| Delaware | 1-5759 | 65-0949535 | ||
| (State or other jurisdiction of | Commission File Number | (I.R.S. Employer Identification No.) | ||
| incorporation or organization) |
| Page | ||||||||
PART I. FINANCIAL INFORMATION |
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Item 1. Vector Group Ltd. Consolidated Financial Statements (Unaudited): |
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| 2 | ||||||||
| 3 | ||||||||
| 4 | ||||||||
| 5 | ||||||||
| 6 | ||||||||
| 47 | ||||||||
| 69 | ||||||||
| 69 | ||||||||
| 70 | ||||||||
| 70 | ||||||||
| 70 | ||||||||
| 71 | ||||||||
| 72 | ||||||||
| Section 302 CEO Certification | ||||||||
| Section 302 CFO Certification | ||||||||
| Section 906 CEO Certification | ||||||||
| Section 906 CFO Certification | ||||||||
| Material Legal Proceeding | ||||||||
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| March 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
| Revised(1) | ||||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 172,151 | $ | 181,059 | ||||
Investment securities available for sale |
30,583 | 18,507 | ||||||
Accounts receivable — trade |
16,503 | 12,714 | ||||||
Other receivables |
716 | 638 | ||||||
Inventories |
72,318 | 70,395 | ||||||
Deferred income taxes |
25,396 | 26,179 | ||||||
Other current assets |
9,556 | 9,607 | ||||||
Total current assets |
327,223 | 319,099 | ||||||
Property, plant and equipment, net |
61,348 | 62,523 | ||||||
Long-term investments, net |
7,869 | 7,828 | ||||||
Investments in non-consolidated real estate businesses |
19,623 | 17,391 | ||||||
Restricted assets |
5,065 | 5,065 | ||||||
Deferred income taxes |
66,644 | 69,988 | ||||||
Intangible asset |
107,511 | 107,511 | ||||||
Other assets |
13,611 | 13,725 | ||||||
Total assets |
$ | 608,894 | $ | 603,130 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||
Current liabilities: |
||||||||
Current portion of notes payable and long-term debt |
$ | 22,503 | $ | 9,313 | ||||
Accounts payable |
9,552 | 15,394 | ||||||
Accrued promotional expenses |
15,924 | 18,317 | ||||||
Accrued taxes payable, net |
31,766 | 32,392 | ||||||
Settlement accruals |
27,118 | 22,505 | ||||||
Deferred income taxes |
6,640 | 3,891 | ||||||
Accrued interest |
3,699 | 5,770 | ||||||
Other accrued liabilities |
11,898 | 20,518 | ||||||
Total current liabilities |
129,100 | 128,100 | ||||||
Notes payable, long-term debt and other obligations, less current portion |
244,789 | 243,590 | ||||||
Fair value of derivatives embedded within convertible debt |
38,147 | 39,371 | ||||||
Non-current employee benefits |
18,425 | 17,235 | ||||||
Deferred income taxes |
150,540 | 143,544 | ||||||
Other liabilities |
5,652 | 5,646 | ||||||
Commitments and contingencies |
— | — | ||||||
Stockholders’ equity: |
||||||||
Preferred stock, par value $1.00 per share, authorized 10,000,000 shares |
— | — | ||||||
Common stock, par value $0.10 per share, authorized 100,000,000
shares, issued 53,505,062 and 53,417,525 shares and outstanding
49,917,970 and 49,849,735 shares |
4,992 | 4,985 | ||||||
Additional paid-in capital |
102,309 | 133,529 | ||||||
Unearned compensation |
— | (11,681 | ) | |||||
Accumulated deficit |
(64,966 | ) | (74,259 | ) | ||||
Accumulated other comprehensive loss |
(3,403 | ) | (10,610 | ) | ||||
Less: 3,587,092 and 3,567,790 shares of common stock in treasury, at cost |
(16,691 | ) | (16,320 | ) | ||||
Total stockholders’ equity |
22,241 | 25,644 | ||||||
Total liabilities and stockholders’ equity |
$ | 608,894 | $ | 603,130 | ||||
| (1) | See Note 1(i) |
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| Three Months Ended | ||||||||
| March 31, 2006 | March 31, 2005 | |||||||
| Revised(1) | ||||||||
Revenues* |
$ | 117,704 | $ | 104,173 | ||||
Expenses: |
||||||||
Cost of goods sold* |
73,341 | 58,998 | ||||||
Operating, selling, administrative and general expenses |
24,136 | 26,527 | ||||||
Operating income |
20,227 | 18,648 | ||||||
Other income (expenses): |
||||||||
Interest and dividend income |
1,781 | 710 | ||||||
Interest expense |
(8,266 | ) | (6,647 | ) | ||||
(Loss) gain on investments, net |
(30 | ) | 1,430 | |||||
Gain from conversion of LTS notes |
— | 9,461 | ||||||
Equity in loss on operations of LTS |
— | (299 | ) | |||||
Equity income (loss) from non-consolidated real
estate businesses |
3,735 | (306 | ) | |||||
Other, net |
46 | (1 | ) | |||||
Income from continuing operations before provision for income
taxes and minority interests |
17,493 | 22,996 | ||||||
Income tax expense |
8,200 | 12,518 | ||||||
Minority interests |
— | (2,016 | ) | |||||
Income from continuing operations |
9,293 | 8,462 | ||||||
Discontinued operations: |
||||||||
Income from discontinued operations, net of minority
interest and taxes |
— | 82 | ||||||
Gain on disposal of discontinued operations, net of
minority interest and taxes |
— | 2,952 | ||||||
Income from discontinued operations |
— | 3,034 | ||||||
Net income |
$ | 9,293 | $ | 11,496 | ||||
Per basic common share: |
||||||||
Income from continuing operations |
$ | 0.17 | $ | 0.19 | ||||
Income from discontinued operations |
$ | — | $ | 0.07 | ||||
Net income applicable to common shares |
$ | 0.17 | $ | 0.26 | ||||
Per diluted common share: |
||||||||
Income from continuing operations |
$ | 0.17 | $ | 0.18 | ||||
Income from discontinued operations |
$ | — | $ | 0.07 | ||||
Net income applicable to common shares |
$ | 0.17 | $ | 0.25 | ||||
Cash distributions declared per share |
$ | 0.40 | $ | 0.38 | ||||
| * | Revenues and Cost of goods sold include excise taxes of $40,118 and $33,432 for the three months ended March 31, 2006 and 2005, respectively. | |
| (1) | See Note 1(i) |
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| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Unearned | Treasury | Comprehensive | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Compensation | Stock | Loss | Total | |||||||||||||||||||||||||
| Revised(1) | Revised(1) | Revised(1) | ||||||||||||||||||||||||||||||
Balance, December 31, 2005 |
49,849,735 | $ | 4,985 | $ | 133,529 | $ | (74,259 | ) | $ | (11,681 | ) | $ | (16,320 | ) | $ | (10,610 | ) | $ | 25,644 | |||||||||||||
Net income |
— | — | — | 9,293 | — | — | — | 9,293 | ||||||||||||||||||||||||
Forward contract adjustments, net of taxes |
— | — | — | — | — | — | 69 | 69 | ||||||||||||||||||||||||
Unrealized gain on investment securities, net of taxes |
— | — | — | — | — | — | 7,138 | 7,138 | ||||||||||||||||||||||||
Total other comprehensive income |
— | — | — | — | — | — | — | 7,207 | ||||||||||||||||||||||||
Total comprehensive income |
— | — | — | — | — | — | — | 16,500 | ||||||||||||||||||||||||
Reclassifications in accordance with SFAS No. 123(R) |
— | — | (11,681 | ) | — | 11,681 | — | — | — | |||||||||||||||||||||||
Distributions on common stock |
— | — | (21,541 | ) | — | — | — | — | (21,541 | ) | ||||||||||||||||||||||
Exercise of options, net of 19,302 shares delivered to
pay exercise price |
68,235 | 7 | 918 | — | — | (371 | ) | — | 554 | |||||||||||||||||||||||
Amortization of deferred compensation |
— | — | 1,084 | — | — | — | — | 1,084 | ||||||||||||||||||||||||
Balance, March 31, 2006 |
49,917,970 | $ | 4,992 | $ | 102,309 | $ | (64,966 | ) | $ | — | $ | (16,691 | ) | $ | (3,403 | ) | $ | 22,241 | ||||||||||||||
| (1) | See Note 1(i) |
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| Three Months Ended | ||||||||
| March 31, 2006 | March, 31, 2005 | |||||||
| Revised(1) | ||||||||
Net cash provided by operating activities |
$ | 1,622 | $ | 7,044 | ||||
Cash flows from investing activities: |
||||||||
Proceeds from sale or maturity of investment securities |
— | 5,420 | ||||||
Purchase of investment securities |
(73 | ) | (2,724 | ) | ||||
Proceeds from sale or liquidation of long-term investments |
25 | — | ||||||
Purchase of long-term investments |
(64 | ) | (46 | ) | ||||
Purchase of LTS stock |
— | (1,500 | ) | |||||
Issuance of note receivable |
— | (1,750 | ) | |||||
Capital expenditures |
(1,446 | ) | (968 | ) | ||||
Discontinued operations |
— | 66,912 | ||||||
Net cash (used in) provided by investing activities |
(1,558 | ) | 65,344 | |||||
Cash flows from financing activities: |
||||||||
Proceeds from debt |
78 | 14,959 | ||||||
Repayments of debt |
(1,648 | ) | (1,434 | ) | ||||
Deferred financing charges |
(200 | ) | (678 | ) | ||||
Borrowings under revolver |
130,788 | 91,615 | ||||||
Repayments on revolver |
(117,003 | ) | (91,268 | ) | ||||
Distributions on common stock |
(21,541 | ) | (16,735 | ) | ||||
Proceeds from exercise of Vector options and warrants |
554 | 779 | ||||||
Other, net |
— | 92 | ||||||
Discontinued operations |
— | (39,213 | ) | |||||
Net cash used in financing activities |
(8,972 | ) | (41,883 | ) | ||||
Net (decrease) increase in cash and cash equivalents |
(8,908 | ) | 30,505 | |||||
Cash and
cash equivalents, beginning of period |
181,059 | 110,004 | ||||||
Cash and
cash equivalents, end of period |
$ | 172,151 | $ | 140,509 | ||||
| (1) | See Note 1(a) |
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| 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. The Company owned all of the limited liability company interests of New Valley at March 31, 2006 and owned 55.1% of the common shares of its corporate predecessor, New Valley Corporation, at March 31, 2005. All significant intercompany balances and transactions have been eliminated. | |||
| Liggett is engaged in the manufacture and sale of cigarettes in the United States. Vector Tobacco is engaged in the development and marketing of low nicotine and nicotine-free cigarette products and the development of reduced risk cigarette products. New Valley is engaged in the real estate business and is seeking to acquire additional operating companies and real estate properties. | |||
| As discussed in Note 13, New Valley’s real estate leasing operations, sold in February 2005, are presented as discontinued operations for the three months ended March 31, 2005. The 2005 interim condensed consolidated statement of cash flows has been revised to separately disclose the operating, investing and financing portions of the cash flows attributable to discontinued operations. These amounts had previously been reported on a combined basis as a separate caption outside operating, financing and investing activities. | |||
| 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 state 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, as amended, for the year ended December 31, 2005, 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, embedded derivative liability, the tobacco quota buy-out, settlement accruals and litigation and defense costs. Actual results could differ from those estimates. | |||
| (c) | 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, 2005. The dividend was |
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| recorded at par value of $210 in 2005 since stockholders’ equity was in a deficit position. In connection with the 5% stock dividend, the Company increased the number of outstanding stock options by 5% and reduced the exercise prices accordingly. All per share amounts have been presented as if the stock dividend had occurred on January 1, 2005. | |||
| In March 2004, the FASB’s Emerging Issue Task Force (“EITF”) reached a final consensus on Issue No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement 128”, which established standards regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company. Earnings available to common stockholders for the period are reduced by the contingent interest and the non-cash interest expense associated with the beneficial conversion feature and embedded derivative related to the Company’s convertible notes issued in 2004 and 2005. These notes, which are a participating security due to the contingent interest feature, had no impact on EPS for the three months ended March 31, 2006 and 2005, as the dividends on the common stock into which the notes are convertible increased interest expense and reduced earnings available to common stockholders so there were no unallocated earnings under EITF Issue No. 03-6. | |||
| As discussed in Note 9, the Company has stock option awards which provide for common stock dividend equivalents at the same rate as paid on the common stock with respect to the shares underlying the unexercised portion of the options. These outstanding options represent participating securities under EITF Issue No. 03-6. Because the Company accounted for the dividend equivalent rights on these options as additional compensation cost in accordance with APB Opinion No. 25, these participating securities had no impact on the calculation of basic EPS in periods ending prior to January 1, 2006. Effective with the adoption of SFAS No. 123(R) on January 1, 2006, the Company recognizes payments of the dividend equivalent rights ($1,578 for the three months ended March 31, 2006) on these options as reductions in additional paid-in capital on the Company’s consolidated balance sheet. As a result, in its calculation of basic EPS for the three months ended March 31, 2006, the Company has adjusted its net income for the effect of these participating securities as follows: |
Net income |
$ | 9,293 | ||
Income attributable to participating securities |
(680 | ) | ||
Net income available to common stockholders |
$ | 8,613 | ||
| Basic EPS is computed by dividing net income available to common stockholders by the weighted-average number of shares outstanding. Diluted EPS includes the dilutive effect of stock options and vested and unvested restricted stock grants. Basic and diluted EPS were calculated using the following shares for the three months ended March 31, 2006 and 2005: |
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
Weighted-average shares for basic EPS |
49,220,398 | 43,883,341 | ||||||
Plus incremental shares related to
stock options and warrants |
1,474,234 | 1,849,284 | ||||||
Weighted-average shares for diluted EPS |
50,694,632 | 45,732,625 | ||||||
