Rule 424(b)(3)
Reg. No. 333-121502
$81,875,000
[VECTOR LOGO]
VECTOR GROUP LTD.
5% VARIABLE INTEREST SENIOR CONVERTIBLE NOTES DUE NOVEMBER 15, 2011
AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE NOTES
This prospectus relates to the resale of up to 4,183,700 of our shares
of common stock by certain selling securityholders. The shares that may be
resold pursuant to this prospectus include 3,490,496 shares of common stock
issuable upon conversion of $68,309,000 aggregate principal amount of our
convertible notes and 693,204 shares issuable upon conversion of $13,566,000
aggregate principal amount of additional convertible notes reserved for issuance
upon the exercise of outstanding additional investment rights (together, the
"notes").
We issued the notes offered by this prospectus in a private placement
in November 2004. This prospectus will be used by selling securityholders to
resell their notes and the common stock issuable upon conversion of their notes.
We will not receive any proceeds from this offering.
The notes are convertible by securityholders prior to maturity (unless
previously redeemed or repurchased pursuant to their terms) into common stock at
a conversion rate of 51.0986 shares per each $1,000 principal amount of notes,
subject to adjustment if certain events occur. This is equivalent to an initial
conversion price of $19.57 per share. We will pay interest on the notes on each
February 15, May 15, August 15, and November 15 of each year the notes are
outstanding, beginning on February 15, 2005. The notes accrue interest at a rate
of 5% per year, with an additional amount of interest payable on the notes on
each interest payment date based on the amount of cash dividends actually paid
by us per share on our common stock during the prior three-month period ending
on the record date for such interest payment multiplied by the number of shares
of our common stock into which the notes are convertible on such record date
(together, the "Total Interest"). Notwithstanding the foregoing, however, during
the period from November 18, 2004 to and including November 15, 2006, the
interest payable on each interest payment date shall be the higher of (i) the
Total Interest and (ii) 6 3/4% per year.
The notes will mature on November 15, 2011, unless earlier converted,
redeemed or repurchased. We must redeem 12.5% of the total aggregate principal
amount of the notes outstanding on November 15, 2009. In addition to such
redemption amount, we will also redeem on November 15, 2009 and on each interest
accrual period thereafter an additional amount, if any, of the notes necessary
to prevent the notes from being treated as an "Applicable High Yield Discount
Obligation" under the Internal Revenue Code. The holders of the notes will have
the option on November 15, 2009 to require us to repurchase some or all of their
remaining notes. The redemption price for such redemptions will equal 100% of
the principal amount of the notes plus accrued and unpaid interest thereafter,
if any. The notes are our unsecured and unsubordinated obligations and rank on a
parity in right of payment with all of our existing and future indebtedness to
the extent described herein. The notes will effectively rank junior to any
future secured indebtedness we may incur and junior to liabilities of our
subsidiaries.
In the event of a fundamental change, as described in this prospectus,
the holders of the notes may require us to repurchase any notes held by them. In
addition to the repurchase price, we will pay the "make-whole premium" described
in this prospectus in cash and/or common stock to holders of notes who require
us to repurchase their notes in connection with such repurchase event.
Our common stock is traded on the New York Stock Exchange under the
symbol "VGR". On January 18, 2005, the closing price of our common stock on
the New York Stock Exchange was $16.07 per share.
THE SECURITIES OFFERED BY THIS PROSPECTUS INVOLVE A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 14.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS DATED JANUARY 19, 2005
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TABLE OF CONTENTS
PAGE
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WHERE YOU CAN FIND MORE INFORMATION............................................................................. 4
INCORPORATION BY REFERENCE...................................................................................... 4
PROSPECTUS SUMMARY.............................................................................................. 6
RISK FACTORS.................................................................................................... 14
FORWARD-LOOKING STATEMENTS...................................................................................... 26
USE OF PROCEEDS................................................................................................. 27
RATIO OF EARNINGS TO FIXED CHARGES.............................................................................. 28
DESCRIPTION OF THE NOTES........................................................................................ 29
CERTAIN FEDERAL INCOME TAX CONSEQUENCES......................................................................... 48
DESCRIPTION OF CAPITAL STOCK.................................................................................... 52
SELLING SECURITYHOLDERS......................................................................................... 53
PLAN OF DISTRIBUTION............................................................................................ 60
LEGAL MATTERS................................................................................................... 62
EXPERTS......................................................................................................... 62
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WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and file
reports, proxy statements and other information with the Securities and Exchange
Commission ("SEC"). You can inspect and copy all of this information at the
Public Reference Room maintained by the SEC at its principal office at 450 Fifth
Street, N.W., Judiciary Plaza, Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a web site that contains reports,
proxy statements and other information regarding issuers, like us, that file
electronically with the SEC. The address of this web site is:
http://www.sec.gov.
We have filed with the SEC a registration statement on Form S-3 under
the Securities Act of 1933 with respect to the notes and common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement. We have omitted parts of the registration
statement as permitted by the rules and regulations of the SEC. Statements
contained in or incorporated by reference into this prospectus as to the
contents of any contract or other document are not necessarily complete. You
should refer to a copy of each contract or document filed as an exhibit to the
registration statement or incorporated by reference into this prospectus for
complete information. Copies of the registration statement, including exhibits
and information incorporated by reference into this prospectus, may be inspected
without charge at the SEC's public reference facility or website.
INCORPORATION BY REFERENCE
The SEC allows us to incorporate by reference into this prospectus
information we have filed with the SEC. This means that we can disclose
important information by referring you to those documents containing the other
information. The information incorporated by reference is considered to be a
part of this prospectus. Information that we file later with the SEC will
automatically update and supercede this information. We incorporate by reference
the documents listed below and any filings made by us with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and before the termination of this offering:
- Our Annual Report on Form 10-K for the fiscal year ended December
31, 2003, filed with the SEC on March 15, 2004;
- Our Quarterly Reports on Form 10-Q for the quarter ended March 31,
2004, filed with the SEC on May 10, 2004, for the quarter ended
June 30, 2004, filed with the SEC on August 9, 2004 and for the
quarter ended September 30, 2004, filed with the SEC on November
9, 2004; and
- Our Current Reports on Form 8-K, filed with the SEC on April 19,
2004, June 7, 2004, July 14, 2004, October 6, 2004, November 17,
2004, November 23, 2004, December 21, 2004 and January 11, 2005,
respectively.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superceded
for purposes of this prospectus to the extent that a statement contained herein
or in any other document subsequently filed which is also incorporated by
reference herein modifies or supercedes such statement. Any such statement so
modified or superceded shall not be deemed, except as so modified, to constitute
a part of this prospectus.
You can obtain any of the documents incorporated by reference through
us or the SEC. Documents incorporated by reference are available from us without
charge. You may obtain documents
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incorporated by reference in this prospectus by sending a request in writing to
the following address or by telephone:
Vector Group Ltd.
Attention: Investor Relations
100 S.E. Second Street, 32nd Floor
Miami, Florida 33131
(305) 579-8000
You should rely only on the information provided or incorporated by
reference in this prospectus or a prospectus supplement or amendment. We have
not authorized anyone else to provide you with different information. We are not
making an offer of these securities in any jurisdiction where the offer is not
permitted. You should not assume the information in this prospectus or a
prospectus supplement or amendment is accurate as of any date other than the
date on the front of the documents.
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PROSPECTUS SUMMARY
This summary highlights some information from this prospectus. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the "Risk Factors" section and the financial statements and the notes
to those statements incorporated by reference into this prospectus. As used in
this prospectus, the terms "Vector", "we", "our" and "us" and similar terms
refer to Vector Group Ltd. and all of our consolidated subsidiaries, including
VGR Holding Inc., Liggett Group Inc., Vector Tobacco Ltd., Liggett Vector Brands
Inc. and New Valley Corporation, except with respect to the section entitled
"Description of Notes" and where it is clear that these terms mean only Vector
Group Ltd.
VECTOR GROUP
We are a holding company for a number of businesses. We are engaged
principally in:
- the manufacture and sale of cigarettes in the United States
through our subsidiary Liggett Group Inc., and
- the development and marketing of the low nicotine and
nicotine-free QUEST cigarette products and the development of
reduced risk cigarette products through our subsidiary Vector
Tobacco Inc.
Our majority-owned subsidiary, New Valley Corporation, is currently
engaged in the real estate business and 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.
We are controlled by Bennett S. LeBow, our Chairman and the Chairman of
New Valley, who beneficially owns approximately 34.9% of our common stock.
Liggett
Liggett is the successor to the Liggett & Myers Tobacco Company, which
was founded in 1873. Liggett, which is currently the fifth largest manufacturer
of cigarettes in the United States in terms of unit sales (as of the closing of
the combination of RJR Tobacco and Brown & Williamson's United States tobacco
businesses in July 2004), shipped approximately 9.8 billion cigarettes during
2003. Liggett believes, based on published industry sources, that this accounted
for 2.4% of the total cigarettes shipped in the United States during 2003.
Liggett has a history of introducing innovative products to improve its
competitive position in the discount cigarette segment, which Liggett's
management believes has been the primary growth segment for the industry for
over a decade. In 1980, Liggett was the first major domestic cigarette
manufacturer to successfully introduce discount cigarettes as an alternative to
premium priced cigarettes. In 1989, Liggett established a new price point within
the discount market segment by introducing PYRAMID, a branded discount product
which, at that time, sold for less than most other discount cigarettes. In 1999,
Liggett introduced LIGGETT SELECT, one of the fastest growing brands in the deep
discount category. LIGGETT SELECT is now the largest seller in Liggett's family
of brands, comprising 55.5% of Liggett's unit volume in the first nine months of
2004, and 50.9% in the 2003 calendar year, 42.1% in 2002 and
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31.4% in 2001. These product introductions allowed Liggett to increase its
market share through greater penetration of the discount segment. Liggett
believes, based on published industry sources, that Liggett's discount cigarette
shipments represented 7.3% of this market segment for 2003.
In April 2002, we acquired the stock of The Medallion Company, Inc. for
a total purchase price of $110 million. Medallion, a discount cigarette
manufacturer, is a participating manufacturer under the Master Settlement
Agreement (described below). Medallion has no payment obligations under the
Master Settlement Agreement unless its market share exceeds approximately 0.28%
of total cigarettes sold in the United States (which amounted to approximately
1.1 billion units in 2003). Following the purchase of the Medallion stock,
Vector Tobacco merged into Medallion and Medallion changed its name to Vector
Tobacco Inc. For purposes of this prospectus, references to the Liggett segment
encompass the manufacture and sale of conventional cigarettes and include the
former operations of Medallion (which operations are held for legal purposes as
part of Vector Tobacco).
Liggett has also taken a unique approach to the litigation proceedings
against U.S. cigarette manufacturers concerning the harmful effects of cigarette
consumption. Beginning in 1996, Liggett settled, independently of its four major
competitors, the tobacco litigation brought by various state attorneys general
against it and the other major cigarette manufacturers.
Liggett believes that it has gained a sustainable cost advantage over
its competitors through these settlement initiatives. Under the Master
Settlement Agreement reached in November 1998 with 46 state attorneys general,
the three largest cigarette manufacturers must make settlement payments to the
46 states based on how many cigarettes are sold 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, the legal
successor by merger to Medallion, likewise has no payment obligation unless its
market share exceeds approximately 0.28% of the U.S. market.
Vector Tobacco
Vector Tobacco is engaged in the development and marketing of the low
nicotine and nicotine-free QUEST cigarette products and the development of
reduced risk cigarette products.
QUEST. In January 2003, Vector Tobacco introduced QUEST, its brand of
low nicotine and nicotine-free cigarette products. The product is currently
available in eight states, and sales of cigarettes in those eight states account
for approximately 30% of all cigarette sales in the United States. QUEST is
designed for adult smokers who are interested in reducing their levels of
nicotine intake and is available in both menthol and nonmenthol styles. Each
style offers three different packagings, with decreasing amounts of nicotine -
QUEST 1, 2 and 3. QUEST 1, the low nicotine variety, contains 0.6 milligrams of
nicotine. QUEST 2, the extra-low nicotine variety, contains 0.3 milligrams of
nicotine. QUEST 3, the nicotine-free variety, contains only trace levels of
nicotine - no more than 0.05 milligrams of nicotine per cigarette. QUEST
cigarettes utilize a proprietary process that enables the production of
nicotine-free tobacco that tastes and smokes like tobacco in conventional
cigarettes. All six QUEST varieties are sold in box style packs and are priced
comparably to other premium brands. We continue to support the brand by
point-of-purchase awareness campaigns and other store-related promotions.
The premium segment of the tobacco industry is currently experiencing
intense competitive activity, with increased discounting of premium brands at
all levels of retail. Given these marketplace conditions, and the results that
we have seen to date with QUEST, we determined during the second quarter of 2004
to postpone indefinitely the national launch of QUEST. Vector Tobacco continues
to explore potential opportunities to expand the market for the brand on a more
limited basis. Any determination as to future expansion of the market presence
of the QUEST brand will be based on the
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ongoing and projected demand for the product, market conditions in the premium
segment and the prevailing regulatory environment, including any restrictions on
the advertising of the product.
In October 2003, we announced that Jed E. Rose, Ph.D., Director of Duke
University Medical Center's Nicotine Research Program and co-inventor of the
nicotine patch, had conducted a study at Duke University Medical Center to
provide preliminary evaluation of the use of the QUEST technology as a smoking
cessation aid. In the preliminary study on QUEST, 33% of QUEST 3 smokers were
able to achieve four-week continuous abstinence, a standard threshold for
smoking cessation. We believe these results show promise for the QUEST
technology as a smoking cessation aid. We have asked the Food and Drug
Administration to supply us with guidance as to the additional research and
regulatory filings necessary to market QUEST as a smoking cessation product. We
believe that obtaining the Food and Drug Administration's approval to market
QUEST as a smoking cessation product will be an important factor in the
long-term commercial success of the QUEST brand. No assurance can be given that
such approval can be obtained or as to the timing of any such approval if
received.
OMNI. In November 2001, Vector Tobacco launched nationwide its OMNI
brand, which was the first reduced carcinogen cigarette that smokes, tastes and
burns like other premium cigarettes. In comparison to comparable styles of the
leading U.S. cigarette brand, OMNI cigarettes produced significantly lower
levels of many of the recognized carcinogens and toxins that the medical
community has identified as major contributors to lung cancer and other diseases
in smokers. Acceptance of OMNI was limited, and the product is not currently
being distributed. Vector Tobacco was unable to achieve the anticipated breadth
of distribution and sales of the OMNI product due in part to the lack of success
of its advertising and marketing efforts in differentiating OMNI from other
conventional cigarettes with consumers through the "reduced carcinogen" message.
Over the next several years, our in-house research program, together with
third-party collaborators, plans to conduct appropriate studies as to the human
effects of OMNI's reduction of carcinogens and, based on these studies, we will
review the marketing and positioning of the OMNI brand in order to formulate a
strategy for its long-term success.
New Valley
We currently own 55.1% of New Valley (NASDAQ: NVAL), which is engaged
in the following businesses:
- New Valley Realty Division, and
- 50% ownership of Douglas Elliman Realty, LLC
New Valley Realty Division. Through its Realty Division, New Valley is
engaged in the real estate business and owns two commercial office buildings in
Princeton, New Jersey and a 50% interest in the Sheraton Keauhou Bay Resort &
Spa in Kailua-Kona, Hawaii, which is reopening in the fourth quarter of 2004
after a major renovation. On December 23, 2004, New Valley agreed to sell the
two office buildings for $71.5 million. The closing of that sale, which is
subject to customary conditions, is currently scheduled to occur in February
2005. New Valley also seeks to acquire additional operating companies and real
estate properties.
Douglas Elliman Realty. New Valley owns 50% of Douglas Elliman Realty,
LLC, which operates the largest residential brokerage company in the New York
metropolitan area through its two subsidiaries, Douglas Elliman, LLC and
Prudential Douglas Elliman Real Estate. Together, the two brokerage companies
have 54 offices with more than 2,500 real estate brokers in the metropolitan New
York area. The companies achieved combined sales of approximately $6.8 billion
of real estate for the year ended December 31, 2003. In 2003, Douglas Elliman
Realty was ranked as the ninth largest residential brokerage company in the
United States based on closed sales volume by the Real Trends broker survey.
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Douglas Elliman, LLC was founded in 1911 and has grown to be one of
Manhattan's leading residential brokers by specializing in the highest end of
the sales and rental marketplaces. It has 14 offices in New York City, more than
1,000 real estate brokers and sales volume of approximately $4 billion of real
estate for the year ended December 31, 2003.
Prudential Douglas Elliman Real Estate is headquartered in Huntington,
New York and is the largest residential brokerage company on Long Island with 40
offices. During 2003, Prudential Douglas Elliman Real Estate closed
approximately 6,955 transactions, representing sales volume of approximately
$2.8 billion of real estate. Prudential Douglas Elliman Real Estate serves
approximately 250 communities from Manhattan to Montauk.
STRATEGY
Our strategy is to maximize shareholder value by increasing the
profitability of our subsidiaries in the following ways:
Liggett
- Capitalize upon Liggett's cost advantage in the U.S. cigarette
market due to the favorable treatment that it receives under
settlement agreements with the state attorney generals and the
Master Settlement Agreement,
- Focus marketing efforts on the discount segment, continue to build
volume and margin in core discount brands (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,
- Expand the portfolio of private and control label partner brands
utilizing flexible promotional strategies,
- Bring niche-driven brands to the market in the future, and
- Pursue strategic acquisitions of smaller tobacco manufacturers.
