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Securities And Exchange Commission
Washington, D.C. 20549
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FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
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VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
DELAWARE 1-5759 65-0949535
(State or other jurisdiction of Commission File Number (I.R.S. Employer
incorporation or organization) Identification No.)
100 S.E. SECOND STREET
MIAMI, FLORIDA 33131
305/579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. [ X ]
Yes [ ] No
Indicate by check mark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. [ X ] Yes [ ] No
At August 6, 2004, Vector Group Ltd. had 39,659,510 shares of common
stock outstanding.
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VECTOR GROUP LTD.
FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Vector Group Ltd. Consolidated Financial Statements (Unaudited):
Vector Group Ltd. Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003.......................................................................... 2
Vector Group Ltd. Consolidated Statements of Operations for the three and six
months ended June 30, 2004 and June 30, 2003............................................... 3
Vector Group Ltd. Consolidated Statement of Stockholders' Equity (Deficit) for the six
months ended June 30, 2004................................................................. 4
Vector Group Ltd. Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and June 30, 2003...................................................... 5
Notes to Consolidated Financial Statements.................................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 54
Item 4. Controls and Procedures....................................................................... 54
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 55
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.............. 55
Item 4. Submission of Matters to a Vote of Security Holders........................................... 55
Item 6. Exhibits and Reports on Form 8-K.............................................................. 56
SIGNATURE ............................................................................................. 58
-1-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
June 30, December 31,
2004 2003
------------ ------------
ASSETS:
Current assets:
Cash and cash equivalents .................................................... $ 80,397 $ 74,808
Investment securities available for sale ..................................... 19,031 67,521
Accounts receivable - trade .................................................. 10,339 10,425
Other receivables ............................................................ 2,046 2,605
Inventories .................................................................. 81,872 127,351
Restricted assets ............................................................ 633 771
Deferred income taxes ........................................................ 28,789 19,328
Other current assets ......................................................... 13,667 12,568
------------ ------------
Total current assets ....................................................... 236,774 315,377
Property, plant and equipment, net ............................................. 122,385 143,596
Assets held for sale ........................................................... 25,800 9,438
Long-term investments, net ..................................................... 2,266 2,431
Investments in non-consolidated real estate businesses ......................... 25,268 18,718
Restricted assets .............................................................. 5,489 5,571
Deferred income taxes .......................................................... 14,326 13,200
Intangible asset ............................................................... 107,511 107,511
Other assets ................................................................... 11,685 12,370
------------ ------------
Total assets ............................................................... $ 551,504 $ 628,212
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
Current liabilities:
Current portion of notes payable and long-term debt .......................... $ 21,421 $ 10,762
Accounts payable ............................................................. 9,567 8,635
Accrued promotional expenses ................................................. 19,803 22,203
Accrued taxes payable, net ................................................... 41,580 48,577
Settlement accruals .......................................................... 10,428 52,650
Deferred income taxes ........................................................ 4,002 4,000
Accrued interest ............................................................. 7,004 7,004
Other accrued liabilities .................................................... 17,735 19,255
------------ ------------
Total current liabilities .................................................. 131,540 173,086
Notes payable, long-term debt and other obligations, less current portion ...... 297,573 299,977
Noncurrent employee benefits ................................................... 15,206 13,438
Deferred income taxes .......................................................... 143,201 139,927
Other liabilities .............................................................. 5,219 4,781
Minority interests ............................................................. 45,387 43,478
Commitments and contingencies .................................................. -- --
Stockholders' equity (deficit):
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares ..... -- --
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 42,900,379 and 42,103,276 shares and outstanding
39,651,210 and 39,021,189 shares ........................................... 3,965 3,902
Additional paid-in capital ................................................... 228,894 251,239
Deficit ...................................................................... (292,873) (280,598)
Accumulated other comprehensive loss ......................................... (10,351) (9,335)
Less: 3,249,169 and 3,082,087 shares of common stock in treasury, at cost ... (16,257) (11,683)
------------ ------------
Total stockholders' equity (deficit) ..................................... (86,622) (46,475)
------------ ------------
Total liabilities and stockholders' equity (deficit) ..................... $ 551,504 $ 628,212
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
-2-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended Six Months Ended
------------------------------ -----------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
Tobacco* .................................................... $ 120,045 $ 129,400 $ 246,618 $ 260,743
Real estate leasing ......................................... 1,811 1,777 3,592 3,576
------------- ------------- ------------- -------------
Total revenues ............................................ 121,856 131,177 250,210 264,319
Expenses:
Cost of goods sold, excluding inventory impairment* ......... 69,828 86,010 143,928 169,801
Inventory impairment ........................................ 37,000 -- 37,000 --
Operating, selling, administrative and general expenses ..... 37,631 44,344 77,468 93,895
Restructuring and impairment charges ........................ 2,359 -- 3,012 --
------------- ------------- ------------- -------------
Operating income (loss) ................................... (24,962) 823 (11,198) 623
Other income (expenses):
Interest and dividend income ................................ 531 1,127 1,226 2,572
Interest expense ............................................ (6,491) (8,516) (12,913) (15,665)
Gain on sale of investments, net ............................ 5,335 332 5,586 270
Equity income (loss) from non-consolidated New Valley real
estate businesses ......................................... 4,642 (174) 5,288 (891)
Other, net .................................................. (4) 24 (9) 17
------------- ------------- ------------- -------------
Loss from operations before benefit for income taxes
and minority interests .................................... (20,949) (6,384) (12,020) (13,074)
Benefit for income taxes .................................... (7,181) (649) (2,493) (1,242)
Minority interests .......................................... (3,134) 805 (2,748) 2,053
------------- ------------- ------------- -------------
Net loss ........................................................ $ (16,902) $ (4,930) $ (12,275) $ (9,779)
============= ============= ============= =============
Per basic common share:
Net loss applicable to common shares ........................ $ (0.43) $ (0.13) $ (0.31) $ (0.25)
============= ============= ============= =============
Basic weighted average common shares outstanding ................ 39,213,205 38,811,880 39,138,102 38,623,285
============= ============= ============= =============
Per diluted common share:
Net loss applicable to common shares ........................ $ (0.43) $ (0.13) $ (0.31) $ (0.25)
============= ============= ============= =============
Diluted weighted average common shares outstanding .............. 39,213,205 38,811,880 39,138,102 38,623,285
============= ============= ============= =============
- --------
* Revenues and Cost of goods sold include excise taxes of $43,933, $48,519,
$90,103 and $98,336, respectively.
The accompanying notes are an integral part
of the consolidated financial statements.
-3-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
Accumulated
Additional Other
Common Stock Paid-In Treasury Comprehensive
Shares Amount Capital Deficit Stock Loss Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2003 ............... 39,021,189 $ 3,902 $ 251,239 $ (280,598) $ (11,683) $ (9,335) $ (46,475)
Net loss ................................. -- -- -- (12,275) -- -- (12,275)
Unrealized loss on investment
securities ............................ -- -- -- -- -- (1,016) (1,016)
----------
Total other comprehensive loss .. -- -- -- -- -- -- (1,016)
----------
Total comprehensive loss ................. -- -- -- -- -- -- (13,291)
----------
Distributions on common stock ............ -- -- (31,495) -- -- -- (31,495)
Exercise of options ...................... 590,021 59 6,153 -- (4,574) -- 1,638
Restricted stock grants .................. 40,000 4 (4) -- -- -- --
Tax benefit of options exercised ......... -- -- 2,839 -- -- -- 2,839
Amortization of deferred
compensation, net ...................... -- -- 162 -- -- -- 162
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2004 ................... 39,651,210 $ 3,965 $ 228,894 $ (292,873) $ (16,257) $ (10,351) $ (86,622)
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part
of the consolidated financial statements.
-4-
VECTOR GROUP LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Six Months Ended
----------------------------
June 30, June 30,
2004 2003
------------ ------------
Net cash used in operating activities: ..................... $ (19,212) $ (23,181)
---------- ------------
Cash flows from investing activities:
Proceeds from sale of assets, net ........................ 2,657 910
Sale or maturity of investment securities ................ 63,108 79,391
Purchase of investment securities ........................ (12,253) (37,061)
Sale of long-term investments ............................ 278 830
Investments in non-consolidated real estate businesses ... (2,500) (9,500)
Decrease (increase) in restricted assets ................. 114 (11,010)
Payment of prepetition claims ............................ -- (18)
New Valley repurchase of common shares ................... -- (1,346)
Capital expenditures ..................................... (1,132) (6,503)
---------- ------------
Net cash provided by investing activities .................. 47,615 14,783
---------- ------------
Cash flows from financing activities:
Repayments of debt ....................................... (7,063) (17,836)
Borrowings under revolver ................................ 276,606 332,181
Repayments on revolver ................................... (262,586) (299,559)
Distributions on common stock ............................ (31,495) (29,565)
Proceeds from exercise of options and warrants ........... 1,724 623
---------- ------------
Net cash used in financing activities ...................... (22,814) (14,156)
---------- ------------
Net increase in cash and cash equivalents .................. 5,589 (22,554)
Cash and cash equivalents, beginning of period ............. 74,808 100,027
---------- ------------
Cash and cash equivalents, end of period ................... $ 80,397 $ 77,473
========= ============
The accompanying notes are an integral part
of the consolidated financial statements.