| For the three months ended March 31, 2006 and 2005, the Company had 218,255 and 711,795 stock options, respectively, and 628,780 and 0 shares of non-vested restricted stock, respectively, that were not included in the computation of diluted EPS because the options, exercise price and the per share expense associated with the non-vested restricted stock were greater than the average market price of the common stock during the respective periods. For the three months ended March 31, 2006, 3,944,329 of stock options with dividend equivalent rights were not included in the computation of diluted EPS. For the three months ended March 31, 2006 and 2005, the Company had 12,267,693 and 9,703,070 shares of common stock, respectively, issuable under convertible notes issued by the Company which were not included in the computation of diluted EPS because their impact was anti-dilutive to EPS. | |||
| (d) | Share-Based Payments | ||
| Effective January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment” using the “modified prospective method” with guidance provided by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” Under the modified prospective method, the share-based compensation cost recognized beginning January 1, 2006 includes compensation cost for (i) all share-based payments granted prior to, but not vested as of January 1, 2006, |
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| based on the grant date fair value originally estimated in accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and (ii) all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Compensation cost under SFAS No. 123(R) is recognized ratably using the straight-line attribution method over the expected vesting period. In addition, pursuant to SFAS No. 123(R), the Company is required to estimate the amount of expected forfeitures when calculating the compensation costs, instead of accounting for forfeitures as incurred, which was the Company’s previous method. As of January 1, 2006, the cumulative effect of adopting the estimated forfeiture method was not significant. Prior periods are not restated under this transition method (see Note 9). | |||
| (e) | 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 foreign contracts, minimum pension liability adjustments and, prior to December 9, 2005, the Company’s proportionate interest in New Valley’s capital transactions. Total comprehensive income was $16,500 for the three months ended March 31, 2006 and $11,479 for the three months ended March 31, 2005. | |||
| (f) | Financial Instruments: | ||
| As required by SFAS No. 133, derivatives embedded within the Company’s convertible debt are recognized on the Company’s balance sheet and are stated at estimated fair value as determined by an independent third party at each reporting period. Changes in the fair value of the embedded derivatives are reflected quarterly as an adjustment to interest expense. | |||
| The Company uses forward foreign exchange contracts to mitigate its exposure to changes in exchange rates relating to purchases of equipment from third parties. The primary currency to which the Company is exposed is the euro. A substantial portion of the Company’s foreign exchange contracts is effective as hedges. The fair value of forward foreign exchange contracts designated as hedges is reported in other current assets or current liabilities and the change in fair value of the contracts during the period is recorded in other comprehensive income. The fair value of the hedge at March 31, 2006 was a liability of approximately $391. | |||
| (g) | 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 in accordance with EITF Issue No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” In accordance with EITF Issue No. 06-3, “How Sales Taxes Should be Presented in the Income Statement (Gross versus Net)”, the Company’s accounting policy is to include federal excise taxes in revenues and cost of goods sold. Such revenues totaled $40,118 and $33,432 for the three months ended March 31, 2006 and 2005, respectively. Since the Company’s primary line of business is tobacco, the Company’s financial position and its results of operations and cash flows have been and could continue to be |
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| 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. | |||
| (h) | Contingencies: | ||
| The Company records Liggett’s product liability legal expenses and other litigation costs as operating, selling, general and administrative expenses as those costs are incurred. As discussed in Note 8, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett. | |||
| The Company records provisions in the consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed in Note 8, (i) management has not concluded that it is probable that a loss has been incurred in any of the pending smoking-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending smoking-related litigation; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Litigation is subject to many uncertainties, and 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. | |||
| (i) | New Accounting Pronouncements: | ||
| In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. SFAS No. 154 changes the requirements for the accounting for and reporting of a change in accounting principle. The provisions of SFAS No. 154 require, unless impracticable, retrospective application to prior periods’ financial statements of (1) all voluntary changes in accounting principles and (2) changes required by a new accounting pronouncement, if a specific transition is not provided. SFAS No. 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate, which requires prospective application of the new method. SFAS No. 154 is effective for all accounting changes made in fiscal years beginning after December 15, 2005. The current period impact of the application of SFAS No. 154 is discussed below in connection with the application of EITF Issue No. 05-8, “Income Tax Effects of Issuing Convertible Debt with a Beneficial Conversion Feature.” | |||
| In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations — an Interpretation of SFAS Statement No. 143” (“FIN 47”). FIN 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and/or method of settlement are conditional on a future event. FIN 47 is effective for fiscal years ending after December 15, 2005. The application of FIN 47 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. | |||
| In September 2005, the EITF reached a consensus on Issue No. 04-13, “Inventory Exchanges”. EITF Issue No. 04-13 required two or more inventory transactions with the same party to be considered a single nonmonetary transaction subject to APB Opinion No. 29, “Accounting for Nonmonetary Transactions”, if the transactions were entered into in contemplation of one another. EITF Issue No. 04-13 is effective for the Company for new arrangements entered into after April 2, 2006. The Company does not expect the adoption of EITF Issue No. 04-13 to have a material impact on its financial position, results of operations or cash flows. |
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| Effective January 1, 2006, the Company adopted EITF Issue No. 05-8, “Income Tax Effects of Issuing Convertible Debt with a Beneficial Conversion Feature.” In Issue No. 05-8, the EITF concluded that the issuance of convertible debt with a beneficial conversion feature creates a temporary difference on which deferred taxes should be provided. The consensus is required to be applied in fiscal periods beginning after December 15, 2005, by retroactive restatement of prior financial statements retroactive to the issuance of the convertible debt. The retrospective application of EITF Issue No. 05-08 reduced income tax expense by $303 and $186 for the three months ended March 31, 2006 and 2005, respectively. A reconciliation of the net impact of the application of EITF Issue No. 05-08 at December 31, 2005 on the Company’s consolidated balance sheet is as follows: |
| Long-Term | Additional | |||||||||||||||
| Deferred | Paid-in | Accumulated | Stockholders’ | |||||||||||||
| Income Taxes | Capital | Deficit | Equity | |||||||||||||
December 31, 2005, as reported
in Form 10-K |
$ | 135,785 | $ | 141,388 | $ | (74,359 | ) | $ | 33,403 | |||||||
Application
of EITF 05-08: |
||||||||||||||||
Establishment of deferred tax
liability |
7,859 | (7,859 | ) | — | (7,859 | ) | ||||||||||
Increase to income tax benefit
for the year ended
December 31, 2004 |
(87 | ) | — | 87 | 87 | |||||||||||
Decrease to income tax expense
for the year ended
December 31, 2005 |
(1,003 | ) | — | 1,003 | 1,003 | |||||||||||
Decrease to extraordinary
item, unallocated goodwill |
990 | — | (990 | ) | (990 | ) | ||||||||||
Retrospective balance,
December 31, 2005 |
$ | 143,544 | $ | 133,529 | $ | (74,259 | ) | $ | 25,644 | |||||||
| In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments”. SFAS No. 155 amends SFAS Nos. 133 and 140 and relates to the financial reporting of certain hybrid financial instruments. SFAS No. 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of fiscal years commencing after September 15, 2006. The Company has not completed its assessment of the impact of this standard. |
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| 2. | RESTRUCTURING | |
| The components of the combined pre-tax restructuring charges relating to the 2004 Liggett Vector Brands restructurings for the three months ended March 31, 2006 are as follows: |
| Employee | Non-Cash | Contract | ||||||||||||||
| Severance | Asset | Termination/ | ||||||||||||||
| and Benefits | Impairment | Exit Costs | Total | |||||||||||||
Balance, December 31, 2005 |
$ | 713 | $ | — | $ | 1,403 | $ | 2,116 | ||||||||
Utilized |
(247 | ) | — | (137 | ) | (384 | ) | |||||||||
Balance, March 31, 2006 |
$ | 466 | $ | — | $ | 1,266 | $ | 1,732 | ||||||||
| 3. | INVESTMENT SECURITIES AVAILABLE FOR SALE | |
| Investment securities classified as available for sale are carried at fair value, with net unrealized gains or losses included as a component of stockholders’ equity, net of taxes and minority interests. For the three months ended March 31, 2006 and 2005, net realized (losses) gains were $(30) and $1,430, respectively. | ||
| The components of investment securities available for sale at March 31, 2006 are as follows: |
| Gross | Gross | |||||||||||||||
| Unrealized | Unrealized | Fair | ||||||||||||||
| Cost | Gain | Loss | Value | |||||||||||||
Marketable equity securities |
$ | 10,171 | $ | 13,179 | $ | (40 | ) | $ | 23,310 | |||||||
Marketable debt securities |
7,337 | — | (64 | ) | 7,273 | |||||||||||
| $ | 17,508 | $ | 13,179 | $ | (104 | ) | $ | 30,583 | ||||||||
| Investment securities available for sale as of March 31, 2006 include New Valley LLC’s 11,111,111 shares of Ladenburg Thalmann Financial Services Inc., which were carried at $16,000 (see Note 11). | ||
| The Company’s marketable debt securities have a weighted average maturity of 1.81 years at March 31, 2006 and mature from April 2006 to March 2010. |
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| 4. | INVENTORIES | |
| Inventories consist of: |
| March 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Leaf tobacco |
$ | 31,779 | $ | 35,312 | ||||
Other raw materials |
3,269 | 3,157 | ||||||
Work-in-process |
1,521 | 1,685 | ||||||
Finished goods |
39,807 | 34,653 | ||||||
Inventories at current cost |
76,376 | 74,807 | ||||||
LIFO adjustments |
(4,058 | ) | (4,412 | ) | ||||
| $ | 72,318 | $ | 70,395 | |||||
| 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 March 31, 2006, Liggett had leaf tobacco purchase commitments of approximately $16,938. There were no leaf tobacco purchase commitments at Vector Tobacco at that date. | ||
| Included in the above table was approximately $1,136 at March 31, 2006 and $1,208 at December 31, 2005 of leaf inventory associated with Vector Tobacco’s QUEST product, which is carried at its estimated net realizable value. | ||
| LIFO inventories represent approximately 93% of total inventories at March 31, 2006 and 92% of total inventories at December 31, 2005. | ||
| 5. | PROPERTY, PLANT AND EQUIPMENT | |
| Property, plant and equipment consist of: |
| March 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Land and improvements |
$ | 1,418 | $ | 1,418 | ||||
Buildings |
13,718 | 13,718 | ||||||
Machinery and equipment |
97,876 | 98,037 | ||||||
Leasehold improvements |
2,869 | 2,724 | ||||||
Construction-in-progress |
3,719 | 2,960 | ||||||
| 119,600 | 118,857 | |||||||
Less accumulated depreciation |
(58,252 | ) | (56,334 | ) | ||||
| $ | 61,348 | $ | 62,523 | |||||
| Depreciation and amortization expense on property, plant and equipment for the three months ended March 31, 2006 and 2005 was $2,473 and $2,666, respectively. Future machinery and equipment purchase commitments at Liggett were $6,720 at March 31, 2006. |
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| In February 2005, New Valley completed the sale of its two office buildings in Princeton, New Jersey for $71,500. (Refer to Notes 11 and 13). The Company recorded a gain of $2,952, net of minority interests and income taxes, in the first quarter of 2005 in connection with the sale. | ||
| 6. | NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS | |
| Notes payable, long-term debt and other obligations consist of: |
| March 31, | December 31, | |||||||
| 2006 | 2005 | |||||||
Vector: |
||||||||
5% Variable Interest Senior Convertible Notes due 2011,
net of unamortized net discount of $51,135 and $53,307* |
$ | 60,729 | $ | 58,557 | ||||
6.25% Convertible Subordinated Notes due 2008 |
132,492 | 132,492 | ||||||
Liggett: |
||||||||
Revolving credit facility |
13,785 | — | ||||||
Term loan under credit facility |
3,250 | 3,482 | ||||||
Equipment loans |
8,686 | 9,828 | ||||||
Vector Tobacco: |
||||||||
Notes payable — Medallion acquisition due 2007 |
35,000 | 35,000 | ||||||
V.T. Aviation: |
||||||||
Note payable |
8,060 | 8,300 | ||||||
VGR Aviation: |
||||||||
Note payable |
4,832 | 4,867 | ||||||
Other |
458 | 377 | ||||||
Total notes payable, long-term debt and other obligations |
267,292 | 252,903 | ||||||
Less: |
||||||||
Current maturities |
(22,503 | ) | (9,313 | ) | ||||
Amount due after one year |
$ | 244,789 | $ | 243,590 | ||||