Vector Tobacco
- Take a measured approach to expanding the market presence of the
QUEST brand through additional marketing and promotional
campaigns,
- Continue to pursue the QUEST technology as a smoking cessation
aid, and
- Continue to conduct appropriate studies as to the effects on
humans of OMNI's reduction of carcinogens and review the marketing
and positioning of the OMNI brand in order to formulate a strategy
for its long-term success.
New Valley
- Continue to grow Douglas Elliman 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
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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 New Valley's excess funds opportunistically in situations
that we believe can maximize shareholder value.
We were incorporated in the State of Delaware on September 7, 1999. The
mailing address of our principal executive offices is 100 S.E. Second Street,
Miami, Florida 33131. Our telephone number at that address is (305) 579-8000.
Our website address is www.vectorgroupltd.com. Our website and the information
contained in our website are not incorporated into this prospectus or the
registration statement of which it forms a part.
RECENT DEVELOPMENTS
Liggett Vector Brands Restructuring. On October 6, 2004, we announced a
plan to restructure the operations of Liggett Vector Brands Inc., our sales,
marketing and distribution agent for our Liggett and Vector Tobacco
subsidiaries. Liggett Vector Brands is realigning its sales force and adjusting
its business model to more efficiently serve its chain and independent accounts
nationwide. In connection with the restructuring, we have eliminated
approximately 330 full-time positions and 135 part-time positions, effective
December 15, 2004.
As a result of these actions, we currently expect to realize annual
cost savings of approximately $30 million beginning in 2005. We will recognize
pre-tax restructuring charges currently estimated to total approximately $12.06
million, of which approximately $4.43 million has been recognized in the third
quarter of 2004 and approximately $7.63 million will be recognized in the fourth
quarter of 2004. Approximately $5.88 million of the charges relate to employee
severance and benefit costs and approximately $6.18 million relate to contract
termination and other associated costs. Approximately $2.5 million of these
charges represent non-cash items. Additionally, in the fourth quarter of 2004,
we will incur other charges for various compensation and related payments to
employees which are related to the restructuring. We expect these additional
charges to total approximately $1.8 million and they will be included in
operating, selling, administrative and general expenses.
Tobacco Quota Elimination. In October 2004, federal legislation was
enacted which will eliminate the federal tobacco quota system and price support
system. Pursuant to the legislation, manufacturers of tobacco products will be
assessed $10.1 billion over a ten year period to compensate tobacco growers and
quota holders for the elimination of their quota rights. Cigarette manufacturers
will be responsible for 96.3% of the assessment, which will be allocated based
on relative unit volume of domestic cigarette shipments. The three largest
manufacturers will be entitled to a credit of a portion of the assessment
payable by them against certain of their MSA obligations. We currently estimate
that Liggett's assessment will be approximately $25 million for the first year
of the program, which began October 1, 2004. The ultimate impact of this
legislation cannot be determined, but there is a risk that smaller
manufacturers, such as Liggett and Vector Tobacco, will be disproportionately
affected by the legislation and that this legislation could have a material
adverse effect on us.
Effective October 22, 2004, Liggett increased the list price of all its
brands by $.65 per carton. The increase was taken due to the recently passed
federal tobacco buyout legislation.
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THE OFFERING
The following is a brief summary of some of the terms of the notes
offered for resale in this prospectus. For a more complete description of the
terms of the notes, see the "Description of Notes" section in this prospectus.
Issuer................................. Vector Group Ltd.
Securities Offered..................... $81,875,000 in principal amount of 5% Variable Interest Senior Convertible
Notes due 2011. This prospectus also relates to the offering of shares of
our common stock issuable upon conversion of the notes and upon conversion
of the notes issuable upon exercise of additional investment rights by the
holders.
Maturity............................... November 15, 2011
Interest............................... Annual Rate: 5%, with an additional amount of interest payable on each
interest payment date based on the amount of cash dividends paid by us per
share on our common stock during the prior three-month period ending on
the record date for such interest payment multiplied by the number of
shares of our common stock into which the notes are convertible on such
record date (together, the "Total Interest"). Notwithstanding the
foregoing, however, during the period from November 18, 2004 to and
including November 15, 2006, the interest payable on each interest payment
date shall be the higher of (i) the Total Interest and (ii) 6 3/4% per
year.
Payment Frequency: Every quarter on February 15, May 15, August 15 and
November 15
First Payment: February 15, 2005
Conversion Rights...................... The notes are convertible, at the holders' option at any time following
the date of issuance until the maturity date, unless previously redeemed
or repurchased as described below, into our common stock at an initial
conversion price of $19.57 per share of common stock, subject to
adjustment. The initial conversion ratio is 51.0986 shares of common stock
per $1,000 principal amount of notes. The conversion price is subject to
adjustment for various events.
Mandatory Redemption................... We must redeem 12.5% of the total aggregate principal amount of the notes
outstanding on November 15, 2009. We will also redeem on November 15, 2009
and on each interest accrual period thereafter an additional amount, if
any, of the notes necessary to prevent the notes from being treated as an
"Applicable High Yield Discount Obligation" under the Internal Revenue
Code. The holders of the notes will have the option on November 15, 2009
to require us to repurchase some or all of their remaining notes. The
redemption price for such redemptions will equal 100% of the principal
amount of the notes plus accrued and unpaid interest, if any.
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Repurchase at Option of the Holders If a fundamental change (as defined in "Description of the Notes -
Upon a Fundamental Change.............. Repurchase of Notes at Option of the Holders Upon a Fundamental Change")
occurs, subject to certain conditions and restrictions, we will be
required to repurchase the notes, at the option of the holders theeof, at
100% of their principal amount, plus accrued and unpaid interest, if any,
plus, under certain circumstances, the "make-whole premium" described in
this prospectus in cash and/or common stock to holders of notes who
require us to repurchase their notes in connection with such repurchase
event.
Ranking................................ The notes are our unsecured and unsubordinated obligations and rank on a
parity in right of payment with all of our existing and future
unsubordinated indebtedness. The notes will effectively rank junior to any
future secured indebtedness we may incur and junior to liabilities of our
subsidiaries. As of September 30, 2004, after application of the proceeds
of the offering of the notes, these notes would have been effectively
junior to approximately $116.6 million of indebtedness of our
subsidiaries.
Use of Proceeds........................ We will not receive any of the proceeds from the sale by any selling
securityholders of the notes or the underlying common stock offered by
this prospectus.
Events of Default...................... The following are events of default under the indenture for the notes:
- we fail to deliver within 30 days the required number of shares of
common stock upon conversion,
- we fail for 30 days to reserve shares of common stock issuable upon
conversion,
- we fail to pay interest or registration default payments when due
and that failure continues for 5 days,
- we fail to pay the principal and any premium on the notes when due,
- we fail to perform any other covenant in the indenture or the notes
and that failure continues for 60 days after notice to us by the
trustee or the holders of a least 25% in the aggregate principal
amount of the outstanding notes,
- we fail to pay when due the principal of any indebtedness for money
borrowed by us or any of our subsidiaries in excess of $10 million
if the indebtedness is not discharged and such failure continues for
30 days or more, or, if such indebtedness has been accelerated and
such acceleration is not annulled, within 30 days after written
notice to us by the trustee of the holders of at least 25% in the
aggregate principal amount of the outstanding notes,
- final unsatisfied judgments not covered by insurance aggregating in
excess of $10 million, at any one time, are rendered against us or
any significant subsidiary and not stayed, bonded or discharged
within 60 days, and
- certain events of bankruptcy, insolvency or reorganization with
respect to us or any of our significant subsidiaries specified in
the indenture.
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See "Description of Notes - Events of Default and Remedies."
Registration Rights.................... This prospectus is part of a registration statement filed pursuant to a
registration rights agreement we entered into with the initial purchasers
listed therein. If we fail to comply with certain of our obligations under
the registration rights agreement, we will pay liquidated damages on the
notes. See "Description of the Notes - Registration Rights."
Trading Market......................... The notes issued in the initial private placement are eligible for trading
in the PORTAL system. However, notes sold using this prospectus will no
longer be eligible for trading in the PORTAL system. We do not intend to
list the notes on any other national securities exchange or automated
quotation system. Our common stock trades on the New York Stock Exchange
under the symbol "VGR".
Risk Factors........................... Investment in the notes and the underlying common stock involves a high
degree of risk. Therefore, you should carefully consider all information
in this prospectus and in particular the matters set forth in the "Risk
Factors" section.
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RISK FACTORS
Before you invest in our securities, you should be aware that we are
subject to various risks, including the ones listed below, the occurrence of any
of which could materially adversely affect our business, financial condition and
results of operations. You should carefully consider these risk factors, as well
as the other information included or incorporated by reference in this
prospectus, in evaluating an investment in our securities. Although the risks
identified below represent those we believe are the most significant risks at
the present time, additional risks of which we are currently unaware or that we
currently deem immaterial could also materially impair our business operations.
RISKS RELATING TO OUR COMPANY
WE AND OUR SUBSIDIARIES HAVE A SUBSTANTIAL AMOUNT OF INDEBTEDNESS.
We and our subsidiaries have significant indebtedness and debt service
obligations. At September 30, 2004, we and our subsidiaries had total
outstanding indebtedness of $308 million. In addition, subject to the terms of
any future agreements, we and our subsidiaries will be able to incur additional
indebtedness in the future. There is a risk that we will not be able to generate
sufficient funds to repay our debt. If we cannot service our fixed charges, it
would have a material adverse effect on our business and results of operations.
WE ARE A HOLDING COMPANY AND DEPEND ON CASH PAYMENTS FROM OUR SUBSIDIARIES,
WHICH ARE SUBJECT TO CONTRACTUAL AND OTHER RESTRICTIONS, IN ORDER TO SERVICE OUR
DEBT AND TO PAY DIVIDENDS ON OUR COMMON STOCK.
We are a holding company and have no operations of our own. We hold our
interests in our various businesses through our wholly-owned subsidiary, VGR
Holding Inc. In addition to our own cash resources, our ability to pay interest
on our convertible notes and to pay dividends on our common stock depends on the
ability of VGR Holding to make cash available to us. VGR Holding's ability to
pay dividends to us depends primarily on the ability of Liggett, its
wholly-owned subsidiary, and New Valley, in which we indirectly hold an
approximately 55.1% interest, to generate cash and make it available to VGR
Holding. Liggett's revolving credit agreement permits Liggett to pay cash
dividends to VGR Holding only if Liggett's borrowing availability exceeds $5
million for the 30 days prior to payment of the dividend and immediately after
giving effect to the dividend, and so long as no event of default has occurred
under the agreement, including Liggett's compliance with the covenants in the
credit facility, including an adjusted net worth and working capital
requirement.
As the controlling stockholder of New Valley, we must deal fairly with
New Valley, which may limit our ability to enter into transactions with New
Valley that result in the receipt of cash from New Valley and to influence New
Valley's dividend policy. In addition, since we indirectly own only
approximately 55.1% of the common shares of New Valley, a significant portion of
any cash and other assets distributed by New Valley will be received by persons
other than us and our subsidiaries.
Our receipt of cash payments, as dividends or otherwise, from our
subsidiaries is an important source of our liquidity and capital resources. If
we do not have sufficient cash resources of our own and do not receive payments
from our subsidiaries in an amount sufficient to repay our debts and to pay
dividends on our common stock, we must obtain additional funds from other
sources. There is a risk that we will not be able to obtain additional funds at
all or on terms acceptable to us. Our inability to service
14
these obligations and to continue to pay dividends on our common stock would
significantly harm us and the value of the notes and our common stock.
OUR LIQUIDITY COULD BE ADVERSELY AFFECTED IF TAXING AUTHORITIES PREVAIL IN THEIR
ASSERTION THAT WE INCURRED A TAX OBLIGATION IN 1998 AND 1999 IN CONNECTION WITH
THE PHILIP MORRIS BRAND TRANSACTION.
In connection with the 1998 and 1999 transaction with Philip Morris
Incorporated, in which a subsidiary of Liggett contributed three of its premium
cigarette brands to Trademarks LLC, a newly-formed limited liability company, we
recognized in 1999 a pre-tax gain of $294.1 million in our consolidated
financial statements and established a deferred tax liability of $103.1 million
relating to the gain. In such transaction, Philip Morris acquired an option to
purchase the remaining interest in Trademarks for a 90-day period commencing in
December 2008, and we have an option to require Philip Morris to purchase the
remaining interest for a 90-day period commencing in March 2010. Upon exercise
of the options during either of the 90-day periods commencing in December 2008
or in March 2010, we will be required to pay tax in the amount of the deferred
tax liability, which will be offset by the benefit of any deferred tax assets,
including any net operating losses, available to us at that time. In connection
with an examination of our 1998 and 1999 federal income tax returns, the
Internal Revenue Service issued to us in September 2003 a notice of proposed
adjustment. The notice asserts that, for tax reporting purposes, the entire gain
should have been recognized in 1998 and in 1999 in the additional amounts of
$150 million and $129.9 million, respectively, rather than upon the exercise of
the options during either of the 90-day periods commencing in December 2008 or
in March 2010. If the Internal Revenue Service were to ultimately prevail with
the proposed adjustment, it would result in the potential acceleration of tax
payments of approximately $120 million, including interest, net of tax benefits,
through September 30, 2004. These amounts have been previously recognized in our
consolidated financial statements as tax liabilities. In addition, we have filed
a protest with the Appeals Division of the Internal Revenue Service. Although no
payment is due with respect to these matters during the appeal process, interest
is accruing on the disputed amounts.
There is a risk that the taxing authorities will ultimately prevail in
their assertion that we incurred a tax obligation prior to the exercise dates of
these options and we will be required to make such tax payments prior to 2009 or
2010. If that were to occur and any necessary financing were not available to
us, our liquidity could be materially adversely affected, which in turn would
materially adversely affect our ability to meet payment obligations under the
notes and the value of our common stock.
LIGGETT FACES INTENSE COMPETITION IN THE DOMESTIC TOBACCO INDUSTRY.
Liggett is considerably smaller and has fewer resources than its major
competitors and, as a result, has a more limited ability to respond to market
developments. Management Science Associates data indicate that the three largest
cigarette manufacturers controlled approximately 84.9% of the United States
cigarette market during 2003. Philip Morris is the largest and most profitable
manufacturer in the market, and its profits are derived principally from its
sale of premium cigarettes. Philip Morris had approximately 62.3% of the premium
segment and 46.7% of the total domestic market during 2003. During 2003,
Liggett's share of the premium cigarette segment was 0.2%, and its share of the
total domestic cigarette market was 2.4%. Philip Morris and RJR Tobacco, the two
largest cigarette manufacturers, have historically, because of their dominant
market share, been able to determine cigarette prices for the various pricing
tiers within the industry. The other cigarette manufacturers historically have
brought their prices into line with the levels established by these two major
manufacturers.
In July 2004, RJR Tobacco and Brown & Williamson, the second and third
largest cigarette manufacturers, completed the combination of their United
States tobacco businesses to create Reynolds American Inc. This transaction will
further consolidate the dominance of the domestic cigarette market
15
by Philip Morris and the newly created Reynolds American, who will have a
combined market share of approximately 76%. This concentration of United States
market share could make it more difficult for Liggett and Vector Tobacco to
compete for shelf space in retail outlets and could impact price competition in
the market, either of which could have a material adverse affect on their sales
volume, operating income and cash flows, which would harm us and the value of
the notes and our common stock.
LIGGETT'S BUSINESS IS HIGHLY DEPENDENT ON THE DISCOUNT CIGARETTE SEGMENT.
Liggett depends more on sales in the discount cigarette segment of the
market, relative to the full-price premium segment, than its major competitors.
Approximately 94.6% of Liggett's unit sales in 2003, and all of Liggett's unit
volume in the first nine months of 2004, were generated in the discount segment.
The discount segment is highly competitive, with consumers having less brand
loyalty and placing greater emphasis on price. While the four major
manufacturers all compete with Liggett in the discount segment of the market,
the strongest competition for market share has recently come from a group of
small manufacturers and importers, most of which sell low quality, deep discount
cigarettes. While Liggett's share of the discount market increased to 7.3% in
2003 from 6.7% in 2002 and 6.5% in 2001, Management Science Associates data
indicate that the discount market share of these other smaller manufacturers and
importers increased to 37.8% in 2003 from 33.5% in 2002 and 26.9% in 2001 due to
their increased competitive discounting. If pricing in the discount market
continues to be impacted by these smaller manufacturers and importers, margins
in Liggett's only current market segment could be negatively affected, which in
turn could negatively affect the value of the notes and our common stock.
LIGGETT'S MARKET SHARE IS SUSCEPTIBLE TO DECLINE.
In years prior to 2000, Liggett suffered a substantial decline in unit
sales and associated market share. Liggett's unit sales and market share
increased during each of 2000, 2001 and 2002, and its market share increased in
2003 while its unit sales declined. During the first nine months of 2004,
Liggett's unit sales and market share declined compared to the same period in
the prior year. This earlier market share erosion resulted in part from
Liggett's highly leveraged capital structure that existed until December 1998
and its limited ability to match other competitors' wholesale and retail trade
programs, obtain retail shelf space for its products and advertise its brands.
The decline in recent years also resulted from adverse developments in the
tobacco industry, intense competition and changes in consumer preferences.
According to Management Science Associates data, Liggett's overall domestic
market share during 2003 and 2002 was 2.4%, compared with 2.1% for 2001.
