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| VGR > SEC Filings for VGR > Form 10-K on 28-Feb-2013 | All Recent SEC Filings |
28-Feb-2013
Annual Report
• the real estate business through our New Valley LLC subsidiary, which is seeking to acquire additional operating companies and real estate properties. New Valley owns 50% of Douglas Elliman Realty, LLC, which operates the largest residential brokerage company in the New York metropolitan area.
All of our tobacco operations' unit sales volume in 2012, 2012 and 2010 was in
the discount segment, which management believes has been the primary growth
segment in the industry for over a decade. The significant discounting of
premium cigarettes in recent years has led to brands, such as EVE, that were
traditionally considered premium brands to become more appropriately categorized
as discount, following list price reductions.
Our tobacco subsidiaries' cigarettes are produced in approximately 117
combinations of length, style and packaging. Liggett's current brand portfolio
includes:
• PYRAMID - the industry's first deep discount product with a brand identity
re-launched in the second quarter of 2009, and
• GRAND PRIX - re-launched as a national brand in 2005,
• LIGGETT SELECT - a leading brand in the deep discount category,
• EVE - a leading brand of 120 millimeter cigarettes in the branded discount category, and
• USA and various Partner Brands and private label brands.
In 1999, Liggett introduced LIGGETT SELECT, one of the leading brands in the
deep discount category. LIGGETT SELECT represented 7.0% in 2012, 8.7% in 2011
and 13.0% in 2010 of Liggett's unit volume. In September 2005, Liggett
repositioned GRAND PRIX to distributors and retailers nationwide. GRAND PRIX
represented 9.6% in 2012, 12.7% in 2011 and 18.5% in 2010 of Liggett's unit
volume. In April 2009, Liggett repositioned PYRAMID as a box-only brand with a
new low price to specifically compete with brands which are priced at the lowest
level of the deep discount segment. PYRAMID is now the largest seller in
Liggett's family of brands with 62.7% of Liggett's unit volume in 2012, 56.4% in
2011 and 42.6% in 2010. According to Management Science Associates, Liggett held
a share of approximately 12.1% of the overall discount market segment for 2012
compared to 12.8% for 2011 and 11.9% for 2010.
Under the Master Settlement Agreement ("MSA") reached in November 1998 with
46 states and various territories, the three largest cigarette manufacturers
must make settlement payments to the states and territories based on how many
cigarettes they sell annually. Liggett, however, is not required to make any
payments unless its market share exceeds approximately 1.65% of the
U.S. cigarette market. Additionally, Vector Tobacco has no payment obligation
unless its market share exceeds approximately 0.28% of the U.S. market.
Liggett's and Vector Tobacco's payments under the MSA are based on each
company's incremental market share above the minimum threshold applicable to
such company. We believe that our tobacco subsidiaries have gained a sustainable
cost advantage over their competitors as a result of the settlement.
The discount segment is a challenging marketplace, with consumers having less
brand loyalty and placing greater emphasis on price. Liggett's competition is
now divided into two segments. The first segment is made up of the three largest
manufacturers of cigarettes in the United States, Philip Morris USA Inc., R.J.
Reynolds Tobacco Company, and Lorillard Tobacco Company. The three largest
manufacturers, while primarily premium cigarette based companies, also produce
and sell discount cigarettes. The second segment of competition is comprised of
a group of smaller manufacturers and importers, most of which sell deep discount
cigarettes. Our largest competitor in this segment is Commonwealth Brands, Inc.
(a wholly owned subsidiary of Imperial Tobacco PLC).
Recent Developments
7.75% Senior Secured Notes due 2021. In February 2013, we sold $450,000 of our
7.75% senior secured notes due 2021 in a private offering to qualified
institutional investors in accordance with Rule 144A of the Securities Act of
1933. We agreed to consummate a registered exchange offer for the 7.75% senior
secured notes within 360 days after the date of the initial issuance of the
7.75% senior secured notes. The new 7.75% senior secured notes to be issued in
the exchange offer will have substantially the same terms as the original notes,
except that the new 7.75% senior secured notes will have been registered under
the Securities Act. We will be required to pay additional interest on the 7.75%
senior secured notes if we fail to timely comply with our obligations under the
Registration Rights Agreement until such time as we comply.
The 7.75% senior secured notes pay interest on a semi-annual basis at a rate of
7.75% per year and mature on February 15, 2021. We may redeem some or all of the
7.75% senior secured notes at any time prior to February 15, 2016 at a
make-whole redemption price. On or after February 15, 2016 we may redeem some or
all of the 7.75% 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.