-5-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation:
The consolidated financial statements of Vector Group Ltd. (the
"Company" or "Vector") include the accounts of VGR Holding Inc. ("VGR
Holding"), Liggett Group Inc. ("Liggett"), Vector Tobacco Inc.
("Vector Tobacco"), Liggett Vector Brands Inc. ("Liggett Vector
Brands"), New Valley Corporation ("New Valley") and other less
significant subsidiaries. The Company owned 58.1% of the common
shares of New Valley at June 30, 2004. All significant intercompany
balances and transactions have been eliminated.
Liggett is engaged in the manufacture and sale of cigarettes in the
United States. Vector Tobacco is engaged in the development and
marketing of low nicotine and nicotine-free cigarette products and
the development of reduced risk cigarette products. New Valley is
currently engaged in the real estate business and is seeking to
acquire additional operating companies.
The interim consolidated financial statements of the Company are
unaudited and, in the opinion of management, reflect all adjustments
necessary (which are normal and recurring) to present fairly the
Company's consolidated financial position, results of operations and
cash flows. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and the
notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 2003, as filed with the Securities
and Exchange Commission. The consolidated results of operations for
interim periods should not be regarded as necessarily indicative of
the results that may be expected for the entire year.
(b) Estimates and Assumptions:
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities and the reported amounts of
revenues and expenses. Significant estimates subject to material
changes in the near term include 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 and litigation and defense costs. Actual results could
differ from those estimates.
(c) Reclassifications:
Certain amounts in the 2003 consolidated financial statements have
been reclassified to conform to the 2004 presentation.
(d) Earnings Per Share:
Information concerning the Company's common stock has been adjusted
to give effect to the 5% stock dividend paid to Company stockholders
on September 29, 2003. In connection with the 5% dividend, the
Company increased the number of outstanding stock options by 5% and
-6-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
reduced the exercise prices accordingly. All share amounts have been
presented as if the stock dividends had occurred on January 1, 2003.
Basic net income per share is computed by dividing net income by the
weighted-average number of shares outstanding. Diluted net income
per share includes the dilutive effect of stock options, vested
restricted stock grants and warrants.
The Company had a net loss for the three and six months ended June
30, 2004 and for the three and six months ended June 30, 2003.
Therefore, the effect of the common stock equivalents and
convertible securities is excluded from the computation of diluted
net loss per share since the effect is antidilutive. Potentially
dilutive shares that were not included in the diluted loss per share
calculations were 1,826,880 and 1,864,901 for the three and six
months ended June 30, 2004 and 1,108,930 and 1,223,783 for the three
and six months ended June 30, 2003, which shares were issuable upon
the exercise of stock options, vested restricted stock grants and
warrants, assuming the treasury stock method.
(e) Comprehensive Loss:
Other comprehensive loss is a component of stockholders' equity
(deficit) and includes such items as the unrealized gains and losses
on investment securities available for sale and minimum pension
liability adjustments. Total comprehensive loss was $13,291 for the
six months ended June 30, 2004 and $7,435 for the six months ended
June 30, 2003.
(f) New Accounting Pronouncements:
In March 2004, the Financial Accounting Standards Board (the "FASB")
reached a consensus on Emerging Issues Task Force Issue 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-1"). EITF 03-1 provides guidance for
determining when an investment is impaired and whether the impairment
is other than temporary. EITF 03-1 also incorporates into its
consensus the required disclosures about unrealized losses on
investments announced by the EITF in late 2003 and adds new
disclosure requirements relating to cost-method investments. The
impairment accounting guidance is effective for reporting periods
beginning after June 15, 2004 and the new disclosure requirements for
annual reporting periods ending after June 15, 2004. The Company does
not expect the adoption of the impairment guidance contained in EITF
03-1 to have a material impact on its financial position or results
of operations.
In December 2003, the FASB issued Statement on Financial Accounting
Standards ("SFAS") No. 132(R), which replaces SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement
Benefits." SFAS No. 132(R) does not change the measurement and
recognition provisions of SFAS No. 87, SFAS No. 88, "Employers
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," however, it includes additional disclosure provisions for
annual reporting, including detailed plan asset information by
category, expanded benefit obligation disclosure and key assumptions.
In addition, interim disclosures related to the individual elements
of plan costs and employer's current year contributions are required.
(See Note 6.)
-7-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
2. RESTRUCTURING
On October 8, 2003, the Company announced that it would close Vector
Tobacco's Timberlake, North Carolina cigarette manufacturing
facility in order to reduce excess tobacco production capacity and
improve operating efficiencies company-wide. Production of the QUEST
line of low nicotine and nicotine-free cigarettes, as well as
production of Vector Tobacco's other cigarette brands, has been
moved to Liggett's state-of-the-art manufacturing facility in
Mebane, North Carolina.
The Mebane facility currently produces in excess of 9 billion units
per year, but maintains the capacity to produce 16 billion units per
year. Vector Tobacco has contracted with Liggett Group to produce
its cigarettes and has transitioned production from Timberlake to
Mebane. All production ceased at Timberlake by December 31, 2003. As
part of the transition, Vector eliminated approximately 150
positions.
As a result of these actions, the Company recognized pre-tax
restructuring and impairment charges of $21,521, of which $21,300
was taken in 2003 and the remaining $221 was taken in the first
quarter of 2004. Machinery and equipment to be disposed of was
reduced to estimated fair value less costs to sell during 2003 and
is being carried on the accompanying consolidated balance sheets as
assets held for sale. The asset impairment charges are based on
management's current estimates of the values the Company will be
able to realize on sales of the excess machinery and equipment, and
may be adjusted in future periods based on the actual amounts
realized.
On June 4, 2004, a wholly-owned subsidiary of Vector Tobacco entered
into an agreement to sell the Timberlake facility, along with all
equipment, which sale closed on July 13, 2004. (Refer to Note 4.) The
Company decreased the asset impairment accrual as of June 30, 2004 to
reflect the actual amounts to be realized from the Timberlake sale
and to reduce the values of other excess Vector Tobacco machinery and
equipment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company further
adjusted the previously recorded restructuring accrual as of June 30,
2004 to reflect additional employee severance and benefits, contract
termination, and associated costs resulting from the Timberlake sale.
No charge to operations resulted from these adjustments as there was
no change to the total impairment and restructuring accruals
previously recognized.
In addition to the $221 recorded in the first quarter, Liggett Vector
Brands, as part of the continuing effort to adjust the cost structure
of the Company's tobacco business and improve operating efficiency,
eliminated 83 positions during April 2004, sublet its New York office
space in July 2004 and relocated several employees. As a result of
these actions, the Company recognized additional pre-tax
restructuring charges of $2,791 in the first half of 2004, including
$824 relating to employee severance and benefit costs and $1,967 for
contract termination and other associated costs. Approximately $518
of these charges represent non-cash items. The Company recognized
$432 of these pre-tax restructuring charges in the first quarter of
2004, and $2,359 in the second quarter of 2004.
Annual cost savings related to the restructuring and impairment
charges are currently expected to be at least $23,000 beginning in
2004. Management is currently reviewing opportunities for additional
cost savings as a result of these restructuring activities at Vector
Tobacco and Liggett Vector Brands.
-8-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
The components of the pre-tax restructuring and impairment charges
for 2003 and the six months ended June 30, 2004 are as follows:
Employee Non-Cash Contract
Severance Asset Termination/
and Benefits Impairment Exit Costs Total
------------ ---------- ----------- ----------
Balance, December 31, 2002 ............. $ -- $ -- $ -- $ --
Original charges ....................... 2,045 18,752 503 21,300
Utilized in 2003 ....................... (182) (18,752) (54) (18,988)
---------- ---------- ---------- ----------
Balance, December 31, 2003 ............. 1,863 -- 449 2,312
Restructuring and impairment charges ... 824 518 1,670 3,012
Adjustments/reclassifications in 2004 .. 507 (871) 364 --
Utilized/recoveries in 2004, net........ (2,432) 388 (1,532) (3,576)
---------- ---------- ---------- ----------
Balance, June 30, 2004 ................. $ 762 $ 35 $ 951 $ 1,748
========== ========== ========== ==========
The Company has recorded the sublease of the New York office space in
accordance with SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," reducing future minimum lease payments
by estimated sublease rentals. The charge of $967 has been included
in the $3,012 charge for the six months ended June 30, 2004; $752
has been recorded in other long-term liabilities and the remainder in
other accrued liabilities. These amounts are not included in the
$1,748 balance at June 30, 2004.