Liggett's share of the premium segment was 0.2% in 2003 and 0.3% in 2002 and
2001, and its share of the discount segment during 2003 was 7.3%, up from 6.7%
in 2002 and 6.5% for 2001. If Liggett's market share continues to decline,
Liggett's sales volume, operating income and cash flows could be materially
adversely affected, which in turn could negatively affect the value of the notes
and our common stock.
THE DOMESTIC CIGARETTE INDUSTRY HAS EXPERIENCED DECLINING UNIT SALES IN RECENT
PERIODS.
Industry-wide shipments of cigarettes in the United States have been
generally declining for a number of years, with published industry sources
estimating that domestic industry-wide shipments decreased by approximately 4.1%
during 2003. According to Management Science Associates data, domestic
industry-wide shipments decreased by 1.4% in 2002 compared to 2001. Liggett's
management believes that industry-wide shipments of cigarettes in the United
States will generally continue to decline as a result of numerous factors. These
factors include health considerations, diminishing social acceptance of smoking,
and a wide variety of federal, state and local laws limiting smoking in
restaurants, bars and other public places, as well as federal and state excise
tax increases and settlement-related expenses which have contributed to high
cigarette price levels in recent years. If this decline in industry-wide
shipments continues and Liggett is unable to capture market share from its
competitors, or if the industry as a whole
16
is unable to offset the decline in unit sales with price increases, Liggett's
sales volume, operating income and cash flows could be materially adversely
affected, which in turn could negatively affect the value of the notes and our
common stock.
LITIGATION AND REGULATION WILL CONTINUE TO HARM THE TOBACCO INDUSTRY.
The cigarette industry continues to be challenged on numerous fronts.
New cases continue to be commenced against Liggett and other cigarette
manufacturers. As of September 30, 2004, there were approximately 384 individual
suits, 28 purported class actions and 18 governmental and other third-party
payor health care reimbursement actions pending in the United States in which
Liggett was a named defendant. A civil lawsuit has been filed by the United
States federal government seeking disgorgement of approximately $289 billion
from various cigarette manufacturers, including Liggett. Trial of the case began
on September 21, 2004. In addition to these cases, in 2000, an action against
cigarette manufacturers involving approximately 1,000 named individual
plaintiffs was consolidated before a single West Virginia state court. Liggett
is a defendant in most of the cases pending in West Virginia. In January 2002,
the court severed Liggett from the trial of the consolidated action.
Approximately 38 purported class action complaints have been filed against the
cigarette manufacturers for alleged antitrust violations. 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.
There are six individual actions where Liggett is the only defendant,
with one of these cases currently scheduled for trial in January 2005 and one in
early 2005. In April 2004, in one of these cases, a jury in a Florida state
court action awarded compensatory damages of $0.5 million against Liggett. In
addition, plaintiff's counsel is seeking legal fees of $0.8 million. Liggett has
appealed the verdict.
In May 2003, a Florida intermediate appellate court overturned a $790
million punitive damages award against Liggett and decertified the Engle smoking
and health class action. In May 2004, the Florida Supreme Court agreed to review
the case. Oral argument was held on November 3, 2004. If the intermediate
appellate court's ruling is not upheld on further appeal, it will have a
material adverse effect on us. In November 2000, Liggett filed the $3.45 million
bond required under the bonding statute enacted in 2000 by the Florida
legislature which limits the size of any bond required, pending appeal, to stay
execution of a punitive damages verdict. In May 2001, Liggett reached an
agreement with the class in the Engle case, which provided assurance to Liggett
that the stay of execution, in effect under the Florida bonding statute, would
not be lifted or limited at any point until completion of all appeals, including
to the United States Supreme Court. As required by the agreement, Liggett paid
$6.27 million into an escrow account to be held for the benefit of the Engle
class, and released, along with Liggett's existing $3.45 million statutory bond,
to the court for the benefit of the class upon completion of the appeals
process, regardless of the outcome of the appeal. In June 2002, the jury in an
individual case brought under the third phase of the Engle case awarded $37.5
million (subsequently reduced by the court to $25.1 million) of compensatory
damages against Liggett and two other defendants and found Liggett 50%
responsible for the damages. The verdict, which is subject to the outcome of the
Engle appeal, has been overturned as a result of the appellate court's ruling
discussed above. It is possible that additional cases could be decided
unfavorably and that there could be further adverse developments in the Engle
case. Liggett may enter into discussions in an attempt to settle particular
cases if it believes it is appropriate to do so. We cannot predict the cash
requirements related to any future settlements and judgments, including cash
required to bond any appeals, and there is a risk that those requirements will
not be able to be met.
In recent years, there have been a number of restrictive regulatory
actions from various federal administrative bodies, including the United States
Environmental Protection Agency and the Food and Drug Administration. There have
also been adverse political decisions and other unfavorable
17
developments concerning cigarette smoking and the tobacco industry, including
the commencement and certification of class actions and the commencement of
third-party payor actions. These developments generally receive widespread media
attention. We are not able to evaluate the effect of these developing matters on
pending litigation or the possible commencement of additional litigation, but
our consolidated financial position, results of operations or cash flows could
be materially adversely affected by an unfavorable outcome in any
smoking-related litigation, which in turn could negatively affect the value of
the notes and our common stock.
LIGGETT HAS SIGNIFICANT SALES TO A SINGLE CUSTOMER.
During 2003, 16.6% of Liggett's total revenues, 17.7% of Liggett's
revenues in the discount segment and 15.6% of our consolidated revenues were
generated by sales to Liggett's largest customer. Liggett's contract with this
customer currently extends through June 30, 2005. If this customer discontinues
its relationship with Liggett or experiences financial difficulties, Liggett's
results of operations could be materially adversely affected.
LIGGETT MAY BE ADVERSELY AFFECTED BY RECENT LEGISLATION TO ELIMINATE THE FEDERAL
TOBACCO QUOTA SYSTEM.
In October 2004, federal legislation was enacted which will eliminate
the federal tobacco quota system and price support system. Pursuant to the
legislation, manufacturers of tobacco products will be assessed $10.1 billion
over a ten year period to compensate tobacco growers and quota holders for the
elimination of their quota rights. Cigarette manufacturers will be responsible
for 96.3% of the assessment, which will be allocated based on relative unit
volume of domestic cigarette shipments. The three largest manufacturers will be
entitled to a credit of a portion of the assessment payable by them against
certain of their MSA obligations. We currently estimate that Liggett's
assessment will be approximately $25 million for the first year of the program
which began October 1, 2004. The ultimate impact of this legislation cannot be
determined, but there is a risk that smaller manufacturers, such as Liggett and
Vector Tobacco, will be disproportionately affected by the legislation, which
could have a material adverse effect on us.
EXCISE TAX INCREASES ADVERSELY AFFECT CIGARETTE SALES.
Cigarettes are subject to substantial and increasing federal, state and
local excise taxes. The federal excise tax on cigarettes is currently $0.39 per
pack. State and local sales and excise taxes vary considerably and, when
combined with the current federal excise tax, may currently exceed $4.00 per
pack. Proposed further tax increases in various jurisdictions are currently
under consideration or pending. In 2004, 10 states enacted increases in excise
taxes. Congress has considered significant increases in the federal excise tax
or other payments from tobacco manufacturers, and several states have pending
legislation proposing further state excise tax increases. We believe that
increases in excise and similar taxes have had an adverse impact on sales of
cigarettes. Further substantial federal or state excise tax increases could
accelerate the trend away from smoking and could have a material adverse effect
on Liggett's sales and profitability, which in turn could negatively affect the
value of the notes and our common stock.
VECTOR TOBACCO IS SUBJECT TO RISKS INHERENT IN NEW PRODUCT DEVELOPMENT
INITIATIVES.
We have made, and plan to continue to make, significant investments in
Vector Tobacco's development projects in the tobacco industry. Vector Tobacco is
in the business of developing and marketing the low nicotine and nicotine-free
QUEST cigarette products and developing reduced risk
18
cigarette products. These initiatives are subject to high levels of risk,
uncertainties and contingencies, including the challenges inherent in new
product development. There is a risk that continued investments in Vector
Tobacco will harm our results of operations, liquidity or cash flow.
The substantial risks facing Vector Tobacco include:
Risks of market acceptance of new products. In November 2001, Vector
Tobacco launched nationwide its reduced carcinogen OMNI cigarettes. During 2002,
acceptance of OMNI in the marketplace was limited, with revenues of only
approximately $5.1 million on sales of 70.7 million units. During 2003, OMNI
sales activity was minimal as Vector Tobacco has not been actively marketing the
OMNI product, and the product is not currently in distribution. Vector Tobacco
was unable to achieve the anticipated breadth of distribution and sales of the
OMNI product due, in part, to the lack of success of its advertising and
marketing efforts in differentiating OMNI from other conventional cigarettes
with consumers through the "reduced carcinogen" message. Over the next several
years, our in-house research program, together with third-party collaborators,
plans to conduct appropriate studies as to the human effects of OMNI's reduction
of carcinogens and, based on these studies, we will review the marketing and
positioning of the OMNI brand in order to formulate a strategy for its long-term
success. OMNI has not been a commercially successful product to date, and there
is a risk that we will be unable to take action to significantly increase the
level of OMNI sales in the future.
Vector Tobacco introduced its low nicotine and nicotine-free QUEST
cigarettes in an initial seven-state market in January 2003 and in Arizona in
January 2004. During the second quarter of 2004, based on an analysis of the
market data obtained since the introduction of the QUEST product, we determined
to postpone indefinitely the national launch of QUEST. A national launch of the
QUEST brands would require the expenditure of substantial additional sums for
advertising and sales promotion, with no assurance of consumer acceptance. Low
nicotine and nicotine-free cigarettes may not ultimately be accepted by adult
smokers and also may not prove to be commercially successful products. Adult
smokers may decide not to purchase cigarettes made with low nicotine and
nicotine-free tobaccos due to taste or other preferences, or due to the use of
genetically modified tobacco or other product modifications.
Recoverability of costs of inventory. At September 30, 2004,
approximately $2.8 million of our inventory was associated with Vector Tobacco's
QUEST product. We estimate an inventory reserve for excess quantities and
obsolete items, taking into account future demand and market conditions. During
the second quarter of 2004, we recognized a non-cash charge of $37 million to
adjust the carrying value of excess leaf tobacco inventory for the QUEST
product, based on estimates of future demand and market conditions. If actual
demand or market conditions in the future are less favorable than those
estimated, additional inventory write-downs may be required.
Third party allegations that Vector Tobacco products are unlawful or
bear deceptive or unsubstantiated product claims. Vector Tobacco is engaged in
the development and marketing of low nicotine and nicotine-free cigarettes and
the development of reduced risk cigarette products. With respect to OMNI, which
is not currently being distributed by Vector Tobacco, reductions in carcinogens
have not yet been proven to result in a safer cigarette. Like other cigarettes,
the OMNI and QUEST products also produce tar, carbon monoxide, other harmful
by-products, and, in the case of OMNI, increased levels of nitric oxide and
formaldehyde. There are currently no specific governmental standards or
parameters for these products and product claims. There is a risk that federal
or state regulators may object to Vector Tobacco's reduced carcinogen and low
nicotine and nicotine-free cigarette products as unlawful or allege they bear
deceptive or unsubstantiated product claims, and seek the removal of the
products from the marketplace, or significant changes to advertising. Various
concerns regarding Vector Tobacco's advertising practices have been expressed to
Vector Tobacco by certain state attorneys general. Vector
19
Tobacco has engaged in discussions in an effort to resolve these concerns and
Vector Tobacco has recently agreed to suspend all print advertising for its
QUEST brand while discussions are pending. If Vector Tobacco is unable to
advertise its QUEST brand, it could have a material adverse effect on sales of
QUEST. Allegations by federal or state regulators, public health organizations
and other tobacco manufacturers that Vector Tobacco's products are unlawful, or
that its public statements or advertising contain misleading or unsubstantiated
health claims or product comparisons, may result in litigation or governmental
proceedings. Vector Tobacco's defense against such claims could require it to
incur substantial expense and to divert significant efforts of its scientific
and marketing personnel. An adverse determination in a judicial proceeding or by
a regulatory agency could have a material and adverse impact on Vector Tobacco's
business, operating results and prospects.
Potential extensive government regulation. Vector Tobacco's business
may become subject to extensive additional domestic and international government
regulation. Various proposals have been made for federal, state and
international legislation to regulate cigarette manufacturers generally, and
reduced constituent cigarettes specifically. It is possible that laws and
regulations may be adopted covering matters such as the manufacture, sale,
distribution and labeling of tobacco products as well as any health claims
associated with reduced carcinogen and low nicotine and nicotine-free cigarette
products and the use of genetically modified tobacco. A system of regulation by
agencies such as the Food and Drug Administration, the Federal Trade Commission
and the United States Department of Agriculture may be established. In addition,
a group of public health organizations submitted a petition to the Food and Drug
Administration, alleging that the marketing of the OMNI product is subject to
regulation by the FDA under existing law. Vector Tobacco has filed a response in
opposition to the petition. The FTC also has expressed interest in the
regulation of tobacco products made by tobacco manufacturers, including Vector
Tobacco, which bear reduced carcinogen claims. The ultimate outcome of any of
the foregoing cannot be predicted, but any of the foregoing could have a
material adverse impact on Vector Tobacco's business, operating results and
prospects.
Necessity of obtaining Food and Drug Administration approval to market
QUEST as a smoking cessation product. In October 2003, we announced that Jed E.
Rose, Ph.D., Director of Duke University Medical Center's Nicotine Research
Program and co-inventor of the nicotine patch, had conducted a study at Duke
University Medical Center to provide preliminary evaluation of the use of the
QUEST technology as a smoking cessation aid. We have asked the Food and Drug
Administration to supply us with guidance as to the additional research and
regulatory filings necessary to market QUEST as a smoking cessation product. We
believe that obtaining the Food and Drug Administration's approval to market
QUEST as a smoking cessation product will be an important factor in the
long-term commercial success of the QUEST brand. No assurance can be given that
such approval can be obtained or as to the timing of any such approval if
received.
Competition from other cigarette manufacturers with greater resources.
The cigarette industry is highly competitive. Vector Tobacco's competitors
generally have substantially greater resources than Vector Tobacco has,
including financial, marketing and personnel resources. Other major tobacco
companies have stated that they are working on reduced risk cigarette products
and have made publicly available at this time only limited additional
information concerning their activities. Philip Morris has announced it is
developing products that potentially reduce smokers' exposure to harmful
compounds in cigarette smoke and may introduce such a product during 2004. RJR
has stated that in 2003 it began a phased expansion into a select number of
retail chain outlets of a cigarette product that primarily heats rather than
burns tobacco, which it claims reduces the toxicity of its smoke. In 2002, Brown
& Williamson Tobacco Corporation announced it was test marketing a new cigarette
with reduced levels of many toxins which it may introduce on a national basis.
There is a substantial likelihood that other major tobacco companies will
continue to introduce new products that are designed to compete directly with
Vector Tobacco's reduced carcinogen and low nicotine and nicotine-free products.
20
Potential disputes concerning intellectual property. Vector Tobacco's
ability to commercially exploit its proprietary technology for its reduced
carcinogen and low nicotine and nicotine-free products depends in large part on
its ability to obtain and defend issued patents, to obtain further patent
protection for its existing technology in the United States and other
jurisdictions, and to operate without infringing on the patents and proprietary
rights of others both in the United States and abroad. Additionally, it must be
able to obtain appropriate licenses to patents or proprietary rights held by
third parties if infringement would otherwise occur, both in the United States
and in foreign countries.
Intellectual property rights, including Vector Tobacco's patents (owned
or licensed), involve complex legal and factual issues. Any conflicts resulting
from third party patent applications and granted patents could significantly
limit Vector Tobacco's ability to obtain meaningful patent protection or to
commercialize its technology. If necessary patents currently exist or are issued
to other companies that contain competitive or conflicting claims, Vector
Tobacco may be required to obtain licenses to use these patents or to develop or
obtain alternative technology. Licensing agreements, if required, may not be
available on acceptable terms or at all. If licenses are not obtained, Vector
Tobacco could be delayed in, or prevented from, pursuing the further development
or marketing of its new cigarette products. Any alternative technology, if
feasible, could take several years to develop.
Litigation which could result in substantial cost also may be necessary
to enforce any patents to which Vector Tobacco has rights, or to determine the
scope, validity and unenforceability of other parties' proprietary rights which
may affect Vector Tobacco's rights. Vector Tobacco also may have to participate
in interference proceedings declared by the U.S. Patent and Trademark Office to
determine the priority of an invention or in opposition proceedings in foreign
counties or jurisdictions, which could result in substantial costs. There is a
risk that its licensed patents would be held invalid by a court or
administrative body or that an alleged infringer would not be found to be
infringing. The mere uncertainty resulting from the institution and continuation
of any technology-related litigation or any interference or opposition
proceedings could have a material and adverse effect on Vector Tobacco's
business, operating results and prospects.
Vector Tobacco may also rely on unpatented trade secrets and know-how
to maintain its competitive position, which it seeks to protect, in part, by
confidentiality agreements with employees, consultants, suppliers and others.
There is a risk that these agreements will be breached or terminated, that
Vector Tobacco will not have adequate remedies for any breach, or that its trade
secrets will otherwise become known or be independently discovered by
competitors.
Dependence on key scientific personnel. Vector Tobacco's business
depends on the continued services of key scientific personnel for its continued
development and growth. The loss of Dr. Anthony Albino, Vice President of Public
Health, Dr. Robert Bereman, Vice President of Chemical Research, or Dr. Mark A.
Conkling, Vice President of Genetic Research, could have a serious negative
impact upon Vector Tobacco's business, operating results and prospects.