The 7.75% senior secured notes are guaranteed subject to certain customary
automatic release provisions on a joint and several basis by all of our 100%
owned domestic subsidiaries that are engaged in the conduct of our cigarette
businesses. In addition, some of the guarantees are collateralized by second
priority or first priority security interests in certain collateral of some of
the subsidiary guarantors, including their common stock, pursuant to security
and pledge agreements. The indenture contains covenants that restrict the
payment of dividends if our consolidated earnings before interest, taxes,
depreciation and amortization, as defined in the indenture, for the most
recently ended four full quarters is less than $75,000. The indenture also
restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage
Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively.
The aggregate net proceeds from the sale of the 7.75% senior secured notes were
approximately $438,250 after deducting underwriting discounts, commissions, fees
and offering expenses. We intend to use the net proceeds of the issuance for the
cash tender offer described below and the redemption price for any existing 11%
senior secured notes that are not tendered, plus accrued and unpaid interest
plus any related fees and expenses.
Tender Offer. On January 29, 2013, we announced we were commencing a cash tender
offer with respect to any and all of the outstanding $415,000 of our 11% senior
secured notes due 2015. We retired $336,315 of the 11% senior secured notes at a
premium of 104.292%, plus accrued and unpaid interest, on February 12, 2013. The
remaining $78,685 of the 11% senior secured notes have been called and will be
retired on March 12, 2013 at a redemption price of 103.667% plus accrued and
unpaid interest.
7.5% Variable Interest Senior Convertible Senior Notes due 2019. In November
2012, we sold $230,000 of our 7.5% variable interest senior convertible notes
due 2019 (the "2019 Convertible Notes") in a public offering registered under
the Securities Act. The 2019 Convertible Notes are our senior unsecured
obligations and are effectively subordinated to any of our secured indebtedness
to the extent of the assets securing such indebtedness. The 2019 Convertible
Notes are also structurally subordinated to all liabilities and commitments of
our subsidiaries. The aggregate net proceeds from the sale of the 2019
Convertible Notes were approximately $218,900 after deducting underwriting
discounts, commissions, fees and offering expenses.
The 2019 Convertible Notes pay interest ("Total Interest") on a quarterly basis
beginning January 15, 2013 at a rate of 2.5% per annum plus additional interest,
which is based on the amount of cash dividends paid during the prior three-month
period ending on the record date for such interest payment multiplied by the
total number of shares of its common stock into which the debt will be
convertible on such record date. Notwithstanding the foregoing, however, the
interest payable on each interest payment date shall be the higher of (i) the
Total Interest and (ii) 7.5% per annum. The notes are convertible into our
common stock at the holder's option. The conversion price at December 31, 2012
was $18.50 per share (approximately 54.0541 shares of common stock per $1,000
principal amount of the note), is subject to adjustment for various events,
including the issuance of stock dividends. The notes will mature on January 15,
2019.
Share Lending Agreement. In connection with the offering of our 2019 Convertible
Notes, we entered into a share lending agreement with Jefferies & Company, the
underwriter for the offering, under which we lent Jefferies & Company 6,114,000
shares of our common stock to facilitate hedging transactions related to the
2019 Convertible Notes. Jefferies & Company has since returned 3,057,000 of the
borrowed shares and 3,057,000 shares remain outstanding at December 31, 2012.
Subject to certain limitations, Jefferies & Company may from time to time during
the term of the share lending agreement borrow up to 1,000,000 additional shares
of our common stock from us for certain additional offerings. We did not receive
any proceeds from the sale of the borrowed shares, other than a nominal loan fee
from Jefferies & Company equal to $0.10 per share lent to Jefferies & Company.
The Share Lending Agreement requires that the shares borrowed be returned upon
the maturity of the related debt, January 2019, or earlier, including the
redemption of the 2019 Convertible Notes or the conversion of the notes to
shares of common stock pursuant to the terms of the indenture governing the
notes. Borrowed shares are issued and outstanding for corporate law purposes
and, accordingly, the holders of the borrowed shares will have all of the rights
of a holder of our outstanding shares. However, because the share borrower must
return to us all borrowed shares ( or identical shares), the borrowed shares are
not considered outstanding for purposes of computing and reporting our earnings
per share in accordance with generally accepted accounting principles. Jefferies
agreed to pay to us an amount equal to any dividends or other distributions that
we pay on the borrowed shares.