3. INVENTORIES
Inventories consist of:
June 30, December 31,
2004 2003
------------ ------------
Leaf tobacco ........................... $ 39,857 $ 80,239
Other raw materials .................... 2,690 3,060
Work-in-process ........................ 1,291 1,609
Finished goods ......................... 41,049 42,825
Replacement parts and supplies ......... -- 636
------------ ------------
Inventories at current cost ............ 84,887 128,369
LIFO adjustments ....................... (3,015) (1,018)
------------ ------------
$ 81,872 $ 127,351
============ ============
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. At June 30, 2004,
Liggett had leaf tobacco purchase commitments of approximately
$4,106 and Vector Tobacco had leaf tobacco purchase commitments of
approximately $1,624.
Included in the above table is approximately $3,226 at June 30, 2004
and $44,220 at December 31, 2003 of inventory associated with Vector
Tobacco's QUEST product. During the second quarter of 2004, based on
an analysis of the market data obtained since the introduction of
the QUEST product, the Company determined to postpone indefinitely
the national launch of QUEST and, accordingly, the Company
recognized a non-cash charge of $37,000 to adjust the carrying value
of excess leaf
-9-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
tobacco inventory for the QUEST product, based on estimated future
demand and market conditions. If actual demand for the product or
market conditions are less favorable than those estimated,
additional inventory write-downs may be required.
LIFO inventories represent approximately 91.9% and 53.8% of total
inventories at June 30, 2004 and December 31, 2003, respectively.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
June 30 December 31,
2004 2003
------------ ------------
Land and improvements .......... $ 9,339 $ 10,019
Buildings ...................... 64,828 74,326
Machinery and equipment ........ 99,620 105,032
Leasehold improvements ......... 1,029 1,023
Construction-in-progress ....... 1,583 1,554
------------ ------------
176,399 191,954
Less accumulated depreciation .. (54,014) (48,358)
------------ ------------
$ 122,385 $ 143,596
============ ============
The table above includes real estate assets and accumulated
depreciation owned and operated by New Valley in the amounts of
$54,258 and $1,843 as of June 30, 2004 and $54,258 and $1,246 as of
December 31, 2003. (Refer to Note 9.)
Depreciation and amortization expense for the three and six months
ended June 30, 2004 was $3,531 and $7,056. Future machinery and
equipment purchase commitments at Liggett are $4,266 as of June 30,
2004.
In July 2003, Liggett granted an unaffiliated third party an option
to purchase Liggett's former manufacturing facility and other excess
real estate in Durham, North Carolina with a net book value at June
30, 2004 of approximately $2,313. The option agreement permits the
purchaser to acquire the property during a period of up to two
years, at a purchase price of $14,000 if the closing occurs by
August 23, 2004 and $15,000 if the closing occurs thereafter during
the term of the option. Liggett has received option fees of $1,000,
of which $250 is refundable if the purchaser terminates the
agreement prior to August 23, 2004. Liggett will be entitled to
receive additional option fees of up to $500 during the remaining
option period. The option fees will generally be creditable against
the purchase price. The purchaser is currently seeking financing for
the transaction, and there can be no assurance the sale of the
property will occur.
The Company recorded an $18,752 non-cash asset impairment charge
during the third quarter of 2003 in conjunction with the closing of
Vector Tobacco's Timberlake, North Carolina facility of which
$17,968 relates to machinery and equipment. (See Note 2.)
On June 4, 2004, a wholly-owned subsidiary of Vector Tobacco entered
into an asset purchase agreement to sell its Timberlake, North
Carolina manufacturing facility along with all equipment to an
affiliate of the Flue-Cured Tobacco Cooperative Stabilization
Corporation for $25,800. The Timberlake sale closed on July 13,
2004. In connection with the closing, the subsidiary of Vector
Tobacco entered into a consulting agreement to provide certain
services to the buyer for $400. (See Notes 2 and 5.)
-10-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
During 2003, Liggett entered into sale-leaseback transactions in
which equipment with a book value of $4,483 was sold and leased back
from a third party as operating leases. Liggett received cash of
$2,386, and no gain or loss was recognized on these transactions.
5. NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
Notes payable, long-term debt and other obligations consist of:
June 30 December 31,
2004 2003
------------ ------------
Vector:
6.25% Convertible Subordinated Notes due 2008 ................... $ 132,500 $ 132,500
VGR Holding:
10% Senior Secured Notes due 2006, net of
unamortized discount of $5,381 and $6,675 .................... 64,619 63,325
Liggett:
Revolving credit facility ....................................... 14,020 --
Term loan under credit facility ................................. 4,881 5,190
Equipment loans ................................................. 8,001 9,758
Vector Tobacco:
Note payables ................................................... 5,194 5,999
Note payables - Medallion acquisition ........................... 35,000 38,125
V.T. Aviation:
Note payable .................................................... 10,015 10,496
VGR Aviation:
Note payable .................................................... 5,229 5,346
New Valley:
Note payable - operating real estate ............................ 39,535 39,910
Other ........................................................... -- 90
------------ ------------
Total notes payable, long-term debt and other obligations ....... 318,994 310,739
Less:
Current maturities ........................................ (21,421) (10,762)
------------ ------------
Amount due after one year ....................................... $ 297,573 $ 299,977
============ ============
6.25% Convertible Subordinated Notes Due July 15, 2008 - Vector:
In July 2001, Vector completed the sale of $172,500 (net proceeds of
approximately $166,400) of its 6.25% convertible subordinated notes
due July 15, 2008 through a private offering to qualified
institutional investors in accordance with Rule 144A under the
Securities Act of 1933. The notes pay interest at 6.25% per annum
and are convertible into Vector's common stock, at the option of the
holder. The conversion price, which was $26.71 per share at June 30,
2004, is subject to adjustment for various events, and any cash
distribution on Vector's common stock will result in a corresponding
decrease in the conversion price. In December 2001, $40,000 of the
notes were converted into Vector's common stock, and $132,500 of the
notes were outstanding at June 30, 2004.
Vector may redeem the notes, in whole or in part, at a price of
103.125% in the year beginning July 15, 2004, 102.083% in the year
beginning July 15, 2005, 101.042% in the year beginning July 15,
2006 and 100% in the year beginning July 15, 2007, together with
accrued interest. If a change of control occurs, Vector will be
required to offer to repurchase the notes at 101% of their principal
amount, plus accrued interest and, under certain circumstances, a
"make whole" payment.
-11-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
10% Senior Secured Notes Due March 31, 2006 - VGR Holding:
In May 2001, VGR Holding issued at a discount $60,000 principal
amount of 10% senior secured notes due March 31, 2006 in a private
placement. VGR Holding received net proceeds from the offering of
approximately $46,500. In April 2002, VGR Holding issued at a
discount an additional $30,000 principal amount of 10% senior
secured notes due March 31, 2006 in a private placement and received
net proceeds of approximately $24,500. The notes were priced to
provide the purchasers with a 15.75% yield to maturity. The new
notes are on the same terms as the $60,000 principal amount of
senior secured notes previously issued. All of the notes have been
guaranteed by the Company and by Liggett.
The notes are collateralized by substantially all of VGR Holding's
assets, including a pledge of VGR Holding's equity interests in its
direct subsidiaries, including Brooke Group Holding, Liggett Vector
Brands, Vector Tobacco and New Valley Holdings, Inc. ("NV
Holdings"), as well as a pledge of the shares of Liggett and all of
the New Valley securities held by VGR Holding and NV Holdings. The
purchase agreement for the notes contains covenants, which the
Company is in compliance with at June 30, 2004. Among other things,
the covenants limit the ability of VGR Holding to make distributions
to the Company to 50% of VGR Holding's net income, unless VGR
Holding holds an amount in cash equal to the then principal amount
of the notes outstanding ($70,000 at June 30, 2004) after giving
effect to the payment of the distribution, and limit additional
indebtedness of VGR Holding, Liggett, Vector Tobacco and Liggett
Vector Brands to 250% of EBITDA (as defined in the purchase
agreements) for the trailing 12 months. The covenants also restrict
transactions with affiliates subject to exceptions which include
payments to Vector not to exceed $9,500 per year for permitted
operating expenses, and limit the ability of VGR Holding to merge,
consolidate or sell certain assets. In August 2004, in connection
with an amendment to the note purchase agreement, VGR Holding
repurchased $7,000 of the notes at a price of 100% of the principal
amount plus accrued interest. The Company will recognize a loss of
approximately $639 in the third quarter of 2004 on the early
extinguishment of debt.