Ability to raise capital and manage growth of business. If Vector
Tobacco succeeds in introducing to market and increasing consumer acceptance for
its new cigarette products, Vector Tobacco will be required to obtain
significant amounts of additional capital and manage substantial volume from its
customers. There is a risk that adequate amounts of additional capital will not
be available to Vector Tobacco to fund the growth of its business. To
accommodate growth and compete effectively, Vector Tobacco will also be required
to attract, integrate, motivate and retain additional highly skilled sales,
technical and other employees. Vector Tobacco will face competition for these
people. Its ability to manage volume also will depend on its ability to scale up
its tobacco processing, production and
21
distribution operations. There is a risk that it will not succeed in scaling its
processing, production and distribution operations and that its personnel,
systems, procedures and controls will not be adequate to support its future
operations.
Potential delays in obtaining tobacco, other raw materials and any
technology needed to produce products. Vector Tobacco is dependent on third
parties to produce tobacco and other raw materials that Vector Tobacco requires
to manufacture its products. In addition, the growing of new tobacco and new
seeds is subject to adverse weather conditions. Vector Tobacco may also need to
obtain licenses to technology subject to patents or proprietary rights of third
parties to produce its products. The failure by such third parties to supply
Vector Tobacco with tobacco, other raw materials and technology on commercially
reasonable terms, or at all, in the absence of readily available alternative
sources, would have a serious negative impact on Vector Tobacco's business,
operating results and prospects. There is also a risk that interruptions in the
supply of these materials and technology may occur in the future. Any
interruption in their supply could have a serious negative impact on Vector
Tobacco.
THE ACTUAL COSTS AND SAVINGS ASSOCIATED WITH RESTRUCTURINGS OF OUR TOBACCO
BUSINESS MAY DIFFER MATERIALLY FROM AMOUNTS WE ESTIMATE.
In recent years, we have undertaken a number of initiatives to
streamline the cost structure of our tobacco business and improve operating
efficiency and long-term earnings. For example, during 2002, the sales,
marketing and support functions of our Liggett and Vector Tobacco subsidiaries
were combined. Effective year-end 2003, we closed Vector Tobacco's Timberlake,
North Carolina manufacturing facility and moved all production to Liggett's
facility in Mebane, North Carolina. In April 2004, we eliminated a number of
positions in our tobacco operations and subleased excess office space. In
October 2004, we announced a plan to restructure the operations of Liggett
Vector Brands, effective December 15, 2004. We may consider various additional
opportunities to further improve efficiencies and reduce costs. These prior and
current initiatives have involved material restructuring and impairment charges,
and any future actions taken are likely to involve material charges as well.
These restructuring charges are based on our best estimate at the time of
restructuring. The status of the restructuring activities is reviewed on a
quarterly basis and any adjustments to the reserve, which could differ
materially from previous estimates, are recorded as an adjustment to operating
income. Although we may estimate that substantial cost savings will be
associated with these restructuring actions, there is a risk that these actions
could have a serious negative impact on our tobacco business and that any
estimated increases in profitability cannot be achieved.
NEW VALLEY IS SUBJECT TO RISKS RELATING TO THE INDUSTRIES IN WHICH IT OPERATES.
Risks of real estate ventures. New Valley has two significant
investments, Douglas Elliman Realty, LLC and the Sheraton Keauhou Bay Resort &
Spa (reopening in the fourth quarter 2004) where it holds only a 50% interest.
New Valley must seek approval from other parties for important actions regarding
these joint ventures. Since these other parties' interests may differ from those
of New Valley, a deadlock could arise that might impair the ability of the
ventures to function. Such a deadlock could significantly harm the ventures.
New Valley plans to pursue a variety of real estate development
projects. Development projects are subject to special risks including potential
increase in costs, changes in market demand, inability to meet deadlines which
may delay the timely completion of projects, reliance on contractors who may be
unable to perform and the need to obtain various governmental and third party
consents.
Risks relating to the residential brokerage business. Through its
investment in Douglas Elliman Realty, LLC New Valley is subject to the risks and
uncertainties endemic to the residential brokerage
22
business. Both Douglas Elliman and Prudential Elliman Real Estate operate as
franchisees of The Prudential Real Estate Affiliates, Inc. Prudential Douglas
Elliman operates each of its offices under its franchiser's brand name, but
generally does not own any of the brand names under which it operates. The
franchiser has significant rights over the use of the franchised service marks
and the conduct of the two brokerage companies' business. Prudential Douglas
Elliman's franchiser also has the right to terminate Douglas Elliman's and
Prudential Douglas Elliman's franchises, upon the occurrence of certain events,
including a bankruptcy or insolvency event, a change in control, a transfer of
rights under the franchise agreements and a failure to promptly pay amounts due
under the franchise agreements. A termination of Douglas Elliman's or Prudential
Douglas Elliman's franchise agreement could adversely affect New Valley's
investment in Douglas Elliman Realty, LLC.
Interest rates in the United States are currently near 40-year lows. The
low interest rate environment in recent years has significantly contributed to
high levels of existing home sales and residential prices and has positively
impacted Douglas Elliman Realty's operating results. However, the residential
real estate market tends to be cyclical and typically is affected by changes in
the general economic conditions that are beyond Douglas Elliman Realty's
control. Any of the following could have a material adverse effect on Douglas
Elliman Realty's residential business by causing a general decline in the number
of home sales and/or prices, which in turn, could adversely affect its revenues
and profitability:
- periods of economic slowdown or recession,
- a change in the current low interest rate environment resulting in
rising interest rates,
- decreasing home ownership rates, or
- declining demand for real estate.
All of Douglas Elliman Realty's current operations are located in the New
York metropolitan area. Local and regional economic conditions in this market
could differ materially from prevailing conditions in other parts of the
country. A downturn in the residential real estate market or economic conditions
in that region could have a material adverse effect on Douglas Elliman Realty
and New Valley's investment in that company.
NEW VALLEY'S POTENTIAL INVESTMENTS ARE UNIDENTIFIED AND MAY NOT SUCCEED.
New Valley currently holds a significant amount of marketable
securities and cash not committed to any specific investments. This subjects a
security holder to increased risk and uncertainty because a security holder will
not be able to evaluate how this cash will be invested and the economic merits
of particular investments. There may be substantial delay in locating suitable
investment opportunities. In addition, New Valley may lack relevant management
experience in the areas in which New Valley may invest. There is a risk that New
Valley will fail in targeting, consummating or effectively integrating or
managing any of these investments.
WE DEPEND ON OUR KEY PERSONNEL.
We depend on the efforts of our executive officers and other key
personnel. While we believe that we could find replacements for these key
personnel, the loss of their services could have a significant adverse effect on
our operations.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH
SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON
OUR BUSINESS AND STOCK PRICE.
23
We are in the process of documenting and testing our internal control
procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires annual management assessments of the
effectiveness of our internal controls over financial reporting and a report by
our independent auditors addressing these assessments. During the course of our
testing we may identify deficiencies which we may not be able to remediate in
time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with
the requirements of Section 404. In addition, if we fail to maintain the
adequacy of our internal controls, as such standards are modified, supplemented
or amended from time to time, we may not be able to ensure that we can conclude
on an ongoing basis that we have effective internal controls over financial
reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Failure to
achieve and maintain an effective internal control environment could have a
material adverse effect on our stock price.
RISKS RELATING TO THE OFFERING
THE NOTES WILL BE UNSECURED AND ARE EFFECTIVELY SUBORDINATED TO INDEBTEDNESS AND
OTHER LIABILITIES OF OUR SUBSIDIARIES.
The notes are general, unsecured obligations, pari passu in right of
payment to all of our existing and future senior debt except for any secured
indebtedness. Holders of any secured indebtedness would have claims that are
superior to your claims as a holder of the notes to the extent of the value of
the assets securing such other indebtedness. If we become insolvent, file for
bankruptcy, reorganize our business or close down, the assets which serve as
collateral for any secured indebtedness would be available to satisfy the
obligations under the secured indebtedness before any payments were to be made
on the notes. Further, the notes are effectively subordinated to all existing
and future liabilities (including trade payables and liabilities to judgment
creditors) of our subsidiaries. In the event of a bankruptcy, liquidation or
dissolution of one of our subsidiaries, the subsidiary may not have sufficient
assets to make payments to us following payment by the subsidiary of its
liabilities. The indenture permits us to incur indebtedness and permits our
subsidiaries to incur senior or other debt or liabilities.
In addition to our own cash resources, we will rely on cash payments
from our subsidiaries to fund our obligations, including payments on the notes.
Liggett's revolving credit agreement contains significant restrictions on its
ability to make distributions to us. This agreement and other future debt
agreements may not permit our subsidiaries to distribute enough cash to us to
allow us to make all payments required on the notes, even in the case of an
event of default under the notes.
THE INDENTURE DOES NOT CONTAIN FINANCIAL COVENANTS AND DOES NOT RESTRICT THE
INCURRENCE OF DEBT BY US OR OUR SUBSIDIARIES AND, AS A RESULT, OUR SUBSIDIARIES
CAN INCUR ADDITIONAL INDEBTEDNESS OR ENTER INTO OTHER AGREEMENTS THAT RESTRICT
THE PAYMENT OF DIVIDENDS TO US.
The indenture does not contain any financial covenants or restrictions
prohibiting the incurrence of indebtedness, including additional senior
indebtedness, by us or the incurrence of any indebtedness by our subsidiaries.
The indenture also does not prohibit our subsidiaries from entering into
agreements that restrict the subsidiaries' ability to pay dividends or make
other cash distributions to us. In addition, the indenture does not restrict the
payment of dividends or the issuance or repurchase of securities by us. The
indenture does not contain any covenants or other provisions to afford
protection to holders of the notes in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction that may adversely affect holders of the notes except to the extent
described under "Description of Notes - Repurchase of Notes at Option of the
Holders Upon a Fundamental Change." The term "fundamental change" is limited to
certain specified transactions and may not include other events that may involve
an actual change of control.
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OUR ABILITY TO PURCHASE THE NOTES WITH CASH AT YOUR OPTION AND OUR ABILITY TO
SATISFY OUR OBLIGATIONS UPON A FUNDAMENTAL CHANGE OR AN EVENT OF DEFAULT MAY BE
LIMITED.
Holders of notes may require us to purchase all or a portion of their
notes for cash upon the occurrence of specific circumstances involving the
events described under "Description of Notes -- Repurchase of Notes at Option of
the Holders Upon a Fundamental Change" and "Description of Notes -- Events of
Default and Remedies." We cannot assure you that, if required, we would have
sufficient cash or other financial resources at that time or would be able to
arrange sufficient financing necessary to pay the purchase price for all notes
tendered by holders thereof. In addition, our ability to repurchase notes in the
event of a fundamental change or an event of default may be prohibited or
limited by law, by regulatory authorities, by the other agreements related to
our indebtedness and by indebtedness and agreements that we or our subsidiaries
may enter into from time to time, which may replace, supplement or amend our
existing or future indebtedness. Our failure to repurchase tendered notes would
constitute an event of default under the indenture.
THE MAKE-WHOLE PREMIUM PAYABLE ON NOTES CONVERTED OR REPURCHASED IN CONNECTION
WITH THE OCCURRENCE OF A FUNDAMENTAL CHANGE MAY NOT ADEQUATELY COMPENSATE YOU
FOR THE LOST OPTION VALUE OF THE NOTES AS A RESULT OF SUCH FUNDAMENTAL CHANGE.
If a fundamental change occurs, we will in certain circumstances pay a
make-whole premium on notes converted or repurchased in connection with such
fundamental change. The amount of the make-whole premium will be determined
based on the date on which the fundamental change becomes effective and the
price per share of our common stock in the fundamental change as described below
under "Description of the Notes -- Repurchase of Notes at Option of the Holders
Upon a Fundamental Change." While the make-whole premium is designed to
compensate holders of notes for the lost option time value of their notes as a
result of such fundamental change, such make-whole premium is only an
approximation of such lost value and may not adequately compensate holders of
notes for such loss. In addition, if the price paid per share of our common
stock in the fundamental change is less than the common stock price at the date
of issuance of the notes, there will be no make-whole premium.
NO PUBLIC TRADING MARKET FOR THE NOTES EXISTS.
Prior to the initial private placement, there was no public market for
these notes. The notes issued in the initial private placement are eligible for
trading in the PORTAL system. However, the notes resold using this prospectus
will no longer trade in the PORTAL system. We do not intend to list the notes on
any national securities exchange or automated quotation system. If any of the
notes are traded after they are initially issued, they may trade at a discount
from their initial offering price. The trading price of the notes may depend on
prevailing interest rates, the market for similar securities and other factors,
including economic conditions and our financial condition, performance and
prospects.
WE HAVE MANY POTENTIALLY DILUTIVE SECURITIES OUTSTANDING.
At September 30, 2004, we had outstanding options granted to employees
to purchase approximately 9,122,859 shares of our common stock, at prices
ranging from $3.73 to $37.60 per share, of which options for 8,510,523 shares
are exercisable during 2004. We also have outstanding two series of convertible
notes maturing in July 2008 and November 2011, respectively, which are currently
convertible into 8,863,570 shares of our common stock (9,556,773 shares of
common stock if the rights to purchase additional notes are exercised in full).
The issuance of these shares will cause dilution which may adversely affect the
market price of our common stock. The availability for sale of significant
quantities of our common stock could adversely affect the prevailing market
price of the stock.
25
OUR STOCK PRICE MAY BE VOLATILE.
The trading price of our common stock has ranged between $13.86 and
$17.38 per share over the past 52 weeks. The overall market and the price of our
common stock may fluctuate greatly. The trading price of our common stock may be
significantly affected by various factors, including:
- the depth and liquidity of the trading market for our common
stock,
- quarterly variations in its actual or anticipated operating
results,
- changes in investors' and analysts' perceptions of the business
and legal risks facing us and the tobacco industry,
- changes in estimates of its earnings by investors and analysts,
and
- announcements or activities by its competitors.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this prospectus contains
"forward-looking statements" within the meaning of the federal securities law.
Forward-looking statements include information relating to our intent, belief or
current expectations, primarily with respect to, but not limited to:
- economic outlook,
- capital expenditures,
- cost reduction,
- cash flows,
- operating performance,
- litigation,
- impairment charges and cost savings associated with restructurings
of our tobacco operations, and
- related industry developments (including trends affecting our
business, financial condition and results of operations).
We identify forward-looking statements in this prospectus by using
words or phrases such as "anticipate", "believe", "estimate", "expect",
"intend", "may be", "objective", "plan", "seek", "predict", "project" and "will
be" and similar words or phrases or their negatives.
The forward-looking information involves important risks and
uncertainties that could cause our actual results, performance or achievements
to differ materially from our anticipated results, performance or achievements
expressed or implied by the forward-looking statements. Factors that could cause
actual results to differ materially from those suggested by the forward-looking
statements include, without limitation, the following:
26
- general economic and market conditions and any changes therein,
due to acts of war and terrorism or otherwise,
- governmental regulations and policies,
- effects of industry competition,
- impact of restructurings on our tobacco business and our ability
to achieve any increases in profitability estimated to occur as a
result of these restructurings,
- uncertainty related to litigation, and
- risks inherent in our new product development initiatives.
Further information on risks and uncertainties specific to our business include
the risk factors discussed above under "Risk Factors" and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
incorporated by reference into this prospectus.
Although we believe the expectations reflected in these forward-looking
statements are based on reasonable assumptions, there is a risk that these
expectations will not be attained and that any deviations will be material. The
forward-looking statements speak only as of the date they are made. We disclaim
any obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained in this prospectus to reflect any changes in
our expectations or any change in events, conditions or circumstances on which
any statement is based.
USE OF PROCEEDS
The selling securityholders will receive all of the proceeds from the
sale of the notes and common stock issuable upon conversion of the notes. We
will not receive any proceeds from the sale by any selling securityholder of the
notes or the shares of common stock issuable upon conversion of the notes
offered by the selling securityholders under this prospectus, but we have agreed
to pay the expenses of preparing this prospectus and the related registration
statement.
We received net proceeds of approximately $63 million from our sale of
the notes to the initial purchasers, after deducting the estimated offering
expenses payable by us. We used the proceeds of the offering to redeem at par
all of the remaining $63 million principal amount of the 10% Senior Secured
Notes due March 31, 2006 issued by the Company's subsidiary, VGR Holding Inc.
27
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods
indicated is as follows:
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPT. 30,
---------------------------------------------- ---------------
1999 2000 2001 2002 2003 2003 2004
---------------------------------------------- ---------------
Ratio of earnings to fixed
charges (1) 6.4x 8.8x 2.2x - - - -
----------------
(1) For purposes of computing the ratio of earnings to fixed charges,
earnings include pre-tax income (loss) from continuing operations and
fixed charges (excluding capitalized interest) and amortization of
capitalized interest. Earnings are also adjusted to exclude equity in
gain or loss of affiliates. Fixed charges consist of interest expense,
capitalized interest (including amounts charged to income and capitalized
during the period), a portion of rental expense (deemed by us to be
representative of the interest factor of rental payments), amortization
of debt issuance costs and amortization of debt discount costs. For the
years ended December 31, 2002 and 2003 and for the nine months ended
September 30, 2003 and 2004, earnings were insufficient to cover fixed
charges as evidenced by a less than one-to-one coverage ratio as shown
above. Additional earnings of approximately $47.2 million and $18.3
million were necessary for the years ended December 31, 2002 and 2003,
respectively, and $26.3 million and $5.8 million for the nine months
ended September 30, 2003 and 2004, respectively, to provide a one-to-one
coverage for us.
