
34,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on extinguishment of debt
|
|
$
|
1,853
|
|
|
$
|
16,720
|
|
|
$
|
18,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving
Credit Facility
Liggett:
Liggett has a $50,000 credit facility with Wachovia Bank, N.A.
(Wachovia) under which $35,710 was outstanding at
December 31, 2010. Availability as determined under the
facility was approximately $294 based on eligible collateral at
December 31, 2010. The facility is collateralized by all
inventories and receivables of Liggett and a mortgage on
Liggetts manufacturing facility. The facility requires
Liggetts compliance with certain financial and other
covenants including a restriction on Liggetts ability to
pay cash dividends unless Liggetts borrowing availability,
as defined, under the facility for the
30-day
period prior to the payment of the dividend, and after giving
F-25
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
effect to the dividend, is at least $5,000 and no event of
default has occurred under the agreement, including
Liggetts compliance with the covenants in the credit
facility.
The term of the Wachovia facility expires on March 8, 2012,
subject to automatic renewal for additional one-year periods
unless a notice of termination is given by Wachovia or Liggett
at least 60 days prior to such date or the anniversary of
such date. Prime rate loans under the facility bear interest at
a rate equal to the prime rate of Wachovia with Eurodollar rate
loans bearing interest at a rate of 2.0% above Wachovias
adjusted Eurodollar rate. The facility contains covenants that
provide that Liggetts earnings before interest, taxes,
depreciation and amortization, as defined under the facility, on
a trailing twelve month basis, shall not be less than $100,000
if Liggetts excess availability, as defined, under the
facility, is less than $20,000. The covenants also require that
annual capital expenditures, as defined under the facility
(before a maximum carryover amount of $2,500), shall not exceed
$10,000 during any fiscal year. On November 1, 2010,
Liggett and Wachovia entered into the credit facilitys
Seventh Amendment to permit Liggett to incur Capital
Expenditures (as defined in the credit facility) of up to
$33,000 solely for the fiscal year ended 2010. The Seventh
Amendment is effective as of August 31, 2010.
Equipment
Loans
Liggett:
In 2010, Liggett entered into nine financing agreements for a
total of $16,634 related to the purchase of equipment. The
weighted average interest rate of the outstanding debt is 5.28%
per annum and the interest rate on the notes ranges between
2.59% and 6.13%. The debt is payable over 30 to 60 months
with an average term of 56 months. Total monthly
installments are $297.
Liggett also refinanced $3,575 of debt related to previous
equipment purchases. The refinanced debt has an interest rate of
5.95% and is payable in 36 installments of $109. Each of these
equipment loans is collateralized by the purchased equipment. In
December 2010, Liggett purchased equipment for $8,068 and
entered into two financing agreements for a total of $8,068,
payable in 60 installments totaling $147. The interest rates on
the two notes are 5.63% and 5.69%.
Each of these equipment loans is collateralized by the purchased
equipment.
Fair
Value of Notes Payable and Long-term Debt:
The estimated fair value of the Companys notes payable and
long-term debt has been determined by the Company using
available market information and appropriate valuation
methodologies including the evaluation of the Companys
credit risk as described in Note 1. However, considerable
judgment is required to develop the estimates of fair value and,
accordingly, the estimate presented herein are not necessarily
indicative of the amount that could be realized in a current
market exchange.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Notes payable and long-term debt
|
|
$
|
557,397
|
|
|
$
|
827,247
|
|
|
$
|
356,809
|
|
|
$
|
573,439
|
|
F-26
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Scheduled
Maturities:
Scheduled maturities of long-term debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized
|
|
|
|
|
|
|
Principal
|
|
|
Discount
|
|
|
Net
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
51,345
|
|
|
|
434
|
|
|
|
50,911
|
|
2012
|
|
|
105,793
|
|
|
|
82,626
|
|
|
|
23,167
|
|
2013
|
|
|
4,375
|
|
|
|
|
|
|
|
4,375
|
|
2014
|
|
|
161,158
|
|
|
|
103,066
|
|
|
|
58,092
|
|
2015
|
|
|
418,025
|
|
|
|
730
|
|
|
|
417,295
|
|
Thereafter
|
|
|
3,557
|
|
|
|
|
|
|
|
3,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
744,253
|
|
|
$
|
186,856
|
|
|
$
|
557,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The scheduled maturities of $105,793 (principal amount) in 2012
reflect $99,000 (principal amount), which may be required to be
redeemed in 2012 in accordance with the terms of the
Companys 3.875% Variable Interest Senior Convertible
Debentures due 2026.
Weighted-Average
Interest Rate on Current Maturities of Long-Term
Debt:
The weighted-average interest rate on the Companys current
maturities of long-term debt at December 31, 2010 was
approximately 11.05%.
Certain of the Companys subsidiaries lease facilities and
equipment used in operations under both
month-to-month
and fixed-term agreements. The aggregate minimum rentals under
operating leases with non-cancelable terms of one year or more
as of December 31, 2010 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease
|
|
|
Sublease
|
|
|
|
|
|
|
Commitments
|
|
|
Rentals
|
|
|
Net
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
$
|
4,739
|
|
|
|
965
|
|
|
|
3,774
|
|
2012
|
|
|
3,984
|
|
|
|
965
|
|
|
|
3,019
|
|
2013
|
|
|
2,204
|
|
|
|
402
|
|
|
|
1,802
|
|
2014
|
|
|
1,165
|
|
|
|
|
|
|
|
1,165
|
|
2015
|
|
|
630
|
|
|
|
|
|
|
|
630
|
|
Thereafter
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,743
|
|
|
$
|
2,332
|
|
|
$
|
10,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2001, the Company entered into an operating sublease for
space in an office building in New York. The lease, as amended,
expires in 2013. Minimum rental expense over the entire period
is $10,584. A rent abatement received upon entering into the
lease is recognized on a straight line basis over the life of
the lease. The Company pays operating expense escalation ($40 in
2010) in monthly installments along with installments of
the base rent.
The Companys rental expense for the years ended
December 31, 2010, 2009 and 2008 was $3,670, $3,904 and
$3,825, respectively.
|
|
9.
|
EMPLOYEE
BENEFIT PLANS
|
Defined
Benefit Plans and Postretirement Plans:
Defined Benefit Plans. The Company sponsors
three defined benefit pension plans (two qualified and one
non-qualified) covering virtually all individuals who were
employed by Liggett on a full-time basis prior to 1994.
F-27
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Future accruals of benefits under these three defined benefit
plans were frozen between 1993 and 1995. These benefit plans
provide pension benefits for eligible employees based primarily
on their compensation and length of service. Contributions are
made to the two qualified pension plans in amounts necessary to
meet the minimum funding requirements of the Employee Retirement
Income Security Act of 1974. The plans assets and benefit
obligations were measured at December 31, 2010 and 2009,
respectively.
The Company also sponsors a Supplemental Retirement Plan
(SERP) where the Company will pay supplemental
retirement benefits to certain key employees, including
executive officers of the Company. In January 2006, the Company
amended and restated its SERP (the Amended SERP),
effective January 1, 2005. The amendments to the plan were
intended, among other things, to cause the plan to meet the
applicable requirements of Section 409A of the Internal
Revenue Code. The Amended SERP is intended to be unfunded for
tax purposes, and payments under the Amended SERP will be made
out of the general assets of the Company. Under the Amended
SERP, the benefit payable to a participant at his normal
retirement date is a lump sum amount which is the actuarial
equivalent of a predetermined annual retirement benefit set by
the Companys board of directors. Normal retirement date is
defined as the January 1 following the attainment by the
participant of the later of age 60 or the completion of
eight years of employment following January 1, 2002 with
the Company or a subsidiary.
In connection with the retirement of the Companys
Chairman, he received in July 2009 a payment of $20,860 under
the terms of the SERP.
In April 2008, the SERP was amended to provide the
Companys President and Chief Executive Officer with an
additional benefit under the SERP equal to a $736 lifetime
annuity beginning January 1, 2013. This additional benefit
vests in full on January 1, 2013, subject to his remaining
continuously employed by the Company through that date, subject
to partial vesting for termination of employment under certain
circumstances. In addition, in the event of a termination of his
employment under the circumstances where he is entitled to
severance payments under his employment agreement, he will be
credited with an additional 36 months of service towards
vesting under the SERP. As a result of the additional benefit
granted to him, the President and Chief Executive Officer will
be eligible to receive a total lump sum retirement benefit of
$20,546 in 2013, an increase of $7,122 over the benefit he would
have been entitled to receive under the SERP prior to the
amendment, assuming a January 1, 2013 retirement date. The
$7,122 increase will be recognized as an expense in the years
ended December 31, 2010, 2011 and 2012.
At December 31, 2010, the aggregate lump sum equivalents of
the annual retirement benefits payable under the Amended SERP at
normal retirement dates occurring during the following years is
as follows: 2011 $0; 2012 $3,505;
2013 $20,647; 2014 $7,232;
2015 $0 and 2016 to 2020 $0. In the case
of a participant who becomes disabled prior to his normal
retirement date or whose service is terminated without cause,
the participants benefit consists of a pro-rata portion of
the full projected retirement benefit to which he would have
been entitled had he remained employed through his normal
retirement date, as actuarially discounted back to the date of
payment. A participant who dies while working for the Company or
a subsidiary (and before becoming disabled or attaining his
normal retirement date) will be paid an actuarially discounted
equivalent of his projected retirement benefit; conversely, a
participant who retires beyond his normal retirement date will
receive an actuarially increased equivalent of his projected
retirement benefit.
Postretirement Medical and Life Plans. The
Company provides certain postretirement medical and life
insurance benefits to certain employees. Substantially all of
the Companys manufacturing employees as of
December 31, 2010 are eligible for postretirement medical
benefits if they reach retirement age while working for Liggett
or certain affiliates. Retirees are required to fund 100%
of participant medical premiums and, pursuant to union
contracts, Liggett reimburses approximately 375 hourly
retirees, who retired prior to 1991, for Medicare Part B
premiums. In addition, the Company provides life insurance
benefits to approximately 200 active employees and 475 retirees
who reach retirement age and are eligible to receive benefits
under one of the Companys defined benefit pension plans.
The Companys postretirement liabilities are comprised of
Medicare Part B and life insurance premiums.
F-28
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table provides a reconciliation of benefit
obligations, plan assets and the funded status of the pension
plans and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1
|
|
$
|
(142,043
|
)
|
|
$
|
(156,318
|
)
|
|
$
|
(9,405
|
)
|
|
$
|
(8,743
|
)
|
Service cost
|
|
|
(1,360
|
)
|
|
|
(1,319
|
)
|
|
|
(13
|
)
|
|
|
(15
|
)
|
Interest cost
|
|
|
(8,131
|
)
|
|
|
(9,385
|
)
|
|
|
(521
|
)
|
|
|
(566
|
)
|
Plan amendment
|
|
|
(6,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits paid
|
|
|
11,787
|
|
|
|
32,903
|
|
|
|
574
|
|
|
|
596
|
|
Expenses paid
|
|
|
479
|
|
|
|
507
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
(3,645
|
)
|
|
|
(8,431
|
)
|
|
|
(485
|
)
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31
|
|
$
|
(148,968
|
)
|
|
$
|
(142,043
|
)
|
|
$
|
(9,850
|
)
|
|
$
|
(9,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1
|
|
$
|
125,166
|
|
|
$
|
111,266
|
|
|
$
|
|
|
|
$
|
|
|
Gap period cash flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets
|
|
|
19,733
|
|
|
|
26,085
|
|
|
|
|
|
|
|
|
|
Expenses paid
|
|
|
(479
|
)
|
|
|
(507
|
)
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
360
|
|
|
|
21,225
|
|
|
|
574
|
|
|
|
596
|
|
Benefits paid
|
|
|
(11,787
|
)
|
|
|
(32,903
|
)
|
|
|
(574
|
)
|
|
|
(596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31
|
|
$
|
132,993
|
|
|
$
|
125,166
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31
|
|
$
|
(15,975
|
)
|
|
$
|
(16,877
|
)
|
|
$
|
(9,850
|
)
|
|
$
|
(9,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension costs
|
|
$
|
13,935
|
|
|
$
|
8,994
|
|
|
$
|
|
|
|
$
|
|
|
Other accrued liabilities
|
|
|
(347
|
)
|
|
|
(357
|
)
|
|
|
(665
|
)
|
|
|
(680
|
)
|
Non-current employee benefit liabilities
|
|
|
(29,563
|
)
|
|
|
(25,514
|
)
|
|
|
(9,185
|
)
|
|
|
(8,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized
|
|
$
|
(15,975
|
)
|
|
$
|
(16,877
|
)
|
|
$
|
(9,850
|
)
|
|
$
|
(9,405
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
|
|
|
|
Pension Benefits
|
|
|
Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Service cost benefits earned during the period
|
|
$
|
1,360
|
|
|
$
|
1,319
|
|
|
$
|
4,139
|
|
|
$
|
13
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Interest cost on projected benefit obligation
|
|
|
8,131
|
|
|
|
9,385
|
|
|
|
9,525
|
|
|
|
521
|
|
|
|
567
|
|
|
|
591
|
|
Expected return on assets
|
|
|
(8,271
|
)
|
|
|
(7,817
|
)
|
|
|
(12,145
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
|
|
|
|
801
|
|
|
|
1,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time contractual termination benefits
|
|
|
|
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss (gain)
|
|
|
3,376
|
|
|
|
2,136
|
|
|
|
98
|
|
|
|
(129
|
)
|
|
|
(163
|
)
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net expense
|
|
$
|
4,596
|
|
|
$
|
4,016
|
|
|
$
|
3,019
|
|
|
$
|
405
|
|
|
$
|
419
|
|
|
$
|
426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes amounts in accumulated other
comprehensive loss that are expected to be recognized as
components of net periodic benefit cost for the year ending
December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
Post-
|
|
|
|
|
Benefit
|
|
Retirement
|
|
|
|
|
Pension Plans
|
|
Plans
|
|
Total
|
|
Prior service cost
|
|
$
|
2,018
|
|
|
$
|
|
|
|
$
|
2,018
|
|
Actuarial loss (gain)
|
|
|
789
|
|
|
|
(88
|
)
|
|
|
701
|
|
As of December 31, 2010, current year accumulated other
comprehensive income, before income taxes, consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Post-
|
|
|
|
|
|
|
Benefit
|
|
|
Retirement
|
|
|
|
|
|
|
Pension Plans
|
|
|
Plans
|
|
|
Total
|
|
|
Prior year accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
$
|
(35,348
|
)
|
|
$
|
1,003
|
|
|
$
|
(34,345
|
)
|
Amortization of prior service costs
|
|
|
2,018
|
|
|
|
|
|
|
|
2,018
|
|
Effect of settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of gain (loss)
|
|
|
1,358
|
|
|
|
(130
|
)
|
|
|
1,228
|
|
Net (loss) gain arising during the year
|
|
|
1,762
|
|
|
|
(485
|
)
|
|
|
1,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year accumulated other comprehensive (loss) income
|
|
$
|
(30,210
|
)
|
|
$
|
388
|
|
|
$
|
(29,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, there was $29,822 of items not yet
recognized as a component of net periodic pension benefit, which
consisted of future pension benefits of $30,210 associated with
the amortization of net loss.
As of December 31, 2010, there was $388 of items not yet
recognized as a component of net periodic postretirement
benefit, which consisted of future benefits associated with the
amortization of net gains.
As of December 31, 2009, current year accumulated other
comprehensive income, before income taxes, consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined
|
|
|
Post-
|
|
|
|
|
|
|
Benefit
|
|
|
Retirement
|
|
|
|
|
|
|
Pension Plans
|
|
|
Plans
|
|
|
Total
|
|
|
Prior year accumulated other
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive income
|
|
$
|
(46,314
|
)
|
|
$
|
1,842
|
|
|
$
|
(44,472
|
)
|
Amortization of prior service costs
|
|
|
801
|
|
|
|
|
|
|
|
801
|
|
Effect of settlement
|
|
|
(1,808
|
)
|
|
|
|
|
|
|
(1,808
|
)
|
Amortization of gain (loss)
|
|
|
2,136
|
|
|
|
(163
|
)
|
|
|
1,973
|
|
Net (loss) gain arising during the year
|
|
|
9,837
|
|
|
|
(676
|
)
|
|
|
9,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year accumulated other comprehensive (loss) income
|
|
$
|
(35,348
|
)
|
|
$
|
1,003
|
|
|
$
|
(34,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, there was $34,345 of items not yet
recognized as a component of net periodic pension benefit, which
consisted of future pension benefits of $35,348 associated with
the amortization of net loss.
As of December 31, 2009, there was $1,003 of items not yet
recognized as a component of net periodic postretirement
benefit, which consisted of future benefits associated with the
amortization of net gains.
As of December 31, 2010, two of the Companys four
defined benefit plans experienced accumulated benefit
obligations in excess of plan assets, for which in the aggregate
the projected benefit obligation, accumulated benefit
F-30
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
obligation and fair value of plan assets were $29,973, $29,973
and $0, respectively. As of December 31, 2009, three of the
Companys four defined benefit plans experienced
accumulated benefit obligations in excess of plan assets, for
which in the aggregate the projected benefit obligation,
accumulated benefit obligation and fair value of plan assets
were $90,216, $90,216 and $64,345, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Postretirement Benefits
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates benefit obligation
|
|
|
5.25
|
%
|
|
|
5.75
|
%
|
|
|
6.75
|
%
|
|
|
5.25
|
%
|
|
|
5.75
|
%
|
|
|
6.75
|
%
|
Discount rates service cost
|
|
|
5.75
|
%
|
|
|
6.75
|
%
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
|
6.75
|
%
|
|
|
6.25
|
%
|
Assumed rates of return on invested assets
|
|
|
7.00
|
%
|
|
|
7.50
|
%
|
|
|
7.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Salary increase assumptions
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
|
|
3.00
|
%
|
Discount rates were determined by a quantitative analysis
examining the prevailing prices of high quality bonds to
determine an appropriate discount rate for measuring
obligations. The aforementioned analysis analyzes the cash flow
from each of the Companys four benefit plans as well as a
separate analysis of the cash flows from the postretirement
medical and life insurance plans sponsored by Liggett. The
aforementioned analyses then construct a hypothetical bond
portfolio whose cash flow from coupons and maturities match the
year-by-year,
projected benefit cash flow from the respective pension or
retiree health plans. The Company uses the lower discount rate
derived from the two independent analyses in the computation of
the benefit obligation and service cost for each respective
retirement liability. The Company uses the discount rate derived
from the analysis in the computation of the benefit obligation
and service cost for all the plans respective retirement
liability.
The Company considers input from its external advisors and
historical returns in developing its expected rate of return on
plan assets. The expected long-term rate of return is the
weighted average of the target asset allocation of each
individual asset class. The Companys actual
10-year
annual rate of return on its pension plan assets was 4.8%, 3.0%
and 2.5% for the years ended December 31, 2010, 2009 and
2008, respectively, and the Companys actual five-year
annual rate of return on its pension plan assets was 5.7%, 3.5%
and 1.2% for the years ended December 31, 2010, 2009 and
2008, respectively.
Gains and losses resulting from changes in actuarial assumptions
and from differences between assumed and actual experience,
including, among other items, changes in discount rates and
changes in actual returns on plan assets as compared to assumed
returns. These gains and losses are only amortized to the extent
that they exceed 10% of the greater of Projected Benefit
Obligation and the fair value of assets. For the year ended
December 31, 2010, Liggett used a 16.01-year period for its
Hourly Plan and a 17.56-year period for its Salaried Plan to
amortize pension fund gains and losses on a straight line basis.
Such amounts are reflected in the pension expense calculation
beginning the year after the gains or losses occur. The
amortization of deferred losses negatively impacts pension
expense in the future.
Plan assets are invested employing multiple investment
management firms. Managers within each asset class cover a range
of investment styles and focus primarily on issue selection as a
means to add value. Risk is controlled through a diversification
among asset classes, managers, styles and securities. Risk is
further controlled both at the manager and asset class level by
assigning excess return and tracking error targets. Investment
managers are monitored to evaluate performance against these
benchmark indices and targets.
Allowable investment types include equity, investment grade
fixed income, high yield fixed income, hedge funds and short
term investments. The equity fund is comprised of common stocks
and mutual funds of large, medium and small companies, which are
predominantly U.S. based. The investment grade fixed income
fund includes managed funds investing in fixed income securities
issued or guaranteed by the U.S. government, or by its
respective agencies, mortgage backed securities, including
collateralized mortgage obligations, and corporate debt
obligations. The high yield fixed income fund includes a fund
which invests in non-investment grade corporate debt
F-31
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
securities. The hedge funds invest in both equity, including
common and preferred stock, and debt obligations, including
convertible debentures, of private and public companies. The
Company generally utilizes its short term investments, including
interest-bearing cash, to pay benefits and to deploy in special
situations.
In 2008, the Liggett Employee Benefits Committee temporarily
suspended its target asset allocation percentages due to the
volatility in the financial markets. Even though such allocation
percentages were suspended, investment manager performance
versus their respective benchmarks was still monitored on a
regular basis. Effective January 1, 2011, the Liggett
Employee Benefits Committee has reinstated its target assets
allocation to equal 50.0% equity investments, 27.5% investment
grade fixed income, 7.5% high yield fixed income, 10.0%
alternative investments (including hedge funds and private
equity funds) and 5.0% short-term investments, with a
rebalancing range of approximately plus or minus 5% around the
target asset allocations.
Vectors defined benefit retirement plan allocations at
December 31, 2010 and 2009, by asset category, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at
|
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Asset category:
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
51
|
%
|
|
|
50
|
%
|
Investment grade fixed income securities
|
|
|
26
|
%
|
|
|
26
|
%
|
High yield fixed income securities
|
|
|
4
|
%
|
|
|
2
|
%
|
Alternative investments
|
|
|
9
|
%
|
|
|
8
|
%
|
Short-term investments
|
|
|
10
|
%
|
|
|
14
|
%
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
The defined benefit plans recurring financial assets and
liabilities subject to fair value measurements and the necessary
disclosures are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts
|
|
$
|
2,359
|
|
|
$
|
|
|
|
$
|
2,359
|
|
|
$
|
|
|
Amounts in individually managed investment accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
14,108
|
|
|
|
14,108
|
|
|
|
|
|
|
|
|
|
U.S. equity securities
|
|
|
53,916
|
|
|
|
53,916
|
|
|
|
|
|
|
|
|
|
Common collective trusts
|
|
|
50,631
|
|
|
|
|
|
|
|
45,722
|
|
|
|
4,909
|
|
Investment partnership
|
|
|
11,996
|
|
|
|
|
|
|
|
|
|
|
|
11,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
133,010
|
|
|
$
|
68,024
|
|
|
$
|
48,081
|
|
|
$
|
16,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
|
|
|
|
|
|
Active Markets for
|
|
|
Significant Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical Assets
|
|
|
Observable Inputs
|
|
|
Unobservable Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts
|
|
$
|
2,684
|
|
|
$
|
|
|
|
$
|
2,684
|
|
|
$
|
|
|
Amounts in individually managed investment accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, mutual funds and common stock
|
|
|
71,726
|
|
|
|
71,726
|
|
|
|
|
|
|
|
|
|
Common collective trusts
|
|
|
40,210
|
|
|
|
|
|
|
|
38,752
|
|
|
|
1,458
|
|
Investment partnership
|
|
|
10,182
|
|
|
|
|
|
|
|
|
|
|
|
10,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124,802
|
|
|
$
|
71,726
|
|
|
$
|
41,436
|
|
|
$
|
11,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value determination disclosed above of assets as
Level 3 under the fair value hierarchy was determined based
on unobservable inputs and were based on company assumptions,
and information obtained from the investments based on the
indicated market values of the underlying assets of the
investment portfolio.
The changes in the fair value of these Level 3 investments
as of December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Balance as of January 1
|
|
$
|
11,640
|
|
|
$
|
15,285
|
|
Distributions
|
|
|
(1,107
|
)
|
|
|
(8,978
|
)
|
Contributions
|
|
|
4,000
|
|
|
|
|
|
Unrealized loss on long-term investments
|
|
|
2,113
|
|
|
|
3,913
|
|
Realized gain on long-term investments
|
|
|
259
|
|
|
|
1,420
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
16,905
|
|
|
$
|
11,640
|
|
|
|
|
|
|
|
|
|
|
For 2010 measurement purposes, annual increases in Medicare
Part B trends were assumed to equal rates between (5.25)%
and 6.8% between 2011 and 2019 and 4.5% after 2019. For 2009
measurement purposes, annual increases in Medicare Part B
trends were assumed to equal rates between (7.24)% and 24.69%
between 2010 and 2018 and 4.5% after 2018.
Assumed health care cost trend rates have a significant effect
on the amounts reported for the health care plans. A 1% change
in assumed health care cost trend rates would have the following
effects:
|
|
|
|
|
|
|
|
|
|
|
1% Increase
|
|
1% Decrease
|
|
Effect on total of service and interest cost components
|
|
$
|
9
|
|
|
$
|
(8
|
)
|
Effect on benefit obligation
|
|
$
|
164
|
|
|
$
|
(151
|
)
|
To comply with ERISAs minimum funding requirements, the
Company does not currently anticipate that it will be required
to make any funding to the pension plans for the pension plan
year beginning on January 1, 2011 and ending on
December 31, 2011. Any additional funding obligation that
the Company may have for subsequent years is contingent on
several factors and is not reasonably estimable at this time.
F-33
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Estimated future pension and postretirement medical benefits
payments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement
|
|
|
|
Pension
|
|
|
Medical
|
|
|
2011
|
|
|
11,956
|
|
|
|
666
|
|
2012
|
|
|
15,064
|
|
|
|
734
|
|
2013
|
|
|
31,838
|
|
|
|
696
|
|
2014
|
|
|
17,959
|
|
|
|
691
|
|
2015
|
|
|
10,413
|
|
|
|
694
|
|
2016 2020
|
|
|
45,989
|
|
|
|
3,471
|
|
Profit
Sharing and Other
Plans:
The Company maintains 401(k) plans for substantially all
U.S. employees which allow eligible employees to invest a
percentage of their pre-tax compensation. The Company
contributed to the 401(k) plans and expensed $1,068, $1,098 and
$1,095 for the years ended December 31, 2010, 2009 and
2008, respectively.
The Company files a consolidated U.S. income tax return
that includes its more than 80%-owned U.S. subsidiaries.
The amounts provided for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
33,142
|
|
|
$
|
94,640
|
|
|
$
|
25,747
|
|
State
|
|
|
101
|
|
|
|
19,274
|
|
|
|
7,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,243
|
|
|
$
|
113,914
|
|
|
$
|
33,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(3,381
|
)
|
|
$
|
(85,158
|
)
|
|
$
|
5,170
|
|
State
|
|
|
1,624
|
|
|
|
(25,025
|
)
|
|
|
(4,738
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,757
|
)
|
|
|
(110,183
|
)
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
31,486
|
|
|
$
|
3,731
|
|
|
$
|
34,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The tax effect of temporary differences which give rise to a
significant portion of deferred tax assets and liabilities are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
|
Deferred Tax
|
|
|
Deferred Tax
|
|
|
Deferred Tax
|
|
|
Deferred Tax
|
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Assets
|
|
|
Liabilities
|
|
|
Excess of tax basis over book basis- non-consolidated entities
|
|
$
|
10,603
|
|
|
$
|
|
|
|
$
|
8,876
|
|
|
$
|
|
|
Employee benefit accruals
|
|
|
10,701
|
|
|
|
|
|
|
|
11,084
|
|
|
|
|
|
Book/tax differences on fixed and Intangible assets
|
|
|
|
|
|
|
34,293
|
|
|
|
|
|
|
|
29,671
|
|
Book/tax differences on inventory
|
|
|
|
|
|
|
21,589
|
|
|
|
|
|
|
|
13,015
|
|
Book/tax differences on long-term investments
|
|
|
7,067
|
|
|
|
|
|
|
|
9,950
|
|
|
|
|
|
Impact of accounting on convertible debt
|
|
|
|
|
|
|
16,155
|
|
|
|
|
|
|
|
13,467
|
|
Impact of timing of settlement payments
|
|
|
26,962
|
|
|
|
|
|
|
|
10,099
|
|
|
|
|
|
Various U.S. state tax loss carryforwards
|
|
|
14,496
|
|
|
|
|
|
|
|
15,138
|
|
|
|
|
|
Other
|
|
|
10,075
|
|
|
|
16,742
|
|
|
|
8,354
|
|
|
|
6,221
|
|
Valuation allowance
|
|
|
(10,290
|
)
|
|
|
|
|
|
|
(9,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69,614
|
|
|
$
|
88,779
|
|
|
$
|
53,992
|
|
|
$
|
62,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company provides a valuation allowance against deferred tax
assets if, based on the weight of available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized. The valuation allowance of $10,290 and $9,509
at December 31, 2010 and 2009, respectively, consisted
primarily of a reserve against various state and local net
operating loss carryforwards, primarily resulting from Vector
Tobaccos losses.
The consolidated balance sheets of the Company include deferred
income tax assets and liabilities, which represent temporary
differences in the application of accounting rules established
by generally accepted accounting principles and income tax laws.
Deferred federal income tax expense differs in 2010, 2009 and
2008 as a result of reclassifications between current and
deferred tax liabilities. The deferred tax expense in 2008
related to the utilization of tax credits. The deferred federal
tax benefit in 2009 related to the recognition of a previously
deferred gain in 2009 and the reduction of a valuation allowance
in 2009. The deferred tax benefit in 2010 results from the
recognition of various temporary differences at the Liggett
segment.
The valuation allowance was reduced in 2009 for the recognition
of state tax net operating losses at Vector Tobacco after
evaluating the impact of the negative and positive evidence that
such asset would be realized. The Company based its conclusion
on the fact that Vector Tobacco reported state taxable income on
a separate company basis for the second consecutive year in
2009. The valuation allowance was increased in 2010 as a result
of changes in Vector Tobaccos state tax apportionment in
2010 which decreased Vector Tobaccos ability to utilize
state tax net operating losses in future years.
F-35
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Differences between the amounts provided for income taxes and
amounts computed at the federal statutory tax rate are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Income before income taxes
|
|
$
|
85,570
|
|
|
$
|
28,537
|
|
|
$
|
94,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense at statutory rate
|
|
|
29,950
|
|
|
|
9,988
|
|
|
|
33,100
|
|
Increases (decreases) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
State income taxes, net of federal income tax benefits
|
|
|
1,121
|
|
|
|
261
|
|
|
|
2,048
|
|
Non-deductible expenses
|
|
|
1,491
|
|
|
|
1,682
|
|
|
|
1,771
|
|
Impact of domestic production deduction
|
|
|
(654
|
)
|
|
|
(1,201
|
)
|
|
|
(1,608
|
)
|
Tax credits
|
|
|
(25
|
)
|
|
|
(833
|
)
|
|
|
|
|
Equity and other adjustments
|
|
|
|
|
|
|
|
|
|
|
381
|
|
Changes in valuation allowance, net of equity and tax audit
adjustments
|
|
|
(397
|
)
|
|
|
(6,166
|
)
|
|
|
(1,624
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
31,486
|
|
|
$
|
3,731
|
|
|
$
|
34,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity related to the
unrecognized tax benefits:
|
|
|
|
|
Balance at January 1, 2008
|
|
$
|
10,605
|
|
Additions based on tax positions related to current year
|
|
|
|
|
Additions based on tax positions related to prior years
|
|
|
747
|
|
Reductions based on tax positions related to prior years
|
|
|
(317
|
)
|
Settlements
|
|
|
|
|
Expirations of the statute of limitations
|
|
|
(3,532
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
7,503
|
|
Additions based on tax positions related to current year
|
|
|
3,380
|
|
Additions based on tax positions related to prior years
|
|
|
2,619
|
|
Reductions based on tax positions related to prior years
|
|
|
(550
|
)
|
Settlements
|
|
|
(903
|
)
|
Expirations of the statute of limitations
|
|
|
(1,833
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
10,216
|
|
Additions based on tax positions related to current year
|
|
|
847
|
|
Additions based on tax positions related to prior years
|
|
|
1,178
|
|
Reductions based on tax positions related to prior years
|
|
|
(2,303
|
)
|
Settlements
|
|
|
(1,076
|
)
|
Expirations of the statute of limitations
|
|
|
(2,094
|
)
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
6,768
|
|
|
|
|
|
|
In the event the unrecognized tax benefits of $6,768 and $10,216
at December 31, 2010 and 2009, respectively, were
recognized, such recognition would impact the annual effective
tax rates. During 2010, the accrual for potential penalties and
interest related to these unrecognized tax benefits was reduced
by $2,444, and in total, as of December 31, 2010, a
liability for potential penalties and interest of $1,091 has
been recorded. During 2009, the accrual for potential penalties
and interest related to these unrecognized tax benefits was
reduced by $281, and in
F-36
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
total, as of December 31, 2009, a liability for potential
penalties and interest of $2,650 has been recorded. The Company
classifies all tax-related interest and penalties as income tax
expense.
It is reasonably possible the Company may recognize up to
approximately $400 of currently unrecognized tax benefits over
the next 12 months, pertaining primarily to expiration of
statutes of limitations of positions reported on state and local
income tax returns. The Company files U.S. and state and
local income tax returns in jurisdictions with varying statutes
of limitations.
In 2009, the Internal Revenue Service concluded an audit of the
Companys income tax return for the year ended
December 31, 2005. There was no material impact on the
Companys consolidated financial statements as a result of
the audit.
The Company grants equity compensation under its Amended and
Restated 1999 Long-Term Incentive Plan (the 1999
Plan). As of December 31, 2010, there were
approximately 3,815,336 shares available for issuance under
the 1999 Plan.
Stock Options. The Company accounts for stock
compensation by valuing unvested stock options granted prior to
January 1, 2006 under the fair value method of accounting
and expensing this amount in the statement of operations over
the stock options remaining vesting period.
The Company recognized compensation expense of $1,218, $292 and
$186 related to stock options in the years ended
December 31, 2010, 2009 and 2008 respectively.
The terms of certain stock options awarded under the 1999 Plan
in December 2009 and January 2001 provide for common stock
dividend equivalents (at the same rate as paid on the common
stock) with respect to the shares underlying the unexercised
portion of the options. The Company recognizes payments of the
dividend equivalent rights on these options as reductions in
additional paid-in capital on the Companys consolidated
balance sheet ($2,480, $4,342 and $4,865 net of taxes, for
the years ended December 31, 2010, 2009 and 2008,
respectively), which is included as Distributions on
common stock in the Companys consolidated statement
of changes in stockholders equity.
The fair value of option grants is estimated at the date of
grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including expected stock price characteristics which
are significantly different from those of traded options, and
because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models
do not necessarily provide a reliable single measure of the fair
value of stock-based compensation awards.
The assumptions used under the Black-Scholes option pricing
model in computing fair value of options are based on the
expected option life considering both the contractual term of
the option and expected employee exercise behavior, the interest
rate associated with U.S. Treasury issues with a remaining
term equal to the expected option life and the expected
volatility of the Companys common stock over the expected
term of the option. The assumptions used for grants in the years
ended December 31, 2010 and 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Risk-free interest rate
|
|
|
2.59%
|
|
|
|
2.0% 3.4%
|
|
Expected volatility
|
|
|
24.43%
|
|
|
|
24.97% 35.93%
|
|
Dividend yield
|
|
|
9.75%
|
|
|
|
0.0%
|
|
Expected holding period
|
|
|
4.74 years
|
|
|
|
4.79 10 years
|
|
Weighted-average grant date fair value
|
|
$
|
1.03
|
|
|
$
|
3.58 $7.40
|
|
F-37
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of employee stock option transactions follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
Contractual Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
(Years)
|
|
|
Value(1)
|
|
|
Outstanding on January 1, 2008
|
|
|
10,326,841
|
|
|
$
|
8.38
|
|
|
|
1.8
|
|
|
$
|
95,238
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,498,715
|
)
|
|
$
|
5.19
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(1,547
|
)
|
|
$
|
28.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2008
|
|
|
5,826,579
|
|
|
$
|
10.50
|
|
|
|
1.7
|
|
|
$
|
13,708
|
|
Granted
|
|
|
1,176,000
|
|
|
$
|
13.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(4,618,558
|
)
|
|
$
|
9.54
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(71,052
|
)
|
|
$
|
15.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2009
|
|
|
2,312,969
|
|
|
$
|
13.82
|
|
|
|
6.6
|
|
|
$
|
1,947
|
|
Granted
|
|
|
105,000
|
|
|
$
|
15.63
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(116,271
|
)
|
|
$
|
10.88
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on December 31, 2010
|
|
|
2,301,679
|
|
|
$
|
14.05
|
|
|
|
6.0
|
|
|
$
|
11,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
5,427,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
1,109,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
1,014,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value represents the amount by which the
fair value of the underlying common stock ($17.32, $14.00 and
$12.97 at December 31, 2010, 2009 and 2008, respectively)
exceeds the option exercise price. |
Additional information relating to options outstanding at
December 31, 2010 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
|
|
|
Exercisable
|
|
|
|
|
Range of
|
|
as of
|
|
|
Contractual Life
|
|
|
Weighted-Average
|
|
|
as of
|
|
|
Weighted-Average
|
|
Exercise Prices
|
|
12/31/2010
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
12/31/2010
|
|
|
Exercise Price
|
|
|
$0.00 8.42
|
|
|
11,637
|
|
|
|
2.0
|
|
|
$
|
8.14
|
|
|
|
11,637
|
|
|
$
|
8.14
|
|
$8.43 11.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$11.23 14.03
|
|
|
1,969,206
|
|
|
|
6.3
|
|
|
$
|
13.10
|
|
|
|
786,825
|
|
|
$
|
13.10
|
|
$14.04 16.84
|
|
|
162,425
|
|
|
|
7.7
|
|
|
$
|
15.77
|
|
|
|
57,425
|
|
|
$
|
15.77
|
|
$16.85 19.64
|
|
|
6,184
|
|
|
|
1.1
|
|
|
$
|
17.86
|
|
|
|
6,184
|
|
|
$
|
17.86
|
|
$19.65 22.45
|
|
|
4,876
|
|
|
|
0.6
|
|
|
$
|
21.56
|
|
|
|
4,876
|
|
|
$
|
21.56
|
|
$22.46 25.25
|
|
|
58,944
|
|
|
|
0.7
|
|
|
$
|
23.85
|
|
|
|
58,944
|
|
|
$
|
23.85
|
|
$25.26 28.06
|
|
|
88,407
|
|
|
|
0.7
|
|
|
$
|
25.64
|
|
|
|
88,407
|
|
|
$
|
25.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,301,679
|
|
|
|
6.0
|
|
|
$
|
14.05
|
|
|
|
1,014,298
|
|
|
$
|
14.98
|
|
As of December 31, 2010, there was $4,057 of total
unrecognized compensation cost related to unvested stock
options. The cost is expected to be recognized over a
weighted-average period of approximately three years at
December 31, 2010.
F-38
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2009, there was $5,171 of total
unrecognized compensation cost related to unvested stock
options. The cost is expected to be recognized over a
weighted-average period of approximately four years at
December 31, 2009.
The Company reflects the tax savings resulting from tax
deductions in excess of expense reflected in its financial
statements as a component of Cash Flows from Financing
Activities.
Non-qualified options for 105,000 shares of common stock
were issued during 2010. The exercise price of the options
granted was $15.63 in 2010. The exercise prices of the options
granted in 2010 were at the fair value on the dates of the
grants.
Non-qualified options for 1,176,000 shares of common stock
were issued during 2009. The exercise price of the options
granted was $13.40 in 2009. The exercise prices of the options
granted in 2009 were at the fair value on the dates of the
grants.
No options were granted in 2008.
The Company has elected to use the long-form method under which
each award grant is tracked on an
employee-by-employee
basis and
grant-by-grant
basis to determine if there is a tax benefit or tax deficiency
for such award. The Company then compares the fair value expense
to the tax deduction received for each grant and aggregates the
benefits and deficiencies to establish its hypothetical APIC
Pool.
The Company recognizes windfall tax benefits associated with the
exercise of stock options directly to stockholders equity
only when realized. A windfall tax benefit occurs when the
actual tax benefit realized by the Company upon an
employees disposition of a share-based award exceeds the
deferred tax asset, if any, associated with the award that the
Company had recorded.
The total intrinsic value of options exercised during the years
ended December 31, 2010, 2009 and 2008 was $673, $22,771
and $44,755, respectively. Tax benefits related to option
exercises of $267, $9,162 and $18,304 were recorded as increases
to stockholders equity for the years ended
December 31, 2010, 2009 and 2008, respectively.
During 2010, 116,271 options, exercisable at prices ranging from
$8.74 to $13.10 per share, were exercised for $1,265 in cash on
the date of exercise.
During 2009, 4,604,152 options, exercisable at prices ranging
from $9.03 to $13.48 per share, were exercised for $1,144 in
cash and the delivery to the Company of 2,955,609 shares of
common stock with a fair market value of $42,768, or $13.91, per
share on the date of exercise.
During 2008, 4,498,715 options, exercisable at prices ranging
from $5.43 to $11.51 per share, were exercised for $87 in cash
and the delivery to the Company of 1,444,690 shares of
common stock with a fair market value of $24,395, or $16.08, per
share on the date of exercise.
Restricted Stock Awards. In 2005, the
President of the Company was awarded restricted stock grants of
738,418 shares of the Companys common stock, pursuant
to the 1999 Plan. Pursuant to the restricted share agreements,
one-fourth of the shares vested on September 15, 2006, with
an additional one-fourth vesting on each of the three succeeding
one-year anniversaries of the first vesting date through
September 15, 2009. The Company recorded deferred
compensation of $11,340 representing the fair market value of
the total restricted shares on the dates of grant. The deferred
compensation was amortized over the vesting period as a charge
to compensation expense. The Company recorded an expense of
$1,996 and $2,843 associated with the grants for the years ended
December 31, 2009 and 2008, respectively.
In November 2005, the President of Liggett and Liggett Vector
Brands was awarded a restricted stock grant of
63,814 shares of the Companys common stock pursuant
to the 1999 Plan. Pursuant to his restricted share agreement,
one-fourth of the shares vested on November 1, 2006, with
an additional one-fourth vesting on each of the three succeeding
one-year anniversaries of the first vesting date through
November 1, 2009. The Company
F-39
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
recorded deferred compensation of $1,018 representing the fair
market value of the restricted shares on the date of grant. The
Company recorded an expense of $218 and $254 associated with the
grant for each of the years ended December 31, 2009 and
2008, respectively.
In June 2007, the Company granted 12,155 restricted shares of
the Companys common stock pursuant to the 1999 Plan to
each of its four outside directors. The shares vested over three
years. The Company recognized $792 of expense over the vesting
period. The Company recognized expense of $264 for the years
ended December 31, 2010, 2009 and 2008, respectively, in
connection with this restricted stock award.
In June 2010, the Company granted 10,500 restricted shares of
the Companys common stock pursuant to the 1999 Plan to
each of its five outside directors. The shares will vest over
three years and the Company will recognize $834 of expense over
the vesting period, including $154 of expense for the year ended
December 31, 2010.
In April 2009, the President of the Company was awarded a
restricted stock grant of 551,250 shares of Vectors
common stock pursuant to the 1999 Plan. Under the terms of the
award, one-fifth of the shares vest on September 15, 2010,
with an additional one-fifth vesting on each of the four
succeeding one-year anniversaries of the first vesting date
through September 15, 2014. In the event that his
employment with the Company is terminated for any reason other
than his death, his disability or a change of control (as
defined in this Restricted Share Agreement) of the Company, any
remaining balance of the shares not previously vested will be
forfeited by him. The fair market value of the restricted shares
on the date of grant was $6,467 is being amortized over the
vesting period as a charge to compensation expense. The Company
recorded an expense of $872 and $872 for the years ended
December 31, 2010 and 2009, respectively.
As of December 31, 2010, there was $5,086 of total
unrecognized compensation costs related to unvested restricted
stock awards. The cost is expected to be recognized over a
weighted-average period of approximately two years at
December 31, 2010.
As of December 31, 2009, there was $5,705 of total
unrecognized compensation costs related to unvested restricted
stock awards. The cost is expected to be recognized over a
weighted-average period of approximately three years at
December 31, 2009.
The Companys accounting policy is to treat dividends paid
on unvested restricted stock as a reduction to additional
paid-in capital on the Companys consolidated balance sheet.
Tobacco-Related
Litigation:
Overview
Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in numerous direct,
third-party and purported class actions predicated on the theory
that cigarette manufacturers should be liable for damages
alleged to have been caused by cigarette smoking or by exposure
to secondary smoke from cigarettes. New cases continue to be
commenced against Liggett and other cigarette manufacturers. The
cases generally fall into the following categories:
(i) smoking and health cases alleging personal injury
brought on behalf of individual plaintiffs (Individual
Actions); (ii) smoking and health cases primarily
alleging personal injury or seeking court-supervised programs
for ongoing medical monitoring, as well as cases alleging the
use of the terms lights
and/or
ultra lights constitutes a deceptive and unfair
trade practice, common law fraud or violation of federal law,
purporting to be brought on behalf of a class of individual
plaintiffs (Class Actions); and
(iii) health care cost recovery actions brought by various
foreign and domestic governmental plaintiffs and
non-governmental plaintiffs seeking reimbursement for health
care expenditures allegedly caused by cigarette smoking
and/or
disgorgement of profits (Health Care Cost Recovery
Actions). As new cases are commenced, the costs associated
with defending these cases and the risks relating to the
inherent unpredictability of litigation continue to increase.
The future financial impact of the risks and expenses of
litigation and the effects of the tobacco litigation settlements
F-40
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
discussed below are not quantifiable at this time. For the years
ended December 31, 2010, 2009 and 2008, Liggett incurred
legal expenses and other litigation costs totaling approximately
$23,389 (which includes expense of $16,161 for the Lukacs
and Ferlanti judgments described below), $6,000 and
$8,800, respectively.
Litigation is subject to uncertainty and it is possible that
there could be adverse developments in pending or future cases.
An unfavorable outcome or settlement of pending tobacco-related
or other litigation could encourage the commencement of
additional litigation. Damages claimed in some tobacco-related
or other litigation are or can be significant.
Although Liggett has been able to obtain required bonds or
relief from bonding requirements in order to prevent plaintiffs
from seeking to collect judgments while adverse verdicts are on
appeal, there remains a risk that such relief may not be
obtainable in all cases. This risk has been reduced given that a
majority of states now limit the dollar amount of bonds or
require no bond at all. Liggett has secured approximately $5,055
in bonds as of December 31, 2010.
In June 2009, Florida amended its existing bond cap statute by
adding a $200,000 bond cap that applies to all Engle
progeny cases (defined below) in the aggregate and
establishes individual bond caps for individual Engle
progeny cases in amounts that vary depending on the number
of judgments in effect at a given time. The legislation applies
to judgments entered after the effective date and remains in
effect until December 31, 2012. Certain plaintiffs have
challenged the constitutionality of the bond cap statute. In one
of these cases, the court recently upheld the constitutionality
of the statute. Although the Company cannot predict the outcome
of such challenges, it is possible that the Companys
financial position, results of operations, or cash flows could
be materially affected by an unfavorable outcome of such
challenges.
The Company and its subsidiaries record provisions in their
consolidated financial statements for pending litigation when
they determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time,
while it is reasonably possible that an unfavorable outcome in a
case may occur, except as disclosed in this Note 12:
(i) management has concluded that it is not probable that a
loss has been incurred in any of the pending tobacco-related
cases; or (ii) management is unable to estimate the
possible loss or range of loss that could result from an
unfavorable outcome of any of the pending tobacco-related cases
and, therefore, management has not provided any amounts in the
consolidated financial statements for unfavorable outcomes, if
any. Liggett believes, and has been so advised by counsel, that
it has valid defenses to the litigation pending against it, as
well as valid bases for appeal of adverse verdicts. All such
cases are, and will continue to be vigorously defended. However,
Liggett may enter into settlement discussions in particular
cases if it believes it is in its best interest to do so.
Individual
Actions
As of December 31, 2010, there were 36 individual cases
pending against Liggett
and/or the
Company, where one or more individual plaintiffs allege injury
resulting from cigarette smoking, addiction to cigarette smoking
or exposure to secondary smoke and seek compensatory and, in
some cases, punitive damages. These cases do not include
Engle progeny cases (described below) or the
approximately 100 individual cases pending in West Virginia
state court as part of a consolidated action. The following
table lists the number of individual cases by state that are
F-41
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
pending against Liggett or its affiliates as of
December 31, 2010 (excluding Engle progeny cases in
Florida and the consolidated cases in West Virginia):
|
|
|
|
|
|
|
Number
|
|
State
|
|
of Cases
|
|
|
Florida
|
|
|
15
|
|
New York
|
|
|
9
|
|
Louisiana
|
|
|
5
|
|
Maryland
|
|
|
3
|
|
West Virginia
|
|
|
2
|
|
Missouri
|
|
|
1
|
|
Ohio
|
|
|
1
|
|
Liggett Only Cases. There are currently seven
cases pending where Liggett is the only tobacco company
defendant. Cases where Liggett is the only defendant could
increase substantially as a result of the Engle progeny
cases. In February 2009, in Ferlanti v. Liggett
Group, a Florida state court jury awarded compensatory
damages of $1,200 as well as $96 in expenses, but found that the
plaintiff was 40% at fault. Therefore, plaintiffs award
was reduced to $720 in compensatory damages. Punitive damages
were not awarded. In February 2011, the award was affirmed on
appeal. In September 2010, the court awarded plaintiffs
attorneys fees of $996. Liggett appealed the
attorneys fee award. Liggett has accrued $2,000 for this
matter for the year ended December 31, 2010. In
Blitch v. R.J. Reynolds, an Engle progeny
case, trial is scheduled for March 7, 2011. In
ODwyer-Harkins v. R.J. Reynolds, an Engle
progeny case, trial is scheduled for August 8, 2011.