We determined the fair value of the Share Lending Agreement was $3,204 at the
date of issuance based on the value of the presence of the Share Lending
Agreement related to the terms of the offering. The $3,204 fair value was
recognized as a debt financing charge and is being amortized to interest expense
over the term of the notes. As of December 31, 2012, 3,057,000 shares were
outstanding on the Share Lending Agreement and $12 had been amortized to
interest expense.
Prudential Franchise Agreements. Douglas Elliman Realty is in discussions with
Prudential related to certain matters in connection with the franchise
agreements, and Douglas Elliman Realty has elected to cease operating as a
Prudential franchisee. Douglas Elliman Realty is seeking a resolution of these
matters. The stated initial expiration date of the franchise agreements is March
13, 2013 unless Douglas Elliman Realty chooses to renew the franchise agreements
prior to March 13, 2013. As a result of the termination or expiration of the
franchise agreements, in accordance with the terms of the Limited Liability
Company Operating Agreement, Douglas Elliman Realty is required to redeem the
approximate 20% equity interest owned by a former affiliate of Prudential. The
redemption price for such equity interest is to be determined through an
appraisal process in accordance with the terms of Douglas Elliman Realty's
Limited Liability Company Operating Agreement.
Chelsea Eleven. In February and April 2012, Chelsea closed on the remaining
utility and two residential units of the 54 unit building and the project is
concluded. New Valley received net distributions of $9,483 and $7,638 from New
Valley Oaktree Chelsea Eleven, LLC for the years ended December 31, 2012 and
2011, respectively. New Valley accounted for its 40% interest in New Valley
Oaktree Chelsea Eleven, LLC under the equity method of accounting. New Valley
recorded equity income of $3,137, $3,000 and $900 for the years ended
December 31, 2012, 2011 and 2010, respectively, related to New Valley Chelsea.
Fifty Third-Five Building. In September 2010, New Valley, through its NV 955
LLC subsidiary, contributed $2,500 to a joint venture, Fifty Third-Five Building
LLC ("JV"), of which it owns 50%. The JV was formed for the purposes of
acquiring a defaulted real estate loan, collateralized by real estate located in
New York City. In October 2010, New Valley contributed an additional $15,500 to
the JV and the JV acquired the defaulted loan for approximately $35,500. In
December 2012, all outstanding principal and interest on the loan was repaid and
the defaulted note was retired. New Valley received a liquidating distribution
of $20,900 from the JV on December 28, 2012. This investment was accounted for
under the equity method of accounting. The Company recorded equity income of
$2,900 for the year ended December 31, 2012.
SOCAL Portfolio. In October 2011, a newly-formed joint venture, between
affiliates of New Valley and Winthrop Realty Trust, entered into an agreement
with Wells Fargo Bank to acquire a $117,900 C-Note (the "C-Note") for a purchase
price of $96,700. The C-Note was the most junior tranche of a $796,000 first
mortgage loan originated in July 2007 which was collateralized by a 31-property
portfolio of office properties situated throughout southern California,
consisting of approximately 4.5 million square feet. The C-Note bore interest
at a rate per annum of LIBOR plus 310 basis points, required payments of
interest only prior to maturity and matured on August 9, 2012. On November 3,
2011, New Valley invested $25,000 for an approximate 26% interest in the joint
venture. The investment is a variable interest entity; however, New Valley is
not the primary beneficiary.
On September 28, 2012, all outstanding principal and interest was repaid and the
C-Note was retired. New Valley received a liquidating distribution of $32,275
from the joint venture on September 28, 2012. New Valley accounted for this
investment under the equity method of accounting. New Valley recorded equity
income of $7,180 and $95 for the years ended December 31, 2012 and 2011,
respectively. We had no exposure to loss as a result of New Valley's investment
in NV SOCAL LLC at December 31, 2012.
11 Beach Street. In June 2012, NV Beach LLC, a wholly-owned subsidiary of New
Valley, invested $9,642 with an additional $1,321 investment to be made in the
future for an approximate 49.5% interest in 11Beach Street Investor LLC (the
"Beach JV"). Beach JV plans to renovate and convert an existing office building
in Manhattan into a luxury residential condominium. Beach JV is a variable
interest entity; however, New Valley is not the primary beneficiary. New Valley
accounts for its interest in Beach JV under the equity method of accounting. Our
maximum exposure to loss as a result of New Valley's investment in Beach JV was
$9,642 at December 31, 2012.