28
DESCRIPTION OF THE NOTES
Set forth below is a summary of certain provisions of the notes and the
registration rights agreement. The notes were issued pursuant to an indenture,
dated as of November 18, 2004, between us and Wells Fargo Bank, N.A., as
trustee. The following summary of the notes, the indenture and the registration
rights agreement does not purport to be complete and is subject to and is
qualified by reference to all of the provisions of the indenture, including the
definitions of certain terms used in the indenture. Copies of the indenture and
the registration rights agreement may be obtained from us upon request. As used
in this section, references to "us", "we", "our" or the "Company" refer to
Vector Group Ltd., exclusive of its subsidiaries. Whenever particular provisions
or defined terms of the indenture (or the form of note which is a part thereof)
or the registration rights agreement are referred to in this summary, such
provisions or defined terms are incorporated by reference as a part of the
statements made and such statements are qualified in their entirety by such
reference.
GENERAL
We issued the notes having a principal amount of $65,500,000 in a
private transaction on November 18, 2004, with the initial buyers having an
option to buy up to an additional $16,375,000 of principal amount of notes on or
before March 18, 2005. The notes are our general unsecured obligations and
constitute "senior indebtedness" of the Company, ranking pari passu with all
other unsubordinated indebtedness of the Company. The notes have been issued
only in fully registered form, without coupons, in denominations of $1,000 and
integral multiples thereof.
The notes will mature on November 15, 2011, unless earlier repurchased
by us at a holders' option upon an event of default under the notes as described
under " -- Events of Default and Remedies" or upon our fundamental change as
described under " -- Repurchase of Notes at Option of the Holders Upon a
Fundamental Change" or redeemed at a holder's option as described under " --
Mandatory Redemption and Redemption at the Option of the Holders" or converted
at a holder's option as described under " -- Conversion Rights". In addition, at
least 12.5% of the aggregate principal amount of the notes outstanding will be
subject to mandatory redemption on November 15, 2009 as described under " --
Mandatory Redemption and Redemption at the Option of the Holders". Interest on
the notes will accrue at the rate of 5% per annum and will be payable in arrears
quarterly on February 15, May 15, August 15 and November 15, commencing on
February 15, 2005, to the noteholders of record on the immediately preceding
February 1, May 1, August 1 and November 1 (the "Record Date"). On each interest
payment date, an additional amount in interest on the notes shall also be
payable in an amount equal to the product of (i) the number of shares of common
stock into which such notes were convertible on the Record Date and (ii) the
total cash dividends and cash distributions we paid per share of common stock
during the three-month period ending on such Record Date (together, the "Total
Interest"). Interest on the notes will accrue from the date of original issuance
or, if interest has already been paid, from the date it was most recently paid.
Interest will be calculated on the basis of a 360-day year consisting of twelve
30-day months. Notwithstanding the foregoing, however, during the period from
November 18, 2004 to and including November 15, 2006, the interest payable on
each interest payment date shall be the higher of (i) the Total Interest and
(ii) 6 3/4% per annum.
Payment of interest will be made by check mailed to each holder at such
holder's address as set forth upon our registry books or, upon the written
request of a holder of in excess of $2 million principal amount of notes, by
wire transfer. No service charge will be made for any registration of transfer
or conversion of notes, but we may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith. Until
otherwise designated by us, our office or agency will be the corporate trust
office of the trustee presently located at Sixth & Marquette, N9303-120,
Minneapolis, MN 55479; Attn: Corporate Trust Services.
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The indenture does not contain any financial covenants or any
restrictions on our payment of dividends, our issuance or repurchase of our
securities or our incurrence of indebtedness, including senior indebtedness. The
indenture contains no covenants or other provisions to afford the holders
protection in the event of a highly leveraged transaction or a change of control
of us, except to the limited extent described under " -- Repurchase of Notes at
Option of Holders Upon a Fundamental Change".
CONVERSION RIGHTS
The holders will have the right to convert any portion of the principal
amount of the notes at any time prior to the close of business on the maturity
date of the notes, unless previously redeemed or repurchased. The conversion
price for the notes is $19.57 per share, which is equal to a conversion rate per
share of approximately 51.0986 shares per $1,000 principal amount of the notes,
subject to adjustment as described below. The holders may convert his or her
notes in part so long as the part converted is $1,000 or an integral multiple of
$1,000. Except as set forth immediately below, his or her right to convert notes
called for redemption or delivered for repurchase and not withdrawn will
terminate at the close of business on the business day immediately prior to the
redemption date or repurchase date, unless we subsequently fail to pay the
applicable redemption price or repurchase price.
If a redemption date occurs on an interest payment date, conversion
rights with respect to the notes subject to the redemption will expire at the
close of business on the applicable redemption date. If the notes are converted
on an interest payment date, the interest due on the interest payment date will
be paid to the holders whose notes are being redeemed or converted on that date
and such holders will not be required to repay that amount. The effect of this
clause is to ensure that in the event of a redemption or conversion on an
interest payment date we will be required to pay, and the redeeming or
converting holders will be entitled to receive and keep the economic value of,
the interest payment due on that date.
Holders converting any notes or portions thereof will be entitled to
receive any accrued and unpaid interest on the principal amount being converted
as of the conversion date to the extent provided for below. If the conversion
date occurs between the close of business on the Record Date and the opening of
business on the immediately following interest payment date, we will pay the
holders in cash, on such interest payment date, an amount equal to the accrued
and unpaid interest through the conversion date on the principal amount of notes
the holders are converting; provided, however, if we pay the holders on such
interest payment date an amount equal to the interest otherwise payable to the
holders as if the holders had not converted any notes or portion thereof prior
to such interest payment date, the holders will promptly pay to us an amount
equal to the difference between (1) such interest payment received and (2) the
amount of accrued and unpaid interest through the conversion date for the
principal amount the holders converted. We will not issue any fractional shares
of common stock upon conversion. If the issuance would result in the issuance of
a fraction of a share of common stock, we will round such fraction of a share of
common stock up to the nearest whole share.
If we fail to issue and deliver or caused to be delivered to the
holders, or such holders' nominee or nominees, such number of shares of common
stock to which the holders are entitled upon conversion of any notes within 3
trading days after the delivery by such holders of a notice of conversion, and
if on or after such third trading day such holders purchase (in an open market
transaction or otherwise) shares of common stock to deliver in satisfaction of a
sale by the holders of shares of common stock that such holders anticipated
receiving from us upon the conversion (a "Buy-In"), then we shall, within 3
business days after such holders' request and in the holders' discretion, either
(i) pay cash to such holders in an amount equal to the holders' total purchase
price (including brokerage commissions, if any) for the shares of common stock
so purchased (the "Buy-In Price"), at which point our obligation to deliver such
certificate (and to issue such common stock) shall terminate, or (ii) promptly
honor our obligation to deliver to the holders a certificate or certificates
representing such common stock and pay cash to the
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holders in an amount equal to the excess (if any) of the Buy-In Price over the
product of (A) such number of shares of common stock, times (B) the closing
price of the common stock on the conversion date.
We will not effect any conversion of notes, and no holders shall have
the right to convert any portion of their notes, to the extent that after giving
effect to such conversion (including any make-whole premium), such holders
(together with such holders' affiliates) would beneficially own in excess of
4.99% of the number of shares of our common stock outstanding immediately after
giving effect to such conversion (the "Conversion Limitation"), subject to
certain exceptions. For purposes of the foregoing sentence, the number of shares
of common stock beneficially owned by the holders and its affiliates shall
include the number of shares of common stock issuable upon conversion of the
notes with respect to which the determination is being made, but shall exclude
the number of shares of common stock which would be issuable upon (A) conversion
of the remaining, nonconverted portion of the notes beneficially owned by the
holders or any of its affiliates and (B) exercise or conversion of the
unexercised or nonconverted portion of any other securities of the Company
subject to a limitation on conversion or exercise analogous to the limitation
contained herein beneficially owned by the holders or any of their affiliates.
Except as provided below, the conversion price will be subject to
adjustment following the issuance of the notes upon certain events, including:
(a) any payment of dividends or distribution on our common stock in
shares of common stock, or subdivision or combination of our outstanding common
stock into a greater or smaller number of shares,
(b) any issuance to all or substantially all holders of our common
stock of rights, options or warrants entitling them to subscribe for or purchase
our common stock at less than the then current market price of our common stock
(determined in accordance with the indenture),
(c) any distribution to all or substantially all holders of our common
stock of shares of capital stock (other than common stock), evidences of
indebtedness or other non-cash assets (including securities, but excluding the
portion of any dividends or distributions paid in cash, or those dividends,
rights, options, warrants and distributions referred to in clauses (a) and (b)
above or distributions in connection with our liquidation, dissolution or
winding up and excluding distributions pursuant to a rights plan), and
(d) any purchase of shares of our common stock by means of a tender
offer.
In any case in which these provisions require that an adjustment be
made to the conversion price, in lieu of the adjustment, we may, at our option,
distribute to holders of notes, concurrently with the distribution to the
holders of our common stock, such shares of our common stock, rights, options,
warrants, any shares of our capital stock (other than common stock), evidences
of indebtedness or other non-cash assets (or the fair market value, as
reasonably determined by our Board of Directors, of the foregoing in cash) that
such holders of notes would have been entitled to receive had such notes been
converted immediately prior to the record date relating to the event that would
have caused such adjustment (without regard to the Conversion Limitation).
No adjustment need be made for any issuance of common stock pursuant to
a plan of ours for reinvestment of dividends or interest, or to the extent the
notes become convertible into the right to receive cash, or if the holders of
the notes may participate in the transaction that would otherwise give rise to
an adjustment described above, or for issuances of cash dividends or
distributions which the holders are entitled to receive as interest, or as
provided above.
31
From time to time and to the extent permitted by law, we may reduce the
conversion price by any amount for any period, if the period is at least 20 days
and if the decrease is irrevocable during the period, if the Board of Directors
has made a determination that such reduction would be in our best interests or
the Board of Directors deems it advisable to avoid or diminish any income tax to
holders of common stock resulting from any dividend or distribution or similar
event, and we provide the holders with 15 days prior notice of any increase in
the conversion price. See "Certain Federal Income Tax Consequences".
Certain holders may, in some circumstances, be deemed to have received
a distribution or dividend subject to United States federal income tax as a
result of an adjustment or the nonoccurrence of an adjustment to the conversion
price.
CONVERSION PROCEDURE
To convert a note, the holder must complete and manually sign the
conversion notice on the back of the note specifying the principal amount of
such note the holder seeks to convert and deliver the conversion notice,
together with the note and any required interest payment, to the office of the
conversion agent for the notes, which will initially be the office of the
trustee. In addition, the holder must furnish any appropriate endorsements and
transfer documents required by the conversion agent and pay any tax or duty
payable as a result of any transfer involving the issuance or delivery of the
shares of common stock in a name other than that of the registered holder of the
note. The note will be deemed to be converted on the date on which the holder
has satisfied all of these requirements.
RANKING
The notes are our unsecured and unsubordinated indebtedness and rank
pari passu with all other of our unsubordinated indebtedness. The notes will
effectively rank junior, however, to any future secured indebtedness we may
incur and junior to liabilities of our subsidiaries. We will not incur or issue
any subordinated indebtedness unless such indebtedness is unsecured and
subordinated to the notes on terms no less favorable than those applicable to
senior indebtedness which constitutes Designated Senior Indebtedness under the
Indenture dated as of July 5, 2001 between the Company and U.S. Bank Trust
National Association, as Trustee, (the "2001 Indenture") under which our 6 1/4%
Convertible Subordinated Notes due 2008 are issued and outstanding.
The notes shall constitute "Senior Indebtedness", and we have
designated the notes as "Designated Senior Indebtedness", in each case under the
2001 Indenture.
We conduct our operations through our subsidiaries. Accordingly, our
ability to meet our cash obligations in the future in part will be dependent
upon the ability of our subsidiaries to make cash distributions to us.
Our subsidiaries are separate and distinct legal entities. Our
subsidiaries have no obligation to pay any amounts due on the notes or to
provide us with funds for our payment obligations, whether by dividends,
distributions, loans or other payments. In addition, any payment of dividends,
distributions, loans or advances by our subsidiaries to us could be subject to
statutory or contractual restrictions.
As of September 30, 2004, we did not have any outstanding senior
indebtedness and, after application of the proceeds of the offering of the
notes, our subsidiaries would have had $116.6 million of indebtedness. The
indenture does not restrict our or our subsidiaries' incurrence of senior
indebtedness or other indebtedness or our ability to transfer assets or business
operations to our subsidiaries, subject to the
32
provisions described under " -- Repurchase of Notes at Option of the Holders
Upon a Fundamental Change" and " -- Limitation on Merger, Sale or
Consolidation".
MANDATORY REDEMPTION AND REDEMPTION AT THE OPTION OF THE HOLDERS
On November 15, 2009, 12.5% of the aggregate principal amount of the
notes outstanding will be subject to mandatory redemption on a pro rata basis.
In addition to such redemption amount, we will also redeem on November 15, 2009
and on each interest accrual period thereafter an additional amount, if any, of
the notes necessary to prevent the notes from being treated as an "Applicable
High Yield Discount Obligation" within the meaning of section 163(i)(l) of the
Internal Revenue Code of 1986, as amended. The holders of the notes will have
the option on November 15, 2009 to require us to repurchase some or all of their
remaining notes. The redemption price shall equal 100% of the principal amount
of the notes being redeemed, together with accrued and unpaid interest and any
registration default payments to, but excluding, the redemption date.
REDEMPTION AT OUR OPTION
We have no right to redeem the notes at our option at any time prior to
the maturity date.
REPURCHASE OF NOTES AT OPTION OF THE HOLDERS UPON A FUNDAMENTAL CHANGE
In the event of a fundamental change, as defined below, we are required
to make an offer to purchase all of the notes at a cash repurchase price equal
to 100% of the principal amount of the notes, together with accrued and unpaid
interest and registration default payments, if any, to, but excluding, the date
of repurchase. Additionally, we will be required to pay a "make-whole premium"
on the repurchased notes if a fundamental change occurs before November 15, 2011
determined by reference upon the table provided in the indenture and based on
the date the fundamental change becomes effective and the stock price, or a
linear interpolation thereof as described below under "Make-Whole Premium". Each
holder may accept the repurchase offer with respect to all or a portion of the
notes held by such holder by delivering to us a repurchase notice, provided that
the principal amount of the notes the holder requires us to repurchase must be
$1,000 or an integral multiple thereof. We will make the repurchase offer within
15 business days following a fundamental change and it will remain open for 10
business days following its commencement. Upon expiration of the repurchase
offer period, we shall purchase all notes tendered in response to the repurchase
offer.
A "fundamental change" means any transaction or event resulting in
either a change of control event or a termination of trading of our common
stock.
A "termination of trading" shall occur if our common stock (or other
securities into which the notes are then convertible) is neither listed for
trading on a U.S. national securities exchange nor approved for trading on an
established automated over-the-counter trading market in the United States.
Except as provided below, a "change of control" means the occurrence,
after the original issue date of the notes, of one or more of the following
events:
(1) any sale, transfer, lease, conveyance or other disposition
(in one transaction or a series of related transactions) of all or substantially
all of our property or assets to any person or group of related persons (other
than to any of our wholly owned subsidiaries) as defined in Sections 13(d) and
14(d) of the Exchange Act, including any group acting for the purpose of
acquiring, holding, voting or disposing of securities within the meaning of Rule
13d-5(b)(1) under the Exchange Act, other than any
33
sale, transfer, lease, conveyance or other disposition in which (x) persons who,
directly or indirectly, are beneficial owners (as defined in Rule 13d-3 under
the Exchange Act) of our voting stock immediately prior to such transaction,
beneficially own, directly or indirectly, immediately after such transaction at
least a majority of the total voting power of the outstanding voting stock of
the corporation or entity purchasing such properties or assets in such sale,
lease, conveyance or other disposition and (y) persons who, directly or
indirectly, are beneficial owners of our voting stock immediately prior to such
transaction, beneficially own, directly or indirectly, immediately after such
transaction shares of common stock of the corporation or entity purchasing such
properties or assets in such sale, lease, conveyance or other disposition in a
proportion that does not, on the whole, materially differ from such ownership
immediately prior to the transaction;
(2) the approval by the holders of our capital stock of any
plan or proposal for liquidation or dissolution;
(3) if any "person" or "group" (as these terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act) (other than Bennett S.
LeBow or his immediate family, any beneficiary of the estate of Bennett S. LeBow
or his immediate family or any trust or partnership controlled by any of the
foregoing (the "LeBow Persons")) is or shall become the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of 50% of
the aggregate ordinary voting power represented by our issued and outstanding
voting stock;
(4) if at any time Bennett S. LeBow and/or any LeBow Person is
or shall become the "beneficial owner" (as defined in Rule 13d-3 under the
Exchange Act,) either individually or collectively, directly or indirectly, of
65% of the aggregate ordinary voting power represented by our issued and
outstanding voting stock; or
(5) we consolidate with, or merge with or into, another person
or any person consolidates with, or merges with or into, us, other than any
consolidation or merger in which (x) persons who, directly or indirectly, are
beneficial owners (as defined in Rule 13d-3 under the Exchange Act) of our
voting stock immediately prior to such transaction, beneficially own, directly
or indirectly, immediately after such transaction at least a majority of the
total voting power of the outstanding voting stock of the continuing or
surviving corporation or entity and (y) persons who, directly or indirectly, are
beneficial owners of our voting stock immediately prior to such transaction
beneficially own, directly or indirectly, immediately after such transaction
shares of common stock of the continuing or surviving corporation or entity in a
proportion that does not, on the whole, materially differ from such ownership
immediately prior to the transaction.