| * | The fair value of the derivatives embedded within these notes ($38,147 at March 31, 2006 and $39,371 at December 31, 2005) is separately classified as a derivative liability in the consolidated balance sheet. |
| 5% Variable Interest Senior Convertible Notes Due November 2011 — Vector: | ||
| In November 2004, the Company sold $65,500 of its 5% variable interest senior convertible notes due November 15, 2011 in a private offering to qualified institutional investors in accordance with Rule 144A under the Securities Act of 1933. The buyers of the notes had the right, for a 120-day period ending March 18, 2005, to purchase up to an additional $16,375 of the notes. At December 31, 2004, buyers had exercised their rights to purchase an additional $1,405 of the notes, and the remaining $14,959 principal amount of notes were purchased during the first quarter of 2005. In April 2005, Vector issued an additional $30,000 principal amount of 5% variable interest senior convertible notes due November 15, 2011 in a separate private offering to qualified institutional investors in accordance with Rule 144A. These notes, which were issued under a new indenture at a net price of 103.5%, were on the same terms as the $81,864 principal amount of notes previously issued in connection with the November 2004 placement. |
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| The notes pay interest on a quarterly basis at a rate of 5% per year with an additional amount of interest payable on the notes on each interest payment date. This additional amount is based on the amount of cash dividends actually paid by the Company per share on its common stock during the prior three-month period ending on the record date for such interest payment multiplied by the number of shares of its common stock into which the notes are convertible on such record date (together, the “Total Interest”). Notwithstanding the foregoing, however, during the period prior to November 15, 2006, the interest payable on each interest payment date is the higher of (i) the Total Interest and (ii) 6 3/4% per year. The notes are convertible into the Company’s common stock, at the holder’s option. The conversion price, which was $18.48 at March 31, 2006, is subject to adjustment for various events, including the issuance of stock dividends. | ||
| The notes will mature on November 15, 2011. The Company must redeem 12.5% of the total aggregate principal amount of the notes outstanding on November 15, 2009. In addition to such redemption amount, the Company will also redeem on November 15, 2009 and on each interest accrual period thereafter an additional amount, if any, of the notes necessary to prevent the notes from being treated as an “Applicable High Yield Discount Obligation” under the Internal Revenue Code. The holders of the notes will have the option on November 15, 2009 to require the Company to repurchase some or all of their remaining notes. The redemption price for such redemptions will equal 100% of the principal amount of the notes plus accrued interest. If a fundamental change (as defined in the indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their principal amount, plus accrued interest and, under certain circumstances, a “make-whole premium”. | ||
| Embedded Derivatives. The portion of the Total Interest on the notes which is computed by reference to the cash dividends paid on the Company’s common stock is considered an embedded derivative. Pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities”, the Company has bifurcated this dividend portion of the interest on the notes and, based on a valuation by an independent third party, estimated the fair value of the embedded derivative liability. At issuance of the November 2004 notes, the estimated initial fair value was $24,738, which was recorded as a discount to the notes and classified as a derivative liability on the consolidated balance sheet. At March 31, 2006, the derivative liability was estimated at $38,147 and at December 31, 2005, the derivative liability was estimated at $39,371. Changes to the fair value of this embedded derivative are reflected quarterly as an adjustment to interest expense. The Company recognized gains of $1,224 and $828 in the first quarter of 2006 and 2005, respectively, due to changes in the fair value of the embedded derivative, which were reported as adjustments to interest expense. | ||
| Beneficial Conversion Feature. After giving effect to the recording of the embedded derivative liability as a discount to the notes, the Company’s 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. EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Convertible Ratios”, requires that the intrinsic value of the beneficial conversion feature ($22,075 at date of issuance) be recorded to additional paid-in capital and as a discount on the notes. The discount is then amortized to interest expense over the term of the notes using the effective interest rate method. The Company recognized non-cash interest expense of $746 and $524 in the first quarter of 2006 and 2005, respectively, due to the amortization of the debt discount attributable to the beneficial conversion feature. |
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| 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 $21.32 per share at March 31, 2006, 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. If the conversion price decreases below the Company’s average share price, the Company could recognize an additional beneficial conversion feature with respect to these notes. In December 2001, $40,000 of the notes were converted into Vector’s common stock and, in October 2004, an additional $8 of the notes were converted. A total $132,492 of the notes were outstanding at March 31, 2006. | ||
| Vector may redeem the notes, in whole or in part, at a price of 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. | ||
| Revolving Credit Facility — Liggett: | ||
| Liggett has a $50,000 credit facility with Wachovia Bank, N.A. (“Wachovia”) under which $13,785 was outstanding at March 31, 2006. Availability as determined under the facility was approximately $22,037 based on eligible collateral at March 31, 2006. The facility is collateralized by all inventories and receivables of Liggett and a mortgage on its manufacturing facility. Borrowings under the facility bear interest at a rate equal to 1.0% above the prime rate of Wachovia. 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 availability under the facility for the 30-day period prior to the payment of the dividend, and after giving effect to the dividend, is at least $5,000 and no event of default has occurred under the agreement, including Liggett’s compliance with the covenants in the credit facility, including an adjusted net worth and working capital requirement. 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 March 31, 2006, management believes that Liggett was in compliance with all covenants under the credit facility; Liggett’s adjusted net worth was $38,347 and net working capital was $26,847, 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 $3,250 outstanding under Liggett’s credit facility at March 31, 2006. The remaining balance of the term loan is payable in two remaining monthly installments of $77 with a final payment on June 1, 2006 of $3,095. 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. |
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| Equipment Loans — Liggett: | ||
| 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. Interest is calculated at LIBOR plus 2.8%. | ||
| 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. Interest is calculated at LIBOR plus 2.8%. | ||
| 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%. | ||
| 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. | ||
| In December 2005, Liggett purchased equipment for $2,273 through a financing agreement payable in 24 installments of $58 and then 24 installments of $46. Interest is calculated at 5.03%. Liggett was required to provide a security deposit equal to 25% of the funded amount or $568. | ||
| Each of these equipment loans is collateralized by the purchased equipment. | ||
| Notes for Medallion Acquisition — Vector Tobacco: | ||
| The purchase price for the 2002 acquisition of the Medallion Company, Inc. (“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 $2,581 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 |
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| final payment of $3,836 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 assumed the debt. | ||
| 7. | EMPLOYEE BENEFIT PLANS | |
| Defined Benefit and Postretirement Plans: | ||
| Net periodic benefit cost for the Company’s pension and other postretirement benefit plans for the three months ended March 31, 2006 and 2005 consists of the following: |
| Other | ||||||||||||||||
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||
| March 31, 2006 | March 31, 2005 | March 31, 2006 | March 31, 2005 | |||||||||||||
Service cost — benefits earned
during the period |
$ | 1,225 | $ | 1,321 | $ | 5 | $ | 7 | ||||||||
Interest cost on projected benefit
obligation |
2,250 | 2,172 | 150 | 153 | ||||||||||||
Expected return on plan assets |
(3,145 | ) | (3,069 | ) | — | — | ||||||||||
Amortization of prior service cost |
262 | — | — | — | ||||||||||||
Amortization of net actuarial loss |
435 | 468 | 3 | 11 | ||||||||||||
Net expense |
$ | 1,027 | $ | 892 | $ | 158 | $ | 171 | ||||||||
| The Company did not make contributions to its pension benefits plans for the three months ended March 31, 2006 and does not anticipate making any contributions to such plans in 2006. The Company anticipates paying approximately $550 in other postretirement benefits in 2006. | ||
| 8. | 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. New cases continue to be commenced against Liggett and the other cigarette manufacturers. 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, 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 |
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| expenses of litigation and the effects of the tobacco litigation settlements discussed below are not quantifiable at this time. For the three months ended March 31, 2006, Liggett incurred legal fees and other litigation costs totaling approximately $1,373 compared to $1,229 for the three months ended March 31, 2005. | ||
| Individual Actions. As of March 31, 2006, there were approximately 271 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, 106 were pending in Florida, 44 in Mississippi, 30 in Maryland and 20 in Missouri. The balance of the individual cases were pending in 16 states and territories. | ||
| There are five individual cases pending where Liggett is the only tobacco company defendant. In April 2004, in the Beverly Davis v. Liggett Group Inc. case, a Florida state court jury awarded compensatory damages of $540 against Liggett. In addition, plaintiff’s counsel was awarded legal fees of $752. Liggett has appealed both the verdict and the award of legal fees. In March 2005, in the Ferlanti v. Liggett Group Inc. case, a Florida state court granted Liggett’s motion for summary judgment. The plaintiff has appealed. In March 2006, in the Schwartz, et. al. v. Liggett Group Inc. case, a Florida state court jury returned a verdict in favor of Liggett. The plaintiff has appealed. | ||
| 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 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. 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. | ||
| In February 2006, in an individual action in Missouri state court against the major tobacco companies, including Liggett, the jury returned a verdict in favor of the defense. The plaintiff may appeal. | ||
| 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: |
| • | 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. In September 2004, the California Supreme Court upheld the $9,000 punitive damages award. In March 2005, the United |
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| States Supreme Court denied review and the defendant has paid the amount of the judgment plus accrued interest. | |||
| • | In March 1999, an Oregon state court jury found in favor of the plaintiff in Williams-Branch 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. In February 2006, the Oregon Supreme Court reaffirmed the $79,500 punitive damages jury verdict. The defendant intends to seek review by the United States Supreme Court. | ||
| • | In 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. | ||
| • | 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. In September 2004, the California Court of Appeals affirmed the compensatory damages award, but reduced the punitive damages award to $50,000. In April 2005, the California Court of Appeals reaffirmed its decision. In August 2005, the California Supreme Court declined further review of the case. In March 2006, the United States Supreme Court denied review and the defendant paid the judgment. | ||
| • | In December 2001, in Kenyon v. R.J. Reynolds Tobacco Co., a Florida state court 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 and attorney’s fees after exhausting all appeals. | ||
| • | 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. In February 2005, the United States Court of Appeals for the Tenth Circuit overturned the punitive damages award, while upholding the compensatory damages award. The defendant paid the compensatory damages award in June 2005. | ||
| • | 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 to the Oregon Court of Appeals. | ||
| • | 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. In April 2006, the California Court of Appeals upheld the punitive damages award. The defendant will seek further review. |
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| • | In April 2003, in Eastman v. Brown & Williamson Tobacco Corp., et al, a Florida state court jury awarded $6,540 in compensatory damages. In May 2004, the Florida Court of Appeals affirmed the verdict in a per curiam opinion. The defendants’ motion for rehearing was denied, and the judgment was paid in October 2004. | ||