Maryland Portfolio. In July 2012, New Valley invested $5,000 for an approximate
30% interest in a joint venture that owns a 25% interest in a portfolio of
approximately 5,500 apartment units primarily located in Baltimore County,
Maryland. The investment is a variable interest entity; however, New Valley is
not the primary beneficiary. New Valley accounts for this investment under the
equity method of accounting. New Valley recorded equity loss of $269 and
received distributions of $117 for the year
ended December 31, 2012. Our maximum exposure to loss as a result of New
Valley's investment in NV Maryland was $4,615 at December 31, 2012.
701 Seventh Avenue. In August and September 2012, New Valley invested a total of
$7,800 for an approximate 11% interest in a joint venture that acquired property
located at 701 Seventh Avenue in Times Square in Manhattan. The joint venture
plans to redevelop the property for retail space and signage, as well as a site
for a potential hotel. The investment closed in October 2012 and New Valley
invested an additional $1,507 at closing. New Valley may have additional future
capital contributions of approximately $14,000. The property, located on the
northeast corner of Seventh Avenue and 47th Street, totals approximately 120,000
gross square feet and is a rectangular corner parcel currently occupied by two
buildings. The investment is a variable interest entity; however, New Valley is
not the primary beneficiary. New Valley accounts for this investment under the
equity method of accounting. Our maximum exposure to loss as a result of New
Valley's investment in 701 Seventh Avenue was $9,307 at December 31, 2012.
Queens Plaza. In December 2012, New Valley invested $7,350 for an approximate
45.37% interest in QPS 23-10 Venture LLC which through its affiliate owns a
condominium conversion project, 23-10 Queens Plaza South, located in Queens, New
York. The investment is a variable interest entity; however, New Valley is not
the primary beneficiary. New Valley accounts for this investment under the
equity method of accounting. Our maximum exposure to loss as a result of New
Valley's investment in Queens Plaza was $7,350 at December 31, 2012.
Chrystie Street. In December 2012, New Valley invested $1,973 for an approximate
49% interest in WG Chrystie LLC which owns a 37.5% ownership interest in 215
Chrystie Venture LLC which, through its affiliate, owns a condominium conversion
project located in Manhattan. The investment is a variable interest entity;
however, New Valley is not the primary beneficiary. New Valley accounts for this
investment under the equity method of accounting. Our maximum exposure to loss
as a result of New Valley's investment in Chrystie Street was $1,973 at
December 31, 2012.
Gains or Losses on Long-term Investments. Two of our long-term investments were
liquidated in January 2011 and April 2011, respectively. We received
distributions of $66,190 for the year ended December 31, 2011 primarily from the
liquidation of the two long-term investments. We recognized a gain of $25,832
for the year ended December 31, 2011.
Recent Developments in Tobacco-Related Litigation
The cigarette industry continues to be challenged on numerous fronts. New cases
continue to be commenced against Liggett and other cigarette manufacturers.
Liggett could be subjected to substantial liabilities and bonding requirements
from litigation relating to cigarette products. Adverse litigation outcomes
could have a negative impact on our ability to operate due to their impact on
cash flows. We and our Liggett subsidiary, as well as the entire cigarette
industry, continue to be challenged on numerous fronts, particularly with
respect to the Engle progeny cases in Florida. New cases continue to be
commenced against Liggett and other cigarette manufacturers. It is likely that
similar legal actions, proceedings and claims will continue to be filed against
Liggett. Punitive damages, often in amounts ranging into the billions of
dollars, are specifically pled in certain cases, in addition to compensatory and
other damages. It is possible that there could be adverse developments in
pending cases including the certification of additional class actions. An
unfavorable outcome or settlement of pending tobacco-related litigation could
encourage the commencement of additional litigation. In addition, an unfavorable
outcome in any tobacco-related litigation could have a material adverse effect
on our consolidated financial position, results of operations or cash flows.
Liggett could face difficulties in obtaining a bond to stay execution of a
judgment pending appeal.
As of December 31, 2012, there were approximately 5,037 Engle progeny cases, 69
individual product liability lawsuits, four purported class actions and one
healthcare cost recovery action pending in the United States in which Liggett or
us, or both, were named as a defendant. To date, adverse verdicts have been
entered against Liggett in eight Engle progeny cases.
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 Court's July 2006 ruling in Engle, which decertified the class
on a prospective basis, and affirmed the appellate court's reversal of the
punitive damages award, former class members had one year from January 11, 2007
in which to file individual lawsuits. In addition, some individuals who filed
suit prior to January 11, 2007, and who claim they meet the conditions in Engle,
are attempting to avail themselves of the Engle ruling. Lawsuits by individuals
requesting the benefit of the Engle ruling, whether filed before or after the
January 11, 2007 deadline, are referred to as the "Engle progeny cases." Liggett
and us are currently named in 5,037 Engle progeny cases in both federal (1,963
cases) and state (3,074 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 6,215 plaintiffs.