VGR Holding has the right (which it has not exercised) under the
purchase agreement for the notes to elect to treat Vector Tobacco as
a "designated subsidiary" and exclude the losses of Vector Tobacco
in determining the amount of additional indebtedness permitted to be
incurred. If VGR Holding were to make this election, future cash
needs of Vector Tobacco would be required to be funded directly by
Vector or by third-party financing as to which neither VGR Holding
nor Liggett could provide any guarantee or credit support.
VGR Holding may redeem the notes, in whole or in part, at a
redemption price of 100% of the principal amount. During the term of
the notes, VGR Holding is required to offer to repurchase all the
notes at a purchase price of 101% of the principal amount, in the
event of a change of control, and to offer to repurchase notes, at
100% of the principal amount, with the proceeds of material asset
sales.
Revolving Credit Facility - Liggett:
On April 14, 2004, Liggett entered into an Amended and Restated Loan
and Security Agreement with Congress Financial Corporation, as
lender. The $50,000 credit facility replaces Liggett's previous
$40,000 facility with Congress, under which $14,020 was outstanding
at June 30, 2004. Availability as determined under the facility was
approximately $20,900 based on eligible collateral at June 30, 2004.
The facility is collateralized by all inventories and receivables of
Liggett. Borrowings under the facility bear interest at a rate equal
to 1.0% above the prime rate of Wachovia Bank, N.A. (the indirect
parent of Congress). The facility requires Liggett's compliance with
certain financial and other covenants including a restriction on
Liggett's ability to pay cash dividends unless Liggett's borrowing
-12-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
availability under the facility for the 30-day period prior to the
payment of the dividend, and after giving effect to the dividend, is
at least $5,000. In addition, the facility imposes requirements with
respect to Liggett's adjusted net worth (not to fall below $8,000 as
computed in accordance with the agreement) and working capital (not
to fall below a deficit of $17,000 as computed in accordance with
the agreement). At June 30, 2004, Liggett was in compliance with all
covenants under the credit facility; Liggett's adjusted net worth
was $63,755 and net working capital was $52,995, as computed in
accordance with the agreement.
100 Maple LLC, a company formed by Liggett in 1999 to purchase its
Mebane, North Carolina manufacturing plant, has a term loan of
$4,881 outstanding under Liggett's credit facility at June 30, 2004.
The remaining balance of the term loan is payable in monthly
installments of $77 with a final payment on June 1, 2006 of $3,033.
Interest is charged at the same rate as applicable to Liggett's
credit facility, and the outstanding balance of the term loan
reduces the maximum availability under the credit facility. Liggett
has guaranteed the term loan, and a first mortgage on the Mebane
property and manufacturing equipment collateralizes the term loan
and Liggett's credit facility.
Equipment Loans - Liggett:
In March 2000, Liggett purchased equipment for $1,000 through the
issuance of a note, payable in 60 monthly installments of $21 with
an effective annual interest rate of 10.14%. In April 2000, Liggett
purchased equipment for $1,071 through the issuance of notes,
payable in 60 monthly installments of $22 with an effective interest
rate of 10.20%.
In October and December 2001, Liggett purchased equipment for $3,204
and $3,200, respectively, through the issuance of notes guaranteed
by the Company, each payable in 60 monthly installments of $53 with
interest calculated at the prime rate.
In March 2002, Liggett purchased equipment for $3,023 through the
issuance of a note, payable in 30 monthly installments of $62 and
then 30 monthly installments of $51 with an effective annual
interest rate of 4.68%.
In May 2002, Liggett purchased equipment for $2,871 through the
issuance of a note, payable in 30 monthly installments of $59 and
then 30 monthly installments of $48 with an effective annual
interest rate of 4.64%.
In September 2002, Liggett purchased equipment for $1,573 through
the issuance of a note guaranteed by the Company, payable in 60
monthly installments of $26 plus interest calculated at LIBOR plus
4.31%.
Notes Payable - Vector Tobacco:
In June 2001, Vector Tobacco purchased for $8,400 an industrial
facility in Timberlake, North Carolina. Vector Tobacco financed the
purchase with an $8,200 loan, payable in 60 monthly installments of
$85, plus annual interest at 4.85% above LIBOR with a final payment
of approximately $3,160. The loan, which was collateralized by a
mortgage and a letter of credit of $1,750, was guaranteed by VGR
Holding and Vector. During December 2001, Vector Tobacco borrowed an
additional $1,159 from the same lender to finance building
improvements. This loan was payable in 30 monthly installments of
$39 plus accrued interest, with an annual interest rate of LIBOR
plus 5.12%. These loans were repaid on July 13, 2004 with a portion
of proceeds from the sale of the Timberlake property. (See Note 4.)
-13-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
Notes for Medallion Acquisition - Vector Tobacco:
The purchase price for the acquisition of Medallion included $60,000
in notes of Vector Tobacco, guaranteed by the Company and Liggett.
Of the notes, $25,000 have been repaid with the final quarterly
principal payment of $3,125 made on March 31, 2004. The remaining
$35,000 of notes bear interest at 6.5% per year, payable
semiannually, and mature on April 1, 2007.
Note Payable - V.T. Aviation:
In February 2001, V.T. Aviation LLC, a subsidiary of Vector Research
Ltd., purchased an airplane for $15,500 and borrowed $13,175 to fund
the purchase. The loan, which is collateralized by the airplane and
a letter of credit from the Company for $775, is guaranteed by
Vector Research, VGR Holding and the Company. The loan is payable in
119 monthly installments of $125, including annual interest of 2.31%
above the 30-day commercial paper rate, with a final payment of
$1,420, based on current interest rates.
Note Payable - VGR Aviation:
In February 2002, V.T. Aviation purchased an airplane for $6,575 and
borrowed $5,800 to fund the purchase. The loan is guaranteed by the
Company. The loan is payable in 119 monthly installments of $40,
including annual interest of 2.75% above the 30-day average
commercial paper rate, with a final payment of $2,793, based on
current interest rates. During the fourth quarter of 2003, this
airplane was transferred to the Company's direct subsidiary, VGR
Aviation LLC, which has assumed the debt.
Note Payable - New Valley:
In December 2002, New Valley financed a portion of its purchase of
two office buildings in Princeton, New Jersey with a mortgage loan
of $40,500 from HSBC Realty Credit Corporation (USA). The loan has a
term of four years, bears interest at a floating rate of 2% above
LIBOR, and is collateralized by a first mortgage on the office
buildings, as well as by an assignment of leases and rents.
Principal is amortized to the extent of $54 per month during the
term of the loan. The loan may be prepaid without penalty and is
non-recourse against New Valley, except for various specified
environmental and related matters, misapplications of tenant
security deposits and insurance and condemnation proceeds, and fraud
or misrepresentation by New Valley in connection with the
indebtedness.
-14-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
6. EMPLOYEE BENEFITS
Net periodic benefit cost for the Company's pension and other
postretirement benefit plans for the three and six months ended June
30, 2004 and 2003 consists of the following:
Pension Benefits Pension Benefits
----------------------- -----------------------
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service cost - benefits earned
during the period ................... $ 1,248 $ 981 $ 2,496 $ 1,962
Interest cost on projected benefit
obligation .......................... 2,240 2,390 4,480 4,780
Expected return on plan assets ......... (3,027) (2,950) (6,054) (5,900)
Amortization of net loss ............... 506 414 1,012 828
---------- ---------- ---------- ----------
Net expense ................... $ 967 $ 835 $ 1,934 $ 1,670
========== ========== ========== ==========
Other Other
Postretirement Benefits Postretirement Benefits
----------------------- -----------------------
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Service cost - benefits earned
during the period ................... $ 8 $ 20 $ 16 $ 40
Interest cost on projected benefit
obligation .......................... 157 169 314 338
Expected return on plan assets ......... -- -- -- --
Amortization of net (gain) loss ........ 5 (32) 10 (64)
---------- ---------- ---------- ----------
Net expense ................... $ 170 $ 157 $ 340 $ 314
========== ========== ========== ==========
The Company did not make contributions to its pension benefits plans
for the six months ended June 30, 2004 and does not anticipate
making any contributions to such plans in 2004. The Company
anticipates paying approximately $550 in other postretirement
benefits in 2004.
7. CONTINGENCIES
SMOKING-RELATED LITIGATION:
Overview. Since 1954, Liggett and other United States cigarette
manufacturers have been named as defendants in numerous direct and
third-party actions predicated on the theory that cigarette
manufacturers should be liable for damages alleged to have been
caused by cigarette smoking or by exposure to secondary smoke from
cigarettes. These cases are reported here as though having been
commenced against Liggett (without regard to whether such cases were
actually commenced against Brooke Group Holding Inc., the Company's
predecessor and a wholly-owned subsidiary of VGR Holding, or
Liggett). There has been a noteworthy increase in the number of
cases
-15-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
commenced against Liggett and the other cigarette manufacturers in
recent years. The cases generally fall into the following
categories: (i) smoking and health cases alleging injury brought on
behalf of individual plaintiffs ("Individual Actions"); (ii) smoking
and health cases alleging injury and purporting to be brought on
behalf of a class of individual plaintiffs ("Class Actions"); (iii)
health care cost recovery actions brought by various foreign and
domestic governmental entities ("Governmental Actions"); and (iv)
health care cost recovery actions brought by third-party payors
including insurance companies, union health and welfare trust funds,
asbestos manufacturers and others ("Third-Party Payor Actions"). As
new cases are commenced, defense costs and the risks attendant to
the inherent unpredictability of litigation continue to increase.
