Delaware
|
1-5759 | 65-0949535 | ||
(State or other jurisdiction of
incorporation
incorporation or organization) |
Commission File Number | (I.R.S. Employer Identification No.) |
100 S.E. Second Street, Miami, Florida
(Address of principal executive offices) |
33131
(Zip Code) |
Title of each class | Name of each exchange on which registered | |
Common Stock, par value $.10 per share | New York Stock Exchange |
Large accelerated filer
þ
|
Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
ITEM 1.
BUSINESS
the manufacture and sale of cigarettes in the United States
through our Liggett Group LLC (Liggett) and Vector
Tobacco Inc. (Vector Tobacco) subsidiaries, and
the real estate business through our New Valley LLC subsidiary,
which is seeking to acquire additional operating companies and
real estate properties. New Valley owns 50% of Douglas Elliman
Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
Capitalize upon our tobacco subsidiaries cost advantage in
the U.S. cigarette market due to the favorable treatment
that they receive under the Master Settlement Agreement,
Focus marketing and selling efforts on the discount segment,
continue to build volume and margin in core discount brands
(PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and utilize core
brand equity to selectively build distribution,
Continue product development to provide the best quality
products relative to other discount products in the marketplace,
Increase efficiency by developing and adopting an organizational
structure to maximize profit potential,
Selectively expand the portfolio of private and control label
partner brands utilizing a pricing strategy that offers
long-term list price stability for customers,
Identify, develop and launch relevant new cigarette brands and
other tobacco products to the market in the future,
Continue to conduct appropriate research relating to the
development of cigarettes that materially reduce risk to
smokers, and
Pursue strategic acquisitions of smaller tobacco manufacturers.
Continue to grow Douglas Elliman Realty operations by utilizing
its strong brand name recognition and pursuing strategic and
financial opportunities,
Continue to leverage our expertise as direct investors by
actively pursuing real estate investments in the United States
and abroad which we believe will generate above-market returns,
Acquire operating companies through mergers, asset purchases,
stock acquisitions or other means, and
Invest our excess funds opportunistically in situations that we
believe can maximize stockholder value.
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PYRAMID the industrys first deep discount
product with a brand identity relaunched in the second quarter
of 2009,
GRAND PRIX re-launched as a national brand in 2005,
LIGGETT SELECT a leading brand in the deep discount
category,
EVE
a leading brand of 120 millimeter
cigarettes in the branded discount category, and
USA and various Partner Brands and private label brands.
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all claims of the Settling States and their respective political
subdivisions and other recipients of state health care funds,
relating to: (i) past conduct arising out of the use, sale,
distribution, manufacture, development, advertising and
marketing of tobacco products; (ii) the health effects of,
the exposure to, or research, statements or warnings about,
tobacco products; and
all monetary claims of the Settling States and their respective
subdivisions and other recipients of state health care funds,
relating to future conduct arising out of the use of or exposure
to, tobacco products that have been manufactured in the ordinary
course of business.
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ITEM 1A.
RISK
FACTORS
cash interest expense of approximately $82.6 million,
the retirement of $11 million of our 3.875% Variable
Interest Senior Convertible Debentures due June 15, 2011,
dividends on our outstanding common shares (currently at an
annual rate of approximately $117 million), and
other corporate expenses and taxes.
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incur or guarantee additional indebtedness or issue preferred
stock;
pay dividends or distributions on, or redeem or repurchase,
capital stock;
create liens with respect to our assets;
make investments, loans or advances;
prepay subordinated indebtedness;
enter into transactions with affiliates; and
merge, consolidate, reorganize or sell our assets.
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increases the number of health warnings required on cigarette
and smokeless tobacco products, increases the size of warnings
on packaging and in advertising, requires the FDA to develop
graphic warnings for cigarette packages, and grants the FDA
authority to require new warnings;
requires practically all tobacco product advertising to
eliminate color and imagery and instead consist solely of black
text on white background;
imposes new restrictions on the sale and distribution of tobacco
products, including significant new restrictions on tobacco
product advertising and promotion as well as the use of brand
and trade names;
bans the use of light, mild,
low or similar descriptors on tobacco products;
bans the use of characterizing flavors in cigarettes
other than tobacco or menthol;
gives the FDA the authority to impose tobacco product standards
that are appropriate for the protection of the public health
(by, for example, requiring reduction or elimination of the use
of particular constituents or components, requiring product
testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);
requires manufacturers to obtain FDA review and authorization
for the marketing of certain new or modified tobacco products;
requires pre-market approval by the FDA for tobacco products
represented (through labels, labeling, advertising, or other
means) as presenting a lower risk of harm or tobacco-related
disease;
requires manufacturers to report ingredients and harmful
constituents and requires the FDA to disclose certain
constituent information to the public;
mandates that manufacturers test and report on ingredients and
constituents identified by the FDA as requiring such testing to
protect the public health, and allows the FDA to require the
disclosure of testing results to the public;
requires manufacturers to submit to the FDA certain information
regarding the health, toxicological, behavioral or physiologic
effects of tobacco products;
prohibits use of tobacco containing a pesticide chemical residue
at a level greater than allowed under federal law;
requires the FDA to establish good manufacturing
practices to be followed at tobacco manufacturing
facilities;
requires tobacco product manufacturers (and certain other
entities) to register with the FDA;
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authorizes the FDA to require the reduction of nicotine
(although it may not require the reduction of nicotine yields of
a tobacco product to zero) and the potential reduction or
elimination of other constituents, including menthol;
imposes (and allows the FDA to impose) various recordkeeping and
reporting requirements on tobacco product manufacturers; and
grants the FDA the regulatory authority to impose broad
additional restrictions.
a recommendation on modified risk applications;
a recommendation on the effects of tobacco product nicotine
yield alteration and whether there is a threshold level below
which nicotine yields do not produce dependence;
a report on the public health impact of the use of menthol in
cigarettes; and
a report on the public health impact of dissolvable tobacco
products.
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use of net unit amounts is not required by the MSA
(as reflected by, among other things, the use of
gross unit amounts through 2005);
such a change is not authorized without the consent of affected
parties to the MSA;
the MSA provides for four-year time limitation periods for
revisiting calculations and determinations, which precludes
recalculating Liggetts 1997 Market Share (and thus,
Liggetts market share exemption); and
Liggett and others have relied upon the calculations based on
gross unit amounts since 1998.
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coordinate with the franchiser on significant matters relating
to their operations, including the opening and closing of
offices;
make substantial royalty payments to the franchiser and
contribute significant amounts to national advertising funds
maintained by the franchiser;
indemnify the franchiser against losses arising out of the
operations of their business under the franchise
agreements; and
maintain standards and comply with guidelines relating to their
operations which are applicable to all franchisees of the
franchisers real estate franchise system.
periods of economic slowdown or recession;
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rising interest rates;
the general availability of mortgage financing, including:
the impact of the recent contraction in the subprime and
mortgage markets generally; and
the effect of more stringent lending standards for home
mortgages;
adverse changes in economic and general business conditions in
the New York metropolitan area;
a decrease in the affordability of homes;
declining demand for real estate;
a negative perception of the market for residential real estate;
commission pressure from brokers who discount their commissions;
acts of God, such as hurricanes, earthquakes and other natural
disasters, or acts or threats of war or terrorism; and/or
an increase in the cost of homeowners insurance.
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actual or anticipated fluctuations in our operating results;
changes in expectations as to our future financial performance,
including financial estimates by securities analysts and
investors;
the operating and stock performance of our competitors;
announcements by us or our competitors of new products or
services or significant contract, acquisitions, strategic
partnerships, joint ventures or capital commitments;
the initiation or outcome of litigation;
changes in interest rates;
general economic, market and political conditions;
additions or departures of key personnel; and
future sales of our equity or convertible securities.
ITEM 1B.
UNRESOLVED
STAFF COMMENTS
ITEM 2.
PROPERTIES
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Approximate Total
Type
Location
Owned or Leased
Square Footage
Danville, VA
Owned
578,000
Mebane, NC
Owned
240,000
Mebane, NC
Owned
60,000
Mebane, NC
Leased
125,000
Mebane, NC
Leased
22,000
ITEM 3.
LEGAL
PROCEEDINGS
ITEM 4.
RESERVED
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F-33
ITEM 5.
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Year
High
Low
Cash Dividends
$
19.07
$
16.01
$
.40
19.81
15.78
.38
16.52
13.22
.38
15.15
12.90
.38
$
15.04
$
12.85
$
.38
15.22
12.44
.36
14.00
11.56
.36
13.53
9.74
.36
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12/05
12/06
12/07
12/08
12/09
12/10
100
112
144
113
136
194
100
116
122
77
97
112
100
110
119
76
104
132
100
140
154
123
173
207
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Year Individual
Became an
Name
Age
Position
Executive Officer
62
President and Chief Executive Officer
2001
57
Executive Vice President
1996
45
Vice President, Chief Financial Officer and Treasurer
2006
50
Vice President, General Counsel and Secretary
1998
57
President and Chief Executive Officer of Liggett
2000
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ITEM 6.
SELECTED
FINANCIAL DATA
Year Ended December 31,
2010
2009
2008
2007
2006
(dollars in thousands, except per share amounts)
$
1,063,289
$
801,494
$
565,186
$
555,430
$
506,252
54,084
24,806
60,504
73,803
42,712
$
0.71
$
0.32
$
0.81
$
1.00
$
0.60
$
0.71
$
0.32
$
0.72
$
0.97
$
0.59
$
1.54
$
1.47
$
1.40
$
1.33
$
1.27
$
526,763
$
389,208
$
355,283
$
395,626
$
303,156
949,595
735,542
717,712
785,289
637,462
226,872
149,008
296,159
109,337
168,786
647,064
487,936
287,545
378,760
198,777
121,893
103,280
100,403
196,340
174,922
(46,234
)
(4,682
)
33,605
100,852
94,977
(1)
Revenues include federal excise taxes of $538,328, $377,771,
$168,170, $176,269 and $174,339, respectively. Effective
April 1, 2009, federal excises taxes increased from $0.39
per pack of cigarettes to $1.01 per pack of cigarettes.
(2)
Per share computations include the impact of 5% stock dividends
on September 29, 2010, September 29, 2009,
September 29, 2008, September 28, 2007 and
September 29, 2006.
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ITEM 7.
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
the manufacture and sale of cigarettes in the United States
through our Liggett Group LLC and Vector Tobacco Inc.
subsidiaries, and
the real estate business through our New Valley LLC subsidiary,
which is seeking to acquire additional operating companies and
real estate properties. New Valley owns 50% of Douglas Elliman
Realty, LLC, which operates the largest residential brokerage
company in the New York metropolitan area.
PYRAMID the industrys first deep discount
product with a brand identity re-launched in the second quarter
of 2009, and
GRAND PRIX re-launched as a national brand in 2005,
LIGGETT SELECT a leading brand in the deep discount
category,
EVE a leading brand of 120 millimeter cigarettes in
the branded discount category, and
USA and various Partner Brands and private label brands.
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December 31, 2010
$
4
351
16,275
1,401
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Year Ended December 31,
2010
2009
2008
(Dollars in thousands)
$
1,063,289
$
801,494
$
565,186
130,157
(1)
160,915
(2)
161,850
(631
)
(886
)
(18,213
)
(16,862
)
(26,546
)
$
111,313
$
143,167
$
135,304
(1)
Operating income includes litigation judgment expense of $16,161
and a $3,000 settlement charge.
(2)
Operating income includes a gain of $5,000 on the Philip Morris
brand transaction completed February 2009 and restructuring
costs of $900.
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Indenture
December 31,
December 31,
Covenant
Requirement
2010
2009
$
50,000
$
184,151
$
174,158
<3.0 to 1
0.5 to 1
0.3 to 1
<1.5 to 1
0.1 to 1
Negative
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Contractual Obligations
2011
2012
2013
2014
2015
Thereafter
Total
$
51,345
$
105,793
(8)
$
4,375
$
161,158
$
418,025
$
3,557
(8)
$
744,253
4,739
3,984
2,204
1,165
630
21
12,743
41,896
41,896
2,726
2,726
83,548
83,839
84,906
86,173
60,985
212,691
612,142
$
184,254
$
193,616
$
91,485
$
248,496
$
479,640
$
216,269
$
1,413,760
(1)
Long-term debt is shown before discount and assumes that only
the mandatory redemption amounts will be retired on our 3.875%
Variable Interest Senior Convertible Debentures due 2026 (10%
and 90% of the principal balance in 2011 and 2026,
respectively). For more information concerning our long-term
debt, see Liquidity and Capital Resources above and
Note 7 to our consolidated financial statements.
(2)
Operating lease obligations represent estimated lease payments
for facilities and equipment. The amounts presented do not
include amounts scheduled to be received under non-cancelable
operating subleases of $965 in 2011, $965 in 2012, $402 in 2013,
$0 in 2014, $0 in 2015 and $0 thereafter. See Note 8 to our
consolidated financial statements.
(3)
Inventory purchase commitments represent purchase commitments
under our leaf inventory management program. See Note 4 to
our consolidated financial statements.
(4)
Capital expenditure purchase commitments represent purchase
commitments for machinery and equipment at Liggett and Vector
Tobacco. See Note 5 to our consolidated financial
statements.
(5)
Interest payments are based on current interest rates at
December 31, 2010 and the assumption our current policy of
a cash dividend of $0.40 per quarter and an annual 5% stock
dividend will continue. In addition, interest payments have been
computed assuming that only the mandatory amounts will be
retired on our convertible debt as discussed in Note
(1) above. For more information concerning our long-term
debt, see Liquidity and Capital Resources above and
Note 7 to our consolidated financial statements.
(6)
Not included in the above table is approximately $19,165 of net
deferred tax liabilities and $5,860 of unrecognized income tax
benefits.
(7)
Because their future cash outflows are uncertain, the above
table excludes our pension and postretirement benefit plans and
contractual guarantees.
(8)
We may be required to redeem $99,000 of this amount in 2012, in
accordance with the terms of our 3.875% Variable Interest Senior
Convertible Debentures due 2026.
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increases the number of health warnings required on cigarette
and smokeless tobacco products, increases the size of warnings
on packaging and in advertising, requires the FDA to develop
graphic warnings for cigarette packages, and grants the FDA
authority to require new warnings;
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requires practically all tobacco product advertising to
eliminate color and imagery and instead consist solely of black
text on white background;
imposes new restrictions on the sale and distribution of tobacco
products, including significant new restrictions on tobacco
product advertising and promotion, as well as the use of brand
and trade names;
bans the use of light, mild,
low or similar descriptors on tobacco products;
bans the use of characterizing flavors in cigarettes
other than tobacco or menthol;
gives the FDA the authority to impose tobacco product standards
that are appropriate for the protection of the public health
(by, for example, requiring reduction or elimination of the use
of particular constituents or components, requiring product
testing, or addressing other aspects of tobacco product
construction, constituents, properties or labeling);
requires manufacturers to obtain FDA review and authorization
for the marketing of certain new or modified tobacco products;
requires pre-market approval by the FDA for tobacco products
represented (through labels, labeling, advertising, or other
means) as presenting a lower risk of harm or tobacco-related
disease;
requires manufacturers to report ingredients and harmful
constituents and requires the FDA to disclose certain
constituent information to the public;
mandates that manufacturers test and report on ingredients and
constituents identified by the FDA as requiring such testing to
protect the public health, and allows the FDA to require the
disclosure of testing results to the public;
requires manufacturers to submit to the FDA certain information
regarding the health, toxicological, behavioral or physiologic
effects of tobacco products;
prohibits use of tobacco containing a pesticide chemical residue
at a level greater than allowed under federal law;
requires the FDA to establish good manufacturing
practices to be followed at tobacco manufacturing
facilities;
requires tobacco product manufacturers (and certain other
entities) to register with the FDA;
authorizes the FDA to require the reduction of nicotine
(although it may not require the reduction of nicotine yields of
a tobacco product to zero) and the potential reduction or
elimination of other constituents, including menthol;
imposes (and allows the FDA to impose) various recordkeeping and
reporting requirements on tobacco product manufacturers; and
grants the FDA the regulatory authority to impose broad
additional restrictions.
a recommendation on modified risk applications;
a recommendation on the effects of tobacco product nicotine
yield alteration and whether there is a threshold level below
which nicotine yields do not produce dependence;
a report on the public health impact of the use of menthol in
cigarettes; and
a report on the public health impact of dissolvable tobacco
products.
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economic outlook,
capital expenditures,
cost reduction,
new legislation,
cash flows,
operating performance,
litigation,
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impairment charges and cost saving 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,
impact of current crises in capital and credit markets,
including any continued worsening,
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,
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 and providing for regulation of tobacco
products by the FDA,
impact of substantial increases in federal, state and local
excise taxes,
uncertainty related to product liability litigation including
the
Engle
progeny cases pending in Florida; and,
potential additional payment obligations for us under the Master
Settlement Agreement and other settlement agreements with the
states.
ITEM 7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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ITEM 9A.
CONTROLS
AND PROCEDURES
ITEM 9B.
OTHER
INFORMATION
ITEM 10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11.
EXECUTIVE
COMPENSATION
ITEM 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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ITEM 13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES
ITEM 15.
EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
F-72
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EXHIBIT
NO.
DESCRIPTION
* 3
.1
Amended and Restated Certificate of Incorporation of Vector
Group Ltd. (formerly known as Brooke Group Ltd.)
(Vector) (incorporated by reference to
Exhibit 3.1 in Vectors
Form 10-Q
for the quarter ended September 30, 1999).
* 3
.2
Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Vector (incorporated by reference to
Exhibit 3.1 in Vectors
Form 8-K
dated May 24, 2000).
* 3
.3
Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Vector Group Ltd. (incorporated by reference
to Exhibit 3.1 in Vectors
Form 10-Q
for the quarter ended June 30, 2007).
* 3
.4
Amended and Restated By-Laws of Vector Group Ltd. (incorporated
by reference to Exhibit 3.4 in Vectors
Form 8-K
dated October 19, 2007).
* 4
.1
Amended and Restated Loan and Security Agreement dated as of
April 14, 2004, by and between Wachovia Bank, N.A., as
lender, Liggett Group Inc. (Liggett), as borrower,
100 Maple LLC and Epic Holdings Inc. (the Wachovia Loan
Agreement) (incorporated by reference to Exhibit 10.1
in Vectors
Form 8-K
dated April 14, 2004).
* 4
.2
Amendment, dated as of December 13, 2005, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated December 13, 2005).
* 4
.3
Amendment, dated as of January 31, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated February 2, 2007).
* 4
.4
Amendment, dated as of August 10, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.6 in
Vectors
Form 8-K
dated August 16, 2007).
* 4
.5
Amendment, dated as of August 16, 2007, to the Wachovia
Loan Agreement (incorporated by reference to Exhibit 4.7 in
Vectors
Form 8-K
dated August 16, 2007).
* 4
.6
Intercreditor Agreement, dated as of August 16, 2007,
between the Wachovia Bank, N.A., as ABL Lender, U.S. Bank
National Association, as Collateral Agent, Liggett Group LLC, as
Borrower, and 100 Maple LLC, as Loan Party (incorporated by
reference to Exhibit 99.1 in Vectors
Form 8-K
dated August 16, 2007).
* 4
.7
Amendment, dated as of August 31, 2010, to Wachovia Loan
and Agreement (incorporated by reference to Exhibit 4.1 in
Vectors
Form 8-K
dated November 1, 2010).
* 4
.8
Indenture, dated as of July 12, 2006, by and between Vector
and Wells Fargo Bank, N.A., relating to the
3
7
/
8
%
Variable Interest Senior Convertible Debentures due 2026 (the
3
7
/
8
% Debentures),
including the form of the
3
7
/
8
% Debenture
(incorporated by reference to Exhibit 4.1 in Vectors
Form 8-K
dated July 11, 2006).
* 4
.9
Indenture, dated as of August 16, 2007, between Vector
Group Ltd., the subsidiary guarantors named therein and U.S.
Bank National Association, as Trustee, relating to the
11% Senior Secured Notes due 2015, including the form of
Note (the Senior Notes Indenture) (incorporated by
reference to Exhibit 4.1 in Vectors
Form 8-K
dated August 16, 2007).
* 4
.10
First Supplemental Indenture, dated as of July 15, 2008, to
the Senior Notes Indenture (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated July 15, 2008).
* 4
.11
Second Supplemental Indenture, dated as of September 1,
2009, to the Senior Notes Indenture (incorporated by reference
to Exhibit 4.1 of Vectors
Form 8-K
dated September 1, 2009).
* 4
.12
Third Supplemental Indenture, dated as of April 20, 2010,
to the Senior Notes Indenture (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated April 20, 2010).
* 4
.13
Fourth Supplemental Indenture, dated as of December 3,
2010, to the Senior Notes Indenture (incorporated by reference
to Exhibit 4.1 of Vectors
Form 8-K
dated December 3, 2010).
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EXHIBIT
NO.
DESCRIPTION
* 4
.14
Fifth Supplemental Indenture, dated as of December 16,
2010, to the Senior Notes Indenture (incorporated by reference
to Exhibit 4.1 of Vectors
Form 8-K
dated December 16, 2010).
* 4
.15
Pledge Agreement, dated as of August 16, 2007, between VGR
Holding LLC, as Grantor, and U.S. Bank National Association, as
Collateral Agent (incorporated by reference to Exhibit 4.2
in Vectors
Form 8-K
dated August 16, 2007).
* 4
.16
Security Agreement, dated as of August 16, 2007, between
Vector Tobacco Inc., as Grantor, and U.S. Bank National
Association, as Collateral Agent (incorporated by reference to
Exhibit 4.3 in Vectors
Form 8-K
dated August 16, 2007).
* 4
.17
Security Agreement, dated as of August 16, 2007, between
Liggett Group LLC and 100 Maple LLC, as Grantors, and U.S. Bank
National Association, as Collateral Agent (incorporated by
reference to Exhibit 4.4 in Vectors
Form 8-K
dated August 16, 2007).
* 4
.18
Note, dated May 11, 2009, by Vector Group Ltd. to Frost
Nevada Investments Trust (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated May 11, 2009).
* 4
.19
Purchase Agreement, dated as of May 11, 2009, between
Vector Group Ltd. and Frost Nevada Investments Trust
(incorporated by reference to Exhibit 4.2 of Vectors
Form 8-K
dated May 11, 2009).
* 4
.20
Form of Issuance and Exchange Agreement, dated as of
June 15, 2009, between Vector Group Ltd. and holders of its
5% Variable Interest Senior Convertible Notes due 2011
(incorporated by reference to Exhibit 4.1 of Vectors
Form 8-K
dated June 15, 2009).
* 4
.21
Indenture, dated as of June 30, 2009, between Vector Group
Ltd. and Wells Fargo Bank, N.A. as trustee, relating to the
6.75% Variable Interest Senior Convertible Exchange Notes Due
2014, including the form of Note (incorporated by reference to
Exhibit 4.1 of Vectors
Form 8-K
dated June 30, 2009).
* 10
.1
Corporate Services Agreement, dated as of June 29, 1990,
between Vector and Liggett (incorporated by reference to
Exhibit 10.10 in Liggetts Registration Statement on
Form S-1,
No. 33-47482).
* 10
.2
Services Agreement, dated as of February 26, 1991, between
Brooke Management Inc. (BMI) and Liggett (the
Liggett Services Agreement) (incorporated by
reference to Exhibit 10.5 in VGR Holdings
Registration Statement on
Form S-1,
No. 33-93576).
* 10
.3
First Amendment to Liggett Services Agreement, dated as of
November 30, 1993, between Liggett and BMI (incorporated by
reference to Exhibit 10.6 in VGR Holdings
Registration Statement on
Form S-1,
No. 33-93576).
* 10
.4
Second Amendment to Liggett Services Agreement, dated as of
October 1, 1995, between BMI, Vector and Liggett
(incorporated by reference to Exhibit 10(c) in
Vectors
Form 10-Q
for the quarter ended September 30, 1995).
* 10
.5
Third Amendment to Liggett Services Agreement, dated as of
March 31, 2001, by and between Vector and Liggett
(incorporated by reference to Exhibit 10.5 in Vectors
Form 10-K
for the year ended December 31, 2003).
* 10
.6
Corporate Services Agreement, dated January 1, 1992,
between VGR Holding and Liggett (incorporated by reference to
Exhibit 10.13 in Liggetts Registration Statement on
Form S-1,
No. 33-47482).
* 10
.7
Settlement Agreement, dated March 15, 1996, by and among
the State of West Virginia, State of Florida, State of
Mississippi, Commonwealth of Massachusetts, and State of
Louisiana, Brooke Group Holding and Liggett (incorporated by
reference to Exhibit 15 in the Schedule 13D filed by
Vector on March 11, 1996, as amended, with respect to the
common stock of RJR Nabisco Holdings Corp.).
* 10
.8
Addendum to Initial States Settlement Agreement (incorporated by
reference to Exhibit 10.43 in Vectors
Form 10-Q
for the quarter ended March 31, 1997).
* 10
.9
Settlement Agreement, dated March 12, 1998, by and among
the States listed in Appendix A thereto, Brooke Group
Holding and Liggett (incorporated by reference to
Exhibit 10.35 in Vectors
Form 10-K
for the year ended December 31, 1997).
* 10
.10
Master Settlement Agreement made by the Settling States and
Participating Manufacturers signatories thereto (incorporated by
reference to Exhibit 10.1 in Philip Morris Companies
Inc.s
Form 8-K
dated November 25, 1998, Commission File
No. 1-8940).
57
Table of Contents
EXHIBIT
NO.
DESCRIPTION
* 10
.11
General Liggett Replacement Agreement, dated as of
November 23, 1998, entered into by each of the Settling
States under the Master Settlement Agreement, and Brooke Group
Holding and Liggett (incorporated by reference to
Exhibit 10.34 in Vectors
Form 10-K
for the year ended December 31, 1998).
* 10
.12
Stipulation and Agreed Order regarding Stay of Execution Pending
Review and Related Matters, dated May 7, 2001, entered into
by Philip Morris Incorporated, Lorillard Tobacco Co., Liggett
and Brooke Group Holding Inc. and the class counsel in Engel,
et. al., v. R.J. Reynolds Tobacco Co., et. al.
(incorporated by reference to Exhibit 99.2 in Philip Morris
Companies Inc.s
Form 8-K
dated May 7, 2001).