| • | 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. In January 2005, the United States Court of Appeals for the Eighth Circuit affirmed the compensatory damages award, but reduced the punitive damages award to $5,000. The judgment was paid in February 2005. | ||
| • | In November 2003, in Thompson v. Brown & Williamson Tobacco Corp., et al., a Missouri state court jury awarded $2,100 in compensatory damages. The defendants have appealed to the Missouri Court of Appeals. | ||
| • | 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. The defendants have appealed to the New York Supreme Court, Appellate Division. | ||
| • | In October 2004, in Arnitz v. Philip Morris, a Florida state court jury awarded $600 in damages but found that the plaintiff was 60% at fault, thereby reducing the verdict against Philip Morris to $240. Philip Morris has appealed to the Florida Second District Court of Appeals. | ||
| • | In February 2005, in Smith v. Brown & Williamson Tobacco Corp., et al., a Missouri state court jury awarded $2,000 in compensatory damages and $20,000 in punitive damages. The defendants have appealed to the Missouri Court of Appeals. | ||
| • | In March 2005, in Rose v. Philip Morris, a New York state court jury awarded $3,400 in compensatory damages and $17,100 in punitive damages. The defendants have appealed to the New York Supreme Court, Appellate Division. |
| In 2003, the Mississippi Supreme Court ruled that the Mississippi Product Liability Act “precludes all tobacco cases that are based on product liability.” In a 2005 decision, the Mississippi Supreme Court ruled that certain claims against cigarette manufacturers may remain available to plaintiffs. | ||
| Class Actions. As of March 31, 2006, there were approximately nine 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 |
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| example, since the Fifth Circuit’s ruling, a court in Louisiana (Liggett is not a defendant in this proceeding) certified an “addiction-as-injury” class action, in the Scott v. American Tobacco Co., Inc. case, that covered only citizens in the state. In May 2004, the Scott jury returned a verdict in the amount of $591,000, plus prejudgment interest, on the class’ claim for a smoking cessation program. The case is on appeal. Two other class actions, Broin, et al., v. Philip Morris Companies Inc., et al., and Engle, et al., v. R.J. Reynolds Tobacco Company, et al., were certified in state court in Florida prior to the Fifth Circuit’s decision. | ||
| In May 1994, the Engle case was filed against Liggett and others in the Circuit Court, Eleventh Judicial Circuit, Miami-Dade County, Florida. The class consists of all Florida residents and citizens, and their survivors, who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine. Phase I of the trial commenced in July 1998 and in July 1999, the jury returned the Phase I verdict. The Phase I verdict concerned certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. Among other things, the jury found that: smoking cigarettes causes 20 diseases or medical conditions, cigarettes are addictive or dependence producing, defective and unreasonably dangerous, defendants made materially false statements with the intention of misleading smokers, defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes and agreed to misrepresent and conceal the health effects and/or the addictive nature of smoking cigarettes, and defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress. The jury also found that defendants’ conduct “rose to a level that would permit a potential award or entitlement to punitive damages.” The court decided that Phase II of the trial, which commenced November 1999, would be a causation and damages trial for three of the class representatives and a punitive damages trial on a class-wide basis, before the same jury that returned the verdict in Phase I. 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 May 2004, the Florida Supreme Court agreed to review the case, and oral argument was held in November 2004. If the Third District Court of Appeal’s ruling is not upheld on appeal, it will have a material adverse effect on the Company. |
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| 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 the bond required to file an appeal of an adverse judgment has been enacted in more than 30 states. | ||
| In May 2001, Liggett, Philip Morris and Lorillard Tobacco Company 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 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), Kansas (Smith) and New Mexico (Romero). A number of class certification denials are on appeal. | ||
| In August 2000, in Blankenship v. Philip Morris, 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. In January 2001, 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, and it denied plaintiffs’ petition for rehearing. Plaintiffs did not seek further appellate review of this matter and the case has been concluded in favor of the other defendants. | ||
| In April 2001, the California state court in Brown, et al., v. The American Tobacco Co., Inc. et al. 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 |
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| period” and who were exposed to defendants’ marketing and advertising activities in California. Certification was granted as to plaintiffs’ claims that defendants violated California’s unfair business practices statute. The court subsequently defined “the applicable class period” for plaintiffs’ claims, pursuant to a stipulation submitted by the parties, as June 10, 1993 through April 23, 2001. In March 2005, the court issued a ruling granting defendants’ motion to decertify the class based on a recent change in California law. In April 2005, the court denied plaintiffs’ motion for reconsideration of the order which decertified the case. The plaintiffs have appealed. 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 major 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 May 2005, the United States Court of Appeals for the Second Circuit vacated the trial court’s class certification order and remanded the case to the trial court for further proceedings. The Second Circuit Court of Appeals denied plaintiffs’ motion for reconsideration of the decertification ruling. In February 2006, the trial court entered an order dismissing the action effective March 8, 2006. | ||
| Class action suits have been filed in a number of states against individual cigarette manufacturers, alleging that the use of the terms “lights” and “ultra lights” constitutes unfair and deceptive trade practices. One such suit (Schwab v. Philip Morris, 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. Plaintiffs’ motion for class certification and summary judgment motions by both sides were heard in September 2005. In November 2005, the court issued an opinion permitting plaintiffs to seek fluid recovery damages if class certification is granted. Fluid recovery would permit potential damages to be paid out in ways other than merely giving cash directly to plaintiffs, such as establishing a pool of money that could be used for public purposes. Although trial was scheduled to commence in January 2006, the judge has allowed an additional period for discovery before deciding the class certification issue. | ||
| In March 2003, in a class action brought against Philip Morris on behalf of smokers of light cigarettes, a state court judge in Illinois in the Price, et al., v. Philip Morris case 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 was stayed. In December 2005, the Illinois Supreme Court overturned the lower state court’s ruling in Price, and sent the case back to the lower court with instructions to dismiss the case. In May 2006, the Illinois Supreme court denied plaintiffs’ motion for a rehearing. | ||
| 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 |
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| 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. The Kansas state court, in the case of Smith v. Philip Morris, et al., granted class certification in November 2001. In April 2003, plaintiffs’ motion for class certification was granted in Romero v. Philip Morris, the case pending in New Mexico state court. In February 2005, the New Mexico Supreme Court affirmed the trial court’s certification order. Liggett is a defendant in both the Kansas and New Mexico cases. | ||
| Although not technically a class action, a West Virginia state court has consolidated for trial on some common related issues approximately 1,000 individual smoker actions against cigarette manufacturers, that were pending prior to 2001. Liggett is a defendant in most of the cases pending in West Virginia. Trial has been set for March 2007. In January 2002, the court severed Liggett from the trial of the consolidated action. | ||
| Governmental Actions. As of March 31, 2006, there were approximately five 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. A health care recovery case is pending in Missouri state court brought by the City of St. Louis, Missouri, and approximately 50 area hospitals against the major cigarette manufacturers. As a result of a June 2005 ruling, the court has limited plaintiffs’ claims by barring those that occurred more than five years before the case was filed. | ||
| Third-Party Payor Actions. As of March 31, 2006, there were approximately three Third-Party Payor Actions pending against Liggett. The claims in Third-Party Payor Actions 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 cigarette manufacturers. The United States Supreme Court has denied petitions for certiorari in the cases decided by five of the courts of appeal. |
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| In Third-Party Payor Actions claimants have set forth several 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. | ||
| In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in a Third-Party Payor Action brought by the largest private insurer in that country, Clalit Health Services, against the major United States tobacco manufacturers. The court ruled that, although Liggett had not sold product in Israel since 1978, it may still have liability for damages resulting from smoking of its product if it did sell cigarettes there before 1978. Motions filed by the defendants are pending before the Israel Supreme Court, seeking appeal from a lower court’s decision granting leave to plaintiffs for foreign service of process. | ||
| In August 2005, the United Seniors Association, Inc. filed a lawsuit in federal court in Massachusetts pursuant to the private cause of action provisions of the Medicare Secondary Payer Act seeking to recover for the Medicare program all expenditures since August 1999 on smoking-related diseases. | ||
| 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 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. In February 2005, the United States Court of Appeals for the District of Columbia upheld the defendants’ motion for summary judgment to dismiss the government’s disgorgement claim, ruling that disgorgement is not an available remedy in a civil RICO action. In April 2005, the appellate court denied the government’s request that the disgorgement ruling be reconsidered by the full court. In October 2005, the United States Supreme Court declined to review this decision, although the government could again seek review of this issue following a verdict. | ||
| Trial of the case concluded June 2005. On June 27, 2005, the government sought to restructure its potential remedies and filed a proposed Final Judgment and Order. The relief can be grouped into |
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| four categories: (1) $14,000,000 for a cessation and counter marketing program; (2) so-called “corrective statements;” (3) disclosures; and (4) enjoined activities. Post-trial briefing was completed in October 2005. | ||
| Settlements. In March 1996, 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, Liggett entered into settlements of smoking-related litigation with the Attorneys General of 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 (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 Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care cost recovery and certain other claims of those Settling States. The MSA received final judicial approval in each settling 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; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities. | ||
| The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage usage of tobacco products and imposes 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 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, 2.4% during 2002, 2.5% during 2003, 2.3% during 2004 and 2.2% during 2005. On April 15 of any year following a year in which Liggett’s and/or Vector Tobacco’s market shares exceed their respective base shares, Liggett and/or |
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| 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 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 entered into a settlement agreement with the Settling States 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. In April 2005, Liggett and Vector Tobacco paid a total of $20,982 for their 2004 MSA obligations. In April 2006, Liggett and Vector Tobacco paid a total of $10,637 for their 2005 MSA obligations. Liggett and Vector Tobacco have expensed $7,588 for their estimated MSA obligations for the first three months of 2006 as part of cost of goods sold. | ||
| Under the payment provisions of the MSA, the Participating Manufacturers are required to pay the following base annual amounts (subject to applicable adjustments, offsets and reductions): |
| Year | Amount | |||
2006 — 2007 |
$ | 8,000,000 | ||
2008 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. | ||