There has been no recent activity in Hausrath v. Philip
Morris, a case pending in New York state court, where two
individuals are suing. The other three individual actions, in
which Liggett is the only tobacco company defendant, are
dormant. In Davis v. Liggett Group, another Liggett
only case, judgment was entered against Liggett in the amount of
$540 plus attorneys fees. The judgment was paid by Liggett
and this matter is concluded.
The plaintiffs allegations of liability in cases in which
individuals seek recovery for injuries allegedly caused by
cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty,
strict liability, fraud, concealment, misrepresentation, design
defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action,
unjust enrichment, common law public nuisance, property damage,
invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade
practice laws, the federal Racketeer Influenced and Corrupt
Organizations Act (RICO), state RICO statutes and
antitrust statutes. In many of these cases, in addition to
compensatory damages, plaintiffs also seek other forms of relief
including treble/multiple damages, medical monitoring,
disgorgement of profits and punitive damages. Although alleged
damages often are not determinable from a complaint, and the law
governing the pleading and calculation of damages varies from
state to state and jurisdiction to jurisdiction, compensatory
and punitive damages have been specifically pleaded in a number
of cases, sometimes in amounts ranging into the hundreds of
millions and even billions of dollars.
Defenses raised in individual cases include lack of proximate
cause, assumption of the risk, comparative fault
and/or
contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as unclean
hands and lack of benefit, failure to state a claim and
federal preemption.
In addition to several adverse verdicts against Liggett, jury
awards in individual cases have also been returned against other
cigarette manufacturers in recent years. The awards in these
individual actions, often in excess of millions of dollars, may
be for both compensatory and punitive damages. There are several
significant jury awards against other cigarette manufacturers
which are currently on appeal and several final awards, have
been paid.
Engle Progeny Cases. In 2000, a jury in
Engle v. R.J. Reynolds Tobacco
Co. rendered a $145,000,000 punitive damages
verdict in favor of a Florida Class against certain
cigarette manufacturers, including Liggett. Pursuant to the
Florida Supreme Courts July 2006 ruling in Engle,
which decertified the class on a prospective
F-42
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
basis, and affirmed the appellate courts reversal of the
punitive damages award, former class members had one year from
January 11, 2007 in which to file individual lawsuits. In
addition, some individuals who filed suit prior to
January 11, 2007, and who claim they meet the conditions in
Engle, are attempting to avail themselves of the Engle
ruling. Lawsuits by individuals requesting the benefit of
the Engle ruling, whether filed before or after the
January 11, 2007 deadline, are referred to as the
Engle progeny cases. Liggett and the Company
have been named in 6,827 Engle progeny cases in both
federal (3,735 cases) and state (3,092 cases) courts in Florida.
Other cigarette manufacturers have also been named as defendants
in these cases, although as a case proceeds, one or more
defendants may ultimately be dismissed from the action. These
cases include approximately 9,100 plaintiffs, 671 of which
represent consortium claims. The number of state court Engle
progeny cases may increase as multi-plaintiff cases continue
to be severed into individual cases. The total number of
plaintiffs may also increase as a result of attempts by existing
plaintiffs to add additional parties.
As of December 31, 2010, in addition to the Lukacs
case (described below), the following Engle progeny
cases have resulted in judgments against Liggett:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensatory
|
|
|
|
Date
|
|
Case Name
|
|
|
County
|
|
Damages
|
|
Punitive Damages
|
|
|
August 2009
|
|
|
Campbell v. R.J. Reynolds
|
|
|
Escambia
|
|
$156
|
|
|
None
|
|
March 2010
|
|
|
Douglas v. R.J. Reynolds
|
|
|
Hillsborough
|
|
$1,350
|
|
|
None
|
|
April 2010
|
|
|
Clay v. R.J. Reynolds
|
|
|
Escambia
|
|
$349
|
|
$
|
1,000
|
|
April 2010
|
|
|
Putney v. R.J. Reynolds
|
|
|
Broward
|
|
$3,008
|
|
|
None
|
|
Through December 31, 2010, there were 20 plaintiffs
verdicts against the industry in Engle progeny cases,
including the four referenced above, and 11 defense verdicts.
The plaintiffs verdicts are currently on appeal. Several
defense verdicts have also been appealed. For further
information on the Engle case and on Engle progeny
cases, see Class Actions Engle
Case, below.
Lukacs Case. In June 2002, the jury in a
Florida state court action entitled Lukacs v. R.J.
Reynolds Tobacco Co., awarded $37,500 in compensatory
damages, jointly and severally, in a case involving Liggett and
two other cigarette manufacturers, which amount was subsequently
reduced by the court. The jury found Liggett 50% responsible for
the damages incurred by the plaintiff. The Lukacs case
was the first case to be tried as an individual Engle
progeny case, but was tried almost five years prior to the
Florida Supreme Courts final decision in Engle. In
November 2008, the court entered final judgment in the amount of
$24,835, plus interest from June 2002. Plaintiff filed a motion
seeking an award of attorneys fees from Liggett based on
plaintiffs prior proposal for settlement. In March 2010,
the Third District Court of Appeal affirmed the decision, per
curiam. In June 2010, Liggett paid its share of the judgment
and settled claims for attorneys fees and accrued interest
for a total payment of $14,361.
Class Actions
As of December 31, 2010, there were six actions pending for
which either a class had been certified or plaintiffs were
seeking class certification, where Liggett is a named defendant,
including one alleged price fixing case. Other cigarette
manufacturers are also named in these actions.
Plaintiffs allegations of liability in class action cases
are based on various theories of recovery, including negligence,
gross negligence, strict liability, fraud, misrepresentation,
design defect, failure to warn, nuisance, breach of express and
implied warranties, breach of special duty, conspiracy, concert
of action, violation of deceptive trade practice laws and
consumer protection statutes and claims under the federal and
state anti-racketeering statutes. Plaintiffs in the class
actions seek various forms of relief, including compensatory and
punitive damages, treble/multiple damages and other statutory
damages and penalties, creation of medical monitoring and
smoking cessation funds, disgorgement of profits, and injunctive
and equitable relief.
F-43
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Defenses raised in these cases include, among others, lack of
proximate cause, individual issues predominate, assumption of
the risk, comparative fault
and/or
contributory negligence, statute of limitations and federal
preemption.
Engle Case. In May 1994, Engle was
filed against Liggett and others in Miami-Dade County, Florida.
The class consisted of all Florida residents who, by
November 21, 1996, have suffered, presently suffer or
have died from diseases and medical conditions caused by their
addiction to cigarette smoking. In July 1999, after the
conclusion of Phase I of the trial, the jury returned a verdict
against Liggett and other cigarette manufacturers on certain
issues determined by the trial court to be common to
the causes of action of the plaintiff class. The jury made
several findings adverse to the defendants including that
defendants conduct rose to a level that would permit
a potential award or entitlement to punitive damages.
Phase II of the trial was a causation and damages trial for
three of the class plaintiffs and a punitive damages trial on a
class-wide
basis before the same jury that returned the verdict in Phase I.
In April 2000, the jury awarded compensatory damages of $12,704
to the three class plaintiffs, to be reduced in proportion to
the respective plaintiffs fault. In July 2000, the jury
awarded approximately $145,000,000 in punitive damages,
including $790,000 against Liggett.
In May 2003, Floridas Third District Court of Appeal
reversed the trial court and remanded the case with instructions
to decertify the class. The judgment in favor of one of the
three class plaintiffs, in the amount of $5,831, was overturned
as time barred and the court found that Liggett was not liable
to the other two class plaintiffs.
In July 2006, the Florida Supreme Court affirmed the decision
vacating the punitive damages award and held that the class
should be decertified prospectively, but determined that the
following Phase I findings are entitled to res judicata
effect in Engle progeny cases: (i) that smoking
causes lung cancer, among other diseases; (ii) that
nicotine in cigarettes is addictive; (iii) that defendants
placed cigarettes on the market that were defective and
unreasonably dangerous; (iv) that defendants concealed
material information knowing that the information was false or
misleading or failed to disclose a material fact concerning the
health effects or addictive nature of smoking; (v) that
defendants agreed to conceal or omit information regarding the
health effects of cigarettes or their addictive nature with the
intention that smokers would rely on the information to their
detriment; (vi) that defendants sold or supplied cigarettes
that were defective; and (vii) that defendants were
negligent. The Florida Supreme Court decision also allowed
former class members to proceed to trial on individual liability
issues (using the above findings) and compensatory and punitive
damage issues, provided they filed their individual lawsuits by
January 2008. In December 2006, the Florida Supreme Court added
the finding that defendants sold or supplied cigarettes that, at
the time of sale or supply, did not conform to the
representations made by defendants. In October 2007, the United
States Supreme Court denied defendants petition for
writ of certiorari. As a result of the Engle
decision, approximately 9,100 plaintiffs have claims pending
against the Company and Liggett and other cigarette
manufacturers.
Three federal district courts (in the Merlob, Brown and
Burr cases) ruled that the findings in Phase I of the
Engle proceedings could not be used to satisfy elements
of plaintiffs claims, and two of those rulings (Brown
and Burr) were certified by the trial court for
interlocutory review. The certification was granted by the
United States Court of Appeals for the Eleventh Circuit and the
appeals were consolidated (in February 2009, the appeal in
Burr was dismissed for lack of prosecution). In July
2010, the Eleventh Circuit ruled that plaintiffs do not have an
unlimited right to use the findings from the original Engle
trial to meet their burden of establishing the elements of
their claims at trial. Rather, plaintiffs may only use the
findings to establish specific facts that they demonstrate with
a reasonable degree of certainty were actually decided by the
original Engle jury. The Eleventh Circuit remanded the
case to the district court to determine what specific factual
findings the Engle jury actually made. All federal cases
were stayed pending review by the Eleventh Circuit. On
December 22, 2010, stays were lifted in 12 cases selected
by plaintiffs.
In December 2010, in the Martin case, a case against R.J.
Reynolds, the Florida District Court of Appeals issued the first
ruling by a Florida intermediate appellate court to address the
Brown decision discussed above. The panel held that the
trial court correctly construed the Florida Supreme Courts
2006 decision in Engle in instructing
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CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
the jury on the preclusive effect of the Phase I Engle
proceedings, expressly disagreeing with certain aspects of
the Brown decision.
Other Class Actions. In Smith v.
Philip Morris, a Kansas state court case filed in February
2000, plaintiffs allege that cigarette manufacturers conspired
to fix cigarette prices in violation of antitrust laws.
Plaintiffs seek to recover an unspecified amount in actual and
punitive damages. Class certification was granted in November
2001. Discovery is ongoing.
Class action suits have been filed in a number of states against
cigarette manufacturers, alleging, among other things, that use
of the terms light and ultra light
constitutes unfair and deceptive trade practices, among other
things. In December 2008, the United States Supreme Court, in
Altria Group v. Good, ruled that the Federal
Cigarette Labeling and Advertising Act did not preempt the state
law claims asserted by the plaintiffs and that they could
proceed with their claims under the Maine Unfair Trade Practices
Act. This ruling has resulted in the filing of additional
lights class action cases in other states against
other cigarette manufacturers. Although Liggett was not a
defendant in the Good case, and is not a defendant in
most of the other lights class actions, an adverse
ruling or commencement of additional lights related
class actions could have a material adverse effect on the
Company.
In November 1997, in Young v. American Tobacco Co., a
purported personal injury class action was commenced on behalf
of plaintiff and all similarly situated residents in Louisiana
who, though not themselves cigarette smokers, are alleged to
have been exposed to secondhand smoke from cigarettes which were
manufactured by the defendants, and who suffered injury as a
result of that exposure. The plaintiffs seek to recover an
unspecified amount of compensatory and punitive damages. In
October 2004, the trial court stayed this case pending the
outcome of an appeal in another matter.
In June 1998, in Cleary v. Philip Morris, a putative
class action was brought in Illinois state court on behalf of
persons who were allegedly injured by: (i) defendants
purported conspiracy to conceal material facts regarding the
addictive nature of nicotine; (ii) defendants alleged
acts of targeting their advertising and marketing to minors; and
(iii) defendants claimed breach of the publics
right to defendants compliance with laws prohibiting the
distribution of cigarettes to minors. Plaintiffs sought
disgorgement of all profits unjustly received through
defendants sale of cigarettes to plaintiffs and the class.
In March 2009, plaintiffs filed a third amended complaint
adding, among other things, allegations regarding
defendants sale of lights cigarettes. The case
was then removed to federal court on the basis of this new
claim. In November 2009, plaintiffs filed a revised motion for
class certification as to the three proposed classes, which
motion was denied by the court. In February 2010, the court
granted summary judgment in favor of defendants as to all
claims, other than a lights claim involving another
cigarette manufacturer. The court granted leave to the
plaintiffs to reinstate the motion as to the addiction claims.
Plaintiffs filed a Fourth Amended Complaint in an attempt to
resurrect their addiction claims. In June 2010, the court
granted defendants motion to dismiss the Fourth Amended
Complaint and in July 2010, the court denied plaintiffs
motion for reconsideration. In August 2010, plaintiffs appealed
to the United States Court of Appeals for the Seventh Circuit.
In April 2001, in Brown v. Philip Morris USA, a
California state court granted in part plaintiffs motion
for class certification and certified a class comprised of adult
residents of California who smoked at least one of
defendants cigarettes during the applicable time
period and who were exposed to defendants marketing
and advertising activities in California. In March 2005, the
court granted defendants motion to decertify the class
based on a recent change in California law. In June 2009, the
California Supreme Court reversed and remanded the case to the
trial court for further proceedings regarding whether the class
representatives have, or can, demonstrate standing. In August
2009, the California Supreme Court denied defendants
rehearing petition and issued its mandate. In September 2009,
plaintiffs sought reconsideration of the courts September
2004 order finding that plaintiffs allegations regarding
lights cigarettes are preempted by federal law, in
light of the United States Supreme Court decision in
Good. In March 2010, the trial court granted
reconsideration of its September 2004 order granting partial
summary judgment to defendants with respect to plaintiffs
lights claims on the basis of judicial decisions
issued since its order was issued, including Good,
thereby reinstating plaintiffs lights claims.
Since the
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CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
trial courts prior ruling decertifying the class was
reversed on appeal by the California Supreme Court, the parties
and the court are treating all claims currently being asserted
by the plaintiffs as certified, subject, however, to
defendants challenge to the class representatives standing
to assert their claims. Trial is scheduled to start on
May 6, 2011.
Although not technically a class action, in In Re: Tobacco
Litigation (Personal Injury Cases), a West Virginia state
court consolidated approximately 750 individual smoker actions
that were pending prior to 2001 for trial of certain common
issues. In January 2002, the court severed Liggett from the
trial of the consolidated action, which commenced in June 2010
and ended in a mistrial. A new trial is scheduled for
October 17, 2011. If the case were to proceed against
Liggett, it is estimated that Liggett could be a defendant in
approximately 100 of the individual cases.
In addition to the cases described above, numerous class actions
remain certified against other cigarette manufacturers. Adverse
decisions in these cases could have a material adverse affect on
Liggetts sales volume, operating income and cash flows.
Health
Care Cost Recovery Actions
As of December 31, 2010, there were four Health Care Cost
Recovery Actions pending against Liggett. Other cigarette
manufacturers are also named in these cases. The claims asserted
in health care cost recovery actions vary. Although, typically,
no specific damage amounts are pled, it is possible that
requested damages might be in the billions of dollars. In these
cases, plaintiffs typically assert equitable claims that the
tobacco industry was unjustly enriched by their
payment of health care costs allegedly attributable to smoking
and seek reimbursement of those costs. Relief sought by some,
but not all, plaintiffs include punitive damages, multiple
damages and other statutory damages and penalties, injunctions
prohibiting alleged marketing and sales to minors, disclosure of
research, disgorgement of profits, funding of anti-smoking
programs, additional disclosure of nicotine yields, and payment
of attorney and expert witness fees.
Other claims asserted 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.
DOJ Lawsuit. In September 1999, the United
States government commenced litigation against Liggett and other
cigarette manufacturers in the United States District Court for
the District of Columbia. The action sought to recover an
unspecified amount of health care costs paid and to be paid by
the federal government for lung cancer, heart disease, emphysema
and other smoking-related illnesses allegedly caused by the
fraudulent and tortious conduct of defendants, to restrain
defendants and co-conspirators from engaging in alleged fraud
and other allegedly unlawful conduct in the future, and to
compel defendants to disgorge the proceeds of their unlawful
conduct. Claims were asserted under RICO.
In August 2006, the trial court entered a Final Judgment against
each of the cigarette manufacturing defendants, except Liggett.
In May 2009, the United States Court of Appeals for the District
of Columbia affirmed most of the district courts decision.
In February 2010, the government and all defendants, other than
Liggett, filed petitions for writ of certiorari to the
United States Supreme Court. In June 2010, the United States
Supreme Court, without comment, denied review. As a result, the
cigarette manufacturing defendants, other than Liggett, are now
subject to the trial courts Final Judgment which ordered
the following relief: (i) an injunction against
committing any act of racketeering relating to the
manufacturing, marketing, promotion, health consequences or sale
of cigarettes in the United States; (ii) an injunction
against participating directly or indirectly in the management
or control of the Council for Tobacco Research, the Tobacco
Institute, or the Center for Indoor Air Research, or any
successor or affiliated entities of each (iii) an
injunction against making, or causing to be made in any
way, any material false, misleading, or deceptive statement or
representation or engaging in any public relations or marketing
F-46
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
endeavor that is disseminated to the United States public and
that misrepresents or suppresses information concerning
cigarettes; (iv) an injunction against conveying any
express or implied health message though use of descriptors on
cigarette packaging or in cigarette advertising or promotional
material, including lights, ultra
lights, and low tar, which the court found
could cause consumers to believe one cigarette brand is less
hazardous than another brand; (v) the issuance of
corrective statements in various media regarding the
adverse health effects of smoking, the addictiveness of smoking
and nicotine, the lack of any significant health benefit from
smoking low tar or light cigarettes,
defendants manipulation of cigarette design to ensure
optimum nicotine delivery and the adverse health effects of
exposure to environmental tobacco smoke; (vi) the
disclosure of defendants public document websites and the
production of all documents produced to the government or
produced in any future court or administrative action concerning
smoking and health; (vii) the disclosure of disaggregated
marketing data to the government in the same form and on the
same schedules as defendants now follow in disclosing such data
to the Federal Trade Commission for a period of ten years;
(viii) certain restrictions on the sale or transfer by
defendants of any cigarette brands, brand names, formulas or
cigarette business within the United States; and
(ix) payment of the governments costs in bringing the
action.
It is unclear what impact, if any, the Final Judgment will have
on the cigarette industry as a whole. To the extent that the
Final Judgment leads to a decline in industry-wide shipments of
cigarettes in the United States or otherwise results in
restrictions that adversely affect the industry, Liggetts
sales volume, operating income and cash flows could be
materially adversely affected.
In City of St. Louis v. American Tobacco Company, a
case pending in Missouri state court since December 1998, the
City of St. Louis and approximately 38 hospitals and former
hospitals seek recovery of costs expended by the hospitals on
behalf of patients who suffer, or have suffered, from illnesses
allegedly resulting from the use of cigarettes. In June 2005,
the court granted defendants motion for summary judgment
as to claims for damages which accrued prior to
November 16, 1993. In April 2010, the court further
determined that each plaintiff is barred from seeking damages
which accrued more than five years prior to the time that that
plaintiff joined the suit. In that same order, the court granted
partial summary judgment for defendants barring plaintiffs
claims for future damages. In July 2010, the court dismissed
certain other claims brought by plaintiffs, on the grounds they
were preempted. In October 2010, the trial court granted
defendants summary judgment with respect to plaintiffs
fraud and negligent misrepresentation claims. Trial commenced on
January 31, 2011.
In June 2005, the Jerusalem District Court in Israel added
Liggett as a defendant in an action commenced in 1998 by the
largest private insurer in that country, General Health
Services, against the major United States cigarette
manufacturers. The plaintiff seeks to recover the past and
future value of the total expenditures for health care services
provided to residents of Israel resulting from tobacco related
diseases, court ordered interest for past expenditures from the
date of filing the statement of claim, increased
and/or
punitive
and/or
exemplary damages and costs. The court ruled that, although
Liggett had not sold product in Israel since at least 1978, it
might still have liability for cigarettes sold prior to that
time. Motions filed by defendants are pending.
In May 2008, in National Committee to Preserve Social
Security and Medicare v. Philip Morris USA, a case
pending in the United States District Court for the Eastern
District of New York, plaintiffs commenced an action to recover
damages equal to twice the amount paid by Medicare for the
smoking-related health care services provided from May 21,
2002 to the present, for which treatment defendants
allegedly were required to make payment under the Medicare
Secondary Payer provisions of the Social Security Act. In July
2008, defendants filed a motion to dismiss
plaintiffs claims and plaintiffs filed a motion for
partial summary judgment. In March 2009, the court granted
defendants motion and dismissed the case. In May 2009,
plaintiffs noticed an appeal to the United States Court of
Appeals for the Second Circuit and in September 2010, the court
vacated the District Courts decision, and remanded the
case with instructions for the District Court to dismiss the
complaint on other grounds. Plaintiffs motion for
rehearing was denied by the court and on December 20, 2010,
the court remanded the case to the district court with
instructions to dismiss the complaint.
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Upcoming
Trials
In addition to the January 2011 trial in the City of
St. Louis case and the May 2011 trial in the Brown
case, both discussed above, as of December 31, 2010,
there were 43 Engle progeny cases scheduled for trial in
2011. Additionally, a Florida individual case is scheduled for
trial on September 12, 2011. The Company
and/or
Liggett and other cigarette manufacturers are currently named as
defendants in each of these cases, although as a case proceeds,
one or more defendants may ultimately be dismissed from the
action. Cases against other cigarette manufacturers are also
currently scheduled for trial in 2011. Trial dates are subject
to change.
MSA and
Other State Settlement Agreements
In March 1996, March 1997 and March 1998, Liggett entered into
settlements of smoking-related litigation with 45 states
and territories. The settlements released Liggett from all
smoking-related claims made by those states and territories,
including claims for health care cost reimbursement and claims
concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson,
R.J. Reynolds and Lorillard (the Original Participating
Manufacturers or OPMs) and Liggett (together
with any other tobacco product manufacturer that becomes a
signatory, the Subsequent Participating
Manufacturers or SPMs) (the OPMs and SPMs are
hereinafter referred to jointly as the Participating
Manufacturers) entered into the Master Settlement
Agreement (the MSA) with 46 states, the
District of Columbia, Puerto Rico, Guam, the United States
Virgin Islands, American Samoa and the Northern Mariana Islands
(collectively, the Settling States) to settle the
asserted and unasserted health care cost recovery and certain
other claims of the Settling States. The MSA received final
judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett
from:
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all claims of the Settling States and their respective political
subdivisions and other recipients of state health care funds,
relating to: (i) past conduct arising out of the use, sale,
distribution, manufacture, development, advertising and
marketing of tobacco products; (ii) the health effects of,
the exposure to, or research, statements or warnings about,
tobacco products; and
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all monetary claims of the Settling States and their respective
subdivisions and other recipients of state health care funds
relating to future conduct arising out of the use of, or
exposure to, tobacco products that have been manufactured in the
ordinary course of business.
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The MSA restricts tobacco product advertising and marketing
within the Settling States and otherwise restricts the
activities of Participating Manufacturers. Among other things,
the MSA prohibits the targeting of youth in the advertising,
promotion or marketing of tobacco products; bans the use of
cartoon characters in all tobacco advertising and promotion;
limits each Participating Manufacturer to one tobacco brand name
sponsorship during any
12-month
period; bans all outdoor advertising, with certain limited
exceptions; prohibits payments for tobacco product placement in
various media; bans gift offers based on the purchase of tobacco
products without sufficient proof that the intended recipient is
an adult; prohibits Participating Manufacturers from licensing
third parties to advertise tobacco brand names in any manner
prohibited under the MSA; and prohibits Participating
Manufacturers from using as a tobacco product brand name any
nationally recognized non-tobacco brand or trade name or the
names of sports teams, entertainment groups or individual
celebrities.
The MSA also requires Participating Manufacturers to affirm
corporate principles to comply with the MSA and to reduce
underage use of tobacco products and imposes restrictions on
lobbying activities conducted on behalf of Participating
Manufacturers. In addition, the MSA provides for the appointment
of an independent auditor to calculate and determine the amounts
of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, the Participating
Manufacturers are required to make annual payments of $9,000,000
(subject to applicable adjustments, offsets and reductions).
These annual payments are
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
allocated based on unit volume of domestic cigarette shipments.
The payment obligations under the MSA are the several, and not
joint, obligation of each Participating Manufacturer and are not
the responsibility of any parent or affiliate of a Participating
Manufacturer.
Liggett has no payment obligations under the MSA except to the
extent its market share exceeds a market share exemption of
approximately 1.65% of total cigarettes sold in the United
States. Vector Tobacco has no payment obligations under the MSA
except to the extent its market share exceeds a market share
exemption of approximately 0.28% of total cigarettes sold in the
United States. For years ended December 31, 2010, 2009 and
2008, Liggett and Vector Tobaccos domestic shipments
accounted for approximately 3.5%, 2.7% and 2.5%, respectively,
of the total cigarettes sold in the United States. If
Liggetts or Vector Tobaccos market share exceeds
their respective market share exemption in a given year, then on
April 15 of the following year, Liggett
and/or
Vector Tobacco, as the case may be, must pay on each excess unit
an amount equal (on a
per-unit
basis) to that due from the OPMs for that year. On
December 31, 2010, Liggett and Vector Tobacco paid $96,500
of their approximately $140,400 2010 MSA payment obligations.
Certain
MSA Disputes
NPM Adjustment. In March 2006, an economic
consulting firm selected pursuant to the MSA determined that the
MSA was a significant factor contributing to the
loss of market share of Participating Manufacturers, to
non-participating manufacturers, for 2003. This is known as the
NPM Adjustment. The economic consulting firm
subsequently rendered the same decision with respect to 2004 and
2005. In March 2009, a different economic consulting firm made
the same determination for 2006. As a result, the manufacturers
are entitled to potential NPM Adjustments to their 2003, 2004,
2005 and 2006 MSA payments. The Participating Manufacturers may
also be entitled to potential NPM Adjustments to their 2007,
2008 and 2009 payments pursuant to an agreement entered into in
June 2009 between the OPMs and the Settling States under which
the OPMs agreed to make certain payments for the benefit of the
Settling States, in exchange for which the Settling States
stipulated that the MSA was a significant factor
contributing to the loss of market share of Participating
Manufacturers in 2007, 2008 and 2009. A Settling State that has
diligently enforced its qualifying escrow statute in the year in
question may be able to avoid application of the NPM Adjustment
to the payments made by the manufacturers for the benefit of
that Settling State.
For 2003 2010, Liggett and Vector Tobacco, as
applicable, disputed that they owed the Settling States the NPM
Adjustments as calculated by the Independent Auditor. As
permitted by the MSA, Liggett and Vector Tobacco withheld
payment associated with these NPM Adjustment amounts. The total
amount withheld or paid into a disputed payment account by
Liggett and Vector Tobacco for 2003 2010 was
$29,236. For 2003, Liggett and Vector Tobacco paid the NPM
adjustment amount of $9,345 to the Settling States although both
companies continue to dispute this amount is owed. At
December 31, 2010, included in Other assets on
the Companys condensed consolidated balance sheet was a
noncurrent receivable of $6,542 relating to such payment.
The following amounts have not been expensed by the Company as
they relate to Liggett and Vector Tobaccos NPM Adjustment
claims for 2003 2005: $6,542 for 2003, $3,789 for
2004 and $800 for 2005. Liggett and Vector Tobacco have expensed
all disputed amounts related to the NPM Adjustment since 2005.
Since April 2006, notwithstanding provisions in the MSA
requiring arbitration, litigation was filed in 49 Settling
States over the issue of whether the application of the NPM
Adjustment for 2003 is to be determined through litigation or
arbitration. These actions relate to the potential NPM
Adjustment for 2003, which the independent auditor under the MSA
previously determined to be as much as $1,200,000 for all
Participating Manufacturers. All but one of the 48 courts that
have decided the issue have ruled that the 2003 NPM Adjustment
dispute is arbitrable. All 47 of those decisions are final. One
court, the Montana Supreme Court, ruled that Montanas
claim of diligent enforcement must be litigated. The United
States Supreme Court denied certiorari with respect to
that opinion. In response to a proposal from the OPMs and many
of the SPMs, 45 of the Settling States, representing
approximately 90% of the allocable share of the Settling States,
entered into an agreement providing
F-49
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
for a nationwide arbitration of the dispute with respect to the
NPM Adjustment for 2003. In June 2010, the three person
arbitration panel was selected and procedural hearings,
discovery and briefing on legal issues of general application
have commenced. Because states representing more than 80% of the
allocable share signed the agreement, signing states will
receive a 20% reduction of any potential 2003 NPM adjustment.
There can be no assurance that Liggett or Vector Tobacco will
receive any adjustment as a result of these proceedings.
Gross v. Net Calculations. In October
2004, the independent auditor notified Liggett and all other
Participating Manufacturers that their payment obligations under
the MSA, dating from the agreements execution in late
1998, had been recalculated using net unit amounts,
rather than gross unit amounts (which had been used
since 1999).
Liggett objected to this retroactive change and disputed the
change in methodology. Liggett contends that the retroactive
change from gross to net unit amounts is
impermissible for several reasons, including:
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use of net unit amounts is not required by the MSA
(as reflected by, among other things, the use of
gross unit amounts through 2005);
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such a change is not authorized without the consent of affected
parties to the MSA;
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the MSA provides for four-year time limitation periods for
revisiting calculations and determinations, which precludes
recalculating Liggetts 1997 Market Share (and thus,
Liggetts market share exemption); and
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Liggett and others have relied upon the calculations based on
gross unit amounts since 1998.
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The change in the method of calculation could result in Liggett
owing, at a minimum, approximately $9,300, plus interest, of
additional MSA payments for prior years, because the proposed
change from gross to net units would
serve to lower Liggetts market share exemption under the
MSA. The Company estimates that Liggetts future MSA
payments would be at least approximately $2,300 higher if the
method of calculation is changed. No amounts have been expensed
or accrued in the accompanying condensed consolidated financial
statements for any potential liability relating to the
gross versus net dispute. There can be
no assurance that Liggett will not be required to make
additional payments, which payments could adversely affect the
Companys consolidated financial position, results of
operations or cash flows.
Litigation Challenging the MSA. In Freedom
Holdings Inc. v. Cuomo, litigation pending in federal
court in New York, certain importers of cigarettes allege that
the MSA and certain related New York statutes violate federal
antitrust and constitutional law. The district court granted New
Yorks motion to dismiss the complaint for failure to state
a claim. On appeal, the United States Court of Appeals for the
Second Circuit held that if all of the allegations of the
complaint were assumed to be true, plaintiffs had stated a claim
for relief on antitrust grounds. In January 2009, the district
court granted New Yorks motion for summary judgment,
dismissing all claims brought by the plaintiffs, and dissolving
the preliminary injunction. Plaintiffs appealed the decision. In
October 2010, the Second Circuit affirmed the district
courts decision.
In Grand River Enterprises Six Nations, Ltd. v. King,
another proceeding pending in federal court in New York,
plaintiffs seek to enjoin the statutes enacted by New York and
other states in connection with the MSA on the grounds that the
statutes violate the Commerce Clause of the United States
Constitution and federal antitrust laws. In September 2005, the
United States Court of Appeals for the Second Circuit held that
if all of the allegations of the complaint were assumed to be
true, plaintiffs had stated a claim for relief and that the New
York federal court had jurisdiction over the other defendant
states. On remand, the trial court held that plaintiffs are
unlikely to succeed on the merits. After discovery, the parties
cross-moved for summary judgment; briefing concluded in December
2009 and oral argument took place in April 2010.
Similar challenges to the MSA and MSA-related state statutes are
pending in several other states. Liggett and the other cigarette
manufacturers are not defendants in these cases. Litigation
challenging the validity of the MSA, including claims that the
MSA violates antitrust laws, has not been successful to date.
F-50
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NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco
(Vibo) commenced litigation in the United States
District Court for the Western District of Kentucky against each
of the Settling States and certain Participating Manufacturers,
including Liggett and Vector Tobacco. Vibo sought damages from
Participating Manufacturers under antitrust laws. Vibo alleged,
among other things, that the market share exemptions (i.e.,
grandfathered shares) provided to certain SPMs under the MSA,
including Liggett and Vector Tobacco, violate federal antitrust
and constitutional law. In January 2009, the district court
dismissed the complaint. In January 2010, the court entered
final judgment in favor of the defendants. Vibo appealed to the
United States Court of Appeals for the Sixth Circuit. A decision
is pending.
Other State Settlements. The MSA replaces
Liggetts prior settlements with all states and territories
except for Florida, Mississippi, Texas and Minnesota. Each of
these four states, prior to the effective date of the MSA,
negotiated and executed settlement agreements with each of the
other major tobacco companies, separate from those settlements
reached previously with Liggett. Liggetts agreements with
these states remain in full force and effect, subject to the
changes with Minnesota and Florida discussed below. These
states settlement agreements with Liggett contained most
favored nation provisions which could reduce Liggetts
payment obligations based on subsequent settlements or
resolutions by those states with certain other tobacco
companies. Beginning in 1999, Liggett determined that, based on
each of these four states settlements with United States
Tobacco Company, Liggetts payment obligations to those
states had been eliminated. With respect to all non-economic
obligations under the previous settlements, Liggett believes it
is entitled to the most favorable provisions as between the MSA
and each states respective settlement with the other major
tobacco companies. Therefore, Liggetts non-economic
obligations to all states and territories are now defined by the
MSA.
In 2003, in order to resolve any issues with Minnesota as to
Liggetts ongoing economic settlement obligations, Liggett
agreed to pay $100 a year to Minnesota, to be paid any year
cigarettes manufactured by Liggett are sold in that state. In
2003 and 2004, the Attorneys General for Florida, Mississippi
and Texas advised Liggett that they believed that Liggett had
failed to make certain required payments under the respective
settlement agreements with these states. Liggett believes it is
not obligated to make any further payments to these states,
based, among other things, on the language of the most favored
nation provisions of the respective settlement agreements. In
December 2010, Liggett settled with Florida and agreed to pay
Florida $1,200 and to make further payments of $250 per year for
a period of 21 years. The payments in years 12
21 will be subject to an inflation adjustment. These payments
are in lieu of any other payments allegedly due to Florida under
the settlement agreement. The Company accrued approximately
$3,200 for this matter. There can be no assurance that Liggett
will be able to resolve the matters with Texas and Mississippi
or that Liggett will not be required to make additional payments
which could adversely affect the Companys consolidated
financial position, results of operations or cash flows.
Cautionary Statement. Management is not able
to predict the outcome of the litigation pending or threatened
against Liggett. Litigation is subject to many uncertainties.
For example, the jury in the Lukacs case, an Engle
progeny case tried in 2002, awarded $24,835 in compensatory
damages plus interest against Liggett and two other defendants
and found Liggett 50% responsible for the damages. The verdict
was affirmed on appeal and Liggett paid $14,361 in June 2010. To
date, Liggett has been found liable in four other Engle
progeny cases, which are currently on appeal. As a result of
the Engle decision, over 9,100 plaintiffs have claims
pending against the Company and Liggett and other cigarette
manufacturers. It is possible that other cases could be decided
unfavorably against Liggett and that Liggett will be
unsuccessful on appeal. Liggett may enter into discussions in an
attempt to settle particular cases if it believes it is in its
best interest to do so.
Management cannot predict the cash requirements related to any
future defense costs, settlements or judgments, including cash
required to bond any appeals, and there is a risk that those
requirements will not be able to be met. An unfavorable outcome
of a pending smoking and health case could encourage the
commencement of additional similar litigation, or could lead to
multiple adverse decisions in the Engle progeny cases.
Management is unable to make a reasonable estimate with respect
to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the
costs of defending such cases and as a result has not
F-51
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
provided any amounts in its condensed consolidated financial
statements for unfavorable outcomes. The complaints filed in
these cases rarely detail alleged damages. Typically, the claims
set forth in an individuals complaint against the tobacco
industry seek money damages in an amount to be determined by a
jury, plus punitive damages, costs and legal fees.
The tobacco industry is subject to a wide range of laws and
regulations regarding the marketing, sale, taxation and use of
tobacco products imposed by local, state and federal
governments. There have been a number of restrictive regulatory
actions, adverse legislative and political decisions and other
unfavorable developments concerning cigarette smoking and the
tobacco industry. These developments may negatively affect the
perception of potential triers of fact with respect to the
tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional
litigation or legislation.
It is possible that the Companys consolidated financial
position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any
of the smoking-related litigation.
Liggetts and Vector Tobaccos management are unaware
of any material environmental conditions affecting their
existing facilities. Liggetts and Vector Tobaccos
management believe that current operations are conducted in
material compliance with all environmental laws and regulations
and other laws and regulations governing cigarette
manufacturers. Compliance with federal, state and local
provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital
expenditures, results of operations or competitive position of
Liggett or Vector Tobacco.
Other
Matters:
In February 2004, Liggett Vector Brands and another cigarette
manufacturer entered into a five year agreement with a
subsidiary of the American Wholesale Marketers Association to
support a program to permit certain tobacco distributors to
secure, on reasonable terms, tax stamp bonds required by state
and local governments for the distribution of cigarettes. This
agreement has been extended through February 2014. Under the
agreement, Liggett Vector Brands has agreed to pay a portion of
losses, if any, incurred by the surety under the bond program,
with a maximum loss exposure of $500 for Liggett Vector Brands.
To secure its potential obligations under the agreement, Liggett
Vector Brands has delivered to the subsidiary of the association
a $100 letter of credit and agreed to fund up to an additional
$400. Liggett Vector Brands has incurred no losses to date under
this agreement, and the Company believes the fair value of
Liggett Vector Brands obligation under the agreement was
immaterial at December 31, 2010.
In December 2009, a complaint was filed against Liggett in
Alabama state court by the estate of a woman who died, in 2007,
in a house fire allegedly caused by the ignition of contents of
the house by a Liggett cigarette. The plaintiff sued under the
Alabama Extended Manufacturers Liability Doctrine and for breach
of warranty and negligence. The plaintiff sought both
compensatory and punitive damages. In January 2010, Liggett
removed the case to federal court. In February 2010, Liggett
filed a motion to dismiss the case and plaintiff filed a motion
to remand. In September 2010, the court granted plaintiffs
motion to remand, but the order was stayed pending non-binding
mediation of the dispute, which occurred in January 2011. The
matter was settled for $30.
There may be several other proceedings, lawsuits and claims
pending against the Company and certain of its consolidated
subsidiaries unrelated to tobacco or tobacco product liability.
Management is of the opinion that the liabilities, if any,
ultimately resulting from such other proceedings, lawsuits and
claims should not materially affect the Companys financial
position, results of operations or cash flows.
F-52
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
13.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
I. Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
67,918
|
|
|
$
|
52,487
|
|
|
$
|
48,794
|
|
Income taxes
|
|
|
41,523
|
|
|
|
94,449
|
|
|
|
4,015
|
|
II. Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock dividend
|
|
|
357
|
|
|
|
333
|
|
|
|
314
|
|
Debt issued in debt exchange
|
|
|
|
|
|
|
119,305
|
|
|
|
|
|
Debt retired in debt exchange
|
|
|
|
|
|
|
(111,501
|
)
|
|
|
|
|
|
|
14.
|
RELATED
PARTY TRANSACTIONS
|
In September 2006, the Company entered into an agreement with
Ladenburg Thalmann Financial Services Inc. (LTS)
pursuant to which the Company agreed to make available to LTS
the services of the Companys Executive Vice President to
serve as the President and Chief Executive Officer of LTS and to
provide certain other financial and accounting services,
including assistance with complying with Section 404 of the
Sarbanes-Oxley Act of 2002. LTS paid the Company $600 for 2010,
$600 for 2009 and $500 for 2008 under the agreement and pays the
Company at a rate of $600 per year in 2011. These amounts are
recorded as a reduction to the Companys operating,
selling, administrative and general expenses. LTS paid
compensation of $200, $0 and $150 for 2010, 2009 and 2008,
respectively, to each of the President of the Company, who
serves as Vice Chairman of LTS, and to the Executive Vice
President of the Company, who serves as President and CEO of
LTS. (See Note 16.)
The Companys President, a firm he serves as a consultant
to, and affiliates of that firm received ordinary and customary
insurance commissions aggregating approximately $431, $329 and
$221 in 2010, 2009 and 2008, respectively, on various insurance
policies issued for the Company and its subsidiaries and equity
investees.
In October 2008, the Company acquired for $4,000 an approximate
11% interest in Castle Brands Inc. (NYSE Amex: ROX), a publicly
traded developer and importer of premium branded spirits. The
Companys Executive Vice President is serving as the
interim President and Chief Executive Officer. In October 2008,
the Company entered into an agreement with Castle where the
Company agreed to make available the services of its Executive
Vice President as well as other financial and accounting
services. The Company recognized management fees of $100 in
2010, $100 in 2009 and $22 in 2008 under the agreement. Castle
pays the Company at a rate of $100 per year in 2011. In December
2009, Vector was part of a consortium, which included
Dr. Phillip Frost, who is a beneficial owner of
approximately 11.7% of the Companys common stock and the
Companys Executive Vice President, that agreed to provide
a line of credit to Castle. The three-year line was for a
maximum amount of $2,500, bears interest at a rate of 11% per
annum on amounts borrowed, pays a 1% annual commitment fee and
is collateralized by Castles receivables and inventory.
The Companys commitment under the line is $1,100; all of
which was outstanding under the credit line as of
December 31, 2010.
In addition to its investment in Castle, the Company has made
investments in entities where Dr. Frost has a relationship.
These include the following: (i) three investments in 2006,
2008 and 2009 totaling approximately $11,000 in OPKO Inc. (NYSE
Amex: OPK) and its predecessor eXegenics Inc.; (ii) a $500
investment in 2008 in Cardo Medical Inc. (OTC BB: CDOM);
(iii) a $250 investment in 2008 in Cocrystal Discovery
Inc.; and (iv) the investments in Castle discussed above.
Dr. Frost is a director, executive officer
and/or more
than 10% shareholder in these entities as well as LTS.
Additional investments in entities where Dr. Frost has a
relationship may be made in the future.
On May 11, 2009, the Company issued in a private placement
the 6.75% Note in the principal amount of $50,000. The
purchase price was paid in cash ($38,225) and by tendering
$11,005 principal amount of the
F-53
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5% Notes, valued at 107% of principal amount. The purchaser
of the 6.75% Note is an entity affiliated with
Dr. Frost.
The Company is an investor in investment partnerships affiliated
with a stockholder of the Company. (See Note 6.)
Jefferies & Company, Inc. beneficially owned
approximately 6.3% of the Companys common stock at
December 31, 2009. Jefferies or its affiliates have from
time to time provided investment banking, general financing and
banking services to the Company and its affiliates, for which
they have received customary compensation. During 2010, 2009 and
2008, the Company paid to Jefferies and its affiliates fees in
the amount of approximately $4,677, $4,547 and $0, respectively.
|
|
15.
|
INVESTMENTS
AND FAIR VALUE MEASUREMENTS
|
The Company utilizes a three-tier framework for assets and
liabilities required to be measured at fair value. In addition,
the Company uses valuation techniques, such as the market
approach (comparable market prices), the income approach
(present value of future income or cash flow), and the cost
approach (cost to replace the service capacity of an asset or
replacement cost) to value these assets and liabilities as
appropriate. The Company uses an exit price when determining the
fair value. The exit price represents amounts that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants.
The Company utilizes a three-tier fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The following is a brief
description of those three levels:
|
|
|
|
Level 1
|
Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.
|
|
|
Level 2
|
Inputs other than quoted prices that are observable for the
assets or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.
|
|
|
Level 3
|
Unobservable inputs in which there is little market data, which
requires the reporting entity to develop their own assumptions.
|
This hierarchy requires the use of observable market data, when
available, and to minimize the use of unobservable inputs when
determining fair value.
F-54
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Companys recurring financial assets and liabilities
subject to fair value measurements and the necessary disclosures
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
267,333
|
|
|
$
|
267,333
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit
|
|
|
2,773
|
|
|
|
|
|
|
|
2,773
|
|
|
|
|
|
Bonds
|
|
|
5,300
|
|
|
|
5,300
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
78,754
|
|
|
|
74,640
|
|
|
|
4,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
354,160
|
|
|
$
|
347,273
|
|
|
$
|
6,887
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
141,492
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
141,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009
|
|
|
|
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active
|
|
|
Significant
|
|
|
|
|
|
|
|
|
|
Markets for
|
|
|
Other
|
|
|
Significant
|
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
199,423
|
|
|
$
|
199,423
|
|
|
$
|
|
|
|
$
|
|
|
Certificates of deposit
|
|
|
2,785
|
|
|
|
|
|
|
|
2,785
|
|
|
|
|
|
Bonds
|
|
|
3,128
|
|
|
|
3,128
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
51,743
|
|
|
|
38,707
|
|
|
|
13,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
257,079
|
|
|
$
|
241,258
|
|
|
$
|
15,821
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
153,016
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
153,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of investment securities available for sale
included in Level 1 are based on quoted market prices from
various stock exchanges. The Level 2 investment securities
available for sale were not registered and therefore do not have
direct market quotes or have certain restrictions.
The fair value of derivatives embedded within convertible debt
were derived using a valuation model and have been classified as
Level 3. The valuation model assumes future dividend
payments by the Company and utilizes interest rates and credit
spreads for secured to unsecured debt, unsecured to subordinated
debt and subordinated debt to preferred stock to determine the
fair value of the derivatives embedded within the convertible
debt. The changes in fair value of derivatives embedded within
convertible debt as of December 31, 2010, 2009 and 2008 are
disclosed. (See Note 7.)
F-55
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition to assets and liabilities that are recorded at fair
value on a recurring basis, the Company is required to record
assets and liabilities at fair value on a nonrecurring basis.
Generally, assets and liabilities are recorded at fair value on
a nonrecurring basis as a result of impairment charges.
The Companys nonrecurring nonfinancial assets subject to
fair value measurements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using:
|
|
|
|
|
|
|
|
|
|
Quoted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prices in
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
|
|
|
Active
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
Markets
|
|
|
Significant
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
for
|
|
|
Other
|
|
|
Significant
|
|
|
|
2009
|
|
|
|
|
|
Identical
|
|
|
Observable
|
|
|
Unobservable
|
|
|
|
Impairment
|
|
|
|
|
|
Assets
|
|
|
Inputs
|
|
|
Inputs
|
|
Description
|
|
Charge
|
|
|
Total
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in real estate
|
|
$
|
5,000
|
|
|
$
|
12,204
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,204
|
|
Investment in non-consolidated real estate businesses
|
|
|
3,500
|
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,500
|
|
|
$
|
13,452
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
13,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company estimated the fair value of its mortgage receivable
and non-consolidated real estate using observable inputs such as
market pricing based on recent events, however, significant
judgment was required to select certain inputs from observed
market data. The decrease in the mortgage receivable and the
non-consolidated real estate were attributed to the decline in
the New York and California real estate markets due to various
factors including downward pressure on housing prices, the
impact of the recent contraction in the subprime and mortgage
markets generally and a large inventory of unsold homes at the
same time that sales volumes were decreasing. The $8,500 of
impairment charges taken in the first quarter of 2009 were
included in the results from operations for the year ended
December 31, 2009.
Investments in non-consolidated real estate
businesses. New Valley accounts for its 50%
interest in Douglas Elliman Realty LLC and its 40% interest in
New Valley Oaktree Chelsea Eleven LLC on the equity method. (See
Note 1(k).) Douglas Elliman Realty operates a residential
real estate brokerage company in the New York metropolitan area.
16th and
K Holdings acquired the St. Regis Hotel, a 193 room luxury hotel
in Washington, D.C. in August 2005, of which 90% was sold
in March 2008.