* 10
.13
Amended and Restated Employment Agreement dated as of
January 27, 2006, between Vector and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 in Vectors
Form 8-K
dated January 27, 2006).
* 10
.14
Employment Agreement, dated as of January 27, 2006, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.3 in Vectors
Form 8-K
dated January 27, 2006).
* 10
.15
Amended and Restated Employment Agreement, dated as of
January 27, 2006, between Vector and Marc N. Bell
(incorporated by reference to Exhibit 10.4 in Vectors
Form 8-K
dated January 27, 2006).
* 10
.16
Employment Agreement, dated as of November 11, 2005,
between Liggett Group Inc. and Ronald J. Bernstein (incorporated
by reference to Exhibit 10.1 in Vectors
Form 8-K
dated November 11, 2005).
10
.17
Amendment to Employment Agreement, dated as of January 14,
2011, between Liggett and Ronald J. Bernstein.
* 10
.18
Employment Agreement, dated as of January 27, 2006, between
Vector and J. Bryant Kirkland III (incorporated by
reference to Exhibit 10.5 in Vectors
Form 8-K
dated January 27, 2006).
* 10
.19
Vector Group Ltd. Amended and Restated 1999 Long-Term Incentive
Plan (incorporated by reference to Appendix A in
Vectors Proxy Statement dated April 21, 2004).
* 10
.20
Stock Option Agreement, dated December 3, 2009, between
Vector and Richard J. Lampen (incorporated by reference to
Exhibit 10.19 in Vectors
Form 10-K
dated December 31, 2009).
* 10
.21
Stock Option Agreement, dated December 3, 2009, between
Vector and Marc N. Bell (incorporated by reference to
Exhibit 10.20 in Vectors
Form 10-K
dated December 31, 2009).
* 10
.22
Stock Option Agreement, dated December 3, 2009, between
Vector and Howard M. Lorber (incorporated by reference to
Exhibit 10.22 in Vectors
Form 10-K
dated December 31, 2009).
* 10
.23
Stock Option Agreement, dated December 3, 2009, between
Vector and J. Bryant Kirkland III (incorporated by
reference to Exhibit 10.23 in Vectors
Form 10-K
dated December 31, 2009).
* 10
.24
Option Letter Agreement, dated as of November 11, 2005
between Vector and Ronald J. Bernstein (incorporated by
reference to Exhibit 10.3 in Vectors
Form 8-K
dated November 11, 2005).
* 10
.25
Restricted Share Award Agreement, dated as of April 7,
2009, between Vector Group Ltd. and Howard M. Lorber
(incorporated by reference to Exhibit 10.1 of Vectors
Form 8-K
dated April 10, 2009).
* 10
.26
Stock Option Agreement, dated January 14, 2011, between
Vector and Howard M. Lorber (incorporated by reference to
Exhibit S to Schedule 13D, as amended, dated
January 21, 2011 filed by Howard M. Lorber).
* 10
.27
Vector Senior Executive Annual Bonus Plan (incorporated by
reference to Exhibit 10.7 in Vectors
Form 8-K
dated January 27, 2006).
* 10
.28
Vector Senior Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.1 in Vectors
Form 8-K
dated January 14, 2011).
* 10
.29
Vector Supplemental Retirement Plan (as amended and restated
April 24, 2008) (incorporated by reference to
Exhibit 10.1 in Vectors
Form 10-Q
for the quarter ended June 30, 2008).
* 10
.30
Operating Agreement of Douglas Elliman Realty, LLC (formerly
known as Montauk Battery Realty LLC) dated
December 17, 2002 (incorporated by reference to
Exhibit 10.1 in New Valleys
Form 8-K
dated December 13, 2002).
58
Table of Contents
*
Incorporated by reference
59
Table of Contents
(Registrant)
By:
SIGNATURE
TITLE
President and Chief Executive Officer
(Principal Executive Officer)
Vice President, Treasurer and Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
60
Table of Contents
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2010
ITEMS 8, 15(a)(1) AND (2), 15(c)
AND FINANCIAL STATEMENT SCHEDULES
Page
F-2
F-3
F-4
F-5
F-6
F-8
F-72
F-1
Table of Contents
of Vector Group Ltd.:
F-2
Table of Contents
F-3
Table of Contents
Year Ended December 31,
2010
2009
2008
(Dollars in thousands, except per share amounts)
$
1,063,289
$
801,494
$
565,186
845,106
577,386
335,299
90,709
85,041
94,583
16,161
(5,000
)
900
111,313
143,167
135,304
(84,096
)
(68,490
)
(62,335
)
11,524
(35,925
)
24,337
(18,573
)
(8,500
)
(32,400
)
19,869
23,963
15,213
24,399
2,997
1,645
5,267
85,570
28,537
94,572
(31,486
)
(3,731
)
(34,068
)
$
54,084
$
24,806
$
60,504
$
0.71
$
0.33
$
0.81
$
0.71
$
0.33
$
0.72
$
1.54
$
1.47
$
1.40
*
Revenues and cost of goods sold include federal excise taxes of
$538,328, $377,771 and $168,170 for the years ended
December 31, 2010, 2009 and 2008, respectively.
F-4
Table of Contents
Additional
Other
Common Stock
Paid-In
Comprehensive
Treasury
Shares
Amount
Capital
Deficit
Income (Loss)
Stock
Total
(Dollars in thousands)
60,361,068
$
6,036
$
89,494
$
$
18,179
$
(12,857
)
$
100,852
60,504
60,504
(30,989
)
(30,989
)
35
35
(399
)
(399
)
(12,263
)
(12,263
)
(43,616
)
16,888
(509
)
195
(314
)
(46,081
)
(59,681
)
(105,762
)
3,142,760
314
(314
)
18,304
18,304
2,510,242
251
(164
)
87
3,550
3,550
66,014,070
6,601
65,103
(25,242
)
(12,857
)
33,605
24,806
24,806
6,232
6,232
34
34
4,097
4,097
10,363
35,169
(88,110
)
(24,473
)
(112,583
)
500,000
50
50
3,326,623
333
(333
)
9,162
9,162
1,582,074
158
986
1,144
(160,083
)
(16
)
(2,298
)
(2,314
)
3,642
3,642
27,443
27,443
71,262,684
7,126
15,928
(14,879
)
(12,857
)
(4,682
)
54,084
54,084
2,938
2,938
42
42
669
669
27,607
27,607
(11,921
)
(11,921
)
15,686
15,686
19,335
73,419
(19,081
)
(99,054
)
(118,135
)
50,000
5
(5
)
(51,941
)
(5
)
(1,035
)
(1,040
)
3,567,023
357
(357
)
269
269
111,518
11
1,254
1,265
2,670
2,670
74,939,284
$
7,494
$
$
(45,327
)
$
4,456
$
(12,857
)
$
(46,234
)
F-5
Table of Contents
Year Ended December 31,
2010
2009
2008
(Dollars in thousands, except per share amounts)
$
54,084
$
24,806
$
60,504
10,790
10,398
10,057
2,704
3,642
3,550
100
53
18,573
74
127
1,225
(110,183
)
432
5,000
4,000
3,500
3,500
21,900
(2,604
)
568
(19,869
)
3,000
(23,963
)
(15,213
)
(24,399
)
12,212
6,466
8,462
3,450
1,082
51,209
(11,907
)
6,249
1,408
(6,393
)
(8,593
)
(5,905
)
(5,756
)
198
35,560
4,035
11,850
(179
)
(902
)
(154
)
(5,218
)
8,606
11,800
67,004
5,667
91,265
F-6
Table of Contents
Year Ended December 31,
2010
2009
2008
Dollars in thousands, except per share amounts
187
41
452
28,587
78
(9,394
)
(12,427
)
(6,411
)
1,002
2,254
8,334
(5,062
)
(51
)
(51
)
(13,462
)
(21,704
)
(4,250
)
(1,100
)
1,720
(411
)
(24,645
)
(474
)
(22,000
)
3,539
6,730
19,393
(930
)
473
(23,391
)
(3,848
)
(6,309
)
(936
)
(839
)
(938
)
(45,132
)
(6,816
)
(33,895
)
185,714
118,805
2,831
(14,539
)
(6,179
)
(6,329
)
(5,077
)
(5,573
)
(137
)
1,034,924
749,474
531,251
(1,016,598
)
(751,607
)
(526,518
)
(117,459
)
(115,778
)
(103,870
)
1,265
1,194
86
269
9,162
18,304
68,499
(502
)
(84,382
)
90,371
(1,651
)
(27,012
)
209,454
211,105
238,117
$
299,825
$
209,454
$
211,105
F-7
Table of Contents
1.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
F-8
Table of Contents
F-9
Table of Contents
F-10
Table of Contents
F-11
Table of Contents
2010
2009
2008
$
54,084
$
24,806
$
60,504
(1,146
)
(956
)
(2,783
)
$
52,938
$
23,850
$
57,721
F-12
Table of Contents
2010
2009
2008
74,330,955
72,989,289
71,093,920
362,904
69,748
790,732
6,530,696
74,693,899
73,059,037
78,415,348
Year Ended December 31,
2010
2009
2008
158,411
1,710,914
567,496
$
24.54
$
14.91
$
17.43
166,872
73,438
$
$
15.50
$
15.99
17,143,180
15,765,854
7,727,448
$
15.61
$
16.06
$
14.48
Year Ended December 31,
2010
2009
2008
$
54,084
$
24,806
$
60,504
(962
)
(1,146
)
(971
)
(2,783
)
$
52,938
$
23,835
$
56,759
F-13
Table of Contents
Year Ended December 31,
2010
2009
2008
$
54,084
$
24,806
$
60,504
27,607
4,097
(14,047
)
(11,921
)
1,784
15,686
4,097
(12,263
)
669
(674
)
275
669
(399
)
42
34
35
2,938
6,232
(30,989
)
$
73,419
$
35,169
$
16,888
December 31,
December 31,
December 31,
2010
2009
2008
$
21,887
$
6,201
$
2,104
669
(206
)
(248
)
(282
)
(17,894
)
(20,832
)
(27,064
)
$
4,456
$
(14,879
)
$
(25,242
)
F-14
Table of Contents
F-15
Table of Contents
2.
RESTRUCTURINGS
Employee
Non-Cash
Contract
Severance
Asset
Termination/
and Benefits
Impairment
Exit Costs
Total
$
70
$
$
$
70
(14
)
(14
)
(56
)
(56
)
738
30
232
1,000
(47
)
(3
)
(50
)
(100
)
(586
)
(27
)
(167
)
(780
)
105
15
120
(105
)
(15
)
(120
)
$
$
$
$
F-16
Table of Contents
3.
INVESTMENT
SECURITIES AVAILABLE FOR SALE
Gross
Gross
Unrealized
Unrealized
Fair
Cost
Gain
Loss
Value
$
42,277
$
36,477
$
$
78,754
$
41,304
$
13,051
$
(2,613
)
$
51,742
4.
INVENTORIES
December 31,
December 31,
2010
2009
$
54,479
$
48,942
4,073
3,497
2,067
2,388
67,773
59,293
128,392
114,120
(21,313
)
(15,635
)
$
107,079
$
98,485
F-17
Table of Contents
5.
PROPERTY,
PLANT AND EQUIPMENT
December 31,
December 31,
2010
2009
$
1,418
$
1,418
13,575
13,575
127,371
107,492
2,205
2,215
144,569
124,700
(89,157
)
(81,714
)
$
55,412
$
42,986
6.
LONG-TERM
INVESTMENTS
December 31, 2010
December 31, 2009
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
$
45,134
$
70,966
$
49,486
$
68,679
899
1,136
837
1,261
$
46,033
$
72,102
$
50,323
$
69,940
F-18
Table of Contents
2010
2009
$
69,940
$
54,997
62
52
(1,002
)
(847
)
(5,790
)
8,892
15,738
$
72,102
$
69,940
F-19
Table of Contents
7.
NOTES PAYABLE,
LONG-TERM DEBT AND OTHER OBLIGATIONS
December 31,
December 31,
2010
2009
$
414,270
$
245,151
11,647
10,245
42,817
37,781
26,940
26,411
35,710
17,382
6,222
6,755
19,030
4,852
3,882
3,687
761
663
557,397
356,809
(51,345
)
(21,889
)
$
506,052
$
334,920
*
The fair value of the derivatives embedded within the 6.75%
Variable Interest Convertible Note ($20,219 at December 31,
2010 and $23,890 at December 31, 2009, respectively), the
6.75% Variable Interest Senior Convertible Exchange Notes
($38,324 at December 31, 2010 and $47,552 at
December 31, 2009, respectively), and the 3.875% Variable
Interest Senior Convertible Debentures ($82,949 at
December 31, 2010 and $81,574 at December 31, 2009,
respectively) is separately classified as a derivative liability
in the condensed consolidated balance sheets.
F-20
Table of Contents
F-21
Table of Contents
F-22
Table of Contents
Year Ended December 31,
2010
2009
2008
$
749
$
331
$
3,113
1,210
575
455
360
3,394
5,445
$
4,437
$
5,390
$
5,805
Year Ended December 31,
2010
2009
2008
$
3,671
$
(2,323
)
$
9,228
(3,237
)
(1,375
)
(29,745
)
16,082
(620
)
8,255
$
11,524
$
(35,925
)
$
24,337
F-23
Table of Contents
6.75%
3.875%
5%
6.75%
Exchange
Convertible
Convertible
Note
Notes
Debentures
Notes
Total
$
$
$
67,911
$
33,671
$
101,582
(16,082
)
(8,255
)
(24,337
)
51,829
25,416
77,245
21,567
(2,485
)
19,082
44,315
(23,551
)
20,764
2,323
3,237
29,745
620
35,925
23,890
47,552
81,574
153,016
(3,671
)
(9,228
)
1,375
(11,524
)
$
20,219
$
38,324
$
82,949
$
$
141,492
Year Ended December 31,
2010
2009
2008
$
653
$
289
$
1,923
748
(46
)
(51
)
(54
)
1,883
3,017
$
2,530
$
2,869
$
2,963
F-24
Table of Contents
6.75%
3.875%
5%
6.75%
Exchange
Convertible
Convertible
Note
Notes
Debentures
Notes
Total
$
$
$
84,299
$
48,027
$
132,326
(360
)
(5,445
)
(5,805
)
54
(3,017
)
(2,963
)
83,993
39,565
123,558
21,567
44,315
65,882
18,808
27,392
46,200
(3,311
)
(3,311
)
(30,977
)
(30,977
)
(331
)
(1,210
)
(455
)
(3,394
)
(5,390
)
(289
)
(748
)
51
(1,883
)
(2,869
)
39,755
69,749
83,589
193,093
(749
)
(3,113
)
(575
)
(4,437
)
(653
)
(1,923
)
46
(2,530
)
$
38,353
$
64,713
$
83,060
$
$
186,126
6.75%
6.75%
Exchange
Note
Notes
Total
$
770
$
7,034
$
7,804
(2,485
)
(23,551
)
(26,036
)
257
2,260
2,517
3,311
30,977
34,288
$
1,853
$
16,720
$
18,573
F-25
Table of Contents
December 31, 2010
December 31, 2009
Carrying
Fair
Carrying
Fair
Value
Value
Value
Value
$
557,397
$
827,247
$
356,809
$
573,439
F-26
Table of Contents
Unamortized
Principal
Discount
Net
51,345
434
50,911
105,793
82,626
23,167
4,375
4,375
161,158
103,066
58,092
418,025
730
417,295
3,557
3,557
$
744,253
$
186,856
$
557,397
8.
COMMITMENTS
Lease
Sublease
Commitments
Rentals
Net
$
4,739
965
3,774
3,984
965
3,019
2,204
402
1,802
1,165
1,165
630
630
21
21
$
12,743
$
2,332
$
10,411
9.
EMPLOYEE
BENEFIT PLANS
F-27
Table of Contents
F-28
Table of Contents
Other
Pension Benefits
Postretirement Benefits
2010
2009
2010
2009
$
(142,043
)
$
(156,318
)
$
(9,405
)
$
(8,743
)
(1,360
)
(1,319
)
(13
)
(15
)
(8,131
)
(9,385
)
(521
)
(566
)
(6,055
)
11,787
32,903
574
596
479
507
(3,645
)
(8,431
)
(485
)
(677
)
$
(148,968
)
$
(142,043
)
$
(9,850
)
$
(9,405
)
$
125,166
$
111,266
$
$
19,733
26,085
(479
)
(507
)
360
21,225
574
596
(11,787
)
(32,903
)
(574
)
(596
)
$
132,993
$
125,166
$
$
$
(15,975
)
$
(16,877
)
$
(9,850
)
$
(9,405
)
$
13,935
$
8,994
$
$
(347
)
(357
)
(665
)
(680
)
(29,563
)
(25,514
)
(9,185
)
(8,725
)
$
(15,975
)
$
(16,877
)
$
(9,850
)
$
(9,405
)
Other Postretirement
Pension Benefits
Benefits
2010
2009
2008
2010
2009
2008
$
1,360
$
1,319
$
4,139
$
13
$
15
$
15
8,131
9,385
9,525
521
567
591
(8,271
)
(7,817
)
(12,145
)
801
1,402
(1,808
)
3,376
2,136
98
(129
)
(163
)
(180
)
$
4,596
$
4,016
$
3,019
$
405
$
419
$
426
F-29
Table of Contents
Defined
Post-
Benefit
Retirement
Pension Plans
Plans
Total
$
2,018
$
$
2,018
789
(88
)
701
Defined
Post-
Benefit
Retirement
Pension Plans
Plans
Total
$
(35,348
)
$
1,003
$
(34,345
)
2,018
2,018
1,358
(130
)
1,228
1,762
(485
)
1,277
$
(30,210
)
$
388
$
(29,822
)
Defined
Post-
Benefit
Retirement
Pension Plans
Plans
Total
$
(46,314
)
$
1,842
$
(44,472
)
801
801
(1,808
)
(1,808
)
2,136
(163
)
1,973
9,837
(676
)
9,161
$
(35,348
)
$
1,003
$
(34,345
)
F-30
Table of Contents
Pension Benefits
Other Postretirement Benefits
2010
2009
2008
2010
2009
2008
5.25
%
5.75
%
6.75
%
5.25
%
5.75
%
6.75
%
5.75
%
6.75
%
6.25
%
5.75
%
6.75
%
6.25
%
7.00
%
7.50
%
7.50
%
N/A
N/A
N/A
3.00
%
3.00
%
3.00
%
F-31
Table of Contents
Plan Assets at
December 31,
2010
2009
51
%
50
%
26
%
26
%
4
%
2
%
9
%
8
%
10
%
14
%
100
%
100
%
Fair Value Measurements as of December 31, 2010
Quoted Prices in
Active Markets for
Significant Other
Significant
Identical Assets
Observable Inputs
Unobservable Inputs
Description
Total
(Level 1)
(Level 2)
(Level 3)
$
2,359
$
$
2,359
$
14,108
14,108
53,916
53,916
50,631
45,722
4,909
11,996
11,996
$
133,010
$
68,024
$
48,081
$
16,905
F-32
Table of Contents
Fair Value Measurements as of December 31, 2009
Quoted Prices in
Active Markets for
Significant Other
Significant
Identical Assets
Observable Inputs
Unobservable Inputs
Description
Total
(Level 1)
(Level 2)
(Level 3)
$
2,684
$
$
2,684
$
71,726
71,726
40,210
38,752
1,458
10,182
10,182
$
124,802
$
71,726
$
41,436
$
11,640
2010
2009
$
11,640
$
15,285
(1,107
)
(8,978
)
4,000
2,113
3,913
259
1,420
$
16,905
$
11,640
1% Increase
1% Decrease
$
9
$
(8
)
$
164
$
(151
)
Table of Contents
Postretirement
Pension
Medical
11,956
666
15,064
734
31,838
696
17,959
691
10,413
694
45,989
3,471
10.
INCOME
TAXES
Year Ended December 31,
2010
2009
2008
$
33,142
$
94,640
$
25,747
101
19,274
7,889
$
33,243
$
113,914
$
33,636
$
(3,381
)
$
(85,158
)
$
5,170
1,624
(25,025
)
(4,738
)
(1,757
)
(110,183
)
432
$
31,486
$
3,731
$
34,068
F-34
Table of Contents
December 31, 2010
December 31, 2009
Deferred Tax
Deferred Tax
Deferred Tax
Deferred Tax
Assets
Liabilities
Assets
Liabilities
$
10,603
$
$
8,876
$
10,701
11,084
34,293
29,671
21,589
13,015
7,067
9,950
16,155
13,467
26,962
10,099
14,496
15,138
10,075
16,742
8,354
6,221
(10,290
)
(9,509
)
$
69,614
$
88,779
$
53,992
$
62,374
F-35
Table of Contents
Year Ended December 31,
2010
2009
2008
$
85,570
$
28,537
$
94,572
29,950
9,988
33,100
1,121
261
2,048
1,491
1,682
1,771
(654
)
(1,201
)
(1,608
)
(25
)
(833
)
381
(397
)
(6,166
)
(1,624
)
$
31,486
$
3,731
$
34,068
$
10,605
747
(317
)
(3,532
)
7,503
3,380
2,619
(550
)
(903
)
(1,833
)
10,216
847
1,178
(2,303
)
(1,076
)
(2,094
)
$
6,768
F-36
Table of Contents
11.
STOCK
COMPENSATION
2010
2009
2.59%
2.0% 3.4%
24.43%
24.97% 35.93%
9.75%
0.0%
4.74 years
4.79 10 years
$
1.03
$
3.58 $7.40
F-37
Table of Contents
Weighted-Average
Remaining
Aggregate
Number of
Weighted-Average
Contractual Term
Intrinsic
Shares
Exercise Price
(Years)
Value(1)
10,326,841
$
8.38
1.8
$
95,238
(4,498,715
)
$
5.19
(1,547
)
$
28.06
5,826,579
$
10.50
1.7
$
13,708
1,176,000
$
13.40
(4,618,558
)
$
9.54
(71,052
)
$
15.95
2,312,969
$
13.82
6.6
$
1,947
105,000
$
15.63
(116,271
)
$
10.88
(19
)
2,301,679
$
14.05
6.0
$
11,208
5,427,575
1,109,849
1,014,298
(1)
The aggregate intrinsic value represents the amount by which the
fair value of the underlying common stock ($17.32, $14.00 and
$12.97 at December 31, 2010, 2009 and 2008, respectively)
exceeds the option exercise price.
Options Outstanding
Options Exercisable
Weighted-Average
Outstanding
Remaining
Exercisable
Range of
as of
Contractual Life
Weighted-Average
as of
Weighted-Average
Exercise Prices
12/31/2010
(Years)
Exercise Price
12/31/2010
Exercise Price
11,637
2.0
$
8.14
11,637
$
8.14
1,969,206
6.3
$
13.10
786,825
$
13.10
162,425
7.7
$
15.77
57,425
$
15.77
6,184
1.1
$
17.86
6,184
$
17.86
4,876
0.6
$
21.56
4,876
$
21.56
58,944
0.7
$
23.85
58,944
$
23.85
88,407
0.7
$
25.64
88,407
$
25.64
2,301,679
6.0
$
14.05
1,014,298
$
14.98
F-38
Table of Contents
F-39
Table of Contents
12.
CONTINGENCIES
F-40
Table of Contents
F-41
Table of Contents
Number
State
of Cases
15
9
5
3
2
1
1
F-42
Table of Contents
Compensatory
Date
Case Name
County
Damages
Punitive Damages
Campbell v. R.J. Reynolds
Escambia
$156
None
Douglas v. R.J. Reynolds
Hillsborough
$1,350
None
Clay v. R.J. Reynolds
Escambia
$349
$
1,000
Putney v. R.J. Reynolds
Broward
$3,008
None
F-43
Table of Contents
F-44
Table of Contents
F-45
Table of Contents
F-46
Table of Contents
F-47
Table of Contents
all claims of the Settling States and their respective political
subdivisions and other recipients of state health care funds,
relating to: (i) past conduct arising out of the use, sale,
distribution, manufacture, development, advertising and
marketing of tobacco products; (ii) the health effects of,
the exposure to, or research, statements or warnings about,
tobacco products; and
all monetary claims of the Settling States and their respective
subdivisions and other recipients of state health care funds
relating to future conduct arising out of the use of, or
exposure to, tobacco products that have been manufactured in the
ordinary course of business.
F-48
Table of Contents
F-49
Table of Contents
use of net unit amounts is not required by the MSA
(as reflected by, among other things, the use of
gross unit amounts through 2005);
such a change is not authorized without the consent of affected
parties to the MSA;
the MSA provides for four-year time limitation periods for
revisiting calculations and determinations, which precludes
recalculating Liggetts 1997 Market Share (and thus,
Liggetts market share exemption); and
Liggett and others have relied upon the calculations based on
gross unit amounts since 1998.
F-50
Table of Contents
F-51
Table of Contents
F-52
Table of Contents
13.
SUPPLEMENTAL
CASH FLOW INFORMATION
Year Ended December 31,
2010
2009
2008
$
67,918
$
52,487
$
48,794
41,523
94,449
4,015
357
333
314
119,305
(111,501
)
14.
RELATED
PARTY TRANSACTIONS
F-53
Table of Contents
15.
INVESTMENTS
AND FAIR VALUE MEASUREMENTS
Level 1
Observable inputs such as quoted prices (unadjusted) in active
markets for identical assets or liabilities.
Level 2
Inputs other than quoted prices that are observable for the
assets or liability, either directly or indirectly. These
include quoted prices for similar assets or liabilities in
active markets and quoted prices for identical or similar assets
or liabilities in markets that are not active.
Level 3
Unobservable inputs in which there is little market data, which
requires the reporting entity to develop their own assumptions.
F-54
Table of Contents
Fair Value Measurements as of December 31, 2010
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
Description
Total
(Level 1)
(Level 2)
(Level 3)
$
267,333
$
267,333
$
$
2,773
2,773
5,300
5,300
78,754
74,640
4,114
$
354,160
$
347,273
$
6,887
$
$
141,492
$
$
$
141,492
Fair Value Measurements as of December 31, 2009
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
Description
Total
(Level 1)
(Level 2)
(Level 3)
$
199,423
$
199,423
$
$
2,785
2,785
3,128
3,128
51,743
38,707
13,036
$
257,079
$
241,258
$
15,821
$
$
153,016
$
$
$
153,016
F-55
Table of Contents
16.