The future financial impact of the risks and expenses of litigation
and the effects of the tobacco litigation settlements discussed
below are not quantifiable at this time. For the six months ended
June 30, 2004, Liggett incurred legal fees and other litigation
costs totaling approximately $2,553 compared to $2,232 for the six
months ended June 30, 2003.
Individual Actions. As of June 30, 2004, there were approximately
382 cases pending against Liggett, and in most cases the other
tobacco companies, where one or more individual plaintiffs allege
injury resulting from cigarette smoking, addiction to cigarette
smoking or exposure to secondary smoke and seek compensatory and, in
some cases, punitive damages. Of these, 108 were pending in
Maryland, 94 in Florida, 51 in New York, 34 in Mississippi and 21 in
California. The balance of the individual cases were pending in 23
states. In addition to these cases, an action against cigarette
manufacturers involving approximately 1,000 named individual
plaintiffs has been consolidated before a single West Virginia state
court. Liggett is a defendant in most of the cases pending in West
Virginia. In January 2002, the court severed Liggett from the trial
of the consolidated action, which is currently scheduled for March
2005.
There are eight individual cases pending where Liggett is the only
named defendant. In April 2004, in one of these cases, Beverly Davis
v. Liggett Group Inc., a jury in a Florida state court action
awarded compensatory damages of $540 against Liggett. Liggett
believes there are a number of grounds to challenge the verdict and
intends to pursue all post-trial and appellate relief.
The plaintiffs' allegations of liability in those cases in which
individuals seek recovery for injuries allegedly caused by cigarette
smoking are based on various theories of recovery, including
negligence, gross negligence, breach of special duty, strict
liability, fraud, misrepresentation, design defect, failure to warn,
breach of express and implied warranties, conspiracy, aiding and
abetting, concert of action, unjust enrichment, common law public
nuisance, property damage, invasion of privacy, mental anguish,
emotional distress, disability, shock, indemnity and violations of
deceptive trade practice laws, the Federal Racketeer Influenced and
Corrupt Organization Act ("RICO"), state RICO statutes and antitrust
statutes. In many of these cases, in addition to compensatory
damages, plaintiffs also seek other forms of relief including
treble/multiple damages, medical monitoring, disgorgement of profits
and punitive damages. Defenses raised by defendants in these cases
include lack of proximate cause, assumption of the risk, comparative
fault and/or contributory negligence, lack of design defect, statute
of limitations, equitable defenses such as "unclean hands" and lack
of benefit, failure to state a claim and federal preemption.
Jury awards in various states have been entered against other
cigarette manufacturers. The awards in these individual actions are
for both compensatory and punitive damages and represent a material
amount of damages. Liggett is not a party to these actions. The
following is a brief description of various of these matters:
-16-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
o In February, 1999, in Henley v. Philip Morris, a California
state court jury awarded $1,500 in compensatory damages and
$50,000 in punitive damages. The trial court reduced the
punitive damages award to $25,000. In September 2003, the
California Court of Appeals reduced the punitive damages award
to $9,000 based on the United States Supreme Court's 2003
opinion in State Farm, limiting punitive damages. The defendant
has appealed to the California Supreme Court.
o In March 1999, an Oregon state court jury found in favor of the
plaintiff in Williams v. Philip Morris. The jury awarded $800 in
compensatory damages and $79,500 in punitive damages. The trial
court reduced the punitive damages award to $32,000. In June
2002, the Oregon Court of Appeals reinstated the $79,500
punitive damages award. In October 2003, the United States
Supreme Court set aside the Oregon appellate court's ruling and
directed the Oregon court to reconsider the case in light of the
State Farm decision. In June 2004, the Oregon appellate court
reinstated the original jury verdict. The defendant has
appealed.
o In March 2000, a California state court jury found in favor of
the plaintiff in Whiteley v. Raybestos-Manhattan, Inc., et al.
The jury awarded the plaintiff $1,720 in compensatory damages
and $20,000 in punitive damages. In April 2004, the California
Court of Appeals reversed the judgment and remanded the case for
a new trial.
o During 2001, as a result of a Florida Supreme Court decision
upholding the award, in Carter v. Brown and Williamson Tobacco
Corp., the defendant paid $1,100 in compensatory damages and
interest to a former smoker and his spouse for injuries they
allegedly incurred as a result of smoking.
o In June 2001, a California state court jury found in favor of
the plaintiff in Boeken v. Philip Morris and awarded $5,500 in
compensatory damages and $3,000,000 in punitive damages. In
August 2001, the trial court reduced the punitive damages award
to $100,000. The parties have appealed.
o In December 2001, in Kenyon v. R.J. Reynolds Tobacco Co., a jury
awarded the plaintiff $165 in compensatory damages, but no
punitive damages. In May 2003, the Florida Court of Appeals
affirmed per curiam (that is, without an opinion) the trial
court's final judgment in favor of the plaintiffs. The defendant
paid the amount of the judgment plus accrued interest ($196)
after exhausting all appeals.
o In February 2002, in Burton v. R.J. Reynolds Tobacco Co., et al,
a federal district court jury in Kansas awarded the plaintiff
$198 in compensatory damages, and determined that the plaintiff
was entitled to punitive damages. In June 2002, the trial court
awarded the plaintiff $15,000 in punitive damages. The defendant
has appealed.
o In March 2002, an Oregon state court jury found in favor of the
plaintiff in Schwarz v. Philip Morris and awarded $169 in
compensatory damages and $150,000 in punitive damages. In May
2002, the trial court reduced the punitive damages award to
$100,000. The parties have appealed.
o In October 2002, a California state court jury found in favor of
the plaintiff in Bullock v. Philip Morris and awarded $850 in
compensatory damages and $28,000,000 in punitive damages. In
December 2002, the trial court reduced the punitive damages
award to $28,000. The parties have appealed.
-17-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
o In April 2003, in Eastman v. Brown & Williamson Tobacco Corp.,
et al, a Florida state court jury awarded $6,500 in compensatory
damages. In May 2004, the Florida Court of Appeals affirmed the
verdict in a per curiam opinion. The defendants will seek
further appellate review.
o In May 2003, in Boerner v. Brown & Williamson Tobacco Corp., a
federal district court jury in Arkansas awarded $4,000 in
compensatory damages and $15,000 in punitive damages. The
defendant has appealed.
o In November 2003, in Thompson v. Brown & Williamson Tobacco
Corp., et al., a Missouri state court jury awarded $1,100 in
compensatory damages. The defendants have appealed.
o In December 2003, in Frankson v. Brown & Williamson Tobacco
Corp., et al., a New York state court jury awarded $350 in
compensatory damages. In January 2004, the jury awarded $20,000
in punitive damages. The deceased smoker was found to be 50% at
fault. In June 2004, the court increased the compensatory
damages to $500 and decreased the punitive damages to $5,000.
Post-trial motions are pending.
One of the states in which cases are pending against Liggett is
Mississippi. During 2003, the Mississippi Supreme Court ruled that
the Mississippi Product Liability Act "precludes all tobacco cases
that are based on product liability." Based on this ruling, Liggett
is seeking, or intends to seek, dismissal of each of the
approximately 34 cases pending against it in Mississippi.
Class Actions. As June 30, 2004, there were approximately 33 actions
pending, for which either a class has been certified or plaintiffs
are seeking class certification, where Liggett, among others, was a
named defendant. Many of these actions purport to constitute
statewide class actions and were filed after May 1996 when the Fifth
Circuit Court of Appeals, in the Castano case, reversed a Federal
district court's certification of a purported nationwide class
action on behalf of persons who were allegedly "addicted" to tobacco
products.
The extent of the impact of the Castano decision on smoking-related
class action litigation is still uncertain. The Castano decision has
had a limited effect with respect to courts' decisions regarding
narrower smoking-related classes or class actions brought in state
rather than federal court. For example, since the Fifth Circuit's
ruling, a court in Louisiana (Liggett is not a defendant in this
proceeding) has certified an "addiction-as-injury" class action that
covered only citizens in the state. In May 2004, the jury returned a
verdict in the amount of $591,000, plus prejudgment interest, on the
class's claim for a smoking cessation program. Post-trial motions are
pending. Two other class actions, Broin and Engle, were certified in
state court in Florida prior to the Fifth Circuit's decision. In
April 2001, the Brown case was certified as a class action in
California.