The components of Investments in non-consolidated real
estate businesses were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Douglas Elliman Realty LLC
|
|
$
|
46,421
|
|
|
$
|
36,086
|
|
Aberdeen Townhomes LLC
|
|
|
|
|
|
|
1,248
|
|
New Valley Oaktree Chelsea Eleven LLC
|
|
|
10,958
|
|
|
|
12,232
|
|
Fifty Third-Five Building LLC
|
|
|
18,000
|
|
|
|
|
|
Sesto Holdings S.r.l.
|
|
|
5,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in non-consolidated real estate businesses
|
|
$
|
80,416
|
|
|
$
|
49,566
|
|
|
|
|
|
|
|
|
|
|
Residential Brokerage Business. New Valley
recorded income of $22,303, $11,429 and $11,833 for the years
ended December 31, 2010, 2009 and 2008, respectively,
associated with Douglas Elliman Realty. Summarized financial
information as of December 31, 2010 and 2009 and for the
three years ended December 31, 2010 for Douglas Elliman
Realty is presented below. New Valleys equity income from
Douglas Elliman Realty includes
F-56
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
$158, $966 and $1,465, respectively, of interest income earned
by New Valley on a subordinated loan to Douglas Elliman Realty,
as well as increases to income resulting from amortization of
negative goodwill which resulted from purchase accounting of
$182, $145 and $193 and management fees of $1,300, $1,100 and
$800 earned from Douglas Elliman for the years ended
December 31, 2010, 2009 and 2008, respectively. New Valley
received cash distributions from Douglas Elliman Realty LLC of
$11,968, $8,517 and $10,550 for the years ended
December 31, 2010, 2009 and 2008, respectively.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
|
Cash
|
|
$
|
45,032
|
|
|
$
|
26,920
|
|
Other current assets
|
|
|
5,989
|
|
|
|
6,664
|
|
Property, plant and equipment, net
|
|
|
15,556
|
|
|
|
13,498
|
|
Trademarks
|
|
|
21,663
|
|
|
|
21,663
|
|
Goodwill
|
|
|
38,424
|
|
|
|
38,601
|
|
Other intangible assets, net
|
|
|
1,337
|
|
|
|
742
|
|
Other non-current assets
|
|
|
3,416
|
|
|
|
2,871
|
|
Notes payable current
|
|
|
1,067
|
|
|
|
776
|
|
Current portion of notes payable to member
Prudential Real Estate Financial Services of America, Inc.
|
|
|
|
|
|
|
2,487
|
|
Current portion of notes payable to member New Valley
|
|
|
|
|
|
|
2,487
|
|
Other current liabilities
|
|
|
21,765
|
|
|
|
20,724
|
|
Notes payable long term
|
|
|
1,129
|
|
|
|
2,136
|
|
Other long-term liabilities
|
|
|
10,500
|
|
|
|
7,747
|
|
Members equity
|
|
|
96,956
|
|
|
|
74,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Revenues
|
|
$
|
348,136
|
|
|
$
|
283,851
|
|
|
$
|
352,680
|
|
Costs and expenses
|
|
|
303,358
|
|
|
|
259,867
|
|
|
|
324,641
|
|
Depreciation expense
|
|
|
3,682
|
|
|
|
4,448
|
|
|
|
5,448
|
|
Amortization expense
|
|
|
329
|
|
|
|
255
|
|
|
|
298
|
|
Other income
|
|
|
2,440
|
|
|
|
2,090
|
|
|
|
|
|
Interest expense, net
|
|
|
552
|
|
|
|
2,413
|
|
|
|
3,290
|
|
Income tax expense
|
|
|
1,329
|
|
|
|
223
|
|
|
|
253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,326
|
|
|
$
|
18,735
|
|
|
$
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Douglas Elliman Realty was negatively impacted in recent years
by the downturn in the residential real estate market. The
residential real estate market is cyclical and is affected by
changes in the general economic conditions that are beyond
Douglas Elliman Realtys control. The U.S. residential
real estate market, including the market in the New York
metropolitan area where Douglas Elliman operates has experienced
a significant downturn due to various factors including downward
pressure on housing prices, the impact of the recent contraction
in the subprime and mortgage markets generally and an
exceptionally large inventory of unsold homes at the same time
that sales volumes are decreasing. The depth and length of the
current downturn in the real estate industry has proved
exceedingly difficult to predict. The Company cannot predict
whether the downturn will worsen or when the market and related
economic forces will return the U.S. residential real
estate industry to a growth period.
All of Douglas Elliman Realtys current operations are
located in the New York metropolitan area. Local and regional
economic and general business conditions in this market could
differ materially from prevailing conditions
F-57
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
in other parts of the country. Among other things, the New York
metropolitan residential real estate market has been impacted by
the significant decline in the financial services industry. A
continued downturn in the residential real estate market or
economic conditions in that region could have a material adverse
effect on Douglas Elliman Realty.
St. Regis Hotel,
Washington, D.C. In December 2009, the
Company received $2,084 in connection with the sale of the tax
credits associated with its former interest in the St. Regis
Hotel in Washington D.C., which was recorded as equity income
for the year ended December 31, 2009. The Company
anticipates receiving an additional $2,700 in various
installments between 2011 and 2012.
Aberdeen Townhomes LLC. In June 2008, a
subsidiary of New Valley purchased a preferred equity interest
in Aberdeen Townhomes LLC (Aberdeen) for $10,000.
Aberdeen acquired five townhome residences located in Manhattan,
New York, which it was in the process of rehabilitating and
selling.
The Company had recorded an impairment loss of $3,500 related to
Aberdeen for each of the years ended December 31, 2009 and
2008.
In September 2009, one of the five townhomes was sold and the
mortgage of approximately $8,700 was retired. The Company
received a preferred return distribution of approximately
$1,752. The Company did not record a gain or loss on the sale.
In January 2010 and August 2010, Aberdeen sold two of its four
townhomes and the two respective mortgages of approximately
$14,350 were retired. The Company received a preferred return
distribution of approximately $971 in connection with the sales.
In addition, Aberdeen received $375 in August 2010 from escrow
on the January 2010 sale.
In August 2010, the Company acquired the mortgage loans from
Wachovia Bank, N.A. on the two remaining townhomes for
approximately $13,500. In accordance with the accounting
guidance as to variable interest entities, the Company
reassessed the primary beneficiary status of the Aberdeen
variable interest entity (VIE) and determined that,
in August 2010, the Company became the primary beneficiary of
this VIE because the Company obtained the power to direct
activities which significantly impact the economic performance
of the VIE; and since it now owns the mortgages, the Company
will absorb losses and returns of the VIE.
The Company is the primary beneficiary of the VIE, and as a
result, the consolidated financial statements of the Company now
include the account balances of Aberdeen Townhomes LLC as of
December 31, 2010. These balances include:
|
|
|
|
|
|
|
December 31, 2010
|
|
|
Cash
|
|
$
|
4
|
|
Restricted cash
|
|
|
351
|
|
Investment in townhomes
|
|
|
16,275
|
|
Accounts payable
|
|
|
1,401
|
|
The $16,275 investment in townhomes is based on September 2010
third-party appraisals, net of estimated selling expenses. The
Company recognized a gain of $760 primarily resulting from the
acquisition of mortgage loans and operating income of $352.
In February 2011, Aberdeen sold one of the two remaining
townhomes for approximately $12,500. The property was carried at
$8,463 as of December 31, 2010.
New Valley Oaktree Chelsea Eleven, LLC. In
September 2008, a subsidiary of New Valley (New Valley
Chelsea) purchased for $12,000 a 40% interest in New
Valley Oaktree Chelsea Eleven, LLC, which lent $29,000 and
contributed $1,000 for 29% of the capital in Chelsea Eleven LLC
(Chelsea). Chelsea is developing a condominium
project in Manhattan, New York, which consists of 54 luxury
residential units and one commercial
F-58
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
unit. New Valley Chelsea is operating as an investment vehicle
for the Chelsea real estate development project. As of
February 23, 2011, sales of 34 of 54 units have closed.
Chelsea Eleven LLC retired its construction loan during the
second quarter of 2010 from the proceeds of the sales of units.
In addition, on July 1, 2010, Chelsea Eleven LLC borrowed
$47,100 (approximately $18,200 as of December 31, 2010), which
is due in July 1, 2012, bearing interest at 14% per annum.
The proceeds were used to retire Chelsea Eleven LLCs then
outstanding mezzanine debt (approximately $37,200) and for other
working capital purposes.
The loan from New Valley Oaktree is subordinate to the new loan.
The New Valley Oaktree loan bears interest at 60.25% per annum,
compounded monthly, with $3,750 being held in an interest
reserve, from which $1,500 was paid to New Valley.
As of December 31, 2010, Chelsea Eleven LLC had
approximately $54,053 of total assets and $24,142 of total
liabilities, excluding amounts owed to New Valley Oaktree
Chelsea Eleven LLC (approximately $103,757 at December 31,
2010).
New Valley Chelsea is a variable interest entity; however, the
Company is not the primary beneficiary. The Companys
maximum exposure to loss as a result of its investment in
Chelsea is $10,958. This investment is being accounted for under
the equity method.
The Company has received net distributions of $1,042 and $594
from New Valley Oaktree Chelsea Eleven LLC for the years ended
December 31, 2010 and 2009, respectively. New Valley
recorded equity income of $900 and $1,500 for the years ended
December 31, 2010 and 2009, respectively, related to New
Valley Chelsea.
Other
investments:
Fifty Third-Five Building LLC. In September
2010, New Valley, through its NV 955 LLC subsidiary, contributed
$2,500 to a joint venture, Fifty Third-Five Building LLC
(JV), of which it owns 50%. The JV was formed for
the purposes of acquiring a defaulted real estate loan,
collateralized by real estate located in New York City. In
October 2010, New Valley contributed an additional $15,500 to
the JV and the JV acquired the defaulted loan for approximately
$35,500. The JV is a variable interest entity; however, the
Company is not the primary beneficiary. The Companys
maximum exposure to loss as a result of its investment in the JV
is $18,000. This investment is being accounted for under the
equity method.
Sesto Holdings S.r.l. In October 2010, New
Valley, through its NV Milan LLC subsidiary, acquired a 7.2%
interest in Sesto Holdings S.r.l. for $5,000. Sesto holds a 42%
interest in an entity that has purchased a land plot of
approximately 322 acres in Milan, Italy. Sesto intends to
develop the land plot as a multi-parcel, multi-building mixed
use urban regeneration project. Sesto is a variable interest
entity; however, the Company is not the primary beneficiary. The
Companys maximum exposure to loss as a result of its
investment in Sesto is $5,037.
Investment
in Real Estate:
Escena. In March 2008, a subsidiary of New
Valley purchased a loan collateralized by a substantial portion
of a
450-acre
approved master planned community in Palm Springs, California
known as Escena. The loan, which was in foreclosure,
was purchased for its $20,000 face value plus accrued interest
and other costs of $1,445. The collateral consists of 867
residential lots with site and public infrastructure, an 18-hole
golf course, a substantially completed clubhouse, and a
seven-acre
site approved for a 450-room hotel.
In April 2009 New Valley completed the foreclosure process and
took title to the collateral. New Valleys subsidiary also
entered into a settlement agreement with Lennar Corporation, a
guarantor of the loan, which required the guarantor to satisfy
its obligations under a completion guaranty by completing
improvements to the
F-59
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
project in settlement, among other things, of its payment
guarantees. The construction of these improvements to the
project is substantially complete. In June 2009, the Company
received $500 from the guarantor pursuant to the settlement
agreement.
As a result of this settlement and changes in the values of real
estate, the Company recorded impairment charges of $5,000 and
$4,000 for the years ended December 31, 2009 and 2008,
respectively.
The assets have been classified as an Investment in
Escena, net on the Companys consolidated balance
sheet and the components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Land and land improvements
|
|
$
|
11,112
|
|
|
$
|
11,126
|
|
Building and building improvements
|
|
|
1,471
|
|
|
|
1,154
|
|
Other
|
|
|
1,144
|
|
|
|
1,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,727
|
|
|
|
13,318
|
|
Less accumulated depreciation
|
|
|
(373
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,354
|
|
|
$
|
13,244
|
|
|
|
|
|
|
|
|
|
|
The Company recorded an operating loss of $631 and $886 for the
years ended December 31, 2010 and 2009, respectively, from
Escena.
Real Estate Market Conditions. Because of the
risks and uncertainties of the real estate markets, the Company
will continue to perform additional assessments to determine the
impact of the markets, if any, on the Companys
consolidated financial statements. Thus, future impairment
charges may occur.
As a result of the suspension of the marketing of low nicotine
and nicotine-free cigarette products by Vector Tobacco and
significant reductions in Vector Tobaccos related research
activities, the Company reevaluated its operating segments and
combined the Liggett and Vector Tobacco businesses into a single
Tobacco segment. The Companys significant business
segments for the three years ended December 31, 2010 were
Tobacco and Real Estate. The Tobacco segment consists of the
manufacture and sale of cigarettes and the research related to
reduced risk products. The Real Estate segment includes the
Companys investment in Escena and investments in
non-consolidated real estate businesses. The accounting policies
of the segments are the same as those described in the summary
of significant accounting policies. Prior period segment
information has been recast to conform to the current
presentation.
F-60
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial information for the Companys operations before
taxes and minority interests for the years ended
December 31, 2010, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
|
Corporate
|
|
|
|
|
|
|
Tobacco
|
|
|
Estate
|
|
|
and Other
|
|
|
Total
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,063,289
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,063,289
|
|
Operating income (loss)
|
|
|
130,157
|
(1)
|
|
|
(631
|
)
|
|
|
(18,213
|
)
|
|
|
111,313
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
23,963
|
|
|
|
|
|
|
|
23,963
|
|
Identifiable assets
|
|
|
434,842
|
|
|
|
110,352
|
(2)
|
|
|
404,401
|
|
|
|
949,595
|
|
Depreciation and amortization
|
|
|
8,179
|
|
|
|
298
|
|
|
|
2,313
|
|
|
|
10,790
|
|
Capital expenditures
|
|
|
23,073
|
|
|
|
226
|
|
|
|
92
|
|
|
|
23,391
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
801,494
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
801,494
|
|
Operating income (loss)
|
|
|
160,915
|
(3)
|
|
|
(886
|
)
|
|
|
(16,862
|
)
|
|
|
143,167
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
15,213
|
|
|
|
|
|
|
|
15,213
|
|
Identifiable assets
|
|
|
297,587
|
|
|
|
61,770
|
(2)
|
|
|
376,185
|
|
|
|
735,542
|
|
Depreciation and amortization
|
|
|
8,078
|
|
|
|
74
|
|
|
|
2,246
|
|
|
|
10,398
|
|
Capital expenditures
|
|
|
2,734
|
|
|
|
1,114
|
|
|
|
|
|
|
|
3,848
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
565,186
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
565,186
|
|
Operating income (loss)
|
|
|
161,850
|
|
|
|
|
|
|
|
(26,546
|
)
|
|
|
135,304
|
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
23,899
|
|
|
|
|
|
|
|
23,899
|
|
Identifiable assets
|
|
|
291,262
|
|
|
|
70,979
|
(2)
|
|
|
355,471
|
|
|
|
717,712
|
|
Depreciation and amortization
|
|
|
7,719
|
|
|
|
|
|
|
|
2,338
|
|
|
|
10,057
|
|
Capital expenditures
|
|
|
6,309
|
|
|
|
|
|
|
|
|
|
|
|
6,309
|
|
|
|
|
(1) |
|
Operating income includes litigation judgment expense of $16,161
and a $3,000 settlement charge. |
|
(2) |
|
Includes investments accounted for under the equity method of
accounting of $86,333, $48,318 and $44,725 as of
December 31, 2010, 2009 and 2008, respectively. |
|
(3) |
|
Operating income includes a gain of $5,000 on the Philip Morris
brand transaction completed February 2009 and restructuring
costs of $900. |
F-61
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
18.
|
QUARTERLY
FINANCIAL RESULTS (UNAUDITED)
|
Unaudited quarterly data for the years ended December 31,
2010 and 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2010(1)
|
|
|
2010(2)
|
|
|
2010(3)
|
|
|
2010
|
|
|
Revenues
|
|
$
|
277,618
|
|
|
$
|
295,124
|
|
|
$
|
268,460
|
|
|
$
|
222,087
|
|
Gross Profit
|
|
|
52,577
|
|
|
|
55,964
|
|
|
|
57,466
|
|
|
|
52,176
|
|
Operating income
|
|
|
29,342
|
|
|
|
29,876
|
|
|
|
21,077
|
|
|
|
31,018
|
|
Net income applicable to common shares
|
|
$
|
12,016
|
|
|
$
|
10,907
|
|
|
$
|
19,223
|
|
|
$
|
11,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
$
|
0.26
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.16
|
|
|
$
|
0.14
|
|
|
$
|
0.19
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fourth quarter 2010 net income applicable to common shares
includes litigation judgment expense of $1,800. |
|
(2) |
|
Third quarter 2010 net income applicable to common shares
includes $3,000 settlement charge. |
|
(3) |
|
Second quarter 2010 net income applicable to common shares
includes litigation judgment expense of $14,361. |
|
(4) |
|
Per share computations include the impact of a 5% stock dividend
paid on September 29, 2010. Quarterly basic and diluted net
income per common share were computed independently for each
quarter and do not necessarily total to the year to date basic
and diluted net income per common share. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2009(1)
|
|
|
2009
|
|
|
2009(2)
|
|
|
2009(3)
|
|
|
Revenues
|
|
$
|
236,748
|
|
|
$
|
236,736
|
|
|
$
|
206,794
|
|
|
$
|
121,216
|
|
Gross Profit
|
|
|
57,451
|
|
|
|
58,937
|
|
|
|
59,032
|
|
|
|
48,689
|
|
Operating income
|
|
|
36,188
|
|
|
|
36,972
|
|
|
|
38,847
|
|
|
|
31,160
|
|
Net income (loss) applicable to common shares
|
|
$
|
13,433
|
|
|
$
|
16,219
|
|
|
$
|
(7,946
|
)
|
|
$
|
3,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per basic common share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share(4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common shares
|
|
$
|
0.18
|
|
|
$
|
0.21
|
|
|
$
|
(0.10
|
)
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fourth quarter 2009 net income applicable to common shares
includes pre-tax loss on extinguishment of debt of $129 and an
adjustment to reduce restructuring charges for 2009 by $100. |
|
(2) |
|
Second quarter 2009 net income applicable to common shares
includes pre-tax loss on extinguishment of debt of $18,444. |
|
(3) |
|
First quarter 2009 net income applicable to common shares
includes pre-tax gain of $5,000 on brand transaction,
restructuring charges of $1,000, and impairment charges of
$8,500 on investments in non-consolidated real estate businesses. |
|
(4) |
|
Per share computations include the impact of a 5% stock dividend
paid on September 29, 2009. Quarterly basic and diluted net
income per common share were computed independently for each
quarter and do not necessarily total to the year to date basic
and diluted net income per common share. |
F-62
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
19.
|
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
|
The accompanying condensed consolidating financial information
has been prepared and presented pursuant to Securities and
Exchange Commission
Regulation S-X,
Rule 3-10,
Financial Statements of Guarantors and Issuers of
Guaranteed Securities Registered or Being Registered. Each
of the subsidiary guarantors are 100% owned, directly or
indirectly, by the Company, and all guarantees are full and
unconditional and joint and several. The Companys
investments in its consolidated subsidiaries are presented under
the equity method of accounting.
The Company has outstanding $415,000 principal amount of its
11% Senior Secured Notes due 2015 that are fully and
unconditionally guaranteed on a joint and several basis by all
of the 100% owned domestic subsidiaries of the Company that are
engaged in the conduct of its cigarette businesses. (See
Note 7.) The notes are not guaranteed by any of the
Companys subsidiaries engaged in the real estate
businesses conducted through its subsidiary New Valley LLC.
Presented herein are Condensed Consolidating Balance Sheets as
of December 31, 2010 and 2009 and the related Condensed
Consolidating Statements of Operations and Cash Flows for the
years ended December 31, 2010, 2009 and 2008 of Vector
Group Ltd. (Parent/Issuer), the guarantor subsidiaries
(Subsidiary Guarantors) and the subsidiaries that are not
guarantors (Subsidiary Non-Guarantors). The Company does not
believe that the separate financial statements and related
footnote disclosures concerning the Guarantors would provide any
additional information that would be material to investors
making an investment decision.
The indenture contains covenants that restrict the payment of
dividends by the Company if the Companys consolidated
earnings before interest, taxes, depreciation and amortization
(Consolidated EBITDA), as defined in the indenture,
for the most recently ended four full quarters is less than
$50,000. The indenture also restricts the incurrence of debt if
the Companys Leverage Ratio and its Secured Leverage
Ratio, as defined in the indenture, exceed 3.0 and 1.5,
respectively. The Companys Leverage Ratio is defined in
the indenture as the ratio of the Companys and the
guaranteeing subsidiaries total debt less the fair market
value of the Companys cash, investments in marketable
securities and long-term investments to Consolidated EBITDA, as
defined in the indenture. The Companys Secured Leverage
Ratio is defined in the indenture in the same manner as the
Leverage Ratio, except that secured indebtedness is substituted
for indebtedness.
F-63
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
283,409
|
|
|
$
|
16,214
|
|
|
$
|
202
|
|
|
$
|
|
|
|
$
|
299,825
|
|
Investment securities available for sale
|
|
|
78,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,754
|
|
Accounts receivable trade
|
|
|
|
|
|
|
1,846
|
|
|
|
3
|
|
|
|
|
|
|
|
1,849
|
|
Intercompany receivables
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
107,079
|
|
|
|
|
|
|
|
|
|
|
|
107,079
|
|
Deferred income taxes
|
|
|
27,470
|
|
|
|
4,316
|
|
|
|
|
|
|
|
|
|
|
|
31,786
|
|
Income taxes receivable
|
|
|
51,260
|
|
|
|
|
|
|
|
|
|
|
|
(51,260
|
)
|
|
|
|
|
Restricted assets
|
|
|
|
|
|
|
2,310
|
|
|
|
351
|
|
|
|
|
|
|
|
2,661
|
|
Other current assets
|
|
|
1,329
|
|
|
|
3,335
|
|
|
|
145
|
|
|
|
|
|
|
|
4,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
442,284
|
|
|
|
135,100
|
|
|
|
701
|
|
|
|
(51,322
|
)
|
|
|
526,763
|
|
Property, plant and equipment, net
|
|
|
609
|
|
|
|
54,803
|
|
|
|
|
|
|
|
|
|
|
|
55,412
|
|
Investment in Escena, net
|
|
|
|
|
|
|
|
|
|
|
13,354
|
|
|
|
|
|
|
|
13,354
|
|
Long-term investments accounted for at cost
|
|
|
45,134
|
|
|
|
|
|
|
|
899
|
|
|
|
|
|
|
|
46,033
|
|
Long-term investments accounted for under the equity method
|
|
|
10,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,954
|
|
Investments in non- consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
80,416
|
|
|
|
|
|
|
|
80,416
|
|
Investment in townhomes
|
|
|
|
|
|
|
|
|
|
|
16,275
|
|
|
|
|
|
|
|
16,275
|
|
Investments in consolidated subsidiaries
|
|
|
259,594
|
|
|
|
|
|
|
|
|
|
|
|
(259,594
|
)
|
|
|
|
|
Restricted assets
|
|
|
2,673
|
|
|
|
6,021
|
|
|
|
|
|
|
|
|
|
|
|
8,694
|
|
Deferred income taxes
|
|
|
22,742
|
|
|
|
106,321
|
|
|
|
12,011
|
|
|
|
(103,246
|
)
|
|
|
37,828
|
|
Intangible asset
|
|
|
|
|
|
|
107,511
|
|
|
|
|
|
|
|
|
|
|
|
107,511
|
|
Prepaid pension costs
|
|
|
|
|
|
|
13,935
|
|
|
|
|
|
|
|
|
|
|
|
13,935
|
|
Other assets
|
|
|
17,710
|
|
|
|
14,710
|
|
|
|
|
|
|
|
|
|
|
|
32,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
801,700
|
|
|
$
|
438,401
|
|
|
$
|
123,656
|
|
|
$
|
(414,162
|
)
|
|
$
|
949,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable and long-term debt
|
|
$
|
11,000
|
|
|
$
|
40,222
|
|
|
$
|
123
|
|
|
$
|
|
|
|
$
|
51,345
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
480
|
|
Current portion of employee benefits
|
|
|
|
|
|
|
1,014
|
|
|
|
|
|
|
|
|
|
|
|
1,014
|
|
Accounts payable
|
|
|
1,098
|
|
|
|
6,405
|
|
|
|
1,524
|
|
|
|
|
|
|
|
9,027
|
|
Intercompany payables
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
Accrued promotional expenses
|
|
|
|
|
|
|
14,327
|
|
|
|
|
|
|
|
|
|
|
|
14,327
|
|
Income taxes payable, net
|
|
|
|
|
|
|
20,719
|
|
|
|
42,158
|
|
|
|
(51,260
|
)
|
|
|
11,617
|
|
Accrued excise and payroll taxes payable, net
|
|
|
|
|
|
|
18,523
|
|
|
|
|
|
|
|
|
|
|
|
18,523
|
|
Settlement accruals
|
|
|
|
|
|
|
48,071
|
|
|
|
|
|
|
|
|
|
|
|
48,071
|
|
Deferred income taxes
|
|
|
34,622
|
|
|
|
2,341
|
|
|
|
|
|
|
|
|
|
|
|
36,963
|
|
Accrued interest
|
|
|
20,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,824
|
|
Other current liabilities
|
|
|
6,530
|
|
|
|
7,670
|
|
|
|
481
|
|
|
|
|
|
|
|
14,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
74,554
|
|
|
|
159,354
|
|
|
|
44,286
|
|
|
|
(51,322
|
)
|
|
|
226,872
|
|
Notes payable, long-term debt and other obligations, less
current portion
|
|
|
484,675
|
|
|
|
21,020
|
|
|
|
357
|
|
|
|
|
|
|
|
506,052
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
141,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141,012
|
|
Non-current employee benefits
|
|
|
21,047
|
|
|
|
17,695
|
|
|
|
|
|
|
|
|
|
|
|
38,742
|
|
Deferred income taxes
|
|
|
126,508
|
|
|
|
28,118
|
|
|
|
435
|
|
|
|
(103,246
|
)
|
|
|
51,815
|
|
Other liabilities
|
|
|
138
|
|
|
|
30,520
|
|
|
|
678
|
|
|
|
|
|
|
|
31,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
847,934
|
|
|
|
256,707
|
|
|
|
45,756
|
|
|
|
(154,568
|
)
|
|
|
995,829
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficiency
|
|
|
(46,234
|
)
|
|
|
181,694
|
|
|
|
77,900
|
|
|
|
(259,594
|
)
|
|
|
(46,234
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficiency
|
|
$
|
801,700
|
|
|
$
|
438,401
|
|
|
$
|
123,656
|
|
|
$
|
(414,162
|
)
|
|
$
|
949,595
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-64
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
204,133
|
|
|
$
|
5,004
|
|
|
$
|
317
|
|
|
$
|
|
|
|
$
|
209,454
|
|
Investment securities available for sale
|
|
|
51,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,743
|
|
Accounts receivable trade
|
|
|
|
|
|
|
8,089
|
|
|
|
9
|
|
|
|
|
|
|
|
8,098
|
|
Intercompany receivables
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
Inventories
|
|
|
|
|
|
|
98,485
|
|
|
|
1
|
|
|
|
|
|
|
|
98,486
|
|
Deferred income taxes
|
|
|
11,240
|
|
|
|
2,914
|
|
|
|
|
|
|
|
|
|
|
|
14,154
|
|
Income taxes receivable
|
|
|
|
|
|
|
26,086
|
|
|
|
|
|
|
|
(26,086
|
)
|
|
|
|
|
Restricted assets
|
|
|
|
|
|
|
3,138
|
|
|
|
|
|
|
|
|
|
|
|
3,138
|
|
Other current assets
|
|
|
497
|
|
|
|
3,512
|
|
|
|
126
|
|
|
|
|
|
|
|
4,135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
267,613
|
|
|
|
147,271
|
|
|
|
453
|
|
|
|
(26,129
|
)
|
|
|
389,208
|
|
Property, plant and equipment, net
|
|
|
623
|
|
|
|
42,363
|
|
|
|
|
|
|
|
|
|
|
|
42,986
|
|
Investment in Escena, net
|
|
|
|
|
|
|
|
|
|
|
13,244
|
|
|
|
|
|
|
|
13,244
|
|
Long-term investments accounted for at cost
|
|
|
49,486
|
|
|
|
|
|
|
|
837
|
|
|
|
|
|
|
|
50,323
|
|
Investments in non- consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
49,566
|
|
|
|
|
|
|
|
49,566
|
|
Investments in consolidated subsidiaries
|
|
|
282,010
|
|
|
|
|
|
|
|
|
|
|
|
(282,010
|
)
|
|
|
|
|
Restricted assets
|
|
|
2,685
|
|
|
|
2,150
|
|
|
|
|
|
|
|
|
|
|
|
4,835
|
|
Deferred income taxes
|
|
|
28,729
|
|
|
|
94,088
|
|
|
|
9,667
|
|
|
|
(92,646
|
)
|
|
|
39,838
|
|
Intangible asset
|
|
|
|
|
|
|
107,511
|
|
|
|
|
|
|
|
|
|
|
|
107,511
|
|
Prepaid pension costs
|
|
|
|
|
|
|
8,994
|
|
|
|
|
|
|
|
|
|
|
|
8,994
|
|
Other assets
|
|
|
14,942
|
|
|
|
14,095
|
|
|
|
|
|
|
|
|
|
|
|
29,037
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
646,088
|
|
|
$
|
416,472
|
|
|
$
|
73,767
|
|
|
$
|
(400,785
|
)
|
|
$
|
735,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS DEFICIENCY:
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of notes payable and long-term debt
|
|
$
|
|
|
|
$
|
21,773
|
|
|
$
|
116
|
|
|
$
|
|
|
|
$
|
21,889
|
|
Current portion of employee benefits
|
|
|
|
|
|
|
1,029
|
|
|
|
|
|
|
|
|
|
|
|
1,029
|
|
Accounts payable
|
|
|
1,490
|
|
|
|
2,763
|
|
|
|
102
|
|
|
|
|
|
|
|
4,355
|
|
Intercompany payables
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
(43
|
)
|
|
|
|
|
Accrued promotional expenses
|
|
|
|
|
|
|
12,745
|
|
|
|
|
|
|
|
|
|
|
|
12,745
|
|
Income taxes payable, net
|
|
|
14,472
|
|
|
|
547
|
|
|
|
30,991
|
|
|
|
(26,086
|
)
|
|
|
19,924
|
|
Accrued excise and payroll taxes payable, net
|
|
|
|
|
|
|
24,088
|
|
|
|
5
|
|
|
|
|
|
|
|
24,093
|
|
Settlement accruals
|
|
|
|
|
|
|
18,803
|
|
|
|
|
|
|
|
|
|
|
|
18,803
|
|
Deferred income taxes
|
|
|
14,992
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
|
|
17,254
|
|
Accrued interest
|
|
|
13,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,840
|
|
Other current liabilities
|
|
|
6,039
|
|
|
|
8,427
|
|
|
|
610
|
|
|
|
|
|
|
|
15,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
50,876
|
|
|
|
92,437
|
|
|
|
31,824
|
|
|
|
(26,129
|
)
|
|
|
149,008
|
|
Notes payable, long-term debt and other obligations, less
current portion
|
|
|
319,588
|
|
|
|
14,853
|
|
|
|
479
|
|
|
|
|
|
|
|
334,920
|
|
Fair value of derivatives embedded within convertible debt
|
|
|
153,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153,016
|
|
Non-current employee benefits
|
|
|
13,301
|
|
|
|
20,946
|
|
|
|
|
|
|
|
|
|
|
|
34,247
|
|
Deferred income taxes
|
|
|
113,667
|
|
|
|
24,040
|
|
|
|
59
|
|
|
|
(92,646
|
)
|
|
|
45,120
|
|
Other liabilities
|
|
|
322
|
|
|
|
22,763
|
|
|
|
828
|
|
|
|
|
|
|
|
23,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
650,770
|
|
|
|
175,039
|
|
|
|
33,190
|
|
|
|
(118,775
|
)
|
|
|
740,224
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders deficiency
|
|
|
(4,682
|
)
|
|
|
241,433
|
|
|
|
40,577
|
|
|
|
(282,010
|
)
|
|
|
(4,682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders deficiency
|
|
$
|
646,088
|
|
|
$
|
416,472
|
|
|
$
|
73,767
|
|
|
$
|
(400,785
|
)
|
|
$
|
735,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-65
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
1,063,289
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,063,289
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
845,106
|
|
|
|
|
|
|
|
|
|
|
|
845,106
|
|
Operating, selling, administrative and general expenses
|
|
|
21,842
|
|
|
|
67,939
|
|
|
|
928
|
|
|
|
|
|
|
|
90,709
|
|
Litigation judgment expense
|
|
|
|
|
|
|
16,161
|
|
|
|
|
|
|
|
|
|
|
|
16,161
|
|
Management fee expense
|
|
|
|
|
|
|
8,521
|
|
|
|
|
|
|
|
(8,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(21,842
|
)
|
|
|
125,562
|
|
|
|
(928
|
)
|
|
|
8,521
|
|
|
|
111,313
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(82,828
|
)
|
|
|
(1,227
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
(84,096
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
11,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,524
|
|
Equity income on non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
23,963
|
|
|
|
|
|
|
|
23,963
|
|
Gain on investment securities available for sale
|
|
|
19,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,869
|
|
Equity income in consolidated subsidiaries
|
|
|
103,697
|
|
|
|
|
|
|
|
|
|
|
|
(103,697
|
)
|
|
|
|
|
Management fee income
|
|
|
8,521
|
|
|
|
|
|
|
|
|
|
|
|
(8,521
|
)
|
|
|
|
|
Other, net
|
|
|
2,958
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
2,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
41,899
|
|
|
|
124,374
|
|
|
|
22,994
|
|
|
|
(103,697
|
)
|
|
|
85,570
|
|
Income tax (expense) benefit
|
|
|
29,721
|
|
|
|
(34,474
|
)
|
|
|
(9,197
|
)
|
|
|
(17,536
|
)
|
|
|
(31,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
71,620
|
|
|
$
|
89,900
|
|
|
$
|
13,797
|
|
|
$
|
(121,233
|
)
|
|
$
|
54,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
801,494
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
801,494
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
577,386
|
|
|
|
|
|
|
|
|
|
|
|
577,386
|
|
Operating, selling, administrative and general expenses
|
|
|
20,679
|
|
|
|
63,277
|
|
|
|
1,085
|
|
|
|
|
|
|
|
85,041
|
|
Gain on brand transaction
|
|
|
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,000
|
)
|
Restructuring charges
|
|
|
|
|
|
|
900
|
|
|
|
|
|
|
|
|
|
|
|
900
|
|
Management fee expense
|
|
|
|
|
|
|
8,223
|
|
|
|
|
|
|
|
(8,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(20,679
|
)
|
|
|
156,708
|
|
|
|
(1,085
|
)
|
|
|
8,223
|
|
|
|
143,167
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
387
|
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
492
|
|
Interest expense
|
|
|
(67,420
|
)
|
|
|
(1,048
|
)
|
|
|
(22
|
)
|
|
|
|
|
|
|
(68,490
|
)
|
Loss on extinguishment of debt
|
|
|
(18,573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,573
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
(35,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,925
|
)
|
Provision for loss on investments
|
|
|
|
|
|
|
|
|
|
|
(8,500
|
)
|
|
|
|
|
|
|
(8,500
|
)
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
15,213
|
|
|
|
|
|
|
|
15,213
|
|
Equity income in consolidated subsidiaries
|
|
|
196,356
|
|
|
|
|
|
|
|
|
|
|
|
(196,356
|
)
|
|
|
|
|
Management fee income
|
|
|
8,223
|
|
|
|
|
|
|
|
|
|
|
|
(8,223
|
)
|
|
|
|
|
Other, net
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
63,522
|
|
|
|
155,765
|
|
|
|
5,606
|
|
|
|
(196,356
|
)
|
|
|
28,537
|
|
Income tax benefit (expense)
|
|
|
(38,716
|
)
|
|
|
37,261
|
|
|
|
(2,276
|
)
|
|
|
|
|
|
|
(3,731
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,806
|
|
|
$
|
193,026
|
|
|
$
|
3,330
|
|
|
$
|
(196,356
|
)
|
|
$
|
24,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-67
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Revenues
|
|
$
|
|
|
|
$
|
565,186
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
565,186
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
|
|
|
|
335,299
|
|
|
|
|
|
|
|
|
|
|
|
335,299
|
|
Operating, selling, administrative and general expenses
|
|
|
29,577
|
|
|
|
65,135
|
|
|
|
(129
|
)
|
|
|
|
|
|
|
94,583
|
|
Management fee expense
|
|
|
|
|
|
|
7,940
|
|
|
|
|
|
|
|
(7,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(29,577
|
)
|
|
|
156,812
|
|
|
|
129
|
|
|
|
7,940
|
|
|
|
135,304
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
|
4,911
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
|
5,864
|
|
Interest expense
|
|
|
(60,172
|
)
|
|
|
(2,163
|
)
|
|
|
|
|
|
|
|
|
|
|
(62,335
|
)
|
Changes in fair value of derivatives embedded within convertible
debt
|
|
|
24,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,337
|
|
Provision for loss on investments
|
|
|
(24,900
|
)
|
|
|
|
|
|
|
(7,500
|
)
|
|
|
|
|
|
|
(32,400
|
)
|
Equity income from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
24,399
|
|
|
|
|
|
|
|
24,399
|
|
Equity income in consolidated subsidiaries
|
|
|
108,539
|
|
|
|
|
|
|
|
|
|
|
|
(108,539
|
)
|
|
|
|
|
Management fee income
|
|
|
7,940
|
|
|
|
|
|
|
|
|
|
|
|
(7,940
|
)
|
|
|
|
|
Other, net
|
|
|
(593
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
30,485
|
|
|
|
155,602
|
|
|
|
17,024
|
|
|
|
(108,539
|
)
|
|
|
94,572
|
|
Income tax benefit (expense)
|
|
|
30,019
|
|
|
|
(57,056
|
)
|
|
|
(7,031
|
)
|
|
|
|
|
|
|
(34,068
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
60,504
|
|
|
$
|
98,546
|
|
|
$
|
9,993
|
|
|
$
|
(108,539
|
)
|
|
$
|
60,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-68
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
45,172
|
|
|
$
|
166,018
|
|
|
$
|
(2,164
|
)
|
|
$
|
(142,022
|
)
|
|
$
|
67,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale or maturity of investment securities
|
|
|
28,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,587
|
|
Purchase of investment securities
|
|
|
(9,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,394
|
)
|
Proceeds from sale of or liquidation of long-term investments
|
|
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002
|
|
Purchase of long-term investment
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
(5,062
|
)
|
Investment in non- consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
(24,645
|
)
|
|
|
|
|
|
|
(24,645
|
)
|
Purchase of Aberdeen mortgages
|
|
|
(13,462
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,462
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
3,539
|
|
|
|
|
|
|
|
3,539
|
|
Increase in cash surrender value of life insurance policies
|
|
|
(513
|
)
|
|
|
(423
|
)
|
|
|
|
|
|
|
|
|
|
|
(936
|
)
|
Decrease (increase) in non-current restricted assets
|
|
|
363
|
|
|
|
(1,112
|
)
|
|
|
(351
|
)
|
|
|
|
|
|
|
(1,100
|
)
|
Issuance of notes receivable
|
|
|
(930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(930
|
)
|
Cash acquired in Aberdeen consolidation
|
|
|
|
|
|
|
|
|
|
|
473
|
|
|
|
|
|
|
|
473
|
|
Proceeds from sale of fixed assets
|
|
|
|
|
|
|
187
|
|
|
|
|
|
|
|
|
|
|
|
187
|
|
Investments in subsidiaries
|
|
|
(10,547
|
)
|
|
|
|
|
|
|
|
|
|
|
10,547
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(23,073
|
)
|
|
|
(318
|
)
|
|
|
|
|
|
|
(23,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(9,894
|
)
|
|
|
(24,421
|
)
|
|
|
(21,364
|
)
|
|
|
10,547
|
|
|
|
(45,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issuance
|
|
|
165,000
|
|
|
|
20,714
|
|
|
|
|
|
|
|
|
|
|
|
185,714
|
|
Deferred financing costs
|
|
|
(5,077
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,077
|
)
|
Repayments of debt
|
|
|
|
|
|
|
(14,424
|
)
|
|
|
(115
|
)
|
|
|
|
|
|
|
(14,539
|
)
|
Borrowings under revolver
|
|
|
|
|
|
|
1,034,924
|
|
|
|
|
|
|
|
|
|
|
|
1,034,924
|
|
Repayments on revolver
|
|
|
|
|
|
|
(1,016,598
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,016,598
|
)
|
Capital contributions received
|
|
|
|
|
|
|
10,547
|
|
|
|
|
|
|
|
(10,547
|
)
|
|
|
|
|
Intercompany dividends paid
|
|
|
|
|
|
|
(165,550
|
)
|
|
|
23,528
|
|
|
|
142,022
|
|
|
|
|
|
Dividends and distributions on common stock
|
|
|
(117,459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(117,459
|
)
|
Proceeds from exercise of Vector options
|
|
|
1,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,265
|
|
Tax benefits from exercise of Vector options and warrants
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(43,998
|
)
|
|
|
(130,387
|
)
|
|
|
23,413
|
|
|
|
131,475
|
|
|
|
68,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
79,276
|
|
|
|
11,210
|
|
|
|
(115
|
)
|
|
|
|
|
|
|
90,371
|
|
Cash and cash equivalents, beginning of period
|
|
|
204,133
|
|
|
|
5,004
|
|
|
|
317
|
|
|
|
|
|
|
|
209,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
283,409
|
|
|
$
|
16,214
|
|
|
$
|
202
|
|
|
$
|
|
|
|
$
|
299,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-69
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Net cash provided by operating activities
|
|
$
|
10,517
|
|
|
$
|
80,572
|
|
|
$
|
5,547
|
|
|
$
|
(90,969
|
)
|
|
$
|
5,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
|
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
Proceeds from sale or maturity of investment securities
|
|
|
|
|
|
|
|
|
|
|
78
|
|
|
|
|
|
|
|
78
|
|
Purchase of investment securities
|
|
|
(12,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,427
|
)
|
Proceeds from sale or liquidation of long-term investments
|
|
|
2,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,254
|
|
Purchase of long-term investments
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
(51
|
)
|
Investment in non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
(474
|
)
|
|
|
|
|
|
|
(474
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
6,730
|
|
|
|
|
|
|
|
6,730
|
|
Increase in cash surrender value of life insurance policies
|
|
|
(413
|
)
|
|
|
(426
|
)
|
|
|
|
|
|
|
|
|
|
|
(839
|
)
|
Decrease in non-current restricted assets
|
|
|
1,160
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
1,720
|
|
Investments in subsidiaries
|
|
|
(3,800
|
)
|
|
|
|
|
|
|
|
|
|
|
3,800
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(2,734
|
)
|
|
|
(1,114
|
)
|
|
|
|
|
|
|
(3,848
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(13,226
|
)
|
|
|
(2,559
|
)
|
|
|
5,169
|
|
|
|
3,800
|
|
|
|
(6,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt issuance
|
|
|
118,125
|
|
|
|
35
|
|
|
|
645
|
|
|
|
|
|
|
|
118,805
|
|
Repayments of debt
|
|
|
(360
|
)
|
|
|
(5,769
|
)
|
|
|
(50
|
)
|
|
|
|
|
|
|
(6,179
|
)
|
Deferred financing charges
|
|
|
(5,567
|
)
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
(5,573
|
)
|
Borrowings under revolver
|
|
|
|
|
|
|
749,474
|
|
|
|
|
|
|
|
|
|
|
|
749,474
|
|
Repayments on revolver
|
|
|
|
|
|
|
(751,607
|
)
|
|
|
|
|
|
|
|
|
|
|
(751,607
|
)
|
Capital contributions received
|
|
|
|
|
|
|
3,800
|
|
|
|
|
|
|
|
(3,800
|
)
|
|
|
|
|
Intercompany dividends paid
|
|
|
|
|
|
|
(79,975
|
)
|
|
|
(10,994
|
)
|
|
|
90,969
|
|
|
|
|
|
Dividends and distributions on common stock
|
|
|
(115,778
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(115,778
|
)
|
Proceeds from exercise of Vector options
|
|
|
1,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,194
|
|
Excess tax benefit of options exercised
|
|
|
9,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
6,776
|
|
|
|
(84,048
|
)
|
|
|
(10,399
|
)
|
|
|
87,169
|
|
|
|
(502
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
4,067
|
|
|
|
(6,035
|
)
|
|
|
317
|
|
|
|
|
|
|
|
(1,651
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
200,066
|
|
|
|
11,039
|
|
|
|
|
|
|
|
|
|
|
|
211,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
204,133
|
|
|
$
|
5,004
|
|
|
$
|
317
|
|
|
$
|
|
|
|
$
|
209,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-70
VECTOR
GROUP LTD.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
CONDENSED
CONSOLIDATING STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
Subsidiary
|
|
|
|
|
|
Consolidated
|
|
|
|
Parent/
|
|
|
Subsidiary
|
|
|
Non-
|
|
|
Consolidating
|
|
|
Vector Group
|
|
|
|
Issuer
|
|
|
Guarantors
|
|
|
Guarantors
|
|
|
Adjustments
|
|
|
Ltd.
|
|
|
Net cash provided by operating activities
|
|
$
|
82,821
|
|
|
$
|
125,279
|
|
|
$
|
7,415
|
|
|
$
|
(124,250
|
)
|
|
$
|
91,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of businesses and assets
|
|
|
|
|
|
|
452
|
|
|
|
|
|
|
|
|
|
|
|
452
|
|
Purchase of investment securities
|
|
|
(6,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,411
|
)
|
Proceeds from sale or liquidation of long-term investments
|
|
|
8,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,334
|
|
Purchase of long-term investments
|
|
|
|
|
|
|
|
|
|
|
(51
|
)
|
|
|
|
|
|
|
(51
|
)
|
Purchase of mortgage receivable
|
|
|
|
|
|
|
|
|
|
|
(21,704
|
)
|
|
|
|
|
|
|
(21,704
|
)
|
Purchase of Castle Brands equity
|
|
|
(4,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,250
|
)
|
Investment in non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
(22,000
|
)
|
|
|
|
|
|
|
(22,000
|
)
|
Distributions from non-consolidated real estate businesses
|
|
|
|
|
|
|
|
|
|
|
19,393
|
|
|
|
|
|
|
|
19,393
|
|
Increase in cash surrender value of life insurance policies
|
|
|
(500
|
)
|
|
|
(438
|
)
|
|
|
|
|
|
|
|
|
|
|
(938
|
)
|
Decrease in non-current restricted assets
|
|
|
(1,465
|
)
|
|
|
1,054
|
|
|
|
|
|
|
|
|
|
|
|
(411
|
)
|
Investments in subsidiaries
|
|
|
(21,747
|
)
|
|
|
|
|
|
|
|
|
|
|
21,747
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(6,309
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,309
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(26,039
|
)
|
|
|
(5,241
|
)
|
|
|
(24,362
|
)
|
|
|
21,747
|
|
|
|
(33,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from debt
|
|
|
|
|
|
|
2,831
|
|
|
|
|
|
|
|
|
|
|
|
2,831
|
|
Repayments of debt
|
|
|
|
|
|
|
(6,329
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,329
|
)
|
Deferred financing charges
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(137
|
)
|
Borrowings under revolver
|
|
|
|
|
|
|
531,251
|
|
|
|
|
|
|
|
|
|
|
|
531,251
|
|
Repayments on revolver
|
|
|
|
|
|
|
(526,518
|
)
|
|
|
|
|
|
|
|
|
|
|
(526,518
|
)
|
Capital contributions received
|
|
|
|
|
|
|
4,800
|
|
|
|
16,947
|
|
|
|
(21,747
|
)
|
|
|
|
|
Intercompany dividends paid
|
|
|
|
|
|
|
(124,250
|
)
|
|
|
|
|
|
|
124,250
|
|
|
|
|
|
Dividends and distributions on common stock
|
|
|
(103,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(103,870
|
)
|
Proceeds from exercise of Vector options
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
Excess tax benefit of options exercised
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(85,617
|
)
|
|
|
(118,215
|
)
|
|
|
16,947
|
|
|
|
102,503
|
|
|
|
(84,382
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(28,835
|
)
|
|
|
1,823
|
|
|
|
|
|
|
|
|
|
|
|
(27,012
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
228,901
|
|
|
|
9,216
|
|
|
|
|
|
|
|
|
|
|
|
238,117
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
200,066
|
|
|
$
|
11,039
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
211,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-71
Schedule
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
|
|
|
at End
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
of Period
|
|
|
Year Ended December 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
$
|
154
|
|
|
$
|
78
|
|
|
$
|
34
|
|
|
$
|
198
|
|
Cash discounts
|
|
|
201
|
|
|
|
25,820
|
|
|
|
25,981
|
|
|
|
40
|
|
Deferred tax valuation allowance
|
|
|
9,509
|
|
|
|
1,432
|
|
|
|
651
|
|
|
|
10,290
|
|
Sales returns
|
|
|
4,337
|
|
|
|
3,363
|
|
|
|
3,465
|
|
|
|
4,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,201
|
|
|
$
|
30,693
|
|
|
$
|
30,131
|
|
|
$
|
14,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
$
|
51
|
|
|
$
|
105
|
|
|
$
|
2
|
|
|
$
|
154
|
|
Cash discounts
|
|
|
203
|
|
|
|
19,901
|
|
|
|
19,903
|
|
|
|
201
|
|
Deferred tax valuation allowance
|
|
|
15,939
|
|
|
|
|
|
|
|
6,430
|
|
|
|
9,509
|
|
Sales returns
|
|
|
4,000
|
|
|
|
3,618
|
|
|
|
3,281
|
|
|
|
4,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,193
|
|
|
$
|
23,624
|
|
|
$
|
29,616
|
|
|
$
|
14,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts
|
|
$
|
51
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
51
|
|
Cash discounts
|
|
|
69
|
|
|
|
14,797
|
|
|
|
14,662
|
|
|
|
204
|
|
Deferred tax valuation allowance
|
|
|
16,835
|
|
|
|
|
|
|
|
896
|
|
|
|
15,939
|
|
Sales returns
|
|
|
3,700
|
|
|
|
2,897
|
|
|
|
2,597
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
20,655
|
|
|
$
|
17,694
|
|
|
$
|
18,155
|
|
|
$
|
20,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-72
exv10w17
Exhibit 10.17
LIGGETT GROUP LLC
100 Maple Lane
Mebane, NC 27302-8160
January 14, 2011
Mr. Ronald J. Bernstein
329 Circle Park Place
Chapel Hill, NC 27517
Dear Ron:
This letter agreement constitutes an amendment to the Employment Agreement dated as of
November 11, 2005, (the Agreement), between Liggett Group Inc. (the Company) and Ronald J.
Bernstein (Executive). The Company and Executive wish to amend the Agreement as set forth below.
Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed
thereto in the Agreement.