NEW
VALLEY LLC
December 31,
December 31,
2010
2009
$
46,421
$
36,086
1,248
10,958
12,232
18,000
5,037
$
80,416
$
49,566
F-56
Table of Contents
December 31, 2010
December 31, 2009
$
45,032
$
26,920
5,989
6,664
15,556
13,498
21,663
21,663
38,424
38,601
1,337
742
3,416
2,871
1,067
776
2,487
2,487
21,765
20,724
1,129
2,136
10,500
7,747
96,956
74,602
Year Ended December 31,
2010
2009
2008
$
348,136
$
283,851
$
352,680
303,358
259,867
324,641
3,682
4,448
5,448
329
255
298
2,440
2,090
552
2,413
3,290
1,329
223
253
$
41,326
$
18,735
$
18,750
F-57
Table of Contents
December 31, 2010
$
4
351
16,275
1,401
F-58
Table of Contents
F-59
Table of Contents
December 31,
December 31,
2010
2009
$
11,112
$
11,126
1,471
1,154
1,144
1,038
13,727
13,318
(373
)
(74
)
$
13,354
$
13,244
17.
SEGMENT
INFORMATION
F-60
Table of Contents
Real
Corporate
Tobacco
Estate
and Other
Total
$
1,063,289
$
$
$
1,063,289
130,157
(1)
(631
)
(18,213
)
111,313
23,963
23,963
434,842
110,352
(2)
404,401
949,595
8,179
298
2,313
10,790
23,073
226
92
23,391
$
801,494
$
$
$
801,494
160,915
(3)
(886
)
(16,862
)
143,167
15,213
15,213
297,587
61,770
(2)
376,185
735,542
8,078
74
2,246
10,398
2,734
1,114
3,848
$
565,186
$
$
$
565,186
161,850
(26,546
)
135,304
23,899
23,899
291,262
70,979
(2)
355,471
717,712
7,719
2,338
10,057
6,309
6,309
(1)
Operating income includes litigation judgment expense of $16,161
and a $3,000 settlement charge.
(2)
Includes investments accounted for under the equity method of
accounting of $86,333, $48,318 and $44,725 as of
December 31, 2010, 2009 and 2008, respectively.
(3)
Operating income includes a gain of $5,000 on the Philip Morris
brand transaction completed February 2009 and restructuring
costs of $900.
F-61
Table of Contents
18.
QUARTERLY
FINANCIAL RESULTS (UNAUDITED)
December 31,
September 30,
June 30,
March 31,
2010(1)
2010(2)
2010(3)
2010
$
277,618
$
295,124
$
268,460
$
222,087
52,577
55,964
57,466
52,176
29,342
29,876
21,077
31,018
$
12,016
$
10,907
$
19,223
$
11,938
$
0.16
$
0.14
$
0.26
$
0.16
$
0.16
$
0.14
$
0.19
$
0.14
(1)
Fourth quarter 2010 net income applicable to common shares
includes litigation judgment expense of $1,800.
(2)
Third quarter 2010 net income applicable to common shares
includes $3,000 settlement charge.
(3)
Second quarter 2010 net income applicable to common shares
includes litigation judgment expense of $14,361.
(4)
Per share computations include the impact of a 5% stock dividend
paid on September 29, 2010. Quarterly basic and diluted net
income per common share were computed independently for each
quarter and do not necessarily total to the year to date basic
and diluted net income per common share.
December 31,
September 30,
June 30,
March 31,
2009(1)
2009
2009(2)
2009(3)
$
236,748
$
236,736
$
206,794
$
121,216
57,451
58,937
59,032
48,689
36,188
36,972
38,847
31,160
$
13,433
$
16,219
$
(7,946
)
$
3,100
$
0.18
$
0.21
$
(0.10
)
$
0.04
$
0.18
$
0.21
$
(0.10
)
$
0.04
(1)
Fourth quarter 2009 net income applicable to common shares
includes pre-tax loss on extinguishment of debt of $129 and an
adjustment to reduce restructuring charges for 2009 by $100.
(2)
Second quarter 2009 net income applicable to common shares
includes pre-tax loss on extinguishment of debt of $18,444.
(3)
First quarter 2009 net income applicable to common shares
includes pre-tax gain of $5,000 on brand transaction,
restructuring charges of $1,000, and impairment charges of
$8,500 on investments in non-consolidated real estate businesses.
(4)
Per share computations include the impact of a 5% stock dividend
paid on September 29, 2009. Quarterly basic and diluted net
income per common share were computed independently for each
quarter and do not necessarily total to the year to date basic
and diluted net income per common share.
F-62
Table of Contents
19.
CONDENSED
CONSOLIDATING FINANCIAL INFORMATION
F-63
Table of Contents
F-64
Table of Contents
F-65
Table of Contents
Year Ended December 31, 2010
Subsidiary
Consolidated
Parent/
Subsidiary
Non-
Consolidating
Vector Group
Issuer
Guarantors
Guarantors
Adjustments
Ltd.
$
$
1,063,289
$
$
$
1,063,289
845,106
845,106
21,842
67,939
928
90,709
16,161
16,161
8,521
(8,521
)
(21,842
)
125,562
(928
)
8,521
111,313
(82,828
)
(1,227
)
(41
)
(84,096
)
11,524
11,524
23,963
23,963
19,869
19,869
103,697
(103,697
)
8,521
(8,521
)
2,958
39
2,997
41,899
124,374
22,994
(103,697
)
85,570
29,721
(34,474
)
(9,197
)
(17,536
)
(31,486
)
$
71,620
$
89,900
$
13,797
$
(121,233
)
$
54,084
F-66
Table of Contents
Year Ended December 31, 2009
Subsidiary
Consolidated
Parent/
Subsidiary
Non-
Consolidating
Vector Group
Issuer
Guarantors
Guarantors
Adjustments
Ltd.
$
$
801,494
$
$
$
801,494
577,386
577,386
20,679
63,277
1,085
85,041
(5,000
)
(5,000
)
900
900
8,223
(8,223
)
(20,679
)
156,708
(1,085
)
8,223
143,167
387
105
492
(67,420
)
(1,048
)
(22
)
(68,490
)
(18,573
)
(18,573
)
(35,925
)
(35,925
)
(8,500
)
(8,500
)
15,213
15,213
196,356
(196,356
)
8,223
(8,223
)
1,153
1,153
63,522
155,765
5,606
(196,356
)
28,537
(38,716
)
37,261
(2,276
)
(3,731
)
$
24,806
$
193,026
$
3,330
$
(196,356
)
$
24,806
F-67
Table of Contents
Year Ended December 31, 2008
Subsidiary
Consolidated
Parent/
Subsidiary
Non-
Consolidating
Vector Group
Issuer
Guarantors
Guarantors
Adjustments
Ltd.
$
$
565,186
$
$
$
565,186
335,299
335,299
29,577
65,135
(129
)
94,583
7,940
(7,940
)
(29,577
)
156,812
129
7,940
135,304
4,911
953
5,864
(60,172
)
(2,163
)
(62,335
)
24,337
24,337
(24,900
)
(7,500
)
(32,400
)
24,399
24,399
108,539
(108,539
)
7,940
(7,940
)
(593
)
(4
)
(597
)
30,485
155,602
17,024
(108,539
)
94,572
30,019
(57,056
)
(7,031
)
(34,068
)
$
60,504
$
98,546
$
9,993
$
(108,539
)
$
60,504
F-68
Table of Contents
Year Ended December 31, 2010
Subsidiary
Consolidated
Parent/
Subsidiary
Non-
Consolidating
Vector Group
Issuer
Guarantors
Guarantors
Adjustments
Ltd.
$
45,172
$
166,018
$
(2,164
)
$
(142,022
)
$
67,004
28,587
28,587
(9,394
)
(9,394
)
1,002
1,002
(5,000
)
(62
)
(5,062
)
(24,645
)
(24,645
)
(13,462
)
(13,462
)
3,539
3,539
(513
)
(423
)
(936
)
363
(1,112
)
(351
)
(1,100
)
(930
)
(930
)
473
473
187
187
(10,547
)
10,547
(23,073
)
(318
)
(23,391
)
(9,894
)
(24,421
)
(21,364
)
10,547
(45,132
)
165,000
20,714
185,714
(5,077
)
(5,077
)
(14,424
)
(115
)
(14,539
)
1,034,924
1,034,924
(1,016,598
)
(1,016,598
)
10,547
(10,547
)
(165,550
)
23,528
142,022
(117,459
)
(117,459
)
1,265
1,265
269
269
(43,998
)
(130,387
)
23,413
131,475
68,499
79,276
11,210
(115
)
90,371
204,133
5,004
317
209,454
$
283,409
$
16,214
$
202
$
$
299,825
F-69
Table of Contents
Year Ended December 31, 2009
Subsidiary
Consolidated
Parent/
Subsidiary
Non-
Consolidating
Vector Group
Issuer
Guarantors
Guarantors
Adjustments
Ltd.
$
10,517
$
80,572
$
5,547
$
(90,969
)
$
5,667
41
41
78
78
(12,427
)
(12,427
)
2,254
2,254
(51
)
(51
)
(474
)
(474
)
6,730
6,730
(413
)
(426
)
(839
)
1,160
560
1,720
(3,800
)
3,800
(2,734
)
(1,114
)
(3,848
)
(13,226
)
(2,559
)
5,169
3,800
(6,816
)
118,125
35
645
118,805
(360
)
(5,769
)
(50
)
(6,179
)
(5,567
)
(6
)
(5,573
)
749,474
749,474
(751,607
)
(751,607
)
3,800
(3,800
)
(79,975
)
(10,994
)
90,969
(115,778
)
(115,778
)
1,194
1,194
9,162
9,162
6,776
(84,048
)
(10,399
)
87,169
(502
)
4,067
(6,035
)
317
(1,651
)
200,066
11,039
211,105
$
204,133
$
5,004
$
317
$
$
209,454
F-70
Table of Contents
Year Ended December 31, 2008
Subsidiary
Consolidated
Parent/
Subsidiary
Non-
Consolidating
Vector Group
Issuer
Guarantors
Guarantors
Adjustments
Ltd.
$
82,821
$
125,279
$
7,415
$
(124,250
)
$
91,265
452
452
(6,411
)
(6,411
)
8,334
8,334
(51
)
(51
)
(21,704
)
(21,704
)
(4,250
)
(4,250
)
(22,000
)
(22,000
)
19,393
19,393
(500
)
(438
)
(938
)
(1,465
)
1,054
(411
)
(21,747
)
21,747
(6,309
)
(6,309
)
(26,039
)
(5,241
)
(24,362
)
21,747
(33,895
)
2,831
2,831
(6,329
)
(6,329
)
(137
)
(137
)
531,251
531,251
(526,518
)
(526,518
)
4,800
16,947
(21,747
)
(124,250
)
124,250
(103,870
)
(103,870
)
86
86
18,304
18,304
(85,617
)
(118,215
)
16,947
102,503
(84,382
)
(28,835
)
1,823
(27,012
)
228,901
9,216
238,117
$
200,066
$
11,039
$
$
$
211,105
F-71
Table of Contents
Additions
Balance at
Charged to
Balance
Beginning
Costs and
at End
Description
of Period
Expenses
Deductions
of Period
$
154
$
78
$
34
$
198
201
25,820
25,981
40
9,509
1,432
651
10,290
4,337
3,363
3,465
4,235
$
14,201
$
30,693
$
30,131
$
14,763
$
51
$
105
$
2
$
154
203
19,901
19,903
201
15,939
6,430
9,509
4,000
3,618
3,281
4,337
$
20,193
$
23,624
$
29,616
$
14,201
$
51
$
$
$
51
69
14,797
14,662
204
16,835
896
15,939
3,700
2,897
2,597
4,000
$
20,655
$
17,694
$
18,155
$
20,194
F-72
By: | /s/ John R. Long | |||
John R. Long | ||||
Vice President, General Counsel and Secretary | ||||
By: | /s/ Ronald J. Bernstein | |
Ronald J. Bernstein |
By: | /s/ Richard J. Lampen | |
Richard J. Lampen
Executive Vice President |
VGR Holding LLC | Delaware | |||
Liggett Group LLC | Delaware | |||
Vector Tobacco Inc. | Virginia | |||
Liggett Vector Brands Inc. | Delaware | |||
New Valley LLC | Delaware |
2
3
4
5
6
7
8
9
10
11
12
Page(s) | ||||
|
||||
Report of Independent Registered Public Accounting Firm
|
1 | |||
Consolidated Financial Statements
|
||||
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
2-3 | |||
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
|
4 | |||
Consolidated Statement of Members Investment
|
5 | |||
Consolidated Statements of Cash Flows
|
6-7 | |||
Notes to Consolidated Financial Statements
|
8-43 | |||
Consolidated Financial Statement Schedule
|
||||
Schedule II Valuation and Qualifying Accounts
|
44 |
1
2010 | 2009 | |||||||
Assets
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 5 | $ | 9 | ||||
Accounts receivable
|
||||||||
Trade, less allowances of $230 and $336, respectively
|
1,683 | 7,480 | ||||||
Related parties
|
14,303 | 10,905 | ||||||
Other
|
443 | 980 | ||||||
Inventories
|
101,715 | 92,703 | ||||||
Restricted assets
|
2,069 | 3,138 | ||||||
Tax receivable from parent
|
| 26,147 | ||||||
Deferred taxes
|
3,702 | 573 | ||||||
Other current assets
|
1,284 | 1,080 | ||||||
|
||||||||
Total current assets
|
125,204 | 143,015 | ||||||
Property, plant and equipment, net
|
52,713 | 37,916 | ||||||
Prepaid pension costs
|
13,935 | 8,994 | ||||||
Restricted assets
|
5,883 | 2,012 | ||||||
Due from related parties
|
| 1,254 | ||||||
Deferred taxes
|
531 | 975 | ||||||
Other assets
|
13,459 | 13,091 | ||||||
|
||||||||
Total assets
|
$ | 211,725 | $ | 207,257 | ||||
|
2
2010 | 2009 | |||||||
|
||||||||
Liabilities and Members Investment
|
||||||||
Current liabilities
|
||||||||
Current portion of long-term debt
|
$ | 4,367 | $ | 2,551 | ||||
Revolving credit facility
|
35,710 | 17,382 | ||||||
Current portion of pension and post-retirement liabilities
|
1,014 | 1,029 | ||||||
Accounts payable trade
|
6,375 | 2,462 | ||||||
Accrued promotional expenses
|
13,811 | 12,099 | ||||||
Income taxes payable
|
19,675 | 266 | ||||||
Other accrued taxes, principally excise taxes
|
18,507 | 24,088 | ||||||
Estimated allowance for sales returns
|
3,850 | 3,330 | ||||||
Settlement accruals
|
45,448 | 16,080 | ||||||
Deferred taxes
|
2,275 | 767 | ||||||
Other current liabilities
|
1,718 | 1,379 | ||||||
|
||||||||
Total current liabilities
|
152,750 | 81,433 | ||||||
|
||||||||
Long-term debt, less current portion
|
20,885 | 9,056 | ||||||
Non-current employee benefits
|
16,279 | 19,804 | ||||||
Deferred income taxes
|
1,659 | 1,387 | ||||||
Other long-term liabilities
|
26,216 | 19,424 | ||||||
|
||||||||
Total liabilities
|
217,789 | 131,104 | ||||||
|
||||||||
|
||||||||
Commitments and contingencies (Note 10)
|
||||||||
|
||||||||
Members Investment
|
||||||||
Contributed capital
|
10,346 | 67,088 | ||||||
Accumulated other comprehensive loss
|
(16,410 | ) | (21,749 | ) | ||||
Retained earnings
|
| 30,814 | ||||||
|
||||||||
Total members investment
|
(6,064 | ) | 76,153 | |||||
|
||||||||
|
$ | 211,725 | $ | 207,257 | ||||
|
3
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Revenues *
|
$ | 957,222 | $ | 762,208 | $ | 529,091 | ||||||
|
||||||||||||
Expenses
|
||||||||||||
Cost of goods sold
|
766,662 | 563,773 | 326,682 | |||||||||
Operating, selling, administrative and
general expenses
|
59,798 | 52,827 | 51,147 | |||||||||
Management fees paid to Vector Group Ltd.
|
8,020 | 7,723 | 7,439 | |||||||||
Net (gain)/loss on sale of assets
|
80 | 128 | (335 | ) | ||||||||
Legal
judgment and settlement charges
|
16,161 | 0 | 0 | |||||||||
Gain on sale of trademarks
|
| (5,000 | ) | | ||||||||
Restructuring and impairment charges
|
| | (35 | ) | ||||||||
|
||||||||||||
|
||||||||||||
Operating income
|
106,501 | 142,757 | 144,193 | |||||||||
|
||||||||||||
Other income (expenses)
|
||||||||||||
Interest income
|
36 | 102 | 848 | |||||||||
Interest expense
|
(1,040 | ) | (802 | ) | (1,595 | ) | ||||||
|
||||||||||||
Income before income taxes
|
105,497 | 142,057 | 143,446 | |||||||||
Income tax provision
|
(41,103 | ) | (52,643 | ) | (55,074 | ) | ||||||
|
||||||||||||
Net income
|
$ | 64,394 | $ | 89,414 | $ | 88,372 | ||||||
|
* | Revenues and cost of goods sold include excise taxes of $484,115, $325,407, and $145,958 for the years ended December 31, 2010, 2009, and 2008, respectively. |
4
Accumulated | ||||||||||||||||
Other | Retained | |||||||||||||||
Contributed | Comprehensive | Earnings/ | ||||||||||||||
Capital | Income (Loss) | (Deficit) | Total | |||||||||||||
|
||||||||||||||||
Balance at January 1, 2008
|
$ | 69,453 | $ | 3,528 | $ | 11,373 | $ | 84,354 | ||||||||
Net income
|
| | 88,372 | 88,372 | ||||||||||||
Change in pension related amounts, net of taxes
|
| (32,813 | ) | | (32,813 | ) | ||||||||||
Change in fair value of forward contracts, net of taxes
|
| 35 | | 35 | ||||||||||||
|
||||||||||||||||
Total comprehensive income
|
| | | 55,594 | ||||||||||||
|
||||||||||||||||
Adoption of SFAS No. 158 measurement date
|
| (11 | ) | 740 | 729 | |||||||||||
Distributions
|
(2,365 | ) | | (100,485 | ) | (102,850 | ) | |||||||||
|
||||||||||||||||
|
||||||||||||||||
Balance at December 31, 2008
|
67,088 | (29,261 | ) | | 37,827 | |||||||||||
|
||||||||||||||||
|
||||||||||||||||
Net income
|
| | 89,414 | 89,414 | ||||||||||||
Change in pension related amounts, net of taxes
|
| 7,476 | | 7,476 | ||||||||||||
Change in fair value of forward contracts, net of taxes
|
| 36 | | 36 | ||||||||||||
|
||||||||||||||||
Total comprehensive income
|
| | | 96,926 | ||||||||||||
|
||||||||||||||||
Distributions
|
| | (58,600 | ) | (58,600 | ) | ||||||||||
|
||||||||||||||||
|
||||||||||||||||
Balance at December 31, 2009
|
67,088 | (21,749 | ) | 30,814 | 76,153 | |||||||||||
|
||||||||||||||||
|
||||||||||||||||
Net income
|
| | 64,394 | 64,394 | ||||||||||||
Change in pension related amounts, net of taxes
|
| 5,290 | | 5,290 | ||||||||||||
Change in fair value of forward contracts, net of taxes
|
| 49 | | 49 | ||||||||||||
|
||||||||||||||||
Total comprehensive income
|
| | | 69,733 | ||||||||||||
|
||||||||||||||||
Distributions
|
(56,742 | ) | | (95,208 | ) | (151,950 | ) | |||||||||
|
||||||||||||||||
|
||||||||||||||||
Balance at December 31, 2010
|
$ | 10,346 | $ | (16,410 | ) | $ | | $ | (6,064 | ) | ||||||
|
5
2010 | 2009 | 2008 | ||||||||||
Cash flows from operating activities
|
||||||||||||
Net income
|
$ | 64,394 | $ | 89,414 | $ | 88,372 | ||||||
Adjustments to reconcile net income to net cash provided by
operating activities
|
||||||||||||
Depreciation and amortization
|
7,475 | 7,170 | 6,766 | |||||||||
Deferred income taxes
|
(916 | ) | (9,554 | ) | (3,684 | ) | ||||||
(Gain) loss on sale of assets
|
76 | 127 | (335 | ) | ||||||||
Restructuring charges, changes in estimates
|
| | (35 | ) | ||||||||
Cash payments on restructuring liabilities
|
| (110 | ) | (88 | ) | |||||||
Changes in assets and liabilities
|
||||||||||||
Trade accounts receivable
|
5,797 | 1,590 | (6,344 | ) | ||||||||
Related party receivable
|
24,003 | 1,409 | (4,927 | ) | ||||||||
Other receivables
|
537 | (306 | ) | (390 | ) | |||||||
Inventories
|
(9,012 | ) | (4,932 | ) | (5,344 | ) | ||||||
Income taxes payable
|
19,420 | (37,719 | ) | (258 | ) | |||||||
Other assets
|
(360 | ) | (1,537 | ) | (1,145 | ) | ||||||
Accounts payable, trade
|
3,401 | (1,085 | ) | (1,085 | ) | |||||||
Accrued expenses
|
26,357 | 15,869 | 12,301 | |||||||||
Employee benefits
|
(3,191 | ) | (2,012 | ) | 15,893 | |||||||
Other long-term liabilities
|
6,792 | 6,595 | 4,669 | |||||||||
Change in book overdraft
|
512 | (63 | ) | 198 | ||||||||
|
||||||||||||
Net cash provided by operating activities
|
145,285 | 64,856 | 104,564 | |||||||||
|
||||||||||||
Cash flows from investing activities
|
||||||||||||
Proceeds from sale of property, plant and equipment
|
187 | 70 | 404 | |||||||||
(Increase) decrease in restricted assets
|
(2,802 | ) | 1,678 | 1,054 | ||||||||
Increase in cash surrender value of life insurance policies
|
(261 | ) | (256 | ) | (230 | ) | ||||||
Capital expenditures
|
(22,436 | ) | (2,593 | ) | (5,453 | ) | ||||||
|
||||||||||||
Net cash used in investing activities
|
(25,312 | ) | (1,101 | ) | (4,225 | ) | ||||||
|
6
2010 | 2009 | 2008 | ||||||||||
Cash flows from financing activities
|
||||||||||||
Repayments of debt
|
(8,629 | ) | (3,990 | ) | (4,631 | ) | ||||||
Proceeds from the issuance of debt
|
22,274 | | 2,745 | |||||||||
Borrowings under revolving credit facility
|
1,034,894 | 749,476 | 531,251 | |||||||||
Repayments under revolving credit facility
|
(1,016,566 | ) | (751,609 | ) | (526,518 | ) | ||||||
Distributions to Parent
|
(151,950 | ) | (58,600 | ) | (102,850 | ) | ||||||
|
||||||||||||
Net cash used in financing activities
|
(119,977 | ) | (64,723 | ) | (100,003 | ) | ||||||
|
||||||||||||
Net increase (decrease) in cash and cash equivalents
|
(4 | ) | (968 | ) | 336 | |||||||
|
||||||||||||
Cash and cash equivalents
|
||||||||||||
Beginning of year
|
9 | 977 | 641 | |||||||||
|
||||||||||||
End of year
|
$ | 5 | $ | 9 | $ | 977 | ||||||
|
||||||||||||
|
||||||||||||
Supplemental disclosures of cash flow information
|
||||||||||||
Cash payments during the period for
|
||||||||||||
Interest
|
$ | 737 | $ | 804 | $ | 1,595 | ||||||
|
||||||||||||
Income taxes
|
$ | 1 | $ | 420 | $ | 39 | ||||||
|
||||||||||||
Tax sharing payments to Parent
|
$ | | $ | 104,050 | $ | 39,100 | ||||||
|
| Liggett recorded other comprehensive loss of ($32,813) (net of taxes) in 2008 and $5,290 (net of taxes) and $7,476 (net of taxes) in other comprehensive income during 2010 and 2009, respectively, in relation to certain of its pension plans (Note 5). In 2010, 2009 and 2008, Liggett recorded $49 (net of taxes), $36 (net of taxes), and $35 (net of taxes), respectively, in comprehensive income in relation to the change in fair value of forward contracts. |
7
1. | Basis of Presentation | |
Liggett Group LLC (Liggett or the Company) is a wholly-owned subsidiary of VGR Holding LLC (VGR), all of whose membership interests are owned by Vector Group Ltd. (Vector or Parent). Liggett is engaged primarily in the manufacture and sale of discount cigarettes, principally in the United States. Certain management and administrative functions are performed by affiliates (Note 11). | ||
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the consolidated financial statements included herein may not necessarily reflect the Companys results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had the Company been a stand-alone company during the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. | ||
Liggett Vector Brands Inc. (Liggett Vector Brands), a company related through common ownership, coordinates and executes the sales, marketing, administration and manufacturing efforts along with certain support functions for all of Vectors tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of its sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Liggett. | ||
Vector and VGR are holding companies and as a result do not have any operating activities that generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR and its other subsidiaries and investments and VGR relies on distributions from its other subsidiaries, including Liggett, in order to fund its operations and meet its obligations. Vector has certain debt outstanding which require interest and principal payments over the terms of such debt. Interest and principal to service the debt is expected to be funded by Vectors cash and cash equivalents, investments, the operations of Vectors subsidiaries, including Liggett, and proceeds, if any, from Vectors future financings. During 2010, 2009, and 2008, Liggett made distributions of $151,950, $58,600, and $102,850, respectively, to VGR. VGR must redeem $11,000 of its outstanding 3.875% Variable Interest Senior Convertible Debentures by June 15, 2011. | ||
The Company has evaluated events that occurred subsequent to December 31, 2010, through the financial statement issue date of February 25, 2011 and determined that there were no recordable or reportable subsequent events. | ||
11% Senior Secured Notes due 2015 Vector | ||
Vector has outstanding $415,000 principal amount of its 11% Senior Secured Notes due 2015 (the Senior Secured Notes). The Senior Secured Notes were sold in August 2007 ($165,000), September 2009 ($85,000), April 2010 ($75,000) and December 2010 ($90,000) in private offerings to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. | ||
In May 2008 and June 2010, Vector completed offers to exchange the Senior Secured Notes then outstanding for an equal amount of newly issued 11% Senior Secured Notes due 2015. The new Senior Secured Notes have substantially the same terms as the original Notes, except that the new Senior Secured Notes have been registered under the Securities Act. Vector agreed to consummate a registered exchange offer for the additional Senior Secured Notes issued in December 2010 within 360 days after the date of their initial issuance. If Vector fails to timely comply with its registration obligations, it will be required to pay additional interest on these notes until it complies. | ||
The Senior Secured Notes pay interest on a semi-annual basis at a rate of 11% per year and mature on August 15, 2015. Vector may redeem some or all of the Senior Secured Notes at any time prior |
8
to August 15, 2011 at a make-whole redemption price. On or after August 15, 2011 Vector may redeem some or all of the Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest and liquidated damages, if any, to the redemption date. In the event of a change of control, as defined in the indenture governing the Senior Secured Notes, each holder of the Senior Secured Notes may require Vector to repurchase some or all of its Senior Secured Notes at a repurchase price equal to 101% of their aggregate principal amount plus accrued and unpaid interest and liquidated damages, if any to the date of purchase. | ||
The Senior Secured Notes are fully and unconditionally guaranteed on a joint and several basis by all of the 100% owned domestic subsidiaries of the Company that are engaged in the conduct of the Companys cigarette businesses, including Liggett. Liggetts stock has been pledged as collateral for the guarantee of the Senior Secured Notes. Liggetts consolidated balance sheet, statement of operations and statement of stockholders equity (deficit) as of December 31, 2010 and 2009 and for each of the three years in the period ended December 31, 2010 do not reflect any accounts related to these notes as the debt is not acquisition related. | ||
Liggetts cash flows from operations may be utilized to fund the interest and debt obligation of the Senior Secured Notes via distributions by Liggett to Vector. | ||
Additional Parent Company Notes | ||
As of December 31, 2010, Vector has debt with a net amount of approximately $81,404 (face amount $267,530) in addition to the Senior Secured Notes previously discussed. This $81,404 is not reflected in Liggetts consolidated financial statements as these obligations are not collateralized by the Liggett assets nor has Liggett guaranteed these obligations. It is anticipated that the majority of the payments on this $81,404 will be funded by Liggetts operations. | ||
In addition to the Senior Secured Notes, the Company may have to fund certain deferred tax liabilities of Vector (Note 6). | ||
General Corporate Expenses | ||
General corporate expense allocations represent costs related to corporate functions such as executive oversight, risk management, information technology, accounting, legal, investor relations, human resources, tax, other services and employee benefits and incentives Vector provides to the Company. The allocations are based on a reasonable estimation of Vectors overhead expenses based on the relative specific identification and the relative percentage of the Companys revenues and headcount to Vectors total cost. All of these allocations are reflected in management fees paid to Vector in the Companys consolidated statements of operations of $8,020, $7,723 and $7,439 in 2010, 2009 and 2008, respectively. | ||
The Company and Vector considered these general corporate expense allocations to be a reasonable reflection of the utilization of services provided. The allocations may not, however, reflect the expense the Company would have incurred as a stand-alone company. Actual costs which may have been incurred if the Company had been a stand-alone company in 2010, 2009 and 2008 would depend on a number of factors, including how the Company chose to organize itself, what if any functions were outsourced or performed by Company employees and strategic decisions made in areas such as information technology systems and infrastructure. However, the Company currently does not believe the difference between the cost allocations from Vector and the costs the Company would have incurred on a stand-alone basis would have a material impact on the Companys statements of operations, balance sheets or statements of cash flows for 2010, 2009 and 2008. |
9
2. | Summary of Significant Accounting Policies | |
Principles of Consolidation | ||
The consolidated financial statements include the accounts of Liggett and its wholly-owned subsidiaries, Eve Holdings Inc., 100 Maple LLC and Liggett & Myers Holdings Inc. All significant intercompany balances and transactions have been eliminated. | ||
Estimates and Assumptions | ||
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at December 31, 2010 and 2009 and the reported amounts of revenues and expenses during the three years ended December 31, 2010, 2009 and 2008, respectively. Significant estimates subject to material changes in the near term include restructuring and impairment charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales returns and allowances, actuarial assumptions of pension plans, settlement accruals including Master Settlement Agreement (MSA) liabilities, and litigation and defense costs. Actual results could differ from those estimates. | ||
Cash and Cash Equivalents | ||
For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in banks and cash equivalents, comprised of short-term investments which have an original maturity of 90 days or less. The carrying value of cash and cash equivalents, restricted assets and short-term loans approximate their fair value. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) insure these balances, up to $250 and $500, respectively. The carrying amount of bank deposits, including amounts classified as cash and cash equivalents, were approximately $5 and $9 at December 31, 2010 and 2009, respectively. All bank deposits at December 31, 2010 and December 31, 2009 are insured by the FDIC. | ||
Accounts Receivable | ||
Accounts receivable-trade are recorded at their net realizable value. The allowance for doubtful accounts and cash discounts was $230 and $336 at December 31, 2010 and 2009, respectively. | ||
Inventories | ||
Tobacco inventories are stated at the lower of cost or market with cost determined using the last-in, first-out method. Although portions of leaf tobacco inventories may not be used or sold within one year because of the time required for aging, they are included in current assets, which is common practice in the cigarette industry. It is not practicable to determine the amount that will not be used or sold within one year. | ||
Restricted Assets | ||
Restricted assets of $2,069 at December 31, 2010 were classified as current assets. This balance consisted of legal bonds posted in connection with ongoing litigation. Long-term restricted assets of $5,883 at December 31, 2010 consisted of deposits associated with financed equipment and legal bonds posted in connection with ongoing litigation. |
10
Restricted assets of $3,138 at December 31, 2009 were classified as current assets. This balance consisted of legal bonds posted in connection with ongoing litigation. Long-term restricted assets of $2,012 at December 31, 2009 consisted of deposits associated with financed equipment. | ||
Property, Plant and Equipment | ||
Property, plant and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets which are 20 years for buildings and four to ten years for machinery and equipment. | ||
Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and betterments are capitalized. The cost and related accumulated depreciation of property, plant and equipment are removed from the accounts upon retirement or other disposition and any resulting gain or loss is reflected in operations. | ||
The Company reviews long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset may not be recoverable. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of property, plant and equipment against their related future undiscounted cash flows. If the carrying value is greater than such cash flows, then impairment is deemed to exist. The amount of any impairment is determined by comparing the long-lived assets carrying value against its fair value, which is determined using discounted future cash flows. | ||
Other Assets | ||
Included in other current assets are point-of-sale materials of $381 and $304 as of December 31, 2010 and 2009, respectively. The remaining balances of $903 and $776 at December 31, 2010 and 2009, respectively, relate to prepaid expenses and deposits. | ||
Other non-current assets include spare parts for property, plant and equipment of $5,057 and $4,744, net of reserves of $1,236 and $1,139, as of December 31, 2010 and 2009, respectively. | ||
Deferred financing charges of $56 and $104 as of December 31, 2010 and 2009, respectively, relate to the Companys debt agreement with Wells Fargo and have been recorded as other assets. The Company recognized amortization expense of $48 in 2010, 2009, and 2008 related to deferred finance charges | ||
The remaining balances of $8,346 and $8,243 at December 31, 2010 and 2009, respectively, relate primarily to other receivables, and pre-paids. | ||
Revenue Recognition | ||