In May 1994, an action entitled Engle, et al. v. R.J. Reynolds
Tobacco Company, et al., Circuit Court, Eleventh Judicial Circuit,
Miami-Dade County, Florida, was filed against Liggett and others.
The class consists of all Florida residents and citizens, and their
survivors, who have suffered, presently suffer or have died from
diseases and medical conditions caused by their addiction to
cigarettes that contain nicotine. Phase I of the trial commenced in
July 1998 and in July 1999, the jury returned the Phase I verdict.
The Phase I verdict concerned certain issues determined by the trial
court to be "common" to the causes of action of the plaintiff class.
Among other things, the jury found that: smoking cigarettes causes
20 diseases or medical conditions, cigarettes are addictive or
dependence producing, defective and unreasonably dangerous,
defendants made materially false statements with the intention of
misleading smokers, defendants concealed or omitted material
information concerning the health effects and/or the addictive
nature of smoking cigarettes and
-18-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
agreed to misrepresent and conceal the health effects and/or the
addictive nature of smoking cigarettes, and defendants were
negligent and engaged in extreme and outrageous conduct or acted
with reckless disregard with the intent to inflict emotional
distress. The jury also found that defendants' conduct "rose to a
level that would permit a potential award or entitlement to punitive
damages." The court decided that Phase II of the trial, which
commenced November 1999, would be a causation and damages trial for
three of the class representatives and a punitive damages trial on a
class-wide basis, before the same jury that returned the verdict in
Phase I. Phase III of the trial was to be conducted before separate
juries to address absent class members' claims, including issues of
specific causation and other individual issues regarding entitlement
to compensatory damages. In April 2000, the jury awarded
compensatory damages of $12,704 to the three plaintiffs, to be
reduced in proportion to the respective plaintiff's fault. The jury
also decided that the claim of one of the plaintiffs, who was
awarded compensatory damages of $5,831, was not timely filed. In
July 2000, the jury awarded approximately $145,000,000 in the
punitive damages portion of Phase II against all defendants
including $790,000 against Liggett. The court entered a final order
of judgment against the defendants in November 2000. The court's
final judgment, which provided for interest at the rate of 10% per
year on the jury's awards, also denied various post-trial motions,
including a motion for new trial and a motion seeking reduction of
the punitive damages award. Liggett appealed the court's order.
In May 2003, Florida's Third District Court of Appeals decertified
the Engle class and set aside the jury's decision in the case
against Liggett and the other cigarette makers, including the
$145,000,000 punitive damages award. The intermediate appellate
court ruled that there were multiple legal bases why the class
action trial, including the punitive damages award, could not be
sustained. The court found that the class failed to meet the legal
requirements for class certification and that class members needed
to pursue their claims on an individualized basis. The court also
ruled that the trial plan violated Florida law and the appellate
court's 1996 certification decision, and was unconstitutional. The
court further found that the proceedings were irretrievably tainted
by class counsel's misconduct and that the punitive damages award
was bankrupting under Florida law.
In October 2003, the Third District Court of Appeals denied class
counsel's motions seeking, among other things, a rehearing by the
court. Class counsel filed a motion with the Florida Supreme Court
to invoke discretionary review on the basis that the Third District
Court of Appeals decision construes the due process provisions of
the state and federal constitutions and conflicts with other
appellate and supreme court decisions. In May 2004, the Florida
Supreme Court agreed to review the case. Oral argument is scheduled
for November 3, 2004. If the Third District Court's ruling is not
upheld on further appeal, it will have a material adverse effect on
the Company.
In May 2000, legislation was enacted in Florida that limits the size
of any bond required, pending appeal, to stay execution of a
punitive damages verdict to the lesser of the punitive award plus
twice the statutory rate of interest, $100,000 or 10% of the net
worth of the defendant, but the limitation on the bond does not
affect the amount of the underlying verdict. In November 2000,
Liggett filed the $3,450 bond required by the Florida law in order
to stay execution of the Engle judgment, pending appeal. Legislation
limiting the amount of bonds required to file an appeal of an
adverse judgment has also been enacted in Arkansas, California,
Colorado, Georgia, Idaho, Indiana, Kansas, Kentucky, Louisiana,
Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey,
North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South
Carolina, South Dakota, Tennessee, Texas, Virginia, West Virginia
and Wisconsin.
In May 2001, Liggett, along with Philip Morris and Lorillard Tobacco
Co., reached an agreement with the class in the Engle case, which
provided assurance of Liggett's ability to appeal the jury's July
2000 verdict. As required by the agreement, Liggett paid $6,273 into
an escrow account to be held for the benefit of the Engle class, and
released, along with Liggett's existing $3,450 statutory bond, to
-19-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
the court for the benefit of the class upon completion of the
appeals process, regardless of the outcome of the appeal. As a
result, the Company recorded a $9,723 pre-tax charge to the
consolidated statement of operations for the first quarter of 2001.
The agreement, which was approved by the court, assured that the
stay of execution, in effect pursuant to the Florida bonding
statute, would not be lifted or limited at any point until
completion of all appeals, including an appeal to the United States
Supreme Court. If Liggett's balance sheet net worth fell below
$33,781 (as determined in accordance with generally accepted
accounting principles in effect as of July 14, 2000), the agreement
provided that the stay granted in favor of Liggett in the agreement
would terminate and the Engle class would be free to challenge the
Florida bonding statute.
In June 2002, the jury in a Florida state court action entitled
Lukacs v. Philip Morris, et al. awarded $37,500 in compensatory
damages in a case involving Liggett and two other tobacco
manufacturers. In March 2003, the court reduced the amount of the
compensatory damages to $25,100. The jury found Liggett 50%
responsible for the damages incurred by the plaintiff. The Lukacs
case was the first individual case to be tried as part of Phase III
of the Engle case; the claims of all other individuals who are
members of the class were stayed pending resolution of the appeal of
the Engle verdict. The Lukacs verdict, which was subject to the
outcome of the Engle appeal, has been overturned as a result of the
appellate court's ruling. As discussed above, class counsel in Engle
is pursuing various appellate remedies seeking reversal of the
appellate court's decision.
Class certification motions are pending in a number of putative
class actions. Classes remain certified against Liggett in West
Virginia (Blankenship), in California (Brown), in New York (Simon),
in Kansas (Smith) and in New Mexico (Romero). A number of class
certification denials are on appeal.
In August 2000, in Blankenship v. Philip Morris, Inc., a West
Virginia state court conditionally certified (only to the extent of
medical monitoring) a class of present or former West Virginia
smokers who desire to participate in a medical monitoring plan. The
trial of this case ended in January 2001, when the judge declared a
mistrial. In July 2001, the court issued an order severing Liggett
from the retrial of the case which began in September 2001. In
November 2001, the jury returned a verdict in favor of the other
defendants. In May 2004, the West Virginia Supreme Court affirmed
the defense jury verdict. In June 2004, plaintiff's motion for
rehearing was denied.
In April 2001, the California state court in the case of Brown v.
The American Tobacco Company, Inc., et al., granted in part
plaintiff's motion for class certification and certified a class
comprised of adult residents of California who smoked at least one
of defendants' cigarettes "during the applicable time period" and
who were exposed to defendants' marketing and advertising activities
in California. Certification was granted as to plaintiff's claims
that defendants violated California's unfair business practices
statute. The court subsequently defined "the applicable class
period" for plaintiff's claims, pursuant to a stipulation submitted
by the parties, as June 10, 1993 through April 23, 2001. The
California Court of Appeals denied defendants' writ application,
which sought review of the trial court's class certification orders.
Defendants filed a petition for review with the California Supreme
Court, which was subsequently denied. The defendants' summary
judgment motions are pending before the court. Liggett is a
defendant in the case.
In September 2002, in In Re Simon II Litigation, the federal
district court for the Eastern District of New York granted
plaintiffs' motion for certification of a nationwide non-opt-out
punitive damages class action against the tobacco companies,
including Liggett. The class is not seeking compensatory damages,
but was created to determine whether smokers across the country may
be entitled to punitive damages. In February 2003, the Second
Circuit agreed to review the district court's class certification
decision, and oral argument was held in November 2003.
-20-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
Class action suits have been filed in a number of states against
individual cigarette manufacturers, alleging that the use of the
terms "lights" and "ultralights" constitutes unfair and deceptive
trade practices. One such suit (McLaughlin v. Philip Morris USA,
Inc., et al.), pending in federal court in New York against the
cigarette manufacturers, seeks to create a nationwide class of
"light" cigarette smokers and includes Liggett as a defendant.
In March 2003, in a class action brought against Philip Morris on
behalf of smokers of light cigarettes, a state court judge in
Illinois awarded $7,100,500 in actual damages to the class members,
$3,000,000 in punitive damages to the State of Illinois (which was
not a plaintiff in this matter), and approximately $1,800,000 in
attorney's fees and costs. Entry of judgment has been stayed. Philip
Morris has appealed the verdict.