| On March 30, 2005, the Independent Auditor under the MSA calculated $28,668 in MSA payments for Liggett’s 2004 sales. On April 15, 2005, Liggett paid $11,678 of this amount and, in accordance with its rights under the MSA, disputed the balance of $16,990. Of the disputed amount, Liggett paid $9,304 into the disputed payments account under the MSA and withheld from payment $7,686. The $9,304 paid into the disputed payment accounts represents the amount claimed by Liggett as an adjustment to its 2003 payment obligation under the MSA for market share loss to non-participating manufacturers. At March 31, 2006, included in “Other current assets” on the Company’s consolidated balance sheet was a receivable of $6,513 relating to such amount. The $7,686 withheld from payment represents $5,318 claimed as an adjustment to Liggett’s 2004 MSA obligation for market share loss to non-participating manufacturers and $2,368 relating to the retroactive change, discussed below, to the method for computing payment obligations under the MSA which Liggett contends, among other things, is not in accordance with the MSA. On May 31, 2005, New York State filed a motion on behalf of the Settling States in New York state court seeking to compel Liggett and the other Subsequent Participating Manufacturers that paid into the disputed payments account to release to the Settling States the amounts paid into such account. The Settling States contend that Liggett had no right under the MSA and related agreements to pay into the disputed payments account any amount claimed as an adjustment for market share loss to non-participating manufacturers for 2003, although they acknowledge that Liggett has the right to dispute such amounts. By stipulation among the parties dated July 25, 2005, New York’s motion was dismissed and Liggett authorized the release to the Settling States of the $9,304 it had paid into the account, although Liggett continues to |
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| dispute that it owes this amount. Liggett withheld from its payment due under the MSA on April 15, 2006 approximately $1,600 which Liggett claims as the non-participating manufacturers adjustment to its 2005 payment obligation and $2,612 relating to the “gross” versus “net” dispute discussed below. | ||
| In March 2006, an independent economic consulting firm, selected pursuant to the provisions of the MSA, determined that the MSA was a “significant factor contributing” to the market share loss of participating manufacturers for 2003. As a result, under the provisions of the MSA, the manufacturers are entitled to a non-participating manufacturers adjustment to their 2003 MSA payments. States that “diligently enforced” in 2003 the escrow statutes enacted in connection with the MSA may be able to avoid application of the adjustment to their payments for that year. A number of states have filed, or are likely to file, actions seeking a determination that they have “diligently enforced” their respective escrow statutes. Liggett and several other subsequent participating manufacturers are in the process of organizing a joint defense group to defend against these actions. | ||
| As of March 31, 2006, Liggett and Vector Tobacco have disputed the following assessments under the MSA related to failure to receive credit for market share loss to non-participating manufacturers: $6,513 for 2003, $3,789 for 2004 and approximately $800 for 2005. These disputed amounts have not been accrued in the accompanying consolidated financial statements. | ||
| In October 2004, Liggett was notified that all Participating Manufacturers’ payment obligations under the MSA, dating from the agreement’s execution in late 1998, have been recalculated utilizing “net” unit amounts, rather than “gross” unit amounts (which have been utilized since 1999). The change in the method of calculation could, among other things, require additional payments by Liggett under the MSA of approximately $12,300 for the periods 2001 through 2005, and require Liggett to pay an additional amount of approximately $2,800 in 2006 and in future periods by lowering Liggett’s market share exemption under the MSA. | ||
| Liggett has objected to this retroactive change, and has disputed the change in methodology. Liggett contends that the retroactive change from utilizing “gross” unit amounts to “net” unit amounts is impermissible for several reasons, including: |
| • | utilization of “net” unit amounts is not required by the MSA (as reflected by, among other things, the utilization of “gross” unit amounts for the past six years), | ||
| • | such a change is not authorized without the consent of affected parties to the MSA, | ||
| • | the MSA provides for four-year time limitation periods for revisiting calculations and determinations, which precludes recalculating Liggett’s 1997 Market Share (and thus, Liggett’s market share exemption), and | ||
| • | Liggett and others have relied upon the calculations based on “gross” unit amounts for the past six years. |
| No amounts have been accrued in the accompanying consolidated financial statements for any potential liability relating to the “gross” versus “net” dispute. | ||
| 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, |
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| negotiated and executed settlement agreements with each of the other major tobacco companies, separate from those settlements reached previously with Liggett. Liggett’s agreements with these states remain in full force and effect, and Liggett made various payments to these states during 1996, 1997 and 1998 under the agreements. These states’ settlement agreements with Liggett contained “most favored nation” provisions, which could reduce Liggett’s payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on each of these four states’ settlements or resolutions with United States Tobacco Company, Liggett’s payment obligations to those states had been eliminated. With respect to all non-economic obligations under the previous settlements, Liggett is entitled to the most favorable provisions as between the MSA and each state’s respective settlement with the other major tobacco companies. Therefore, Liggett’s non-economic obligations to all states and territories are now defined by the MSA. | ||
| In 2003, in order to resolve any potential issues with the State of Minnesota as to Liggett’s settlement obligations, Liggett negotiated a $100 a year payment to Minnesota, to be paid any year cigarettes manufactured by Liggett are sold in that state. In 2004, the Attorneys General for each of Florida, Mississippi and Texas advised Liggett that they believed that Liggett has failed to make all required payments under the respective settlement agreements with these states for the period 1998 through 2003 and that additional payments may be due for 2004 and subsequent years. Liggett believes these allegations are without merit, based, among other things, on the language of the most favored nation provisions of the settlement agreements. In December 2004, the State of Florida offered to settle all amounts allegedly owed by Liggett for the period through 2003 for the sum of $13,500. In March 2005, the State of Florida reaffirmed its December 2004 offer to settle and provided Liggett with a 60 day notice to cure the alleged defaults. In November 2005, Florida made a revised offer that Liggett pay Florida $4,250 to resolve all matters through December 31, 2005, and pay Florida $0.17 per pack on all Liggett cigarettes sold in Florida beginning January 1, 2006. After further discussions, Florida’s most recent offer is that Liggett pay a total of $3,500 in four annual payments, $1,000 for the first three years and $500 in the fourth year, and defer further discussion of any alleged future obligations until the end of Florida’s 2006 legislative session. Liggett has not yet responded to this most recent offer from Florida and there can be no assurance that a settlement will be reached. In November 2004, the State of Mississippi offered to settle all amounts allegedly owed by Liggett for the period through 2003 for the sum of $6,500. In April 2005, the State of Mississippi reaffirmed its November 2004 offer to settle and provided Liggett with a 60 day notice to cure the alleged defaults. No specific monetary demand has been made by the State of Texas. Liggett has met with representatives of Mississippi and Texas to discuss the issues relating to the alleged defaults, although no resolution has been reached. | ||
| Except for $2,000 accrued for the year ended December 31, 2005, in connection with the foregoing matters, no other amounts have been accrued in the accompanying consolidated financial statements for any additional amounts that may be payable by Liggett under the settlement agreements with Florida, Mississippi and Texas. At March 31, 2006, the $2,000 remained accrued in settlement accruals on the Company’s consolidated balance sheet. There can be no assurance that Liggett will prevail in any of these matters and that Liggett will not be required to make additional material payments, which payments could adversely affect the Company’s consolidated financial position, results of operations or cash flows. | ||
| In August 2004, the Company announced that Liggett and Vector Tobacco had notified the Attorneys General of 46 states that they intend to initiate proceedings against one or more of the Settling States for violating the terms of the MSA. The Company’s subsidiaries allege that the Settling States |
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| violated their rights and the MSA by extending unauthorized favorable financial terms to Miami-based Vibo Corporation d/b/a General Tobacco when, on August 19, 2004, the Settling States entered into an agreement with General Tobacco allowing it to become a Subsequent Participating Manufacturer under the MSA. General Tobacco imports discount cigarettes manufactured in Colombia, South America. | ||
| In the notice sent to the Attorneys General, the Company’s subsidiaries indicated that they will seek to enforce the terms of the MSA, void the General Tobacco agreement and enjoin the Settling States and National Association of Attorneys General from listing General Tobacco as a Participating Manufacturer on their websites. Several Subsequent Participating Manufacturers, including Liggett and Vector Tobacco, filed a motion in state court in Kentucky seeking to enforce the terms of the MSA with respect to General Tobacco. On January 26, 2006, the court entered an order denying the motion and finding that the terms of the General Tobacco settlement agreement were reasonable and not in violation of the MSA. The judge also found that the Subsequent Participating Manufacturers, under these circumstances, were not entitled to most favored nation treatment. These Subsequent Participating Manufacturers have given notice of appeal in this case. | ||
| There is a suit pending against New York state officials, in which importers of cigarettes allege that the MSA and certain New York statutes enacted in connection with the MSA violate federal antitrust law. In September 2004, the court denied plaintiffs’ motion to preliminarily enjoin the MSA and certain related New York statutes, but the court issued a preliminary injunction against the “allocable share” provision of the New York escrow statute. In addition, similar lawsuits are pending in Kentucky, Arkansas, Kansas, Louisiana, Nebraska, Tennessee and Oklahoma. Liggett is not a defendant in these cases. | ||
| Trials. Trial in the United States government action concluded on June 15, 2005 in federal court in the District of Columbia. Post-trial submissions have been completed, and the parties are awaiting a final decision from the trial court. Cases currently scheduled for trial during the next six months include two individual actions in Missouri state court and one in New York state court where Liggett is a defendant along with various of the other major tobacco companies. Trial dates, however, are subject to change. | ||
| Management is not able to predict the outcome of the litigation pending against 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, and oral argument was held in November 2004. If the intermediate appellate court’s ruling is not upheld on 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, |
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| 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. In addition, plaintiff’s counsel was awarded legal fees of $752. Liggett has appealed both the verdict and the award of legal fees. 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 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 seek 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. | ||
| 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. The nine cases were consolidated before the United States District Court for the Northern District of Illinois. In June 2005, the court granted defendants’ motion to dismiss the consolidated action. The plaintiffs have appealed. | ||
| 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. |
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| In January 1993, the Environmental Protection Agency (“EPA”) released a report on the respiratory effect of secondary smoke which concludes that secondary smoke is a known human lung carcinogen in adults and in children, causes increased respiratory tract disease and middle ear disorders and increases the severity and frequency of asthma. In June 1993, the two largest of the major domestic cigarette manufacturers, together with other segments of the tobacco and distribution industries, commenced a lawsuit against the EPA seeking a determination that the EPA did not have the statutory authority to regulate secondary smoke, and that given the scientific evidence and the EPA’s failure to follow its own guidelines in making the determination, the EPA’s classification of secondary smoke was arbitrary and capricious. In July 1998, a federal district court vacated those sections of the report relating to lung cancer, finding that the EPA may have reached different conclusions had it complied with relevant statutory requirements. The federal government appealed the court’s ruling. In December 2002, the United States Court of Appeals for the Fourth Circuit rejected the industry challenge to the EPA report ruling that it was not subject to court review. Issuance of the report may encourage efforts to limit smoking in public areas. | ||