Revenues from sales are recognized upon the shipment of finished goods when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sale price is determinable and collectibility is reasonably assured. The Company provides an allowance for expected sales returns, net of any related inventory cost recoveries. Certain sales incentives, including buydowns, are classified as reductions of net sales. The Company includes federal excise taxes in revenues and cost of goods sold. Such revenues and cost of goods sold totaled $484,115, $325,407 and $145,958 for the years ended December 31, 2010, 2009 and 2008, respectively. The large increase in 2009 from 2008 was due to the $6.17 per carton increase implemented on April 1, 2009. Since the Companys line of business is tobacco, the Companys |
11
financial position and its results of operations and cash flows have been and could continue to be materially adversely affected by significant unit sales volume declines, litigation and defense costs, increased tobacco costs or reductions in the selling price of cigarettes in the near term. | ||
Shipping and Handling Fees and Costs | ||
Shipping and handling fees related to sales transactions are not billed to customers nor recorded as sales revenue. Shipping and handling costs, which were $4,784, $3,487 and $3,914 for 2010, 2009 and 2008, respectively, are recorded in selling, general and administrative expenses. | ||
Advertising Costs | ||
Advertising and related agency costs are expensed as incurred and were $2,966, $3,145 and $3,255 for the years ended December 31, 2010, 2009 and 2008, respectively. These costs are recorded as selling, general and administrative expenses. | ||
Research and Development Costs | ||
Research and development costs are expensed as incurred, and were $1,058, $981 and $1,028 for the years ended December 31, 2010, 2009 and 2008, respectively. | ||
Stock-Based Compensation | ||
The Company, through an affiliate, accounts for stock compensation plans by measuring compensation cost for share-based payments at fair value. | ||
Employee Benefits | ||
The Company sponsors a postretirement benefit plan and records an actuarially determined liability and charges operations for the estimated cost of postretirement benefits for current employees and retirees. | ||
The cost of providing retiree pension benefits, health care and life insurance benefits is actuarially determined and accrued over the service period of the active employee group. The funded status of each defined benefit pension plan, retiree health care and other postretirement benefit plans and postemployment benefit plans is recognized on the balance sheet. The measurement date for determining the funded status of the plans is December 31, 2010 and 2009. (See Note 5.) | ||
Income Taxes | ||
The Company recognizes the financial statement impact of a tax position when it is more likely than not that the position will be sustained upon examination. If the tax position meets the more-likely-than-not recognition threshold, the tax effect is recognized at the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement. Any liabilities created for unrecognized deferred tax benefits are presented as a liability and not combined with deferred tax liabilities or assets. | ||
Deferred taxes reflect the impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes as well as tax credit carryforwards and loss carryforwards. These deferred taxes are measured by applying currently enacted tax rates. A valuation allowance reduces deferred tax assets when it is |
12
deemed more likely than not that future taxable income will be insufficient to realize some portion or all of the deferred tax assets. | ||
Liggetts U.S. income tax provision and related deferred income tax amounts are determined as if the Company filed tax returns on a standalone basis. The Companys entities currently join in the filing of a consolidated U.S. tax return with Vector and its other U.S. subsidiaries. | ||
Contingencies | ||
The Company records product liability legal expenses and other litigation costs as selling, general and administrative expenses as those costs are incurred. As discussed in Note 10, legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against Liggett. | ||
The Company records provisions in its consolidated financial statements for pending litigation when it is determined that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in Note 10, (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome in any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred. Litigation is subject to many uncertainties, and it is possible that the Companys consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation. | ||
Distributions and Dividends on Common Stock | ||
The Company records distributions on its common stock as dividends in its consolidated statement of members investment to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a reduction to contributed capital. | ||
Comprehensive Income | ||
Other comprehensive income is a component of members investment and relates to pension related adjustments and the change in the estimated fair value of forward contracts. The Companys comprehensive income was $69,733, $96,926, and $55,594 for the years ended December 31, 2010, 2009, and 2008, respectively. | ||
The components of accumulated other comprehensive income (loss), net of taxes, were as follows at December 31: |
2010 | 2009 | |||||||
|
||||||||
Forward contracts adjustment, net of taxes of $139
and $165, respectively
|
$ | (204 | ) | $ | (253 | ) | ||
Pension-related amounts, net of taxes of $9,518 and
$13,038, respectively
|
(16,206 | ) | (21,496 | ) | ||||
|
||||||||
Accumulated other comprehensive loss
|
$ | (16,410 | ) | $ | (21,749 | ) | ||
|
13
This forward contract relates to a prior contract no longer open at December 31, 2010 and 2009, respectively. It is being amortized over the life of the fixed asset originally associated with the contract. | ||
Fair Value of Financial Instruments | ||
The carrying amount of borrowings outstanding under the variable rate revolving credit facility and other long-term debt is a reasonable estimate of fair value, based upon estimated current borrowing rates for loans with similar terms and maturities. The estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values. |
December 31, | December 31, | |||||||||||||||
2010 | 2009 | |||||||||||||||
|
Carrying | Fair | Carrying | Fair | ||||||||||||
|
Amount | Value | Amount | Value | ||||||||||||
Financial assets
|
||||||||||||||||
Cash and cash equivalents
|
$ | 5 | $ | 5 | $ | 9 | $ | 9 | ||||||||
Restricted assets
|
7,952 | 7,952 | 5,150 | 5,150 | ||||||||||||
Financial liabilities
|
||||||||||||||||
Notes payable and long-term
debt
|
$ | 60,962 | $ | 60,962 | $ | 28,989 | $ | 29,225 |
14
New Accounting Pronouncements |
In January 2010, the Financial Accounting Standards Board (FASB) issued authoritative guidance intended to improve disclosure about fair value measurements. The guidance requires entities to disclose significant transfers in and out of fair value hierarchy levels and the reasons for the transfers and to present information about purchases, sales, issuances, and settlements separately in the reconciliation of fair value measurements using significant unobservable inputs (Level 3). Additionally, the guidance clarifies that a reporting entity should provide fair value measurements for each class of assets and liabilities and disclose the inputs and valuation techniques used for fair value measurements using significant other observable inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is effective for interim and annual periods beginning after December 15, 2009 except for the disclosure about purchases, sales, issuances and settlements in the Level 3 reconciliation, which will be effective for annual periods beginning after December 15, 2010. The Company adopted this authoritative guidance, with the exception of the disclosures about purchases, sales, issuances and settlements in the Level 3 reconciliation. The adoption of this guidance did not impact the Companys 2010 consolidated financial statements. The remaining disclosures will be added to the Companys future filings when applicable | ||
Concentrations of Credit Risk | ||
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. | ||
Liggetts customers are primarily candy and tobacco distributors, the military and large grocery, drug and convenience store chains. No single retail customer represented more than 10% of Liggetts revenues in 2010, 2009 and 2008. Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of customers, located primarily throughout the United States, comprising Liggetts customer base. Ongoing credit evaluations of customers financial condition are performed and, generally, no collateral is required. Liggett maintains reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded managements expectations. | ||
3. | Inventories | |
Inventories consist of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Leaf tobacco
|
$ | 54,479 | $ | 48,613 | ||||
Other raw materials
|
4,074 | 3,497 | ||||||
Work-in-process
|
2,067 | 2,388 | ||||||
Finished goods
|
62,375 | 53,826 | ||||||
|
||||||||
Inventories at current cost
|
122,995 | 108,324 | ||||||
LIFO adjustment
|
(21,280 | ) | (15,621 | ) | ||||
|
||||||||
|
$ | 101,715 | $ | 92,703 | ||||
|
15
The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated requirements and are at prices, including carrying costs, established at the date of the commitment. Liggett had leaf tobacco purchase commitments of approximately $41,896 at December 31, 2010. During 2007, the Company entered into a single source supply agreement for fire safe cigarette paper through 2012. | |||
The Company capitalizes the incremental prepaid cost of the Master Settlement Agreement in ending inventory. The prepaid cost of MSA was $14,627 and $11,909 at December 31, 2010 and 2009, respectively. MSA expense was decreased by $648 in 2010 for 2009 and increased by $598 in 2009 for 2008 as a result of a change in estimate to the MSA assessment. | |||
4. | Property, Plant and Equipment | ||
Property, plant and equipment consists of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Land and land improvements
|
$ | 1,418 | $ | 1,418 | ||||
Buildings
|
13,722 | 13,722 | ||||||
Machinery and equipment
|
100,517 | 80,712 | ||||||
|
||||||||
Property, plant and equipment
|
115,657 | 95,852 | ||||||
Less accumulated depreciation
|
(62,944 | ) | (57,936 | ) | ||||
|
||||||||
Property, plant and equipment, net
|
$ | 52,713 | $ | 37,916 | ||||
|
Depreciation expense for the years ended December 31, 2010, 2009, and 2008 was $7,377, $7,122, and $6,718, respectively. Future machinery and equipment purchase commitments were $2,726 at December 31, 2010. | |||
5. | Employee Benefits Plans | ||
Defined Benefit Plans | |||
Liggett sponsors three defined benefit pension plans (two qualified and one non-qualified) covering virtually all individuals who were employed by Liggett on a full-time basis prior to 1994. Future accruals of benefits under these three defined benefit plans were frozen between 1993 and 1995. These benefit plans provide pension benefits for eligible employees based primarily on their compensation and length of service. Contributions are made to the pension plans in amounts necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974. The plans assets and benefit obligations were measured at December 31, 2010 and 2009. |
16
Postretirement Medical and Life Plans | |||
The Company provides certain postretirement medical and life insurance benefits to certain employees. Substantially all manufacturing employees as of December 31, 2010 are eligible for postretirement medical benefits if they reach retirement age while working for Liggett or certain affiliates. Retirees are required to fund 100% of participant medical premiums and, pursuant to union contracts, Liggett reimburses approximately 375 hourly retirees, who retired prior to 1991, for Medicare Part B premiums. In addition, an affiliate provides life insurance benefits to approximately 210 active employees and 465 retirees who reach retirement age and are eligible to receive benefits under one of the Companys defined benefit pension plans. The Companys postretirement liabilities are comprised of Medicare Part B and life insurance premiums. | |||
Computation of Defined Benefit and Postretirement Benefit Plan Liabilities | |||
The funded status of each defined pension benefit plan, retiree health care and other postretirement benefit plans and postemployment benefit plans is recognized on the Companys consolidated balance sheet. Each overfunded plan is recognized as an asset and each underfunded plan is recognized as a liability. The initial impact of the standard due to unrecognized prior service costs or credit and net actuarial gains or losses as well as subsequent changes in the funded status is recognized as a component of accumulated comprehensive income (loss) in the Companys consolidated statement of members investment. | |||
The following table summarizes amounts in accumulated other comprehensive (income) loss that are expected to be recognized as components of net periodic benefit cost (credit) for the year ending December 31, 2011. |
Defined | ||||||||||||
Benefit | Post - | |||||||||||
Pension | Retirement | |||||||||||
Plan | Plans | Total | ||||||||||
|
||||||||||||
Actuarial
loss (gain)
|
$ | 789 | $ | (88 | ) | $ | 701 | |||||
|
17
Other | ||||||||||||||||
Pension Benefits | Postretirement Benefits | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Change in benefit obligation
|
||||||||||||||||
Benefit obligation at January 1
|
$ | (127,600 | ) | $ | (123,850 | ) | $ | (9,405 | ) | $ | (8,743 | ) | ||||
|
||||||||||||||||
Service cost
|
(825 | ) | (838 | ) | (13 | ) | (15 | ) | ||||||||
Interest cost
|
(6,951 | ) | (7,895 | ) | (521 | ) | (566 | ) | ||||||||
Benefits paid (including expenses)
|
12,265 | 12,551 | 574 | 596 | ||||||||||||
Time contractual termination benefits
|
| | | | ||||||||||||
Actuarial gain/(loss)
|
(3,394 | ) | (7,568 | ) | (485 | ) | (677 | ) | ||||||||
|
||||||||||||||||
Benefit obligation at December 31
|
$ | (126,505 | ) | $ | (127,600 | ) | $ | (9,850 | ) | $ | (9,405 | ) | ||||
|
||||||||||||||||
Change in plan assets
|
||||||||||||||||
Fair value of plan assets at January 1
|
$ | 125,167 | $ | 111,266 | $ | | $ | | ||||||||
|
||||||||||||||||
Actual return on plan assets
|
19,731 | 26,087 | | | ||||||||||||
Contributions
|
361 | 365 | 574 | 596 | ||||||||||||
Benefits paid (including expenses)
|
(12,265 | ) | (12,551 | ) | (574 | ) | (596 | ) | ||||||||
|
||||||||||||||||
Fair value of plan assets at December 31
|
$ | 132,994 | $ | 125,167 | $ | | $ | | ||||||||
|
||||||||||||||||
Funded status at December 31
|
$ | 6,489 | $ | (2,433 | ) | $ | (9,850 | ) | $ | (9,406 | ) | |||||
|
||||||||||||||||
Amounts recognized in the balance sheet:
|
||||||||||||||||
Prepaid pension cost
|
$ | 13,935 | $ | 8,994 | $ | | $ | | ||||||||
Other accrued expenses
|
(352 | ) | (357 | ) | (665 | ) | (680 | ) | ||||||||
Non-current employee benefit liabilities
|
(7,094 | ) | (11,070 | ) | (9,185 | ) | (8,726 | ) | ||||||||
|
||||||||||||||||
Net amounts recognized
|
$ | 6,489 | $ | (2,433 | ) | $ | (9,850 | ) | $ | (9,406 | ) | |||||
|
Other | ||||||||||||||||||||||||
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Actuarial assumptions
|
||||||||||||||||||||||||
Discount rates benefit obligation
|
5.25 | % | 5.75 | % | 6.75 | % | 5.25 | % | 5.75 | % | 6.75 | % | ||||||||||||
Discount rates service cost
|
5.75 | % | 6.75 | % | 6.25 | % | 5.75 | % | 6.75 | % | 6.25 | % | ||||||||||||
Assumed rates of return on invested assets
|
7.00 | % | 7.50 | % | 7.50 | % | | | | |||||||||||||||
Salary increase assumptions
|
N/A | N/A | N/A | 3.00 | % | 3.00 | % | 3.00 | % |
18
Other | ||||||||||||||||||||||||
Pension Benefits | Postretirement Benefits | |||||||||||||||||||||||
2010 | 2009 | 2008 | 2010 | 2009 | 2008 | |||||||||||||||||||
Service cost benefits earned during the period
|
$ | 825 | $ | 838 | $ | 808 | * | $ | 13 | $ | 15 | $ | 15 | |||||||||||
Interest cost on projected benefit obligation
|
6,951 | 7,895 | 7,862 | 521 | 567 | 591 | ||||||||||||||||||
Expected return on assets
|
(8,271 | ) | (7,817 | ) | (12,145 | ) | | | | |||||||||||||||
Amortization of net loss (gain)
|
1,358 | 2,136 | 101 | (130 | ) | (163 | ) | (180 | ) | |||||||||||||||
Net (income) expense | $ | 863 | $ | 3,052 | $ | (3,374 | ) | $ | 405 | $ | 419 | $ | 426 | |||||||||||
* | $500 and $350 of this service cost amount represents the expected administrative expenses of the salaried and hourly pension plans in 2010 and 2009 respectively. |
As of December 31, 2010, current year accumulated other comprehensive income (loss), before income taxes, consist of the following: |
Defined | ||||||||||||
Benefit | Post- | |||||||||||
Pension | Retirement | |||||||||||
Plans | Benefits | Total | ||||||||||
|
||||||||||||
Prior year accumulated other comprehensive income (loss)
|
$ | (35,536 | ) | $ | 1,003 | $ | (34,533 | ) | ||||
Amortization of gain (loss)
|
1,358 | (130 | ) | 1.228 | ||||||||
Net gain (loss) arising during the year
|
8,066 | (485 | ) | 7,581 | ||||||||
|
||||||||||||
Current year accumulated other comprehensive income (loss)
|
$ | (26,112 | ) | $ | 388 | $ | (25,724 | ) | ||||
|
As of December 31, 2010, there was $25,724 of items not yet recognized as a component of net periodic pension costs, which consisted of future pension costs of $26,112 associated with the amortization of net losses. | |||
As of December 31, 2010, there was $388 of items not yet recognized as a component of net periodic postretirement benefit, which consisted of future benefits associated with the amortization of net gains. | |||
As of December 31, 2010, two of the Companys four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $29,973, $29,973 and $0, respectively. As of December 31, 2009, three of the Companys four defined benefit plans experienced accumulated benefit obligations in excess of plan assets, for which the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $90,216, $90,216 and $64,385, respectively. | |||
Discount rates were determined by a quantitative analysis examining the prevailing prices of high quality bonds to determine an appropriate discount rate for measuring obligations. The aforementioned analysis analyzes the cash flow from each of the Companys two qualified defined benefit plans as well as a separate analysis of the cash flows from the postretirement medical and life insurance plans sponsored by the Company. The aforementioned analyses then construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the year-by-year, projected benefit cash flow from the respective pension or retiree health plans. The Company uses the lower discount rate derived from the two independent analyses in the computation of the benefit obligation and service cost for each respective retirement liability. |
19
The Company considers input from its external advisors and historical returns in developing its expected rate of return on plan assets. The expected long-term rate of return is the weighted average of the target asset allocation of each individual asset class. The Companys actual 10-year annual rate of return on its pension plan assets was 4.8%, 3.0%, and 2.5% for the years ended December 31, 2010, 2009 and 2008, respectively, and the Companys actual five-year annual rate of return on its pension plan assets was 5.7%, 3.5%, and 1.2% for the years ended December 31, 2010, 2009, and 2008, respectively. | ||
Gains and losses result from changes in actuarial assumptions and from differences between assumed and actual experience, including, among other items, changes in discount rates and changes in actual returns on plan assets as compared to assumed returns. These gains and losses are only amortized to the extent that they exceed 10% of the greater of Projected Benefit Obligation and the fair value of assets. For the year ended December 31, 2010, Liggett used a 16.01-year period for its Hourly Plan and an 17.56-year period for its Salaried Plan to amortize pension fund gains and losses on a straight line basis. Such amounts are reflected in the pension expense calculation beginning the year after the gains or losses occur. The amortization of deferred losses negatively impacts pension expense in the future. | ||
Plan assets are invested employing multiple investment management firms. Managers within each asset class cover a range of investment styles and focus primarily on issue selection as a means to add value. Risk is controlled through a diversification among asset classes, managers, styles and securities. Risk is further controlled both at the manager and asset class level by assigning excess return and tracking error targets. Investment managers are monitored to evaluate performance against these benchmark indices and targets. | ||
Allowable investment types include equity, investment grade fixed income, high yield fixed income, hedge funds and short term investments. The equity fund is comprised of common stocks and mutual funds of large, medium and small companies, which are predominantly U.S. based. The investment grade fixed income fund includes managed funds investing in fixed income securities issued or guaranteed by the U.S. government, or by its respective agencies, mortgage backed securities, including collateralized mortgage obligations, and corporate debt obligations. The high yield fixed income fund includes a fund which invests in non-investment grade corporate debt securities. The hedge funds invest in both equity, including common and preferred stock, and debt obligations, including convertible debentures, of private and public companies. The Company generally utilizes its short term investments, including interest-bearing cash, to pay benefits and to deploy in special situations. | ||
In 2008, the Liggett Employee Benefits Committee temporarily suspended its target asset allocation percentages due to the volatility in the financial markets. Even though such allocation percentages were suspended, investment manager performance versus their respective benchmarks was still monitored on a regular basis. Effective January 1, 2011, the Liggett Employee Benefits Committee has reinstated its target assets allocation to equal 50% equity investments, 27.5% investment grade fixed income, 7.5% high yield fixed income, 10.0% alternative investments (including hedge funds and private equity funds) and 5.0% short-term investments, with a rebalancing range of approximately plus or minus 5% around the target asset allocations. | ||
Liggetts defined benefit retirement plan allocations at December 31, 2010 and 2009, by asset category, were as follows: |
20
Plan Assets | ||||||||
At | ||||||||
December 31, | ||||||||
2010 | 2009 | |||||||
Asset category
|
||||||||
Equity securities
|
51 | % | 50 | % | ||||
Investment grade fixed income securities
|
26 | % | 26 | % | ||||
High yield fixed income securities
|
4 | % | 2 | % | ||||
Alternative investments
|
9 | % | 8 | % | ||||
Short-term investments
|
10 | % | 14 | % | ||||
|
||||||||
|
100 | % | 100 | % | ||||
|
The defined benefit plans recurring financial assets and liabilities subject to fair value measurements and the necessary disclosures are as follows: |
Fair Value Measurements as of December 31, 2010 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets:
|
||||||||||||||||
Insurance contracts
|
$ | 2,359 | $ | | $ | 2,359 | $ | | ||||||||
Amounts in individually managed investment
accounts:
|
||||||||||||||||
Cash
|
14,108 | 14,108 | | | ||||||||||||
U.S. equity securities
|
53,916 | 53,916 | | | ||||||||||||
Common collective trusts
|
50,631 | | 45,722 | 4,909 | ||||||||||||
Investment partnership
|
11,996 | | | 11,996 | ||||||||||||
|
||||||||||||||||
|
||||||||||||||||
Total
|
$ | 133,010 | $ | 68,024 | $ | 48,081 | $ | 16,905 | ||||||||
|
Fair Value Measurements as of December 31, 2009 | ||||||||||||||||
Quoted Prices | ||||||||||||||||
in Active | Significant | |||||||||||||||
Markets for | Other | Significant | ||||||||||||||
Identical | Observable | Unobservable | ||||||||||||||
Assets | Inputs | Inputs | ||||||||||||||
Description | Total | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Assets:
|
||||||||||||||||
Insurance contracts
|
$ | 2,684 | $ | | $ | 2,684 | $ | | ||||||||
Amounts in individually managed investment
accounts:
|
||||||||||||||||
Cash, mutual funds and common stock
|
71,726 | 71,726 | | | ||||||||||||
Common collective trusts
|
40,210 | | 38,752 | 1,458 | ||||||||||||
Investment partnership
|
10,182 | | | 10,182 | ||||||||||||
|
||||||||||||||||
|
||||||||||||||||
Total
|
$ | 124,802 | $ | 71,726 | $ | 41,436 | $ | 11,640 | ||||||||
|
21
The fair value determination disclosed above of assets as Level 3 under the fair value hierarchy was determined based on unobservable inputs and were based on company assumptions, and information obtained from the investments based on the indicated market values of the underlying assets of the investment portfolio. | ||
The changes in the fair value of these Level 3 investments as of December 31, 2010 and 2009 were as follows: |
December 31, 2010 | December 31, 2009 | |||||||
|
||||||||
Prior year balance
|
$ | 11,640 | $ | 15,285 | ||||
|
||||||||
Distributions
|
(1,107 | ) | (8,978 | ) | ||||
Contributions
|
4,000 | | ||||||
Unrealized
gain on long-term
investments
|
2,113 | 3,913 | ||||||
|
||||||||
Realized gain on long-term
investments
|
259 | 1,420 | ||||||
|
||||||||
|
||||||||
Balance as of December 31
|
$ | 16,905 | $ | 11,640 | ||||
|
For 2010 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between (5.25%) and 6.8% between 2011 and 2019 and 4.5% after 2019. For 2009 measurement purposes, annual increases in Medicare Part B trends were assumed to equal rates between (7.2%) and 24.7% between 2010 and 2018 and 4.5% after 2018. | ||
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A 1% change in assumed health care cost trend rates would have the following effects: |
1% | 1% | |||||||
Increase | Decrease | |||||||
Effect on total of service and interest cost components
|
$ | 9 | $ | (8 | ) | |||
Effect on benefit obligation
|
$ | 164 | $ | (151 | ) |
To comply with ERISAs minimum funding requirements, the Company does not currently anticipate that it will be required to make any funding to the pension plans for the pension plan year beginning on January 1, 2011 and ending on December 31, 2011. Any additional funding obligation that the Company may have for subsequent years is contingent on several factors and is not reasonably estimable at this time. | ||
Estimated future pension and postretirement medical benefits payments are as follows: |
22
Postretirement | ||||||||
Pension | Medical | |||||||
2011
|
$ | 11,956 | $ | 666 | ||||
2012
|
11,673 | 734 | ||||||
2013
|
11,192 | 696 | ||||||
2014
|
15,333 | 691 | ||||||
2015
|
10,413 | 694 | ||||||
2016 2020
|
45,989 | 3,471 |
Profit Sharing Plans | ||
Liggett Vector Brands maintains 401(k) plans for substantially all employees which allow eligible employees to invest a percentage of their pre-tax compensation. Liggett Vector Brands is obligated to match a certain portion of employee contributions to the 401(k) plan. Accordingly, Liggett Vector Brands allocated to Liggett contribution expenses of $1,032, $979, and $957 for the years ended December 31, 2010, 2009 and 2008, respectively. | ||
6. | Income Taxes | |
Liggetts operations are included in the consolidated federal income tax return of its indirect parent, Vector. Pursuant to a tax allocation agreement amended in 1999, the amounts provided for as currently payable for federal income taxes are based on the Companys pre-tax income for financial reporting purposes. Accordingly, federal deferred income taxes which would normally be reflected in the accompanying consolidated financial statements are presented by Vector. The Company expenses and pays Vector their portion of the consolidated income tax expense in accordance with the tax allocation agreement. | ||
The amounts provided for income taxes are as follows: |
2010 | 2009 | 2008 | ||||||||||
Current
|
||||||||||||
Federal
|
$ | 33,650 | $ | 43,160 | $ | 46,583 | ||||||
State
|
8,725 | 19,235 | 10,263 | |||||||||
Deferred
|
||||||||||||
Federal
|
| | | |||||||||
State
|
(1,272 | ) | (9,752 | ) | (1,772 | ) | ||||||
|
||||||||||||
Total tax provision
|
$ | 41,103 | $ | 52,643 | $ | 55,074 | ||||||
|
Historically, Liggett has paid Vector on a quarterly basis for its tax liabilities. While these payments have been made to the parent they may not have been formally remitted to the Internal Revenue Service and may still represent a liability at the Vector level. | ||
Temporary differences which give rise to a significant portion of deferred tax assets and liabilities are as follows: |
23
2010 | 2009 | |||||||||||||||
Deferred Tax | Deferred Tax | |||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||
Sales and product allowances
|
$ | 286 | $ | | $ | 266 | $ | | ||||||||
Inventories
|
93 | 2,275 | 112 | 767 | ||||||||||||
Property, plant and equipment
|
| 1,659 | | 1,333 | ||||||||||||
Employee benefit plan accruals
|
556 | | 977 | 54 | ||||||||||||
Tobacco litigation settlements
|
3,298 | | 163 | | ||||||||||||
Forward contracts
|
| | 30 | | ||||||||||||
|
||||||||||||||||
Total deferred tax
|
$ | 4,233 | $ | 3,934 | $ | 1,548 | $ | 2,154 | ||||||||
|
Differences between the amounts provided for income taxes and amounts computed at the federal statutory tax rates are summarized as follows: |
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Income before income taxes
|
$ | 105,497 | $ | 142,057 | $ | 143,446 | ||||||
|
||||||||||||
|
||||||||||||
Federal income tax at statutory rate
|
36,924 | 49,720 | 50,206 | |||||||||
State income taxes, net of federal tax benefit
|
4,844 | 6,164 | 5,519 | |||||||||
Impact of IRS audit settlement and other
|
(665 | ) | (3,241 | ) | (651 | ) | ||||||
|
||||||||||||
Income tax expense
|
$ | 41,103 | $ | 52,643 | $ | 55,074 | ||||||
|
In 1998 Liggett contributed three of its premium cigarette brands to Trademarks LLC, a newly-formed limited liability company. In such transaction, Philip Morris acquired an option to purchase the remaining interest in Trademarks for a 90-day period commencing in December 2008. Philip Morris exercised its option to purchase the remaining interest in Trademarks on February 19, 2009. Vector paid approximately $75,500 in taxes on this transaction in 2009. | ||
The following table summarizes the activity related to the unrecognized tax benefits: |
Balance at January 1, 2008
|
4,203 | |||
Additions based on tax positions related to current year
|
| |||
Additions based on tax positions related to prior years
|
186 | |||
Reductions based on tax positions related to prior years
|
| |||
Settlements
|
| |||
Expirations of the statute of limitations
|
(1,686 | ) | ||
|
||||
Balance at December 31, 2008
|
2,703 | |||
Additions based on tax positions related to current year
|
| |||
Additions based on tax positions related to prior years
|
378 | |||
Reductions based on tax positions related to prior years
|
(550 | ) | ||
Settlements
|
(419 | ) | ||
Expirations of the statute of limitations
|