Approximately 38 purported state and federal class action complaints
were filed against the cigarette manufacturers, including Liggett,
for alleged antitrust violations. The actions allege that the
cigarette manufacturers have engaged in a nationwide and
international conspiracy to fix the price of cigarettes in violation
of state and federal antitrust laws. Plaintiffs allege that
defendants' price-fixing conspiracy raised the price of cigarettes
above a competitive level. Plaintiffs in the 31 state actions
purport to represent classes of indirect purchasers of cigarettes in
16 states; plaintiffs in the seven federal actions purport to
represent a nationwide class of wholesalers who purchased cigarettes
directly from the defendants. The federal class actions were
consolidated and, in July 2000, plaintiffs filed a single
consolidated complaint that did not name Liggett as a defendant,
although Liggett complied with discovery requests. In July 2002, the
court granted defendants' motion for summary judgment in the
consolidated federal cases, which decision was affirmed on appeal by
the United States Court of Appeals for the Eleventh Circuit. All
state court cases on behalf of indirect purchasers have been
dismissed, except for two cases pending in Kansas and New Mexico. A
Kansas state court, in the case of Smith v. Philip Morris Companies
Inc., et al., granted class certification in November 2001. In April
2003, plaintiffs' motion for class certification was granted in
Romero v. Philip Morris Companies Inc., a case pending in New Mexico
state court, which decision has been appealed. Liggett is one of the
defendants in the Kansas and New Mexico cases.
Governmental Actions. As of June 30, 2004, there were approximately
13 Governmental Actions pending against Liggett. In these
proceedings, both foreign and domestic governmental entities seek
reimbursement for Medicaid and other health care expenditures. The
claims asserted in these health care cost recovery actions vary. In
most of these cases, plaintiffs assert the equitable claim that the
tobacco industry was "unjustly enriched" by plaintiffs' payment of
health care costs allegedly attributable to smoking and seek
reimbursement of those costs. Other claims made by some but not all
plaintiffs include the equitable claim of indemnity, common law
claims of negligence, strict liability, breach of express and
implied warranty, breach of special duty, fraud, negligent
misrepresentation, conspiracy, public nuisance, claims under state
and federal statutes governing consumer fraud, antitrust, deceptive
trade practices and false advertising, and claims under RICO.
In August 2003, following the refusal by the Florida Supreme Court
to hear the appeal of the Republic of Venezuela in connection with
the dismissal of its health care cost recovery action (which
decision plaintiff has appealed to the United States Supreme Court),
the trial court hearing the health care cost recovery actions
brought in Florida by the Republic of Tajikistan and the Brazilian
State of Tocantins granted defendants' motions to dismiss the cases.
Subsequently, plaintiffs voluntarily dismissed additional heath care
cost recovery cases brought in Florida by various foreign
governmental entities.
-21-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
Third-Party Payor Actions. As of June 30, 2004, there were
approximately six Third-Party Payor Actions pending against Liggett.
The claims in these cases are similar to those in the Governmental
Actions but have been commenced by insurance companies, union health
and welfare trust funds, asbestos manufacturers and others. Nine
United States Circuit Courts of Appeal have ruled that Third-Party
Payors did not have standing to bring lawsuits against the cigarette
manufacturers. The United States Supreme Court has denied petitions
for certiorari in the cases decided by five of the courts of appeal.
However, a number of Third-Party Payor Actions, including an action
brought by 24 Blue Cross/Blue Shield Plans, remain pending.
In June 2001, a jury in a third party payor action brought by Empire
Blue Cross and Blue Shield in the Eastern District of New York
rendered a verdict awarding the plaintiff $17,800 in damages against
the major tobacco companies. As against Liggett, the jury awarded
the plaintiff damages of $89. In February 2002, the court awarded
plaintiff's counsel $37,800 in attorneys' fees, without allocating
the fee award among the several defendants. Liggett has appealed
both the jury verdict and the attorneys' fee award. In September
2003, the United States Court of Appeals for the Second Circuit
certified two questions relating to plaintiff's direct claims of
deceptive business practices to the New York Court of Appeals, which
has agreed to review the certified questions. The Second Circuit
reversed the portion of the judgment relating to the verdict
returned against defendants under plaintiff's subrogation claim, and
deferred its ruling on defendants' appeal of the attorneys' fees
award until such time as the New York Court of Appeals rules on the
certified questions.
In other Third-Party Payor Actions claimants have set forth several
additional theories of relief sought: funding of corrective public
education campaigns relating to issues of smoking and health;
funding for clinical smoking cessation programs; disgorgement of
profits from sales of cigarettes; restitution; treble damages; and
attorneys' fees. Nevertheless, no specific amounts are provided. It
is understood that requested damages against the tobacco company
defendants in these cases might be in the billions of dollars.
Federal Government Action. In September 1999, the United States
government commenced litigation against Liggett and the other major
tobacco companies in the United States District Court for the
District of Columbia. The action seeks to recover an unspecified
amount of health care costs paid for and furnished, and to be paid
for and furnished, by the Federal Government for lung cancer, heart
disease, emphysema and other smoking-related illnesses allegedly
caused by the fraudulent and tortious conduct of defendants, to
restrain defendants and co-conspirators from engaging in fraud and
other unlawful conduct in the future, and to compel defendants to
disgorge the proceeds of their unlawful conduct. The complaint
alleges that such costs total more than $20,000,000 annually. The
action asserted claims under three federal statutes, the Medical
Care Recovery Act ("MCRA"), the Medicare Secondary Payer provisions
of the Social Security Act ("MSP") and RICO. In September 2000, the
court dismissed the government's claims based on MCRA and MSP,
reaffirming its decision in July 2001. In the September 2000
decision, the court also determined not to dismiss the government's
RICO claims, under which the government continues to seek court
relief to restrain the defendant tobacco companies from allegedly
engaging in fraud and other unlawful conduct and to compel
disgorgement. In May 2003, the court denied the industry's motion
which sought partial summary judgment as to the government's
advertising, marketing, promotion and warning claims on the basis
that these claims are within the exclusive jurisdiction of the
Federal Trade Commission. In January 2004, the court granted one of
the government's pending motions and dismissed certain equitable
defenses of defendants. In April 2004, the court denied Liggett's
motion to be dismissed from the case. In May 2004, the court denied
the defendants' motion for
-22-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
summary judgment to dismiss the government's disgorgement claim and,
in June 2004, certified that decision for interlocutory appeal to
the United States Court of Appeals for the District of Columbia,
which has agreed to hear the appeal. Oral argument is scheduled for
November 19, 2004.
In June 2001, the United States Attorney General assembled a team of
three Department of Justice ("DOJ") lawyers to work on a possible
settlement of the federal lawsuit. The DOJ lawyers met with
representatives of the tobacco industry, including Liggett, in July
2001. No settlement was reached. In a January 2003 filing with the
court, the government alleged that disgorgement by defendants of
approximately $289,000,000 is an appropriate remedy in the case.
Trial has been scheduled for September 2004.
Settlements. In March 1996, Brooke Group Holding and Liggett entered
into an agreement, subject to court approval, to settle the Castano
class action tobacco litigation. The Castano class was subsequently
decertified by the court.
In March 1996, March 1997 and March 1998, Brooke Group Holding and
Liggett entered into settlements of smoking-related litigation with
the Attorneys General of 45 states and territories. The settlements
released both Brooke Group Holding and Liggett from all
smoking-related claims, including claims for health care cost
reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson Tobacco
Corporation, R.J. Reynolds Tobacco Company and Lorillard Tobacco
Company (collectively, the "Original Participating Manufacturers" or
"OPMs") and Liggett (together with the OPMs and any other tobacco
product manufacturer that becomes a signatory, the "Participating
Manufacturers") entered into the Master Settlement Agreement (the
"MSA") with 46 states, the District of Columbia, Puerto Rico, Guam,
the United States Virgin Islands, American Samoa and the Northern
Marianas (collectively, the "Settling States") to settle the
asserted and unasserted health care cost recovery and certain other
claims of those Settling States. The MSA received final judicial
approval in each settling jurisdiction.
The MSA restricts tobacco product advertising and marketing within
the Settling States and otherwise restricts the activities of
Participating Manufacturers. Among other things, the MSA prohibits
the targeting of youth in the advertising, promotion or marketing of
tobacco products; bans the use of cartoon characters in all tobacco
advertising and promotion; limits each Participating Manufacturer to
one tobacco brand name sponsorship during any 12-month period; bans
all outdoor advertising, with the exception of signs, 14 square feet
or less, at retail establishments that sell tobacco products;
prohibits payments for tobacco product placement in various media;
bans gift offers based on the purchase of tobacco products without
sufficient proof that the intended recipient is an adult; prohibits
Participating Manufacturers from licensing third parties to
advertise tobacco brand names in any manner prohibited under the
MSA; prohibits Participating Manufacturers from using as a tobacco
product brand name any nationally recognized non-tobacco brand or
trade name or the names of sports teams, entertainment groups or
individual celebrities; and prohibits Participating Manufacturers
from selling packs containing fewer than 20 cigarettes.