| In August 1996, the Food and Drug Administration (the “FDA”) filed in the Federal Register a Final Rule classifying tobacco as a “drug” or “medical device”, asserting jurisdiction over the manufacture and marketing of tobacco products and imposing restrictions on the sale, advertising and promotion of tobacco products. Litigation was commenced challenging the legal authority of the FDA to assert such jurisdiction, as well as challenging the constitutionality of the rules. In March 2000, the United States Supreme Court ruled that the FDA does not have the power to regulate tobacco. Liggett supported the FDA Rule and began to phase in compliance with certain of the proposed FDA regulations. Since the Supreme Court decision, various proposals and recommendations have been made for additional federal and state legislation to regulate cigarette manufacturers. Congressional advocates of FDA regulations have introduced legislation that would give the FDA authority to regulate the manufacture, sale, distribution and labeling of tobacco products to protect public health, thereby allowing the FDA to reinstate its prior regulations or adopt new or additional regulations. In October 2004, the Senate passed a bill, which did not become law, providing for FDA regulation of tobacco products. A substantially similar bill was reintroduced in Congress in March 2005. The ultimate outcome of these proposals cannot be predicted, but FDA regulation of tobacco products could have a material adverse effect on the Company. | ||
| In October 2004, federal legislation was enacted which abolished the federal tobacco quota and price support program. Pursuant to the legislation, manufacturers of tobacco products will be assessed $10,140,000 over a ten year period to compensate tobacco growers and quota holders for the elimination of their quota rights. Cigarette manufacturers will initially be responsible for 96.3% of the assessment (subject to adjustment in the future), which will be allocated based on relative unit volume of domestic cigarette shipments. Management currently estimates that Liggett’s and Vector Tobacco’s assessment will be approximately $22,000 for the second year of the program which began January 1, 2006. The relative cost of the legislation to the three largest cigarette manufacturers will likely be less than the cost to smaller manufacturers, including Liggett and Vector Tobacco, because one effect of the legislation is that the three largest manufacturers will no longer be obligated to make certain contractual payments, commonly known as Phase II payments, 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 the Company. |
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| In August 1996, Massachusetts enacted legislation requiring tobacco companies to publish information regarding the ingredients in cigarettes and other tobacco products sold in that state. In December 2002, the United States Court of Appeals for the First Circuit ruled that the ingredients disclosure provisions violated the constitutional prohibition against unlawful seizure of property by forcing firms to reveal trade secrets. The decision was not appealed by the state. Liggett began voluntarily complying with this legislation in December 1997 by providing ingredient information to the Massachusetts Department of Public Health and, notwithstanding the appellate court’s ruling, has continued to provide ingredient disclosure. Liggett also provides ingredient information annually, as required by law, to the states of Texas and Minnesota. Several other states are considering ingredient disclosure legislation and the Senate bill providing for FDA regulation also calls for, among other things, ingredient disclosure. | ||
| Cigarettes are subject to substantial and increasing federal, state and local excise taxes. The federal excise tax on cigarettes is currently $0.39 per pack. State and local sales and excise taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may currently exceed $4.00 per pack. In 2005, nine states enacted increases in excise taxes. Further increases from other states are expected. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and various states and other jurisdictions have currently under consideration or pending legislation proposing further state excise tax increases. Management believes increases in excise and similar taxes have had an adverse effect on sales of cigarettes. | ||
| Various state governments have adopted or are considering adopting legislation establishing ignition propensity standards for cigarettes. Compliance with this legislation could be burdensome and costly. In June 2000, the New York State legislature passed legislation charging the state’s Office of Fire Prevention and Control, referred to as the “OFPC,” with developing standards for or “self-extinguishing” or reduced ignition propensity cigarettes. All cigarettes manufactured for sale in New York state must be manufactured to specific reduced ignition propensity standards set forth in the regulations. Liggett and Vector Tobacco are in compliance with the New York reduced ignition propensity regulatory requirements. Since the passage of the New York law, the states of Vermont, California and Illinois have passed similar laws utilizing the same technical standards, to become effective on May 1, 2006, June 1, 2007 and January 1, 2008, respectively. Similar legislation is being considered by other state governments and at the federal level. Compliance with such legislation could harm the business of Liggett and Vector Tobacco, particularly if there are varying standards from state to state. | ||
| Federal or state regulators may object to Vector Tobacco’s low nicotine and nicotine-free cigarette products and reduced risk cigarette products it may develop as unlawful or allege they bear deceptive or unsubstantiated product claims, and seek the removal of the products from the marketplace, or significant changes to advertising. Various concerns regarding Vector Tobacco’s advertising practices have been expressed to Vector Tobacco by certain state attorneys general. Vector Tobacco has engaged in discussions in an effort to resolve these concerns and Vector Tobacco has, in the interim, suspended all print advertising for its Quest brand. If Vector Tobacco is unable to advertise its Quest brand, it could have a material adverse effect on sales of Quest. Allegations by federal or state regulators, public health organizations and other tobacco manufacturers that Vector Tobacco’s products are unlawful, or that its public statements or advertising contain misleading or unsubstantiated health claims or product comparisons, may result in litigation or governmental proceedings. Vector Tobacco’s business may become subject to extensive domestic and international governmental regulation. Various proposals have been made for federal, state and international legislation to regulate cigarette manufacturers generally, and |
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| reduced constituent cigarettes specifically. It is possible that laws and regulations may be adopted covering issues like the manufacture, sale, distribution, advertising and labeling of tobacco products as well as any express or implied health claims associated with reduced risk, low nicotine and nicotine-free cigarette products and the use of genetically modified tobacco. A system of regulation by agencies such as the FDA, the Federal Trade Commission or the United States Department of Agriculture may be established. In addition, a group of public health organizations submitted a petition to the FDA, alleging that the marketing of the OMNI product is subject to regulation by the FDA under existing law. Vector Tobacco has filed a response in opposition to the petition. The FTC has expressed interest in the regulation of tobacco products made by tobacco manufacturers, including Vector Tobacco, which bear reduced carcinogen claims. The ultimate outcome of any of the foregoing cannot be predicted, but any of the foregoing could have a material adverse effect on the Company. | ||
| In addition to the foregoing, there have been a number of other restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. 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. | ||
| Other Matters: | ||
| See Note 12 for information concerning purported class action lawsuits commenced against the Company, New Valley and New Valley’s directors in connection with the Company’s exchange offer for New Valley. | ||
| In May 1999, in connection with the Philip Morris brand transaction, Eve Holdings Inc., a subsidiary of Liggett, guaranteed a $134,900 bank loan to Trademarks LLC. The loan is secured by Trademarks’ three premium cigarette brands and Trademarks’ interest in the exclusive license of the three brands by Philip Morris. The license provides for a minimum annual royalty payment equal to the annual debt service on the loan plus $1,000. The Company believes that the fair value of Eve’s guarantee was negligible at March 31, 2006. | ||
| 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 the Company believes the fair value of Liggett Vector Brands’ obligation under the agreement was immaterial at March 31, 2006. | ||
| In 1994, New Valley commenced an action against the United States government seeking damages for breach of a launch services agreement covering the launch of one of the Westar satellites owned by New Valley’s former Western Union satellite business. New Valley had a contract with NASA to launch two Westar satellites. The first satellite was launched in 1984, and the second was scheduled to be launched in 1986. Following the explosion of the space shuttle Challenger in January 1986, the President of the United States announced a change in the government’s policy regarding commercial satellite launches, and New Valley’s satellite was not launched. |
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| In 1995, the United States Court of Federal Claims granted the government’s motion to dismiss and, in 1997, the United States Court of Appeals for the Federal Circuit reversed and remanded the case. Trial of the case was completed in New York federal court in August 2004 and decision was reserved. In December 2004, the case was transferred to Judge Wiese of the United States Court of Federal Claims. On August 19, 2005, Judge Wiese issued an opinion concluding that the United States government is liable for breach of contract to New Valley. A determination of damages was deferred until presentation of further evidence in a supplementary trial proceeding. | ||
| In December 2001, New Valley’s subsidiary, Western Realty Development LLC, sold all the membership interests in Western Realty Investments LLC to Andante Limited. In August 2003, Andante submitted an indemnification claim to Western Realty Development alleging losses of $1,225 from breaches of various representations made in the purchase agreement. Under the terms of the purchase agreement, Western Realty Development has no obligation to indemnify Andante unless the aggregate amount of all claims for indemnification made by Andante exceeds $750, and Andante is required to bear the first $200 of any proven loss. New Valley would be responsible for 70% of any damages payable by Western Realty Development. New Valley has contested the indemnification claim. | ||
| 9. | STOCK-BASED COMPENSATION | |
| The Company grants equity compensation under two long term incentive plans. As of March 31, 2006, there were approximately 4,750,000 shares remaining available for issuance under the Company’s Amended and Restated 1999 Long-Term Incentive Plan (the “1999 Plan”) and approximately 800,000 shares remaining available for issuance under the 1998 Long-Term Incentive Plan. | ||
| Prior to January 1, 2006, the Company accounted for share-based compensation plans in accordance with the provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” as permitted by SFAS No. 123. The Company elected to use the intrinsic value method of accounting for employee and director share-based compensation expense for its non-compensatory employee and director stock option awards and did not recognize compensation expense for the issuance of options with an exercise price equal to the market price of the underlying common stock on the date of grant. | ||
| Stock Options. On January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), which requires the Company to value unvested stock options granted prior to the adoption of SFAS No. 123(R) under the fair value method of accounting and expense this amount in the statement of operations over the stock option’s remaining vesting period. Upon adoption, there was no cumulative adjustment for the impact of the change in accounting principles because the assumed forfeiture rate did not differ significantly from prior periods. The Company recognized compensation expense of $186 related to stock options in the first quarter of 2006 as a result of adopting SFAS No. 123(R). | ||
| The terms of certain stock options awarded under the 1999 Plan in January 2001 and November 1999 provide for common stock dividend equivalents (at the same rate as paid on the common stock) with respect to the shares underlying the unexercised portion of the options. Prior to January 1, 2006, in accordance with APB Opinion No. 25, the Company accounted for the dividend equivalent rights on these options as additional compensation cost ($1,770 for the three months ended March 31, 2005). Effective January 1, 2006, in accordance with SFAS No. 123(R), the Company recognizes payments of the dividend equivalent rights on these options as reductions in additional paid-in capital on the Company’s consolidated balance sheet ($1,578 for the three months ended March 31, 2006). | ||
| The net impact of the adoption of SFAS No. 123(R) was a reduction in the operating, selling, administrative and general expenses of $1,392 and an increase in net income of $1,467 for the three months ended March 31, 2006. | ||