Notwithstanding the foregoing, a merger or consolidation shall not be
deemed to constitute a "change of control" if (i) at least 90% of the
consideration (excluding cash payments for fractional shares or pursuant to
statutory appraisal rights) in such merger or consolidation consists of shares
of capital stock that are, or immediately after the transaction or event will
be, traded on a national securities exchange in the United States or quoted on
the New York Stock Exchange, the Nasdaq National Market or The Nasdaq SmallCap
Market (or which shall be so traded or quoted when issued or exchanged in
connection with such merger or consolidation) (these securities being referred
to as "publicly traded securities") and (ii) as a result of such merger or
consolidation the notes become convertible into such publicly traded securities,
excluding cash payments for fractional shares.
The definition of change of control includes a phrase relating to the
sale, transfer, lease, conveyance or other disposition of "all or substantially
all" of our assets. The term "all or substantially all" as used in the
definition of "change of control" has not been interpreted under New York law
(which
34
is the governing law of the indenture) to represent a specific quantitative
test. Accordingly, our obligation to make the repurchase offer upon a
fundamental change, and the ability of the holders to require us to make and
consummate such an offer, as a result of a sale, transfer, lease, conveyance or
other disposition of less than all of our assets may be uncertain.
On or before the repurchase date, we will:
- accept for payment notes or portions thereof properly tendered
pursuant to the repurchase offer,
- deposit with the paying agent cash sufficient to pay the
repurchase price, together with accrued and unpaid interest,
if any, of all notes so tendered, and
- deliver to the trustee the notes so accepted, together with an
officers' certificate listing the notes or portions thereof
being purchased by us.
The paying agent will promptly mail to the holders of notes so accepted
payment in an amount equal to the repurchase price, together with accrued and
unpaid interest, if any, and the trustee will promptly authenticate and mail or
deliver to such holders a new note or notes equal in principal amount to any
unpurchased portion of the notes surrendered. We will promptly mail or deliver
any notes not accepted to their holders. We will announce publicly the results
of the repurchase offer on or as soon as practicable after the repurchase date.
The fundamental change purchase feature of the notes also may make more
difficult or discourage a takeover of us and, thus, the removal of incumbent
management. The fundamental change purchase feature resulted from negotiations
between us and the initial purchasers of the notes.
The provisions of the indenture relating to a fundamental change may
not afford the holders protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger, spin-off or similar
transaction that may adversely affect the holders, if such transaction does not
constitute a fundamental change under the indenture. Moreover, certain events
with respect to us which may involve an actual change of control of us may not
constitute a fundamental change for purposes of the indenture.
If a repurchase offer is made, we may not have available funds
sufficient to pay the repurchase price for all of the notes that might be
delivered by holders seeking to accept the repurchase offer. Our failure to make
or consummate the repurchase offer or pay the repurchase price when due would
give the trustee and the holders the rights described under " -- Events of
Default and Remedies."
At any time following the occurrence of a fundamental change and the
delivery of a repurchase notice by a holders and before the close of business on
the business day immediately preceding the date of repurchase, a holders may
withdraw his repurchase notice and the paying agent will promptly return to the
holders the notes with respect to which a repurchase notice has been withdrawn.
To the extent applicable, we will comply with the provisions of Rule
13e-4 and 14e-1 or any other tender offer rules under the Exchange Act and any
other securities laws, and will file a Schedule 13e-4 or any other schedule if
required under such rules, in connection with any offer by us to repurchase
notes at the option of the holders upon a fundamental change.
35
MAKE-WHOLE PREMIUM
The "make-whole premium" shall be determined by reference to
the table below (the "make-whole premium table") and is based on the date that
the applicable fundamental change becomes effective (the "Effective Date") and
the stock price. The "stock price" means the price paid per share of common
stock in the transaction constituting the applicable fundamental change,
determined as follows: (i) if holders of common stock receive only cash in the
fundamental change, the stock price shall be the cash amount paid per share of
common stock; or (ii) in all other circumstances, the stock price shall be the
arithmetic average of the closing prices per share of the common stock on the
ten trading days prior to, but not including, the Effective Date.
The following table shows what the make-whole premium would be for
various stock prices and Effective Dates set forth below, expressed as a
percentage of the principal amount of the notes.
MAKE-WHOLE PREMIUM TABLE
(% OF PRINCIPAL AMOUNT)
EFFECTIVE DATE
------------------------------------------------------------------------------------------------------------------------------------
STOCK
PRICE NOV. 18, 2004 NOV. 15, 2005 NOV. 15, 2006 NOV. 15, 2007 NOV. 15, 2008 NOV. 15, 2009 NOV. 15, 2010 NOV. 15, 2011
------------------------------------------------------------------------------------------------------------------------------------
$13.70 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
$16.31 8.53 6.89 5.32 4.18 3.04 0.25 0.00 0.00
$19.57 23.67 21.54 19.17 16.71 14.03 10.54 6.54 0.00
$22.83 22.76 20.39 17.69 14.73 11.32 7.30 2.28 0.00
$26.10 22.23 19.72 16.85 13.67 10.01 5.75 0.63 0.00
$29.36 21.92 19.33 16.37 13.08 9.33 5.05 0.16 0.00
$32.62 21.73 19.09 16.09 12.76 8.99 4.74 0.01 0.00
$35.88 21.61 18.95 15.93 12.58 8.81 4.60 0.00 0.00
$39.14 21.53 18.86 15.83 12.47 8.72 4.55 0.00 0.00
$42.41 21.48 18.80 15.77 12.41 8.67 4.52 0.00 0.00
$45.67 21.44 18.76 15.73 12.38 8.64 4.51 0.00 0.00
$48.93 21.42 18.74 15.71 12.36 8.63 4.51 0.00 0.00
36
The exact stock price and repurchase dates may not be as set forth in the table,
in which case:
- If the stock price is between two stock price amounts listed
on the Make-Whole Premium Table or the Effective Date is
between two dates listed on the Make-Whole Premium Table, the
make-whole premium shall be determined by linear interpolation
between the amounts set forth in the Make-Whole Premium Table
for the higher and lower stock price amounts and the two
dates, as applicable, based on a 365-day or 366-day year, as
applicable,
- If the stock Price on the Effective Date exceeds $48.93 per
share (subject to certain adjustment), (the "Stock Price
Cap"), the amount of the make-whole premium will be equal to
the make-whole premium as if the stock price were $48.93
(subject to certain adjustment), and
- If the stock price on the Effective Date is less than or equal
to $13.70 per share (subject to certain adjustment), (the
"Stock Price Threshold"), no make-whole premium will be paid.
The Stock Prices set forth in the first column are subject to
adjustment.
We may pay the make-whole premium in shares of common stock (other than
cash paid in lieu of fractional shares), in cash, in the same form of
consideration into which shares of common stock have been converted in
connection with the applicable fundamental change or in any combination of the
foregoing. Notwithstanding the foregoing, our right to pay the make-whole
premium for the notes, in whole or in part, in shares of our common stock is
subject to the various provisions, including:
- our providing timely written notice of our election to pay all
or part of the make-whole premium in shares of our common
stock,
- our common stock to be issued as payment for the make-whole
premium being approved for listing on a U.S. national
securities exchange or the Nasdaq National Market, the Nasdaq
SmallCap Market or any similar system of automated
dissemination of quotations of securities,
- there being sufficient authorized but unissued (or issued but
not outstanding) shares of common stock to issue the issue the
shares of common stock in connection with the make-whole
premium, and such shares of common stock will upon issue, be
duly and validly issued and fully paid and nonassessable and
free of any preemptive or similar rights, and
- the receipt by the trustee of an (1) officers' certificate
stating that the terms of the issuance of the shares of common
stock are in conformity with the indenture, (2) an opinion of
counsel to the effect that the shares of common stock to be
issued by us in payment of the fundamental change conversion
in respect of the notes have been duly authorized and, when
issued and delivered pursuant to the terms of the indenture in
payment of such make-whole premium will be validly issued,
fully paid and non-assessable and (3) an officer's
certificate, stating that the conditions to the issuance of
the shares of common stock have been satisfied.
37
LIMITATION ON MERGER, SALE OR CONSOLIDATION
We may not, directly or indirectly, consolidate with or merge with or
into another person or convey, transfer or lease our properties and assets
substantially as an entirety to any person, and we will not permit any person to
consolidate with or merge into us or convey, transfer or lease its properties
and assets substantially as an entirety to us, unless:
- either (i) we are the continuing person or (ii) the person (if
other than us) formed by such consolidation or into which we
are merged or the person which acquires by conveyance or
transfer, or which leases, our properties and assets
substantially as an entirety (the "Surviving Entity"), (1)
shall be either (a) organized and validly existing under the
laws of the United States of America, any State thereof or the
District of Columbia, or (b) organized under the laws of a
jurisdiction outside the United States and has, or immediately
after the transaction or event will have, common stock traded
on a national securities exchange in the United States or
quoted on the Nasdaq National Market or The Nasdaq SmallCap
Market and a worldwide total market capitalization of its
equity securities before giving effect to the consolidation or
merger of at least $250 million, and (2) the surviving entity
shall expressly assume, by an indenture supplemental hereto,
executed and delivered to the Trustee, all of our obligations
under the notes and the indenture,
- immediately after giving effect to such transaction, no event
of default, and no event which, after notice or lapse of time
or both, would become an event of default, shall have occurred
and be continuing, and
- we or the surviving entity have delivered to the trustee an
officers' certificate and an opinion of counsel stating that
the transaction comply with the provisions of the indenture.
Upon any consolidation with, or merger into, any other person or any
conveyance, transfer or lease of our properties and assets substantially as an
entirety, the successor person formed by such consolidation or into which we are
merged or to which such conveyance, transfer or lease is made shall succeed to,
and be substituted for, and may exercise every right and power of, us under the
indenture with the same effect as if such successor person had been named as us
therein, and thereafter, except in the case of a lease, the predecessor person
shall be relieved of all obligations and covenants under the indenture and the
notes.
EVENTS OF DEFAULT AND REMEDIES
The indenture defines an event of default as:
- our (A) failure to deliver the required number of shares of
common stock into which notes shall have been connected within
30 business days after the applicable conversion date or (B)
notice, written or oral, to any holders, including by way of
public announcement or through any agents of any holder, at
any time, of our intention not to comply with a request for
conversion of any notes into shares of common stock that is
tendered in accordance with the provisions of the notes,
- at any time following the 30th consecutive business day that a
holder's (i) pro rata share of the number of shares of our
common stock reserved for the purpose of issuance upon
conversion of all notes is exceeded by (ii) the number of
shares of common stock that
38
such holder would be entitled to receive upon a conversion of
the full principal amount of such holder's notes (without
regard to the Conversion Limitation, as defined in the
indenture),
- a default in the payment of interest or registration default
payments, if any, on any notes when due and payable which
default continues for a period of five days,
- a default in the payment of the principal amount, the
redemption price, the fundamental change repurchase price or
any applicable make-whole premium on any note when it becomes
due and payable,
- a default in our performance of any of our covenants,
agreements or conditions in the indenture or the notes (other
than a default specified in the bullet points above), which
default continues for a period of 60 days after there has been
given, by registered or certified mail, to us by the trustee
or to us and the trustee by the holders of at least 25% in
aggregate principal amount of the outstanding notes a written
notice specifying such default and requiring it to be remedied
and stating that such notice is a "notice of default"
thereunder,
- a default by us or any of our significant subsidiaries (as
defined under Regulation S-X of the Exchange Act) in the
payment of the principal or interest on any loan agreement or
other instrument under which there may be outstanding, or by
which there may be evidenced, any debt for money borrowed in
excess of $10 million in the aggregate of us and any of our
significant subsidiaries (other than indebtedness for borrowed
money secured only by the real property to which the
indebtedness relates and which is non-recourse to us or to our
significant subsidiary), whether such debt now exists or shall
hereafter be created, resulting in such debt becoming or being
declared due and payable prior to its stated maturity, and
such acceleration shall not have been rescinded or annulled
within 30 days after written notice specifying such default
and requiring it to be remedied and stating that such notice
is a "notice of default" thereunder has been received by us or
such significant subsidiary from the trustee or by the
trustee, us and such significant subsidiary by the holders of
at least 25% in aggregate principal amount of the outstanding
notes (provided that if any time before a judgment or decree
has been obtained by the trustee as provided in the indenture,
such default is remedied or cured by us or such significant
subsidiary within the applicable cure period, or is waived by
the holders of such indebtedness, default under this clause
shall be deemed to have been remedied, cured or waived, as the
case may be),
- one or more final unsatisfied judgments not covered by
insurance aggregating in excess of $10 million, at any one
time, are rendered against us or any significant subsidiary
and not stayed, bonded or discharged within 60 days,
- our failure to give the notice of the occurrence of a
fundamental change as and when required by the indenture,
- the entry by a court having jurisdiction of (i) a decree or
order for relief in respect of us or any of our significant
subsidiaries of a voluntary case or proceeding under any
applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or (ii) a decree or order
adjudging us or any of our significant subsidiaries as
bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement,
39
adjustment or composition of or in respect of us or any of our
significant subsidiaries under any applicable federal or state
law or (iii) a decree or order appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other
similar official of us or any of our significant subsidiaries
or of any substantial part of our property, or ordering the
winding up or liquidation of our affairs, and the continuance
of any such decree or order for relief or any such other
decree or order unstayed and in effect for a period of 60
consecutive days, or
- the commencement by us or any of our significant subsidiaries
of a voluntary case or proceeding under any applicable federal
or state bankruptcy, insolvency, reorganization or other
similar law or of any other case or proceeding to be
adjudicated a bankrupt or insolvent, or our or any of our
significant subsidiaries consent to the entry of a decree or
order for relief in respect of us or any of our significant
subsidiaries in an involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency,
reorganization or other similar law or to the commencement of
any bankruptcy or insolvency case or proceeding against us or
any of our significant subsidiaries, or the filing by us or
any of our significant subsidiaries of a petition or answer or
consent seeking reorganization or relief under any applicable
federal or state law, or consent by us or any of our
significant subsidiaries to the filing of such petition or to
the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other
similar official of us or any of our significant subsidiaries
or of any substantial part of property of us or any of our
significant subsidiaries, or the making by us or any of our
significant subsidiaries of an assignment for the benefit of
creditors, or the admission by us or any of our significant
subsidiaries in writing of the inability of us or any of our
significant subsidiaries to pay the debt of us or any of our
significant subsidiaries generally as they become due, or the
taking of corporate action by us or any of our significant
subsidiaries in furtherance of any such action.
If a default occurs and is continuing, the trustee must, within 10 days
after the trustee's receiving notice or having knowledge of the occurrence of
such default, give the holders notice of such default.
If an event of default occurs and is continuing, other than an event of
default described above relating to bankruptcy, insolvency or reorganization
with respect to us or any of our significant subsidiaries, then in every such
case, unless the principal of all of the notes shall have already become due and
payable, either the trustee or the holders of at least 25% in aggregate
principal amount of the notes then outstanding, by notice in writing to us, and
to the trustee if such notice is given by holders, may declare all principal,
premium, if any, and accrued interest, if any, on or with respect to the notes
to be due and payable immediately. If an event of default described above
relating to bankruptcy, insolvency or reorganization with respect to us occurs,
all principal, premium, if any, accrued interest, if any, will be immediately
due and payable on all outstanding notes without any declaration or other act on
the part of the trustee or the holders. The holders of no less than a majority
in aggregate principal amount of notes generally are authorized to rescind such
acceleration if all existing events of default, other than the non-payment of
principal of, premium, if any, and interest on the notes that have become due
solely by such acceleration, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the notes,
the holders of a majority in aggregate principal amount of the notes at the time
outstanding may waive on behalf of all the holders any default, except a default
relating to bankruptcy, insolvency or reorganization with respect to us, or a
default in the payment of principal of, interest on, or registration default
payments with respect to any note not yet cured, or a default with respect to
any covenant or provision that cannot be modified or amended without the consent
of the holders of each outstanding note affected. Subject to the provisions
40
of the indenture relating to the duties of the trustee, the trustee will be
under no obligation to exercise any of its rights or powers under the indenture
at the request, order or direction of any of the holders, unless those holders
have offered to the trustee reasonable security or indemnity. Subject to all
provisions of the indenture and applicable law, the holders of a majority in
aggregate principal amount of the notes at the time outstanding will have the
right to direct the time, method and place of conducting any proceeding for any
remedy available to the trustee, or exercising any trust or power conferred on
the trustee.
No holders may pursue any remedy under the indenture, except for a
default in the payment of principal, premium, if any, or interest, if any, on
the notes, unless:
- the holders has previously given written notice to the trustee
of a continuing event of default,
- the holders of not less than 25% in aggregate principal amount
of the outstanding notes make a written request to the trustee
to institute proceedings in respect of such event of default
in the name of the trustee,
- the holders offer to the trustee indemnity satisfactory to the
trustee against any loss, liability or expense,
- the trustee for 60 days after its receipt of such notice,
request and offer of security after the receipt of the
request, and offer of security or indemnity has failed to
institute any such proceeding, and
- the trustee has not received a contrary direction from the
holders of a majority in principal amount of the outstanding
notes during such 60 day period.
It should also be noted the Trustee is under no obligation to exercise
any of the rights or powers vested in it by the indenture at the request of the
holders, unless such holders offer to the trustee security or indemnity
reasonably satisfactory to the trustee against the costs, expenses and
liabilities which might be incurred by the trustee in compliance with such
request.