(1,833 | ) | ||
|
||||
Balance at December 31, 2009
|
279 | |||
Additions based on tax positions related to current year
|
| |||
Additions based on tax positions related to prior years
|
54 | |||
Reductions based on tax positions related to prior years
|
(157 | ) | ||
Settlements
|
(80 | ) | ||
|
||||
Balance at December 31, 2010
|
$ | 96 | ||
|
24
In the event the unrecognized tax benefits of $96 at December 31, 2010 were recognized, such recognition would impact the annual effective tax rate. The Company classifies all tax-related interest and penalties as income tax expense. | ||
The Company believes it is reasonably possible that none of the currently unrecognized tax benefits will be recognized over the next 12 months, pertaining primarily to expiration of statutes of limitations of positions reported on U.S. and state and local income tax returns. The Company files U.S. and state and local income tax returns in jurisdictions with varying statutes of limitations. | ||
7. | Long-Term Debt | |
Long-term debt consists of the following: |
2010 | 2009 | |||||||
|
||||||||
Borrowings outstanding under revolving credit facility
|
$ | 35,710 | $ | 17,382 | ||||
Term loan outstanding under revolving credit facility
|
6,222 | 6,755 | ||||||
Equipment loans
|
19,030 | 4,852 | ||||||
|
||||||||
|
60,962 | 28,989 | ||||||
Less current portion
|
(40,077 | ) | (19,933 | ) | ||||
|
||||||||
Amount due after one year
|
$ | 20,885 | $ | 9,056 | ||||
|
The following table sets forth the future principal payment obligations: |
Year Ending December 31, | ||||
2011
|
$ | 40,077 | ||
2012
|
6,527 | |||
2013
|
4,230 | |||
2014
|
3,547 | |||
2015
|
3,024 | |||
Thereafter
|
3,557 | |||
|
||||
|
$ | 60,962 | ||
|
Revolving Credit Facility | ||
The Company has a $50,000 credit facility with Wachovia Bank, N.A. (Wachovia) under which $35,710 was outstanding at December 31, 2010. Availability as determined under the facility was $290 based on eligible collateral at December 31, 2010. The facility is collateralized by all inventories and receivables of the Company and a mortgage on the Companys manufacturing facility. The facility requires the Companys compliance with certain financial and other covenants including a restriction on the Companys ability to pay cash dividends unless the Companys borrowing availability, as defined, under the facility for the 30-day period prior to the payment of the dividend, and after giving effect to the dividend, is at least $5,000 and no event of default has occurred under the agreement, including the Companys compliance with the covenants in the credit facility. |
25
The term of the Wachovia facility expires on March 8, 2012, subject to automatic renewal for additional one-year periods unless a notice of termination is given by Wachovia or the Company at least 60 days prior to such date or the anniversary of such date. Prime rate loans under the facility bear interest at a rate equal to the prime rate of Wachovia with Eurodollar rate loans bearing interest at a rate of 2.0% above Wachovias adjusted Eurodollar rate. The facility contains covenants that provide that the Companys earnings before interest, taxes, depreciation and amortization, as defined under the facility, on a trailing twelve month basis, shall not be less than $100,000 if the Companys excess availability, as defined, under the facility, is less than $20,000. The covenants also require that annual capital expenditures, as defined under the facility (before a maximum carryover amount of $2,500), shall not exceed $10,000 during any fiscal year. On November 1, 2010, the Company and Wachovia entered into the credit facilitys Seventh Amendment to permit the Company to incur Capital Expenditures (as defined in the credit facility) of up to $33,000 solely for 2010. The Seventh Amendment was effective as of August 31, 2010. | ||
In August 2007, Wachovia made an $8,000 term loan to 100 Maple LLC (Maple), a subsidiary of the Company, within the commitment under the existing credit facility. The $8,000 term loan is collateralized by the existing collateral securing the credit facility, and is also collateralized by a lien on certain real property (the Mebane Property) owned by Maple. The Mebane Property also secures the other obligations of the Company under the credit facility. The $8,000 term loan did not increase the $50,000 borrowing amount of the credit facility, but did increase the outstanding amounts under the credit facility by the amount of the term loan and proportionately reduces the maximum borrowing availability under the facility. | ||
In August 2007, Liggett and Wachovia amended the credit facility to permit the guaranty of the Senior Secured Notes described in Note 1 by each of Liggett and Maple and the pledging of certain assets of Liggett and Maple on a subordinated basis to secure their guarantees. The credit facility was amended to grant to Wachovia a blanket lien on all the assets of Liggett and Maple, excluding any equipment pledged to current or future purchase money or other financiers of such equipment and excluding any real property, other than the Mebane Property and other real property to the extent its value is in excess of $5,000. In connection with the amendment, Wachovia, Liggett, Maple and the collateral agent for the holders of Vectors Senior Secured Notes entered into an inter-creditor agreement, pursuant to which the liens of the collateral agent on the Liggett and Maple assets will be subordinated to the liens of Wachovia on the Liggett and Maple assets. |
Equipment Loans | ||
In October 2005, Liggett purchased equipment for $4,441 through a financing agreement payable in 24 installments of $112 and then 24 installments of $90. Interest is calculated at 4.89%. Liggett was required to provide a security deposit equal to 25% of the funded amount or $1,110. This loan was retired and the security deposit was returned to Liggett during 2009. | ||
In December 2005, Liggett purchased equipment for $2,273 through a financing agreement payable in 24 installments of $58 and then 24 installments of $46. Interest is calculated at 5.05%. Liggett was required to provide a security deposit equal to 25% of the funded amount or $568. This loan was retired and the security deposit was returned to Liggett during 2009. | ||
In August 2006, Liggett purchased equipment for $7,922 through a financing agreement payable in 30 installments of $191 and then 30 installments of $103. Interest is calculated at 5.15%. Liggett was required to provide a security deposit equal to 20% of the funded amount or $1,584. This debt was retired as part of the refinancing discussed below in the third quarter of 2010. |
26
In May 2007, Liggett purchased equipment for $1,576 through a financing agreement, payable in 60 installments of $32. Interest is calculated at 7.99% per annum. This debt was retired as part of the refinancing discussed below in the third quarter of 2010. In August 2008, Liggett purchased equipment for $2,745 through a financing agreement, payable in 60 installments of $53. Interest is calculated at 5.94% per annum. Liggett was required to provide a security deposit equal to approximately 15% of the funded amount or $428. . This debt was retired as part of the refinancing discussed below in the third quarter of 2010. | ||
In 2010, the Company has entered into nine financing agreements for a total of $16,634 related to the purchase of equipment. The weighted average interest rate of the outstanding debt is 5.28% per annum and the interest rate on the various notes ranges between 2.59% and 6.13%. | ||
The Company also refinanced $3,575 of debt related to prior equipment purchases during the third quarter of 2010. The refinanced debt had a weighted average interest rate of 6.03% and an average remaining term of 25 months. The new debt carries an interest rate of 5.95% and a term of 36 months. | ||
At December 31, 2010 and 2009, the Company had approximately $19,030 and $4,852 outstanding under these equipment loans. | ||
All equipment loans are collateralized by the equipment they finance. | ||
See Note 2 for fair value of debt at December 31, 2010 and 2009. |
8. | Operating Leases | |
At December 31, 2010, the Company has operating leases for building space, vehicles and computer equipment. The future minimum lease payments are as follows: |
Lease | ||||
Commitments | ||||
Year Ending December 31
|
||||
2011
|
$ | 687 | ||
2012
|
676 | |||
2013
|
677 | |||
2014
|
686 | |||
2015
|
630 | |||
Thereafter
|
21 | |||
|
||||
|
$ | 3,377 | ||
|
In addition to the above scheduled future minimum lease payments, Liggett expects to receive approximately $2,513 in allocated lease expense over the next five years and thereafter from Liggett Vector Brands, a wholly-owned subsidiary of VGR. | ||
Rental expense for the years ended December 31, 2010, 2009, and 2008 amounted to approximately $2,368, $1,852, and $1,969, respectively. |
27
9. | Stock Compensation | |
The Companys parent, Vector, offers stock option plans. As of December 31, 2010, there were approximately 3,815,336 shares available for issuance under Vectors Amended and Restated 1999 Long-Term Incentive Plan (the 1999 Plan). All employees of Vector and its subsidiaries are eligible to receive grants under such plans. Although Liggett has no employees it received an allocation of non-cash stock compensation from Liggett Vector Brands of $31, $355, and $387 for the years ended December 31, 2010, 2009, and 2008, respectively. These amounts are expense allocations only and do not represent a rollforward of option balances. These amounts have been recorded in selling, general and administrative cost in the Companys consolidated statement of operations. As of December 31, 2010 Liggett Vector Brands had employees with options for 712,077 shares of Vectors common stock. | ||
Non-qualified options for 105,000 shares of Vectors common stock were issued during 2010 to employees under Vectors stock compensation plans. The exercise price of the options granted was $15.63 in 2010. The exercise prices of the options granted in 2010 were at the fair market value on the dates of the grants. There were no option grants during 2009 or 2008. Awards of options to employees under the Vectors stock compensation plans generally vest over periods ranging from four to five years and have a term of ten years from the date of grant. | ||
The fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price characteristics which are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards. | ||
The assumptions used under the Black-Scholes option pricing model in computing fair value of options are based on the expected option life considering both the contractual term of the option and expected employee exercise behavior, the interest rate associated with U.S. Treasury issues with a remaining term equal to the expected option life and the expected volatility of the Companys common stock over the expected term of the option. The assumptions used for grants in the year ended December 31, 2010 were as follows: |
Risk-free interest rate
|
2.59 | % | ||
Expected volatility
|
24.43 | % | ||
Dividend yield
|
9.75 | % | ||
Expected holding period
|
4.74 years | |||
Weighted
average grant date fair value
|
$ | 1.03 |
In November 2005, the President of Liggett and Liggett Vector Brands was awarded a restricted stock grant of 63,813 shares of Vectors common stock pursuant to the 1999 Plan. Pursuant to his restricted share agreement, one-fourth of the shares vested on November 1, 2006, with an additional one-fourth vesting on each of the three succeeding one-year anniversaries of the first vesting date through November 1, 2009. Liggett Vector Brands recorded deferred compensation of $1,018 representing the fair market value of the restricted shares on the date of grant. Liggett recorded an expense of $0 in 2010, $196 for 2009, and $229 in 2008 associated with the grant. |
28
These amounts have been recorded in selling, general and administrative cost in the Companys consolidated statement of operations. |
10. | Commitments and Contingencies | |
Tobacco-Related Litigation : | ||
Overview | ||
Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. New cases continue to be commenced against Liggett and other cigarette manufacturers. The cases generally fall into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (Individual Actions); (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging the use of the terms lights and/or ultra lights constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (Class Actions); and (iii) health care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (Health Care Cost Recovery Actions). As new cases are commenced, the costs associated with defending these cases and the risks relating to the inherent unpredictability of litigation continue to increase. The future financial impact of the risks and expenses of litigation and the effects of the tobacco litigation settlements discussed below are not quantifiable at this time. For the years ended December 31, 2010, 2009, and 2008, Liggett incurred legal expenses and other litigation costs totaling approximately $23,389 (which includes expense of $16,161 for the Lukacs and Ferlanti judgments described below), $6,000, and $8,800 , respectively. | ||
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco-related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are or can be significant. | ||
Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. Liggett has secured approximately $5,055 in bonds as of December 31, 2010. | ||
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Engle progeny cases (defined below) in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. The legislation applies to judgments entered after the effective date and remains in effect until December 31, 2012. Certain plaintiffs have challenged the constitutionality of the bond cap statute. In one of these cases, the court recently upheld the constitutionality of the statute. Although the Company cannot predict the outcome of such challenges, it is possible that the Companys financial position, results of operations, or cash flows could be materially affected by an unfavorable outcome of such challenges. |
29
Liggett records provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in this Note 10: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be vigorously defended. However, Liggett may enter into settlement discussions in particular cases if it believes it is in its best interest to do so. | ||
Individual Actions | ||
As of December 31, 2010, there were 36 individual cases pending against Liggett where one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. These cases do not include Engle progeny cases (defined below) or the approximately 100 individual cases pending in West Virginia state court as part of a consolidated action. The following table lists the number of individual cases by state that are pending against Liggett or its affiliates as of December 31, 2010 (excluding Engle progeny cases in Florida and the cases consolidated in West Virginia): |
Number | ||||
State | of Cases | |||
Florida
|
15 | |||
New York
|
9 | |||
Louisiana
|
5 | |||
Maryland
|
3 | |||
West Virginia
|
2 | |||
Missouri
|
1 | |||
Ohio
|
1 |
Liggett Only Cases. There are currently seven cases pending where Liggett is the only tobacco company defendant. Cases where Liggett is the only defendant could increase substantially as a result of the Engle progeny cases. In February 2009, in Fetlanti v. Liggett Group, a Florida state court jury awarded compensatory damages of $1,200 as well as $96 in expenses, but found that the plaintiff was 40% at fault. Therefore, plaintiffs award was reduced to $720 in compensatory damages. Punitive damages were not awarded. In February 2011, the award was affirmed on appeal. In September 2010, the court awarded plaintiffs attorneys fees of $996. Liggett has accrued $2,000 for this matter for the year ended December 31, 2010. In Blitch v. Liggett Group, an Engle progeny case, trial is scheduled for March 7, 2011. In ODwyer-Harkins v. R.J. Reynolds, an Engle progeny case, trial is scheduled for August 8, 2011. There has been no recent activity in Hausrath v. Philip Morris , a case pending in New York state court, where two individuals are suing. The other three individual actions, in which Liggett is the only tobacco company defendant, are dormant. In Davis v. Liggett Group , another Liggett only case, judgment was entered against Liggett in the amount of $540 plus attorneys fees. The judgment was paid by Liggett and this matter is concluded. | ||
The plaintiffs allegations of liability in those cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, |
30
misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity and violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (RICO), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars. | ||
Defenses raised in individual cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, equitable defenses such as unclean hands and lack of benefit, failure to state a claim and federal preemption. | ||
In addition to several adverse verdicts against Liggett, jury awards in individual cases have also been returned against other cigarette manufacturers in recent years. The awards in these individual actions, often in excess of millions of dollars, may be for both compensatory and punitive damages. There are several significant jury awards against other cigarette manufacturers which are currently on appeal and several awards which are final and have been paid. | ||
Engle Progeny Cases . In 2000, a jury in Engle v. R.J. Reynolds Tobacco Co. rendered a $145,000,000 punitive damages verdict in favor of a Florida Class against certain cigarette manufacturers, including Liggett. Pursuant to the Florida Supreme Courts July 2006 ruling in Engle , which decertified the class on a prospective basis, and affirmed the appellate courts reversal of the punitive damages award, former class members had one year from January 11, 2007 in which to file individual lawsuits. In addition, some individuals who filed suit prior to January 11, 2007, and who claim to meet the conditions in Engle , are attempting to avail themselves of the Engle ruling. Lawsuits by individuals requesting the benefit of the Engle ruling, whether filed before or after the January 11, 2007 deadline, are referred to as the Engle progeny cases. Liggett has been named in approximately 6,827 Engle progeny cases in both federal (3,735 cases) and state (3,092 cases) courts in Florida. Other cigarette manufacturers have also been named as defendants in these cases, although as a case proceeds, one or more defendants may ultimately be dismissed from the action. These cases include approximately 9,100 plaintiffs, 671 of which represent consortium claims. The number of Engle progeny cases may increase as multi-plaintiff cases continue to be severed into individual cases. The total number of plaintiffs may also increase as a result of attempts by existing plaintiffs to add additional parties. | ||
As of December 31, 2010, in addition to the Lukacs case described below, the following Engle progeny cases have resulted in judgments against Liggett: |
31
COMPENSATORY | PUNITIVE | |||||||||||||||
DAMAGES | DAMAGES | |||||||||||||||
AGAINST | AGAINST | |||||||||||||||
DATE | CASE NAME | COUNTY | LIGGETT | LIGGETT | ||||||||||||
|
||||||||||||||||
August 2009 |
Campbell v. R.J. Reynolds
|
Escambia | $ | 156 | None | |||||||||||
March 2010 |
Douglas v. R.J. Reynolds
|
Hillsborogh | $ | 1,350 | None | |||||||||||
April 2010 |
Clay v. R.J. Reynolds
|
Escambia | $ | 349 | $ | 1,000 | ||||||||||
April 2010 |
Putney v. R.J. Reynolds
|
Broward | $ | 3,008 | None |
Through December 31, 2010, there were 20 plaintiffs verdicts against the industry in Engle progeny cases including four adverse verdicts against Liggett, and 11 defense verdicts. The plaintiffs verdicts are currently on appeal. Several defense verdicts have also been appealed. For further information on the Engle case and on Engle progeny cases see Class Actions Engle Case , below. | ||
Lukacs Case. In June 2002, the jury in a Florida state court action entitled Lukacs v. R.J. Reynolds Tobacco Co., awarded $37,500 in compensatory damages, jointly and severally, in a case involving Liggett and two other cigarette manufacturers, which amount was subsequently reduced by the court. The jury found Liggett 50% responsible for the damages incurred by the plaintiff. The Lukacs case was the first case to be tried as an individual Engle progeny case, but was tried almost five years prior to the Florida Supreme Courts final decision in Engle . In November 2008, the court entered final judgment in the amount of $24,835 (for which Liggett was 50% responsible), plus interest from June 2002. Plaintiff filed a motion seeking an award of attorneys fees from Liggett based on plaintiffs prior proposal for settlement. In March 2010, the Third District Court of Appeal affirmed the decision, per curiam . In June 2010, Liggett paid its share of the judgment and settled claims for attorneys fees and accrued interest for a total payment of approximately $14,361. | ||
Class Actions | ||
As of December 31, 2010, there were six actions pending for which either a class had been certified or plaintiffs were seeking class certification, where Liggett is a named defendant, including one alleged price fixing cases. Other cigarette manufacturers are also named in these actions. | ||
Plaintiffs allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. | ||
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption. | ||
Engle Case . In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking. In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be common to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants conduct rose to a level that would permit a potential award or entitlement to punitive damages. Phase II of the trial was a causation and damages trial for three of |
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the class plaintiffs and a punitive damages trial on a class-wide basis, before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class plaintiffs, to be reduced in proportion to the respective plaintiffs fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett. | ||
In May 2003, Floridas Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831, was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs. | ||
In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but determined that the following Phase I findings are entitled to res judicata effect in Engle progeny cases: (i) that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they filed their individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. In October 2007, the United States Supreme Court denied defendants petition for writ of certiorari. As a result of the Engle decision, approximately 9,100 plaintiffs have claims pending against Liggett and other cigarette manufacturers. | ||
Three federal district courts (in the Merlob, Brown and Burr cases) ruled that the findings in the Phase I of the Engle proceedings could not be used to satisfy elements of plaintiffs claims, and two of those rulings ( Brown and Burr ) were certified by the trial court for interlocutory review. The certification was granted by the United States Court of Appeals for the Eleventh Circuit and the appeals were consolidated (in February 2009, the appeal in Burr was dismissed for lack of prosecution). In July 2010, the Eleventh Circuit ruled that the plaintiffs do not have an unlimited right to use the findings from the original Engle trial to meet their burden of establishing the elements of their claims at trial. Rather, plaintiffs may only use the findings to establish specific facts that they demonstrate with a reasonable degree of certainty were actually decided by the original Engle jury. The Eleventh Circuit remanded the case to the district court to determine what specific factual findings the Engle jury actually made. All federal cases were stayed pending review by the Eleventh Circuit. On December 22, 2010, stays were lifted in 12 cases selected by plaintiffs. | ||
In December 2010, in the Martin case, a case against R.J. Reynolds, the Florida District Court of Appeals issued the first ruling by a Florida intermediate appellate court to address the Brown decision discussed above. The panel held that the trial court correctly construed the Florida Supreme Courts 2006 decision in Engle in instructing the jury on the preclusive effect of the Phase I Engle proceedings, expressly disagreeing with certain aspects of the Brown decision. | ||
Other Class Actions. In Smith v. Philip Morris, a Kansas state court case filed in February 2000, plaintiffs allege that cigarette manufacturers conspired to fix cigarette prices in violation of antitrust |
33
laws. Plaintiffs seek to recover an unspecified amount in actual and punitive damages. Class certification was granted in Smith in November 2001. Discovery is ongoing. | ||
Class action suits have been filed in a number of states against cigarette manufacturers, alleging, among other things, that use of the terms light and ultra light constitutes unfair and deceptive trade practices, among other things. In December 2008, the United States Supreme court, in Altria Group v. Good , ruled that the Federal Cigarette Labeling and Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they could proceed with their claims under the Maine Unfair Trade Practices Act. This ruling has resulted in the filing of additional lights class action cases in other states. Although Liggett was not a defendant in the Good case, and is not a defendant in most of the other lights class actions, an adverse ruling or commencement of additional lights related class actions could have a material adverse effect on the Company. | ||
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, are alleged to have been exposed to secondhand smoke from cigarettes which were manufactured by the defendants, and who suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. In October 2004, the trial court stayed this case pending the outcome of the appeal in another matter. | ||
In June 1998, in Cleary v. Philip Morris, a putative class action was brought in Illinois state court on behalf of persons who were allegedly injured by: (i) defendants purported conspiracy to conceal material facts regarding the addictive nature of nicotine; (ii) defendants alleged acts of targeting their advertising and marketing to minors; and (iii) defendants claimed breach of the publics right to defendants compliance with laws prohibiting the distribution of cigarettes to minors. Plaintiffs sought disgorgement of all profits unjustly received through defendants sale of cigarettes to plaintiffs and the class. In March 2009, plaintiffs filed a third amended complaint adding, among other things, allegations regarding defendants sale of light cigarettes. The case was then removed to federal court on the basis of this new claim. In November 2009, plaintiffs filed a revised motion for class certification which was denied by the court. In February 2010, the court granted summary judgment in favor of defendants as to all claims, other than a lights claim involving another cigarette manufacturer. The court granted leave to the plaintiffs to reinstate the motion as to the addiction claims. Plaintiffs filed a Fourth Amended Complaint in an attempt to resurrect their addiction claims. In June 2010, the court granted defendants motion to dismiss the Fourth Amended Complaint and in July 2010, the court denied plaintiffs motion for reconsideration. In August 2010, plaintiffs appealed to the United States Court of Appeals for the Seventh Circuit. | ||
In April 2001, in Brown v. Philip Morris USA, a California state court granted in part plaintiffs motion for class certification and certified a class comprised of adult residents of California who smoked at least one of defendants cigarettes during the applicable time period and who were exposed to defendants marketing and advertising activities in California. In March 2005, the court granted defendants motion to decertify the class based on a recent change in California law. In June 2009, the California Supreme Court reversed and remanded the case to the trial court for further proceedings regarding whether the class representatives have, or can, demonstrate standing. In August 2009, the California Supreme Court denied defendants rehearing petition and issued its mandate. In September 2009, plaintiffs sought reconsideration of the courts September 2004 order finding that plaintiffs allegations regarding lights cigarettes were preempted by federal law, in light of the recent United States Supreme Court decision in Good . In March 2010, the trial court granted reconsideration of its September 2004 order granting partial summary judgment to defendants with respect to plaintiffs lights claims on the basis of judicial decisions issued since its order was |
34
issued, including the Unitied States Supreme Courts ruling in Good , thereby reinstating plaintiffs lights claims. Since the trial courts prior ruling decertifying the class was reversed on appeal by the California Supreme court, the parties and the court are treating all claims currently being asserted by the plaintiffs as certified, subject, however, to defendants challenge to the class representatives standing to assert their claims. Trial is scheduled to start on May 6, 2011. | ||
Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases) , a West Virginia state court consolidated approximately 750 individual smoker actions that were pending prior to 2001 for trial of certain common issues. In January 2002, the court severed Liggett from the trial of the consolidated action which commenced in June 2010 and ended in a mistrial. A new trial is scheduled for October 17, 2011. If the case were to proceed against Liggett, it is estimated that Liggett could be a defendant in approximately 100 of the individual cases. | ||
In addition to the cases described above, numerous class actions remain certified against other cigarette manufacturers. Adverse decisions in these cases could have a material adverse affect on Liggetts sales volume, operating income and cash flows. | ||
Health Care Cost Recovery Actions | ||
As of December 31, 2010, there were four Health Care Cost Recovery Actions pending against Liggett. Other cigarette manufacturers are also named in these cases. The claims asserted in health care cost recovery actions vary. Although, typically, no specific damage amounts are pled, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was unjustly enriched by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. | ||
Other claims asserted include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach of special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. | ||
DOJ Lawsuit. In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. Claims were asserted under RICO. | ||