| Awards of options to employees under the Company’s 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 expense related to stock option compensation included in the determination of net income for the three month period ended March 31, 2005 differs from than that which would have been recognized if the fair value method had been applied to all awards since the original effective date of SFAS No. 123. Had the Company elected to adopt the fair value approach as prescribed by SFAS No. 123, which charges earnings for the estimated fair value of stock options, its pro forma net income and pro forma EPS for the first quarter of fiscal 2005 would have been as follows: |
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| Three Months Ended | ||||
| March 31, 2005 | ||||
| Revised | ||||
Net income |
$ | 11,496 | ||
Add: employee stock compensation
expense included in reported net income,
net of related tax effects |
1,950 | |||
Deduct: total employee stock compensation
expense determined under the fair
value method for all awards, net of
related tax effects |
(310 | ) | ||
Pro forma net income |
$ | 13,136 | ||
Income per share: |
||||
Basic — as reported |
$ | 0.26 | ||
Diluted — as reported |
$ | 0.25 | ||
Basic — pro forma |
$ | 0.27 | ||
Diluted — pro forma |
$ | 0.27 | ||
| The amounts previously reported for the 2005 period have been revised to reflect payments of dividend equivalent rights ($1,721, net of tax) on unexercised options as reductions in additional paid-in capital rather than compensation expense in accordance with SFAS No. 123. Additionally, upon reflecting the payment of dividend equivalent rights as a reduction of additional paid-in capital in determining its pro forma net income, the Company accounted for the effect of the underlying options as participating securities when calculating its basic pro forma EPS. As a result, pro forma net income was reduced by $1,082 when calculating basic pro forma EPS. | ||
| As permitted by SFAS No. 123 and SFAS No. 123(R), 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. | ||
| There were no option grants in the three months ended March 31, 2006 and 2005. If options had been granted, the assumptions used in computing fair value under the Black-Scholes option pricing model would have been 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 Company’s common stock over the expected term of the option. |
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| A summary of the Company’s stock option activity during the three months ended March 31, 2006 follows: |
| Weighted-Average | ||||||||||||||||
| Remaining | Aggregate | |||||||||||||||
| Weighted-Average | Contractual Term | Intrinsic | ||||||||||||||
| Shares | Exercise Price | (in years) | Value(1) | |||||||||||||
Outstanding at December 31, 2005 |
8,567,174 | 10.54 | 3.6 | — | ||||||||||||
Granted |
— | — | — | — | ||||||||||||
Exercised |
(87,537 | ) | 10.56 | 8.1 | — | |||||||||||
Forfeited or expired |
— | — | — | — | ||||||||||||
Outstanding at March 31, 2006 |
8,479,637 | 10.54 | 3.4 | $ | 74,268 | |||||||||||
Option exercisable at March 31, 2006 |
8,341,789 | 73,968 | ||||||||||||||
Option
vested during period |
2,729 | $ | 11 | |||||||||||||
| (1) | The aggregate intrinsic value represents the amount by which the fair value of the underlying common stock ($19.06 at March 31, 2006) exceeds the option exercise price. |
| The total intrinsic value of options exercised during the three months ended March 31, 2006 and 2005 was $410 and $262, respectively. | ||
| As of March 31, 2006, there was $243 of total unrecognized compensation cost related to unvested stock options. The cost is expected to be recognized over a weighted-average period of less than one year at March 31, 2006. | ||
| In November 2005, the President of Liggett and Liggett Vector Brands agreed to the cancellation of an option to purchase 303,876 shares of the Company’s common stock at $31.59 per share granted under the 1999 Long-Term Incentive Plan in September 2001. In this regard, the President of Liggett and the Company entered into an agreement, in which the Company, in accordance with the Incentive Plan, agreed after the passage of more than six months and assuming his continued employment with the Company or an affiliate of the Company, to grant him another stock option under the 1999 Amended Plan covering 250,000 shares of the Company’s common stock with the exercise price equal to the value of the common stock on the grant date of the replacement option. The new option will have a ten-year term and will become exercisable with respect to one-fourth of the shares on December 1, 2006, with an additional one-fourth becoming exercisable on each of the three succeeding one-year anniversaries of the first exercisable date through December 1, 2009. | ||
| Prior to the adoption of SFAS No. 123(R), the Company presented the tax savings resulting from the deductions resulting from the exercise of non-qualified stock options as an operating cash flow in accordance with EITF Issue No. 00-15, “Classification in the Statement of Cash Flows of the Income Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option.” SFAS No. 123(R) requires the Company to reflect 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.” | ||
| Restricted Stock Awards. In January 2005, New Valley awarded the President and Chief Operating Officer of New Valley, who also served in the same positions with the Company, a restricted stock |
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| grant of 1,250,000 shares of New Valley’s common shares. Under the terms of the award, one-seventh of the shares vested on July 15, 2005, with an additional one-seventh vesting on each of the five succeeding one-year anniversaries of the first vesting date through July 15, 2010 and an additional one-seventh vesting on January 15, 2011. In September 2005, in connection with his election as Chief Executive Officer of the Company, he renounced and waived, as of that date, the unvested 1,071,429 common shares deliverable by New Valley to him in the future. The Company recorded an expense of $545 ($194 net of income taxes and minority interests) associated with the grant in the first quarter of 2005. | ||
| In September 2005, the President of the Company was awarded a restricted stock grant of 500,000 shares of the Company’s common stock and, on November 16, 2005, he was awarded an additional restricted stock grant of 78,570 shares of the Company’s common stock, in each case, pursuant to the Company’s Amended and Restated 1999 Long-Term Incentive Plan (the “1999 Amended Plan”). Pursuant to the restricted share agreements, one-fourth of the shares vest on September 15, 2006, with an additional one-fourth vesting on each of the three succeeding one-year anniversaries of the first vesting date through September 15, 2009. In the event his employment with the Company is terminated for any reason other than his death, his disability or a change of control (as defined in his restricted share agreements) of the Company, any remaining balance of the shares not previously vested will be forfeited by him. These restricted stock awards by the Company replaced the unvested portion of the New Valley restricted stock grant relinquished by the President of the Company. The number of restricted shares of the Company’s common stock awarded to him by the Company (578,570 shares) was the equivalent of the number of shares of the Company’s common stock that would have been issued to him had he retained his unvested New Valley restricted shares and those shares were exchanged for the Company’s common stock in the exchange offer and subsequent merger whereby the Company acquired the remaining minority interest in New Valley in December 2005. The Company recorded deferred compensation of $11,340 representing the fair market value of the total restricted shares on the dates of grant. The deferred compensation will be amortized over the vesting period as a charge to compensation expense. The Company recorded an expense of $781 associated with the grants in the first quarter of 2006. | ||
| In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted stock grant of 50,000 shares of the Company’s common stock pursuant to the 1999 Amended Plan. Pursuant to his restricted share agreement, one-fourth of the shares vest on November 1, 2006, with an additional one-fourth vesting on each of the three succeeding one-year anniversaries of the first vesting date through November 1, 2009. In the event his employment with the Company is terminated for any reason other than his death, his disability or a change of control (as defined in his restricted share agreement) of the Company, any remaining balance of the shares not previously vested will be forfeited by him. The Company recorded deferred compensation of $1,018 representing the fair market value of the restricted shares on the date of grant. The Company recorded an expense of $64 associated with the grants in the first quarter of 2006. | ||
| The Company also recognized $53 of expense for the three months ended March 31, 2006 and March 31, 2005, respectively, in connection with restricted stock awards granted to its outside directors in June 2004. | ||
| As of March 31, 2006, there was $11,048 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 1.7 years at March 31, 2006. | ||
| The Company’s accounting policy is to treat dividends paid on restricted stock as a reduction to additional paid-in-capital on the Company’s consolidated balance sheet. |
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| 10. | INCOME TAXES | |
| Vector’s income tax rate for the three months ended March 31, 2006 does not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses and state income taxes. Vector’s income tax rate for the three months ended March 31, 2005 does not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes and the intraperiod allocation at New Valley between income from continuing and discontinued operations. | ||
| The consolidated balance sheets of the Company include deferred income tax assets and liabilities, which represent temporary differences in the application of accounting rules established by generally accepted accounting principles and income tax laws. As of March 31, 2006, the Company’s deferred income tax liabilities exceeded its deferred income tax assets by $65,140. The largest component of the Company’s deferred tax liabilities exists because of differences that resulted from a 1998 and 1999 transaction with Philip Morris Incorporated where a subsidiary of Liggett contributed three of its premium cigarette brands to Trademarks LLC, a newly-formed limited liability company. In such transaction, Philip Morris acquired an option to purchase the remaining interest in Trademarks for a 90-day period commencing in December 2008, and the Company has an option to require Philip Morris to purchase the remaining interest for a 90-day period commencing in March 2010. | ||
| In connection with the transaction, the Company recognized in 1999 a pre-tax gain of $294,078 in its consolidated financial statements and established a deferred tax liability of $103,100 relating to the gain. Upon exercise of the options during the 90-day periods commencing in December 2008 or in March 2010, the Company will be required to pay tax in the amount of the deferred tax liability, which will be offset by the benefit of any deferred tax assets, including any net operating losses, available to the Company at that time. In connection with an examination of the Company’s 1998 and 1999 federal income tax returns, the Internal Revenue Service issued to the Company in September 2003 a notice of proposed adjustment. The notice asserts that, for tax reporting purposes, the entire gain should have been recognized in 1998 and in 1999 in the additional amounts of $150,000 and $129,900, respectively, rather than upon the exercise of the options during the 90-day periods commencing in December 2008 or in March 2010. If the Internal Revenue Service were to ultimately prevail with the proposed adjustment, it would result in the potential acceleration of tax payments of approximately $129,000, including interest, net of tax benefits, through March 31, 2006. These amounts have been previously recognized in the Company’s consolidated financial statements as tax liabilities. As of March 31, 2006, the Company believes amounts potentially due have been provided for in its consolidated statements of operations. | ||
| The Company believes the positions reflected on its income tax returns are correct and intends to vigorously oppose any proposed adjustments to its returns. The Company has filed a protest with the Appeals Division of the Internal Revenue Service. No payment is due with respect to these matters during the appeal process. Interest currently is accruing on the disputed amounts at a rate of 9%, with the rate adjusted quarterly based on rates published by the U.S. Treasury Department. If taxing authorities were to ultimately prevail in their assertion that the Company incurred a tax obligation prior to the exercise dates of these options and it was required to make such tax payments prior to 2009 or 2010, and if any necessary financing were not available to the Company, its liquidity could be adversely affected. |
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| 11. | NEW VALLEY | |
| Office Buildings. In December 2002, New Valley purchased two office buildings in Princeton, New Jersey for a total purchase price of $54,000. New Valley financed a portion of the purchase price through a borrowing of $40,500 from HSBC Realty Credit Corporation (USA). In February 2005, New Valley completed the sale of the office buildings for $71,500. The mortgage loan on the properties was retired at closing with the proceeds of the sale. | ||
| Real Estate Businesses. New Valley accounts for its 50% interests in Douglas Elliman Realty LLC, Koa Investors LLC and 16th & K Holdings LLC on the equity method. Douglas Elliman Realty operates a residential real estate brokerage company in the New York metropolitan area. Koa Investors owns the Sheraton Keauhou Bay Resort & Spa in Kailua-Kona, Hawaii. Following a major renovation, the property reopened in the fourth quarter 2004 as a four star resort with 521 rooms. 16th and K Holdings acquired the St. Regis Hotel in Washington, D.C. in August 2005. | ||