Liggett Only Cases. There are currently eight cases pending where Liggett is the only remaining tobacco company defendant. These cases consist of four individual actions and four Engle progeny cases. Cases where Liggett is the only defendant could increase substantially as a result of the Engle progeny cases. In February 2009, in Ferlanti v. Liggett Group, a Florida state court jury awarded compensatory damages to plaintiff and an $816 judgment was entered by the court. That judgment was affirmed on appeal and was satisfied by Liggett in March 2011. In September 2010, the court awarded plaintiff legal fees of $996. Liggett paid legal fees and accrued interest of $1,231 in January 2013. Liggett previously accrued $2,000 for the Ferlanti case.
Critical Accounting Policies
General. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenues and expenses. Significant estimates subject to
material changes in the near term include impairment charges, inventory
valuation, deferred tax assets, allowance for doubtful accounts, promotional
accruals, sales returns and allowances, actuarial assumptions of pension plans,
the estimated fair value of embedded derivative liabilities, settlement
accruals, long-term investments and impairments, accounting for investments in
equity securities, and litigation and defense costs. Actual results could differ
from those estimates.
Revenue Recognition. Revenues from sales of cigarettes are recognized upon the
shipment of finished goods when title and risk of loss have passed to the
customer, there is persuasive evidence of an arrangement, the sale price is
determinable and collectibility is reasonably assured. We provide an allowance
for expected sales returns, net of any related inventory cost recoveries. In
accordance with authoritative guidance on how taxes collected from customers and
remitted to governmental authorities should be presented in the income statement
(that is, gross versus net presentation), our accounting policy is to include
federal excise taxes in revenues and cost of goods sold. Such revenues and cost
of sales totaled $508,027, $552,965, and $538,328 for the years ended
December 31, 2012, 2011 and 2010, respectively. Since our primary line of
business is tobacco, our financial position and our results of operations and
cash flows have been and could continue to be materially adversely affected by
significant unit sales volume declines, litigation and defense costs, increased
tobacco costs or reductions in the selling price of cigarettes in the near term.
Marketing Costs. We record marketing costs as an expense in the period to which
such costs relate. We do not defer the recognition of any amounts on our
consolidated balance sheets with respect to marketing costs. We expense
advertising costs as incurred, which is the period in which the related
advertisement initially appears. We record consumer incentive and trade
promotion costs as a reduction in revenue in the period in which these programs
are offered, based on estimates of utilization and redemption rates that are
developed from historical information.
Contingencies. We record Liggett's product liability legal expenses and other
litigation costs as operating, selling, administrative and general expenses as
those costs are incurred. As discussed in Note 12 to our consolidated financial
statements, legal proceedings regarding Liggett's tobacco products are pending
or threatened in various jurisdictions against Liggett and us.
We record provisions in our consolidated financial statements for pending
litigation when we determine that an unfavorable outcome is probable and the
amount of loss can be reasonably estimated. At the present time, while it is
reasonably possible that an unfavorable outcome in a case may occur, except as
disclosed in Note 12 to our consolidated financial statements and discussed
below related to the eight cases where an adverse verdict was entered against
Liggett: (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. Legal defense costs are expensed as incurred.
Although Liggett has generally been successful in managing litigation in the
past, litigation is subject to uncertainty and significant challenges remain,
particularly with respect to the Engle progeny cases.
Adverse verdicts have been entered against Liggett in eight state court Engle
progeny cases (exclusive of the Lukacs case, discussed in Note 12 to our
consolidated financial statements), and two of these verdicts have been affirmed
on appeal. At December 31, 2012, Liggett and us are defendants in 3,074 state
court Engle progeny cases. Through December 31, 2012, other than the Lukacs
case, the verdicts against Liggett have ranged from $1 to $3,008. In two of
these cases, punitive damages were also awarded for $1,000 and $7,600. We have
not accrued for these cases as of December 31, 2012. Our potential range of loss
in the six Engle progeny cases currently on appeal is between $0 and $16,166 in
the aggregate, plus accrued interest and attorneys' fees. In determining the
range of loss, we consider potential settlements as well as future appellate
relief.
Except as discussed in Note 12 to our consolidated financial statements,
management is unable to estimate the possible loss or range of loss from
remaining Engle progeny cases as there are currently multiple defendants in each
case and discovery has
not occurred or is limited. As a result, we lack information about whether plaintiffs are, in fact, Engle class members (non-class members' claims are . . .
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