A. The Agreement is amended in the following respects:
1. Section 3(f) of the Agreement is deleted and replaced by the following:
(f) Annual Incentive Compensation. Subject to the approval of the VGR
Senior Executive Incentive Compensation Plan (together with any amendments thereto,
the Plan) at VGRs 2011 annual shareholders meeting, during the Contract Term,
Executive shall be entitled to participate in the Plan, including any successor
thereto, commencing with the calendar year ending December 31, 2011, and be eligible
to receive an annual bonus based on a target bonus opportunity of 100% of Salary and
to receive such other long-term incentive awards as may from time to time be awarded
to Executive under the Plan. Annual Bonus payments and any long-term incentive
awards shall be subject to compliance with performance goals determined by the VGR
Compensation Committee in accordance with the Plan.
2. Exhibit D of the Agreement is deleted in its entirety.
B. This letter agreement constitutes an amendment to and a modification of the Agreement and
shall for all purposes be considered a part of the Agreement. Except as amended hereby, the
Agreement is confirmed and ratified in all respects and shall remain in full force and effect.
Please indicate your agreement with the foregoing by countersigning two copies of this letter
agreement in the space provided below and returning one of such copies to us.
Very truly yours,
LIGGETT GROUP INC.
Mr. Ronald J. Bernstein
January 14, 2011
Page 2
|
|
|
|
|
|
|
|
|
By: |
/s/ John R. Long |
|
|
|
John R. Long |
|
|
|
Vice President, General Counsel and Secretary |
|
|
The foregoing letter agreement
is consented and agreed to as
of the date first above written.
|
|
|
By: |
|
/s/ Ronald
J. Bernstein |
|
|
Ronald
J. Bernstein |
Vector Group Ltd.
(as to Section 3(f) only)
|
|
|
By: |
|
/s/ Richard J. Lampen |
|
|
Richard J. Lampen
Executive Vice President |
exv21
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following is a list of our active subsidiaries as of December 31, 2010, including the
jurisdiction of incorporation of each and the names under which such subsidiaries conduct business.
In the case of each subsidiary which is indented, its immediate parent owns beneficially all of
the voting securities.
|
|
|
|
|
|
VGR Holding LLC
|
|
Delaware |
|
Liggett Group LLC
|
|
Delaware |
|
Vector Tobacco Inc.
|
|
Virginia |
|
Liggett Vector Brands Inc.
|
|
Delaware |
|
New Valley LLC
|
|
Delaware |
Not included above are other subsidiaries which, if considered in the aggregate as a single
subsidiary, would not constitute a significant subsidiary, as such term is defined by Rule 1-02(w)
of Regulation S-X.
exv23w1
Exhibit
23.1
CONSENT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8
(Nos. 333-59210, 333-71596, 333-118113 and 333-130406) and on Forms S-3 (Nos. 333-46055, 33-38869,
333-45377, 333-56873, 333-62156, 333-69294, 333-82212, 333-121502, 333-121504, 333-125077,
333-135816, 333-135962 and 333-137093) of Vector Group Ltd. of our
report dated February 25, 2011
relating to the financial statements, financial statement schedule and the effectiveness of
internal control over financial reporting, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Miami, Florida
February 25, 2011
exv23w2
Exhibit
23.2
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8
(Nos. 333-59210, 333-71596, 333-118113 and 333-130406) and on Forms S-3 (Nos. 333-46055, 33-38869,
333-45377, 333-56873, 333-62156, 333-69294, 333-82212, 333-121502, 333-121504, 333-125077,
333-135816, 333-135962 and 333-137093) of Vector Group Ltd. of our
report dated February 25, 2011
relating to the financial statements and financial statement schedule of Liggett Group LLC, which
appears in this Form 10-K of Vector Group Ltd.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 25, 2011
exv23w3
Exhibit 23.3
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8
(Nos. 333-59210, 333-71596, 333-118113 and 333-130406) and on Forms S-3 (Nos. 333-46055, 33-38869,
333-45377, 333-56873, 333-62156, 333-69294, 333-82212, 333-121502, 333-121504, 333-125077,
333-135816, 333-135962 and 333-137093) of Vector Group Ltd. of our
report dated February 25, 2011
relating to the financial statements and financial statement schedule of Vector Tobacco Inc.,
which appears in this Form 10-K of Vector Group Ltd.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 25, 2011
exv23w4
Exhibit 23.4
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8
(Nos. 333-59210, 333-71596, 333-118113 and 333-130406) and on Forms S-3 (Nos. 333-46055, 33-38869,
333-45377, 333-56873, 333-62156, 333-69294, 333-82212, 333-121502, 333-121504, 333-125077,
333-135816, 333-135962 and 333-137093) of Vector Group Ltd. of our
report dated February 17, 2011
relating to the financial statements and financial statement schedule of Douglas Elliman Realty
LLC, which appears in this Form 10-K of Vector Group Ltd.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 25, 2011
exv31w1
EXHIBIT 31.1
RULE 13a-14(a)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Howard M. Lorber, certify that:
1. I have reviewed this annual report on
Form 10-K
of Vector Group Ltd.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: February 25, 2011
Howard M. Lorber
President and Chief Executive Officer
exv31w2
EXHIBIT 31.2
RULE 13a-14(a)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, J. Bryant Kirkland III, certify that:
1. I have reviewed this annual report on
Form 10-K
of Vector Group Ltd.;
2. Based on my knowledge, this report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and
other financial information included in this report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act
Rules 13a-15(e)
and
15d-15(e))
and internal control over financial reporting (as defined in
Exchange Act
Rules 13a-15(f)
and
15d-15(f))
for the registrant and have:
(a) designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being prepared;
(b) designed such internal control over financial
reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles;
(c) evaluated the effectiveness of the registrants
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
(d) disclosed in this report any change in the
registrants internal control over financial reporting that
occurred during the registrants most recent fiscal quarter
(the registrants fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably
likely to materially affect, the registrants internal
control over financial reporting; and
5. The registrants other certifying officer and I
have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrants
auditors and the audit committee of registrants board of
directors (or persons performing the equivalent functions):
(c) all significant deficiencies and material weaknesses in
the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrants ability to record, process, summarize and
report financial information; and
(d) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal control over financial reporting.
Date: February 25, 2011
/s/ J.
Bryant Kirkland III
J. Bryant Kirkland III
Vice President, Treasurer and Chief Financial Officer
exv32w1
EXHIBIT 32.1
SECTION 1350
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
In connection with the Annual Report of Vector Group Ltd. (the
Company) on
Form 10-K
for the year ended December 31, 2010 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, Howard M. Lorber, Chief Executive
Officer of the Company, certify, pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of
the Sarbanes-Oxley Act of 2002, that, to my knowledge:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
February 25, 2011
Howard M. Lorber
President and Chief Executive Officer
exv32w2
EXHIBIT 32.2
SECTION 1350
CERTIFICATION OF CHIEF FINANCIAL OFFICER
In connection with the Annual Report of Vector Group Ltd. (the
Company) on
Form 10-K
for the year ended December 31, 2010 as filed with the
Securities and Exchange Commission on the date hereof (the
Report), I, J. Bryant Kirkland III, Chief
Financial Officer of the Company, certify, pursuant to
18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that, to my
knowledge:
1. The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
2. The information contained in the Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
February 25, 2011
/s/ J.
Bryant Kirkland III
J. Bryant Kirkland III
Vice President, Treasurer and Chief Financial Officer
exv99w1
Exhibit 99.1
I. INDIVIDUAL SMOKER CASES
Florida
a) Engle Progeny Cases.
Pursuant to the Florida Supreme Courts July 2006 ruling in Engle v. Liggett Group Inc.,
which decertified the Engle class on a prospective basis, former class members had one year
from January 11, 2007 to file individual lawsuits. In addition, some individuals who filed
suit prior to January 11, 2007, and who claim they meet the conditions in Engle, are
attempting to avail themselves of the Engle ruling. Lawsuits by individuals requesting the
benefit of the Engle ruling, whether filed before or after the January 11, 2007 mandate, are
hereinafter referred to as the Engle progeny cases. As of December 31, 2010, Liggett
and/or the Company were named in 6,827 Engle progeny cases in both state and federal courts
in Florida. These cases include approximately 9,100 plaintiffs, 3,736 of whom have claims
pending in federal court and 5,380 in state court. The total number of plaintiffs include
671 consortium claims. The total number of state court cases may likely increase as courts
may require multi-plaintiff cases to be severed into individual cases. The total number of
plaintiffs may increase as a result of attempts by existing plaintiffs to add additional
parties. For more information on the Engle case, see
Note 12. Contingencies. As of
December 31, 2010, 43 alleged Engle progeny cases, where Liggett is currently a named
defendant, were scheduled for trial in 2011. These cases, and cases that have been tried and
are currently on appeal, or will be appealed, are described below:
Allen, B. v. R.J. Reynolds, et al., Case No. 08-6848, Circuit Court of the
13th Judicial Circuit, Florida, Hillsborough County (case filed 03/28/08). One
smoker suing on behalf of the estate and survivors of a deceased smoker. The case is set for
trial starting 04/04/11.
Allen, J. v. R.J. Reynolds, et al., Case No. 16-2007-CA-11674-AXXXMA, Circuit Court
of the 4th Judicial Circuit, Florida, Duval County (case filed 12/11/07). One
individual suing. The case is scheduled for trial starting 05/02/11.
Alvarez v. R.J. Reynolds, et al., Case No. 07-30302, Circuit Court of the
11th Judicial Circuit, Florida, Miami-Dade County (case filed 09/17/07). Two
individuals suing. The case is scheduled for trial starting 04/11/11.
Baker v. R.J. Reynolds, et al., Case No. 16-2007-CA-008311-EXXXMA, Circuit Court of
the 4th Judicial Circuit, Florida, Duval County (case filed 01/11/08). One
individual suing. The case is scheduled for trial starting 10/03/11.
Blitch v. R.J. Reynolds, et al., Case No. 16-2007-CA-011175-EXXXMA, Circuit Court of
the 4th Judicial Circuit, Florida, Duval County (case filed 11/29/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. Liggett is the
only remaining defendant in this case. The case is scheduled for trial starting 03/07/11.
Bloom v. R.J. Reynolds, et al., Case No. 16-2007-CA-008311-EXXXMA, Circuit Court of
the 4th Judicial Circuit, Florida, Duval County (case filed 09/18/07). One
individual suing. The case is scheduled for trial starting 05/02/11.
Bronstein v. R.J. Reynolds, et al., Case No. 10-28219, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 11/29/07). One
individual suing. The case is presently scheduled for the trial period 06/27/11
09/23/11.
Bowman v. R.J. Reynolds, et al., Case No. 16-2007-CA-11175-AXXXMA, Circuit Court of
the 4th Judicial Circuit, Florida, Duval County (case filed 11/29/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 07/11/11.
Campbell v. R.J. Reynolds., et al., Case No. 2008-CA-2147, Circuit Court of the
1st Judicial Circuit, Florida, Escambia County (case filed 07/08/08). This is a
wrongful death action which proceeded to jury trial in July 2009. In August 2009, the jury
returned a verdict in favor of the plaintiff and awarded compensatory damages in the amount
of $7,800,000. The jury apportioned damages as follows: plaintiff 57%, R.J. Reynolds
39%, Philip Morris 2%, and Liggett 2% ($156,000). No punitive damages were awarded
against Liggett. Plaintiff moved for an award of attorneys fees against Liggett pursuant
to the fee shifting provisions of Floridas proposal for settlement statute based on a
settlement offer that was not accepted by Liggett. Entitlement to an attorney fee award,
and the amount of such an award, will be determined in a separate proceeding. Defendants
appealed the judgment. Oral argument on the appeal occurred on 01/05/11.
Calloway v. R.J. Reynolds, et al., Case No. 08-21770, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 05/15/08). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for the trial period 06/27/11 09/23/11.
Ciccone v. Brown & Williamson, et al., Case No. 04-13258, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 08/19/04). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for the trial period 03/28/11 06/24/11.
Clay v. R.J. Reynolds, et al., Case No. 2007-CA-003020, Circuit Court of the
1st Judicial Circuit, Florida, Escambia County (case filed 12/13/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. Trial
commenced on March 22, 2010. On April 13, 2010, the jury returned a verdict in favor of the
plaintiff and awarded compensatory damages in the amount of $3,490,000. The jury
apportioned damages as follows: plaintiff 30%, Liggett 10% ($349,000), R.J. Reynolds
60%. The jury found Liggett liable for $1,000,000 in punitive damages. Plaintiff moved
for an award of attorneys fees against Liggett pursuant to the fee shifting provisions of
Floridas proposal for settlement statute based on a settlement offer that was not accepted
by Liggett. Entitlement to an attorney fee award, and the amount of such an award, will be
determined in a separate proceeding. Defendants appealed the judgment.
Collins v. R.J. Reynolds, et al., Case No. 16-2007-CA-11175-EXXXMA, Circuit Court of
the 4th Judicial Circuit, Florida, Duval County (case filed 11/29/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 10/31/11.
Cox v. R.J. Reynolds, et al., Case No. 01-2008-CA-3712, Circuit Court of the
8th Judicial Circuit, Florida, Alachua County (case filed 07/25/08). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 08/08/11.
Dawes v. R.J. Reynolds, et al., Case No. 07-36725, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 12/28/07). One
individual suing. The case is scheduled for the trial period 09/26/11 12/16/11.
2
Delgado v. R.J. Reynolds, et al., Case No. 07-29094, Circuit Court of the
11th Judicial Circuit Florida, Miami-Dade County (case filed 09/07/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 05/02/11.
Douglas v. R.J. Reynolds, et al., Case No. 08-8108, Circuit Court of the
13th Judicial Circuit, Florida, Hillsborough County (case filed 11/02/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. On March 10,
2010, the jury returned a verdict in favor of the plaintiff and awarded compensatory damages
in the amount of $5,000,000. The jury apportioned damages as follows: plaintiff 50%,
Liggett 27% ($1,350,000), Philip Morris 18% and R.J. Reynolds 5%. No punitive
damages were awarded. Plaintiff moved for an award of attorneys fees against Liggett
pursuant to the fee shifting provisions of Floridas proposal for settlement statute based
on a settlement offer that was not accepted by Liggett. The parties reached a confidential
settlement agreement regarding the attorneys fees incurred through trial, which agreement
is contingent upon the pending appeal of the compensatory damages award. Defendants
appealed the judgment.
Eshbaugh v. R.J. Reynolds, et al., Case No. 07-CA-017247, Florida, Circuit
Court of the 20th Judicial Circuit, Lee County (case filed 12/13/07). One
individual suing on behalf of the estate and survivors of a deceased smoking. The case is
scheduled for trial starting 09/06/11.
Hallgren v. R.J. Reynolds, et al., Case No. 10-761, Circuit Court of the
10th Judicial Circuit, Florida, Highlands County (case filed 06/22/10). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 10/10/11.
Hancock v. R.J. Reynolds, et al., Case No. 07-36725, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 06-03-10). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for the trial period 09/26/11 12/16/11.
Jewett v. R.J. Reynolds, et al., Case No. 16-2007-CA-012087-IXXXMA, Circuit Court of
the 4th Judicial Circuit, Florida, Duval County (case filed 12/20/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 04/04/11.
Johnson v. R.J. Reynolds, et al., Case No. 16-2007-CA-011654-GXXXMA, Circuit Court
of the 4th Judicial Circuit, Florida, Duval County (case filed 12/11/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 04/04/11.
Jones v. Philip Morris USA, Inc., et al., Case No. 07-012531, Circuit Court of the
6th Judicial Circuit, Florida, Pinellas County (case filed 11/29/07). One
individual suing. The case is scheduled for trial starting 04/11/11.
Kaplan v. R.J. Reynolds, et al., Case No. 08-26341, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 05/01/08). One
individual suing. The case is scheduled for trial starting in the second quarter of 2011.
Katz v. R.J. Reynolds, et al., Case No. 2009-CA-004037, Circuit Court
of the 15th Judicial Circuit, Florida, Palm Beach County
(case filed 02/04/09). One individual suing on behalf of the estate
and survivors of a deceased smoker. Liggett is the only remaining
defendant in this case. The case is scheduled for trial starting
04/25/11.
3
Kirchen-Hawkins v. R.J. Reynolds, et al., Case No. 50
2008-CA-039473, Circuit Court of the 15th Judicial Circuit,
Florida, Palm Beach County (case filed 12/08/10). One individual
suing on behalf of the estate and survivors of a deceased smoker. The
case is scheduled for trial starting 09/12/11.
Larkin v. R.J. Reynolds, et al., Case No. 02-02829, Circuit Court of the
11th Judicial Circuit, Florida, Miami-Dade County (case filed 01/31/02). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 03/14/11.
Marotta v. R.J. Reynolds, et al., Case No. 07-36723, Florida, , Circuit Court of the
17th Judicial Circuit, Broward County (case filed 12/28/08). One individual suing
on behalf of the estate and survivors of a deceased smoker. The case is scheduled for the
trial period 06/27/11 09/23/11.
Marraffino v. R.J. Reynolds, et al., Case No. 08-22565, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 05/20/08). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for the trial period 03/28/11 06/24/11.
McLaughlin v. R.J. Reynolds, et al., Case No. 2008-CA-0104, Circuit Court of the
1st Judicial Circuit, Florida, Escambia County (case filed 01/10/08). Two
individuals suing. The case is scheduled for trial starting 09/12/11.
ODwyer-Harkins v. R.J. Reynolds, et al., Case No. 16-2008-CA-000009-XXXX-MA,
Circuit Court of the 4th Judicial Circuit, Florida, Duval County (case filed
01/02/08). One individual suing as on behalf of the estate and survivors of a deceased
smoker. It is likely that Liggett will be the only remaining defendant in this case. The
case is scheduled for trial starting 08/08/11.
Palmieri v. R.J. Reynolds, et al., Case No. 07-26287, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 10/10/07). One
individual suing. The case is scheduled for trial starting 01/31/11.
Perring v. R.J. Reynolds, et al., Case No. 16-2007-CA-11785-AXXMA, Circuit Court of
the 4th Judicial Circuit , Florida, Duval County (case filed 12/13/07). Two
individuals suing. The case is scheduled for trial starting 10/31/11.
Putney v. R.J. Reynolds, et al., Case No. 07-36668, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 12/28/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. Trial commenced
in March 2010. On April 26, 2010, the jury returned a verdict in favor of the plaintiff and
awarded compensatory damages in the amount of $15,000,000. The jury apportioned damages as
follows: plaintiff 35%, Liggett 20% ($3,008,138), Philip Morris 15% and R.J.
Reynolds 30%. No punitive damages were awarded against Liggett. Plaintiff moved for an
award of attorneys fees against Liggett pursuant to the fee shifting provisions of
Floridas proposal for settlement statute based on a settlement offer that was not accepted
by Liggett. Entitlement to an attorney fee award has been entered, and the amount of such
award will be determined in a separate proceeding. Defendants appealed the judgment.
Richter v. R.J. Reynolds, et al., Case No. 50 2008-CA-038650, Circuit Court of the
15th Judicial Circuit, Florida, Palm Beach County (case filed 12/08/08). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 09/12/11.
4
Rizzuto v. R.J. Reynolds, et al., Case No. H27-CA-2008-003318, Circuit Court of the
5th Judicial Circuit, Florida, Hernando County (case filed 05/21/08). The case
is scheduled for trial starting 05/02/11.
Simon v. R.J. Reynolds, et al., Case No. 50 2008-CA-038812, Circuit Court of the
15th Judicial Circuit, Florida, Palm Beach County (case filed 12/08/08). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 05/05/11.
Sotherden v. R.J. Reynolds, et al., Case No. 01-2008-CA-3116, Circuit Court of the
8th Judicial Circuit, Florida, Alachua County (case filed 06/09/08). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 03/07/11.
Starr-Allen v. R.J. Reynolds, et al., Case No. 16-2007-CA-12167-BXMA, Circuit Court
of the 4th Judicial Circuit, Florida, Duval County (case filed 12/20/07). One
individual suing on behalf of the estate and survivors of a deceased smoking. The case is
scheduled for trial starting 11/28/11.
Syzmanski v. R.J. Reynolds, et al., Case No. 07-CA-015501, Circuit Court of the
20th Judicial Circuit, Florida, Lee County (case filed 11/20/07). One individual
suing. The case is scheduled for trial starting 06/07/11.
Tatum v. R.J. Reynolds, et al., Case No. 2007-CA-3066, Circuit Court of the
1st Judicial Circuit, Florida, Escambia County (case filed 12/18/07). One
individual suing. The case is scheduled for trial starting 07/18/11.
Tognoli v. R.J. Reynolds, et al., Case No. 08-45898, Florida, Circuit Court of the
17th Judicial Circuit, Broward County (case filed 09/25/08). One individual
suing on behalf of the estate and survivors of a deceased smoking. The case is scheduled
for the trial period 09/26/11 12/16/11.
Tullo v. R.J. Reynolds, et al., Case No. 2008-CA-035457, Circuit Court of the
15th Judicial Circuit, Florida, Palm Beach County (case filed 11/14/08). One
individual suing. The case is scheduled for trial starting 03/28/11.
Walden v. R.J. Reynolds, et al., Case No. 2007-CA-2539, Circuit Court of the
1st Judicial Circuit, Florida, Escambia County (case filed 10/26/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 11/07/11.
Ward v. R.J. Reynolds, et al., Case No. 2008-CA-2135, Circuit Court of the
1st Judicial Circuit, Florida, Escambia County (case filed 12/13/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 07/18/11.
Washington v. R.J. Reynolds, et al., Case No. 16-2007-CA-11552-BXXXMA, Circuit Court
of the 4th Judicial Circuit, Florida, Duval County (case filed 12/07/07). One
individual suing on behalf of the estate and survivors of a deceased smoker. The case is
scheduled for trial starting 11/28/11.
West v. R.J. Reynolds, et al., Case No. 16-2007-CA-11525-XXXMA, Circuit Court of the
4th Judicial Circuit, Florida, Duval County (case filed 12/06/07). One
individual suing. The case is scheduled for trial starting 08/08/11.
5
b) Other Individual Cases.
Beatty v. R.J. Reynolds, et al., Case No. 50-2009-CA-032435 (AB), Circuit Court of
the 15th Judicial Circuit, Florida, Palm Beach County (case filed 09/24/09). Two
individuals suing. This case is scheduled for trial starting 09/12/11.
Bryant v. Philip Morris Inc., et al., Case No. 50-2008-CA-25429 (AJ), Circuit Court
of the 15th Judicial Circuit, Florida, Palm Beach County (case filed 08/25/08).
One individual suing as personal representative of the estate and survivors of a deceased
smoker.
Caldwell v. Philip Morris Inc., et al., Case No. 08-000391 (AA), Circuit Court of
the 15th Judicial Circuit, Florida, Palm Beach County (case filed 01/07/08). One
individual suing on behalf of the estate and survivors of a deceased smoker.
Cowart v. Liggett Group Inc., et al., Case No. 98-01483-CA, Circuit Court of the
4th Judicial Circuit, Florida, Duval County (case filed 03/16/98). One
individual suing. Liggett is the only tobacco company defendant in this case. The case is
dormant.
Diamond v. R.J. Reynolds, et al., Case No. 08-24533, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 05/30/08). One
individual suing.
Ferlanti v. Liggett Group LLC, Case No. 03-21697, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 12/11/03). One
individual suing on behalf of the estate and survivors of a deceased smoker. Liggett was
the sole defendant in this action. Trial concluded in February 2009 and the jury returned
a verdict for plaintiff in the amount of $1,200,000 (plus $95,972 in economic damages) but
found plaintiff 40% at fault, which reduced the damages award to $815,972. No punitive
damages were awarded. The final judgment was entered on March 30, 2009. In February 2011,
the award was affirmed on appeal. In May 2009, the court granted plaintiffs motion for an
award of attorneys fees and in September 2010, awarded legal fees of $996,000. The
attorneys fee award is on appeal.
Fine v. Philip Morris, Inc., et al., Case No. 08-000383 (AA), Circuit Court of the
15th Judicial Circuit, Florida, Palm Beach County (case filed 01/07/08). One
individual suing on behalf of the estate and survivors of a deceased smoker.
Grose v. R.J. Reynolds, et al., Case No. 08-38276, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 08/15/08). One
individual suing as personal representative of the estate and survivors of a deceased
smoker.
Hikin, et al. v. Philip Morris Inc., et al., Case No. 08-57479, Circuit Court of the
17th Judicial Circuit, Florida, Broward County (case filed 11/21/08). Two
individuals suing.
Laschke, et al. v. R.J. Reynolds, et al., Case No. 96-8131-CI-008, Circuit Court of
the 6th Judicial Circuit, Florida, Pinellas County (case filed 12/20/96). Two
individuals suing. The dismissal of the case was reversed on appeal, and the case was
remanded to the trial court. An amended complaint was filed by the plaintiffs. In January
2006, defendants filed motions to dismiss the amended complaint. A hearing has not been
scheduled.
McKeever v. R.J. Reynolds Tobacco Co., et al., Case No. 09-87681, Circuit Court of
the 11th Judicial Circuit, Florida, Miami-Dade County (case filed 12/04/09). Two
individuals suing.
6
Meckler v. Liggett Group Inc., Case No. 97-03949-CA, Circuit Court of the
4th Judicial Circuit, Florida, Duval County (case filed 07/10/97). One
individual suing. Liggett is the only tobacco company defendant in this case. The case is
dormant.
Rawls v. Liggett Group Inc., Case No. 97-01354-CA, Circuit Court of the
4th Judicial Circuit, Florida, Duval County (case filed 03/06/97). One
individual suing. Liggett is the only tobacco company defendant in this case. The case is
dormant.
Spivak v. Philip Morris Inc., et al., Case No. 08-19309 (AH), Circuit Court of the
15th Judicial Circuit, Florida, Palm Beach County (case filed 06/26/08). One
individual suing as personal representative of the estate and survivors of a deceased
smoker.
Spry v. Liggett Group LLC, et al., Case No. 06-31216 CICI, Circuit Court of the
7th Judicial Circuit, Florida, Volusia County (case filed 07/27/06). Two
individuals suing.
Louisiana
Dimm, et al. v. R.J. Reynolds, et al., Case No. 53919, Circuit Court of the
18th Judicial District Court, Louisiana, Iberville Parish (case filed 07/25/00).
Seven individuals suing.
Hunter, et al. v. R. J. Reynolds, et al., Case No. 2002/18748m, Circuit Court of the
Civil District Court, Louisiana, Parish of Orleans (case filed 12/04/02). Two individuals
suing.
Newsom, et al. v. R.J. Reynolds, et al., Case No. 105838, Circuit Court of the
16th Judicial District Court, Louisiana, St. Mary Parish (case filed 05/17/00).
Five individuals suing.
Oser v. The American Tobacco Co., et al., Case No. 97-9293, Circuit Court of the
Civil District Court, Louisiana, Parish of Orleans (case filed 05/27/97). One individual
suing.
Reese, et al. v. R. J. Reynolds, et al., Case No. 2003-12761, Circuit Court of the
22nd Judicial District Court, Louisiana, St. Tammany Parish (case filed
06/10/03). Five individuals suing.
Maryland
Burik, et al. v. John Crane-Houdaille, Inc. et al., Case No. 24-X-08-000429, Circuit
Court, Maryland, Baltimore City (case filed 06/09/10). Plaintiff is suing individually and
as personal representative of the estate of a deceased smoker. Plaintiff seeks damages
allegedly caused to decedent by exposure to asbestos and cigarettes, with claims against
certain asbestos manufacturer defendants and certain tobacco company defendants, including
Liggett. The defendants, including Liggett, filed a motion to dismiss in July 2010.
Plaintiff filed a Response to the Defendants Motion to Dismiss on 07/29/10. The motion is
pending.
Kraska, et al. v. John Crane-Houdaille, Inc. et al., Case No. 24X08000209, Circuit
Court, Maryland, Baltimore City (case filed 08/02/10). Plaintiff is suing individually and
as personal representative of the estate of a deceased smoker. Plaintiff seeks damages
allegedly caused to decedent by exposure to asbestos and cigarettes, with claims against
certain asbestos manufacturer defendants and certain tobacco company defendants, including
Liggett. Liggett joined in and adopted the Defendants Motion to Dismiss on 10/08/10. The
motion is pending.
7
Love, et al. v. John Crane-Houdaille, Inc. et al., Case No. 24-X-08-000120, Circuit
Court, Maryland, Baltimore City (case filed 06/01/10). Plaintiff and his wife seek damages
allegedly caused by exposure to asbestos and cigarettes, with claims against certain
asbestos manufacturer defendants and certain tobacco company defendants, including Liggett.
The defendants filed a motion to dismiss in July 2010. Plaintiffs filed a
Response to the Defendants Motion to Dismiss on 07/29/10. The motion is pending.
Schoppert, et al., v. John Crane-Houdaille, Inc., et al., Case No. 24-X-07-000300,
Circuit Court, Maryland, Baltimore City (case filed 02/19/10). Plaintiffs are husband and
wife. Plaintiffs seek damages allegedly caused to Plaintiff Leon D. Schoppert by exposure
to asbestos and cigarette smoke, with claims against certain asbestos manufacturer
defendants and certain tobacco company defendants, including Liggett. Liggett joined in and
adopted the Defendants Motion to Dismiss on 08/18/10. Plaintiffs filed a response to
Liggetts Motion to Dismiss on 08/20/10. The motion is pending.
Missouri
Nuzum, et al. v. Brown & Williamson Tobacco Corporation, et al., Case No.
03-cv-237237, Circuit Court, Missouri, Jackson County (case filed 05/21/03). Two
individuals suing.
New York
Brantley v. The American Tobacco Company, et al., Case No. 114317/01, Supreme Court
of New York, New York County (case filed 07/23/01). One individual suing.
Debobes v. The American Tobacco Company, et al., Case No. 29544/92, Supreme Court of
New York, Nassau County (case filed 10/17/97). One individual suing.
Hausrath, et al. v. Liggett Group LLC, Case No. I2001-09526, Supreme Court of New
York, Erie County (case filed 01/24/02). Two individuals suing. Liggett is the only
defendant in this case.
James v. The American Tobacco Company, et al., Case No. 103034/02, Supreme Court of
New York, New York County (case filed 04/04/97). One individual suing.
Shea, et al. v. The American Tobacco Company, et al., Case No. 008938/03, Supreme
Court of New York, Nassau County (case filed 10/17/97). Two individuals suing. In December
2008, the trial court granted defendants motion to dismiss plaintiffs claims for punitive
damages as barred by the prior settlement with the New York Attorney General, but denied the
defendants motion to dismiss the case. The dismissal of the punitive damages claim was
affirmed by the intermediate appellate court in May 2010. Plaintiffs motion to reargue the
decision was denied by the appellate court.
Standish v. The American Tobacco Company, et al., Case No. 18418-97, Supreme Court
of New York, Bronx County (case filed 07/28/97). One individual suing.
Tomasino, et al. v. The American Tobacco Company, et al., Case No. 027182/97,
Supreme Court of New York, Nassau County (case filed 09/23/97). Two individuals suing. In
June 2009, the trial court granted defendants motion to dismiss plaintiffs claims for
punitive damages as barred by the prior settlement with the New York Attorney General, but
denied the defendants motion to dismiss the case. The dismissal of the punitive damages
claim was affirmed by the
8
intermediate appellate court in May 2010. Plaintiffs motion to reargue the decision was
denied by the appellate court.
Yedwabnick v. The American Tobacco Company, et al., Case No. 20525/97, Supreme Court
of New York, Queens County (case filed 09/19/97). One individual suing.
Ohio
Croft, et al. v. Akron Gasket & Packing, et al., Case No. CV04541681, Court of
Common Pleas, Ohio, Cuyahoga County (case filed 08/25/05). Two individuals suing.
West Virginia
Brewer, et al. v. The American Tobacco Company, et al., Case No. 01-C-82, Circuit
Court, West Virginia, Ohio County (case filed 03/20/01). Two individuals suing.
Little v. The American Tobacco Company, et al., Case No. 01-C-235, Circuit Court,
West Virginia, Ohio County (case filed 06/04/01). One individual suing.
II. CLASS ACTION CASES
a) Smoking Related
Brown, et al. v. Philip Morris USA Inc., et al., (In Re: Tobacco II Cases), Case No.
711400, Superior Court of California, County of San Diego (case filed 10/01/97). The action
was brought against the major U.S. cigarette manufacturers, including Liggett, seeking to
recover restitution, disgorgement of profits and other equitable relief under California
Business and Professions Code. In April 2001, under the California Unfair Competition Laws
and the Consumer Legal Remedies Act, the court granted in part the plaintiffs motion for
certification of a class composed of residents of California who smoked at least one of the
defendants cigarettes from June 10, 1993 through April 23, 2001, and who were exposed to
the defendants marketing and advertising activities in California. Certification was
granted as to the plaintiffs claims that the defendants violated § 17200 of the California
Business and Professions Code pertaining to unfair competition. The court, however, refused
to certify the class under the California Legal Remedies Act or the plaintiffs common law
claims. Following the November 2004 passage of a proposition in California that changed the
law regarding cases of this nature, the defendants moved to decertify the class. In March
2005, the court granted the defendants motion, and plaintiffs appealed that decertification
order. In September 2006, the California Court of Appeal affirmed the class
decertification order. In May 2009, the California Supreme Court reversed the class
decertification order and remanded the case for further proceedings regarding whether there
are class representatives that can demonstrate standing. In June 2009, the defendants filed
a Petition for Rehearing in the California Supreme Court, which was denied by the court in
August 2009. Additionally, in September 2009, plaintiffs counsel informed the trial court
that plaintiffs intend to seek reconsideration of the trial courts September 2004 order
finding that plaintiffs allegations regarding lights cigarettes are preempted by federal
law. Plaintiffs contend that the recent decision in Altria v. Good, by the United States
Supreme Court, necessitates reconsideration of the trial courts September 2004 preemption
ruling. In March 2010, the trial court granted reconsideration of its September 2004 order
granting partial summary judgment to defendants with respect to plaintiffs lights claims
on the basis of judicial decisions issued since its order was issued, including the United
States Supreme Courts ruling in Altria, thereby
9
reinstating plaintiffs lights claims. Since the trial courts prior ruling decertifying
the class was reversed on appeal by the California Supreme Court, the parties and the court
are treating all claims currently being asserted by the plaintiffs as certified, subject,
however, to defendants challenge to the class representatives standing to assert their
claims. In December 2010, defendants filed a motion for a determination that the class
representatives lack standing and are not adequate to represent the class. Argument on this
motion is scheduled for February 23, 2011. Trial is scheduled to start on 05/06/11.
Cleary, et al. v. Philip Morris, Inc., et al., Case No. 09-cv-01596, USDC Northern
District of Illinois (case was originally filed 06/03/98 in Circuit Court of Cook County,
Illinois). The action was brought on behalf of persons who have allegedly been injured by
(1) the defendants purported conspiracy pursuant to which defendants allegedly concealed
material facts regarding the addictive nature of nicotine; (2) the defendants alleged acts
of targeting their advertising and marketing to minors; and (3) the defendants claimed
breach of the publics right to defendants compliance with laws prohibiting the
distribution of cigarettes to minors. The plaintiffs seek disgorgement of all profits
unjustly received through defendants sale of cigarettes to plaintiffs. In March 2009,
plaintiffs filed a Third Amended Complaint replacing one named class representative with a
new plaintiff and adding new allegations regarding defendants sale of light cigarettes.
In March 2009, defendants filed a notice of removal to the United States District Court for
the Northern District of Illinois. In November 2009, plaintiffs filed a revised motion for
class certification. On February 1, 2010, the court granted summary judgment in favor of
defendants as to all claims, other than a lights claim involving another cigarette
manufacturer. On February 22, 2010, the court denied plaintiffs motion for class
certification as to each purported class of plaintiffs, but, allowed plaintiffs an
opportunity to reinstate the motion as to the addiction claim, if the plaintiffs identified
a new class representative, which they did, on April 13, 2010. Plaintiffs filed a Fourth
Amended Complaint in an attempt to resurrect their addiction claims. In June 2010, the
court granted defendants motion to dismiss the Fourth Amended Complaint. Plaintiffs motion
for reconsideration was denied by the court. In August 2010, plaintiffs appealed to the
United States Court of Appeals for the Seventh Circuit.
In Re: Tobacco Litigation (Personal Injury Cases), Case No. 00-C-5000, Circuit
Court, West Virginia, Ohio County (case filed 01/18/00). Although not technically a class
action, the court consolidated approximately 750 individual smoker actions that were pending
prior to 2001 for trial on some common related issues. Liggett was severed from trial of
the consolidated action. Trial commenced in June 2010 and ended in a mistrial. A new trial
is scheduled for 10/17/11.
Parsons, et al. v. A C & S Inc., et al., Case No. 98-C-388, Circuit Court, West
Virginia, Kanawha County (case filed 04/09/98). This personal injury class action is
brought on behalf of plaintiffs decedent and all West Virginia residents who allegedly have
personal injury claims arising from their exposure to cigarette smoke and asbestos fibers.
The case is stayed as a result of the December 2000 bankruptcy petitions filed by three
defendants in the United States Bankruptcy Court for the District of Delaware.
Young, et al. v. American Brands Inc., et al., Case No. 97-19984cv, Civil District
Court, Louisiana, Orleans Parish (case filed 11/12/97). This purported personal injury
class action is brought on behalf of plaintiff and all similarly situated residents in
Louisiana who, though not themselves cigarette smokers, have been exposed to secondhand
smoke from cigarettes which were manufactured by the defendants, and who suffered injury as
a result of that exposure. The class has not been certified. The plaintiffs seek to
recover an unspecified amount of compensatory and punitive damages. In October 2004, the
trial court stayed this case pending the outcome of an appeal in Scott v. American Tobacco
Co.
10
b) Price Fixing
Smith, et al. v. Philip Morris, Inc., et al., Case No. 00-cv-26, District Court,
Kansas, Seward County (case filed 02/07/00). In this class action, plaintiffs allege that
defendants conspired to fix, raise, stabilize, or maintain prices for cigarettes in Kansas.
The court granted class certification in November 2001 and discovery is proceeding. A status
conference was conducted in August 2010 at which time the court ordered the parties to
non-binding mediation.
III. HEALTH CARE COST RECOVERY ACTIONS
City of St. Louis, et al. v. American Tobacco Company, Inc., et al., Case No.
cv-982-09652, Circuit Court, Missouri, City of St. Louis (case filed 11/16/98). The City of
St. Louis and approximately 38 hospitals and former hospitals seek to recover past and
future costs expended to provide healthcare to charity and bad debt patients suffering from
tobacco-related illnesses, as well as the increased costs associated with the treatment of
all patients, from defendants, including Liggett Group LLC and Liggett & Myers Inc. In June
2005, the court granted defendants motion for summary judgment as to claims for damages
which accrued prior to November 16, 1993. In April 2010, the court further determined that
each plaintiff is barred from seeking any damages which accrued more than five years prior
to the time that that plaintiff joined the suit. In that same order, the court granted
partial summary judgment for defendants barring plaintiffs claim for future damages, which
include damages that may accrue after August 23, 2007 or a later date (but prior to trial)
as the court may determine by subsequent order. In June 2010, the court denied
plaintiffs motion for summary judgment asserting collateral estoppel. In July 2010, the
court granted in part defendants motion for partial summary judgment based on preemption,
regarding: failure to warn claims, whether sounding in negligence or in strict liability;
negligent omission (although not including the negligent misrepresentation or fraudulent
omission claims); and targeted marketing claims. On October 8, 2010, the Court granted
partial summary judgment on claims alleging misrepresentation, concealment and omission
based upon the plaintiffs failure to prove reliance. Claims for civil
conspiracy, aiding and abetting, strict liability, negligent design, restitution and
punitive damages are pending. Defendants have filed other summary judgment motions that
remain pending. Trial commenced 01/31/11.
Crow Creek Sioux Tribe v. The American Tobacco Company, et al., Case No.
cv-97-09-082, Tribal Court of the Crow Creek Sioux Tribe, South Dakota (case filed
09/26/97). The plaintiff seeks to recover actual and punitive damages, restitution,
funding of a clinical cessation program, funding of a corrective public education program
and disgorgement of unjust profits from sales to minors. The case is dormant.
General Health Services (Kupat Holim Clalit) v. Philip Morris, Inc., et al., Case
No. 1571/98, District Court, Jerusalem, Israel (case filed 09/28/98). General Health
Services seeks to recover the past and future value of the total expenditures for
health-care services provided to residents of Israel resulting from tobacco related disease
along with interest, increased and/or exemplary damages and costs. Motions filed by the
defendants are pending before the Israel Supreme Court.
National Committee to Preserve Social Security and Medicare, et al. v. Philip Morris
USA, Inc., et al., 08-cv-02021, USDC, Eastern District of New York (case filed
05/20/08). Plaintiffs filed this action pursuant to the Medicare as Secondary Payer statute
to recover for Medicare expenditures made from May 21, 2002 to the present. In July 2008,
defendants filed a motion to
11
dismiss and plaintiffs filed a motion for partial summary judgment. In March 2009, the
court granted defendants motion to dismiss. In May 2009, plaintiffs noticed an appeal to
the United States Court of Appeals for the Second Circuit and in September 2010, the court
vacated the district courts decision with instructions to dismiss the case on other
grounds. Plaintiffs motion for rehearing was denied by the court and on December 20, 2010,
the court remanded the case to the district court with instructions to dismiss the
complaint.
12
exv99w2
Exhibit 99.2
Liggett Group LLC and
Subsidiaries
Consolidated Financial Statements
as of December 31, 2010 and 2009,
and for each of the three years
ended December 31, 2010, 2009 and 2008
Liggett Group LLC and Subsidiaries
Index
December 31, 2010 and 2009
|
|
|
|
|
|
|
Page(s) |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
1 |
|
Consolidated Financial Statements |
|
|
|
|
Consolidated Balance Sheets as of December 31, 2010 and 2009 |
|
|
2-3 |
|
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 |
|
|
4 |
|
Consolidated Statement of Members Investment |
|
|
5 |
|
Consolidated Statements of Cash Flows |
|
|
6-7 |
|
Notes to Consolidated Financial Statements |
|
|
8-43 |
|
Consolidated Financial Statement Schedule |
|
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
|
44 |
|
Report of Independent Registered Public Accounting Firm
To the Managers and the
Member of Liggett Group LLC:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Liggett Group LLC and its subsidiaries
(the Company), a wholly-owned subsidiary of Vector Group, Ltd., at December 31, 2010 and 2009,
and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2010 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers
Raleigh, North Carolina
February 25, 2011
1
Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets
December 31, 2010 and 2009
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5 |
|
|
$ |
9 |
|
Accounts receivable |
|
|
|
|
|
|
|
|
Trade, less allowances of $230 and $336, respectively |
|
|
1,683 |
|
|
|
7,480 |
|
Related parties |
|
|
14,303 |
|
|
|
10,905 |
|
Other |
|
|
443 |
|
|
|
980 |
|
Inventories |
|
|
101,715 |
|
|
|
92,703 |
|
Restricted assets |
|
|
2,069 |
|
|
|
3,138 |
|
Tax receivable from parent |
|
|
|
|
|
|
26,147 |
|
Deferred taxes |
|
|
3,702 |
|
|
|
573 |
|
Other current assets |
|
|
1,284 |
|
|
|
1,080 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
125,204 |
|
|
|
143,015 |
|
Property, plant and equipment, net |
|
|
52,713 |
|
|
|
37,916 |
|
Prepaid pension costs |
|
|
13,935 |
|
|
|
8,994 |
|
Restricted assets |
|
|
5,883 |
|
|
|
2,012 |
|
Due from related parties |
|
|
|
|
|
|
1,254 |
|
Deferred taxes |
|
|
531 |
|
|
|
975 |
|
Other assets |
|
|
13,459 |
|
|
|
13,091 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
211,725 |
|
|
$ |
207,257 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
Liggett Group LLC and Subsidiaries
Consolidated Balance Sheets (continued)
December 31, 2010 and 2009
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Members Investment |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of long-term debt |
|
$ |
4,367 |
|
|
$ |
2,551 |
|
Revolving credit facility |
|
|
35,710 |
|
|
|
17,382 |
|
Current portion of pension and post-retirement liabilities |
|
|
1,014 |
|
|
|
1,029 |
|
Accounts payable trade |
|
|
6,375 |
|
|
|
2,462 |
|
Accrued promotional expenses |
|
|
13,811 |
|
|
|
12,099 |
|
Income taxes payable |
|
|
19,675 |
|
|
|
266 |
|
Other accrued taxes, principally excise taxes |
|
|
18,507 |
|
|
|
24,088 |
|
Estimated allowance for sales returns |
|
|
3,850 |
|
|
|
3,330 |
|
Settlement accruals |
|
|
45,448 |
|
|
|
16,080 |
|
Deferred taxes |
|
|
2,275 |
|
|
|
767 |
|
Other current liabilities |
|
|
1,718 |
|
|
|
1,379 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
152,750 |
|
|
|
81,433 |
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
|
20,885 |
|
|
|
9,056 |
|
Non-current employee benefits |
|
|
16,279 |
|
|
|
19,804 |
|
Deferred income taxes |
|
|
1,659 |
|
|
|
1,387 |
|
Other long-term liabilities |
|
|
26,216 |
|
|
|
19,424 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
217,789 |
|
|
|
131,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Members Investment |
|
|
|
|
|
|
|
|
Contributed capital |
|
|
10,346 |
|
|
|
67,088 |
|
Accumulated other comprehensive loss |
|
|
(16,410 |
) |
|
|
(21,749 |
) |
Retained earnings |
|
|
|
|
|
|
30,814 |
|
|
|
|
|
|
|
|
Total members investment |
|
|
(6,064 |
) |
|
|
76,153 |
|
|
|
|
|
|
|
|
|
|
$ |
211,725 |
|
|
$ |
207,257 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Liggett Group LLC and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues * |
|
$ |
957,222 |
|
|
$ |
762,208 |
|
|
$ |
529,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
766,662 |
|
|
|
563,773 |
|
|
|
326,682 |
|
Operating, selling, administrative and
general expenses |
|
|
59,798 |
|
|
|
52,827 |
|
|
|
51,147 |
|
Management fees paid to Vector Group Ltd. |
|
|
8,020 |
|
|
|
7,723 |
|
|
|
7,439 |
|
Net (gain)/loss on sale of assets |
|
|
80 |
|
|
|
128 |
|
|
|
(335 |
) |
Legal
judgment and settlement charges |
|
|
16,161 |
|
|
|
0 |
|
|
|
0 |
|
Gain on sale of trademarks |
|
|
|
|
|
|
(5,000 |
) |
|
|
|
|
Restructuring and impairment charges |
|
|
|
|
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
106,501 |
|
|
|
142,757 |
|
|
|
144,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
36 |
|
|
|
102 |
|
|
|
848 |
|
Interest expense |
|
|
(1,040 |
) |
|
|
(802 |
) |
|
|
(1,595 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
105,497 |
|
|
|
142,057 |
|
|
|
143,446 |
|
Income tax provision |
|
|
(41,103 |
) |
|
|
(52,643 |
) |
|
|
(55,074 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
64,394 |
|
|
$ |
89,414 |
|
|
$ |
88,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Revenues and cost of goods sold include excise taxes of $484,115, $325,407, and $145,958 for the years ended
December 31, 2010, 2009, and 2008, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
4
Liggett Group LLC and Subsidiaries
Consolidated Statement of Members Investment
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Retained |
|
|
|
|
|
|
Contributed |
|
|
Comprehensive |
|
|
Earnings/ |
|
|
|
|
|
|
Capital |
|
|
Income (Loss) |
|
|
(Deficit) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
$ |
69,453 |
|
|
$ |
3,528 |
|
|
$ |
11,373 |
|
|
$ |
84,354 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
88,372 |
|
|
|
88,372 |
|
Change in pension related amounts, net of taxes |
|
|
|
|
|
|
(32,813 |
) |
|
|
|
|
|
|
(32,813 |
) |
Change in fair value of forward contracts, net of taxes |
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of SFAS No. 158 measurement date |
|
|
|
|
|
|
(11 |
) |
|
|
740 |
|
|
|
729 |
|
Distributions |
|
|
(2,365 |
) |
|
|
|
|
|
|
(100,485 |
) |
|
|
(102,850 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
67,088 |
|
|
|
(29,261 |
) |
|
|
|
|
|
|
37,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
89,414 |
|
|
|
89,414 |
|
Change in pension related amounts, net of taxes |
|
|
|
|
|
|
7,476 |
|
|
|
|
|
|
|
7,476 |
|
Change in fair value of forward contracts, net of taxes |
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,926 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
(58,600 |
) |
|
|
(58,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009 |
|
|
67,088 |
|
|
|
(21,749 |
) |
|
|
30,814 |
|
|
|
76,153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
64,394 |
|
|
|
64,394 |
|
Change in pension related amounts, net of taxes |
|
|
|
|
|
|
5,290 |
|
|
|
|
|
|
|
5,290 |
|
Change in fair value of forward contracts, net of taxes |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
(56,742 |
) |
|
|
|
|
|
|
(95,208 |
) |
|
|
(151,950 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010 |
|
$ |
10,346 |
|
|
$ |
(16,410 |
) |
|
$ |
|
|
|
$ |
(6,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Membership interests are pledged as collateral for Liggett Group LLCs guarantee of Parents debt. See Note 1.
The accompanying notes are an integral part of these consolidated financial statements.