| Residential Brokerage Business. New Valley recorded income of $2,590 and $1,334 for the three months ended March 31, 2006 and 2005, respectively, associated with Douglas Elliman Realty. The income includes 50% of Douglas Elliman’s net income, interest income and management fees earned by New Valley. Summarized financial information for Douglas Elliman Realty for the three months ended March 31, 2006 and 2005 and as of March 31, 2006 and December 31, 2005 is presented below. |
| March 31, 2006 | December 31, 2005 | |||||||
Cash |
$ | 16,776 | $ | 15,384 | ||||
Other current assets |
7,544 | 5,977 | ||||||
Property, plant and equipment, net |
18,204 | 17,973 | ||||||
Trademarks |
21,663 | 21,663 | ||||||
Goodwill |
37,991 | 37,924 | ||||||
Other intangible assets, net |
2,291 | 2,072 | ||||||
Other non-current assets |
865 | 1,579 | ||||||
Notes payable — current |
6,636 | 4,770 | ||||||
Other current liabilities |
20,921 | 16,977 | ||||||
Notes payable — long term |
50,656 | 54,422 | ||||||
Other long-term liabilities |
2,107 | 4,941 | ||||||
Members’ equity |
25,014 | 21,462 | ||||||
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
Revenues |
$ | 81,793 | $ | 71,402 | ||||
Costs and expenses |
75,497 | 66,325 | ||||||
Depreciation expense |
1,221 | 1,126 | ||||||
Amortization expense |
102 | 184 | ||||||
Interest expense, net |
1,280 | 1,548 | ||||||
Income tax expense |
120 | 181 | ||||||
Net income |
$ | 3,573 | $ | 2,038 | ||||
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| March 31, 2006 | December 31, 2005 | |||||||
Cash |
$ | 958 | $ | 1,375 | ||||
Restricted assets |
3,023 | 3,135 | ||||||
Other current assets |
1,965 | 1,543 | ||||||
Property, plant and equipment, net |
71,496 | 72,836 | ||||||
Deferred financing costs, net |
1,824 | 2,018 | ||||||
Accounts payable and other current liabilities |
8,728 | 8,539 | ||||||
Notes payable |
82,000 | 82,000 | ||||||
Members’ equity (deficit) |
(11,462 | ) | (9,632 | ) | ||||
| Three Months Ended March 31, | ||||||||
| 2006 | 2005 | |||||||
Revenues |
$ | 8,560 | $ | 5,530 | ||||
Costs and operating expenses |
7,350 | 5,754 | ||||||
Management fees |
30 | 30 | ||||||
Depreciation and amortization expense |
1,545 | 1,527 | ||||||
Interest expense, net |
1,465 | 1,499 | ||||||
Net loss |
$ | (1,830 | ) | $ | (3,280 | ) | ||
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| 12. | NEW VALLEY EXCHANGE OFFER | |
| In December 2005, the Company completed an exchange offer and subsequent short-form merger whereby it acquired the remaining 42.3% of the common shares of New Valley Corporation that it did not already own. As result of these transactions, New Valley Corporation became a wholly-owned subsidiary of the Company and each outstanding New Valley Corporation common share was exchanged for 0.54 shares of the Company’s common stock. The surviving corporation in the short- |
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| Three Months | ||||
| Ended | ||||
| March 31, 2005 | ||||
Pro forma total net revenues |
$ | 104,173 | ||
Pro forma net income from continuing operations |
$ | 9,101 | ||
Pro forma net income |
$ | 17,622 | ||
Pro forma basic weighted average shares outstanding |
48,678,937 | |||
Pro forma income from continuing operations per
basic common share |
$ | 0.19 | ||
Pro forma net income per basic common share |
$ | 0.36 | ||
Pro forma diluted weighted average shares outstanding |
50,528,221 | |||
Pro forma income from continuing operations per
diluted common share |
$ | 0.18 | ||
Pro forma net income per diluted common share |
$ | 0.35 | ||
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| 13. | DISCONTINUED OPERATIONS | |
| Real Estate Leasing. As discussed in Note 11, in February 2005, New Valley completed the sale for $71,500 of its two office buildings in Princeton, N.J. As a result of the sale, the consolidated financial statements of the Company reflect New Valley’s real estate leasing operations as discontinued operations for the three months ended March 31, 2005. Accordingly, revenues, costs and expenses of the discontinued operations have been excluded from the respective captions in the consolidated statements of operations. The net operating results of the discontinued operations have been reported, net of applicable income taxes and minority interests, as “Income from discontinued operations”. | ||
| Summarized operating results of the discontinued real estate leasing operations for the three months ended March 31, 2005 are as follows: |
| Three Months | ||||
| Ended | ||||
| March 31, 2005 | ||||
Revenues |
$ | 924 | ||
Expenses |
515 | |||
Income from discontinued operations before
income taxes and minority interests |
409 | |||
Income tax expense from discontinued
operations |
223 | |||
Minority interests |
104 | |||
Income from discontinued operations |
$ | 82 | ||
| Gain on Disposal of Discontinued Operations. New Valley recorded a gain on disposal of
discontinued operations of $2,952 (net of minority interests and taxes) for the three months
ended March 31, 2005 in connection with the sale of the office buildings. |
||
| 14. | SEGMENT INFORMATION | |
| The Company’s significant business segments for the three months ended March 31, 2006 and 2005 were Liggett and Vector Tobacco. The Liggett segment consists of the manufacture and sale of conventional cigarettes and, for segment reporting purposes, includes the operations of Medallion acquired on April 1, 2002 (which operations are held for legal purposes as part of Vector Tobacco). The Vector Tobacco segment includes the development and marketing of the low nicotine and nicotine-free cigarette products as well as the development of reduced risk cigarette products and, |
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| Vector | Corporate | |||||||||||||||
| Liggett | Tobacco | and Other | Total | |||||||||||||
Three months ended March 31, 2006 |
||||||||||||||||
Revenues |
$ | 115,739 | $ | 1,965 | $ | — | $ | 117,704 | ||||||||
Operating income (loss) |
30,421 | (3,548 | ) | (6,646 | ) | 20,227 | ||||||||||
Identifiable assets |
266,924 | 3,266 | 338,704 | 608,894 | ||||||||||||
Depreciation and amortization |
1,814 | 57 | 602 | 2,473 | ||||||||||||
Capital expenditures |
1,417 | 19 | 10 | 1,446 | ||||||||||||
Three months ended March 31, 2005 |
||||||||||||||||
Revenues |
$ | 101,635 | $ | 2,538 | $ | — | $ | 104,173 | ||||||||
Operating income (loss) |
31,870 | (4,432 | ) | (8,790 | ) | 18,648 | ||||||||||
Identifiable assets |
260,762 | 7,972 | 236,164 | 504,898 | ||||||||||||
Depreciation and amortization |
1,817 | 228 | 621 | 2,666 | ||||||||||||
Capital expenditures |
698 | 12 | 258 | 968 | ||||||||||||
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| • | the manufacture and sale of cigarettes in the United States through our subsidiary Liggett Group LLC, | ||
| • | the development and marketing of the low nicotine and nicotine-free QUEST cigarette products and the development of reduced risk cigarette products through our subsidiary Vector Tobacco Inc., and | ||
| • | the real estate business through our subsidiary, New Valley LLC, which is seeking to acquire additional operating companies and real estate properties. New Valley owns 50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage company in the New York metropolitan area. |
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| • | LIGGETT SELECT — the third largest brand in the deep discount category, | ||
| • | GRAND PRIX — a rapidly growing brand in the deep discount segment, | ||
| • | EVE — a leading brand of 120 millimeter cigarettes in the branded discount category, | ||
| • | PYRAMID — the industry’s first deep discount product with a brand identity, and | ||
| • | USA and various Partner Brands and private label brands. |
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| Three Months Ended March | ||||||||
| March 31, | ||||||||
| 2006 | 2005 | |||||||
Revenues: |
||||||||
Liggett |
$ | 115,739 | $ | 101,635 | ||||
Vector Tobacco |
1,965 | 2,538 | ||||||
Total revenues |
$ | 117,704 | $ | 104,173 | ||||
Operating income: |
||||||||
Liggett |
$ | 30,421 | $ | 31,870 | ||||
Vector Tobacco |
(3,548 | ) | (4,432 | ) | ||||
Total tobacco |
26,873 | 27,438 | ||||||
Corporate and other |
(6,646 | ) | (8,790 | ) | ||||
Total operating income |
$ | 20,227 | $ | 18,648 | ||||
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| Three Months Ended | ||||
| March 31, 2005 | ||||
Revenues |
$ | 924 | ||
Expenses |
515 | |||
Income from operations before income taxes
and minority interests |
409 | |||
Provision for income taxes |
223 | |||
Minority interests |
104 | |||
Income from discontinued operations |
$ | 82 | ||
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| • | economic outlook, | ||
| • | capital expenditures, | ||
| • | cost reduction, | ||
| • | new legislation, | ||
| • | cash flows, | ||
| • | operating performance, | ||
| • | litigation, | ||
| • | impairment charges and cost savings associated with restructurings of our tobacco operations, and | ||
| • | related industry developments (including trends affecting our business, financial condition and results of operations). |
| • | general economic and market conditions and any changes therein, due to acts of war and terrorism or otherwise, | ||
| • | governmental regulations and policies, | ||
| • | effects of industry competition, | ||
| • | impact of business combinations, including acquisitions and divestitures, both internally for us and externally in the tobacco industry, |
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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, | ||
| • | 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, | ||
| • | uncertainty related to litigation and potential additional payment obligations for us under the Master Settlement Agreement and other settlement agreements with the states, and | ||
| • | risks inherent in our new product development initiatives. |
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Item 1.
|
Legal Proceedings | |
| Reference is made to Note 8, incorporated herein by reference, to our consolidated financial statements included elsewhere in this report which contains a general description of certain legal proceedings to which VGR Holding, New Valley or their subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1 for additional information regarding the pending smoking-related material legal proceedings to which Liggett is a party. A copy of Exhibit 99 will be furnished without charge upon written request to us at our principal executive offices, 100 S.E. Second St., Miami, Florida 33131, Attn. Investor Relations. |
Item 1A.
|
Risk Factors | |
| There are no material changes from the risk factors set forth in Item 1A, “Risk Factors,” of our Annual Report or 10-K, as amended, for the year ended December 31, 2005. Please refer to that section for disclosures regarding the risks and uncertainties related to our business. |
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds | |
| No securities of ours which were not registered under the Securities Act of 1933 have been issued or sold by us during the three months ended March 31, 2006. | ||
| Our purchases of our common stock during the three months ended March 31, 2006 were as follows: |
| Total Number | Maximum Number | |||||||||||||||
| of Shares | of Shares that | |||||||||||||||
| Total | Purchased as | May Yet Be | ||||||||||||||
| Number of | Average | Part of Publicly | Purchased Under | |||||||||||||
| Shares | Price Paid | Announced Plans | the Plans | |||||||||||||
| Period | Purchased | per Share | or Programs | or Programs | ||||||||||||
January 1 to January 31,
2006 |
— | $ | — | — | — | |||||||||||
February 1 to February
28, 2006 |
— | — | — | — | ||||||||||||
March 1 to March 31, 2006 |
19,302 | (1) | 19.21 | — | — | |||||||||||
Total |
19,302 | $ | 19.21 | — | — | |||||||||||
| (1) | Delivery of shares to us in payment of exercise price in connection with exercise of an employee stock option for 35,279 shares on March 13, 2006. |
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*10.1
|
Amendment dated January 27, 2006 to Amended and Restated Employment Agreement, dated as of September 27, 2005, between Vector and Bennett S. LeBow (incorporated by reference to Exhibit 10.2 in Vector’s Form 8-K dated January 27, 2006). | |
*10.2
|
Amended and Restated Employment Agreement dated as of January 27, 2006, between Vector and Howard M. Lorber (incorporated by reference to Exhibit 10.1 to Vector’s Form 8-K dated January 27, 2006). | |
*10.3
|
Employment Agreement, dated as of January 27, 2006, between Vector and Richard J. Lampen (incorporated by reference to Exhibit 10.3 in Vector’s Form 8-K dated January 27, 2006). | |
*10.4
|
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 Vector’s Form 8-K dated January 27, 2006). | |
*10.5
|
Executive Retirement Agreement and Release, dated as of February 3, 2006, between Vector and Joselynn D. Van Siclen (incorporated by reference to Exhibit 10.1 in Vector’s Form 8-K dated February 3, 2006). | |
*10.6
|
Employment Agreement, dated as of January 27, 2006, between Vector and J. Bryant Kirkland III (incorporated by reference to Exhibit 10.5 in Vector’s Form 8-K dated January 27, 2006). | |
*10.7
|
Vector Senior Executive Annual Bonus Plan (incorporated by reference to Exhibit 10.7 in Vector’s Form 8-K dated January 27, 2006). | |
*10.8
|
Vector Supplemental Retirement Plan (as amended and restated January 27, 2006) (incorporated by reference to Exhibit 10.6 in Vector’s Form 8-K dated January 27, 2006). | |
31.1
|
Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2
|
Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1
|
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2
|
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
99.1
|
Material Legal Proceedings. |
| * | Incorporated by reference. |
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| VECTOR GROUP LTD. | ||
| (Registrant) | ||
| By: /s/ J. Bryant Kirkland III | ||
| J. Bryant Kirkland III | ||
| Vice President and Chief | ||
| Financial Officer | ||
Date: May 10, 2006 |
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