In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for the District of Columbia affirmed most of the district courts decision. In February 2010, the government and all defendants, other than Liggett, filed petitions for writ of certiorari to the United States Supreme Court. In June 2010, the United states Supreme Court, without comment denied review. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial courts Final Judgment which ordered the following relief: (i) an injunction against committing any act of racketeering relating to the manufacturing, marketing, promotion, health consequences or sale of |
35
cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each (iii) an injunction against making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes; (iv) an injunction against conveying any express or implied health message though use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including lights, ultra lights, and low tar, which the court found could cause consumers to believe one cigarette brand is less hazardous that another brand; (v) the issuance of corrective statements in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking low tar or light cigarettes, defendants manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure of defendants public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim or privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedules as defendants now follow in disclosing such data to the Federal Trade Commission (FTC) for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette business within the United States; and (ix) payment of the governments costs in bringing the action. | ||
It is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United States or otherwise results in restrictions that adversely affect the industry, Liggetts sales volume, operating income and cash flows could be materially adversely affected. | ||
In City of St. Louis v. American Tobacco Company , a case pending in Missouri state court since December 1998, the City of St. Louis and approximately 38 hospitals seek recovery of costs expended by the hospitals on behalf of patients who suffer, or have suffered, from illnesses allegedly resulting from the use of cigarettes. In June 2005, the court granted defendants motion for summary judgment as to claims for damages which accrued prior to November 16, 1993. In April 2010, the court further determined that each plaintiff is barred from seeking damages which accrued more than five years prior to the time that plaintiff joined the suit. In that same order, the court granted partial summary judgment for defendants barring plaintiffs claims for future damages. In July 2010, the court dismissed certain other claims brought by plaintiffs, on the grounds that they were preempted. Defendants have filed other summary judgment motions that remain pending. Trial commenced on January 31, 2011. | ||
In June 2005, the Jerusalem District Court in Israel added Liggett as a defendant in an action commenced in 1998 by the largest private insurer in that country, General Health Services, against the major United States cigarette manufacturers. The plaintiff seeks to recover the past and future value of the total expenditures for health care services provided to residents of Israel resulting from tobacco related diseases, court ordered interest for past expenditures from the date of filing the statement of claim, increased and/or punitive and/or exemplary damages and costs. The court ruled that, although Liggett had not sold product in Israel since at least 1978, it might still have liability for cigarettes sold prior to that time. Motions filed by defendants are pending. | ||
In May 2008, in National Committee to Preserve Social Security and Medicare v. Philip Morris USA, a case pending in the United States District Court for the Eastern District of New York, plaintiffs commenced an action to recover twice the amount paid by Medicare for the health care services |
36
(in thousands of dollars) |
provided to Medicare beneficiaries to treat diseases allegedly attributable to smoking defendants cigarettes from May 21, 2002 to the present, for which treatment defendants allegedly were required to make payment under Medicare Secondary Payer provisions of the Social Security Act. In July 2008, defendants filed a motion to dismiss plaintiffs claims and plaintiffs filed a motion for partial summary judgment. In March 2009, the court granted defendants motion and dismissed the case. In May 2009, plaintiffs noticed an appeal to the United States Court of Appeals for the Second Circuit and in September 2010, the court vacated the District Courts decision, and remanded the case with instructions for the the District Court to dismiss the complaint on other grounds. Plaintiffs motion for rehearing was denied by the court and on December 20, 2010, the court remanded the case to the district court with instructions to dismiss the complaint. | ||
Upcoming Trials | ||
In addition to the January 2011 trial in the City of St. Louis case and the May 2011 trial in the Brown case, both discussed above, as of December 31, 2010, there were approximately 43 Engle progeny cases scheduled for trial in 2011. Additionally, a Florida individual case is scheduled for trial on September 12, 2011. Liggett and other cigarette manufacturers are currently named as defendants in each of these cases, although as a case proceeds, one or more defendants may ultimately be dismissed from the action. Cases against other cigarette manufacturers are also currently scheduled for trial in 2011. Trial dates are subject to change. | ||
MSA and Other State Settlement Agreements | ||
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims within those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors. | ||
In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the Original Participating Manufacturers or OPMs) and Liggett (together with any other tobacco product manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs) (the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers) entered into the Master Settlement Agreement (the MSA) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the Settling States) to settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State. | ||
As a result of the MSA, the Settling States released Liggett from: |
| all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and | ||
| all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business. |
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA |
37
prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities. | ||
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA. | ||
Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual payments of $9,000,000 (subject to applicable adjustments, offsets, and reductions). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligation of each Participating Manufacturer and are not the responsibility of any parent or affiliate of a Participating Manufacturer. | ||
Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. According to data from Management Science Associates, Inc., domestic shipments by Liggett accounted for approximately 2.2%, 2.3% and 3.2% of the total cigarettes shipped in the United States in 2008, 2009 and 2010 respectively. If Liggetts market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. Liggett paid $39,760 for their 2008 MSA obligations, and paid $47,599 for their 2009 MSA obligations. Liggett has expensed $129,392 for its estimated MSA obligations in 2010 as part of cost of goods sold. In December 2010, Liggett prepaid $92,500 of their estimated 2010 MSA obligations. Additional amounts may be due for 2010 but will not be determined by the Independent Auditor until April 2011. | ||
Certain MSA Disputes | ||
NPM Adjustment. In March 2006, an economic consulting firm selected pursuant to the MSA rendered its final and non-appealable decision that the MSA was a significant factor contributing to the loss of market share of Participating Manufacturers to non-participating manufacturers for 2003. This is known as the NPM Adjustment. The economic consulting firm subsequently rendered the same decision with respect to 2004 and 2005. In March 2009, a different economic consulting firm made the same determination for 2006. As a result, the manufacturers are entitled to potential NPM Adjustments to their 2003, 2004, 2005 and 2006 MSA payments. The Participating Manufacturers may also be entitled to potential NPM Adjustments to their 2007, 2008 and 2009 payments pursuant to an agreement entered into in June 2009 between the OPMs and the Settling States under which the OPMs agreed to make certain payments for the benefit of the Settling States, in exchange for which the Settling States stipulated that the MSA was a significant factor contributing to the loss of market share of Participating Manufacturers in 2007, 2008 and 2009. A Settling State that has diligently enforced its qualifying escrow statute in the year in question may be able to avoid |
38
application of the NPM Adjustment to the payments made by the manufacturers for the benefit of that Settling State. | ||
For 2003 through 2010, Liggett disputed that they owe the Settling States the NPM Adjustments as calculated by the Independent Auditor. As permitted by the MSA, Liggett has withheld payment associated with these NPM Adjustment amounts. The total amount withheld or paid into a disputed payment account by Liggett for 2003 through 2010 is $27,186. In 2003, Liggett paid the NPM adjustment amount of $9,304 to the Settling States although the Company continues to dispute this amount. At December 31, 2010, included in Other assets on the Companys consolidated balance sheet was a noncurrent receivable of $6,513 relating to such payment. | ||
The following amounts have not been expensed in the accompanying consolidated financial statements as they relate to Liggetts claim for an NPM adjustment: $6,513 for 2003, $3,789 for 2004 and $800 for 2005. Liggett has expensed all disputed amounts related to the NPM Adjustment since 2005. | ||
Since April 2006, notwithstanding provisions in the MSA requiring arbitration, litigation was filed in 49 Settling States over the issue of whether the application of the NPM Adjustment for 2003 is to be determined through litigation or arbitration. These actions relate to the potential NPM Adjustment for 2003, which the independent auditor under the MSA previously determined to be as much as $1,200,000 for all Participating Manufacturers. All but one of the 48 courts that have decided the issue have ruled that the 2003 NPM Adjustment dispute is arbitrable. All 47 of those decisions are final and non-appealable. One court, the Montana Supreme Court, ruled that Montanas claim of diligent enforcement must be litigated. The United States Supreme Court denied certiorari with respect to that opinion. In response to a proposal from each of the OPMs and many of the SPMs, 45 of the Settling States, representing approximately 90% of the allocable share of the Settling States, entered into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM Adjustment for 2003. In June 2010, the three person arbitration panel was selected and procedural hearings, discovery and briefing on legal issues of general application have commenced. Because states representing more than 80% of the allocable share signed the agreement, signing states will receive a 20% reduction of any potential 2003 NPM adjustment. There can be no assurance that Liggett will receive any adjustment as a result of these proceedings. | ||
Gross v. Net Calculations. In October 2004, the independent auditor notified Liggett and all other Participating Manufacturers that their payment obligations under the MSA, dating from the agreements execution in late 1998, had been recalculated using net unit amounts, rather than gross unit amounts (which had been used since 1999). | ||
Liggett objected to this retroactive change and disputed the change in methodology. Liggett contends that the retroactive change from using gross to net unit amounts is impermissible for several reasons, including: |
| use of net unit amounts is not required by the MSA (as reflected by, among other things, the use of gross unit amounts through 2005); | ||
| such a change is not authorized without the consent of affected parties to the MSA; | ||
| the MSA provides for four-year time limitation periods for revisiting calculations and determinations, which precludes recalculating Liggetts 1997 Market Share (and thus, Liggetts market share exemption); and | ||
| Liggett and others have relied upon the calculations based on gross unit amounts since 1998. |
39
The change in the method of calculation could result in Liggett owing, at a minimum, approximately $9,300 plus interest of additional MSA payments by Liggett because the proposed change from gross to net units would serve to lower Liggetts market share exemption under the MSA. The Company currently estimates that future MSA payments would be at least $2,300 higher if the method of calculation is changed. No amounts have been expensed or accrued in the accompanying consolidated financial statements for any potential liability relating to the gross versus net dispute. There can be no assurance that Liggett will not be required to make additional payments, which payments could adversely affect the Companys consolidated financial position, results of operations or cash flows. | ||
Litigation Challenging the MSA. In Freedom Holdings Inc. v. Cuomo, litigation pending in federal court in New York, certain importers of cigarettes allege that the MSA and certain related New York statutes violate federal antitrust and constitutional law. The district court granted New Yorks motion to dismiss the complaint for failure to state a claim. On appeal, the United States Court of Appeals for the Second Circuit held that if all of the allegations of the complaint were assumed to be true, plaintiffs had stated a claim for relief on antitrust grounds. In January 2009, the district court granted New Yorks motion for summary judgment, dismissing all claims brought by the plaintiffs, and dissolving the preliminary injunction. Plaintiffs appealed the decision. In October 2010, the Second Circuit affirmed the district courts decision. | ||
In Grand River Enterprises Six Nations, Ltd. v. King , another proceeding pending in federal court in New York, plaintiffs seek to enjoin the statutes enacted by New York and other states in connection with the MSA on the grounds that the statutes violate the Commerce Clause of the United States Constitution and federal antitrust laws. In September 2005, the United States Court of Appeals for the Second Circuit held that if all of the allegations of the complaint were assumed to be true, plaintiffs had stated a claim for relief and that the New York federal court had jurisdiction over the other defendant states. On remand, the trial court held that plaintiffs are unlikely to succeed on the merits. After discovery, the parties cross-moved for summary judgment; briefing concluded in December 2009 and oral argument took place in April 2010. | ||
Similar challenges to the MSA and MSA-related state statutes are pending in several other states. Liggett and the other cigarette manufacturers are not defendants in these cases. Litigation challenging the validity of the MSA, including claims that the MSA violates antitrust laws, has not been successful to date. | ||
In October 2008, Vibo Corporation, Inc., d/b/a General Tobacco (Vibo) commenced litigation in the United States District Court for the Western District of Kentucky against each of the Settling States and certain Participating Manufacturers. Vibo alleged, among other things, that the market share exemptions (i.e.: grandfathered shares) provided to certain SPMs under the MSA, including Liggett, violate federal antitrust and constitutional law. In January 2009, the district court dismissed the complaint. In January 2010, the court entered final judgment in favor of the defendants. Vibo appealed to the United States Court of Appeals for the Sixth Circuit. A decision is pending. | ||
Other State Settlements. The MSA replaces Liggetts prior settlements with all states and territories except for Florida, Mississippi, Texas and Minnesota. Each of these four states, prior to the effective date of the MSA, negotiated and executed settlement agreements with each of the other major tobacco companies, separate from those settlements reached previously with Liggett. Liggetts agreements with these states remain in full force and effect, subject to the changes with Minnesota and Florida discussed below. These states settlement agreements with Liggett contained most favored nation provisions which could reduce Liggetts payment obligations based on subsequent |
40
settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on each of these four states settlements with United States Tobacco Company, Liggetts payment obligations to those states had been eliminated. With respect to all non-economic obligations under the previous settlements, Liggett believes it is entitled to the most favorable provisions as between the MSA and each states respective settlement with the other major tobacco companies. Therefore, Liggetts non-economic obligations to all states and territories are now defined by the MSA. | ||
In 2003, in order to resolve any potential issues with Minnesota as to Liggetts ongoing economic settlement obligations, Liggett agreed to pay $100 a year to Minnesota, to be paid any year cigarettes manufactured by Liggett are sold in that state. In 2003 and 2004, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed that Liggett had failed to make certain required payments under the respective settlement agreements with these states. Liggett believes it is not obligated to make any further payments to these states, based, among other things, on the language of the most favored nation provisions of the respective settlement agreements. In December 2010, Liggett settled with Florida and agreed to pay Florida $1,200 and to make further payments of $250 per year for a period of 21 years. The payments in years 12 21 will be subject to an inflation adjustment. These payments are in lieu of any other payments allegedly due to Florida under the settlement agreement. The Company accrued approximately $3,200 for this matter. There can be no assurance that Liggett will be able to resolve the matters with Texas and Mississippi or that Liggett will not be required to make additional payments, which could adversely affect the Companys consolidated financial position, results of operations or cash flows. | ||
Cautionary Statement. Management is not able to predict the outcome of the litigation pending or threatened against Liggett. Litigation is subject to many uncertainties. For example, the jury in the Lukacs case, an Engle progeny case tried in 2002, awarded $24,835 in compensatory damages plus interest against Liggett and two other defendants and found Liggett 50% responsible for the damages. The verdict was affirmed on appeal and Liggett paid $14,361 in June 2010. To date, Liggett has been found liable in four other Engle progeny cases, which are currently on appeal. As a result of the Engle decision, over 9,100 plaintiffs have claims pending against Liggett and other cigarette manufacturers. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal. Liggett may enter into discussions in an attempt to settle particular cases, if it believes it is in its best interests to do so. | ||
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. An unfavorable outcome of a pending smoking and health case could encourage the commencement of additional similar litigation, or could lead to multiple adverse decisions in the Engle progeny cases. Management is unable to make a reasonable estimate with respect to the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its condensed consolidated financial statements for unfavorable outcomes. The complaints filed in these cases rarely detail alleged damages. Typically, the claims set forth in an individuals complaint against the tobacco industry seek money damages in an amount to be determined by a jury, plus punitive damages and costs. | ||
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the |
41
tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation or legislation. | ||
It is possible that the Companys consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation. | ||
Liggetts management is unaware of any material environmental conditions affecting their existing facilities. Liggetts management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, results of operations or competitive position of Liggett. | ||
Other Matters : | ||
In February 2004, Liggett Vector Brands and another cigarette manufacturer entered into a five year agreement with a subsidiary of the American Wholesale Marketers Association to support a program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the distribution of cigarettes. This agreement has been extended through February 2014. Under the agreement, Liggett Vector Brands has agreed to pay a portion of losses, if any, incurred by the surety under the bond program, with a maximum loss exposure of $500 for Liggett Vector Brands. To secure its potential obligations under the agreement, Liggett Vector Brands has delivered to the subsidiary of the association a $100 letter of credit and agreed to fund up to an additional $400. Liggett Vector Brands has incurred no losses to date under this agreement, and the Company believes the fair value of Liggett Vector Brands obligation under the agreement was immaterial at December 31, 2010. | ||
In December 2009, a complaint was filed against Liggett in Alabama state court by the estate of a woman who died, in 2007, in a house fire allegedly caused by the ignition of contents of the house by a Liggett cigarette. The plaintiff sued under the Alabama Extended Manufacturers Liability Doctrine and for breach of warranty and negligence. The plaintiff sought both punitive and compensatory damages. In January 2010, Liggett removed the case to federal court. In February 2010, Liggett filed a motion to dismiss the case and plaintiff filed a motion to remand. In September 2010, the court granted plaintiffs motion to remand, but the order was stayed pending non-binding mediation of the dispute, which occurred in January 2011. The matter was settled for $30. | ||
There may be several other proceedings, lawsuits and claims pending against Liggett unrelated to tobacco or tobacco product liability. Management is of the opinion that the liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially affect the Companys financial position, results of operations or cash flows. |
11. | Related Party Transactions |
Liggett is a party to an agreement dated February 26, 1991, as amended June 30, 2001, with Vector to provide various management and administrative services to Liggett in consideration for an annual management fee of $900 paid in monthly installments and annual overhead reimbursements of $864 paid in monthly installments. The charges for services under this agreement amounted to $1,764 in 2010, 2009 and 2008. |
42
In addition, Liggett has entered into an annually renewable Corporate Services Agreement with VGR wherein VGR agreed to provide corporate services to Liggett at an annual fee paid in monthly installments. Corporate services provided by VGR under this agreement include the provision of administrative services related to Liggetts participation in its parent companys multi-employer benefit plan, external publication of financial results, preparation of consolidated financial statements and tax returns and such other administrative and managerial services as may be reasonably requested by Liggett. The charges for services rendered under the agreement amounted to $6,256 in 2010, $5,959 in 2009 and $5,675 in 2008. | ||
Liggett is party to a tax sharing agreement with Vector and certain other entities pursuant to which Liggett will pay taxes on an estimated basis to Vector as if it were filing a separate company tax return, except that the agreement effectively limits the ability of Liggett to carry back losses for refunds. Liggett is entitled to recoup overpayments in a given year out of future payments due under the agreement and is required to fund underpayments. | ||
On January 1, 2004 Liggett entered into a manufacturing agreement with Vector Tobacco whereby Liggett agreed to provide handling, storage, manufacturing, preparation, record-keeping, remittance of federal excise tax payments, processing of returns and other services relating to the manufacture of Vector Tobacco brands. The agreement expired December 31, 2005, but is automatically renewed for a successive one-year term unless otherwise terminated by either party. Pricing is set forth in the agreement based on previously determined standard costs and invoices are sent to Vector Tobacco monthly. In 2010, 2009 and 2008, Liggett manufactured approximately 1.1, 1.2 and 1.1 billion units of Vector Tobacco brands respectively, and realized $66,667, $67,161 and $34,577, respectively, in net receipts from these sales and $1,171, $1,349 and $1,158, respectively, in profit from the agreement. | ||
As of December 31, 2010 and 2009, Liggett has a net receivable from Vector Tobacco totaling $969 and $6,304, respectively. This overall net receivable position is related primarily to the manufacturing agreement between Liggett and Vector Tobacco in 2010. | ||
The remaining related party net receivable balances of $13,334 and $5,855 at December 31, 2010 and 2009, respectively, relate primarily to transactions with Liggetts affiliate, Liggett Vector Brands. | ||
Liggett Vector Brands coordinates and executes the sales, marketing and manufacturing efforts along with certain support functions for all of Vectors tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Liggett. During 2010, 2009 and 2008, Liggett expensed $61,840, $55,549 and $55,602, respectively, for services provided by Liggett Vector Brands of which $(35) related to restructuring costs in 2008. The remaining expenses have been classified as selling, general and administrative ($35,431, $31,553 and $31,612 for the years ended December 31, 2010, 2009 and 2008, respectively) and cost of goods sold ($26,409, $23,996 and $24,025 for the years ended December 31, 2010, 2009 and 2008, respectively). |
12. | Restructuring |
During 2004, Liggett Vector Brands adopted a restructuring plan in its continuing effort to adjust the cost structure of the business and improve operating efficiency. The remaining pre-tax restructuring liability of $280 as of December 31, 2010, relates to the subletting of its New York office. |
43
Additions | ||||||||||||||||
Charged | ||||||||||||||||
Balance | to | |||||||||||||||
at | Costs | Balance | ||||||||||||||
Beginning | and | at End of | ||||||||||||||
of Period | Expenses | Deductions | Period | |||||||||||||
Description
|
||||||||||||||||
Year ended December 31, 2010
|
||||||||||||||||
Allowance for:
|
||||||||||||||||
Doubtful accounts
|
$ | 150 | $ | 78 | $ | 34 | $ | 194 | ||||||||
Cash discounts
|
186 | 23,361 | 23,511 | 36 | ||||||||||||
Sales returns
|
3,330 | 2,873 | 2,353 | 3,850 | ||||||||||||
|
||||||||||||||||
Total
|
$ | 3,666 | $ | 26,312 | $ | 25,898 | $ | 4,080 | ||||||||
|
||||||||||||||||
Year ended December 31, 2009
|
||||||||||||||||
Allowance for:
|
||||||||||||||||
Doubtful accounts
|
$ | 46 | $ | 105 | $ | 1 | $ | 150 | ||||||||
Cash discounts
|
194 | 17,347 | 17,355 | 186 | ||||||||||||
Sales returns
|
3,000 | 2,997 | 2,667 | 3,330 | ||||||||||||
|
||||||||||||||||
Total
|
$ | 3,240 | $ | 20,449 | $ | 20,023 | $ | 3,666 | ||||||||
|
||||||||||||||||
Year ended December 31, 2008
|
||||||||||||||||
Allowance for:
|
||||||||||||||||
Doubtful accounts
|
$ | 46 | $ | | $ | | $ | 46 | ||||||||
Cash discounts
|
61 | 12,980 | 12,847 | 194 | ||||||||||||
Sales returns
|
2,600 | 2,355 | 1,955 | 3,000 | ||||||||||||
|
||||||||||||||||
Total
|
$ | 2,707 | $ | 15,335 | $ | 14,802 | $ | 3,240 | ||||||||
|
44
Page(s) | ||||
|
||||
Report of Independent Registered Public Accounting Firm
|
1 | |||
|
||||
Consolidated Financial Statements
|
||||
|
||||
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
2-3 | |||
|
||||
Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008
|
4 | |||
|
||||
Consolidated Statements of Stockholders Equity
|
5 | |||
|
||||
Consolidated Statements of Cash Flows
|
6-7 | |||
|
||||
Notes to Consolidated Financial Statements
|
8-25 | |||
|
||||
Consolidated Financial Statement Schedule
|
||||
|
||||
Schedule II Valuation and Qualifying Accounts
|
26 |
1
2010 | 2009 | |||||||
|
||||||||
Assets
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 4,803 | $ | 472 | ||||
Accounts receivable trade, less allowances of $9 and $18,
respectively
|
163 | 609 | ||||||
Inventories, net
|
5,364 | 5,782 | ||||||
Deferred taxes
|
2,892 | 2,341 | ||||||
Other current assets
|
913 | 192 | ||||||
|
||||||||
Total current assets
|
14,135 | 9,396 | ||||||
|
||||||||
Property, plant and equipment, net
|
17 | 25 | ||||||
Intangible asset
|
107,511 | 107,511 | ||||||
Deferred taxes
|
103,837 | 93,113 | ||||||
Other assets
|
1,251 | 999 | ||||||
|
||||||||
Total assets
|
$ | 226,751 | $ | 211,044 | ||||
|
2
2010 | 2009 | |||||||
|
||||||||
Liabilities and Stockholders Equity
|
||||||||
Current liabilities
|
||||||||
Due to related parties
|
$ | 4,472 | $ | 9,629 | ||||
Accrued promotional expenses
|
516 | 646 | ||||||
Estimated allowance for sales returns
|
385 | 1,007 | ||||||
Settlement accruals
|
2,624 | 2,723 | ||||||
Deferred taxes
|
2,280 | 1,433 | ||||||
Income taxes payable
|
| 538 | ||||||
Other
|
151 | 311 | ||||||
|
||||||||
Total current liabilities
|
10,428 | 16,287 | ||||||
|
||||||||
Non-current employee benefits
|
1,416 | 1,142 | ||||||
Deferred income taxes
|
25,984 | 22,550 | ||||||
Other long-term liabilities
|
4,056 | 2,982 | ||||||
|
||||||||
Total liabilities
|
41,884 | 42,961 | ||||||
|
||||||||
|
||||||||
Commitments and contingencies (Note 11)
|
||||||||
|
||||||||
Stockholders equity
|
||||||||
Common stock ($1 par value per share; 1,000 shares
authorized; 100 shares issued and outstanding)
|
| | ||||||
Additional paid-in capital
|
358,692 | 372,292 | ||||||
Accumulated other comprehensive income
|
288 | 295 | ||||||
Accumulated deficit
|
(174,113 | ) | (204,504 | ) | ||||
|
||||||||
Total stockholders equity
|
184,867 | 168,083 | ||||||
|
||||||||
Total liabilities and stockholders equity
|
$ | 226,751 | $ | 211,044 | ||||
|
3
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Revenues *
|
$ | 106,066 | $ | 106,446 | $ | 70,652 | ||||||
|
||||||||||||
Expenses
|
||||||||||||
Cost of goods sold
|
78,444 | 80,772 | 43,455 | |||||||||
Operating, selling, administrative and
general expenses
|
2,941 | 4,564 | 6,499 | |||||||||
Management fees paid to Vector Group Ltd.