5
Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
64,394 |
|
|
$ |
89,414 |
|
|
$ |
88,372 |
|
Adjustments to reconcile net income to net cash provided by
operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,475 |
|
|
|
7,170 |
|
|
|
6,766 |
|
Deferred income taxes |
|
|
(916 |
) |
|
|
(9,554 |
) |
|
|
(3,684 |
) |
(Gain) loss on sale of assets |
|
|
76 |
|
|
|
127 |
|
|
|
(335 |
) |
Restructuring charges, changes in estimates |
|
|
|
|
|
|
|
|
|
|
(35 |
) |
Cash payments on restructuring liabilities |
|
|
|
|
|
|
(110 |
) |
|
|
(88 |
) |
Changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
5,797 |
|
|
|
1,590 |
|
|
|
(6,344 |
) |
Related party receivable |
|
|
24,003 |
|
|
|
1,409 |
|
|
|
(4,927 |
) |
Other receivables |
|
|
537 |
|
|
|
(306 |
) |
|
|
(390 |
) |
Inventories |
|
|
(9,012 |
) |
|
|
(4,932 |
) |
|
|
(5,344 |
) |
Income taxes payable |
|
|
19,420 |
|
|
|
(37,719 |
) |
|
|
(258 |
) |
Other assets |
|
|
(360 |
) |
|
|
(1,537 |
) |
|
|
(1,145 |
) |
Accounts payable, trade |
|
|
3,401 |
|
|
|
(1,085 |
) |
|
|
(1,085 |
) |
Accrued expenses |
|
|
26,357 |
|
|
|
15,869 |
|
|
|
12,301 |
|
Employee benefits |
|
|
(3,191 |
) |
|
|
(2,012 |
) |
|
|
15,893 |
|
Other long-term liabilities |
|
|
6,792 |
|
|
|
6,595 |
|
|
|
4,669 |
|
Change in book overdraft |
|
|
512 |
|
|
|
(63 |
) |
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
145,285 |
|
|
|
64,856 |
|
|
|
104,564 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sale of property, plant and equipment |
|
|
187 |
|
|
|
70 |
|
|
|
404 |
|
(Increase) decrease in restricted assets |
|
|
(2,802 |
) |
|
|
1,678 |
|
|
|
1,054 |
|
Increase in cash surrender value of life insurance policies |
|
|
(261 |
) |
|
|
(256 |
) |
|
|
(230 |
) |
Capital expenditures |
|
|
(22,436 |
) |
|
|
(2,593 |
) |
|
|
(5,453 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(25,312 |
) |
|
|
(1,101 |
) |
|
|
(4,225 |
) |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Liggett Group LLC and Subsidiaries
Consolidated Statements of Cash Flows (continued)
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of debt |
|
|
(8,629 |
) |
|
|
(3,990 |
) |
|
|
(4,631 |
) |
Proceeds from the issuance of debt |
|
|
22,274 |
|
|
|
|
|
|
|
2,745 |
|
Borrowings under revolving credit facility |
|
|
1,034,894 |
|
|
|
749,476 |
|
|
|
531,251 |
|
Repayments under revolving credit facility |
|
|
(1,016,566 |
) |
|
|
(751,609 |
) |
|
|
(526,518 |
) |
Distributions to Parent |
|
|
(151,950 |
) |
|
|
(58,600 |
) |
|
|
(102,850 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(119,977 |
) |
|
|
(64,723 |
) |
|
|
(100,003 |
) |
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(4 |
) |
|
|
(968 |
) |
|
|
336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
9 |
|
|
|
977 |
|
|
|
641 |
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
5 |
|
|
$ |
9 |
|
|
$ |
977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments during the period for |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
737 |
|
|
$ |
804 |
|
|
$ |
1,595 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
1 |
|
|
$ |
420 |
|
|
$ |
39 |
|
|
|
|
|
|
|
|
|
|
|
Tax sharing payments to Parent |
|
$ |
|
|
|
$ |
104,050 |
|
|
$ |
39,100 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities
|
|
|
Liggett recorded other comprehensive loss of ($32,813) (net
of taxes) in 2008 and $5,290 (net of taxes)
and $7,476 (net of taxes) in other comprehensive income during 2010 and 2009, respectively,
in relation to certain of its pension plans (Note 5). In 2010, 2009 and 2008, Liggett
recorded $49 (net of taxes), $36 (net of taxes), and $35 (net of taxes), respectively, in
comprehensive income in relation to the change in fair value of forward contracts. |
The accompanying notes are an integral part of these consolidated financial statements.
7
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
1. |
|
Basis of Presentation |
|
|
|
Liggett Group LLC (Liggett or the Company) is a wholly-owned subsidiary of VGR Holding
LLC (VGR), all of whose membership interests are owned by Vector Group Ltd. (Vector or
Parent). Liggett is engaged primarily in the manufacture and sale of discount cigarettes,
principally in the United States. Certain management and administrative functions are
performed by affiliates (Note 11). |
|
|
|
Management believes the assumptions underlying the consolidated financial statements are
reasonable. However, the consolidated financial statements included herein may not
necessarily reflect the Companys results of operations, financial position and cash flows in
the future or what its results of operations, financial position and cash flows would have
been had the Company been a stand-alone company during the periods presented. All
significant intercompany accounts and transactions have been eliminated in consolidation. |
|
|
|
Liggett Vector Brands Inc. (Liggett Vector Brands), a company related through common
ownership, coordinates and executes the sales, marketing, administration and manufacturing
efforts along with certain support functions for all of Vectors tobacco operations. In
conjunction with the duties performed at Liggett Vector Brands, a portion of its sales,
marketing, manufacturing, distribution, and administrative expenses have been allocated to
Liggett. |
|
|
|
Vector and VGR are holding companies and as a result do not have any operating activities
that generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR
and its other subsidiaries and investments and VGR relies on distributions from its other
subsidiaries, including Liggett, in order to fund its operations and meet its obligations.
Vector has certain debt outstanding which require interest and principal payments over
the terms of such debt. Interest and principal to service the debt is expected to be funded
by Vectors cash and cash equivalents, investments, the operations of Vectors subsidiaries,
including Liggett, and proceeds, if any, from Vectors future financings. During 2010, 2009,
and 2008, Liggett made distributions of $151,950, $58,600, and $102,850, respectively, to
VGR. VGR must redeem $11,000 of its outstanding 3.875% Variable Interest Senior Convertible
Debentures by June 15, 2011. |
|
|
|
The Company has evaluated events that occurred subsequent to
December 31, 2010, through the financial statement issue date of
February 25, 2011 and determined that there were no recordable
or reportable subsequent events. |
|
|
|
11% Senior Secured Notes due 2015 Vector |
|
|
|
Vector has outstanding $415,000 principal amount of its 11% Senior Secured Notes due 2015
(the Senior Secured Notes). The Senior Secured Notes were sold in August 2007 ($165,000),
September 2009 ($85,000), April 2010 ($75,000) and December 2010 ($90,000) in private
offerings to qualified institutional investors in accordance with Rule 144A of the Securities
Act of 1933. |
|
|
|
In May 2008 and June 2010, Vector completed offers to exchange the Senior Secured Notes then
outstanding for an equal amount of newly issued 11% Senior Secured Notes due 2015. The new Senior
Secured Notes have substantially the same terms as the original Notes, except that the new Senior
Secured Notes have been registered under the Securities Act. Vector agreed to consummate a registered exchange offer for the additional Senior Secured Notes issued in
December 2010 within 360 days after the date of their initial issuance. If Vector fails to
timely comply with its registration obligations, it will be required to pay additional
interest on these notes until it complies. |
|
|
|
The Senior Secured Notes pay interest on a semi-annual basis at a rate of 11% per year
and mature on August 15, 2015. Vector may redeem some or all of the Senior Secured Notes
at any time prior
|
8
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
to August 15, 2011
at a make-whole redemption price. On or after August
15, 2011 Vector may redeem some or all of the Senior Secured Notes at a premium that will
decrease over time, plus accrued and unpaid interest and liquidated damages, if any, to
the redemption date. In the event of a change of control, as defined in the indenture
governing the Senior Secured Notes, each holder of the Senior Secured Notes may require
Vector to repurchase some or all of its Senior Secured Notes at a repurchase price equal
to 101% of their aggregate principal amount plus accrued and unpaid interest and
liquidated damages, if any to the date of purchase. |
|
|
|
The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several
basis by all of the 100% owned domestic subsidiaries of the Company that are engaged in the
conduct of the Companys cigarette businesses, including Liggett. Liggetts stock has been
pledged as collateral for the guarantee of the Senior Secured Notes. Liggetts consolidated
balance sheet, statement of operations and statement of stockholders equity (deficit) as of
December 31, 2010 and 2009 and for each of the three years in the period ended December 31,
2010 do not reflect any accounts related to these notes as the debt is not acquisition
related. |
|
|
|
Liggetts cash flows from operations may be utilized to fund the interest and debt obligation
of the Senior Secured Notes via distributions by Liggett to Vector. |
|
|
|
Additional Parent Company Notes |
|
|
|
As of December 31, 2010, Vector has debt with a net amount of approximately $81,404 (face
amount $267,530) in addition to the Senior Secured Notes previously discussed. This $81,404
is not reflected in Liggetts consolidated financial statements as these obligations are not
collateralized by the Liggett assets nor has Liggett guaranteed these obligations. It is
anticipated that the majority of the payments on this $81,404 will be funded by Liggetts
operations. |
|
|
|
In addition to the Senior Secured Notes, the Company may have to fund certain deferred tax
liabilities of Vector (Note 6). |
|
|
|
General Corporate Expenses |
|
|
|
General corporate expense allocations represent costs related to corporate functions such as
executive oversight, risk management, information technology, accounting, legal, investor
relations, human resources, tax, other services and employee benefits and incentives Vector
provides to the Company. The allocations are based on a reasonable estimation of Vectors
overhead expenses based on the relative specific identification and the relative percentage
of the Companys revenues and headcount to Vectors total cost. All of these allocations are
reflected in management fees
paid to Vector in the Companys consolidated statements of operations of $8,020, $7,723 and
$7,439 in 2010, 2009 and 2008, respectively. |
|
|
|
The Company and Vector considered these general corporate expense allocations to be a
reasonable reflection of the utilization of services provided. The allocations may not,
however, reflect the expense the Company would have incurred as a stand-alone company.
Actual costs which may have been incurred if the Company had been a stand-alone company in
2010, 2009 and 2008 would depend on a number of factors, including how the Company chose to
organize itself, what if any functions were outsourced or performed by Company employees and
strategic decisions made in areas such as information technology systems and infrastructure.
However, the Company currently does not believe the difference between the cost allocations
from Vector and the costs the Company would have incurred on a stand-alone basis would have a
material impact on the Companys statements of operations, balance sheets or statements of
cash flows for 2010, 2009 and 2008. |
9
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
2. |
|
Summary of Significant Accounting Policies |
|
|
|
Principles of Consolidation |
|
|
|
The consolidated financial statements include the accounts of Liggett and its wholly-owned
subsidiaries, Eve Holdings Inc., 100 Maple LLC and Liggett & Myers Holdings Inc. All
significant intercompany balances and transactions have been eliminated. |
|
|
|
Estimates and Assumptions |
|
|
|
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
December 31, 2010 and 2009 and the reported amounts of revenues and expenses during the three
years ended December 31, 2010, 2009 and 2008, respectively. Significant estimates subject to
material changes in the near term include restructuring and impairment charges, inventory
valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales
returns and allowances, actuarial assumptions of pension plans, settlement accruals including
Master Settlement Agreement (MSA) liabilities, and litigation and defense costs. Actual
results could differ from those estimates. |
|
|
|
Cash and Cash Equivalents |
|
|
|
For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in banks
and cash equivalents, comprised of short-term investments which have an original maturity of 90
days or less. The carrying value of cash and cash equivalents, restricted assets and short-term
loans approximate their fair value. The Company places its cash and cash equivalents with large
commercial banks. The Federal Deposit Insurance Corporation (FDIC) and Securities
Investor Protection Corporation (SIPC) insure these balances, up to $250 and $500,
respectively. The carrying amount of bank deposits, including amounts classified as cash
and cash equivalents,
were approximately $5 and $9 at December 31, 2010 and 2009, respectively. All bank deposits
at December 31, 2010 and December 31, 2009 are insured by the FDIC. |
|
|
|
Accounts Receivable |
|
|
|
Accounts receivable-trade are recorded at their net realizable value. The allowance for
doubtful accounts and cash discounts was $230 and $336 at December 31, 2010 and 2009,
respectively. |
|
|
|
Inventories |
|
|
|
Tobacco inventories are stated at the lower of cost or market with cost determined using the
last-in, first-out method. Although portions of leaf tobacco inventories may not be used or
sold within one year because of the time required for aging, they are included in current
assets, which is common practice in the cigarette industry. It is not practicable to
determine the amount that will not be used or sold within one year. |
|
|
|
Restricted Assets |
|
|
|
Restricted assets of $2,069 at December 31, 2010 were classified as current assets. This
balance consisted of legal bonds posted in connection with ongoing litigation. Long-term
restricted assets of $5,883 at December 31, 2010 consisted of deposits associated with
financed equipment and legal bonds posted in connection with ongoing
litigation. |
10
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
Restricted assets of $3,138 at December 31, 2009 were classified as
current assets. This balance consisted of legal bonds posted in connection with ongoing
litigation. Long-term restricted assets of $2,012 at December 31, 2009 consisted of deposits
associated with financed equipment. |
|
|
|
Property, Plant and Equipment |
|
|
|
Property, plant and equipment are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the respective assets which are 20 years for
buildings and four to ten years for machinery and equipment. |
|
|
|
Expenditures for repairs and maintenance are charged to expense as incurred. The costs of
major renewals and betterments are capitalized. The cost and related accumulated
depreciation of property, plant and equipment are removed from the accounts upon retirement
or other disposition and any resulting gain or loss is reflected in operations. |
|
|
|
The Company reviews long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of an asset may not be recoverable.
Accordingly, when indicators of impairment are present, the Company evaluates the carrying
value of property, plant and equipment against their related future undiscounted cash flows.
If the carrying value is greater than such cash flows, then impairment is deemed to exist.
The amount of any impairment is determined by comparing the long-lived assets carrying value
against its fair value, which is determined using discounted future cash flows. |
|
|
|
Other Assets |
|
|
|
Included in other current assets are point-of-sale materials of $381 and $304 as of December
31, 2010 and 2009, respectively. The remaining balances of $903 and $776 at December 31,
2010 and 2009, respectively, relate to prepaid expenses and deposits. |
|
|
|
Other non-current assets include spare parts for property, plant and equipment of $5,057 and
$4,744, net of reserves of $1,236 and $1,139, as of December 31, 2010 and 2009, respectively. |
|
|
|
Deferred financing charges of $56 and $104 as of December 31, 2010 and 2009, respectively,
relate to the Companys debt agreement with Wells Fargo and have been recorded as other
assets. The Company recognized amortization expense of $48 in 2010, 2009, and 2008 related
to deferred finance charges |
|
|
|
The remaining balances of $8,346 and $8,243 at December 31, 2010 and 2009, respectively,
relate primarily to other receivables, and pre-paids. |
|
|
|
Revenue Recognition |
|
|
|
Revenues from sales are recognized upon the shipment of finished goods when title and risk of
loss have passed to the customer, there is persuasive evidence of an arrangement, the sale
price is determinable and collectibility is reasonably assured. The Company provides an
allowance for expected sales returns, net of any related inventory cost recoveries. Certain
sales incentives, including buydowns, are classified as reductions of net sales. The Company
includes federal excise taxes in revenues and cost of goods sold. Such revenues and cost of
goods sold totaled $484,115, $325,407 and $145,958 for the years ended December 31, 2010,
2009 and 2008, respectively. The large increase in 2009 from 2008 was due to the $6.17 per
carton increase implemented on April 1, 2009. Since the Companys line of business is
tobacco, the Companys |
11
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
financial position and its results of operations and cash flows have
been and could continue to be materially adversely affected by significant unit sales volume
declines, litigation and defense costs, increased tobacco costs or reductions in the selling
price of cigarettes in the near term. |
|
|
|
Shipping and Handling Fees and Costs |
|
|
|
Shipping and handling fees related to sales transactions are not billed to customers nor
recorded as sales revenue. Shipping and handling costs, which were $4,784, $3,487 and $3,914
for 2010, 2009 and 2008, respectively, are recorded in selling, general and administrative
expenses. |
|
|
|
Advertising Costs |
|
|
|
Advertising and related agency costs are expensed as incurred and were $2,966, $3,145 and
$3,255 for the years ended December 31, 2010, 2009 and 2008, respectively. These costs are
recorded as selling, general and administrative expenses. |
|
|
|
Research and Development Costs |
|
|
|
Research and development costs are expensed as incurred, and were $1,058, $981 and $1,028 for
the years ended December 31, 2010, 2009 and 2008, respectively. |
|
|
|
Stock-Based Compensation |
|
|
|
The Company, through an affiliate, accounts for stock compensation plans by measuring
compensation cost for share-based payments at fair value. |
|
|
|
Employee Benefits |
|
|
|
The Company sponsors a postretirement benefit plan and records an actuarially determined
liability and charges operations for the estimated cost of postretirement benefits for
current employees and retirees. |
|
|
|
The cost of providing retiree pension benefits, health care and life insurance benefits is
actuarially determined and accrued over the service period of the active employee group. The
funded status of each defined benefit pension plan, retiree health care and other
postretirement benefit plans and postemployment benefit plans is recognized on the balance
sheet. The measurement date for determining the funded status of the plans is December 31,
2010 and 2009. (See Note 5.) |
|
|
|
Income Taxes |
|
|
|
The Company recognizes the financial statement impact of a tax position when it is more
likely than not that the position will be sustained upon examination. If the tax position
meets the more-likely-than-not recognition threshold, the tax effect is recognized at the
largest amount of the benefit that is greater than 50% likely of being realized upon ultimate
settlement. Any liabilities created for unrecognized deferred tax benefits are presented as a
liability and not combined with deferred tax liabilities or assets. |
|
|
|
Deferred taxes reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the amounts recognized for tax
purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes
are measured by applying currently enacted tax rates. A valuation allowance reduces deferred
tax assets when it is |
12
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
deemed more likely than not that future taxable income will be
insufficient to realize some portion or all of the deferred tax assets. |
|
|
|
Liggetts U.S. income tax provision and related deferred income tax amounts are determined as
if the Company filed tax returns on a standalone basis. The Companys entities currently
join in the filing of a consolidated U.S. tax return with Vector and its other U.S.
subsidiaries. |
|
|
|
Contingencies |
|
|
|
The Company records product liability legal expenses and other litigation costs as selling,
general and administrative expenses as those costs are incurred. As discussed in Note 10,
legal
proceedings covering a wide range of matters are pending or threatened in various
jurisdictions against Liggett. |
|
|
|
The Company records provisions in its consolidated financial statements for pending
litigation when it is determined that an unfavorable outcome is probable and the amount of
loss can be reasonably estimated. At the present time, while it is reasonably possible
that an unfavorable outcome in a case may occur, except as disclosed
in Note 10, (i) management has concluded that it is not
probable that a loss has been incurred in any of the pending tobacco-related cases; (ii)
management is unable to estimate the possible loss or range of loss that could result from an
unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly,
management has not provided any amounts in the consolidated financial statements for
unfavorable outcomes, if any. Legal defense costs are expensed
as incurred. Litigation is subject to many uncertainties, and it is possible that the
Companys consolidated financial position, results of operations or cash flows could be
materially adversely affected by an unfavorable outcome in any such
tobacco-related
litigation. |
|
|
|
Distributions and Dividends on Common Stock |
|
|
|
The Company records distributions on its common stock as dividends in its consolidated
statement of members investment to the extent of retained earnings. Any amounts exceeding
retained earnings are recorded as a reduction to contributed capital. |
|
|
|
Comprehensive Income |
|
|
|
Other comprehensive income is a component of members investment and relates to pension
related adjustments and the change in the estimated fair value of forward contracts. The
Companys comprehensive income was $69,733, $96,926, and $55,594 for the years ended December
31, 2010, 2009, and 2008, respectively. |
|
|
|
The components of accumulated other comprehensive income (loss), net of taxes, were as
follows at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Forward contracts adjustment, net of taxes of $139
and $165, respectively |
|
$ |
(204 |
) |
|
$ |
(253 |
) |
Pension-related amounts, net of taxes of $9,518 and
$13,038, respectively |
|
|
(16,206 |
) |
|
|
(21,496 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(16,410 |
) |
|
$ |
(21,749 |
) |
|
|
|
|
|
|
|
13
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
This forward contract relates to a prior contract no longer open at December 31, 2010 and
2009, respectively. It is being amortized over the life of the fixed asset originally
associated with the contract. |
|
|
|
Fair Value of Financial Instruments |
|
|
|
The carrying amount of borrowings outstanding under the variable rate revolving credit
facility and other long-term debt is a reasonable estimate of fair value, based upon
estimated current borrowing rates for loans with similar terms and maturities. The estimates
presented herein are not necessarily indicative of the amounts the Company could realize in a
current market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair values. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
December 31, |
|
|
2010 |
|
2009 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
Financial assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5 |
|
|
$ |
5 |
|
|
$ |
9 |
|
|
$ |
9 |
|
Restricted assets |
|
|
7,952 |
|
|
|
7,952 |
|
|
|
5,150 |
|
|
|
5,150 |
|
Financial liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and long-term
debt |
|
$ |
60,962 |
|
|
$ |
60,962 |
|
|
$ |
28,989 |
|
|
$ |
29,225 |
|
14
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
New Accounting Pronouncements |
|
|
|
In January 2010, the Financial Accounting Standards
Board (FASB) issued authoritative guidance intended to improve disclosure about
fair value measurements. The guidance requires entities to disclose significant transfers in
and out of fair value hierarchy levels and the reasons for the transfers and to present
information about purchases, sales, issuances, and settlements separately in the
reconciliation of fair value measurements using significant unobservable inputs (Level 3).
Additionally, the guidance clarifies that a reporting entity should provide fair value
measurements for each class of assets and liabilities and disclose the inputs and valuation
techniques used for fair value measurements using significant other observable inputs (Level
2) and significant unobservable inputs (Level 3). This guidance is effective for interim and
annual periods beginning after December 15, 2009 except for the disclosure about purchases,
sales, issuances and settlements in the Level 3 reconciliation, which will be effective for
annual periods beginning after December 15, 2010. The Company adopted this authoritative
guidance, with the exception of the disclosures about purchases, sales, issuances and
settlements in the Level 3 reconciliation. The adoption of this guidance did not impact the
Companys 2010 consolidated financial statements. The remaining disclosures will be added to
the Companys future filings when applicable |
|
|
|
Concentrations of Credit Risk |
|
|
|
Financial instruments which potentially subject the Company to concentrations of credit risk
consist principally of trade receivables. |
|
|
|
Liggetts customers are primarily candy and tobacco
distributors, the military and large grocery, drug and convenience store
chains. No single retail customer represented more than 10% of
Liggetts revenues in 2010, 2009 and 2008. Concentrations of credit risk with respect to trade receivables are
generally limited due to the large number of customers, located primarily throughout the
United States, comprising Liggetts customer base. Ongoing credit evaluations of
customers financial condition are performed and, generally, no collateral is required.
Liggett maintains reserves for potential credit losses and such losses, in the
aggregate, have generally not exceeded managements expectations. |
|
3. |
|
Inventories |
|
|
|
Inventories consist of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Leaf tobacco |
|
$ |
54,479 |
|
|
$ |
48,613 |
|
Other raw materials |
|
|
4,074 |
|
|
|
3,497 |
|
Work-in-process |
|
|
2,067 |
|
|
|
2,388 |
|
Finished goods |
|
|
62,375 |
|
|
|
53,826 |
|
|
|
|
|
|
|
|
Inventories at current cost |
|
|
122,995 |
|
|
|
108,324 |
|
LIFO adjustment |
|
|
(21,280 |
) |
|
|
(15,621 |
) |
|
|
|
|
|
|
|
|
|
$ |
101,715 |
|
|
$ |
92,703 |
|
|
|
|
|
|
|
|
15
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
The Company has a leaf inventory management program whereby, among other things, it is
committed to purchase certain quantities of leaf tobacco. The purchase commitments are for
quantities not in excess of anticipated requirements and are at prices, including carrying
costs, established at the date of the commitment. Liggett had leaf tobacco purchase
commitments of approximately $41,896 at December 31, 2010. During 2007, the Company entered
into a single source supply agreement for fire safe cigarette paper through 2012. |
|
|
|
|
The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in
ending inventory. The prepaid cost of MSA was $14,627 and $11,909 at December 31, 2010 and
2009, respectively. MSA expense was decreased by $648 in 2010 for 2009 and increased by $598
in 2009 for 2008 as a result of a change in estimate to the MSA assessment. |
|
|
4. |
|
Property, Plant and Equipment |
|
|
|
|
Property, plant and equipment consists of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Land and land improvements |
|
$ |
1,418 |
|
|
$ |
1,418 |
|
Buildings |
|
|
13,722 |
|
|
|
13,722 |
|
Machinery and equipment |
|
|
100,517 |
|
|
|
80,712 |
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
115,657 |
|
|
|
95,852 |
|
Less accumulated depreciation |
|
|
(62,944 |
) |
|
|
(57,936 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
52,713 |
|
|
$ |
37,916 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense for the years ended December 31, 2010, 2009, and 2008 was $7,377,
$7,122, and $6,718, respectively. Future machinery and equipment purchase commitments were
$2,726 at December 31, 2010. |
|
|
5. |
|
Employee Benefits Plans |
|
|
|
|
Defined Benefit Plans |
|
|
|
|
Liggett sponsors three defined benefit pension plans (two qualified and one non-qualified)
covering virtually all individuals who were employed by Liggett on a full-time basis prior to
1994. Future accruals of benefits under these three defined benefit plans were frozen between
1993 and 1995. These benefit plans provide pension benefits for eligible employees based
primarily on their compensation and length of service. Contributions are made to the pension
plans in amounts necessary to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974. The plans assets and benefit obligations were
measured at December 31, 2010 and 2009. |
16
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
Postretirement Medical and Life Plans |
|
|
|
|
The Company provides certain postretirement medical and life insurance benefits to certain
employees. Substantially all manufacturing employees as of December 31, 2010 are eligible for
postretirement medical benefits if they reach retirement age while working for Liggett or
certain affiliates. Retirees are required to fund 100% of participant medical premiums and,
pursuant to union contracts, Liggett reimburses approximately 375 hourly retirees, who
retired prior to 1991, for Medicare Part B premiums. In addition, an affiliate provides life
insurance benefits to approximately 210 active employees and 465 retirees who reach
retirement age and are eligible to receive benefits under one of the Companys defined
benefit pension plans. The Companys postretirement liabilities are comprised of Medicare
Part B and life insurance premiums. |
|
|
|
|
Computation of Defined Benefit and Postretirement Benefit Plan Liabilities |
|
|
|
|
The funded status of each defined pension benefit plan, retiree health care and other
postretirement benefit plans and postemployment benefit plans is recognized on the Companys
consolidated balance sheet. Each overfunded plan is recognized as an asset and each
underfunded plan is recognized as a liability. The initial impact of the standard due to
unrecognized prior service costs or credit and net actuarial gains or losses as well as
subsequent changes in the funded status is recognized as a component of accumulated
comprehensive income (loss) in the Companys consolidated statement of members investment. |
|
|
|
|
The following table summarizes amounts in accumulated other comprehensive (income) loss that
are expected to be recognized as components of net periodic benefit cost (credit) for the
year ending December 31, 2011. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined |
|
|
|
|
|
|
|
|
|
Benefit |
|
|
Post - |
|
|
|
|
|
|
Pension |
|
|
Retirement |
|
|
|
|
|
|
Plan |
|
|
Plans |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial
loss (gain) |
|
$ |
789 |
|
|
$ |
(88 |
) |
|
$ |
701 |
|
|
|
|
|
|
|
|
|
|
|
17
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
The following provides a reconciliation of benefit obligations, plan assets and the funded status
of the pension plans and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Change in benefit obligation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at January 1 |
|
$ |
(127,600 |
) |
|
$ |
(123,850 |
) |
|
$ |
(9,405 |
) |
|
$ |
(8,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
|
(825 |
) |
|
|
(838 |
) |
|
|
(13 |
) |
|
|
(15 |
) |
Interest cost |
|
|
(6,951 |
) |
|
|
(7,895 |
) |
|
|
(521 |
) |
|
|
(566 |
) |
Benefits paid (including expenses) |
|
|
12,265 |
|
|
|
12,551 |
|
|
|
574 |
|
|
|
596 |
|
Time contractual termination benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain/(loss) |
|
|
(3,394 |
) |
|
|
(7,568 |
) |
|
|
(485 |
) |
|
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at December 31 |
|
$ |
(126,505 |
) |
|
$ |
(127,600 |
) |
|
$ |
(9,850 |
) |
|
$ |
(9,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at January 1 |
|
$ |
125,167 |
|
|
$ |
111,266 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual return on plan assets |
|
|
19,731 |
|
|
|
26,087 |
|
|
|
|
|
|
|
|
|
Contributions |
|
|
361 |
|
|
|
365 |
|
|
|
574 |
|
|
|
596 |
|
Benefits paid (including expenses) |
|
|
(12,265 |
) |
|
|
(12,551 |
) |
|
|
(574 |
) |
|
|
(596 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at December 31 |
|
$ |
132,994 |
|
|
$ |
125,167 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at December 31 |
|
$ |
6,489 |
|
|
$ |
(2,433 |
) |
|
$ |
(9,850 |
) |
|
$ |
(9,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension cost |
|
$ |
13,935 |
|
|
$ |
8,994 |
|
|
$ |
|
|
|
$ |
|
|
Other accrued expenses |
|
|
(352 |
) |
|
|
(357 |
) |
|
|
(665 |
) |
|
|
(680 |
) |
Non-current employee benefit liabilities |
|
|
(7,094 |
) |
|
|
(11,070 |
) |
|
|
(9,185 |
) |
|
|
(8,726 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amounts recognized |
|
$ |
6,489 |
|
|
$ |
(2,433 |
) |
|
$ |
(9,850 |
) |
|
$ |
(9,406 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Pension Benefits |
|
Postretirement Benefits |
|
|
2010 |
|
2009 |
|
2008 |
|
2010 |
|
2009 |
|
2008 |
Actuarial assumptions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rates benefit obligation |
|
|
5.25 |
% |
|
|
5.75 |
% |
|
|
6.75 |
% |
|
|
5.25 |
% |
|
|
5.75 |
% |
|
|
6.75 |
% |
Discount rates service cost |
|
|
5.75 |
% |
|
|
6.75 |
% |
|
|
6.25 |
% |
|
|
5.75 |
% |
|
|
6.75 |
% |
|
|
6.25 |
% |
Assumed rates of return on invested assets |
|
|
7.00 |
% |
|
|
7.50 |
% |
|
|
7.50 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Salary increase assumptions |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
3.00 |
% |
|
|
3.00 |
% |
|
|
3.00 |
% |
18
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Pension Benefits |
|
|
Postretirement Benefits |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Service cost benefits earned during the period |
|
$ |
825 |
|
|
$ |
838 |
|
|
$ |
808 |
* |
|
$ |
13 |
|
|
$ |
15 |
|
|
$ |
15 |
|
Interest cost on projected benefit obligation |
|
|
6,951 |
|
|
|
7,895 |
|
|
|
7,862 |
|
|
|
521 |
|
|
|
567 |
|
|
|
591 |
|
Expected return on assets |
|
|
(8,271 |
) |
|
|
(7,817 |
) |
|
|
(12,145 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of net loss (gain) |
|
|
1,358 |
|
|
|
2,136 |
|
|
|
101 |
|
|
|
(130 |
) |
|
|
(163 |
) |
|
|
(180 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (income) expense |
|
$ |
863 |
|
|
$ |
3,052 |
|
|
$ |
(3,374 |
) |
|
$ |
405 |
|
|
$ |
419 |
|
|
$ |
426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
$500 and $350 of this service cost amount represents the expected administrative expenses of the salaried and hourly pension plans in 2010 and 2009 respectively. |
|
|
|
As of December 31, 2010, current year accumulated other comprehensive income (loss), before
income taxes, consist of the following: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined |
|
|
|
|
|
|
|
|
|
Benefit |
|
|
Post- |
|
|
|
|
|
|
Pension |
|
|
Retirement |
|
|
|
|
|
|
Plans |
|
|
Benefits |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior year accumulated other comprehensive income (loss) |
|
$ |
(35,536 |
) |
|
$ |
1,003 |
|
|
$ |
(34,533 |
) |
Amortization of gain (loss) |
|
|
1,358 |
|
|
|
(130 |
) |
|
|
1.228 |
|
Net gain (loss) arising during the year |
|
|
8,066 |
|
|
|
(485 |
) |
|
|
7,581 |
|
|
|
|
|
|
|
|
|
|
|
Current year accumulated other comprehensive income (loss) |
|
$ |
(26,112 |
) |
|
$ |
388 |
|
|
$ |
(25,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, there was $25,724 of items not yet recognized as a component of net
periodic pension costs, which consisted of future pension costs of $26,112 associated with
the amortization of net losses. |
|
|
|
|
As of December 31, 2010, there was $388 of items not yet recognized as a component of net
periodic postretirement benefit, which consisted of future benefits associated with the
amortization of net gains. |
|
|
|
|
As of December 31, 2010, two of the Companys four defined benefit plans experienced
accumulated benefit obligations in excess of plan assets, for which the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were $29,973,
$29,973 and $0, respectively. As of December 31, 2009, three of the Companys four
defined benefit plans experienced accumulated benefit obligations in excess of plan assets,
for which the projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $90,216, $90,216 and $64,385, respectively. |
|
|
|
|
Discount rates were determined by a quantitative analysis examining the prevailing prices of
high quality bonds to determine an appropriate discount rate for measuring obligations. The
aforementioned analysis analyzes the cash flow from each of the Companys two qualified
defined benefit plans as well as a separate analysis of the cash flows from the
postretirement medical and life insurance plans sponsored by the Company. The aforementioned
analyses then construct a hypothetical bond portfolio whose cash flow from coupons and
maturities match the year-by-year, projected benefit cash flow from the respective pension or
retiree health plans. The Company uses the lower discount rate derived from the two
independent analyses in the computation of the benefit obligation and service cost for each
respective retirement liability. |
19
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
The Company considers input from its external advisors and historical returns in
developing its expected rate of return on plan assets. The expected long-term rate of return
is the weighted average of the target asset allocation of each individual asset class. The
Companys actual 10-year annual rate of return on its pension plan assets was 4.8%, 3.0%, and
2.5% for the years ended December 31, 2010, 2009 and 2008, respectively, and the Companys
actual five-year annual rate of return on its pension plan assets was 5.7%, 3.5%, and 1.2%
for the years ended December 31, 2010, 2009, and 2008, respectively. |
|
|
|
Gains and losses result from changes in actuarial assumptions and from differences between
assumed and actual experience, including, among other items, changes in discount rates and
changes in actual returns on plan assets as compared to assumed returns. These gains and
losses are only amortized to the extent that they exceed 10% of the greater of Projected
Benefit Obligation and the fair value of assets. For the year ended December 31, 2010,
Liggett used a 16.01-year period for its Hourly Plan and an 17.56-year period for its
Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such
amounts are reflected in the pension expense calculation beginning the year after the gains
or losses occur. The amortization of deferred losses negatively impacts pension expense in
the future. |
|
|
|
Plan assets are invested employing multiple investment management firms. Managers within each
asset class cover a range of investment styles and focus primarily on issue selection as a
means to add value. Risk is controlled through a diversification among asset classes,
managers, styles and securities. Risk is further controlled both at the manager and asset
class level by assigning excess return and tracking error targets. Investment managers are
monitored to evaluate performance against these benchmark indices and targets. |
|
|
|
Allowable investment types include equity, investment grade fixed income, high yield fixed
income, hedge funds and short term investments. The equity fund is comprised of common stocks
and mutual funds of large, medium and small companies, which are predominantly U.S. based.
The investment grade fixed income fund includes managed funds investing in fixed income
securities issued or guaranteed by the U.S. government, or by its respective agencies,
mortgage backed securities, including collateralized mortgage obligations, and corporate debt
obligations. The high yield fixed income fund includes a fund which invests in non-investment
grade corporate debt securities. The hedge funds invest in both equity, including common and
preferred stock, and debt obligations, including convertible debentures, of private and
public companies. The Company generally utilizes its short term investments, including
interest-bearing cash, to pay benefits and to deploy in special situations. |
|
|
|
In 2008, the Liggett Employee Benefits Committee temporarily suspended its target asset
allocation percentages due to the volatility in the financial markets. Even though such
allocation percentages were suspended, investment manager performance versus their respective
benchmarks was still monitored on a regular basis. Effective January 1, 2011, the Liggett
Employee Benefits Committee has reinstated its target assets allocation to equal 50% equity
investments, 27.5% investment grade fixed income, 7.5% high yield fixed income, 10.0%
alternative investments (including hedge funds and private equity funds) and 5.0% short-term
investments, with a rebalancing range of approximately plus or minus 5% around the target
asset allocations. |
|
|
|
Liggetts defined benefit retirement plan allocations at December 31, 2010 and 2009, by asset
category, were as follows: |
20
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
Plan Assets |
|
|
At |
|
|
December 31, |
|
|
2010 |
|
2009 |
Asset category |
|
|
|
|
|
|
|
|
Equity securities |
|
|
51 |
% |
|
|
50 |
% |
Investment grade fixed income securities |
|
|
26 |
% |
|
|
26 |
% |
High yield fixed income securities |
|
|
4 |
% |
|
|
2 |
% |
Alternative investments |
|
|
9 |
% |
|
|
8 |
% |
Short-term investments |
|
|
10 |
% |
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
The defined benefit plans recurring financial assets and liabilities subject to fair value
measurements and the necessary disclosures are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2010 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts |
|
$ |
2,359 |
|
|
$ |
|
|
|
$ |
2,359 |
|
|
$ |
|
|
Amounts in individually managed investment
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash |
|
|
14,108 |
|
|
|
14,108 |
|
|
|
|
|
|
|
|
|
U.S. equity securities |
|
|
53,916 |
|
|
|
53,916 |
|
|
|
|
|
|
|
|
|
Common collective trusts |
|
|
50,631 |
|
|
|
|
|
|
|
45,722 |
|
|
|
4,909 |
|
Investment partnership |
|
|
11,996 |
|
|
|
|
|
|
|
|
|
|
|
11,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
133,010 |
|
|
$ |
68,024 |
|
|
$ |
48,081 |
|
|
$ |
16,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2009 |
|
|
|
|
|
|
|
Quoted Prices |
|
|
|
|
|
|
|
|
|
|
|
|
|
in Active |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Markets for |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Identical |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
|
Assets |
|
|
Inputs |
|
|
Inputs |
|
Description |
|
Total |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance contracts |
|
$ |
2,684 |
|
|
$ |
|
|
|
$ |
2,684 |
|
|
$ |
|
|
Amounts in individually managed investment
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, mutual funds and common stock |
|
|
71,726 |
|
|
|
71,726 |
|
|
|
|
|
|
|
|
|
Common collective trusts |
|
|
40,210 |
|
|
|
|
|
|
|
38,752 |
|
|
|
1,458 |
|
Investment partnership |
|
|
10,182 |
|
|
|
|
|
|
|
|
|
|
|
10,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
124,802 |
|
|
$ |
71,726 |
|
|
$ |
41,436 |
|
|
$ |
11,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
The fair value determination disclosed above of assets as Level 3 under the fair value
hierarchy was determined based on unobservable inputs and were based on company assumptions,
and information obtained from the investments based on the indicated market values of the
underlying assets of the investment portfolio. |
|
|
|
The changes in the fair value of these Level 3 investments as of December 31, 2010 and 2009
were as follows: |
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
Prior year balance |
|
$ |
11,640 |
|
|
$ |
15,285 |
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
(1,107 |
) |
|
|
(8,978 |
) |
Contributions |
|
|
4,000 |
|
|
|
|
|
Unrealized
gain on long-term
investments |
|
|
2,113 |
|
|
|
3,913 |
|
|
|
|
|
|
|
|
|
|
Realized gain on long-term
investments |
|
|
259 |
|
|
|
1,420 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31 |
|
$ |
16,905 |
|
|
$ |
11,640 |
|
|
|
|
|
|
|
|
|
|
For 2010 measurement purposes, annual increases in Medicare Part B trends were assumed
to equal rates between (5.25%) and 6.8% between 2011 and 2019 and
4.5% after 2019. For 2009
measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates
between (7.2%) and 24.7% between 2010 and 2018 and 4.5% after 2018. |
|
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for
the health care plans. A 1% change in assumed health care cost trend rates would have the
following effects: |
|
|
|
|
|
|
|
|
|
|
|
1% |
|
1% |
|
|
Increase |
|
Decrease |
Effect on total of service and interest cost components |
|
$ |
9 |
|
|
$ |
(8 |
) |
Effect on benefit obligation |
|
$ |
164 |
|
|
$ |
(151 |
) |
|
|
To comply with ERISAs minimum funding requirements, the Company does not currently
anticipate that it will be required to make any funding to the pension plans for the pension
plan year beginning on January 1, 2011 and ending on
December 31, 2011. Any additional
funding obligation that the Company may have for subsequent years is contingent on several
factors and is not reasonably estimable at this time. |
|
|
|
Estimated future pension and postretirement medical benefits payments are as
follows: |
22
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Postretirement |
|
|
Pension |
|
Medical |
2011 |
|
$ |
11,956 |
|
|
$ |
666 |
|
2012 |
|
|
11,673 |
|
|
|
734 |
|
2013 |
|
|
11,192 |
|
|
|
696 |
|
2014 |
|
|
15,333 |
|
|
|
691 |
|
2015 |
|
|
10,413 |
|
|
|
694 |
|
2016 2020 |
|
|
45,989 |
|
|
|
3,471 |
|
|
|
Profit Sharing Plans |
|
|
|
Liggett Vector Brands maintains 401(k) plans for substantially all employees which allow
eligible employees to invest a percentage of their pre-tax compensation. Liggett Vector
Brands is obligated to match a certain portion of employee contributions to the 401(k) plan.
Accordingly, Liggett Vector Brands allocated to Liggett contribution expenses of $1,032,
$979, and $957 for the years ended December 31, 2010, 2009 and 2008, respectively. |
|
6. |
|
Income Taxes |
|
|
|
Liggetts operations are included in the consolidated federal income tax return of its
indirect parent, Vector. Pursuant to a tax allocation agreement amended in 1999, the amounts
provided for as currently payable for federal income taxes are based on the Companys pre-tax
income for financial reporting purposes. Accordingly, federal deferred income taxes which
would normally be reflected in the accompanying consolidated financial statements are
presented by Vector. The Company expenses and pays Vector their portion of the consolidated
income tax expense in accordance with the tax allocation agreement. |
|
|
|
The amounts provided for income taxes are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
33,650 |
|
|
$ |
43,160 |
|
|
$ |
46,583 |
|
State |
|
|
8,725 |
|
|
|
19,235 |
|
|
|
10,263 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
|
State |
|
|
(1,272 |
) |
|
|
(9,752 |
) |
|
|
(1,772 |
) |
|
|
|
|
|
|
|
|
|
|
Total tax provision |
|
$ |
41,103 |
|
|
$ |
52,643 |
|
|
$ |
55,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Historically, Liggett has paid Vector on a quarterly basis for its tax liabilities. While
these payments have been made to the parent they may not have been formally remitted to the
Internal Revenue Service and may still represent a liability at the Vector level. |
|
|
|
Temporary differences which give rise to a significant portion of deferred tax assets
and liabilities are as follows: |
23
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Deferred Tax |
|
|
Deferred Tax |
|
|
|
Asset |
|
|
Liability |
|
|
Asset |
|
|
Liability |
|
Sales and product allowances |
|
$ |
286 |
|
|
$ |
|
|
|
$ |
266 |
|
|
$ |
|
|
Inventories |
|
|
93 |
|
|
|
2,275 |
|
|
|
112 |
|
|
|
767 |
|
Property, plant and equipment |
|
|
|
|
|
|
1,659 |
|
|
|
|
|
|
|
1,333 |
|
Employee benefit plan accruals |
|
|
556 |
|
|
|
|
|
|
|
977 |
|
|
|
54 |
|
Tobacco litigation settlements |
|
|
3,298 |
|
|
|
|
|
|
|
163 |
|
|
|
|
|
Forward contracts |
|
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax |
|
$ |
4,233 |
|
|
$ |
3,934 |
|
|
$ |
1,548 |
|
|
$ |
2,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences between the amounts provided for income taxes and amounts computed at the
federal statutory tax rates are summarized as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
105,497 |
|
|
$ |
142,057 |
|
|
$ |
143,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal income tax at statutory rate |
|
|
36,924 |
|
|
|
49,720 |
|
|
|
50,206 |
|
State income taxes, net of federal tax benefit |
|
|
4,844 |
|
|
|
6,164 |
|
|
|
5,519 |
|
Impact of IRS audit settlement and other |
|
|
(665 |
) |
|
|
(3,241 |
) |
|
|
(651 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
41,103 |
|
|
$ |
52,643 |
|
|
$ |
55,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1998 Liggett contributed three of its premium cigarette brands to Trademarks LLC, a
newly-formed limited liability company. In such transaction, Philip Morris acquired an option
to purchase the remaining interest in Trademarks for a 90-day period commencing in December
2008. Philip Morris exercised its option to purchase the remaining interest in Trademarks on
February 19, 2009. Vector paid approximately $75,500 in taxes on this transaction in 2009. |
|
|
|
The following table summarizes the activity related to the unrecognized tax benefits: |
|
|
|
|
|
Balance at January 1, 2008 |
|
|
4,203 |
|
Additions based on tax positions related to current year |
|
|
|
|
Additions based on tax positions related to prior years |
|
|
186 |
|
Reductions based on tax positions related to prior years |
|
|
|
|
Settlements |
|
|
|
|
Expirations of the statute of limitations |
|
|
(1,686 |
) |
|
|
|
|
Balance at December 31, 2008 |
|
|
2,703 |
|
Additions based on tax positions related to current year |
|
|
|
|
Additions based on tax positions related to prior years |
|
|
378 |
|
Reductions based on tax positions related to prior years |
|
|
(550 |
) |
Settlements |
|
|
(419 |
) |
Expirations of the statute of limitations |
|
|
(1,833 |
) |
|
|
|
|
Balance at December 31, 2009 |
|
|
279 |
|
Additions based on tax positions related to current year |
|
|
|
|
Additions based on tax positions related to prior years |
|
|
54 |
|
Reductions based on tax positions related to prior years |
|
|
(157 |
) |
Settlements |
|
|
(80 |
) |
|
|
|
|
Balance at December 31, 2010 |
|
$ |
96 |
|
|
|
|
|
24
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
In the event the unrecognized tax benefits of $96 at December 31, 2010 were recognized, such
recognition would impact the annual effective tax rate. The Company classifies all
tax-related interest and penalties as income tax expense. |
|
|
|
The Company believes it is reasonably possible that none of the currently unrecognized tax
benefits will be recognized over the next 12 months, pertaining primarily to expiration of
statutes of limitations of positions reported on U.S. and state and local income tax returns.
The Company files U.S. and state and local income tax returns in jurisdictions with varying
statutes of limitations. |
|
7. |
|
Long-Term Debt |
|
|
|
Long-term debt consists of the following: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding under revolving credit facility |
|
$ |
35,710 |
|
|
$ |
17,382 |
|
Term loan outstanding under revolving credit facility |
|
|
6,222 |
|
|
|
6,755 |
|
Equipment loans |
|
|
19,030 |
|
|
|
4,852 |
|
|
|
|
|
|
|
|
|
|
|
60,962 |
|
|
|
28,989 |
|
Less current portion |
|
|
(40,077 |
) |
|
|
(19,933 |
) |
|
|
|
|
|
|
|
Amount due after one year |
|
$ |
20,885 |
|
|
$ |
9,056 |
|
|
|
|
|
|
|
|
|
|
The following table sets forth the future principal payment obligations: |
|
|
|
|
|
Year Ending December 31, |
|
|
|
|
2011 |
|
$ |
40,077 |
|
2012 |
|
|
6,527 |
|
2013 |
|
|
4,230 |
|
2014 |
|
|
3,547 |
|
2015 |
|
|
3,024 |
|
Thereafter |
|
|
3,557 |
|
|
|
|
|
|
|
$ |
60,962 |
|
|
|
|
|
|
|
Revolving Credit Facility |
|
|
|
The Company has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which
$35,710 was outstanding at December 31, 2010. Availability as determined under the facility
was $290 based on eligible collateral at December 31, 2010. The facility is collateralized by
all
inventories and receivables of the Company and a mortgage on the Companys manufacturing
facility. The facility requires the Companys compliance with certain financial and other
covenants including a restriction on the Companys ability to pay cash dividends unless the
Companys borrowing availability, as defined, under the facility for the 30-day period prior
to the payment of the dividend, and after giving effect to the dividend, is at least $5,000
and no event of default has occurred under the agreement, including the Companys compliance
with the covenants in the credit facility. |
25
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
The term of the Wachovia facility expires on March 8, 2012, subject to automatic renewal
for additional one-year periods unless a notice of termination is given by Wachovia or the
Company at least 60 days prior to such date or the anniversary of such date. Prime rate loans
under the facility bear interest at a rate equal to the prime rate of Wachovia with
Eurodollar rate loans bearing interest at a rate of 2.0% above Wachovias adjusted Eurodollar
rate. The facility contains covenants that provide that the Companys earnings before
interest, taxes, depreciation and amortization, as defined under the facility, on a trailing
twelve month basis, shall not be less than $100,000 if the Companys excess availability, as
defined, under the facility, is less than $20,000. The covenants also require that annual
capital expenditures, as defined under the facility (before a maximum carryover amount of
$2,500), shall not exceed $10,000 during any fiscal year. On November 1, 2010, the Company
and Wachovia entered into the credit facilitys Seventh Amendment to permit the Company to
incur Capital Expenditures (as defined in the credit facility) of up to $33,000 solely for 2010. The Seventh Amendment was effective as of August 31, 2010. |
|
|
|
In August 2007, Wachovia made an $8,000 term loan to 100 Maple LLC (Maple), a subsidiary of
the Company, within the commitment under the existing credit facility. The $8,000 term loan
is collateralized by the existing collateral securing the credit facility, and is also
collateralized by a lien on certain real property (the Mebane Property) owned by Maple. The
Mebane Property also secures the other obligations of the Company under the credit facility.