AMENDMENTS AND SUPPLEMENTS
We may enter into a supplemental indenture with the trustee for certain
purposes without the consent of the holders. With the consent of the holders of
not less than a majority in aggregate principal amount of the notes at the time
outstanding, we and the trustee are permitted to amend or supplement the
indenture or any supplemental indenture, but no such modification may, without
the consent of each holders affected thereby:
- reduce the rate of or extend the time for payment of interest,
if any, on the notes,
- reduce the principal amount of, or extend the maturity date
of, the notes,
- make any change that impairs or adversely affects the
conversion rights of the notes,
- reduce the redemption price, the fundamental change repurchase
price or the make-whole premium or amend or modify in any
manner adverse to the holders our obligation to make such
payments, whether through an amendment or waiver of provisions
in the covenants or definitions or otherwise,
41
- modify the provisions with respect to the right of holders to
cause us to redeem the notes on the redemption date or to
repurchase notes upon a fundamental change in a manner adverse
to holders,
- make any interest or principal on the notes payable in money
other than that stated in the notes or other than in
accordance with the provisions of the indenture,
- impair the right of any holder to receive payment of the
principal amount of or interest or registration default
payments, if any, on a holder's notes on or after the due
dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's notes,
- reduce the quorum or voting requirements under the indenture,
- change the ranking of the notes in a manner adverse to the
holders,
- make any change in the amendment provisions which require each
holder's consent or in the waiver provisions,
- reduce the percentage in principal amount of the outstanding
notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is
required for any waiver (of compliance with certain provisions
of the indenture or certain defaults hereunder and their
consequences) provided for in the indenture,
- modify any of the provisions in the indenture concerning the
holders consent requirement described above or the provisions
in the indenture concerning the waiver of past defaults,
except to increase any such percentage or to provide that
certain other provisions of the indenture cannot be modified
or waived without the consent of the holder of each
outstanding note affected thereby, or
- modify the provisions of the indenture in a manner adverse to
the holders in any material respect.
TRANSFER AND EXCHANGE
We have initially appointed the trustee as security registrar, paying
agent and conversion agent, acting through its corporate trust office. We
reserve the right to:
- vary or terminate the appointment of the security registrar,
paying agent or conversion agent,
- appoint additional paying agents or conversion agents, or
- approve any change in the office through which any security
registrar or any paying agent or conversion agent acts.
A holder may transfer or convert the notes in accordance with the
indenture. We or the trustee may require a holder, among other things, to
furnish appropriate endorsements, legal opinions and transfer documents, and to
pay any taxes and fees required by law or permitted by the indenture. We are not
required to issue, register the transfer of, or exchange any notes during the 15
days period
42
immediately preceding the mailing of any notice of redemption right or the 10
days period before the redemption date.
The registered holders of a note may be treated as the owner of it for
all purposes.
BOOK ENTRY, DELIVERY AND FORM
The notes are evidenced by one or more global notes, which were
deposited on the date of the closing of the sale of the notes with, or on behalf
of, the depositary and registered in the name of Cede & Co. as the depositary's
nominee. Except as set forth below, the global note may be transferred, in whole
or in part, only to another nominee of the depositary or to a successor of the
depositary or its nominee.
The holders may hold his or her interests in the global note directly
through the depositary if the holders are participants in the depositary, or the
holders may hold his or her interests in the global note indirectly through
organizations which are participants in the depositary. Transfers between
holders whose interests in the global note are directly or indirectly held by
the depositary will be effected in accordance with the depositary's rules and
will be settled in same-day funds.
The depositary has advised us that it is a limited-purpose trust
company that was created to hold securities for its participants and to
facilitate the clearance and settlement of transactions in such securities
between its participants through electronic book-entry changes in accounts of
its participants. The depositary's participants include securities brokers and
dealers (including Jefferies), banks and trust companies, clearing corporations
and certain other organizations. Access to the depositary's system is also
available to other entities such as banks, brokers, dealers and trust companies,
known as indirect participants, that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly. Holders
may elect to hold notes purchased by them through the depositary. Holders who
are not participants may beneficially own securities held by or on behalf of the
depositary only through direct or indirect participants.
We expect that pursuant to procedures established by the depositary:
- upon deposit of the global notes, the depositary will credit
the accounts of participants with an interest in the global
notes, and
- ownership of the notes evidenced by the global notes will be
shown on, and the transfer of ownership thereof will be
effected only through, records maintained by the depositary
(with respect to the interests of participants), the
participants and the indirect participants.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own and that security
interests in negotiable instruments can only be perfected by delivery of
securities representing the instruments. Consequently, his or her ability to
transfer notes evidenced by the global notes will be limited to such extent.
So long as the depositary or its nominee is the registered owner of a
note, the depositary or such nominee, as the case may be, will be considered the
sole owner or holders of the notes represented by the global notes for all
purposes under the indenture and the notes. Except as provided below, owners of
beneficial interests in a global note will not be entitled to have notes
represented by such global note registered in their names, will not receive or
be entitled to receive physical delivery of certificated notes, and will not be
considered the owners or holders thereof under the indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the trustee thereunder. As a result, the ability of a person having
a beneficial interest in notes represented by a global note to pledge
43
such interest to persons that do not participate in the depositary's system, or
to otherwise take actions with respect to such interest, may be affected by the
lack of a physical certificate evidencing such interest.
Neither we nor the trustee will have any responsibility or liability
for any aspect of the records relating to or payments made on account of notes
by the depositary, or for maintaining, supervising or reviewing any records of
the depositary relating to such notes.
Payments with respect to the principal of, premium, if any, interest on
any note represented by a global note registered in the name of the depositary
or its nominee on the applicable record date will be payable by the trustee to
or at the direction of the depositary or its nominee in its capacity as the
registered holders of the global notes representing such notes under the
indenture. We and the trustee may treat the persons in whose names the notes,
including the global notes, are registered as the owners thereof for the purpose
of receiving such payments and for any and all other purposes whatsoever.
Consequently, neither we nor the trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of notes
(including, principal, premium, if any, or interest), or immediately to credit
the accounts of the relevant participants with such payment, in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the global notes as shown on the records of the depositary.
Payments by the direct and the indirect participants to the beneficial owners of
notes will be governed by standing instructions and customary practice and will
be the responsibility of the direct or indirect participants.
If the holders desire to convert his or her notes into common stock
pursuant to the terms of the notes, the holders should contact his or her broker
or other participants or indirect participants to obtain information on
procedures, including proper forms and cut-off times, for submitting such
requests.
PHYSICAL SECURITIES
If:
- we notify the trustee in writing that the depositary is no
longer willing or able to act as a depositary and we are
unable to locate a qualified successor within 90 days, or
- an event of default has occurred and is continuing and the
notes become due and payable under the indenture, and the
trustee requests that physical notes be issued, then, upon
surrender by the depositary of the global notes, physical
notes will be issued to each person that the depositary
identifies as the beneficial owner of the notes represented by
the global notes. In addition, subject to certain conditions,
any person having a beneficial interest in a global note may,
upon request to the trustee, exchange such beneficial interest
for notes in the form of physical notes. Upon any such
issuance, the trustee is required to register such physical
notes in the name of such person or persons (or the nominee of
any thereof), and cause the same to be delivered thereto.
Neither we nor the trustee shall be liable for any delay by the
depositary or any direct or indirect participant in identifying the beneficial
owners of the notes, and we and the trustee may conclusively rely on, and shall
be protected in relying on, instructions from the depositary for all purposes
(including with respect to the registration and delivery, and the respective
principal amounts, of the notes to be issued).
44
VOTING RIGHTS
The holders of the notes shall have no voting rights as the holders of
the notes, except as required by law.
GOVERNING LAW
The indenture and the notes provide that they are to be governed in
accordance with the laws of the State of New York, without regard to choice of
laws provisions.
THE TRUSTEE
Wells Fargo Bank, N.A. is the trustee under the indenture. A successor
trustee may be appointed in accordance with the terms of the indenture.
The indenture contains certain limitations on the rights of the
trustee, in the event it becomes our creditor, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The trustee will be permitted to engage in other
transactions with us and our subsidiaries, but if it acquires any conflicting
interest (as defined), it must eliminate such conflict or resign.
In case an event of default shall occur (and shall not be cured or
waived), the trustee will be required to use the degree of care of a prudent
person in the conduct of its own affairs in the exercise of its powers. Subject
to such provisions, the trustee will be under no obligation to exercise any of
its rights or powers under the indenture at the request of any of the holders of
notes, unless they shall have offered to the trustee reasonable security or
indemnity.
REGISTRATION RIGHTS
We have entered into a registration rights agreement with the initial
purchasers of the notes for the benefit of the holders of the notes and the
common stock issuable upon conversion of the notes. The following is a summary
of the registration rights agreement and is not complete. The holders should
refer to the registration rights agreement for a full description of the
registration rights that apply to the notes.
We agreed to file a shelf registration statement, of which this
prospectus is a part, under the Securities Act to register resales of the notes
and the shares of common stock into which the notes are convertible, referred to
as registrable securities. We agreed to use commercially reasonable efforts to
have the shelf registration statement declared effective within 180 days after
the first date of original issuance of the notes, and to keep it effective until
the earliest of:
- two years after the closing date;
- the last date on which in the opinion of counsel to us the
holding period applicable to sales of all registrable
securities under Rule 144(k) has expired;
- the date as of which all registrable securities have been
transferred under Rule 144 under circumstances in which any
legend borne by such notes or conversion shares relating to
restrictions on transferability thereof, under the 1933 Act or
otherwise, is removed; and
- the date when all registrable securities shall have been
registered under the Securities Act and disposed of;
45
We are permitted to suspend the use of the prospectus which is a part
of the shelf registration statement for a period not to exceed (i) 30
consecutive days at any one time; (ii) 45 days in the aggregate in any
three-month period; or (iii) 90 days in the aggregate during any 12-month period
(a "Suspension Period"), in each case only for valid business reasons, to be
determined in good faith by the Company in its reasonable judgment, including
pending corporate developments, public filings with the Securities and Exchange
Commission and similar events.
A holders of registrable securities that sells registrable securities
pursuant to the shelf registration statement generally is required to provide
information about itself and the specifics of the sale, be named as a selling
securityholders in the related prospectus and deliver a prospectus to
purchasers, be subject to relevant civil liability provisions under the
Securities Act in connection with such sales and be bound by the provisions of
the registration rights agreements which are applicable to such holders.
If:
- on or prior to the 180th day after the first date of original
issuance of the notes the shelf registration statement has not
been declared effective by the SEC,
- we fail with respect to a note holders that supplies the
questionnaire described below to supplement the shelf
registration statement in a timely manner in order to name
additional selling securities holders, or
- after the shelf registration statement has been declared
effective the shelf registration statement ceases to be
effective or fails to be usable in connection with resales of
notes and the common stock issuable upon the conversion of the
notes (without being succeeded within 3 business days by a
replacement shelf registration statement filed and declared
effective) or usable (including as a result of a Suspension
Period) for the offer and sale of notes for a period of time
(including any Suspension Period) which exceeds: (x) 30
consecutive days at any time; (y) 45 days in the aggregate in
any three-month period; or (z) 90 days in the aggregate in any
12-month period,
(each such event referred to in the three clauses above, a registration
default), then, in each case, we will pay, until such failure is cured,
liquidated damages equal to (i) 0.5% per annum for the notes for the period up
to and including the 90th day during which such registration default has
occurred and is continuing, and (ii) 1.0% per annum for the notes for the period
including and subsequent to the 91st day during which such registration default
has occurred and is continuing.
We agreed to give notice of our intention to file the shelf
registration statement, which we refer to as a filing notice, to each of the
holders of the notes in the same manner as we would give notice to holders of
notes under the indenture. The filing notice seeks, among other things, a
determination from each such holders as to whether such holders elected to have
its notes and the common stock issuable on conversion thereof registered for
sale pursuant to the shelf registration statement.
Any holders of notes wishing to include its registrable securities is
required to deliver to us a properly completed and signed selling
securityholders notice and questionnaire. Depending on how quickly the shelf
registration statement is declared effective, a holders who responds at the end
of the period may not have its registrable securities included until after the
shelf registration statement is declared effective. No holders are entitled to
have the registrable securities held by it covered by the shelf registration
statement unless such holders agrees in writing to be bound by all the
provisions of the registration rights agreement applicable to such holders.
46
Holders of notes are required to deliver the questionnaire prior to the
effectiveness of the shelf registration statement so that they can be named as
selling securityholders in the prospectus. Upon receipt of any completed
questionnaires after the effectiveness of the shelf registration statement, we
are required, as promptly as practicable but in any event within ten business
days of receipt, to file any amendments or supplements to the shelf registration
statement so that such securityholders may use the prospectus, subject to our
right to suspend under certain circumstances; provided, however, that if a
supplement to the related prospectus or a post effective amendment to the shelf
registration statement is required to permit the holders to deliver the
prospectus to purchasers of registrable securities, we shall not be required to
file more than one such supplement during any 20 day period and one such
post-effective amendment in any 60 day period. Under the registration rights
agreement all selling securityholders are required to deliver a prospectus to
purchasers and will be bound by the provisions of the agreement.
We agreed to pay all expenses of the shelf registration statement,
provide each holders that is selling registrable securities pursuant to the
shelf registration statement copies of the related prospectus and take other
actions as are required to permit, subject to the foregoing, registered resales
of the registrable securities.
47
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following section summarizes the material United States federal
income tax consequences of purchasing, owning, and disposing of the notes and
common stock into which you may convert the notes. This is not a complete
analysis of all the potential tax consequences that you may need to consider
before investing based on your particular circumstances. This summary is based
on the Internal Revenue Code of 1986, as amended (the "Code"), the applicable
treasury regulations promulgated or proposed under the Code, judicial authority
and current administrative rulings and practice. All of these may change,
possibly on a retroactive basis.
This summary deals only with beneficial owners who hold notes and
common stock as "capital assets" and does not address tax consequences under
special tax rules. Special tax rules may apply to certain types of investors,
including but not limited to banks, tax-exempt organizations or funds, pension
funds, insurance companies, dealers in securities or foreign currencies, persons
participating in a hedging transaction or a "straddle" or "conversion
transaction" for tax purposes, or persons that have a "functional currency"
other than the U.S. dollar.
This summary discusses the tax consequences to holders who purchase the
notes at their "issue price" (the first price at which a substantial portion of
the notes is sold to the public) and generally does not discuss the tax
consequences to subsequent purchasers of the notes. We have not sought any
ruling from the Internal Revenue Service with respect to the statements and
conclusions in the following summary. We cannot guarantee the IRS will agree
with these statements and conclusions.
Before you invest in these securities, you should consult your own tax
advisor to determine how the United States federal income and estate tax laws
apply to your particular situation and for information about any tax
consequences arising under the laws of any state, local or foreign taxing
jurisdiction or under any applicable tax treaty.
The following discussion is limited to the U.S. federal income tax
consequences relevant to a "U.S. Holder" of a note. You are a "U.S. Holder" if
you are:
- a citizen or resident (as defined in Section 7701(b)(1) of the
Code) of the United States,
- a corporation or other entity taxable as a corporation for
United States federal income tax purposes, or a partnership or
other entity taxable as a partnership for United States
federal income tax purposes, organized under the laws of the
United States or any political subdivision thereof or therein,
- an estate, the income of which is subject to U.S. federal
income tax regardless of the source, or
- a trust, (1) the administration of which is subject to the
primary supervision of a U.S. court and for which one or more
U.S. persons can make all significant decisions or (2) that
has a valid election in effect under applicable treasury
regulations to be treated as a United States person.
In addition, if a holder is an entity treated as a partnership for
United States federal income tax purposes, the tax treatment of the partnership
and each partner of such partnership will generally depend upon the status of
the partner and upon the activities of the partnership. Partnerships which hold
notes or common stock, and partners in such partnerships, should consult their
tax advisors.
48
TAXATION OF INTEREST
You generally must include interest on a note in your income as
ordinary income at the time you receive or accrue interest, in accordance with
your method of accounting for United States federal income tax purposes.
SALE, EXCHANGE OR REDEMPTION OF THE NOTES
Except as described below under "Conversion of the Notes", you
generally will recognize capital gain or loss on the sale, exchange or
redemption of a note equal to the difference between:
- the amount of cash proceeds and the fair market value of any
property you receive on the sale, exchange or redemption
(except any portion that is accrued but unpaid interest not
previously included in income, which is taxable as ordinary
income), and
- your adjusted tax basis in the note.
Your adjusted tax basis generally will equal the cost of the note to
you, less any principal payments you have received. This capital gain or loss
will be long-term if you have held the note for more than one year and will be
short-term if you have held the note one year or less. Long-term capital gains
for non-corporate taxpayers, including individuals, are taxed at a maximum rate
of 15%, and short-term capital gains are taxed at a maximum rate of 35%.
Corporate taxpayers pay a maximum regular tax rate of 35% on all capital gains
and ordinary income. The deductibility of capital losses is subject to
limitations.
EARLY REDEMPTION
In the event of a change of control, the holders of notes will have the
right to require Vector to purchase their notes. Treasury regulations provide
that the right of holders of the notes to require redemption of the notes upon
the occurrence of a change of control will not affect the yield or maturity date
of the notes if, based on all the facts and circumstances as of the issue date,
the likelihood that a change of control giving rise to the redemption right will
occur is a "remote" or "incidental" contingency. Vector intends to take the
position that such likelihood is a remote or incidental contingency and,
consequently, does not intend to treat this redemption provision of the notes as
affecting the computation of the yield or maturity date of the notes.