The MSA also requires Participating Manufacturers to affirm
corporate principles to comply with the MSA and to reduce underage
usage of tobacco products and imposes requirements applicable to
lobbying activities conducted on behalf of Participating
Manufacturers.
Liggett has no payment obligations under the MSA except to the
extent its market share exceeds a base share of 125% of its 1997
market share, or approximately 1.65% of total cigarettes sold in the
United States. As a result of the Medallion acquisition in April
2002, 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
-23-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
United States. During 1999 and 2000, Liggett's market share did not
exceed the base amount. According to data from Management Science
Associates, Inc., domestic shipments by Liggett and Vector Tobacco
accounted for approximately 2.2% of the total cigarettes shipped in
the United States during 2001, 2.5% during 2002 and 2.7% during
2003. On April 15 of any year following a year in which Liggett's
and/or Vector Tobacco's market shares exceed their base shares,
Liggett and/or Vector Tobacco will pay on each excess unit an amount
equal (on a per-unit basis) to that due during the same following
year by the OPMs under the annual and strategic contribution payment
provisions of the MSA, subject to applicable adjustments, offsets
and reductions. In March and April 2002, Liggett and Vector Tobacco
paid a total of $31,130 for their 2001 MSA obligations. In March and
April 2003, Liggett and Vector Tobacco paid a total of $37,541 for
their 2002 MSA obligations. At that time, funds were held back based
on Liggett's and Vector Tobacco's belief that their MSA payments for
2002 should be reduced as a result of market share loss to
non-participating manufacturers. In June 2003, Liggett and Vector
Tobacco reached a settlement with the jurisdictions party to the MSA
whereby Liggett and Vector Tobacco agreed to pay $2,478 in April
2004 to resolve these claims. In April 2004, Liggett and Vector
Tobacco paid a total of $50,322 for their 2003 MSA obligations.
Liggett and Vector Tobacco have expensed $8,391 for their estimated
MSA obligations for the first six months of 2004 as part of cost of
goods sold. Under the annual and strategic contribution payment
provisions of the MSA, the OPMs (and Liggett and Vector Tobacco to
the extent their market shares exceed their base shares) are
required to pay the following annual amounts (subject to certain
adjustments):
Year Amount
---- ------
2004 - 2007............................ $8,000,000
2008 - 2017............................ $8,139,000
2018 and each year thereafter......... $9,000,000
These annual payments will be allocated based on relative unit
volume of domestic cigarette shipments. The payment obligations
under the MSA are the several, and not joint, obligations of each
Participating Manufacturer and are not the responsibility of any
parent or affiliate of a Participating Manufacturer.
The MSA replaces Liggett's prior settlements with all states and
territories except for Florida, Mississippi, Texas and Minnesota.
Each of these four states, prior to the effective date of the MSA,
negotiated and executed settlement agreements with each of the other
major tobacco companies, separate from those settlements reached
previously with Liggett. Because these states' settlement agreements
with Liggett provided for "most favored nation" protection for both
Brooke Group Holding and Liggett, the payments due these states by
Liggett (with certain possible exceptions) have been eliminated,
other than a $100 a year payment to Minnesota starting in 2003, to
be paid any year cigarettes manufactured by Liggett are sold in the
state. With respect to all non-economic obligations under the
previous settlements, both Brooke Group Holding and Liggett are
entitled to the most favorable provisions as between the MSA and
each state's respective settlement with the other major tobacco
companies. Therefore, Liggett's non-economic obligations to all
states and territories are now defined by the MSA.
Copies of the various settlement agreements are filed as exhibits to
the Company's Annual Report on Form 10-K and the discussion herein
is qualified in its entirety by reference thereto.
-24-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
Trials. Cases currently scheduled for trial during the next six
months include two individual actions in Florida state court
scheduled for trial in September 2004. Liggett is the sole defendant
in each of these cases. Trial in the United States government action
is scheduled for September 2004 in federal court in the District of
Columbia. Trial dates, however, are subject to change.
Management is not able to predict the outcome of the litigation
pending against Brooke Group Holding or Liggett. Litigation is
subject to many uncertainties. In May 2003, a Florida intermediate
appellate court overturned a $790,000 punitive damages award against
Liggett and decertified the Engle smoking and health class action.
In May 2004, the Florida Supreme Court agreed to review the case.
Oral argument is scheduled for November 3, 2004. If the intermediate
appellate court's ruling is not upheld on further appeal, it will
have a material adverse effect on the Company. In November 2000,
Liggett filed the $3,450 bond required under the bonding statute
enacted in 2000 by the Florida legislature which limits the size of
any bond required, pending appeal, to stay execution of a punitive
damages verdict. In May 2001, Liggett reached an agreement with the
class in the Engle case, which provided assurance to Liggett that
the stay of execution, in effect pursuant to the Florida bonding
statute, would not be lifted or limited at any point until
completion of all appeals, including to the United States Supreme
Court. As required by the agreement, Liggett paid $6,273 into an
escrow account to be held for the benefit of the Engle class, and
released, along with Liggett's existing $3,450 statutory bond, to
the court for the benefit of the class upon completion of the
appeals process, regardless of the outcome of the appeal. As a
result, the Company recorded a $9,723 pre-tax charge to the
consolidated statement of operations for the first quarter of 2001.
In June 2002, the jury in an individual case brought under the third
phase of the Engle case awarded $37,500 (subsequently reduced by the
court to $25,100) of compensatory damages against Liggett and two
other defendants and found Liggett 50% responsible for the damages.
The verdict, which was subject to the outcome of the Engle appeal,
has been overturned as a result of the appellate court's ruling. In
April 2004, a jury in a Florida state court action awarded
compensatory damages of approximately $540 against Liggett in an
individual action. Liggett intends to appeal the verdict. 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.
Management cannot predict the cash requirements related to any
future settlements and judgments, including cash required to bond
any appeals, and there is a risk that those requirements will not be
able to be met. An unfavorable outcome of a pending smoking and
health case could encourage the commencement of additional similar
litigation. Management is unable to make a meaningful estimate with
respect to the amount or range of loss that could result from an
unfavorable outcome of the cases pending against Brooke Group
Holding or Liggett or the costs of defending such cases. The
complaints filed in these cases rarely detail alleged damages.
Typically, the claims set forth in an individual's complaint against
the tobacco industry pray for money damages in an amount to be
determined by a jury, plus punitive damages and costs. These damage
claims are typically stated as being for the minimum necessary to
invoke the jurisdiction of the court.
It is possible that the Company's consolidated financial position,
results of operations or cash flows could be materially adversely
affected by an unfavorable outcome in any such smoking-related
litigation.
Liggett's and Vector Tobacco's management are unaware of any
material environmental conditions affecting their existing
facilities. Liggett's and Vector Tobacco's management believe that
current operations are conducted in material compliance with all
environmental laws and regulations and other laws and regulations
governing cigarette manufacturers. Compliance with federal, state
and local provisions regulating the discharge of materials into the
environment, or otherwise relating to the protection of the
environment, has not had a material effect on the capital
expenditures, results of operations or competitive position of
Liggett or Vector Tobacco.
-25-
VECTOR GROUP LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)-(CONTINUED)
(UNAUDITED)
Liggett has been served in three reparations actions brought by
descendants of slaves. Plaintiffs in these actions claim that
defendants, including Liggett, profited from the use of slave labor.
Seven additional cases have been filed in California, Illinois and
New York. Liggett is a named defendant in only one of these
additional cases, but has not been served.
There are several other proceedings, lawsuits and claims pending
against the Company and certain of its consolidated subsidiaries
unrelated to smoking or tobacco product liability. Management is of
the opinion that the liabilities, if any, ultimately resulting from
such other proceedings, lawsuits and claims should not materially
affect the Company's financial position, results of operations or
cash flows.
LEGISLATION AND REGULATION:
Many cities and states have recently enacted legislation banning
smoking in public places including offices, restaurants, public
buildings and bars. Efforts to limit smoking in public places could
have a material adverse effect on the Company and Liggett.
In January 1993, the Environmental Protection Agency ("EPA")
released a report on the respiratory effect of secondary smoke which
concludes that secondary smoke is a known human lung carcinogen in
adults and in children, causes increased respiratory tract disease
and middle ear disorders and increases the severity and frequency of
asthma. In June 1993, the two largest of the major domestic
cigarette manufacturers, together with other segments of the tobacco
and distribution industries, commenced a lawsuit against the EPA