The $8,000 term loan did not increase the $50,000 borrowing amount of the credit facility,
but did increase the outstanding amounts under the credit facility by the amount of the term
loan and proportionately reduces the maximum borrowing availability under the facility. |
|
|
|
In August 2007, Liggett and Wachovia amended the credit facility to permit the guaranty of
the Senior Secured Notes described in Note 1 by each of Liggett and Maple and the pledging of
certain assets of Liggett and Maple on a subordinated basis to secure their guarantees. The
credit facility was amended to grant to Wachovia a blanket lien on all the assets of Liggett
and Maple, excluding any equipment pledged to current or future purchase money or other
financiers of such equipment and excluding any real property, other than the Mebane Property
and other real property to the extent its value is in excess of $5,000. In connection with
the amendment, Wachovia, Liggett, Maple and the collateral agent for the holders of Vectors
Senior Secured Notes entered into an inter-creditor agreement, pursuant to which the liens of
the collateral agent on the Liggett and Maple assets will be subordinated to the liens of
Wachovia on the Liggett and Maple assets. |
|
|
Equipment Loans |
|
|
|
In October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable
in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%.
Liggett
was required to provide a security deposit equal to 25% of the funded amount or $1,110. This
loan was retired and the security deposit was returned to Liggett during 2009. |
|
|
|
In December 2005, Liggett purchased equipment for $2,273 through a financing agreement
payable in 24 installments of $58 and then 24 installments of $46. Interest is calculated at
5.05%. Liggett was required to provide a security deposit equal to 25% of the funded amount
or $568. This loan was retired and the security deposit was returned to Liggett during 2009. |
|
|
|
In August 2006, Liggett purchased equipment for $7,922 through a financing agreement payable
in 30 installments of $191 and then 30 installments of $103. Interest is calculated at
5.15%. Liggett was required to provide a security deposit equal to 20% of the funded amount
or $1,584. This debt was retired as part of the refinancing discussed below in the third
quarter of 2010. |
26
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
In May 2007, Liggett purchased equipment for $1,576 through a financing agreement, payable in
60 installments of $32. Interest is calculated at 7.99% per annum. This debt was retired as
part of the refinancing discussed below in the third quarter of 2010. In August 2008, Liggett
purchased equipment for $2,745 through a financing agreement, payable in 60 installments of
$53. Interest is calculated at 5.94% per annum. Liggett was required to provide a security
deposit equal to approximately 15% of the funded amount or $428. . This debt was retired as
part of the refinancing discussed below in the third quarter of 2010. |
|
|
|
In 2010, the Company has entered into nine financing agreements for a total of $16,634
related to the purchase of equipment. The weighted average interest rate of the outstanding
debt is 5.28% per annum and the interest rate on the various notes ranges between 2.59% and
6.13%. |
|
|
|
The Company also refinanced $3,575 of debt related to prior equipment purchases during the
third quarter of 2010. The refinanced debt had a weighted average interest rate of 6.03% and
an average remaining term of 25 months. The new debt carries an interest rate of 5.95% and a
term of 36 months. |
|
|
|
At December 31, 2010 and 2009, the Company had
approximately $19,030 and $4,852 outstanding
under these equipment loans. |
|
|
|
All equipment loans are collateralized by the equipment they finance. |
|
|
|
See Note 2 for fair value of debt at December 31, 2010
and 2009. |
8. |
|
Operating Leases |
|
|
|
At December 31, 2010, the Company has operating leases for building space, vehicles and
computer equipment. The future minimum lease payments are as follows: |
|
|
|
|
|
|
|
Lease |
|
|
|
Commitments |
|
Year Ending December 31 |
|
|
|
|
2011 |
|
$ |
687 |
|
2012 |
|
|
676 |
|
2013 |
|
|
677 |
|
2014 |
|
|
686 |
|
2015 |
|
|
630 |
|
Thereafter |
|
|
21 |
|
|
|
|
|
|
|
$ |
3,377 |
|
|
|
|
|
|
|
In addition to the above scheduled future minimum lease payments, Liggett expects to receive
approximately $2,513 in allocated lease expense over the next five years and thereafter from
Liggett Vector Brands, a wholly-owned subsidiary of VGR. |
|
|
|
Rental expense for the years ended December 31, 2010, 2009, and 2008 amounted to
approximately $2,368, $1,852, and $1,969, respectively. |
27
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
9. |
|
Stock Compensation |
|
|
|
The Companys parent, Vector, offers stock option plans. As of December 31, 2010, there were
approximately 3,815,336 shares available for issuance under Vectors Amended and Restated
1999 Long-Term Incentive Plan (the 1999 Plan). All
employees of Vector and its subsidiaries are
eligible to receive grants under such plans. Although Liggett has no employees it received
an allocation of non-cash stock compensation from Liggett Vector Brands of $31, $355, and
$387 for the years ended December 31, 2010, 2009, and 2008, respectively. These amounts are
expense allocations only and do not represent a rollforward of option balances. These
amounts have been recorded in selling, general and administrative cost in the Companys
consolidated statement of operations. As of December 31, 2010
Liggett Vector Brands had
employees with options for 712,077 shares of Vectors common
stock. |
|
|
|
Non-qualified options for 105,000 shares of Vectors common stock were issued during 2010 to employees
under Vectors stock compensation plans. The exercise price of the options granted was $15.63
in 2010. The exercise prices of the options granted in 2010 were at
the fair market value on the
dates of the
grants. There were no option grants during 2009 or 2008. Awards of options to employees
under the Vectors stock compensation plans generally vest over periods ranging from four to
five years and have a term of ten years from the date of grant. |
|
|
|
The fair value of option grants is estimated at the date of grant using the Black-Scholes
option pricing model. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly subjective
assumptions including expected stock price characteristics which are significantly different
from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the
existing models do not necessarily provide a reliable single measure of the fair value of
stock-based compensation awards. |
|
|
|
The assumptions used under the Black-Scholes option pricing model in computing fair value of
options are based on the expected option life considering both the contractual term of the
option and expected employee exercise behavior, the interest rate associated with U.S.
Treasury issues with a remaining term equal to the expected option life and the expected
volatility of the Companys common stock over the expected term of the option. The
assumptions used for grants in the year ended December 31, 2010 were as follows: |
|
|
|
|
|
Risk-free interest rate |
|
|
2.59 |
% |
Expected volatility |
|
|
24.43 |
% |
Dividend yield |
|
|
9.75 |
% |
Expected holding period |
|
4.74 years |
Weighted
average grant date fair value |
|
$ |
1.03 |
|
|
|
In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted
stock grant of 63,813 shares of Vectors common stock pursuant to the 1999 Plan. Pursuant to
his restricted share agreement, one-fourth of the shares vested on November 1, 2006, with an
additional one-fourth vesting on each of the three succeeding one-year anniversaries of the
first vesting date through November 1, 2009. Liggett Vector Brands recorded deferred
compensation of $1,018 representing the fair market value of the restricted shares on the
date of grant. Liggett recorded an expense of $0 in 2010, $196 for 2009, and $229 in 2008
associated with the grant. |
28
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
These amounts have been recorded in selling, general and
administrative cost in the Companys consolidated statement of operations. |
10. |
|
Commitments and Contingencies |
|
|
|
Tobacco-Related Litigation: |
|
|
|
Overview |
|
|
|
Since 1954, Liggett and other United States cigarette manufacturers have been named as
defendants in numerous direct, third-party and purported class actions predicated on the
theory that cigarette manufacturers should be liable for damages alleged to have been caused
by cigarette smoking or by exposure to secondary smoke from cigarettes. New cases continue to
be commenced against Liggett and other cigarette manufacturers. The cases generally fall into
the following categories: (i) smoking and health cases alleging personal injury brought on
behalf of individual plaintiffs (Individual Actions); (ii) smoking and health cases
primarily alleging personal injury or seeking court-supervised programs for ongoing medical
monitoring, as well as cases alleging the use of the terms lights and/or ultra lights
constitutes a deceptive and unfair trade practice, common law fraud or violation of federal
law, purporting to be brought on behalf of a class of individual plaintiffs (Class
Actions); and (iii) health care cost recovery actions brought by
various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking
reimbursement for health care expenditures allegedly caused by cigarette smoking and/or
disgorgement of profits (Health Care Cost Recovery Actions). As new cases are commenced,
the costs associated with defending these cases and the risks relating to the inherent
unpredictability of litigation continue to increase. The future financial impact of the risks
and expenses of litigation and the effects of the tobacco litigation settlements discussed
below are not quantifiable at this time. For the years ended December 31, 2010, 2009, and
2008, Liggett incurred legal expenses and other litigation costs totaling approximately
$23,389 (which includes expense of $16,161 for the Lukacs and
Ferlanti judgments described below), $6,000, and
$8,800 , respectively. |
|
|
|
Litigation is subject to uncertainty and it is possible that there could be adverse
developments in pending or future cases. An unfavorable outcome or settlement of pending
tobacco-related or other litigation could encourage the commencement of additional
litigation. Damages claimed in some tobacco-related or other litigation are or can be
significant. |
|
|
|
Although Liggett has been able to obtain required bonds or relief from bonding requirements
in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are
on appeal, there remains a risk that such relief may not be obtainable in all cases. This
risk has been reduced given that a majority of states now limit the dollar amount of bonds or
require no bond at all. Liggett has secured approximately $5,055 in bonds as of December 31,
2010. |
|
|
|
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap
that applies to all Engle progeny cases (defined below) in the aggregate and establishes
individual bond caps for individual Engle progeny cases in amounts that vary depending on the
number of
judgments in effect at a given time. The legislation applies to judgments
entered after the effective date and remains in effect until December 31, 2012. Certain
plaintiffs have challenged the constitutionality of the bond cap statute. In one of
these cases, the court recently upheld the constitutionality of the statute. Although
the Company cannot predict the outcome of such challenges, it is possible that the
Companys financial position, results of operations, or cash flows could be materially
affected by an unfavorable outcome of such challenges. |
29
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
Liggett records provisions in their consolidated financial statements for pending litigation
when they determine that an unfavorable outcome is probable and the amount of loss can be
reasonably estimated. At the present time, while it is reasonably possible that an
unfavorable outcome in a case may occur, except as disclosed in this
Note 10: (i) management has concluded that it is not probable
that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management
is unable to estimate the possible loss or range of loss that could result from an
unfavorable outcome of any of the pending tobacco-related cases and, therefore, management
has not provided any amounts in the consolidated financial statements for unfavorable
outcomes, if any. Liggett believes, and has been so advised by counsel, that it has valid
defenses to the litigation pending against it, as well as valid bases for appeal of adverse
verdicts. All such cases are, and will continue to be vigorously defended. However, Liggett
may enter into settlement discussions in particular cases if it believes it is in its
best interest to do so. |
|
|
|
Individual Actions |
|
|
|
As of December 31, 2010, there were 36 individual cases pending against Liggett
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. These cases do not include Engle progeny cases (defined
below) or the approximately
100 individual cases pending in West Virginia state court as part of a consolidated action.
The following table lists the number of individual cases by state that are pending against
Liggett or its affiliates as of December 31, 2010 (excluding Engle progeny cases in Florida
and the cases consolidated in West Virginia): |
|
|
|
|
|
|
|
Number |
State |
|
of Cases |
Florida |
|
|
15 |
|
New York |
|
|
9 |
|
Louisiana |
|
|
5 |
|
Maryland |
|
|
3 |
|
West Virginia |
|
|
2 |
|
Missouri |
|
|
1 |
|
Ohio |
|
|
1 |
|
|
|
Liggett Only Cases. There are currently seven cases pending where Liggett is the only
tobacco company defendant. Cases where Liggett is the only defendant could increase
substantially as a result of the Engle progeny cases. In February 2009, in Fetlanti v.
Liggett Group, a Florida state court jury awarded compensatory damages of $1,200 as well as
$96 in expenses, but found that the plaintiff was 40% at fault. Therefore, plaintiffs award
was reduced to $720 in compensatory damages. Punitive damages were not awarded. In February
2011, the award was affirmed on appeal. In September 2010, the court awarded plaintiffs
attorneys fees of $996. Liggett has accrued $2,000 for this matter for the year ended
December 31, 2010. In Blitch v. Liggett Group, an Engle progeny case, trial is scheduled for
March 7, 2011. In ODwyer-Harkins v. R.J. Reynolds, an Engle progeny case, trial is scheduled
for August 8, 2011. There has been no recent activity in Hausrath v. Philip Morris, a case
pending in New York state court, where two individuals are suing. The other three individual
actions, in which Liggett is the only tobacco company defendant, are dormant. In Davis v.
Liggett Group, another Liggett only case, judgment was entered against Liggett in the amount
of $540 plus attorneys fees. The judgment was paid by Liggett and this matter is concluded. |
|
|
|
The plaintiffs allegations of liability in those cases in which individuals seek recovery
for injuries allegedly caused by cigarette smoking are based on various theories of recovery,
including negligence, gross negligence, breach of special duty, strict liability, fraud,
concealment, |
30
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
misrepresentation, design defect, failure to warn, breach of express and implied
warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law
public nuisance, property damage, invasion of privacy, mental anguish, emotional distress,
disability, shock, indemnity and violations of deceptive trade practice laws, the federal
Racketeer Influenced and Corrupt Organizations Act (RICO), state RICO statutes and
antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs
also seek other forms of relief including treble/multiple damages, medical monitoring,
disgorgement of profits and punitive damages. Although alleged damages often are not
determinable from a complaint, and the law governing the pleading and calculation of damages
varies from state to state and jurisdiction to jurisdiction, compensatory and punitive
damages have been specifically pleaded in a number of cases, sometimes in amounts ranging
into the hundreds of millions and even billions of dollars. |
|
|
|
Defenses raised in individual cases include lack of proximate cause, assumption of the risk,
comparative fault and/or contributory negligence, lack of design defect, statute of
limitations, equitable defenses such as unclean hands and lack of benefit, failure to state
a claim and federal preemption. |
|
|
|
In addition to several adverse verdicts against Liggett, jury awards in individual cases have
also been returned against other cigarette manufacturers in recent years. The awards in
these individual actions, often in excess of millions of dollars, may be for both
compensatory and punitive damages. There are several significant jury awards against other
cigarette manufacturers which are currently on appeal and several awards which are final and
have been paid. |
|
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|
Engle Progeny Cases. In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co. rendered a
$145,000,000 punitive damages verdict in favor of a Florida Class against certain cigarette
manufacturers, including Liggett. Pursuant to the Florida Supreme Courts July 2006 ruling in
Engle, which decertified the class on a prospective basis, and affirmed the appellate courts
reversal of the punitive damages award, former class members had one year from January 11,
2007 in which to file individual lawsuits. In addition, some individuals who filed suit
prior to January 11, 2007, and who claim to meet the conditions in Engle, are attempting to
avail themselves of the Engle ruling. Lawsuits by individuals requesting the benefit of the
Engle ruling, whether filed before or after the January 11, 2007 deadline, are referred to as
the Engle progeny cases. Liggett has been named in approximately 6,827 Engle progeny cases
in both federal (3,735 cases) and state (3,092 cases) courts in Florida. Other cigarette
manufacturers have also been named as defendants in these cases, although as a case proceeds,
one or more defendants may ultimately be dismissed from the action. These cases include
approximately 9,100 plaintiffs, 671 of which represent consortium claims. The number of
Engle progeny cases may increase as multi-plaintiff cases continue to be severed into
individual cases. The total number of plaintiffs may also increase as a result of attempts by
existing plaintiffs to add additional parties. |
|
|
|
As of December 31, 2010, in addition to the Lukacs case described below, the following Engle
progeny cases have resulted in judgments against Liggett: |
31
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPENSATORY |
|
PUNITIVE |
|
|
|
|
|
|
|
|
|
|
DAMAGES |
|
DAMAGES |
|
|
|
|
|
|
|
|
|
|
AGAINST |
|
AGAINST |
DATE |
|
CASE NAME |
|
COUNTY |
|
LIGGETT |
|
LIGGETT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 2009 |
|
Campbell v. R.J. Reynolds |
|
Escambia |
|
$ |
156 |
|
|
None |
March 2010 |
|
Douglas v. R.J. Reynolds |
|
Hillsborogh |
|
$ |
1,350 |
|
|
None |
April 2010 |
|
Clay v. R.J. Reynolds |
|
Escambia |
|
$ |
349 |
|
|
$ |
1,000 |
|
April 2010 |
|
Putney v. R.J. Reynolds |
|
Broward |
|
$ |
3,008 |
|
|
None |
|
|
Through December 31, 2010, there were 20 plaintiffs verdicts against the industry in
Engle progeny cases including four adverse verdicts against Liggett, and 11 defense verdicts.
The plaintiffs verdicts are currently on appeal. Several defense verdicts have also been
appealed. For further information on the Engle case and on Engle progeny cases see Class
Actions Engle Case, below. |
|
|
|
Lukacs Case. In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J.
Reynolds Tobacco Co., awarded $37,500 in compensatory damages, jointly and severally, in a case
involving Liggett and two other cigarette manufacturers, which amount was subsequently reduced
by the court. The jury found Liggett 50% responsible for the damages incurred by the
plaintiff. The Lukacs case was the first case to be tried as an individual Engle progeny case,
but was tried almost five years prior to the Florida Supreme Courts final decision in Engle.
In November 2008, the court entered final judgment in the amount of $24,835 (for which Liggett
was 50% responsible), plus interest from June 2002. Plaintiff filed a motion seeking an award
of attorneys fees from Liggett based on plaintiffs prior proposal for settlement. In March
2010, the Third District Court of Appeal affirmed the decision, per curiam. In June 2010,
Liggett paid its share of the judgment and settled claims for attorneys fees and accrued
interest for a total payment of approximately $14,361. |
|
|
|
Class Actions |
|
|
|
As of December 31, 2010, there were six actions pending for which either a class had been
certified or plaintiffs were seeking class certification, where Liggett is a named defendant,
including one alleged price fixing cases. Other cigarette manufacturers are also named in these
actions. |
|
|
|
Plaintiffs allegations of liability in class action cases are based on various theories of
recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation,
design defect, failure to warn, nuisance, breach of express and implied warranties, breach of
special duty, conspiracy, concert of action, violation of deceptive trade practice laws and
consumer protection statutes and claims under the federal and state anti-racketeering statutes.
Plaintiffs in the class actions seek various forms of relief, including compensatory and
punitive damages, treble/multiple damages and other statutory damages and penalties, creation
of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and
equitable relief. |
|
|
|
Defenses raised in these cases include, among others, lack of proximate cause, individual
issues predominate, assumption of the risk, comparative fault and/or contributory negligence,
statute of limitations and federal preemption. |
|
|
|
Engle Case. In May 1994, Engle was filed against Liggett and others in Miami-Dade County,
Florida. The class consisted of all Florida residents who, by November 21, 1996, have
suffered, presently suffer or have died from diseases and medical conditions caused by their
addiction to cigarette smoking. In July 1999, after the conclusion of Phase I of the trial,
the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues
determined by the trial court to be common to the causes of action of the plaintiff class.
The jury made several findings adverse to the defendants including that defendants conduct
rose to a level that would permit a potential award or entitlement to punitive damages.
Phase II of the trial was a causation and damages trial for three of |
32
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
the class plaintiffs and a punitive damages trial on a class-wide basis, before the same jury
that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of
$12,704 to the three class plaintiffs, to be reduced in proportion to the respective
plaintiffs fault. In July 2000, the jury awarded approximately $145,000,000 in punitive
damages, including $790,000 against Liggett. |
|
|
|
In May 2003, Floridas Third District Court of Appeal reversed the trial court and remanded the
case with instructions to decertify the class. The judgment in favor of one of the three class
plaintiffs, in the amount of $5,831, was overturned as time barred and the court found that
Liggett was not liable to the other two class plaintiffs. |
|
|
|
In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages
award and held that the class should be decertified prospectively, but determined that the
following Phase I findings are entitled to res judicata effect in Engle progeny cases: (i)
that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is
addictive; (iii) that defendants placed cigarettes on the market that were defective and
unreasonably dangerous; (iv) that defendants concealed material information knowing that the
information was false or misleading or failed to disclose a material fact concerning the health
effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit
information regarding the health effects of cigarettes or their addictive nature with the
intention that smokers would rely on the information to their detriment; (vi) that defendants
sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The
Florida Supreme Court decision also allowed former class members to proceed to trial on
individual liability issues (using the above findings) and compensatory and punitive damage
issues, provided they filed their individual lawsuits by January 2008. In December 2006, the
Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at
the time of sale or supply, did not conform to the representations made by defendants. In
October 2007, the United States Supreme Court denied defendants petition for writ of
certiorari. As a result of the Engle decision, approximately 9,100 plaintiffs have claims
pending against Liggett and other cigarette manufacturers. |
|
|
|
Three federal district courts (in the Merlob, Brown and Burr cases) ruled that the findings in
the Phase I of the Engle proceedings could not be used to satisfy elements of plaintiffs
claims, and two of those rulings (Brown and Burr) were certified by the trial court for
interlocutory review. The certification was granted by the United States Court of Appeals for
the Eleventh Circuit and the appeals were consolidated (in February 2009, the appeal in Burr
was dismissed for lack of prosecution). In July 2010, the Eleventh Circuit ruled that the
plaintiffs do not have an unlimited right to use the findings from the original Engle trial to
meet their burden of establishing the elements of their claims at trial. Rather, plaintiffs
may only use the findings to establish specific facts that they demonstrate with a reasonable
degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit
remanded the case to the district court to determine what specific factual findings the Engle
jury actually made. All federal cases were stayed pending review by the Eleventh Circuit. On
December 22, 2010, stays were lifted in 12 cases selected by plaintiffs. |
|
|
|
In December 2010, in the Martin case, a case against R.J. Reynolds, the Florida District Court
of Appeals issued the first ruling by a Florida intermediate appellate court to address the
Brown
decision discussed above. The panel held that the trial court correctly construed the Florida
Supreme Courts 2006 decision in Engle in instructing the jury on the preclusive effect of the
Phase I Engle proceedings, expressly disagreeing with certain aspects of the Brown decision. |
|
|
|
Other Class Actions. In Smith v. Philip Morris, a Kansas state court case filed in February
2000, plaintiffs allege that cigarette manufacturers conspired to fix cigarette prices in
violation of antitrust |
33
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
laws. Plaintiffs seek to recover an unspecified amount in actual and
punitive damages. Class certification was granted in Smith in November 2001. Discovery is
ongoing. |
|
|
|
Class action suits have been filed in a number of states against cigarette manufacturers,
alleging, among other things, that use of the terms light and ultra light constitutes
unfair and deceptive trade practices, among other things. In December 2008, the United States
Supreme court, in Altria Group v. Good, ruled that the Federal Cigarette Labeling and
Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they
could proceed with their claims under the Maine Unfair Trade Practices Act. This ruling has
resulted in the filing of additional lights class action cases in other states. Although
Liggett was not a defendant in the Good case, and is not a defendant in most of the other
lights class actions, an adverse ruling or commencement of additional lights related class
actions could have a material adverse effect on the Company. |
|
|
|
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action
was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who,
though not themselves cigarette smokers, are alleged to have been exposed to secondhand smoke
from cigarettes which were manufactured by the defendants, and who suffered injury as a result
of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and
punitive damages. In October 2004, the trial court stayed this case pending the outcome of the
appeal in another matter. |
|
|
|
In June 1998, in Cleary v. Philip Morris, a putative class action was brought in Illinois state
court on behalf of persons who were allegedly injured by: (i) defendants purported conspiracy
to conceal material facts regarding the addictive nature of nicotine; (ii) defendants alleged
acts of targeting their advertising and marketing to minors; and (iii) defendants claimed
breach of the publics right to defendants compliance with laws prohibiting the distribution
of cigarettes to minors. Plaintiffs sought disgorgement of all profits unjustly received
through defendants sale of cigarettes to plaintiffs and the class. In March 2009, plaintiffs
filed a third amended complaint adding, among other things, allegations regarding defendants
sale of light cigarettes. The case was then removed to federal court on the basis of this
new claim. In November 2009, plaintiffs filed a revised motion for class certification which
was denied by the court. In February 2010, the court granted summary judgment in favor of
defendants as to all claims, other than a lights claim involving another cigarette
manufacturer. The court granted leave to the plaintiffs to reinstate the motion as to the
addiction claims. Plaintiffs filed a Fourth Amended Complaint in an attempt to resurrect their
addiction claims. In June 2010, the court granted defendants motion to dismiss the Fourth
Amended Complaint and in July 2010, the court denied plaintiffs motion for reconsideration.
In August 2010, plaintiffs appealed to the United States Court of Appeals for the Seventh
Circuit. |
|
|
|
In April 2001, in Brown v. Philip Morris USA, a California state court granted in part
plaintiffs motion for class certification and certified a class comprised of adult residents
of California who smoked at least one of defendants cigarettes during the applicable time
period and who were exposed to defendants marketing and advertising activities in California.
In March 2005, the court granted defendants motion to decertify the class based on a recent
change in California law. In June 2009, the California Supreme Court reversed and remanded the
case to the trial court for further proceedings regarding whether the class representatives
have, or can, demonstrate standing. In
August 2009, the California Supreme Court denied defendants rehearing petition and issued its
mandate. In September 2009, plaintiffs sought reconsideration of the courts September 2004
order finding that plaintiffs allegations regarding lights cigarettes were preempted by
federal law, in light of the recent United States Supreme Court decision in Good. In March
2010, the trial court granted reconsideration of its September 2004 order granting partial
summary judgment to defendants with respect to plaintiffs lights claims on the basis of
judicial decisions issued since its order was |
34
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
issued, including the Unitied States Supreme
Courts ruling in Good, thereby reinstating plaintiffs lights claims. Since the trial
courts prior ruling decertifying the class was reversed on appeal by the California Supreme
court, the parties and the court are treating all claims currently being asserted by the
plaintiffs as certified, subject, however, to defendants challenge to the class
representatives standing to assert their claims. Trial is scheduled to start on May 6, 2011. |
|
|
|
Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases),
a West Virginia state court consolidated approximately 750 individual smoker actions that were
pending prior to 2001 for trial of certain common issues. In January 2002, the court severed
Liggett from the trial of the consolidated action which commenced in June 2010 and ended in a
mistrial. A new trial is scheduled for October 17, 2011. If the case were to proceed against
Liggett, it is estimated that Liggett could be a defendant in approximately 100 of the
individual cases. |
|
|
|
In addition to the cases described above, numerous class actions remain certified against other
cigarette manufacturers. Adverse decisions in these cases could have a material adverse affect
on Liggetts sales volume, operating income and cash flows. |
|
|
|
Health Care Cost Recovery Actions |
|
|
|
As of December 31, 2010, there were four Health Care Cost Recovery Actions pending against
Liggett. Other cigarette manufacturers are also named in these cases. The claims asserted in
health care cost recovery actions vary. Although, typically, no specific damage amounts are
pled, it is possible that requested damages might be in the billions of dollars. In these
cases, plaintiffs typically assert equitable claims that the tobacco industry was unjustly
enriched by their payment of health care costs allegedly attributable to smoking and seek
reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive
damages, multiple damages and other statutory damages and penalties, injunctions prohibiting
alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding
of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and
expert witness fees. |
|
|
|
Other claims asserted 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. |
|
|
|
DOJ Lawsuit. In September 1999, the United States government commenced litigation against
Liggett and other cigarette manufacturers in the United States District Court for the District
of Columbia. The action sought to recover an unspecified amount of health care costs paid and
to be paid by the federal government for lung cancer, heart disease, emphysema and other
smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of
defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other
allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of
their unlawful conduct. Claims were asserted under RICO. |
|
|
|
In August 2006, the trial court entered a Final Judgment against each of the cigarette
manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for
the District of Columbia affirmed most of the district courts decision. In February 2010, the
government and all defendants, other than Liggett, filed petitions for writ of certiorari to
the United States Supreme Court. In June 2010, the United states Supreme Court, without
comment denied review. As a result, the cigarette manufacturing defendants, other than Liggett,
are now subject to the trial courts Final Judgment which ordered the following relief: (i) an
injunction against committing any act of racketeering relating to the manufacturing,
marketing, promotion, health consequences or sale of |
35
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
cigarettes in the United States; (ii) an
injunction against participating directly or indirectly in the management or control of the
Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or
any successor or affiliated entities of each (iii) an injunction against making, or causing to
be made in any way, any material false, misleading, or deceptive statement or representation or
engaging in any public relations or marketing endeavor that is disseminated to the United
States public and that misrepresents or suppresses information concerning cigarettes; (iv) an
injunction against conveying any express or implied health message though use of descriptors on
cigarette packaging or in cigarette advertising or promotional material, including lights,
ultra lights, and low tar, which the court found could cause consumers to believe one
cigarette brand is less hazardous that another brand; (v) the issuance of corrective
statements in various media regarding the adverse health effects of smoking, the addictiveness
of smoking and nicotine, the lack of any significant health benefit from smoking low tar or
light cigarettes, defendants manipulation of cigarette design to ensure optimum nicotine
delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the
disclosure of defendants public document websites and in the Minnesota document repository of
all documents produced to the government in the lawsuit or produced in any future court or
administrative action concerning smoking and health until 2021, with certain additional
requirements as to documents withheld from production under a claim or privilege or
confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the
same form and on the same schedules as defendants now follow in disclosing such data to the
Federal Trade Commission (FTC) for a period of ten years; (viii) certain restrictions on the
sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette
business within the United States; and (ix) payment of the governments costs in bringing the
action. |
|
|
|
It is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a
whole. To the extent that the Final Judgment leads to a decline in industry-wide shipments of
cigarettes in the United States or otherwise results in restrictions that adversely affect the
industry, Liggetts sales volume, operating income and cash flows could be materially adversely
affected. |
|
|
|
In City of St. Louis v. American Tobacco Company, a case pending in Missouri state court since
December 1998, the City of St. Louis and approximately 38 hospitals seek recovery of costs
expended by the hospitals on behalf of patients who suffer, or have suffered, from illnesses
allegedly resulting from the use of cigarettes. In June 2005, the court granted defendants
motion for summary judgment as to claims for damages which accrued prior to November 16, 1993.
In April 2010, the court further determined that each plaintiff is barred from seeking damages
which accrued more than five years prior to the time that plaintiff joined the suit. In that
same order, the court granted partial summary judgment for defendants barring plaintiffs
claims for future damages. In July 2010, the court dismissed certain other claims brought by
plaintiffs, on the grounds that they were preempted. Defendants have filed other summary
judgment motions that remain pending. Trial commenced on January 31, 2011. |
|
|
|
In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action
commenced in 1998 by the largest private insurer in that country, General Health Services,
against the major United States cigarette manufacturers. The plaintiff seeks to recover the
past and future value of the total expenditures for health care services provided to residents
of Israel resulting from
tobacco related diseases, court ordered interest for past expenditures from the date of filing
the statement of claim, increased and/or punitive and/or exemplary damages and costs. The court
ruled that, although Liggett had not sold product in Israel since at least 1978, it might still
have liability for cigarettes sold prior to that time. Motions filed by defendants are
pending. |
|
|
|
In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris
USA, a case pending in the United States District Court for the Eastern District of New York,
plaintiffs commenced an action to recover twice the amount paid by Medicare for the health care
services
|
36
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars) |
|
|
provided to Medicare beneficiaries to treat diseases allegedly attributable to smoking
defendants cigarettes from May 21, 2002 to the present, for which treatment defendants
allegedly were required to make payment under Medicare Secondary Payer provisions of the Social
Security Act. In July 2008, defendants filed a motion to dismiss plaintiffs claims and
plaintiffs filed a motion for partial summary judgment. In March 2009, the court granted
defendants motion and dismissed the case. In May 2009, plaintiffs noticed an appeal to the
United States Court of Appeals for the Second Circuit and in September 2010, the court vacated
the District Courts decision, and remanded the case with instructions for the the District
Court to dismiss the complaint on other grounds. Plaintiffs motion for rehearing was denied by
the court and on December 20, 2010, the court remanded the case to the district court with
instructions to dismiss the complaint. |
|
|
|
Upcoming Trials |
|
|
|
In addition to the January 2011 trial in the City of St. Louis case and the May 2011 trial in
the Brown case, both discussed above, as of December 31, 2010, there were approximately 43
Engle progeny cases scheduled for trial in 2011. Additionally, a Florida individual case is
scheduled for trial on September 12, 2011. Liggett and other cigarette manufacturers are
currently named as defendants in each of these cases, although as a case proceeds, one or more
defendants may ultimately be dismissed from the action. Cases against other cigarette
manufacturers are also currently scheduled for trial in 2011. Trial dates are subject to
change. |
|
|
|
MSA and Other State Settlement Agreements |
|
|
|
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related
litigation with 45 states and territories. The settlements released Liggett from all
smoking-related claims within those states and territories, including claims for health care
cost reimbursement and claims concerning sales of cigarettes to minors. |
|
|
|
In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original
Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs)
(the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers)
entered into the Master Settlement Agreement (the MSA) with 46 states, the District of
Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern
Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted
health care cost recovery and certain other claims of the Settling States. The MSA received
final judicial approval in each Settling State. |
|
|
|
As a result of the MSA, the Settling States released Liggett from: |
|
|
|
all claims of the Settling States and their respective political subdivisions and other
recipients of state health care funds, relating to: (i) past conduct arising out of the
use, sale, distribution,
manufacture, development, advertising and marketing of tobacco products; (ii) the health
effects of, the exposure to, or research, statements or warnings about, tobacco products;
and |
|
|
|
|
all monetary claims of the Settling States and their respective subdivisions and other
recipients of state health care funds relating to future conduct arising out of the use
of, or exposure to, tobacco products that have been manufactured in the ordinary course of
business. |
|
|
The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA |
37
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco
products; bans the use of cartoon characters in all tobacco advertising and promotion; limits
each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month
period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for
tobacco product placement in various media; bans gift offers based on the purchase of tobacco
products without sufficient proof that the intended recipient is an adult; prohibits
Participating Manufacturers from licensing third parties to advertise tobacco brand names in
any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a
tobacco product brand name any nationally recognized non-tobacco brand or trade name or the
names of sports teams, entertainment groups or individual celebrities. |
|
|
|
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with
the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying
activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides
for the appointment of an independent auditor to calculate and determine the amounts of
payments owed pursuant to the MSA. |
|
|
|
Under the payment provisions of the MSA, the Participating Manufacturers are required to make
annual payments of $9,000,000 (subject to applicable adjustments, offsets, and reductions).
These annual payments are allocated based on unit volume of domestic cigarette shipments. The
payment obligations under the MSA are the several, and not joint, obligation of each
Participating Manufacturer and are not the responsibility of any parent or affiliate of a
Participating Manufacturer. |
|
|
|
Liggett has no payment obligations under the MSA except to the extent its market share exceeds
a market share exemption of approximately 1.65% of total cigarettes sold in the United States.
According to data from Management Science Associates, Inc., domestic shipments by Liggett
accounted for approximately 2.2%, 2.3% and 3.2% of the total cigarettes shipped in the United
States in 2008, 2009 and 2010 respectively. If Liggetts market share exceeds their respective
market share exemption in a given year, then on April 15 of the following year, Liggett must
pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for
that year. Liggett paid $39,760 for their 2008 MSA obligations, and paid $47,599 for their
2009 MSA obligations. Liggett has expensed $129,392 for its estimated MSA obligations in 2010
as part of cost of goods sold. In December 2010, Liggett prepaid $92,500 of their estimated
2010 MSA obligations. Additional amounts may be due for 2010 but will not be determined by the
Independent Auditor until April 2011. |
|
|
|
Certain MSA Disputes |
|
|
|
NPM Adjustment. In March 2006, an economic consulting firm selected pursuant to the MSA
rendered its final and non-appealable decision that the MSA was a significant factor
contributing to the loss of market share of Participating Manufacturers to non-participating
manufacturers for 2003. This is known as the NPM Adjustment. The economic consulting firm
subsequently rendered the same decision with respect to 2004 and 2005. In March 2009, a
different economic consulting firm
made the same determination for 2006. As a result, the manufacturers are entitled to
potential NPM Adjustments to their 2003, 2004, 2005 and 2006 MSA payments. The Participating
Manufacturers may also be entitled to potential NPM Adjustments to their 2007, 2008 and 2009
payments pursuant to an agreement entered into in June 2009 between the OPMs and the Settling
States under which the OPMs agreed to make certain payments for the benefit of the Settling
States, in exchange for which the Settling States stipulated that the MSA was a significant
factor contributing to the loss of market share of Participating Manufacturers in 2007, 2008
and 2009. A Settling State that has diligently enforced its qualifying escrow statute in the
year in question may be able to avoid |
38
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
application of the NPM Adjustment to the payments made by
the manufacturers for the benefit of that Settling State. |
|
|
|
For 2003 through 2010, Liggett disputed that they owe the Settling States the NPM
Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett has
withheld payment associated with these NPM Adjustment amounts. The total amount withheld or
paid into a disputed payment account by Liggett for 2003 through 2010 is $27,186. In 2003,
Liggett paid the NPM adjustment amount of $9,304 to the Settling States although the Company
continues to dispute this amount. At December 31, 2010, included in Other assets on the
Companys consolidated balance sheet was a noncurrent receivable of $6,513 relating to such
payment. |
|
|
|
The following amounts have not been expensed in the accompanying consolidated financial
statements as they relate to Liggetts claim for an NPM adjustment: $6,513 for 2003, $3,789 for
2004 and $800 for 2005. Liggett has expensed all disputed amounts related to the NPM
Adjustment since 2005. |
|
|
|
Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was
filed in 49 Settling States over the issue of whether the application of the NPM Adjustment for
2003 is to be determined through litigation or arbitration. These actions relate to the
potential NPM Adjustment for 2003, which the independent auditor under the MSA previously
determined to be as much as $1,200,000 for all Participating Manufacturers. All but one of the
48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is
arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana
Supreme Court, ruled that Montanas claim of diligent enforcement must be litigated. The
United States Supreme Court denied certiorari with respect to that opinion. In response to a
proposal from each of the OPMs and many of the SPMs, 45 of the Settling States, representing
approximately 90% of the allocable share of the Settling States, entered into an agreement
providing for a nationwide arbitration of the dispute with respect to the NPM Adjustment for
2003. In June 2010, the three person arbitration panel was selected and procedural hearings,
discovery and briefing on legal issues of general application have commenced. Because states
representing more than 80% of the allocable share signed the agreement, signing states will
receive a 20% reduction of any potential 2003 NPM adjustment. There can be no assurance that
Liggett will receive any adjustment as a result of these proceedings. |
|
|
|
Gross v. Net Calculations. In October 2004, the independent auditor notified Liggett and all
other Participating Manufacturers that their payment obligations under the MSA, dating from the
agreements execution in late 1998, had been recalculated using net unit amounts, rather than
gross unit amounts (which had been used since 1999). |
|
|
|
Liggett objected to this retroactive change and disputed the change in methodology. Liggett
contends that the retroactive change from using gross to net unit amounts is impermissible
for several reasons, including: |
|
|
|
use of net unit amounts is not required by the MSA (as reflected by, among
other things, the use of gross unit amounts through 2005); |
|
|
|
|
such a change is not authorized without the consent of affected parties to
the MSA; |
|
|
|
|
the MSA provides for four-year time limitation periods for revisiting
calculations and determinations, which precludes recalculating Liggetts 1997
Market Share (and thus, Liggetts market share exemption); and |
|
|
|
|
Liggett and others have relied upon the calculations based on gross unit
amounts since 1998.
|
39
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
The change in the method of calculation could result in Liggett owing, at a minimum,
approximately $9,300 plus interest of additional MSA payments by Liggett because the proposed
change from gross to net units would serve to lower Liggetts market share exemption under
the MSA. The Company currently estimates that future MSA payments would be at least $2,300
higher if the method of calculation is changed. No amounts have been expensed or accrued in the
accompanying consolidated financial statements for any potential liability relating to the
gross versus net dispute. There can be no assurance that Liggett will not be required to
make additional payments, which payments could adversely affect the Companys consolidated
financial position, results of operations or cash flows. |
|
|
|
Litigation Challenging the MSA. In Freedom Holdings Inc. v. Cuomo, litigation pending in
federal court in New York, certain importers of cigarettes allege that the MSA and certain
related New York statutes violate federal antitrust and constitutional law. The district court
granted New Yorks motion to dismiss the complaint for failure to state a claim. On appeal,
the United States Court of Appeals for the Second Circuit held that if all of the allegations
of the complaint were assumed to be true, plaintiffs had stated a claim for relief on antitrust
grounds. In January 2009, the district court granted New Yorks motion for summary judgment,
dismissing all claims brought by the plaintiffs, and dissolving the preliminary injunction.
Plaintiffs appealed the decision. In October 2010, the Second Circuit affirmed the district
courts decision. |
|
|
|
In Grand River Enterprises Six Nations, Ltd. v. King, another proceeding pending in federal
court in New York, plaintiffs seek to enjoin the statutes enacted by New York and other states
in connection with the MSA on the grounds that the statutes violate the Commerce Clause of the
United States Constitution and federal antitrust laws. In September 2005, the United States
Court of Appeals for the Second Circuit held that if all of the allegations of the complaint
were assumed to be true, plaintiffs had stated a claim for relief and that the New York federal
court had jurisdiction over the other defendant states. On remand, the trial court held that
plaintiffs are unlikely to succeed on the merits. After discovery, the parties cross-moved for
summary judgment; briefing concluded in December 2009 and oral argument took place in April
2010. |
|
|
|
Similar challenges to the MSA and MSA-related state statutes are pending in several other
states. Liggett and the other cigarette manufacturers are not defendants in these cases.
Litigation challenging the validity of the MSA, including claims that the MSA violates
antitrust laws, has not been successful to date. |
|
|
|
In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (Vibo) commenced litigation in
the United States District Court for the Western District of Kentucky against each of the
Settling States and certain Participating Manufacturers. Vibo alleged, among other things,
that the market share exemptions (i.e.: grandfathered shares) provided to certain SPMs under
the MSA, including Liggett, violate federal antitrust and constitutional law. In January 2009,
the district court dismissed the complaint. In January 2010, the court entered final judgment
in favor of the defendants. Vibo appealed to the United States Court of Appeals for the Sixth
Circuit. A decision is pending. |
|
|
|
Other State Settlements. The MSA replaces Liggetts prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota. Each of these four states,
prior to the effective date of the MSA, negotiated and executed settlement agreements with each
of the other major tobacco companies, separate from those settlements reached previously with
Liggett. Liggetts agreements with these states remain in full force and effect, subject to
the changes with Minnesota and Florida discussed below. These states settlement agreements
with Liggett contained most favored nation provisions which could reduce Liggetts payment
obligations based on subsequent |
40
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
settlements or resolutions by those states with certain other
tobacco companies. Beginning in 1999, Liggett determined that, based on each of these four
states settlements with United States Tobacco Company, Liggetts payment obligations to those
states had been eliminated. With respect to all non-economic obligations under the previous
settlements, Liggett believes it is entitled to the most favorable provisions as between the
MSA and each states respective settlement with the other major tobacco companies. Therefore,
Liggetts non-economic obligations to all states and territories are now defined by the MSA. |
|
|
|
In 2003, in order to resolve any potential issues with Minnesota as to Liggetts ongoing
economic settlement obligations, Liggett agreed to pay $100 a year to Minnesota, to be paid any
year cigarettes manufactured by Liggett are sold in that state. In 2003 and 2004, the
Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed that
Liggett had failed to make certain required payments under the respective settlement agreements
with these states. Liggett believes it is not obligated to make any further payments to these
states, based, among other things, on the language of the most favored nation provisions of the
respective settlement agreements. In December 2010, Liggett settled with Florida and agreed to
pay Florida $1,200 and to make further payments of $250 per year for a period of 21 years. The
payments in years 12 21 will be subject to an inflation adjustment. These payments are in
lieu of any other payments allegedly due to Florida under the settlement agreement. The Company
accrued approximately $3,200 for this matter. There can be no assurance that Liggett will be
able to resolve the matters with Texas and Mississippi or that Liggett will not be required to
make additional payments, which could adversely affect the Companys consolidated financial
position, results of operations or cash flows. |
|
|
|
Cautionary Statement. Management is not able to predict the outcome of the litigation pending
or threatened against Liggett. Litigation is subject to many uncertainties. For example, the
jury in the Lukacs case, an Engle progeny case tried in 2002, awarded $24,835 in compensatory
damages plus interest against Liggett and two other defendants and found Liggett 50%
responsible for the damages. The verdict was affirmed on appeal and Liggett paid $14,361 in
June 2010. To date, Liggett has been found liable in four other Engle progeny cases, which are
currently on appeal. As a result of the Engle decision, over 9,100 plaintiffs have claims
pending against Liggett and other cigarette manufacturers. It is possible that other cases
could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal.
Liggett may enter into discussions in an attempt to settle particular cases, if it believes it
is in its best interests to do so. |
|
|
|
Management cannot predict the cash requirements related to any future defense costs,
settlements or judgments, including cash required to bond any appeals, and there is a risk that
those requirements will not be able to be met. An unfavorable outcome of a pending smoking and
health case could encourage the commencement of additional similar litigation, or could lead to
multiple adverse decisions in the Engle progeny cases. Management is unable to make a
reasonable estimate with respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Liggett or the costs of defending such cases
and as a result has not provided any amounts in its condensed consolidated financial statements
for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in
an individuals complaint against the tobacco industry seek money damages in an amount to be
determined by a jury, plus punitive damages and costs. |
|
|
|
The tobacco industry is subject to a wide range of laws and regulations regarding the
marketing, sale, taxation and use of tobacco products imposed by local, state and federal
governments. There have been a number of restrictive regulatory actions, adverse legislative
and political decisions and other unfavorable developments concerning cigarette smoking and the
tobacco industry. These developments may negatively affect the perception of potential triers
of fact with respect to the |
41
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
tobacco industry, possibly to the detriment of certain pending
litigation, and may prompt the commencement of additional similar litigation or legislation. |
|
|
|
It is possible that the Companys consolidated financial position, results of operations or
cash flows could be materially adversely affected by an unfavorable outcome in any of the
smoking-related litigation. |
|
|
|
Liggetts management is unaware of any material environmental conditions affecting their
existing facilities. Liggetts management believe that current operations are conducted in
material compliance with all environmental laws and regulations and other laws and regulations
governing cigarette manufacturers. Compliance with federal, state and local provisions
regulating the discharge of materials into the environment, or otherwise relating to the
protection of the environment, has not had a material effect on the capital expenditures,
results of operations or competitive position of Liggett. |
|
|
|
Other Matters: |
|
|
|
In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five
year agreement with a subsidiary of the American Wholesale Marketers Association to support a
program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds
required by state and local governments for the distribution of cigarettes. This agreement has
been extended through February 2014. Under the agreement, Liggett Vector Brands has agreed to
pay a portion of losses, if any, incurred by the surety under the bond program, with a maximum
loss exposure of $500 for Liggett Vector Brands. To secure its potential obligations under the
agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100
letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has
incurred no losses to date under this agreement, and the Company believes the fair value of
Liggett Vector Brands obligation under the agreement was immaterial at December 31, 2010. |
|
|
|
In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of
a woman who died, in 2007, in a house fire allegedly caused by the ignition of contents of the
house by a Liggett cigarette. The plaintiff sued under the Alabama Extended Manufacturers
Liability Doctrine and for breach of warranty and negligence. The plaintiff sought both
punitive and compensatory damages. In January 2010, Liggett removed the case to federal court.
In February 2010, Liggett filed a motion to dismiss the case and plaintiff filed a motion to
remand. In September 2010, the court granted plaintiffs motion to remand, but the order was
stayed pending non-binding mediation of the dispute, which occurred in January 2011. The
matter was settled for $30. |
|
|
|
There may be several other proceedings, lawsuits and claims pending against Liggett
unrelated to tobacco or tobacco product liability. Management is of the opinion that the
liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims
should not materially affect the Companys financial position, results of operations or cash
flows. |
11. |
|
Related Party Transactions |
|
|
Liggett is a party to an agreement dated February 26, 1991, as amended June 30, 2001, with
Vector to provide various management and administrative services to Liggett in consideration
for an annual management fee of $900 paid in monthly installments and annual overhead
reimbursements of $864 paid in monthly installments. The charges for services under this
agreement amounted to $1,764 in 2010, 2009 and 2008. |
42
Liggett Group LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
In addition, Liggett has entered into an annually renewable Corporate Services Agreement with
VGR wherein VGR agreed to provide corporate services to Liggett at an annual fee paid in
monthly installments. Corporate services provided by VGR under this agreement include the
provision of administrative services related to Liggetts participation in its parent
companys multi-employer benefit plan, external publication of financial results, preparation
of consolidated financial statements and tax returns and such other administrative and
managerial services as may be reasonably requested by Liggett. The charges for services
rendered under the agreement amounted to $6,256 in 2010, $5,959 in 2009 and $5,675 in 2008. |
|
|
|
Liggett is party to a tax sharing agreement with Vector and certain other entities pursuant
to which Liggett will pay taxes on an estimated basis to Vector as if it were filing a
separate company tax return, except that the agreement effectively limits the ability of
Liggett to carry back losses for refunds. Liggett is entitled to recoup overpayments in a
given year out of future payments due under the agreement and is required to fund
underpayments. |
|
|
|
On January 1, 2004 Liggett entered into a manufacturing agreement with Vector Tobacco whereby
Liggett agreed to provide handling, storage, manufacturing, preparation, record-keeping,
remittance of federal excise tax payments, processing of returns and other services relating
to the manufacture of Vector Tobacco brands. The agreement expired December 31, 2005, but is
automatically renewed for a successive one-year term unless otherwise terminated by either
party. Pricing is set forth in the agreement based on previously determined standard costs
and invoices are sent to Vector Tobacco monthly. In 2010, 2009 and 2008, Liggett
manufactured approximately 1.1, 1.2 and 1.1 billion units of Vector Tobacco brands
respectively, and realized $66,667, $67,161 and $34,577, respectively, in net receipts from
these sales and $1,171, $1,349 and $1,158, respectively, in profit from the agreement. |
|
|
|
As of December 31, 2010 and 2009, Liggett has a net receivable from Vector Tobacco totaling
$969 and $6,304, respectively. This overall net receivable position is related primarily to
the manufacturing agreement between Liggett and Vector Tobacco in 2010. |
|
|
|
The remaining related party net receivable balances of $13,334 and $5,855 at December 31,
2010 and 2009, respectively, relate primarily to transactions with Liggetts affiliate,
Liggett Vector Brands. |
|
|
|
Liggett Vector Brands coordinates and executes the sales, marketing and manufacturing efforts
along with certain support functions for all of Vectors tobacco operations. In conjunction
with the duties performed at Liggett Vector Brands, a portion of sales, marketing,
manufacturing, distribution, and administrative expenses have been allocated to Liggett.