|
500 | 500 | 500 | |||||||||
Restructuring and impairment charges,
changes in estimate
|
| 900 | (18 | ) | ||||||||
Research and development
|
524 | 1,552 | 2,960 | |||||||||
|
||||||||||||
Operating income
|
23,657 | 18,158 | 17,256 | |||||||||
|
||||||||||||
Other income (expense)
|
||||||||||||
Interest income
|
1 | 3 | 105 | |||||||||
Interest expense
|
| (6 | ) | (39 | ) | |||||||
|
||||||||||||
Income before income taxes
|
23,658 | 18,155 | 17,322 | |||||||||
|
||||||||||||
Income tax benefit (expense)
|
6,733 | 89,903 | (1,983 | ) | ||||||||
|
||||||||||||
Net income
|
$ | 30,391 | $ | 108,058 | $ | 15,339 | ||||||
|
* | Revenues and cost of goods sold include excise taxes of $54,250, $52,365, and $22,212 for the years ended December 31, 2010, 2009, and 2008, respectively. |
4
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||||||
Common Stock | Paid-In | Comprehensive | Accumulated | Stockholders | ||||||||||||||||||||
Shares | Amount | Capital | Income | Deficit | Equity (Deficiency) | |||||||||||||||||||
|
||||||||||||||||||||||||
Balance at January 1, 2008
|
100 | $ | | $ | 415,067 | $ | 312 | $ | (327,848 | ) | $ | 87,531 | ||||||||||||
|
||||||||||||||||||||||||
Net Income
|
| | | | 15,339 | 15,339 | ||||||||||||||||||
|
||||||||||||||||||||||||
Pension Adjustments,
measurement date
|
| | | | (53 | ) | (53 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Accumulated other comprehensive income
|
| | | 9 | | 9 | ||||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Total Comprehensive income
|
15,295 | |||||||||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Distributions
|
| | (21,400 | ) | | | (21,400 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Balance as of December 31, 2008
|
100 | * | | 393,667 | 321 | (312,562 | ) | 81,426 | ||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Net Income
|
| | | | 108,058 | 108,058 | ||||||||||||||||||
|
||||||||||||||||||||||||
Accumulated other comprehensive income
|
| | | (26 | ) | | (26 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Total Comprehensive Income
|
| | | | | 108,032 | ||||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Distributions
|
| | (21,375 | ) | | | (21,375 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Balance as of December 31, 2009
|
100 | * | | 372,292 | 295 | (204,504 | ) | 168,083 | ||||||||||||||||
|
||||||||||||||||||||||||
|
||||||||||||||||||||||||
Net Income
|
| | | | 30,391 | 30,391 | ||||||||||||||||||
|
||||||||||||||||||||||||
Accumulated other comprehensive income
|
| | | (7 | ) | | (7 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Total Comprehensive Income
|
| | | | | 30,384 | ||||||||||||||||||
|
||||||||||||||||||||||||
Distributions
|
| | (13,600 | ) | | | (13,600 | ) | ||||||||||||||||
|
||||||||||||||||||||||||
Balance as of December 31, 2010
|
100 | * | $ | | $ | 358,692 | $ | 288 | $ | (174,113 | ) | $ | 184,867 | |||||||||||
|
* | Stock pledged as collateral for Vector Tobaccos guarantee of the Parents debt. See Note 1. |
5
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Cash flows from operating activities
|
||||||||||||
Net income
|
$ | 30,391 | $ | 108,058 | $ | 15,339 | ||||||
Adjustments to reconcile net income to net cash
provided by operating activities
|
||||||||||||
Depreciation and amortization
|
8 | 28 | 39 | |||||||||
Deferred taxes
|
(6,994 | ) | (90,593 | ) | 2,856 | |||||||
Net gain on disposal of equipment
|
| | (50 | ) | ||||||||
Restructuring and impairment charges, changes in
estimates
|
| 938 | (18 | ) | ||||||||
Cash
payments on restructuring liabilities
|
(120 | ) | (753 | ) | (66 | ) | ||||||
Changes in
assets and liabilities:
|
| |||||||||||
Accounts receivable
|
446 | (173 | ) | (49 | ) | |||||||
Inventories
|
418 | (972 | ) | 20 | ||||||||
Other assets
|
(514 | ) | 2 | (84 | ) | |||||||
Accounts payable
|
| (8 | ) | 2 | ||||||||
Due to/from related parties
|
(5,157 | ) | 3,523 | (214 | ) | |||||||
Accrued expenses
|
(891 | ) | (56 | ) | 992 | |||||||
Income tax payable
|
(538 | ) | 538 | | ||||||||
Employee benefits
|
267 | 246 | 212 | |||||||||
Other long-term liabilities
|
1,074 | 1,104 | 107 | |||||||||
|
||||||||||||
Net cash provided by operating activities
|
18,390 | 21,882 | 19,086 | |||||||||
|
||||||||||||
|
||||||||||||
Cash flows from investing activities
|
||||||||||||
Capital expenditures
|
| | (4 | ) | ||||||||
Proceeds from sales of equipment
|
| | 50 | |||||||||
Increase in restricted assets
|
(241 | ) | | | ||||||||
Increase in cash surrender value of life insurance
policies
|
(218 | ) | (213 | ) | (208 | ) | ||||||
|
||||||||||||
Net cash used in investing activities
|
(459 | ) | (213 | ) | (162 | ) | ||||||
|
||||||||||||
|
||||||||||||
Cash flows from financing activities
|
||||||||||||
Distributions to Parent
|
(13,600 | ) | (21,375 | ) | (21,400 | ) | ||||||
|
||||||||||||
Net cash used in financing activities
|
(13,600 | ) | (21,375 | ) | (21,400 | ) | ||||||
|
||||||||||||
|
||||||||||||
Net (decrease) increase in cash and cash equivalents
|
4,331 | 294 | (2,476 | ) | ||||||||
Cash and cash equivalents
|
||||||||||||
Beginning of period
|
472 | 178 | 2,654 | |||||||||
|
||||||||||||
End of period
|
$ | 4,803 | $ | 472 | $ | 178 | ||||||
|
6
Supplemental schedule of non-cash investing and financing activities | |||
| Vector Tobacco paid income taxes of $1,234, $150 and $0 in 2010, 2009 and 2008, respectively. | ||
| Vector Tobacco paid interest of $0, $6 and $39 in 2010, 2009 and 2008, respectively. |
7
1. | Basis of Presentation | |
Vector Tobacco Inc. (Vector Tobacco or the Company), is a wholly-owned subsidiary of VGR Holding LLC (VGR), which in turn is wholly owned by Vector Group Ltd. (Vector or Parent). The Company is engaged in the manufacture and sale of cigarettes in the United States. Certain management and administrative functions are performed by affiliates (See Note 13 and 14). | ||
Management believes the assumptions underlying the consolidated financial statements are reasonable. However, the consolidated financial statements included herein may not necessarily reflect the Companys results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had the Company been a stand-alone company during the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. | ||
Liggett Vector Brands Inc. (Liggett Vector Brands), a company affiliated through common ownership, coordinates and executes the sales, marketing, administration and manufacturing efforts along with certain support functions for all of Vectors tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to Vector Tobacco. | ||
Liggett Group LLC (Liggett), an affiliate of Vector Tobacco, manufactures most of Vector Tobaccos cigarette brands under contract at Liggetts Mebane, North Carolina manufacturing facility. | ||
Vector and VGR are holding companies and as a result do not have any operating activities that generate revenues or cash flows. Accordingly, Vector relies on distributions from VGR and its other subsidiaries and investments and VGR relies on distributions from its other subsidiaries, including Vector Tobacco, in order to fund its operations and meet its obligations. Vector has certain debt outstanding which require interest and principal payments over the terms of such debt. Interest and principal to service the debt is expected to be funded by Vectors cash and cash equivalents, investments, the operations of Vectors subsidiaries, including Vector Tobacco, and proceeds, if any, from Vectors future financings. During 2010, 2009, and 2008 Vector Tobacco made distributions of $13,600, $21,375, and $21,400 respectively, to VGR. | ||
The Company has evaluated events that occurred subsequent to December 31, 2010, through the financial statement issue date of February 25, 2011 and determined that there were no recordable or reportable subsequent events. | ||
11% Senior Secured Notes due 2015 Vector | ||
Vector has outstanding $415,000 principal amount of its 11% Senior Secured Notes due 2015 (the Senior Secured Notes). The Senior Secured Notes were sold in August 2007 ($165,000), September 2009 ($85,000), April 2010 ($75,000) and December 2010 ($90,000) in private offerings to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. | ||
In May 2008 and June 2010, Vector completed offers to exchange the Senior Secured Notes then outstanding for an equal amount of newly issued 11% Senior Secured Notes due 2015. The new Senior Secured Notes have substantially the same terms as the original Notes, except that the new Senior Secured Notes have been registered under the Securities Act. Vector agreed to consummate a registered exchange offer for the additional Senior Secured Notes issued in December 2010 within 360 days after the date of their initial issuance. If Vector fails to timely comply with its registration obligations, it will be required to pay additional interest on these notes until it complies. |
8
9
2. | Summary of Significant Accounting Policies | |
Basis of Presentation
These consolidated financial statements include the accounts of Vector Tobacco and its wholly-owned subsidiary, Vector Tobacco Limited (Bermuda.) The consolidated financial statements exclude VT Aviation LLC as Vector consolidates this entity as its primary beneficiary. In 2008, Vector Tobacco Limited (Bermuda) was dissolved. All significant intercompany balances and transactions have been eliminated. |
||
Estimates and Assumptions
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of December 31, 2010, and 2009, and the reported amounts of revenues and expenses for the years ended December 31, 2010, 2009, and 2008. Significant estimates subject to material changes in the near term include restructuring and impairment charges, promotional accruals, inventory reserves, allowances for doubtful accounts and allowances for sales returns, Master Settlement Agreement (MSA) liabilities and litigation and defense costs. Actual results could differ from those estimates. |
||
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash includes cash on hand, cash on deposit in banks and cash equivalents, comprised of short-term investments which have an original maturity of 90 days or less. The carrying value of cash and cash equivalents, restricted assets and short-term loans approximate their fair value. The Company places its cash and cash equivalents with large commercial banks. The Federal Deposit Insurance Corporation (FDIC) and Securities Investor Protection Corporation (SIPC) insure these balances, up to $250 and $500, respectively. The carrying amount of bank deposits, including amounts classified as cash and cash equivalents, were approximately $4,803 and $472 at December 31, 2010, and 2009 respectively. Bank deposits of approximately $100 at December 31, 2010 and 2009, are insured by the FDIC. |
||
Accounts Receivable
Accounts receivable-trade is recorded at their net realizable value. |
10
11
12
13
December 31, 2010 | December 31, 2009 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets:
|
||||||||||||||||
|
||||||||||||||||
Cash and cash equivalents
|
$ | 4,803 | $ | 4,803 | $ | 472 | $ | 472 |
14
3. | Medallion | |
On April 1, 2002, an indirect wholly owned subsidiary of Vector acquired the stock of Medallion and certain related assets from Medallions principal stockholder. The total purchase price consisted of $50,000 in cash and $60,000 in promissory notes, which has been fully paid. | ||
Medallion, formerly a discount cigarette manufacturer headquartered in Richmond, Virginia, is a participant in the MSA agreement between the state Attorneys General and the tobacco industry. Medallion has no payment obligations under the MSA agreement except to the extent its market share exceeds approximately 0.28% of total cigarettes sold in the United States (approximately 840 million cigarettes in 2010). | ||
4. | Inventories | |
Inventories consist of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Leaf tobacco
|
$ | | $ | 329 | ||||
Finished goods
|
5,397 | 5,467 | ||||||
|
||||||||
Inventories at current cost
|
5,397 | 5,796 | ||||||
LIFO adjustment
|
(33 | ) | (14 | ) | ||||
|
||||||||
Total inventories, net
|
$ | 5,364 | $ | 5,782 | ||||
|
5. | Property, Plant and Equipment | |
Property, plant and equipment consist of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Machinery and equipment
|
$ | 848 | 858 | |||||
|
15
2010 | 2009 | |||||||
|
||||||||
Less accumulated depreciation
|
(831 | ) | (833 | ) | ||||
|
||||||||
Property, plant and equipment, net
|
$ | 17 | $ | 25 | ||||
|
Depreciation expense was $9, $20, and $32 for the years ended December 31, 2010, 2009, and 2008, respectively. There were no commitments to purchase machinery and equipment at December 31, 2010. | ||
6. | Intangible Assets | |
Intangible assets consist of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Indefinite useful live intangible asset
|
$ | 107,511 | $ | 107,511 | ||||
|
In connection with the acquisition of Medallion, the Company allocated a portion of the total purchase price of $110,000 to Medallions exemption under the MSA agreement. See Note 3. This intangible asset was deemed to have an indefinite useful life and is tested for impairment annually or more frequently when indicators of impairment are present. The annual test was performed in the fourth quarter of 2010, 2009, and 2008, resulting in no impairment. | ||
Other intangible assets consist of trademarks which were amortized using the straight-line method over 10 years and had no net book value at December 31, 2010 and 2009. Amortization expense associated with trademarks and patents totaled $0 in 2010, $8 in 2009 and $7 in 2007. An impairment charge of $38 was taken in the fourth quarter of 2009 to write off the remaining value of the trademarks. | ||
7. | Employee Benefit Plans | |
The Companys portion of the 401(k) plan expenses sponsored by Liggett Vector Brands, for entities in the affiliates controlled group, were $12, $43, and $71 for the years ended December 31, 2010, 2009, and 2008, respectively. | ||
Defined Benefit Retirement Plans
During 2010, 2009, and 2008, a certain senior executive of the Company also participated in the Supplemental Executive Retirement Plan (SERP) sponsored by Vector where the Company will pay supplemental retirement benefits to certain key employees. The Company expensed $267, $245, and $212 in relation to the SERP plan during 2010, 2009, and 2008 respectively. The executives retirement date is projected to be January 1, 2012 and the Company estimates payments under the SERP will be approximately $1,700. |
||
8. | Income Taxes | |
Vector Tobaccos income tax provision and related deferred income tax amounts are determined as if the Company filed tax returns on a stand alone basis. The Companys entities currently join in the filing of a consolidated tax return with Vector and its other subsidiaries. |
16
Year Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Current:
|
||||||||||||
U.S. Federal
|
$ | 4,981 | $ | 4,746 | $ | | ||||||
State
|
1,635 | 1,487 | | |||||||||
|
||||||||||||
|
$ | 6,616 | $ | 6,233 | $ | | ||||||
|
||||||||||||
Deferred:
|
||||||||||||
U.S. Federal
|
$ | (14,386 | ) | $ | (91,041 | ) | $ | 1,468 | ||||
State
|
1,037 | (5,095 | ) | 515 | ||||||||
|
||||||||||||
|
$ | (13,349 | ) | $ | (96,136 | ) | $ | 1,983 | ||||
|
||||||||||||
Total
|
$ | (6,733 | ) | $ | (89,903 | ) | $ | 1,983 |
2010 | 2009 | |||||||||||||||
Deferred Tax | Deferred Tax | |||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||
Sales and product allowances
|
$ | 164 | $ | | $ | 419 | $ | |
17
2010 | 2009 | |||||||||||||||
Deferred Tax | Deferred Tax | |||||||||||||||
Asset | Liability | Asset | Liability | |||||||||||||
Inventories
|
15 | 2,280 | 15 | 1,433 | ||||||||||||
Property, plant and equipment
|
| 8 | | 8 | ||||||||||||
Compensation, benefits and related items
|
590 | | 467 | | ||||||||||||
Amortization of intangibles
|
| 25,976 | | 22,542 | ||||||||||||
Restructuring
|
| 6 | | |||||||||||||
Settlement payments
|
2,713 | | 1,901 | | ||||||||||||
Net operating losses
|
125,714 | | 139,545 | | ||||||||||||
Valuation allowance
|
(22,468 | ) | | (46,899 | ) | | ||||||||||
|
||||||||||||||||
Total deferred taxes
|
$ | 106,728 | $ | 28,264 | $ | 95,454 | $ | 23,983 | ||||||||
|
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Income before income tax provision
|
$ | 23,658 | $ | 18,155 | $ | 17,322 | ||||||
|
||||||||||||
Federal income tax expense at statutory rate
|
$ | 8,280 | $ | 6,354 | $ | 6,063 | ||||||
State income tax provision at statutory rate,
net of federal income tax benefit
|
1,736 | 1,654 | 338 | |||||||||
Other changes due to changes in state income tax rates
|
7,682 | (493 | ) | (385 | ) | |||||||
Change in valuation allowance, net
|
(24,431 | ) | (97,418 | ) | (4,033 | ) | ||||||
|
||||||||||||
Total income tax (benefit) provision
|
$ | (6,733 | ) | $ | (89,903 | ) | $ | 1,983 | ||||
|
There were no unrecognized tax benefits for the years ended December 31, 2010, 2009 and 2008, respectively. The Company classifies all tax-related interest and penalties as income tax expense. | ||
9. | Operating Leases | |
As of December 31, 2010, the Company has no operating leases. | ||
Rental expense for the years ended December 31, 2010, 2009, and 2008 was $0, $378, and $340, respectively. This includes $141 expensed as part of the Companys restructuring in 2009. | ||
10. | Concentrations of Credit Risk | |
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables and cash and cash equivalents. | ||
Vector Tobaccos customers are primarily candy and tobacco distributors, and large grocery, drug and convenience store chains. Three customers accounted for approximately 47%, 14% and 13%, respectively of gross sales in 2010. Three customers accounted for approximately 42%, 14% and 13%, respectively of gross sales in 2009. Three customers accounted for approximately 35%, 17% and 15%, respectively of |
18
gross sales in 2008. Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising the Companys customer base and the frequency of orders by these customers. Vector Tobaccos largest single customer represented approximately 0% of net accounts receivable at December 31, 2010 and 39% at December 31, 2009. Ongoing credit evaluations of customers financial condition are performed and, generally, no collateral is required. The Company maintains reserves for potential credit losses and such losses, in the aggregate, have generally not exceeded managements estimates. | ||
The Company maintains cash deposits and money market accounts with major banks which from time to time may exceed federally insured limits. The Company periodically assesses the financial condition of the institutions and believes that the risk of loss is minimal. | ||
11. | Contingencies | |
Tobacco-Related Litigation | ||
Overview
Since 1954, United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. Although new cases continue to be commenced against certain cigarette manufacturers, including Vector Tobaccos affiliate, Liggett Group LLC, Vector Tobacco has not been named as a defendant in any such actions. |
||
Master Settlement Agreement
In November 1998, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation, R.J. Reynolds Tobacco Company and Lorillard Tobacco Company (collectively, the Original Participating Manufacturers or OPMs) (together with the OPMs and any other tobacco product manufacturer that becomes a signatory, the Subsequent Participating Manufacturers or SPMs), (the OPMs and SPMs are hereinafter referred to jointly as the Participating Manufacturers) entered into the Master Settlement Agreement (the MSA) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas (collectively, the Settling States) to settle the asserted and unasserted health care cost recovery and certain other claims of those Settling States. The MSA received final judicial approval in each of the settling jurisdictions. In February 1999, Medallion (n/k/a Vector Tobacco) became a subsequent participating manufacturer under the MSA. |
||
In the Settling States, the MSA released Vector Tobacco from: |
| all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and | ||
| all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds, relating to future conduct arising out of the use or exposure to, tobacco products that have been manufactured in the ordinary course of business. |
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters |
19
20
| use of net unit amounts is not required by the MSA (as reflected by, among other things, the use of gross unit amounts through 2005); | ||
| such a change is not authorized without the consent of affected parties to the MSA; | ||
| the MSA provides for four-year time limitation periods for revisiting calculations and determinations, which precludes recalculating Vector Tobaccos 1997 Market Share (and thus, Vector Tobaccos market share exemption); and | ||
| Vector Tobacco and others have relied upon the calculations based on gross unit amounts since 1998. |
21
12. | Legislation and Regulation | |
Vector Tobaccos management believes that it is in compliance in all material respects with the laws regulating cigarette manufacturers. | ||
13. | Related Party Transactions | |
In October 2002, the sales and marketing functions of Liggett and Vector Tobacco were combined into Liggett Vector Brands. Liggett Vector Brands coordinates and executes the sales, marketing and manufacturing efforts along with certain support functions for all of the Companys tobacco operations. In conjunction with the duties performed at Liggett Vector Brands, a portion of sales, marketing, manufacturing, distribution, and administrative expenses have been allocated to the Company. During 2010, 2009 and 2008, Vector Tobacco expensed $1,723, $3,507 and $3,512, respectively, for services |
22
2010 | 2009 | |||||||
|
||||||||
Liggett
|
$ | 969 | $ | 6,304 | ||||
Liggett Vector Brands
|
3,503 | 3,325 | ||||||
|
||||||||
|
$ | 4,472 | $ | 9,629 | ||||
|
14. | Restructuring |
Asset Impairment | ||||||||||||
Employee | Contract | |||||||||||
Severance | Termination, | |||||||||||
and Benefits | and Exit Cost | Totals | ||||||||||
|
||||||||||||
Balance as of December 31, 2007
|
$ | 70 | $ | 60 | $ | 130 | ||||||
Change in estimate
|
(14 | ) | (4 | ) | (18 | ) |
23
Asset Impairment | ||||||||||||
Employee | Contract | |||||||||||
Severance | Termination, | |||||||||||
and Benefits | and Exit Cost | Totals | ||||||||||
|
||||||||||||
Utilized in 2008
|
(56 | ) | (10 | ) | (66 | ) | ||||||
|
||||||||||||
|
||||||||||||
Balance as of December 31, 2008
|
| 46 | 46 | |||||||||
|
||||||||||||
Restructuring charges
|
691 | 209 | 900 | |||||||||
Utilized in 2009
|
(586 | ) | (206 | ) | (792 | ) | ||||||
|
||||||||||||
Balance as of December 31, 2009
|
105 | 49 | 154 | |||||||||
Change in estimate
|
| (34 | ) | (34 | ) | |||||||
Utilized in 2010
|
(105 | ) | (15 | ) | (120 | ) | ||||||
|
||||||||||||
Balance as of December 31, 2010
|
$ | | $ | | $ | | ||||||
|