During 2010, 2009 and 2008, Liggett expensed $61,840, $55,549 and $55,602, respectively, for
services provided by Liggett Vector Brands of which $(35) related to restructuring costs in
2008. The remaining expenses have been classified as selling, general and administrative
($35,431, $31,553 and $31,612 for the years ended December 31, 2010, 2009 and 2008,
respectively) and cost of goods sold ($26,409, $23,996 and $24,025 for the years ended
December 31, 2010, 2009 and 2008, respectively). |
|
|
During 2004, Liggett Vector Brands adopted a restructuring plan in its continuing effort to
adjust the cost structure of the business and improve operating efficiency. The remaining
pre-tax restructuring liability of $280 as of December 31, 2010, relates to the subletting of
its New York office.
|
43
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charged |
|
|
|
|
|
|
|
|
|
|
Balance |
|
|
to |
|
|
|
|
|
|
|
|
|
|
at |
|
|
Costs |
|
|
|
|
|
|
Balance |
|
|
|
Beginning |
|
|
and |
|
|
|
|
|
|
at End of |
|
|
|
of Period |
|
|
Expenses |
|
|
Deductions |
|
|
Period |
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts |
|
$ |
150 |
|
|
$ |
78 |
|
|
$ |
34 |
|
|
$ |
194 |
|
Cash discounts |
|
|
186 |
|
|
|
23,361 |
|
|
|
23,511 |
|
|
|
36 |
|
Sales returns |
|
|
3,330 |
|
|
|
2,873 |
|
|
|
2,353 |
|
|
|
3,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,666 |
|
|
$ |
26,312 |
|
|
$ |
25,898 |
|
|
$ |
4,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts |
|
$ |
46 |
|
|
$ |
105 |
|
|
$ |
1 |
|
|
$ |
150 |
|
Cash discounts |
|
|
194 |
|
|
|
17,347 |
|
|
|
17,355 |
|
|
|
186 |
|
Sales returns |
|
|
3,000 |
|
|
|
2,997 |
|
|
|
2,667 |
|
|
|
3,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,240 |
|
|
$ |
20,449 |
|
|
$ |
20,023 |
|
|
$ |
3,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts |
|
$ |
46 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
46 |
|
Cash discounts |
|
|
61 |
|
|
|
12,980 |
|
|
|
12,847 |
|
|
|
194 |
|
Sales returns |
|
|
2,600 |
|
|
|
2,355 |
|
|
|
1,955 |
|
|
|
3,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,707 |
|
|
$ |
15,335 |
|
|
$ |
14,802 |
|
|
$ |
3,240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
exv99w3
Exhibit 99.3
Vector Tobacco Inc. and Subsidiaries
Consolidated Financial Statements
as of December 31, 2010 and 2009
and for each of the three years
ended December 31, 2010, 2009 and 2008
Vector Tobacco Inc. and Subsidiaries
Index
December 31, 2010 and 2009
|
|
|
|
|
|
|
Page(s) |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
1 |
|
|
|
|
|
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2010 and 2009 |
|
|
2-3 |
|
|
|
|
|
|
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008 |
|
|
4 |
|
|
|
|
|
|
Consolidated Statements of Stockholders Equity |
|
|
5 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
6-7 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
8-25 |
|
|
|
|
|
|
Consolidated Financial Statement Schedule |
|
|
|
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts |
|
|
26 |
|
Report of Independent Registered Public Accounting Firm
To the Board of Directors and the
Stockholder of Vector Tobacco Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Vector Tobacco Inc. and its
subsidiaries (the Company), a wholly-owned subsidiary of Vector Group Ltd., at December 31, 2010
and 2009, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2010 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial statement schedule listed
in the accompanying index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedule are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Raleigh, North Carolina
February 25, 2011
1
Vector Tobacco Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2010 and 2009
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,803 |
|
|
$ |
472 |
|
Accounts receivable trade, less allowances of $9 and $18,
respectively |
|
|
163 |
|
|
|
609 |
|
Inventories, net |
|
|
5,364 |
|
|
|
5,782 |
|
Deferred taxes |
|
|
2,892 |
|
|
|
2,341 |
|
Other current assets |
|
|
913 |
|
|
|
192 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
14,135 |
|
|
|
9,396 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
17 |
|
|
|
25 |
|
Intangible asset |
|
|
107,511 |
|
|
|
107,511 |
|
Deferred taxes |
|
|
103,837 |
|
|
|
93,113 |
|
Other assets |
|
|
1,251 |
|
|
|
999 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
226,751 |
|
|
$ |
211,044 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
Vector Tobacco Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2010 and 2009
(in
thousands of dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Due to related parties |
|
$ |
4,472 |
|
|
$ |
9,629 |
|
Accrued promotional expenses |
|
|
516 |
|
|
|
646 |
|
Estimated allowance for sales returns |
|
|
385 |
|
|
|
1,007 |
|
Settlement accruals |
|
|
2,624 |
|
|
|
2,723 |
|
Deferred taxes |
|
|
2,280 |
|
|
|
1,433 |
|
Income taxes payable |
|
|
|
|
|
|
538 |
|
Other |
|
|
151 |
|
|
|
311 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
10,428 |
|
|
|
16,287 |
|
|
|
|
|
|
|
|
|
|
Non-current employee benefits |
|
|
1,416 |
|
|
|
1,142 |
|
Deferred income taxes |
|
|
25,984 |
|
|
|
22,550 |
|
Other long-term liabilities |
|
|
4,056 |
|
|
|
2,982 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
41,884 |
|
|
|
42,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Common stock ($1 par value per share; 1,000 shares
authorized; 100 shares issued and outstanding) |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
358,692 |
|
|
|
372,292 |
|
Accumulated other comprehensive income |
|
|
288 |
|
|
|
295 |
|
Accumulated deficit |
|
|
(174,113 |
) |
|
|
(204,504 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
184,867 |
|
|
|
168,083 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
226,751 |
|
|
$ |
211,044 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Vector Tobacco Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues * |
|
$ |
106,066 |
|
|
$ |
106,446 |
|
|
$ |
70,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
78,444 |
|
|
|
80,772 |
|
|
|
43,455 |
|
Operating, selling, administrative and
general expenses |
|
|
2,941 |
|
|
|
4,564 |
|
|
|
6,499 |
|
Management fees paid to Vector Group Ltd. |
|
|
500 |
|
|
|
500 |
|
|
|
500 |
|
Restructuring and impairment charges,
changes in estimate |
|
|
|
|
|
|
900 |
|
|
|
(18 |
) |
Research and development |
|
|
524 |
|
|
|
1,552 |
|
|
|
2,960 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
23,657 |
|
|
|
18,158 |
|
|
|
17,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
1 |
|
|
|
3 |
|
|
|
105 |
|
Interest expense |
|
|
|
|
|
|
(6 |
) |
|
|
(39 |
) |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
23,658 |
|
|
|
18,155 |
|
|
|
17,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense) |
|
|
6,733 |
|
|
|
89,903 |
|
|
|
(1,983 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30,391 |
|
|
$ |
108,058 |
|
|
$ |
15,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Revenues and cost of goods sold include excise taxes of $54,250, $52,365, and $22,212 for the years
ended December 31, 2010, 2009, and 2008, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
4
Vector Tobacco Inc. and Subsidiaries
Consolidated Statements of Stockholders Equity
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid-In |
|
|
Comprehensive |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Income |
|
|
Deficit |
|
|
Equity (Deficiency) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 1, 2008 |
|
|
100 |
|
|
$ |
|
|
|
$ |
415,067 |
|
|
$ |
312 |
|
|
$ |
(327,848 |
) |
|
$ |
87,531 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,339 |
|
|
|
15,339 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Adjustments,
measurement date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53 |
) |
|
|
(53 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
(21,400 |
) |
|
|
|
|
|
|
|
|
|
|
(21,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
100 |
* |
|
|
|
|
|
|
393,667 |
|
|
|
321 |
|
|
|
(312,562 |
) |
|
|
81,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,058 |
|
|
|
108,058 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
|
(26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
(21,375 |
) |
|
|
|
|
|
|
|
|
|
|
(21,375 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
100 |
* |
|
|
|
|
|
|
372,292 |
|
|
|
295 |
|
|
|
(204,504 |
) |
|
|
168,083 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,391 |
|
|
|
30,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Comprehensive Income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,384 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
|
|
|
|
|
|
|
(13,600 |
) |
|
|
|
|
|
|
|
|
|
|
(13,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
|
100 |
* |
|
$ |
|
|
|
$ |
358,692 |
|
|
$ |
288 |
|
|
$ |
(174,113 |
) |
|
$ |
184,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Stock pledged as collateral for Vector Tobaccos guarantee of the Parents debt. See Note 1. |
The accompanying notes are an integral part of these consolidated financial statements.
5
Vector Tobacco Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
30,391 |
|
|
$ |
108,058 |
|
|
$ |
15,339 |
|
Adjustments to reconcile net income to net cash
provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
8 |
|
|
|
28 |
|
|
|
39 |
|
Deferred taxes |
|
|
(6,994 |
) |
|
|
(90,593 |
) |
|
|
2,856 |
|
Net gain on disposal of equipment |
|
|
|
|
|
|
|
|
|
|
(50 |
) |
Restructuring and impairment charges, changes in
estimates |
|
|
|
|
|
|
938 |
|
|
|
(18 |
) |
Cash
payments on restructuring liabilities |
|
|
(120 |
) |
|
|
(753 |
) |
|
|
(66 |
) |
Changes in
assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
446 |
|
|
|
(173 |
) |
|
|
(49 |
) |
Inventories |
|
|
418 |
|
|
|
(972 |
) |
|
|
20 |
|
Other assets |
|
|
(514 |
) |
|
|
2 |
|
|
|
(84 |
) |
Accounts payable |
|
|
|
|
|
|
(8 |
) |
|
|
2 |
|
Due to/from related parties |
|
|
(5,157 |
) |
|
|
3,523 |
|
|
|
(214 |
) |
Accrued expenses |
|
|
(891 |
) |
|
|
(56 |
) |
|
|
992 |
|
Income tax payable |
|
|
(538 |
) |
|
|
538 |
|
|
|
|
|
Employee benefits |
|
|
267 |
|
|
|
246 |
|
|
|
212 |
|
Other long-term liabilities |
|
|
1,074 |
|
|
|
1,104 |
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
18,390 |
|
|
|
21,882 |
|
|
|
19,086 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
Proceeds from sales of equipment |
|
|
|
|
|
|
|
|
|
|
50 |
|
Increase in restricted assets |
|
|
(241 |
) |
|
|
|
|
|
|
|
|
Increase in cash surrender value of life insurance
policies |
|
|
(218 |
) |
|
|
(213 |
) |
|
|
(208 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(459 |
) |
|
|
(213 |
) |
|
|
(162 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Parent |
|
|
(13,600 |
) |
|
|
(21,375 |
) |
|
|
(21,400 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(13,600 |
) |
|
|
(21,375 |
) |
|
|
(21,400 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
4,331 |
|
|
|
294 |
|
|
|
(2,476 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
|
|
472 |
|
|
|
178 |
|
|
|
2,654 |
|
|
|
|
|
|
|
|
|
|
|
End of period |
|
$ |
4,803 |
|
|
$ |
472 |
|
|
$ |
178 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Vector Tobacco Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009, and 2008
(in thousands of dollars)
|
|
|
Supplemental schedule of non-cash investing and financing activities |
|
|
|
|
Vector Tobacco paid income taxes of $1,234, $150 and $0 in 2010, 2009 and 2008,
respectively. |
|
|
|
|
Vector Tobacco paid interest of $0, $6 and $39 in 2010, 2009 and 2008, respectively. |
The accompanying notes are an integral part of these consolidated financial statements.
7
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years Ended December 31, 2010, 2009 and 2008
(in thousands of dollars)
1. |
|
Basis of Presentation |
|
|
|
Vector Tobacco Inc. (Vector Tobacco or the Company), is a wholly-owned subsidiary of VGR
Holding LLC (VGR), which in turn is wholly owned by Vector Group Ltd. (Vector or
Parent). The Company is engaged in the manufacture and sale of cigarettes in the United
States. Certain management and administrative functions are performed by affiliates (See Note
13 and 14). |
|
|
|
Management believes the assumptions underlying the consolidated financial statements are
reasonable. However, the consolidated financial statements included herein may not necessarily
reflect the Companys results of operations, financial position and cash flows in the future
or what its results of operations, financial position and cash flows would have been had the
Company been a stand-alone company during the periods presented. All
significant intercompany accounts and transactions have been eliminated in consolidation. |
|
|
|
Liggett Vector Brands Inc. (Liggett Vector Brands), a company affiliated through common
ownership, coordinates and executes the sales, marketing, administration and manufacturing
efforts along with certain support functions for all of Vectors tobacco operations. In
conjunction with the duties performed at Liggett Vector Brands, a portion of sales, marketing,
manufacturing, distribution, and administrative expenses have been allocated to Vector
Tobacco. |
|
|
|
Liggett Group LLC (Liggett), an affiliate of Vector Tobacco, manufactures most of Vector
Tobaccos cigarette brands under contract at Liggetts Mebane, North Carolina manufacturing
facility. |
|
|
|
Vector and VGR are holding companies and as a result do not have any operating activities that
generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR and its
other subsidiaries and investments and VGR relies on distributions from its other
subsidiaries, including Vector Tobacco, in order to fund its operations and meet its
obligations. Vector has certain debt outstanding which require interest and principal
payments over the terms of such debt. Interest and principal to service the debt is expected
to be funded by Vectors cash and cash equivalents, investments, the operations of Vectors
subsidiaries, including Vector Tobacco, and proceeds, if any, from Vectors future financings.
During 2010, 2009, and 2008 Vector Tobacco made distributions of $13,600, $21,375, and $21,400
respectively, to VGR. |
|
|
|
The Company has evaluated events that occurred subsequent to
December 31, 2010, through the financial statement issue date of
February 25, 2011 and determined that there were no recordable or
reportable subsequent events. |
|
|
|
11% Senior Secured Notes due 2015 Vector |
|
|
|
Vector has outstanding $415,000 principal amount of its 11% Senior Secured Notes due 2015 (the
Senior Secured Notes). The Senior Secured Notes were sold in August 2007 ($165,000),
September 2009 ($85,000), April 2010 ($75,000) and December 2010 ($90,000) in private offerings
to qualified institutional investors in accordance with Rule 144A of the Securities Act of
1933. |
|
|
|
In May 2008 and June 2010, Vector completed offers to exchange the Senior Secured Notes then
outstanding for an equal amount of newly issued 11% Senior Secured Notes due 2015. The new
Senior Secured Notes have substantially the same terms as the original Notes, except that the
new Senior Secured Notes have been registered under the Securities Act. Vector agreed to
consummate a registered exchange offer for the additional Senior Secured Notes issued in
December 2010 within 360 days after the date of their initial issuance. If Vector fails to
timely comply with its registration obligations, it will be required to pay additional interest
on these notes until it complies. |
The accompanying notes are an integral part of these consolidated financial statements.
8
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
The Senior Secured Notes pay interest on a semi-annual basis at a rate of 11% per year and
mature on August 15, 2015. Vector may redeem some or all of the Senior Secured Notes at any
time prior to August 15, 2011 at a make-whole redemption price.
On or after August 15, 2011,
Vector may redeem some or all of the Senior Secured Notes at a premium that will decrease over
time, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date.
In the event of a change of control, as defined in the indenture governing the Senior Secured
Notes, each holder of the Senior Secured Notes may require Vector to repurchase some or all of
its Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal
amount plus accrued and unpaid interest and liquidated damages, if any to the date of purchase.
The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis
by all of the 100% owned domestic subsidiaries of the Company that are engaged in the conduct
of the Companys cigarette businesses, including Vector Tobacco. Vector Tobaccos stock has
been pledged as collateral for the guarantee of the Senior Secured Notes. Vector Tobaccos
consolidated balance sheet, statement of operations and statement of stockholders equity
as of December 31, 2010 and 2009 and for each of the three years in the period ended
December 31, 2010 do not reflect any accounts related to these notes as the debt is not
acquisition related.
Vector Tobaccos cash flows from operations may be utilized to fund the interest and debt
obligation of the Senior Secured Notes via distributions by Vector Tobacco to Vector.
Additional Parent Company Notes
As of December 31, 2010, Vector has debt with a net amount of approximately $81,404 (face
amount $267,530) in addition to the Senior Secured Notes previously discussed. These notes
are not reflected in Vector Tobaccos consolidated financial statements as these obligations
are not collateralized by Vector Tobacco assets nor has Vector Tobacco guaranteed these
obligations. VGR must redeem $11,000 of its 3.875% Variable Interest Senior Convertible
Debentures by June 15, 2011.
General Corporate Expenses
General corporate expense allocations represent costs related to corporate functions such as
executive oversight, risk management, accounting, legal, investor relations, tax, other
services and employee benefits and incentives Vector provides to the Company. The allocations
are based on a reasonable estimation of Vectors overhead expenses based on the relative
specific identification and the relative percentage of the Companys revenues and headcount to
Vectors total cost. All of these allocations are reflected in management fees paid to Vector
Group Ltd. of $500 in the Companys consolidated statements of operations for each of the
years ended December 31, 2010, 2009, and 2008.
The Company and Vector considered these general corporate expense allocations to be a
reasonable reflection of the utilization of services provided. The allocations may not,
however, reflect the expense the Company would have incurred as a stand-alone company. Actual
costs which may have been incurred if the Company had been a
stand-alone company in 2010, 2009 and 2008 would depend on a number of factors, including how the Company chose to organize
itself, what if any functions were outsourced or performed by Company employees and strategic
decisions made in areas such as infrastructure. However, the Company currently does not
believe the difference between the cost allocations from Vector and the costs the Company
would have incurred on a stand-alone basis would have a material impact on the Companys
statements of operations, balance sheets or statements of cash flows
for 2010, 2009 and 2008.
9
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Background
In January 2003, Vector Tobacco introduced QUEST, the Companys brand of low nicotine and
nicotine-free cigarette products. QUEST brand cigarettes were marketed from 2003 until 2009 as
premium cigarettes to permit adult smokers, who wish to continue smoking, to gradually reduce
their intake of nicotine. The products were not labeled or advertised for smoking cessation and
Vector Tobacco made no claims that QUEST was safer than other cigarette products. Vector
Tobacco ceased manufacturing Quest cigarettes during the third quarter of 2009.
Vector Tobacco is also engaged in the sale of conventional cigarettes through their USA,
Silver Eagle, Eagle and Meridian brands. Sales of the Meridian brand were discontinued in 2010
with all remaining inventory sold.
Recent Developments
In February 2009 Vector Tobacco settled an outstanding patent interference suit with North
Carolina State University. Under the terms of the settlement, Vector Tobacco received $325
during 2009. The $325 was recorded as a reduction of expense in 2009. The patents have a book
value of $0 at December 31, 2010 and 2009.
2. |
|
Summary of Significant Accounting Policies |
|
|
|
Basis of Presentation
These consolidated financial statements include the accounts of Vector Tobacco and its
wholly-owned subsidiary, Vector Tobacco Limited (Bermuda.) The consolidated financial
statements exclude VT Aviation LLC as Vector consolidates this entity as its primary
beneficiary. In 2008, Vector Tobacco Limited (Bermuda) was dissolved. All significant
intercompany balances and transactions have been eliminated. |
|
|
|
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities as of
December 31, 2010, and 2009, and the reported amounts of revenues and expenses for the years
ended December 31, 2010, 2009, and 2008. Significant estimates subject to material changes in
the near term include restructuring and impairment charges, promotional accruals, inventory
reserves, allowances for doubtful accounts and allowances for sales returns, Master Settlement
Agreement (MSA) liabilities and litigation and defense costs. Actual results could differ
from those estimates. |
|
|
|
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in
banks and cash equivalents, comprised of short-term investments which have an original
maturity of 90 days or less. The carrying value of cash and cash equivalents, restricted
assets and short-term loans approximate their fair value. The Company places its cash and
cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation
(FDIC) and Securities Investor Protection Corporation (SIPC) insure these balances, up to
$250 and $500, respectively. The carrying amount of bank deposits, including amounts
classified as cash and cash equivalents, were approximately $4,803 and $472 at December 31,
2010, and 2009 respectively. Bank deposits of approximately $100 at December 31, 2010
and 2009, are insured by the FDIC. |
|
|
|
Accounts Receivable
Accounts receivable-trade is recorded at their net realizable value. |
10
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Inventories
Inventories are stated at the lower of cost or market with cost determined using the last-in,
first-out method. Although portions of leaf tobacco inventories may not be used or sold
within one year because of the time required for aging, they are included in current assets,
which is common practice in the cigarette industry. It is not practicable to determine the
amount that will not be used or sold within one year.
The Company estimates an inventory reserve for excess quantities and obsolete items based on
specific identification and historical write-offs, taking into account future demand and
market conditions.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the respective assets which are three to fifteen
years for machinery and equipment. Leasehold improvements are amortized over the term of the
respective lease or the estimated useful life of improvements whichever is shorter.
Expenditures for repairs and maintenance are charged to expense as incurred. The costs of
major renewals and betterments are capitalized. The cost and related accumulated depreciation
of property, plant and equipment are removed from the accounts upon retirement or other
disposition and any resulting gain or loss is reflected in operations.
The Company reviews long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Accordingly, when indicators of impairment are present, the Company evaluates the carrying
value of property, plant and equipment against their related future undiscounted cash flows.
If the carrying value exceeds such cash flows, then impairment is deemed to exist. The amount
of any impairment is determined by comparing the long-lived assets carrying value against its
fair value, which is determined using discounted future cash flows.
Intangible Asset
The Company is required to conduct an annual review of intangible assets for potential
impairment including the intangible asset of $107,511, which is not subject to amortization
due to its indefinite useful life. This intangible asset relates to the exemption of
Medallion, acquired in April 2002, under the MSA agreement, which states payments under the
MSA continue in perpetuity. (See Note 6) As a result, the Company believes it will realize the
benefit of the exemption for the foreseeable future.
Other intangible assets, included in other assets, consisting of trademarks are amortized
using the straight-line method over 10 years and had no net book value of at December 31, 2010
and 2009. The amortization expense related to the intangible assets was $0, $8, and $7 in
2010, 2009, and 2008, respectively. In connection with the restructuring of Vector Tobacco,
the Company recorded an impairment charge of approximately $38 related to Quest trademark
agreements, which is included as a component of Operating, selling, general and
administrative charges in the Companys consolidated statement of operations for the year
ended December 31, 2009.
Other Assets
Other current assets of $913 and $192 as of December 31, 2010 and 2009, respectively, are
primarily restricted assets and prepaid items including insurance.
Other non-current assets of $1,251 and $999 as of December 31, 2010 and 2009, respectively,
are primarily related to the cash surrender value of certain life insurance policies.
11
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Revenue Recognition
Revenues from sales are recognized upon shipment of finished goods when title and risk of loss
have passed to the customer, there is pervasive evidence of an arrangement, the sales price is
determinable and collectability is reasonably assured. The Company provides for expected sales
returns. Certain sales incentives, including buy downs, are classified as reductions of net
sales. The Companys accounting policy is to include federal excise taxes in revenues and cost
of goods sold. Such revenues and cost of goods sold totaled $54,250, $52,365, and $22,212 for
the years ended December 31, 2010, 2009, and 2008, respectively. The large increase in 2009
from 2008 was due to the imposition of a $6.17 per carton increase in the federal excise tax
on tobacco products effective April 1, 2009. Since the Companys primary line of business is
tobacco, the Companys financial position and its results of operations and cash flows have
been and could continue to be materially adversely affected by significant unit sales volume
declines, litigation and defense costs, increased tobacco costs or reductions in the selling
price of cigarettes in the near term.
Shipping and Handling Fees and Costs
Shipping and handling fees related to sales transactions are not billed to customers nor
recorded as sales revenue. Shipping and handling costs, which were $539, $572, and $595 in
2010, 2009, and 2008, respectively, are recorded as selling, general and administrative
expenses.
Advertising Costs
Advertising costs are expensed as incurred and were $4, $14, and $27 for the years ended
December 31, 2010, 2009 and 2008, respectively and are recorded as selling, general and
administrative expenses.
Research and Development Costs
Research and development costs are expensed as incurred and were $524, $1,552, and $2,960 in
2010, 2009, and 2008, respectively. The year over year decline in expense relates primarily
to the decision not to pursue FDA approval of Quest as a smoking
cessation device (Note 14). In connection with this decision, the Company closed its Durham, NC research operations in the
second quarter of 2009.
Stock-Based Compensation
Vector Tobacco through an affiliate accounted for employee stock compensation plans by
measuring compensation cost for share-based payments at fair value.
Employee Benefits
As of December 31, 2010, Vector Tobacco has no employees. Employees of Liggett Vector Brands,
an affiliate, perform services for Vector Tobacco and associated expenses, including benefits,
of such employees are allocated to Vector Tobacco. A senior executive of Liggett Vector Brands
who provides services to Vector Tobacco participates in the Supplemental Executive Retirement
Plan (SERP) sponsored by Vector and such expenses are allocated from Vector to Vector
Tobacco.
The cost of providing retiree pension benefits, health care and life insurance benefits is
actuarially determined and accrued over the service period of the active employee group. The
funded status of each defined benefit pension plan, retiree health care and other
postretirement benefit plans and postemployment benefit plans as of December 31, 2010 and 2009
are recognized on the balance sheet.
Income Taxes
Accounting guidance requires that an entity recognize the financial statement impact of a tax
position when it is more likely than not that the position will be sustained upon examination.
If the tax position meets the more-likely-than-not recognition threshold, the tax effect is
recognized at the largest amount of the benefit that is greater than 50% likely of being
realized upon ultimate settlement. Any liability created for unrecognized deferred tax
benefits is presented as a liability and cannot be combined with deferred tax liabilities or
assets.
12
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Deferred taxes reflect the impact of temporary differences between the amounts of assets and
liabilities recognized for financial reporting purposes and the amounts recognized for tax
purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are
measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax
assets when it is deemed more likely than not that future taxable income will be insufficient
to realize some portion or all of the deferred tax assets. A current tax provision is
recorded for any income taxes payable.
Vector Tobaccos U.S. income tax provision and related deferred income tax amounts are
determined as if the Company filed tax returns on a stand-alone basis. The Companys entities
currently join in the filing of a consolidated U.S. tax return with Vector and its other U.S.
subsidiaries.
Although indefinite-lived intangible assets and goodwill are not amortized, the Company
recognizes deferred tax liabilities and assets for temporary differences related to its
indefinite-lived intangible asset and the tax-deductible portion of such assets. Because
indefinite-lived intangible assets are not amortized for financial reporting purposes, the
related deferred tax liability will not reverse until some indeterminate future period should
the assets become impaired or are disposed of. Therefore, the reversal of deferred tax
liability related to the Medallion intangible asset is no longer considered a source of future
taxable income in assessing the realization of deferred tax assets. As a result, the Company
is required to record a deferred tax asset valuation allowance totaling approximately $22,468
and $46,899 as of December 31, 2010 and 2009, respectively.
Legal Costs
The Company records product liability legal expenses and other litigation costs as selling,
general and administrative expenses as those costs are incurred.
The Company records provisions in its consolidated financial statements for pending litigation
when it is determined that an unfavorable outcome is probable and the amount of loss can be
reasonably estimated. Management is unable to make a reasonable estimate with respect to the
amount or range of loss that could result from an unfavorable outcome in any of the pending
tobacco-related cases or the costs of defending such cases, and no amounts have been provided
in the Companys consolidated financial statements for unfavorable outcomes. Litigation is
subject to many uncertainties, and it is possible that the Companys consolidated financial
position, results of operations or cash flows could be materially adversely affected by an
unfavorable outcome in any such tobacco-related litigation.
Distributions and Dividends on Common Stock
The Company records distributions on its common stock as dividends in its consolidated
statement of stockholders equity to the extent of retained earnings. Any amounts
exceeding retained earnings are recorded as a reduction to additional paid-in-capital.
Comprehensive Income
Other comprehensive income is a component of stockholders equity and relates to
pension related adjustments. The Companys comprehensive income
was $30,384, $108,032 and $15,295 for the years ended
December 31, 2010, 2009 and 2008 respectively.
13
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Fair Value of Financial Instruments
The estimates presented herein are not necessarily indicative of the amounts the Company could
realize in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair values.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Amount |
|
|
Value |
|
|
Amount |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
4,803 |
|
|
$ |
4,803 |
|
|
$ |
472 |
|
|
$ |
472 |
|
New Accounting Pronouncements
In
June 2009, the Financial Accounting Standards Board ("FASB") issued an amendment to the accounting and disclosure requirements for
the consolidation of variable interest entities. The amended guidance eliminates exceptions
to consolidating qualifying special purpose entities, contains new criteria for determining
the primary beneficiary, and increases the frequency of required reassessments to determine
whether a company is the primary beneficiary of a variable interest entity. This guidance
also contains a new requirement that any term, transaction, or arrangement that does not have
a substantive effect on an entitys status as a variable interest entity, a companys power
over a variable interest entity, or a companys obligation to absorb losses or its right to
receive benefits of an entity must be disregarded. The elimination of the qualifying
special-purpose entity concept and its consolidation exception means more entities will be
subject to consolidation assessments and reassessments. The Company adopted this guidance
for interim and annual reporting periods beginning on January 1, 2010. The adoption of this
guidance did not impact the Companys condensed consolidated financial statements.
In January 2010, the FASB issued authoritative guidance intended to improve disclosure about
fair value measurements. The guidance requires entities to disclose significant transfers in
and out of fair value hierarchy levels and the reasons for the transfers and to present
information about purchases, sales, issuances, and settlements separately in the
reconciliation of fair value measurements using significant unobservable inputs (Level 3).
Additionally, the guidance clarifies that a reporting entity should provide fair value
measurements for each class of assets and liabilities and disclose the inputs and valuation
techniques used for fair value measurements using significant other observable inputs (Level
2) and significant unobservable inputs (Level 3). This guidance is effective for interim and
annual periods beginning after December 15, 2009 except for the disclosure about purchases,
sales, issuances and settlements in the Level 3 reconciliation, which will be effective for
annual periods beginning after December 15, 2010. The Company adopted this authoritative
guidance, with the exception of the disclosures about purchases, sales, issuances and
settlements in the Level 3 reconciliation. The adoption of this guidance did not impact the
Companys 2010 consolidated financial statements. The remaining disclosures will be added to
the Companys future filings when applicable.
14
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
3. |
|
Medallion |
|
|
|
On April 1, 2002, an indirect wholly owned subsidiary of Vector acquired the stock of
Medallion and certain related assets from Medallions principal stockholder. The total
purchase price consisted of $50,000 in cash and $60,000 in promissory notes, which has been
fully paid. |
|
|
|
Medallion, formerly a discount cigarette manufacturer headquartered in Richmond, Virginia, is
a participant in the MSA agreement between the state Attorneys General and the tobacco
industry. Medallion has no payment obligations under the MSA agreement except to the extent
its market share exceeds approximately 0.28% of total cigarettes sold in the United States
(approximately 840 million cigarettes in 2010). |
|
4. |
|
Inventories |
|
|
|
Inventories consist of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Leaf tobacco |
|
$ |
|
|
|
$ |
329 |
|
Finished goods |
|
|
5,397 |
|
|
|
5,467 |
|
|
|
|
|
|
|
|
Inventories at current cost |
|
|
5,397 |
|
|
|
5,796 |
|
LIFO adjustment |
|
|
(33 |
) |
|
|
(14 |
) |
|
|
|
|
|
|
|
Total inventories, net |
|
$ |
5,364 |
|
|
$ |
5,782 |
|
|
|
|
|
|
|
|
Leaf tobacco at December 31, 2009 includes costs related to tobacco purchased by the Company
from third party tobacco dealers and tobacco grown under contract with independent farmers.
There were no leaf tobacco purchase commitments at Vector Tobacco as of December 31, 2010.
The Company classifies the prepaid cost of the MSA in ending inventory. The prepaid cost of
MSA was $1,673 and $1,654 at December 31, 2010 and 2009, respectively.
Since January 1, 2004 most of Vector Tobaccos products have been manufactured at Liggetts
manufacturing facility in Mebane, North Carolina under a contract manufacturing agreement with
Liggett (See Note 13).
5. |
|
Property, Plant and Equipment |
|
|
|
Property, plant and equipment consist of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Machinery and equipment |
|
$ |
848 |
|
|
|
858 |
|
|
|
|
|
|
|
|
15
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
(831 |
) |
|
|
(833 |
) |
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
17 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $9, $20, and $32 for the years ended December 31, 2010, 2009, and
2008, respectively. There were no commitments to purchase machinery and equipment at December
31, 2010. |
|
6. |
|
Intangible Assets |
|
|
|
Intangible assets consist of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Indefinite useful live intangible asset |
|
$ |
107,511 |
|
|
$ |
107,511 |
|
|
|
|
|
|
|
|
|
|
In connection with the acquisition of Medallion, the Company allocated a portion of the total
purchase price of $110,000 to Medallions exemption under the MSA agreement. See Note 3.
This intangible asset was deemed to have an indefinite useful life and is tested for
impairment annually or more frequently when indicators of impairment are present. The annual
test was performed in the fourth quarter of 2010, 2009, and 2008, resulting in no impairment. |
|
|
|
Other intangible assets consist of trademarks which were amortized using the straight-line
method over 10 years and had no net book value at December 31, 2010 and 2009. Amortization
expense associated with trademarks and patents totaled $0 in 2010, $8 in 2009 and $7 in 2007.
An impairment charge of $38 was taken in the fourth quarter of 2009 to write off the remaining
value of the trademarks. |
|
7. |
|
Employee Benefit Plans |
|
|
|
The Companys portion of the 401(k) plan expenses sponsored by Liggett Vector Brands, for
entities in the affiliates controlled group, were $12, $43, and $71 for the years ended
December 31, 2010, 2009, and 2008, respectively. |
|
|
|
Defined Benefit Retirement Plans
During 2010, 2009, and 2008, a certain senior executive of the Company also participated in
the Supplemental Executive Retirement Plan (SERP) sponsored by Vector where the Company will
pay supplemental retirement benefits to certain key employees. The Company expensed $267,
$245, and $212 in relation to the SERP plan during 2010, 2009, and 2008 respectively. The
executives retirement date is projected to be January 1, 2012 and the Company estimates
payments under the SERP will be approximately $1,700. |
|
8. |
|
Income Taxes |
|
|
|
Vector Tobaccos income tax provision and related deferred income tax amounts are determined
as if the Company filed tax returns on a stand alone basis. The Companys entities currently
join in the filing of a consolidated tax return with Vector and its other subsidiaries. |
16
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
The amounts provided for income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
4,981 |
|
|
$ |
4,746 |
|
|
$ |
|
|
State |
|
|
1,635 |
|
|
|
1,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,616 |
|
|
$ |
6,233 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal |
|
$ |
(14,386 |
) |
|
$ |
(91,041 |
) |
|
$ |
1,468 |
|
State |
|
|
1,037 |
|
|
|
(5,095 |
) |
|
|
515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(13,349 |
) |
|
$ |
(96,136 |
) |
|
$ |
1,983 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(6,733 |
) |
|
$ |
(89,903 |
) |
|
$ |
1,983 |
|
Vector Tobaccos operations are included in consolidated federal and state income tax returns
of its indirect parent, Vector Group Ltd. At December 31, 2010 and 2009, the Company had
$22,468 and $46,899 of unrecognized net deferred tax assets, comprised principally of net
operating loss carryforwards, available to offset future taxable income for federal and state
income tax purposes, respectively. A valuation allowance has been provided against these net
deferred tax assets as it is presently deemed more likely than not that the benefit of such
net tax assets will not be utilized. The valuation allowance was reduced in 2009 for the
recognition of federal and state tax net operating losses after evaluating the impact of the
negative and positive evidence that such asset would be realized. The Company based its
conclusion on the fact that Vector Tobacco reported federal and state taxable income on a
separate company basis for the second consecutive year in 2009. The Company continues to
evaluate the realizability of its net deferred tax assets and its estimate is subject to
change. The reversal of deferred tax liabilities related to Medallion intangible asset are not
considered a source of future taxable income in assessing the realization of deferred tax
assets. As a result, the Company was required to record a deferred tax asset valuation
allowance totaling approximately $22,468 and $46,899 during the year ended December 31, 2010
and 2009, respectively.
The Companys parent, VGR, participates in a tax sharing agreement with Vector in which VGR
remits tax payments to Vector based on the consolidated taxable income of VGR and its
subsidiaries (the VGR Group). Under the tax sharing agreement, each member of the VGR Group
whose tax liability is reduced by a net operating loss or credit of another member is treated
as paying such member for the use of such benefit. However, the member providing such benefit
does not receive credit until it is able to use the benefit on a separate company basis,
rather than when the benefit is actually used by the VGR Group. Because Vector Tobacco could
not use the benefit of its net operating losses on a separate company basis, VGR did not
allocate tax benefits to Vector Tobacco as of December 31, 2008. Consequently, no income tax
benefit was recorded for the year ended December 31, 2008.
Temporary differences which give rise to a significant portion of deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Deferred Tax |
|
|
Deferred Tax |
|
|
|
Asset |
|
|
Liability |
|
|
Asset |
|
|
Liability |
|
Sales and product allowances |
|
$ |
164 |
|
|
$ |
|
|
|
$ |
419 |
|
|
$ |
|
|
17
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
Deferred Tax |
|
|
Deferred Tax |
|
|
|
Asset |
|
|
Liability |
|
|
Asset |
|
|
Liability |
|
Inventories |
|
|
15 |
|
|
|
2,280 |
|
|
|
15 |
|
|
|
1,433 |
|
Property, plant and equipment |
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
8 |
|
Compensation, benefits and related items |
|
|
590 |
|
|
|
|
|
|
|
467 |
|
|
|
|
|
Amortization of intangibles |
|
|
|
|
|
|
25,976 |
|
|
|
|
|
|
|
22,542 |
|
Restructuring |
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
Settlement payments |
|
|
2,713 |
|
|
|
|
|
|
|
1,901 |
|
|
|
|
|
Net operating losses |
|
|
125,714 |
|
|
|
|
|
|
|
139,545 |
|
|
|
|
|
Valuation allowance |
|
|
(22,468 |
) |
|
|
|
|
|
|
(46,899 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred taxes |
|
$ |
106,728 |
|
|
$ |
28,264 |
|
|
$ |
95,454 |
|
|
$ |
23,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Differences between the amounts provided for income taxes and amounts computed at the federal
statutory tax rates for the years ended December 31, 2010, 2009, and 2008 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision |
|
$ |
23,658 |
|
|
$ |
18,155 |
|
|
$ |
17,322 |
|
|
|
|
|
|
|
|
|
|
|
Federal income tax expense at statutory rate |
|
$ |
8,280 |
|
|
$ |
6,354 |
|
|
$ |
6,063 |
|
State income tax provision at statutory rate,
net of federal income tax benefit |
|
|
1,736 |
|
|
|
1,654 |
|
|
|
338 |
|
Other changes due to changes in state income tax rates |
|
|
7,682 |
|
|
|
(493 |
) |
|
|
(385 |
) |
Change in valuation allowance, net |
|
|
(24,431 |
) |
|
|
(97,418 |
) |
|
|
(4,033 |
) |
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) provision |
|
$ |
(6,733 |
) |
|
$ |
(89,903 |
) |
|
$ |
1,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no unrecognized tax benefits for the years ended December 31, 2010, 2009 and 2008,
respectively. The Company classifies all tax-related interest and penalties as income tax
expense. |
|
9. |
|
Operating Leases |
|
|
|
As of December 31, 2010, the Company has no operating leases. |
|
|
|
Rental expense for the years ended December 31, 2010, 2009, and 2008 was $0, $378, and $340,
respectively. This includes $141 expensed as part of the Companys restructuring in 2009. |
|
10. |
|
Concentrations of Credit Risk |
|
|
|
Financial instruments which potentially subject the Company to concentrations of credit risk
consist principally of trade receivables and cash and cash equivalents. |
|
|
|
Vector Tobaccos customers are primarily candy and tobacco distributors, and large grocery,
drug and convenience store chains. Three customers accounted for approximately 47%, 14% and
13%, respectively of gross sales in 2010. Three customers accounted for approximately 42%, 14%
and 13%, respectively of gross sales in 2009. Three customers accounted for approximately 35%,
17% and 15%, respectively of |
18
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
gross sales in 2008. Concentrations of credit risk with respect to trade receivables are
limited due to the number of customers comprising the Companys customer base and the
frequency of orders by these customers. Vector Tobaccos largest single customer represented
approximately 0% of net accounts receivable at December 31, 2010 and 39% at December 31, 2009.
Ongoing credit evaluations of customers financial condition are performed and, generally, no
collateral is required. The Company maintains reserves for potential credit losses and such
losses, in the aggregate, have generally not exceeded managements estimates. |
|
|
|
The Company maintains cash deposits and money market accounts with major banks which from time
to time may exceed federally insured limits. The Company periodically assesses the financial
condition of the institutions and believes that the risk of loss is minimal. |
|
11. |
|
Contingencies |
|
|
|
Tobacco-Related Litigation |
|
|
|
Overview
Since 1954, United States cigarette manufacturers have been named as defendants in numerous
direct, third-party and purported class actions predicated on the theory that cigarette
manufacturers should be liable for damages alleged to have been caused by cigarette smoking or
by exposure to secondary smoke from cigarettes. Although new cases continue to be commenced
against certain cigarette manufacturers, including Vector Tobaccos affiliate, Liggett Group
LLC, Vector Tobacco has not been named as a defendant in any such actions. |
|
|
|
Master Settlement Agreement
In November 1998, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation, R.J.
Reynolds Tobacco Company and Lorillard Tobacco Company (collectively, the Original
Participating Manufacturers or OPMs) (together with the OPMs and any other tobacco product
manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or
SPMs), (the OPMs and SPMs are hereinafter referred to jointly as the Participating
Manufacturers) entered into the Master Settlement Agreement (the MSA) with 46 states, the
District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and
the Northern 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 received final judicial approval in each of the settling jurisdictions. In February 1999,
Medallion (n/k/a Vector Tobacco) became a subsequent participating manufacturer under the MSA. |
|
|
|
In the Settling States, the MSA released Vector Tobacco from: |
|
|
|
all claims of the Settling States and their respective political subdivisions and
other recipients of state health care funds, relating to: (i) past conduct arising out
of the use, sale, distribution, manufacture, development, advertising and marketing of
tobacco products; (ii) the health effects of, the exposure to, or research, statements or
warnings about, tobacco products; and |
|
|
|
|
all monetary claims of the Settling States and their respective subdivisions and other
recipients of state health care funds, relating to future conduct arising out of the use
or exposure to, tobacco products that have been manufactured in the ordinary course of
business. |
|
|
The MSA restricts tobacco product advertising and marketing within the Settling States and
otherwise restricts the activities of Participating Manufacturers. Among other things, the
MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco
products; bans the use of cartoon characters |
19
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
in all tobacco advertising and promotion; limits each Participating Manufacturer to one
tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with
certain limited exceptions; prohibits payments for tobacco product placement in various media;
bans gift offers based on the purchase of tobacco products without sufficient proof that the
intended recipient is an adult; prohibits Participating Manufacturers from licensing third
parties to advertise tobacco brand names in any manner prohibited under the MSA; prohibits
Participating Manufacturers from using as a tobacco product brand name any nationally
recognized non-tobacco brand or trade name or the name or names of sports teams, entertainment
groups or individual celebrities.
The MSA also requires Participating Manufacturers to affirm corporate principles to comply
with the MSA and to reduce underage usage of tobacco products and imposes restrictions on
lobbying activities conducted on behalf of Participating Manufacturers. In addition, the MSA
provides for the appointment of an independent auditor to calculate and determine the amounts
of payments owed pursuant to the MSA.
Under
the payment provisions of the MSA, the Participating Manufacturers
are required to make
annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions).
These annual payments are allocated based on unit volume of domestic cigarette shipments. The
payment obligations under the MSA are the several, and not joint, obligations of each
Participating Manufacturer and are not the responsibility of any parent or affiliate of a
Participating Manufacturer.
Vector Tobacco has no payment obligations under the MSA except to the extent its market share
exceeds a base amount of approximately 0.28% of total cigarettes sold in the United States
(approximately 840 million cigarettes in 2010). If Vector Tobaccos market share exceeds
their respective market share exemption in a given year, then on April 15 of the following
year, Vector Tobacco must pay on each excess unit an amount equal (on a per-unit basis) to
that due by the OPMs for that year. Vector Tobacco paid $6,836 for their 2009 MSA obligations
and paid $3,040 for their 2008 MSA obligations. Vector Tobacco
expensed $6,292 for its estimated MSA obligation for 2010 as part of cost of goods sold. Vector Tobacco prepaid
$4,000 of its 2010 estimated MSA obligation in December 2010. Additional amounts may be due
for 2010 but will not be finalized by the Independent Auditor until April 2011.
Certain MSA Disputes
NPM Adjustment. In March 2006, an economic consulting firm selected pursuant to the MSA
rendered its final and non-appealable decision that the MSA was a significant factor
contributing to the loss of market share of Participating Manufacturers to non-participating
manufacturers for 2003. This is known as the NPM Adjustment. The economic consulting firm
rendered the same decision with respect to 2004 and 2005. In March 2009, a different economic
consulting firm made the same determination for 2006. As a result, the manufacturers are
entitled to a potential NPM Adjustment to their 2003, 2004, 2005 and 2006 MSA payments. The
Participating Manufacturers are also entitled to potential NPM Adjustments to their 2007, 2008
and 2009 payments pursuant to an agreement entered into in June 2009 between the OPMs and the
Settling States under which the OPMs agreed to make certain payments for the benefit of the
Settling States, in exchange for which the Settling States stipulated that the MSA was a
significant factor contributing to the loss of market share of Participating Manufacturers
in 2007, 2008 and 2009. A Settling State that has diligently enforced its qualifying escrow
statute in the year in question may be able to avoid application of the NPM Adjustment to the
payments made by the manufacturers for the benefit of that Settling State.
From
2003 to 2010, Vector Tobacco disputed that they owed the Settling States the NPM
Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Vector Tobacco
withheld payment associated with these NPM Adjustment amounts. The total amount withheld or
paid into a disputed payment account by Vector Tobacco from 2003
to 2010 was $2,050.
20
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was
filed in 49 Settling States over the issue of whether the application of the NPM Adjustment for
2003 is to be determined through litigation or arbitration. These actions relate to the
potential NPM Adjustment for 2003, which the independent auditor under the MSA previously
determined to be as much as $1,200,000 for all Participating Manufacturers. All but one of the
48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is
arbitrable. All 47 of those decisions are final. One court, the Montana Supreme Court, ruled
that Montanas claim of diligent enforcement must be litigated. The United States Supreme Court
denied certiorari with respect to that opinion. In response to a proposal from the OPMs and
many of the SPMs, 45 of the Settling States, representing approximately 90% of the allocable
share of the Settling States, entered into an agreement providing for a nationwide arbitration
of the dispute with respect to the NPM Adjustment for 2003. In June 2010, the three person
arbitration panel was selected and procedural hearings, discovery and briefing on legal issues
of general application have commenced. Because states representing more than 80% of the
allocable share signed the agreement, signing states will receive a 20% reduction of any
potential 2003 NPM adjustment. Vector Tobacco does not have a claim
for a 2003 NPM adjustment and there can be no assurance that
Vector Tobacco will receive any adjustment as a result of future
proceedings.
Gross v. Net Calculations. In October 2004, the independent auditor notified Vector Tobacco
and all other Participating Manufacturers that their payment obligations under the MSA, dating
from the agreements execution in late 1998, had been recalculated using net unit amounts,
rather than gross unit amounts (which had been used since 1999).
Vector Tobacco has objected to this retroactive change and has disputed the change in
methodology. Vector Tobacco contends that the retroactive change from using gross to net
unit amounts is impermissible for several reasons, including:
|
|
|
use of net unit amounts is not required by the MSA (as
reflected by, among other things, the use of gross unit amounts through 2005); |
|
|
|
|
such a change is not authorized without the consent of affected
parties to the MSA; |
|
|
|
|
the MSA provides for four-year time limitation periods for
revisiting calculations and determinations, which precludes recalculating Vector
Tobaccos 1997 Market Share (and thus, Vector Tobaccos market share exemption);
and |
|
|
|
|
Vector Tobacco and others have relied upon the calculations based
on gross unit amounts since 1998. |
No amounts have been expensed or accrued in the accompanying consolidated financial statements
for any potential liability relating to the gross versus net dispute.
QUEST 3. Vector Tobacco has not made MSA payments on sales of its QUEST 3 product as Vector
Tobacco believes that QUEST 3 does not fall within the definition of a cigarette under the
MSA. Quest is no longer being sold by Vector Tobacco. There can be no assurance that Vector
Tobaccos assessment is correct and that additional payments under the MSA for QUEST 3 will
not be owed.
Litigation Challenging the MSA. In Freedom Holdings Inc. v. Cuomo, litigation pending in
federal court in New York, certain importers of cigarettes allege that the MSA and certain
related New York statutes violate federal antitrust and constitutional law. The district court
granted New Yorks motion to dismiss the complaint for failure to state a claim. On appeal,
the United States Court of Appeals for the Second Circuit held that if all of the allegations
of the complaint were assumed to be true, plaintiffs had stated a claim for relief on
21
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
antitrust grounds. In January 2009, the district court granted New Yorks motion for summary
judgment, dismissing all claims brought by the plaintiffs, and dissolving the preliminary
injunction. Plaintiffs appealed the decision. In October 2010, the Second Circuit affirmed
the district courts decision.
In Grand River Enterprises Six Nations, Ltd. v. King, another proceeding pending in federal
court in New York, plaintiffs seek to enjoin the statutes enacted by New York and other states
in connection with the MSA on the grounds that the statutes violate the Commerce Clause of the
United States Constitution and federal antitrust laws. In September 2005, the United States
Court of Appeals for the Second Circuit held that if all of the allegations of the complaint
were assumed to be true, plaintiffs had stated a claim for relief and that the New York federal
court had jurisdiction over the other defendant states. On remand, the trial court held that
plaintiffs are unlikely to succeed on the merits. After discovery, the parties cross-moved for
summary judgment; briefing concluded in December 2009 and oral argument took place in April
2010.
Similar challenges to the MSA and MSA-related state statutes are pending in several other
states. Vector Tobacco and the other cigarette manufacturers are not defendants in these cases.
Litigation challenging the validity of the MSA, including claims that the MSA violates
antitrust laws, has not been successful to date.
In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (Vibo) commenced litigation
in the United States District Court for the Western District of Kentucky against each of the
Settling States and certain Participating Manufacturers, including Vector Tobacco. Vibo
sought damages from Participating Manufacturers under antitrust laws. Vibo alleged, among
other things, that the market share exemptions (i.e., grandfathered shares) provided to
certain SPMs under the MSA, including Vector Tobacco, violate federal antitrust and
constitutional law. In January 2009, the district court dismissed the complaint. In January
2010, the court entered final judgment in favor of the defendants. Vibo appealed to the United
States Court of Appeals for the Sixth Circuit. A decision is pending.
Other Matters
Vector Tobaccos management is unaware of any material environmental conditions affecting its
existing facilities. Vector Tobaccos 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 Vector Tobacco. Vector Tobaccos management
is also unaware of any other claims that would materially affect the Companys financial
position, results of operations or cash flows.
12. |
|
Legislation and Regulation |
|
|
|
Vector Tobaccos management believes that it is in compliance in all material respects with
the laws regulating cigarette manufacturers. |
|
13. |
|
Related Party Transactions |
|
|
|
In October 2002, the sales and marketing functions of Liggett and Vector Tobacco were combined
into Liggett Vector Brands. Liggett Vector Brands coordinates and executes the sales,
marketing and manufacturing efforts along with certain support functions for all of the
Companys tobacco operations. In conjunction with the duties performed at Liggett Vector
Brands, a portion of sales, marketing, manufacturing, distribution, and administrative
expenses have been allocated to the Company. During 2010, 2009 and 2008, Vector Tobacco
expensed $1,723, $3,507 and $3,512, respectively, for services |
22
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
provided by Liggett Vector Brands. These expenses have been classified as selling, general
and administrative costs.
In 2006, Vector Tobacco entered into an agreement with VGR to provide various management and
administrative services to Vector Tobacco in consideration for an annual management fee. The
charges for services under this agreement amounted to $500 for each year ending December 31
2010, 2009 and 2008.
On January 1, 2004 Vector Tobacco entered into a manufacturing agreement (the Agreement)
with Liggett whereby Liggett agreed to provide handling, storage, manufacturing, preparation,
record-keeping, remittance of federal excise tax payments, processing of returns and other
services relating to the manufacture of Vector Tobacco brands. The Agreement expired December
31, 2005, but is automatically renewed for a successive one year term unless otherwise
terminated by either party. Pricing is set forth in the Agreement based on previously
determined standard costs and invoices are sent to Vector Tobacco monthly. In 2010, 2009 and
2008, Vector Tobacco purchased approximately 1.1 billion, 1.2 billion and 1.1 billion units,
respectively, from Liggett and paid $66,667, $67,161 and $34,557, respectively, which included
profit of $1,171, $1,349 and $1,158, respectively, to Liggett.
Vector Tobacco incurred additional expenses of approximately $7, $2, and $1 in 2010, 2009 and
2008, respectively, for transactions with VGR and Vector, which primarily reflects
reimbursement of amounts paid on behalf of Vector Tobacco.
Vector Tobacco has a related party payable to Liggett of relating primarily to the contract manufacturing agreement.
Related party payables for each year ended consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Liggett |
|
$ |
969 |
|
|
$ |
6,304 |
|
Liggett Vector Brands |
|
|
3,503 |
|
|
|
3,325 |
|
|
|
|
|
|
|
|
|
|
$ |
4,472 |
|
|
$ |
9,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairment |
|
|
|
|
|
|
Employee |
|
|
Contract |
|
|
|
|
|
|
Severance |
|
|
Termination, |
|
|
|
|
|
|
and Benefits |
|
|
and Exit Cost |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007 |
|
$ |
70 |
|
|
$ |
60 |
|
|
$ |
130 |
|
Change in estimate |
|
|
(14 |
) |
|
|
(4 |
) |
|
|
(18 |
) |
23
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Impairment |
|
|
|
|
|
|
Employee |
|
|
Contract |
|
|
|
|
|
|
Severance |
|
|
Termination, |
|
|
|
|
|
|
and Benefits |
|
|
and Exit Cost |
|
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilized in 2008 |
|
|
(56 |
) |
|
|
(10 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008 |
|
|
|
|
|
|
46 |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges |
|
|
691 |
|
|
|
209 |
|
|
|
900 |
|
Utilized in 2009 |
|
|
(586 |
) |
|
|
(206 |
) |
|
|
(792 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009 |
|
|
105 |
|
|
|
49 |
|
|
|
154 |
|
Change in estimate |
|
|
|
|
|
|
(34 |
) |
|
|
(34 |
) |
Utilized in 2010 |
|
|
(105 |
) |
|
|
(15 |
) |
|
|
(120 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In November 2006, Vectors Board of Directors determined to discontinue the genetics operation
of Vector Tobacco and not to pursue, at this time, FDA approval of QUEST as a smoking
cessation aid, due to the projected significant additional time and expense involved in
seeking such approval. In connection with this decision, we eliminated 12 full-time positions
effective December 31, 2006. In addition, we terminated certain license agreements associated
with the genetics operation. In March 2009, Vector Tobacco eliminated an additional nine
full-time positions in connection with this decision. |
|
|
|
The Company recognized pre-tax restructuring charges of $900 during 2009 in connection with
the closure of its Durham research operations. The restructuring charges primarily related to
employee severance and benefit costs. |
|
15. |
|
Stock Compensation |
|
|
|
The Companys parent, Vector, offers stock option plans. As of December 31, 2010, there were
approximately 3,815,336 shares available for issuance under Vectors Amended and Restated 1999
Long-Term Incentive Plan (the 1999 Plan). All employees
of Vector and its subsidiaries are
eligible to receive grants under such plans. Although Vector Tobacco has no employees it
received a stock compensation expense allocation from Liggett Vector Brands of $0, $39, and
$43 for the years ended December 31, 2010, 2009, and 2008, respectively. These amounts have
been recorded in selling, general and administrative cost in the Companys consolidated
statement of operations. As of December 31, 2010 Liggett Vector
Brands had employees with
options for 712,077 shares of Vectors common stock. |
|
|
|
Nonqualified options for 105,000 shares of Vectors common stock were issued during 2010 to employees
under Vectors stock compensation plans. The exercise price of the options granted was $15.63 in
2010. The exercise prices of the options granted in 2010 were at the
fair market value on the dates
of the grants. There were no option grants during 2009 or 2008 to
Liggett Vector Brands employees. Awards of options to
employees under the Vectors stock compensation plans generally vest over periods ranging from
four to five years and have a term of ten years from the date of grant. |
|
|
|
The fair value of option grants is estimated at the date of grant using the Black-Scholes
option pricing model. The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly subjective
assumptions including expected stock price characteristics which are significantly different
from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, the existing models do not necessarily provide a
reliable single measure of the fair value of stock-based compensation awards. |
24
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
The assumptions used under the Black-Scholes option pricing model in computing fair value of
options are based on the expected option life considering both the contractual term of the
option and expected employee exercise behavior, the interest rate associated with U.S.
Treasury issues with a remaining term equal to the expected option life and the expected
volatility of the Companys common stock over the expected term of the option. The
assumptions used for grants in the year ended December 31, 2010 were as follows:
|
|
|
Risk-free interest rate |
|
2.59% |
Expected volatility |
|
24.43% |
Dividend yield |
|
9.75% |
Expected holding period |
|
4.74 years |
Weighted
average grant date fair value |
|
$1.03 |
In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted
stock grant of 63,813 shares of Vectors common stock pursuant to the 1999 Plan. Pursuant to
his restricted share agreement, one-fourth of the shares vested on November 1, 2006, with an
additional one-fourth vesting on each of the three succeeding one-year anniversaries of the
first vesting date through November 1, 2009. Liggett Vector Brands recorded deferred
compensation of $1,018 representing the fair market value of the restricted shares on the date
of grant. Vector Tobacco recorded an expense of $0 in 2010, $22 for 2009, and $25 in 2008
associated with the grant. These amounts have been recorded in selling, general and
administrative cost in the Companys consolidated statement of operations.
25
Vector Tobacco Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
(in thousands of dollars)
Schedule II Valuation and Qualifying Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
Charged to |
|
|
|
|
|
|
Balance at |
|
|
|
Beginning |
|
|
Costs and |
|
|
|
|
|
|
End of |
|
|
|
of Period |
|
|
Expenses |
|
|
Deductions |
|
|
Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts |
|
$ |
4 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
4 |
|
Cash discounts |
|
|
14 |
|
|
|
2,459 |
|
|
|
2,469 |
|
|
|
4 |
|
Deferred tax valuation allowance |
|
|
46,899 |
|
|
|
|
|
|
|
24,431 |
|
|
|
22,468 |
|
Sales returns |
|
|
1,007 |
|
|
|
490 |
|
|
|
1,112 |
|
|
|
385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,924 |
|
|
$ |
2,949 |
|
|
$ |
28,012 |
|
|
$ |
22,861 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts |
|
$ |
5 |
|
|
$ |
|
|
|
$ |
1 |
|
|
$ |
4 |
|
Cash discounts |
|
|
10 |
|
|
|
2,553 |
|
|
|
2,549 |
|
|
|
14 |
|
Deferred tax valuation allowance |
|
|
143,835 |
|
|
|
|
|
|
|
96,936 |
|
|
|
46,899 |
|
Sales returns |
|
|
1,000 |
|
|
|
622 |
|
|
|
615 |
|
|
|
1,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
144,850 |
|
|
$ |
3,175 |
|
|
$ |
100,101 |
|
|
$ |
47,924 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Doubtful accounts |
|
$ |
5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5 |
|
Cash discounts |
|
|
8 |
|
|
|
1,817 |
|
|
|
1,815 |
|
|
|
10 |
|
Deferred tax valuation allowance |
|
|
138,882 |
|
|
|
4,953 |
|
|
|
|
|
|
|
143,835 |
|
Sales returns |
|
|
1,100 |
|
|
|
542 |
|
|
|
642 |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
139,995 |
|
|
$ |
7,312 |
|
|
$ |
2,457 |
|
|
$ |
144,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
exv99w4
Exhibit 99.4
Douglas Elliman Realty LLC
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2010, 2009 and 2008
Douglas Elliman Realty LLC and Subsidiaries
Index
December 31, 2010 and 2009
|
|
|
|
|
|
|
Page(s) |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm |
|
|
1 |
|
|
|
|
|
|
Consolidated Financial Statements |
|
|
|
|
|
|
|
|
|
Consolidated Statements of Financial Position |
|
|
2 |
|
|
|
|
|
|
Consolidated Statements of Operations |
|
|
3 |
|
|
|
|
|
|
Consolidated Statements of Changes in Members Equity |
|
|
4 |
|
|
|
|
|
|
Consolidated Statements of Cash Flows |
|
|
5 |
|
|
|
|
|
|
Notes to Consolidated Financial Statements |
|
|
6-19 |
|
Report of Independent Registered Public Accounting Firm
To the Board of Managers and the Members
of Douglas Elliman Realty LLC:
In our opinion, the accompanying consolidated statements of financial position and the related
consolidated statements of operations, of changes in members equity and of cash flows present
fairly, in all material respects, the financial position of Douglas Elliman Realty LLC and
Subsidiaries (the Company) at December 31, 2010 and 2009, and the results of their operations and
their cash flows for the years then ended in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits of these statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers, LLP
Melville, NY
February 17, 2011
1
Douglas Elliman Realty LLC and Subsidiaries
Consolidated Statements of Financial Position
December 31, 2010 and 2009
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
44,307 |
|
|
$ |
26,195 |
|
Certificates of deposit |
|
|
725 |
|
|
|
725 |
|
Receivables |
|
|
3,431 |
|
|
|
4,702 |
|
Prepaid expenses and other current assets |
|
|
2,190 |
|
|
|
1,962 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
50,653 |
|
|
|
33,584 |
|
Property, equipment and leasehold improvements, net |
|
|
15,556 |
|
|
|
13,498 |
|
Goodwill |
|
|
38,676 |
|
|
|
38,601 |
|
Trademarks |
|
|
21,663 |
|
|
|
21,663 |
|
Other intangible assets, net |
|
|
1,085 |
|
|
|
742 |
|
Deferred financing charges, net |
|
|
|
|
|
|
57 |
|
Security deposits and other non current assets |
|
|
858 |
|
|
|
920 |
|
Investments in non-consolidated businesses |
|
|
2,926 |
|
|
|
1,894 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
131,417 |
|
|
$ |
110,959 |
|
|
|
|
|
|
|
|
Liabilities and Members Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of notes payable and other obligations |
|
$ |
1,067 |
|
|
$ |
233 |
|
Current portion of notes payable to related parties |
|
|
581 |
|
|
|
5,517 |
|
Accounts payable and accrued expenses |
|
|
12,340 |
|
|
|
13,416 |
|
Accrued compensation |
|
|
3,306 |
|
|
|
2,946 |
|
Commissions payable |
|
|
5,216 |
|
|
|
4,040 |
|
Current portion of accrued royalties |
|
|
322 |
|
|
|
322 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
22,832 |
|
|
|
26,474 |
|
Notes payable and other obligations, less current portion |
|
|
1,129 |
|
|
|
863 |
|
Notes payable to related parties, less current portion |
|
|
693 |
|
|
|
1,273 |
|
Deferred rent |
|
|
9,404 |
|
|
|
7,022 |
|
Accrued royalties, less current portion |
|
|
403 |
|
|
|
725 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
34,461 |
|
|
|
36,357 |
|
Commitments and contingencies (Note 12) |
|
|
|
|
|
|
|
|
Members equity |
|
|
96,956 |
|
|
|
74,602 |
|
|
|
|
|
|
|
|
Total liabilities and members equity |
|
$ |
131,417 |
|
|
$ |
110,959 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
2
Douglas Elliman Realty LLC and Subsidiaries
Consolidated Statements of Operations
Years Ended December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Not covered |
|
|
|
|
|
|
|
|
|
|
|
by Auditor's |
|
|
|
|
|
|
|
|
|
|
|
Report) |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
348,136 |
|
|
$ |
283,851 |
|
|
$ |
352,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Selling |
|
|
227,083 |
|
|
|
179,333 |
|
|
|
236,973 |
|
General and administration |
|
|
80,286 |
|
|
|
85,237 |
|
|
|
93,414 |
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses |
|
|
307,369 |
|
|
|
264,570 |
|
|
|
330,387 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
40,767 |
|
|
|
19,281 |
|
|
|
22,293 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net income of non-consolidated
businesses |
|
|
2,440 |
|
|
|
2,090 |
|
|
|
|
|
Interest income |
|
|
20 |
|
|
|
44 |
|
|
|
308 |
|
Interest expense |
|
|
(572 |
) |
|
|
(2,457 |
) |
|
|
(3,598 |
) |
|
|
|
|
|
|
|
|
|
|
Net income before taxes |
|
|
42,655 |
|
|
|
18,958 |
|
|
|
19,003 |
|
Income tax expense |
|
|
1,329 |
|
|
|
223 |
|
|
|
253 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,326 |
|
|
$ |
18,735 |
|
|
$ |
18,750 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Douglas Elliman Realty LLC and Subsidiaries
Consolidated Statements of Changes In Members Equity
Years Ended December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Not covered |
|
|
|
|
|
|
|
|
|
|
|
by Auditor's |
|
|
|
|
|
|
|
|
|
|
|
Report) |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of Year |
|
$ |
74,602 |
|
|
$ |
60,722 |
|
|
$ |
52,650 |
|
Net income |
|
|
41,326 |
|
|
|
18,735 |
|
|
|
18,750 |
|
Distributions to members |
|
|
(18,972 |
) |
|
|
(4,855 |
) |
|
|
(10,678 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, End of Year |
|
$ |
96,956 |
|
|
$ |
74,602 |
|
|
$ |
60,722 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Douglas Elliman Realty LLC and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2010, 2009 and 2008
(in thousands of dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Not covered |
|
|
|
|
|
|
|
|
|
|
|
by Auditors |
|
|
|
|
|
|
|
|
|
|
|
Report) |
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
41,326 |
|
|
$ |
18,735 |
|
|
$ |
18,750 |
|
Adjustments
to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,011 |
|
|
|
4,703 |
|
|
|
5,746 |
|
Loss on sale and disposal of property and equipment |
|
|
22 |
|
|
|
172 |
|
|
|
132 |
|
Interest paid in-kind, net |
|
|
21 |
|
|
|
(55 |
) |
|
|
369 |
|
Amortization of discount on subordinated debt, net |
|
|
129 |
|
|
|
1,299 |
|
|
|
714 |
|
Equity in net income of non-consolidated businesses, net |
|
|
(2,440 |
) |
|
|
(2,090 |
) |
|
|
|
|
Dividends received from non-consolidated businesses |
|
|
1,408 |
|
|
|
|
|
|
|
|
|
Deferred rent |
|
|
2,382 |
|
|
|
1,899 |
|
|
|
836 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
1,271 |
|
|
|
100 |
|
|
|
936 |
|
Prepaid expenses and other assets |
|
|
(293 |
) |
|
|
732 |
|
|
|
344 |
|
Other assets |
|
|
62 |
|
|
|
(16 |
) |
|
|
9 |
|
Accounts payable, accrued expenses and accrued compensation |
|
|
(716 |
) |
|
|
(3,346 |
) |
|
|
(1,258 |
) |
Commissions payable |
|
|
1,176 |
|
|
|
898 |
|
|
|
(1,020 |
) |
Accrued royalties |
|
|
(322 |
) |
|
|
(322 |
) |
|
|
(322 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
48,037 |
|
|
|
22,709 |
|
|
|
25,236 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(4,959 |
) |
|
|
(2,245 |
) |
|
|
(3,372 |
) |
Investments in non-consolidated businesses, net |
|
|
|
|
|
|
(249 |
) |
|
|
|
|
Other |
|
|
(75 |
) |
|
|
(23 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,034 |
) |
|
|
(2,517 |
) |
|
|
(3,369 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Payments of notes payable and other obligations |
|
|
(274 |
) |
|
|
(256 |
) |
|
|
(262 |
) |
Payments of notes payable to related parties |
|
|
(5,645 |
) |
|
|
(10,286 |
) |
|
|
(16,718 |
) |
Distributions to members |
|
|
(18,972 |
) |
|
|
(4,855 |
) |
|
|
(10,678 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(24,891 |
) |
|
|
(15,397 |
) |
|
|
(27,658 |
) |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
18,112 |
|
|
|
4,795 |
|
|
|
(5,791 |
) |
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
26,195 |
|
|
|
21,400 |
|
|
|
27,191 |
|
|
|
|
|
|
|
|
|
|
|
End of year |
|
$ |
44,307 |
|
|
$ |
26,195 |
|
|
$ |
21,400 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
234 |
|
|
$ |
1,075 |
|
|
$ |
2,500 |
|
Income taxes paid |
|
|
1,308 |
|
|
|
264 |
|
|
|
608 |
|
Assets acquired under capital lease |
|
|
746 |
|
|
|
|
|
|
|
|
|
Acquisition of property management contracts through borrowings |
|
|
610 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
1. |
|
Basis of Presentation |
|
|
|
Principles of Consolidation
The consolidated financial statements include the accounts of Douglas Elliman Realty LLC,
formerly Montauk Battery Realty LLC, a New York limited liability company, and its
wholly-owned subsidiaries (the Company). All significant intercompany balances and
transactions have been eliminated in consolidation. |
|
|
|
Nature of Operations
The Company is engaged primarily in the real estate brokerage business through its principal
subsidiaries, Douglas Elliman LLC (Douglas Elliman), a residential real estate brokerage
company based in New York City and its Long Island based operations, B&H Associates of New
York LLC and B&H of the Hamptons LLC, both of which conduct business as Prudential Douglas
Elliman Real Estate (Prudential Douglas Elliman). The Company is engaged in property
management through its subsidiary, Residential Management Group LLC, which conducts business
as Douglas Elliman Property Management (DEPM). The Company is also engaged in the mortgage
brokerage business through its joint venture ownership in DE Capital Mortgage LLC. Additional
services provided by the Company include title search and appraisal services through PDE
Title LLC (Title) and marketing consulting services through DE Worldwide Consulting LLC
(DEWW). |
|
|
|
Organization
On October 15, 2002, Montauk Battery Realty LLC was formed to consolidate the ownership of
the then Companys operating entities, B&H Associates of New York LLC and B&H of the Hamptons
LLC, under one company, which was completed on December 19, 2002. On March 14, 2003, the
Company acquired Douglas Elliman and DEPM and, on May 19, 2003, Montauk Battery Realty LLC
changed its name to Douglas Elliman Realty LLC. In October 2004, upon receipt of required
regulatory approvals, the Company purchased all of the then outstanding membership interests
in Burr Enterprises Ltd., which conducts business as Preferred Empire Mortgage Company. |
|
2. |
|
Summary of Significant Accounting Policies |
|
|
|
Estimates
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. |
|
|
|
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with an original maturity of
less than three months to be cash equivalents. Excluded from cash and cash equivalents are
certificates of deposit of $725 as of December 31, 2010 and 2009 as the original maturities
of these deposits are in excess of three months. |
6
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Receivables
Receivables consist of commissions earned on sales transactions which closed prior to the
Companys year-end but for which the related commissions have not yet been received.
Receivables also consist of commissions advanced to the Companys agents for transactions
that have not yet closed. The Company provides an allowance for potential losses on
uncollectible receivables based principally on the specific identification method. There are
no allowances for bad debts as of December 31, 2010 and 2009. Uncollectible accounts are
written off when the likelihood of collection is remote and when collection efforts have been
abandoned.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided using the straight-line method over
the estimated useful lives of the related assets. The cost of leasehold improvements is
amortized over the lesser of the length of the related leases or the estimated useful lives
of the improvements. Costs of major additions and betterments are capitalized while
expenditures for routine maintenance and repairs are charged to expense as incurred. When
property and equipment are sold or otherwise disposed of, the cost and related accumulated
depreciation are eliminated from the accounts and any resulting gain or loss is reflected in
general and administrative expense.
Software Costs
Costs associated with the acquisition and development of internal-use software that are
incurred during the preliminary project stage are expensed as incurred. Costs incurred
during the application development stage, including design, coding, installation and testing,
are capitalized and are included in property and equipment. Once the software has been put
into use, any additional costs such as costs for maintenance and training are expensed.
Amortization of capitalized amounts commences on the date the software is placed into use and
is computed using the straight-line method over the estimated economic life of the software,
which is generally three to five years.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in business
circumstances indicate the carrying value of the assets may not be recoverable. In reviewing
for impairment, the Company compares the carrying value of the assets to the anticipated
undiscounted future cash flows expected from the use of the assets and their eventual
disposition. When the estimated undiscounted future cash flows are less than their carrying
amount, an impairment loss is recognized equal to the difference between the assets fair
value and its carrying amount. No impairment losses were recognized during the three year
period ended December 31, 2010.
Goodwill and Trademarks
Goodwill and intangible assets with indefinite lives are not amortized, but instead are
tested for impairment on an annual basis at December 31, or whenever events or changes in
business circumstances indicate the carrying value of the assets may not be recoverable.
Goodwill is tested by estimating the fair value of each reporting unit to which the goodwill
relates using a discounted cash flow model with an appropriate risk adjusted discount rate.
The fair value of each reporting unit is then compared with the carrying value to determine
if any impairment
7
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
exists. The Company performed its goodwill impairment test for each of the years ended
December 31, 2010, 2009, and 2008 and no impairments were noted.
The fair value of trademarks is calculated using a relief from royalty payments method.
This approach involves two steps: (i) estimating reasonable royalty rates for its trademarks
and (ii) applying these royalty rates to a net sales stream and discounting the resulting
cash flows to determine fair value. This fair value is then compared with the carrying value
of each trademark. The Company performed its trademark impairment test for each of the years
ended December 31, 2010, 2009 and 2008 and no impairment was noted.
Other Intangible Assets
Other intangible assets consist primarily of acquired management contracts. Amortization of
management contracts is being provided over fifteen years.
Deferred Financing Charges
Deferred financing charges consist primarily of professional fees related to the acquisition
of new financing and the restructuring of the Companys debt obligations. These are being
amortized over the life of the related debt obligations.
Investments in Non-Consolidated Businesses
The Company accounts for its investments in Innova Risk Services LLC (Innova) and DE
Capital Mortgage LLC (DECM) under the equity method as the Company has determined that
neither Innova nor DECM meet the criteria of a variable interest entity and, accordingly, the
Company applies the voting interest model to this investment.
Leases
The Company leases office space for use in operations. The Companys leases are evaluated at
inception or at any subsequent material modification and, depending on the lease terms, are
classified as either capital leases or operating leases. For operating leases containing
predetermined fixed escalations of the minimum rentals during the term of the lease, the
Company recognizes the related rental expense on a straight-line basis over the life of the
lease, beginning with the point at which control and possession of the leased properties is
obtained. Incentives provided in operating lease agreements such as reimbursements of
capital expenditures by the landlord are also deferred and are recorded as a reduction of
rent expense on a straight line basis over the life of the lease. The Company records
differences between the amounts charged to operations and amounts paid as deferred rent.
Revenue Recognition
Revenue is recognized only when persuasive evidence of an arrangement exists, the price is
fixed or determinable, the transaction has been completed and collectibility of the resulting
receivable is reasonably assured.
Real estate and mortgage commissions earned by the Companys real estate and mortgage
brokerage businesses are recorded as revenue on a gross basis upon the closing of a real
estate transaction as evidenced when the escrow or similar account is closed, the transaction
documents have been recorded and funds are distributed to all appropriate parties.
Commissions and
8
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
royalties expenses are recognized concurrently with related revenues. Property management
fees earned by DEPM are recorded as revenue when the related services are performed.
From time to time, Douglas Elliman receives a portion of its commissions in advance of the
closing of a brokered real estate transaction. In turn, Douglas Elliman advances the related
commissions to the agent responsible for brokering the transaction. Because the Companys
commission is not earned until the transaction closes, the advance commissions received by
Douglas Elliman are recorded as deferred income and are included in accounts payable and
accrued expenses in the consolidated statement of financial position. Further, advances to
agents under these arrangements are recorded as receivables in the consolidated statement of
financial position. Upon closing of the transaction, the Company will receive the remainder
of its commission and will recognize the related revenue on the sale as well as the
commission expense due to the agent.
Advertising Costs
Advertising costs are expensed as incurred and are included in selling expenses. Such
expenses were $10,370, $9,290 and $18,168 for the years ended December 31, 2010, 2009, and
2008, respectively.
Income Taxes
The Company is a limited liability company. The members of a limited liability company are
taxed on their proportionate share of the Companys taxable income. Accordingly, no provision
or liability for Federal income taxes is included in the financial statements, except for
Preferred which is taxed as a C-Corporation. The Company is, however, subject to New York
City Unincorporated Business Tax (UBT) and accordingly has recorded a provision for UBT in
its consolidated financial statements.
Effective January 1, 2009, the Company adopted the provisions of a recently issued accounting
pronouncement related to uncertain tax positions. With the adoption of this guidance, the
Company now recognizes tax liabilities when, despite the Companys belief that its tax return
positions are supportable, the Company believes that certain positions may not be fully
sustained upon review by tax authorities. Benefits from tax positions are measured at the
largest amount of benefit that is greater than 50 percent likely of being realized upon
settlement. To the extent that the final tax outcome of these matters is different than the
amounts recorded, such differences impact income tax expense in the period in which such
determination is made. Interest and penalties, if any, related to accrued liabilities for
potential tax assessments are included in income tax expense. Adoption of this guidance did
not have an impact on the Companys consolidated financial statements.
9
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Fair Value Measurements
The Company measures fair value as the price that would be received to sell an asset or paid
to transfer a liability in the principal or most advantageous market in an orderly
transaction between market participants. As such, fair value is a market-based measurement
that should be determined based on assumptions that market participants would use in pricing
an asset or liability. As a basis for considering assumptions, generally accepted accounting
principles establishes a three-level hierarchy for fair value measurements based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date:
Level 1 Observable inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets;
Level 2 Inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the same term of the financial instrument;
and
Level 3 Unobservable inputs to the valuation methodology in which there is little or no
market data and which are significant to the fair value measurement.
The fair value hierarchy gives the highest priority to quoted prices in active markets for
identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs
(Level 3). If the inputs used to measure the financial instruments fall within different
levels of the hierarchy, the categorization is based on the lowest level input that is
significant to the fair value measurement of the instrument.
At December 31, 2010 and 2009, the Company holds $10,279 and $12,574 of Level 1 cash
equivalents and $725 and $725 of Level 2 certificates of deposit that are measured at fair
value on a recurring basis. The Company does not have any assets or liabilities that are
based on Level 3 inputs.
Fair Value of Financial Instruments
The carrying amounts of the Companys cash equivalents, receivables, payables and other
current liabilities approximate fair value due to their short maturity. The carrying value
of the Companys long-term debt approximates fair value because the underlying instruments
are variable-rate notes based on a current market rate. The carrying value of the Companys
related-party debt approximates fair value due to its current maturities.
Subsequent Events
The Company evaluated all events or transactions that occurred after the balance sheet date
of December 31, 2010 through February 17, 2011, the date it issued these financial
statements. During this period, the Company did not have any material recognizable or
nonrecognizable subsequent events.
10
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Codification
In June 2009, the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (the Codification). The Codification is the single source of
authoritative nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF) and related
literature. The Codification eliminates the GAAP hierarchy contained in Statement of
Financial Accounting Standards and establishes one level of authoritative GAAP. All other
literature is considered non-authoritative. The Codification is effective for financial
statements issued for interim and annual periods ending after September 15, 2009. In
response, the Company has used plain English or included the references to the Codification,
as appropriate, in these consolidated financial statements.
3. |
|
Property and Equipment |
|
|
|
Property and equipment at consists of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Furniture, fixtures and office equipment |
|
$ |
18,982 |
|
|
$ |
19,528 |
|
Computer software |
|
|
7,895 |
|
|
|
6,378 |
|
Leasehold improvements |
|
|
21,065 |
|
|
|
18,313 |
|
Automobiles |
|
|
137 |
|
|
|
137 |
|
Construction in progress |
|
|
1,244 |
|
|
|
1,279 |
|
|
|
|
|
|
|
|
|
|
|
49,323 |
|
|
|
45,635 |
|
Less, accumulated depreciation and amortization |
|
|
(33,767 |
) |
|
|
(32,137 |
) |
|
|
|
|
|
|
|
|
|
$ |
15,556 |
|
|
$ |
13,498 |
|
|
|
|
|
|
|
|
The estimated useful lives of furniture, fixtures and office equipment ranges from five
to ten years. Computer software has an estimated useful life of three to five years, and
automobiles have a life of six years. Leasehold improvements are depreciated based on the
lesser of the remaining life of the lease or the useful life of the leasehold improvement.
Construction in process is not depreciated until the related asset is placed into service.
Depreciation and amortization expense was $3,625, $4,443 and $5,507 for the years ended
December 31, 2010, 2009 and 2008, respectively.
For the years ended December 31, 2010, 2009 and 2008 the Company capitalized $1,497, $0 and
$490 respectively, for costs related to software acquired for internal use. Unamortized
software costs amounted to $1,728, $844 and $1,723 at December 31, 2010, 2009 and 2008,
respectively. Amortization of software costs, which is included in depreciation and
amortization expense, was $518, $880 and $1,044 for the years ended December 31, 2010, 2009
and 2008, respectively.
4. |
|
Investments in Non-Consolidated Businesses |
|
|
|
During 2006, the Company invested $1,500 for a 50% interest in a property and casualty
insurance broker (the Broker). The Company made this investment in order to enter into the
insurance |
11
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
brokerage business. Under the operating agreement, profits and losses are shared
equally by each partner. While the Company shares a board seat with its joint venture partner, most day
to day decisions are made by such partner as the Managing Member.
The Companys investment in the Broker was financed entirely with debt funded by the parent
company of the Managing Member. The note bore interest at 7% per year and the principal and
interest were to be repaid from the Companys share of the earnings of the Broker. Since
inception through 2009, the Companys equity in the earnings of the Broker is $2,702.
Distributions of $1,748 have been applied to fully repay the original capital loan of $1,500
plus interest thereon of $248. Additionally, distributions of $587 have been received in
2009 in order to pay taxes owed on the Brokers earnings on behalf of the Company. At
December 31, 2009, the Companys investment in the Broker was $1,612. In 2010, earnings from
the investment were $645 and dividends received were $389, resulting in a net investment of
$1,868 at December 31, 2010.
Prior to the year ended December 31, 2009, the Company had not accounted for its investment
in the Broker, nor had it recorded its equity in the earnings of the Broker. During 2009,
the Company recorded a cumulative adjustment to record its original investment, all
accumulated earnings not previously recorded and all distributions made to repay the
aforementioned capital loan and taxes. The Companys equity in the earnings of the Broker
related to periods prior to January 1, 2009 was $1,293 and this amount is included in the
equity in earnings recorded in 2009. Because the effects on all prior periods individually,
and the cumulative effect of such earnings, are immaterial, the cumulative effect of the
change has been included in the Companys results of operations in 2009.
In July 2009, the Company invested $249 for a 49.9% interest in an entity called DE Capital
Mortgage LLC (DECM), with 50.1% owned by its joint venture partner. DECM operates as a
mortgage lender in the New York Metropolitan area. The Companys equity in the earnings of
DECM was $1,794 and $33 for the years ended December 31, 2010 and 2009, respectively. In
2010 the Company received a dividend of $1,018. The Companys investment in DECM is $1,058
at December 31, 2010.
12
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
5. |
|
Intangible Assets |
|
|
|
Intangible assets at consist of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
38,676 |
|
|
$ |
38,601 |
|
|
$ |
38,579 |
|
Trademarks |
|
|
21,663 |
|
|
|
21,663 |
|
|
|
21,663 |
|
Deferred financing charges |
|
|
506 |
|
|
|
506 |
|
|
|
506 |
|
Other intangible assets |
|
|
3,345 |
|
|
|
2,735 |
|
|
|
2,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,190 |
|
|
|
63,505 |
|
|
|
63,482 |
|
Less: accumulated amortization on amortizable intangibles |
|
|
(2,766 |
) |
|
|
(2,442 |
) |
|
|
(2,182 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
61,424 |
|
|
$ |
61,063 |
|
|
$ |
61,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of other intangibles and deferred financing charges for the years ended
December 31, 2010, 2009 and 2008 was $329, $260 and $239, respectively. Amortization expense
is estimated to be $215, $129, $105, $95 and $35 during the five years ended December 31,
2011 through 2015, respectively. In 2010 and 2009, the Company paid $75 and $22 in
connection with the finalization of earn outs from earlier year acquisitions. In 2010, the
Company acquired certain property management contracts with a value of $610. |
|
6. |
|
Notes Payable and Other Obligations |
|
|
|
Notes payable and other obligations were comprised of the following at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Notes payable and other obligations |
|
|
|
|
|
|
|
|
Payment obligation former owner |
|
$ |
359 |
|
|
$ |
337 |
|
Term note payable bank |
|
|
584 |
|
|
|
759 |
|
Capital lease obligations |
|
|
728 |
|
|
|
|
|
Notes payable issued in connection with acquisitions |
|
|
525 |
|
|
|
|
|
|
|
|
|
|
|
|
Total notes payable and other obligations |
|
|
2,196 |
|
|
|
1,096 |
|
Less, current maturities |
|
|
(1,067 |
) |
|
|
(233 |
) |
|
|
|
|
|
|
|
Amount due after one year |
|
$ |
1,129 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
13
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Payment Obligation Former Owner
In connection with the acquisition of Douglas Elliman, the Company assumed an obligation to
make a payment to a former owner of Douglas Elliman in an amount up to $4,000, due in 2003
and 2004. The first payment was made in 2003. The second liability for the payment was
settled in 2005, with a partial payment to the former owner, and a partial assumption of a
deferred compensation liability. The remaining liability bears interest at 5% per year and
is payable at various points through 2013.
Term Note Payable Bank
In December 2002, Prudential Douglas Elliman borrowed $1,940 from a bank, bearing interest at
7% per annum, due in 2008. In October 2008, the note was renegotiated at an interest rate of
6.26% per annum, due in 2013. Principal is payable in the amount of $15 per month for the
term of the loan. The loan is collateralized by the assets of Prudential Douglas Elliman to
the extent of the unpaid principal and interest.
Capital Lease Obligations
In 2010, the Company entered into two leases as follows:
Server Lease
Capital lease payable in 36 monthly installments of $5, including interest at a rate of
2.9% through 2013. The net book value of the server was $223 at December 31, 2010.
Phone Lease
Capital lease payable to in 60 monthly installments of $11, including interest at a
rate of 8.6% through 2015. The net book value of the phones were $446 at December 31,
2010.
Notes Payable Issued in Connection with Acquisitions
Prudential Douglas Elliman had various other notes issued in connection with acquisitions of
real estate brokerage companies bearing interest at various rates up to 6%, which matured and
were fully repaid during 2009. In connection with the acquisition of various property
management contracts in 2010, the Company has recorded a liability for amounts due under the
agreement at an effective borrowing rate of 5%, payable through 2016.
14
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Scheduled Maturities
Scheduled maturities of notes payable and other obligations are as follows:
|
|
|
|
|
Year ending December 31 |
|
|
|
|
|
|
|
|
|
2011 |
|
$ |
1,067 |
|
2012 |
|
|
462 |
|
2013 |
|
|
318 |
|
2014 |
|
|
170 |
|
2015 |
|
|
179 |
|
|
|
|
|
Total |
|
$ |
2,196 |
|
|
|
|
|
7. |
|
Notes Payable to Related Parties |
|
|
|
Notes payable to related parties were as follows at December 31: |
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Acquisition subordinated note payable PREFSA |
|
$ |
|
|
|
$ |
2,487 |
|
Acquisition subordinated note payable Vector |
|
|
|
|
|
|
2,487 |
|
Franchise term notes payable PREA |
|
|
1,274 |
|
|
|
1,816 |
|
|
|
|
|
|
|
|
Total notes payable to related parties |
|
|
1,274 |
|
|
|
6,790 |
|
Less, current maturities |
|
|
(581 |
) |
|
|
(5,517 |
) |
|
|
|
|
|
|
|
Amount due after one year |
|
$ |
693 |
|
|
$ |
1,273 |
|
|
|
|
|
|
|
|
Acquisition Notes Payable PREFSA and Vector
In connection with the acquisition of Douglas Elliman and DEPM, PREFSA and Vector Group Ltd.
(Vector) each lent the Company $9,500 of subordinated debt, due 2013 (the Subordinated
Debt). The Subordinated Debt was subordinate to the Term Note and bore interest at 12% per
annum, of which 10% was payable in cash and 2% accrued and was added to the principal amount.
In connection with the issuance of the Subordinated Debt, PREFSA and Vector each acquired
additional membership interests representing a 15% fully-diluted interest in the Company.
Based on an appraisal conducted by an third party, the Company valued those membership
interests at $2,500 and recorded this amount as a reduction to the principal amount of the
Subordinated Debt. The Company is amortizing the value of these membership interests over
the term of the Subordinated Debt using the interest method. Amortization of $129, $1,299 and
$714 was recorded during the years ended December 31, 2010, 2009 and 2008, respectively, and
is included as a component of interest expense. There is no remaining unamortized discount
on these notes at December 31, 2010. The Subordinated Debt was payable in eight equal
quarterly installments. The first payments of $1,182 were made on each note on September 1,
2008. The Subordinated Debt matured June 1, 2010.
15
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Franchise term notes payable
In December 2002, The Prudential Real Estate Affiliates, Inc. (PREA or the Franchiser),
an affiliate of PREFSA, lent Prudential Douglas Elliman $3,300 bearing interest at 9% per
annum and due in annual installments of principal and interest of $514 through 2012. In
March 2003, PREA lent Douglas Elliman $1,250 bearing interest at 8% per annum and due in
annual installments of principal and interest of $186 through 2013.
Scheduled Maturities
Scheduled maturities of debt to related parties are presented below.
|
|
|
|
|
Year ending December 31 |
|
2010 |
|
|
|
|
|
|
2011 |
|
$ |
581 |
|
2012 |
|
|
648 |
|
2013 |
|
|
45 |
|
|
|
|
|
Total |
|
$ |
1,274 |
|
|
|
|
|
8. |
|
Franchise Agreement and Royalty Fees |
|
|
|
Douglas Elliman is party to a franchise agreement with PREA which was entered into in March
2003. The agreement provides for Douglas Elliman to make monthly payments of royalty fees to
PREA based on the level of gross revenue, with a royalty rate ranging from 1.8% to 6.0% of
gross revenues earned. Pursuant to the franchise agreement, Douglas Elliman was granted a
25% deferral of applicable royalty fees, which is payable in monthly installments beginning
in the first month of the fourth year. A balance of $725 and $1,047 was accrued at December
31, 2010 and 2009, respectively and is included in accrued royalties in the consolidated
statement of financial position. The agreement also provides for Douglas Elliman to remit
advertising and annual franchise fees to PREA, which are based on gross revenues and the
number of offices occupied. |
|
|
|
For the years ended December 31, 2010, 2009 and 2008 total royalty fees incurred under the
franchise agreements amounted to approximately $5,408, $4,212 and $5,340, respectively, and
is included as a component of general and administrative expenses in the consolidated
statements of operations. |
|
|
|
The Franchiser has significant rights over the use of the franchised service marks and the
conduct of the brokerage companies business. The franchise agreements require the companies
to coordinate with the Franchiser on significant matters relating to their operations,
including the opening and closing of offices, make substantial royalty payments to the
Franchiser and contribute significant amounts to national advertising funds maintained by the
Franchiser, indemnify the Franchiser against losses arising out of the operations of their
business under the franchise agreements and maintain standards and comply with guidelines
relating to their operations which are applicable to all franchisees of the Franchisers real
estate franchise system. |
|
|
|
The Franchiser has the right to terminate Douglas Ellimans and Prudential Douglas Ellimans
franchises, upon the occurrence of certain events, including a bankruptcy or insolvency
event, a |
16
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
change in control, a transfer of rights under the franchise agreement and a failure to
promptly pay amounts due under the franchise agreements.
The franchise agreements grant Douglas Elliman and Prudential Douglas Elliman exclusive
franchises in New York for the counties of Nassau and Suffolk on Long Island and for
Brooklyn, Queens and Manhattan, subject to various exceptions and to meeting certain annual
revenue thresholds. If Douglas Elliman or Prudential Douglas Elliman fails to achieve these
levels of revenues for two consecutive years or otherwise materially breaches the franchise
agreements, the Franchiser would have the right to terminate the applicable brokerage
companys exclusivity rights.
A termination of Douglas Ellimans or Prudential Douglas Ellimans franchise agreement could
have a material adverse affect on the Company.
9. |
|
Income Taxes |
|
|
|
Income tax expense includes a provision for New York City Unincorporated Business Tax (UBT)
and income tax benefits specifically related to Preferred, which is taxed as a C-
Corporation. The following are the components of income tax expense (benefit) for the years
ended December 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for New York City UBT |
|
$ |
1,329 |
|
|
$ |
449 |
|
|
$ |
650 |
|
Income tax benefit for Preferred |
|
|
|
|
|
|
(226 |
) |
|
|
(397 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
$ |
1,329 |
|
|
$ |
223 |
|
|
$ |
253 |
|
|
|
|
|
|
|
|
|
|
|
Additionally, the provision (benefit) for income taxes related to Preferred is comprised
of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
Current provision (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
$ |
(260 |
) |
|
$ |
(478 |
) |
State and local |
|
|
34 |
|
|
|
81 |
|
|
|
|
|
|
|
|
Total current benefit |
|
|
(226 |
) |
|
|
(397 |
) |
|
|
|
|
|
|
|
Preferred had no taxable activity in 2010. During the year ended December 31, 2009,
Preferred incurred net operating losses for Federal income tax purposes, which resulted in
receivables of approximately $260 in refundable income taxes being recorded at December 31,
2009 which is included in prepaid expenses and other current assets in the consolidated
statement of financial
17
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
position. Preferred has state and local net operating loss carry forwards of $302 which are
fully reserved and may be utilized to offset future state and local taxes expiring at various
dates through 2028.
Liabilities for uncertain tax positions reflected as of December 31, 2010 are not significant
and it is not anticipated that they will materially change in the next 12 months. With
limited exceptions, the Company is no longer subject to tax audits by taxing authorities for
years through 2006 for all jurisdictions. Although the outcome of tax audits is always
uncertain, the Company believes that its tax positions will generally be sustained under
audit.
10. |
|
Related Party Transaction
The Company has recorded in general and administrative expenses a management fee of $1,000
and $800 to Vector at December 31, 2010 and 2009, respectively, which liability is included
in accounts payable and accrued expenses. |
|
11. |
|
Defined Contribution Plans
Douglas Elliman, Prudential Douglas Elliman and DEPM sponsor individual 401(k) plans which
allow eligible employees to make pre-tax contributions. Employees who have completed one
year of service, as defined, are eligible to participate in the plans. Prior to 2009, the
plans provided for matching employer contributions ranging from 10% to 25% of employee
contributions up to a maximum annual contribution of $4 per employee. This was changed in
2009 and the plans no longer provide matching contributions. Participants are immediately
vested in their contributions made. Matching contributions for the year ended December 31,
2008 amounted to $363. |
|
12. |
|
Commitments and Contingencies |
|
|
|
Litigation
The Company is involved in litigation through the normal course of business. Certain claims
arising before the date of acquisition of Douglas Elliman and DEPM are subject to
indemnification agreements with the prior owners. The majority of these claims have been
referred to the insurance carrier and related counsel. The Company believes that the
resolution of these matters will not have a material adverse effect on the financial
position, results of operations or cash flows of the Company. |
|
|
|
Leases
The Company and its subsidiaries are obligated under various operating lease agreements for
office facilities. Certain leases are non-cancelable and expire on various dates through
March 2020. Additionally, certain leases contain escalating minimum rentals, which are
amortized on a straight line basis over the non-cancellable portion of the leases. Total
rent expense charged to operations under the leases for the year ended December 31, 2010,
2009 and 2008 is approximately $14,675, $15,485 and $13,663, respectively, and is included in
general and administrative expense in the consolidated statements of operations. In
connection with these leases, the Company has a deferred rent liability of $9,404 and $7,022
at December 31, 2010 and 2009, respectively. |
18
Douglas Elliman Realty LLC and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010 and 2009
(Information as of December 31, 2008 and for the
year ended December 31, 2008 not covered
by Auditors Report included herein)
(in thousands of dollars)
Future minimum rental payments under the operating leases at December 31, 2010 are as
follows:
|
|
|
|
|
Year ending December 31, |
|
|
|
|
|
|
|
|
|
2011 |
|
$ |
12,762 |
|
2012 |
|
|
11,439 |
|
2013 |
|
|
10,336 |
|
2014 |
|
|
9,795 |
|
2015 |
|
|
9,600 |
|
Thereafter |
|
|
42,820 |
|
|
|
|
|
Total |
|
$ |
96,752 |
|
|
|
|
|
|
|
The Company entered into letter of credit agreements with a bank totaling $725 in
relation to certain office leases which expire on various dates through September 2010.
Certificates of deposit of $725 with the same maturities are pledged as collateral for these
letters of credit. |
|
13. |
|
Risks and Uncertainties |
|
|
|
The Company operates primarily in the New York City and Long Island residential real estate
markets, which subjects the Company to a degree of risk. The profitability of the Company is
dependant upon the activity within these markets, which could be impacted by various external
factors such as the general state of the economy, declines in home selling prices and the
availability of credit to buyers. However, declines in demand and lack of availability of
credit to potential home buyers could materially impact the Companys profitability in 2011. |
|
|
|
The Company and its subsidiaries may, from time to time, maintain demand deposits in excess
of federally insured limits in the normal course of business. The Company mitigates this
risk by placing cash and cash equivalents with financial institutions with high credit
ratings. |
|
|
|
Substantially all of the Companys receivables are derived from commissions earned and are due from
escrow and other residential real estate transfer agents. These receivables are unsecured. |
19