In November 2006, Vectors Board of Directors determined to discontinue the genetics operation of Vector Tobacco and not to pursue, at this time, FDA approval of QUEST as a smoking cessation aid, due to the projected significant additional time and expense involved in seeking such approval. In connection with this decision, we eliminated 12 full-time positions effective December 31, 2006. In addition, we terminated certain license agreements associated with the genetics operation. In March 2009, Vector Tobacco eliminated an additional nine full-time positions in connection with this decision. | ||
The Company recognized pre-tax restructuring charges of $900 during 2009 in connection with the closure of its Durham research operations. The restructuring charges primarily related to employee severance and benefit costs. | ||
15. | Stock Compensation | |
The Companys parent, Vector, offers stock option plans. As of December 31, 2010, there were approximately 3,815,336 shares available for issuance under Vectors Amended and Restated 1999 Long-Term Incentive Plan (the 1999 Plan). All employees of Vector and its subsidiaries are eligible to receive grants under such plans. Although Vector Tobacco has no employees it received a stock compensation expense allocation from Liggett Vector Brands of $0, $39, and $43 for the years ended December 31, 2010, 2009, and 2008, respectively. These amounts have been recorded in selling, general and administrative cost in the Companys consolidated statement of operations. As of December 31, 2010 Liggett Vector Brands had employees with options for 712,077 shares of Vectors common stock. | ||
Nonqualified options for 105,000 shares of Vectors common stock were issued during 2010 to employees under Vectors stock compensation plans. The exercise price of the options granted was $15.63 in 2010. The exercise prices of the options granted in 2010 were at the fair market value on the dates of the grants. There were no option grants during 2009 or 2008 to Liggett Vector Brands employees. Awards of options to employees under the Vectors stock compensation plans generally vest over periods ranging from four to five years and have a term of ten years from the date of grant. | ||
The fair value of option grants is estimated at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price characteristics which are significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models do not necessarily provide a reliable single measure of the fair value of stock-based compensation awards. |
24
Risk-free interest rate
|
2.59% | |
Expected volatility
|
24.43% | |
Dividend yield
|
9.75% | |
Expected holding period
|
4.74 years | |
Weighted
average grant date fair value
|
$1.03 |
25
Additions | ||||||||||||||||
Balance at | Charged to | Balance at | ||||||||||||||
Beginning | Costs and | End of | ||||||||||||||
of Period | Expenses | Deductions | Period | |||||||||||||
|
||||||||||||||||
Description
|
||||||||||||||||
Year ended December 31, 2010
|
||||||||||||||||
Allowance for:
|
||||||||||||||||
Doubtful accounts
|
$ | 4 | $ | | $ | | $ | 4 | ||||||||
Cash discounts
|
14 | 2,459 | 2,469 | 4 | ||||||||||||
Deferred tax valuation allowance
|
46,899 | | 24,431 | 22,468 | ||||||||||||
Sales returns
|
1,007 | 490 | 1,112 | 385 | ||||||||||||
|
||||||||||||||||
Total
|
$ | 47,924 | $ | 2,949 | $ | 28,012 | $ | 22,861 | ||||||||
|
||||||||||||||||
|
||||||||||||||||
Year ended December 31, 2009
|
||||||||||||||||
Allowance for:
|
||||||||||||||||
Doubtful accounts
|
$ | 5 | $ | | $ | 1 | $ | 4 | ||||||||
Cash discounts
|
10 | 2,553 | 2,549 | 14 | ||||||||||||
Deferred tax valuation allowance
|
143,835 | | 96,936 | 46,899 | ||||||||||||
Sales returns
|
1,000 | 622 | 615 | 1,007 | ||||||||||||
|
||||||||||||||||
Total
|
$ | 144,850 | $ | 3,175 | $ | 100,101 | $ | 47,924 | ||||||||
|
||||||||||||||||
|
||||||||||||||||
Year ended December 31, 2008
|
||||||||||||||||
Allowance for:
|
||||||||||||||||
Doubtful accounts
|
$ | 5 | $ | | $ | | $ | 5 | ||||||||
Cash discounts
|
8 | 1,817 | 1,815 | 10 | ||||||||||||
Deferred tax valuation allowance
|
138,882 | 4,953 | | 143,835 | ||||||||||||
Sales returns
|
1,100 | 542 | 642 | 1,000 | ||||||||||||
|
||||||||||||||||
Total
|
$ | 139,995 | $ | 7,312 | $ | 2,457 | $ | 144,850 | ||||||||
|
26
Page(s) | ||||
|
||||
Report of Independent Registered Public Accounting Firm
|
1 | |||
|
||||
Consolidated Financial Statements
|
||||
|
||||
Consolidated Statements of Financial Position
|
2 | |||
|
||||
Consolidated Statements of Operations
|
3 | |||
|
||||
Consolidated Statements of Changes in Members Equity
|
4 | |||
|
||||
Consolidated Statements of Cash Flows
|
5 | |||
|
||||
Notes to Consolidated Financial Statements
|
6-19 |
1
2010 | 2009 | |||||||
|
||||||||
Assets
|
||||||||
Current assets
|
||||||||
Cash and cash equivalents
|
$ | 44,307 | $ | 26,195 | ||||
Certificates of deposit
|
725 | 725 | ||||||
Receivables
|
3,431 | 4,702 | ||||||
Prepaid expenses and other current assets
|
2,190 | 1,962 | ||||||
|
||||||||
Total current assets
|
50,653 | 33,584 | ||||||
Property, equipment and leasehold improvements, net
|
15,556 | 13,498 | ||||||
Goodwill
|
38,676 | 38,601 | ||||||
Trademarks
|
21,663 | 21,663 | ||||||
Other intangible assets, net
|
1,085 | 742 | ||||||
Deferred financing charges, net
|
| 57 | ||||||
Security deposits and other non current assets
|
858 | 920 | ||||||
Investments in non-consolidated businesses
|
2,926 | 1,894 | ||||||
|
||||||||
Total assets
|
$ | 131,417 | $ | 110,959 | ||||
|
||||||||
Liabilities and Members Equity
|
||||||||
Current liabilities
|
||||||||
Current portion of notes payable and other obligations
|
$ | 1,067 | $ | 233 | ||||
Current portion of notes payable to related parties
|
581 | 5,517 | ||||||
Accounts payable and accrued expenses
|
12,340 | 13,416 | ||||||
Accrued compensation
|
3,306 | 2,946 | ||||||
Commissions payable
|
5,216 | 4,040 | ||||||
Current portion of accrued royalties
|
322 | 322 | ||||||
|
||||||||
Total current liabilities
|
22,832 | 26,474 | ||||||
Notes payable and other obligations, less current portion
|
1,129 | 863 | ||||||
Notes payable to related parties, less current portion
|
693 | 1,273 | ||||||
Deferred rent
|
9,404 | 7,022 | ||||||
Accrued royalties, less current portion
|
403 | 725 | ||||||
|
||||||||
Total liabilities
|
34,461 | 36,357 | ||||||
Commitments and contingencies (Note 12)
|
||||||||
Members equity
|
96,956 | 74,602 | ||||||
|
||||||||
Total liabilities and members equity
|
$ | 131,417 | $ | 110,959 | ||||
|
2
(Not covered | ||||||||||||
by Auditor's | ||||||||||||
Report) | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Revenues
|
$ | 348,136 | $ | 283,851 | $ | 352,680 | ||||||
|
||||||||||||
Costs and expenses
|
||||||||||||
Selling
|
227,083 | 179,333 | 236,973 | |||||||||
General and administration
|
80,286 | 85,237 | 93,414 | |||||||||
|
||||||||||||
Total costs and expenses
|
307,369 | 264,570 | 330,387 | |||||||||
|
||||||||||||
Operating income
|
40,767 | 19,281 | 22,293 | |||||||||
|
||||||||||||
Other income (expense)
|
||||||||||||
|
||||||||||||
Equity in net income of non-consolidated
businesses
|
2,440 | 2,090 | | |||||||||
Interest income
|
20 | 44 | 308 | |||||||||
Interest expense
|
(572 | ) | (2,457 | ) | (3,598 | ) | ||||||
|
||||||||||||
Net income before taxes
|
42,655 | 18,958 | 19,003 | |||||||||
Income tax expense
|
1,329 | 223 | 253 | |||||||||
|
||||||||||||
Net income
|
$ | 41,326 | $ | 18,735 | $ | 18,750 | ||||||
|
3
(Not covered | ||||||||||||
by Auditor's | ||||||||||||
Report) | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Balance, Beginning of Year
|
$ | 74,602 | $ | 60,722 | $ | 52,650 | ||||||
Net income
|
41,326 | 18,735 | 18,750 | |||||||||
Distributions to members
|
(18,972 | ) | (4,855 | ) | (10,678 | ) | ||||||
|
||||||||||||
Balance, End of Year
|
$ | 96,956 | $ | 74,602 | $ | 60,722 | ||||||
|
4
(Not covered | ||||||||||||
by Auditors | ||||||||||||
Report) | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Cash flows from operating activities
|
||||||||||||
Net income
|
$ | 41,326 | $ | 18,735 | $ | 18,750 | ||||||
Adjustments
to reconcile net income to net cash provided by operating activities
|
||||||||||||
Depreciation and amortization
|
4,011 | 4,703 | 5,746 | |||||||||
Loss on sale and disposal of property and equipment
|
22 | 172 | 132 | |||||||||
Interest paid in-kind, net
|
21 | (55 | ) | 369 | ||||||||
Amortization of discount on subordinated debt, net
|
129 | 1,299 | 714 | |||||||||
Equity in net income of non-consolidated businesses, net
|
(2,440 | ) | (2,090 | ) | | |||||||
Dividends received from non-consolidated businesses
|
1,408 | | | |||||||||
Deferred rent
|
2,382 | 1,899 | 836 | |||||||||
Changes in operating assets and liabilities
|
||||||||||||
Receivables
|
1,271 | 100 | 936 | |||||||||
Prepaid expenses and other assets
|
(293 | ) | 732 | 344 | ||||||||
Other assets
|
62 | (16 | ) | 9 | ||||||||
Accounts payable, accrued expenses and accrued compensation
|
(716 | ) | (3,346 | ) | (1,258 | ) | ||||||
Commissions payable
|
1,176 | 898 | (1,020 | ) | ||||||||
Accrued royalties
|
(322 | ) | (322 | ) | (322 | ) | ||||||
|
||||||||||||
Net cash provided by operating activities
|
48,037 | 22,709 | 25,236 | |||||||||
|
||||||||||||
Cash flows from investing activities
|
||||||||||||
Capital expenditures
|
(4,959 | ) | (2,245 | ) | (3,372 | ) | ||||||
Investments in non-consolidated businesses, net
|
| (249 | ) | | ||||||||
Other
|
(75 | ) | (23 | ) | 3 | |||||||
|
||||||||||||
Net cash used in investing activities
|
(5,034 | ) | (2,517 | ) | (3,369 | ) | ||||||
|
||||||||||||
Cash flows from financing activities
|
||||||||||||
Payments of notes payable and other obligations
|
(274 | ) | (256 | ) | (262 | ) | ||||||
Payments of notes payable to related parties
|
(5,645 | ) | (10,286 | ) | (16,718 | ) | ||||||
Distributions to members
|
(18,972 | ) | (4,855 | ) | (10,678 | ) | ||||||
|
||||||||||||
Net cash used in financing activities
|
(24,891 | ) | (15,397 | ) | (27,658 | ) | ||||||
|
||||||||||||
Net change in cash and cash equivalents
|
18,112 | 4,795 | (5,791 | ) | ||||||||
Cash and cash equivalents
|
||||||||||||
Beginning of year
|
26,195 | 21,400 | 27,191 | |||||||||
|
||||||||||||
End of year
|
$ | 44,307 | $ | 26,195 | $ | 21,400 | ||||||
|
||||||||||||
Supplemental disclosure of cash flow information
|
||||||||||||
Interest paid
|
$ | 234 | $ | 1,075 | $ | 2,500 | ||||||
Income taxes paid
|
1,308 | 264 | 608 | |||||||||
Assets acquired under capital lease
|
746 | | ||||||||||
Acquisition of property management contracts through borrowings
|
610 | | |
5
1. | Basis of Presentation | |
Principles of Consolidation
The consolidated financial statements include the accounts of Douglas Elliman Realty LLC, formerly Montauk Battery Realty LLC, a New York limited liability company, and its wholly-owned subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. |
||
Nature of Operations
The Company is engaged primarily in the real estate brokerage business through its principal subsidiaries, Douglas Elliman LLC (Douglas Elliman), a residential real estate brokerage company based in New York City and its Long Island based operations, B&H Associates of New York LLC and B&H of the Hamptons LLC, both of which conduct business as Prudential Douglas Elliman Real Estate (Prudential Douglas Elliman). The Company is engaged in property management through its subsidiary, Residential Management Group LLC, which conducts business as Douglas Elliman Property Management (DEPM). The Company is also engaged in the mortgage brokerage business through its joint venture ownership in DE Capital Mortgage LLC. Additional services provided by the Company include title search and appraisal services through PDE Title LLC (Title) and marketing consulting services through DE Worldwide Consulting LLC (DEWW). |
||
Organization
On October 15, 2002, Montauk Battery Realty LLC was formed to consolidate the ownership of the then Companys operating entities, B&H Associates of New York LLC and B&H of the Hamptons LLC, under one company, which was completed on December 19, 2002. On March 14, 2003, the Company acquired Douglas Elliman and DEPM and, on May 19, 2003, Montauk Battery Realty LLC changed its name to Douglas Elliman Realty LLC. In October 2004, upon receipt of required regulatory approvals, the Company purchased all of the then outstanding membership interests in Burr Enterprises Ltd., which conducts business as Preferred Empire Mortgage Company. |
||
2. | Summary of Significant Accounting Policies | |
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. |
||
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with an original maturity of less than three months to be cash equivalents. Excluded from cash and cash equivalents are certificates of deposit of $725 as of December 31, 2010 and 2009 as the original maturities of these deposits are in excess of three months. |
6
7
8
9
10
3. | Property and Equipment | |
Property and equipment at consists of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Furniture, fixtures and office equipment
|
$ | 18,982 | $ | 19,528 | ||||
Computer software
|
7,895 | 6,378 | ||||||
Leasehold improvements
|
21,065 | 18,313 | ||||||
Automobiles
|
137 | 137 | ||||||
Construction in progress
|
1,244 | 1,279 | ||||||
|
||||||||
|
49,323 | 45,635 | ||||||
Less, accumulated depreciation and amortization
|
(33,767 | ) | (32,137 | ) | ||||
|
||||||||
|
$ | 15,556 | $ | 13,498 | ||||
|
4. | Investments in Non-Consolidated Businesses | |
During 2006, the Company invested $1,500 for a 50% interest in a property and casualty insurance broker (the Broker). The Company made this investment in order to enter into the insurance |
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5. | Intangible Assets | |
Intangible assets at consist of the following at December 31: |
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Goodwill
|
$ | 38,676 | $ | 38,601 | $ | 38,579 | ||||||
Trademarks
|
21,663 | 21,663 | 21,663 | |||||||||
Deferred financing charges
|
506 | 506 | 506 | |||||||||
Other intangible assets
|
3,345 | 2,735 | 2,735 | |||||||||
|
||||||||||||
|
64,190 | 63,505 | 63,482 | |||||||||
Less: accumulated amortization on amortizable intangibles
|
(2,766 | ) | (2,442 | ) | (2,182 | ) | ||||||
|
||||||||||||
|
$ | 61,424 | $ | 61,063 | $ | 61,300 | ||||||
|
Amortization of other intangibles and deferred financing charges for the years ended December 31, 2010, 2009 and 2008 was $329, $260 and $239, respectively. Amortization expense is estimated to be $215, $129, $105, $95 and $35 during the five years ended December 31, 2011 through 2015, respectively. In 2010 and 2009, the Company paid $75 and $22 in connection with the finalization of earn outs from earlier year acquisitions. In 2010, the Company acquired certain property management contracts with a value of $610. | ||
6. | Notes Payable and Other Obligations | |
Notes payable and other obligations were comprised of the following at December 31: |
2010 | 2009 | |||||||
|
||||||||
Notes payable and other obligations
|
||||||||
Payment obligation former owner
|
$ | 359 | $ | 337 | ||||
Term note payable bank
|
584 | 759 | ||||||
Capital lease obligations
|
728 | | ||||||
Notes payable issued in connection with acquisitions
|
525 | | ||||||
|
||||||||
Total notes payable and other obligations
|
2,196 | 1,096 | ||||||
Less, current maturities
|
(1,067 | ) | (233 | ) | ||||
|
||||||||
Amount due after one year
|
$ | 1,129 | $ | 863 | ||||
|
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7. | Notes Payable to Related Parties | |
Notes payable to related parties were as follows at December 31: |
2010 | 2009 | |||||||
|
||||||||
Acquisition subordinated note payable PREFSA
|
$ | | $ | 2,487 | ||||
Acquisition subordinated note payable Vector
|
| 2,487 | ||||||
Franchise term notes payable PREA
|
1,274 | 1,816 | ||||||
|
||||||||
Total notes payable to related parties
|
1,274 | 6,790 | ||||||
Less, current maturities
|
(581 | ) | (5,517 | ) | ||||
|
||||||||
Amount due after one year
|
$ | 693 | $ | 1,273 | ||||
|
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Year ending December 31 | 2010 | |||
|
||||
2011
|
$ | 581 | ||
2012
|
648 | |||
2013
|
45 | |||
|
||||
Total
|
$ | 1,274 | ||
|
8. | Franchise Agreement and Royalty Fees | |
Douglas Elliman is party to a franchise agreement with PREA which was entered into in March 2003. The agreement provides for Douglas Elliman to make monthly payments of royalty fees to PREA based on the level of gross revenue, with a royalty rate ranging from 1.8% to 6.0% of gross revenues earned. Pursuant to the franchise agreement, Douglas Elliman was granted a 25% deferral of applicable royalty fees, which is payable in monthly installments beginning in the first month of the fourth year. A balance of $725 and $1,047 was accrued at December 31, 2010 and 2009, respectively and is included in accrued royalties in the consolidated statement of financial position. The agreement also provides for Douglas Elliman to remit advertising and annual franchise fees to PREA, which are based on gross revenues and the number of offices occupied. | ||
For the years ended December 31, 2010, 2009 and 2008 total royalty fees incurred under the franchise agreements amounted to approximately $5,408, $4,212 and $5,340, respectively, and is included as a component of general and administrative expenses in the consolidated statements of operations. | ||
The Franchiser has significant rights over the use of the franchised service marks and the conduct of the brokerage companies business. The franchise agreements require the companies to coordinate with the Franchiser on significant matters relating to their operations, including the opening and closing of offices, make substantial royalty payments to the Franchiser and contribute significant amounts to national advertising funds maintained by the Franchiser, indemnify the Franchiser against losses arising out of the operations of their business under the franchise agreements and maintain standards and comply with guidelines relating to their operations which are applicable to all franchisees of the Franchisers real estate franchise system. | ||
The Franchiser has the right to terminate Douglas Ellimans and Prudential Douglas Ellimans franchises, upon the occurrence of certain events, including a bankruptcy or insolvency event, a |
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9. | Income Taxes | |
Income tax expense includes a provision for New York City Unincorporated Business Tax (UBT) and income tax benefits specifically related to Preferred, which is taxed as a C- Corporation. The following are the components of income tax expense (benefit) for the years ended December 31: |
2010 | 2009 | 2008 | ||||||||||
|
||||||||||||
Provision for New York City UBT
|
$ | 1,329 | $ | 449 | $ | 650 | ||||||
Income tax benefit for Preferred
|
| (226 | ) | (397 | ) | |||||||
|
||||||||||||
Income tax expense
|
$ | 1,329 | $ | 223 | $ | 253 | ||||||
|
2009 | 2008 | |||||||
|
||||||||
Current provision (benefit):
|
||||||||
Federal
|
$ | (260 | ) | $ | (478 | ) | ||
State and local
|
34 | 81 | ||||||
|
||||||||
Total current benefit
|
(226 | ) | (397 | ) | ||||
|
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10. |
Related Party Transaction
The Company has recorded in general and administrative expenses a management fee of $1,000 and $800 to Vector at December 31, 2010 and 2009, respectively, which liability is included in accounts payable and accrued expenses. |
|
11. |
Defined Contribution Plans
Douglas Elliman, Prudential Douglas Elliman and DEPM sponsor individual 401(k) plans which allow eligible employees to make pre-tax contributions. Employees who have completed one year of service, as defined, are eligible to participate in the plans. Prior to 2009, the plans provided for matching employer contributions ranging from 10% to 25% of employee contributions up to a maximum annual contribution of $4 per employee. This was changed in 2009 and the plans no longer provide matching contributions. Participants are immediately vested in their contributions made. Matching contributions for the year ended December 31, 2008 amounted to $363. |
|
12. | Commitments and Contingencies | |
Litigation
The Company is involved in litigation through the normal course of business. Certain claims arising before the date of acquisition of Douglas Elliman and DEPM are subject to indemnification agreements with the prior owners. The majority of these claims have been referred to the insurance carrier and related counsel. The Company believes that the resolution of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company. |
||
Leases
The Company and its subsidiaries are obligated under various operating lease agreements for office facilities. Certain leases are non-cancelable and expire on various dates through March 2020. Additionally, certain leases contain escalating minimum rentals, which are amortized on a straight line basis over the non-cancellable portion of the leases. Total rent expense charged to operations under the leases for the year ended December 31, 2010, 2009 and 2008 is approximately $14,675, $15,485 and $13,663, respectively, and is included in general and administrative expense in the consolidated statements of operations. In connection with these leases, the Company has a deferred rent liability of $9,404 and $7,022 at December 31, 2010 and 2009, respectively. |
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Year ending December 31, | ||||
|
||||
2011
|
$ | 12,762 | ||
2012
|
11,439 | |||
2013
|
10,336 | |||
2014
|
9,795 | |||
2015
|
9,600 | |||
Thereafter
|
42,820 | |||
|
||||
Total
|
$ | 96,752 | ||
|
The Company entered into letter of credit agreements with a bank totaling $725 in relation to certain office leases which expire on various dates through September 2010. Certificates of deposit of $725 with the same maturities are pledged as collateral for these letters of credit. | ||
13. | Risks and Uncertainties | |
The Company operates primarily in the New York City and Long Island residential real estate markets, which subjects the Company to a degree of risk. The profitability of the Company is dependant upon the activity within these markets, which could be impacted by various external factors such as the general state of the economy, declines in home selling prices and the availability of credit to buyers. However, declines in demand and lack of availability of credit to potential home buyers could materially impact the Companys profitability in 2011. | ||
The Company and its subsidiaries may, from time to time, maintain demand deposits in excess of federally insured limits in the normal course of business. The Company mitigates this risk by placing cash and cash equivalents with financial institutions with high credit ratings. | ||
Substantially all of the Companys receivables are derived from commissions earned and are due from escrow and other residential real estate transfer agents. These receivables are unsecured. |
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