CONSTRUCTIVE DIVIDENDS ON THE NOTES
The conversion price of the notes may change under certain
circumstances. In such a case, you may be treated as having received a
constructive distribution whether or not you ever exercise your conversion
privilege. The constructive distribution will be taxable as dividend income,
subject to a possible dividends received deduction if you are a corporate
holder, to the extent of our current or accumulated earnings and profits, if,
and to the extent that, the adjustment in the conversion price increases your
proportionate interest in the fully diluted common stock. Moreover, common
stockholders themselves will generally be treated as having received a
constructive distribution if there is not a full adjustment to the conversion
price of the notes to reflect a stock dividend or other event increasing the
proportionate interest of the common stockholders in our assets or earnings and
profits. In such an event, the constructive distribution will be taxable as
ordinary income, subject to a possible dividends received deduction if you are a
corporate holder, to the extent of our current or accumulated earnings and
profits. Under these circumstances, it is possible that you could be required to
pay tax even though you did not receive any cash or other property.
49
LIQUIDATED DAMAGES
If we fail to register the notes with the SEC on a shelf registration
statement to permit you to resell your notes, we will be required to pay you
liquidated damages, as described above under "Description of Notes --
Registration Rights". We intend to take the position for United States federal
income tax purposes that any payments of liquidated damages should be taxable to
you as additional ordinary income when received or accrued, in accordance with
your method of tax accounting. This position is based in part on the assumption
that as of the date of issuance of the notes, the possibility that liquidated
damages will have to be paid is a remote or incidental contingency within the
meaning of applicable treasury regulations. Our determination that such
possibility is a remote or incidental contingency is binding on you, unless you
explicitly disclose that you are taking a different position to the IRS on your
tax return for the year during which you acquire the notes. However, the IRS may
take a contrary position from that described above, which could affect the
timing and character of both your income from the notes and our deduction with
respect to the payments of liquidated damages. If you convert your notes prior
to the payment of liquidated damages, liquidated damages paid to you will be
treated as a distribution on your common stock in the manner discussed under "
-- Dividends on Common Stock" below.
If we fail to file a registration statement, you should consult your
tax advisors concerning the appropriate tax treatment of the payment of
liquidated damages with respect to the notes.
CONVERSION OF THE NOTES
You generally will not recognize any income, gain or loss on conversion
of a note into common stock, except for any cash you receive instead of a
fractional share of common stock. Your tax basis in the common stock will be the
same as your adjusted tax basis in the note at the time of conversion, reduced
by any basis allocable to any fractional share interest for which you received
cash. For capital gains purposes, your holding period for the common stock will
generally include the holding period of the note you converted. To the extent
the fair market value of shares of common stock received is attributable to
accrued interest, the fair market value of such stock will be taxable as
ordinary income, your tax basis in such shares generally will equal the amount
of such accrued interest included in income, and the holding period for such
shares will begin on the date of conversion.
You should treat cash you receive instead of a fractional share of
common stock as a payment in exchange for the fractional share of common stock.
This will generally result in capital gain or loss (measured by the difference
between the cash you received for the fractional share and your adjusted tax
basis in the fractional share).
DIVIDENDS ON COMMON STOCK
Generally, distributions are treated as a dividend and taxed as
dividend income to the extent of our current or accumulated earnings and
profits. Thereafter, distributions are treated as a tax-free return of capital
to the extent of your tax basis in the common stock, and thereafter as gain from
the sale or exchange of such stock. Under legislation enacted in 2003, with
respect to U.S. Holders that are non-corporate taxpayers, for taxable years
beginning after December 31, 2002 and before January 1, 2009, dividends will
generally be subject to tax at the lower applicable capital gains rate, provided
certain holding period requirements are satisfied.
A dividend distribution to a corporate holder may qualify for the 70%
dividends received deduction if the holder owns less than 20% of the voting
power and value of our stock, not counting non-
50
voting, nonconvertible, non-participating preferred stock. A corporate holder
that owns 20% or more of the voting power and value of our stock, other than
non-voting, non-convertible, non-participating preferred stock, generally will
qualify for an 80% dividends received deduction.
SALE, EXCHANGE OR REDEMPTION OF COMMON STOCK
On the sale, exchange or redemption of common stock, you generally will
recognize capital gain or loss equal to the difference between:
- the amount of cash and the fair market value of any property
received on the sale, exchange or redemption, and
- your adjusted tax basis in the common stock.
This capital gain or loss will be long-term if you have held the stock
for more than one year and will be short-term if you have held the stock for one
year or less. The tax rates on long-term and short-term capital gains applicable
to non-corporate taxpayers are discussed above under " -- Dividends on Common
Stock". A holder's basis and holding period in common stock received upon
conversion of a note are determined as discussed above under " -- Conversion of
the Notes".
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
In general, we must report to the record holders of the notes and
common stock, other than corporations other exempt holders, and to the IRS,
payments of principal, premium and interest on a note, payments of dividends on
common stock, payments of the proceeds of the sale or other disposition of a
note and payments of the proceeds of the sale or other disposition of common
stock. The payer must withhold backup withholding tax at a rate of up to 31% if:
- the payee fails to furnish a taxpayer identification number
(which, for an individual, generally is his social security
number) to the payer or establish an exemption from backup
withholding,
- the IRS notifies the payer that the number furnished by the
payee is incorrect,
- the payee has underreported interest, dividends or original
issue discount, or
- the payee has failed to certify under the penalty of perjury
that he is not subject to backup withholding under the Code.
Certain holders, including, among others, all corporations and certain
tax-exempt organizations, generally are exempt from such backup withholding. You
generally may credit any amounts withheld under the backup withholding rules
against your United States federal income tax, and you may receive a refund, if
you furnish the required information to the IRS.
51
DESCRIPTION OF CAPITAL STOCK
This summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of our Amended and Restated
Certificate of Incorporation, as amended, and all applicable provisions of the
Delaware General Corporation Law.
GENERAL
Our Amended and Restated Certificate of Incorporation, as amended,
authorizes us to issue 100,000,000 shares of common stock, par value $.10 per
share, and 10,000,000 shares of preferred stock, par value $1.00 per share. As
of January 18, 2005, there were 41,773,591 shares of our common stock, and no
shares of our preferred stock, issued and outstanding.
COMMON STOCK
The holders of common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Subject
to the prior rights of any outstanding preferred stock, the holders of common
stock are entitled to receive such dividends as the Board of Directors may
declare out of funds legally available for payment of dividends. In the event of
our liquidation, dissolution or winding up, the holders of common stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding preferred stock. The
holders of common stock have no right to convert their common stock into any
other securities. The common stock has no preemptive or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are duly authorized,
validly issued, fully paid and nonassessable. The rights of holders of common
stock are subject to, and may be adversely affected by, the rights of holders of
any series of preferred stock that we may designate in the future.
PREFERRED STOCK
The Board of Directors may authorize the issuance of up to 10,000,000
shares of preferred stock from time to time in one or more series and for such
consideration as the Board may determine and subject to certain restrictions,
with such designations, preferences and rights, and such qualifications,
limitations and restrictions, as the Board may determine with respect thereto by
duly adopted resolution or resolutions. The issuance of preferred stock may
delay, defer or prevent our change in control without further action by the
stockholders and may adversely affect the voting and other rights of holders of
our common stock. As of the date hereof, no shares of preferred stock are issued
and outstanding.
OPTIONS AND OTHER DILUTIVE SECURITIES
At September 30, 2004, we had outstanding options granted to employees
to purchase 9,112,859 shares of our common stock, at prices ranging from $3.73
to $37.60 per share, of which options for 8,510,523 shares are exercisable
during 2004. We also have outstanding two series of convertible notes maturing
in July 2008 and November 2011, respectively, which are currently convertible
into 8,863,570 shares of our common stock (9,556,773 shares of common stock if
the rights to purchase additional notes are exercised in full).
52
ANTITAKEOVER EFFECTS OF PROVISIONS OF DELAWARE LAW
We are a Delaware corporation subject to the provisions of Section 203
of the Delaware General Corporation Law. Section 203 generally provides that a
stockholder acquiring more than 15%, but less than 85%, of the outstanding
voting stock of a corporation subject to Section 203 may not engage in a
"business combination," as defined in Section 203, with the corporation for a
period of three years from the date on which that stockholder became an
"interested stockholder," as defined in Section 203, unless:
- prior to such date the board of directors of the corporation
approved either the business combination or the transaction in
which the stockholder became an interested stockholder, or
- the business combination is approved by the board of directors of
the corporation and authorized by the holders of at least 66 2/3%
of the outstanding voting stock of the corporation not owned by
the interested stockholder.
A "business combination" includes a merger, asset sale and certain other
transactions with an interested stockholder. In general, an "interested
stockholder" is a person or entity who, together with affiliates thereof, owns,
or within three years prior to the determination of the interested stockholder
status, did own, 15% or more of the voting stock of the corporation. Section 203
could prohibit or delay a merger or other takeover or change of control
transaction with respect to our company and, accordingly, may discourage actions
that could result in a premium over the market price for the shares held by our
stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, New York, New York.
SELLING SECURITYHOLDERS
The notes were originally issued by us, in transactions exempt from the
registration requirements of the Securities Act, to entities believed by us to
be qualified institutional buyers. Selling securityholders, including their
transferees, pledgees or donees or their successors, may from time to time offer
and sell any or all the notes and common stock into which the notes are
convertible pursuant to this prospectus.
The selling securityholders have represented to us that they purchased
the notes and the common stock issuable upon conversion of the notes for their
own account for investment only and not with a view toward selling or
distributing them, except through sales registered under the Securities Act or
pursuant to exemptions therefrom. We agreed with the initial purchasers of the
notes to file this registration statement to register the resale of the notes
and the common stock. We agreed to prepare and file all necessary amendments and
supplements to the registration statement to keep it effective until the date on
which the notes and the common stock issuable upon their conversion no longer
qualify as "registrable securities" under our registration rights agreement,
subject to our ability to suspend the registration statement under certain
circumstances for valid business reasons.
The following table sets forth, as of January 18, 2005, information
regarding the beneficial ownership of the notes and our common stock by the
selling securityholders. The information is based on information provided by or
on behalf of the selling securityholders. Information about the selling
53
securityholders may change over time. Any material changed information will be
set forth in prospectus supplements.
The selling securityholders may offer from time to time all, some or
none of the notes or common stock into which the notes are convertible. See
"Plan of Distribution". Thus, we cannot estimate the amount of the notes or the
common stock that will be held by the selling securityholders upon termination
of any sales. In addition, the selling securityholders identified below may have
sold, transferred or otherwise disposed of all or a portion of their notes since
the date on which they provided the information about their notes in
transactions exempt from the registration requirements of the Securities Act.
Except as otherwise may be described in the footnotes below, none of the selling
securityholders has had any material relationship with us or our affiliates
within the past three years.
NUMBER OF NUMBER OF NUMBER OF
SHARES OF SHARES SHARES OF
PRINCIPAL AMOUNT COMMON OF COMMON COMMON
OF NOTES STOCK STOCK STOCK PERCENTAGE OF
BENEFICIALLY PERCENTAGE OF BENEFICIALLY THAT MAY BE SOLD BENEFICIALLY COMMON
OWNED NOTES OWNED PURSUANT TO OWNED STOCK
THAT MAY BE SOLD OUTSTANDING BEFORE THIS THIS PROSPECTUS AFTER THIS OUTSTANDING
NAME (1) (2) OFFERING (3) OFFERING (4)
-----------------------------------------------------------------------------------------------------------------------------
Barnet Partners
Ltd. (5) $ 1,562,500 1.9% 0 79,842 0 *
Basso Holdings
Ltd. (6) (7) $ 1,621,000 2.0% 0 82,831 0 *
Basso
Multi-Strategy
Holding Fund
Ltd. (7) (8) $ 3,784,000 4.6% 0 193,358 0 *
Canyon Balanced
Equity Master
Fund, Ltd. (9) (10) $ 312,500 * 55,961 15,969 55,961 *
Canyon Capital
Arbitrage Master
Fund, Ltd. (10) (11) $ 1,000,000 1.2% 0 51,099 0 *
Canyon Value
Realization
Fund, L.P. (10) (12) $ 812,500 * 145,782 41,518 145,782 *
The Canyon Value
Realization Fund
(Cayman), Ltd. (10) (13) $ 2,968,750 3.6% 538,929 151,700 538,929 1.6%
54
Canyon Value
Realization MAC
18, Ltd. (RMF) (10) $ 312,500 * 53,933 15,969 53,933 *
CitiCanyon, Ltd. (10) (15) $ 312,500 * 51,905 15,969 51,905 *
Hamilton
Multi-Strategy
Master Fund,
L.P. (16) $ 1,377,500 1.7% 182,562 70,389 182,562 *
Highbridge
International
LLC (17) $ 41,250,000 50.4% 0 2,107,819 0 4.8%
Institutional
Benchmarks
Master Fund,
Ltd.(10) (18) $ 218,750 * 37,712 11,178 37,712 *
Jefferies
Paragon Master
Fund, Ltd. (19) $ 10,000,000 12.2% 0 510,987 0 1.2%
Lakeshore
International,
Ltd. (20) (21) $ 3,593,000 4.4% 0 183,598 0 *
Man MAC 2
Limited (22) (23) $ 1,903,750 2.3% 252,149 97,279 252,149 *
Merced Partners
Limited
Partnership (24) $ 1,718,000 2.1% 0 87,788 0 *
Peoples Benefit
Life Insurance
Company
Teamsters (25) $ 625,000 * 0 31,937 0 *
SPhinX Special
Situations Fund
SPC (10) (26) $ 62,500 * 13,990 3,194 13,990 *
St. Albans
Partners Ltd. (27) $ 2,343,750 2.9% 0 119,763 0 *
Tamarack
International,
Ltd. (21) (28) $ 1,718,000 2.1% 0 87,788 0 *
55
Yield Strategies
Fund I, L.P. (29) $ 1,562,500 1.9% 0 79,842 0 *
Yield Strategies
Fund II, L.P. (30) $ 1,562,500 1.9% 0 79,842 0 *
Any other holder
of notes or
future transferee
from any holder (31) $ 1,250,000 1.5% 0 63,874 0 *
-------------
* Less than 1%.
(1) Includes the aggregate principal amount of notes issuable upon exercise
in full of the additional investment rights held by the holder.
(2) Amount of total notes outstanding includes the $13,566,000 aggregate
principal amount of additional notes issuable upon exercise of all the
remaining additional investment rights.
(3) Assumes conversion of all of the securityholders' notes, including the
shares of common stock issuable upon conversion of the notes issuable
upon exercise of the additional investment rights held by the holder, at
a conversion price of $19.57 per share of common stock.
(4) Calculated based on Rule 13d-3(d)(i) of the Exchange Act using shares of
common stock outstanding as of January 18, 2005. In calculating this
amount, we treated as outstanding the number of shares of common stock
issuable upon conversion of all of that particular securityholder's
notes. We did not assume, however, the conversion of any other
securityholder's notes.
(5) Includes $1,250,000 aggregate principal amount of initial notes issued
and $312,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights. John Wagner acts as portfolio
manager for the selling securityholder and exercises voting control and
dispositive power over these securities.
(6) Includes $1,200,000 aggregate principal amount of initial notes issued
and $421,000 aggregate principal amount of additional notes issued upon
exercise of additional investment rights.
(7) Basso Asset Management, L.P. acts as investment manager for Basso
Multi-Strategy Holding Fund Ltd., and Basso Capital Management, L.P. acts
as investment manager for Basso Holdings Ltd. Basso GP, LLC is the
general partner of Basso Asset Management, L.P. and Basso Capital
Management, L.P., and Howard I. Fischer as a managing member of Basso GP,
LLC exercises investment power and voting control over these securities.
Howard I. Fischer disclaims beneficial ownership of these securities.
(8) Includes $2,800,000 aggregate principal amount of initial notes issued
and $984,000 aggregate principal amount of additional notes issued upon
exercise of additional investment rights.
56
(9) Includes $250,000 aggregate principal amount of initial notes issued and
$62,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(10) Canyon Capital Advisors LLC acts as the investment advisor for the
selling securityholder and has the power to direct investments by the
selling securityholder. The managing partners of Canyon Capital Advisors
LLC are Joshua S. Friedman, Mitchell R. Julis, R. Christian, B. Evensen
and K. Robert Turner. The selling securityholder has informed us that (i)
it is an affiliate of Canyon Partners Incorporated, a registered
broker-dealer, (ii) it purchased the securities in the ordinary course of
business, and (iii) at the time of purchase, the selling securityholder
had no agreements or understandings, directly or indirectly, with any
person to distribute the securities. Also beneficially owned the
following principal amounts of our 6.25% Convertible Subordinated Notes
due 2008: Canyon Balanced Equity Master Fund, Ltd. - $1,380,000,
convertible into 55,961 shares of our common stock; Canyon Value
Realization Fund, L.P. - $3,595,000, convertible into 145,782 shares of
our common stock; The Canyon Value Realization Fund (Cayman), Ltd. -
$13,290,000, convertible into 538,929 shares of our common stock; Canyon
Value Realization MAC 18, Ltd. (RMF) - $1,330,000, convertible into
53,933 shares of our common stock; CitiCanyon, Ltd. - $1,280,000,
convertible into 51,905 shares of our common stock; Institutional
Benchmarks Master Fund, Ltd. - $930,000, convertible into 37,712 shares
of our common stock; and SPhinX Special Situations Fund SPC - $345,000,
convertible into 13,990 shares of our common stock.
(11) Includes $800,000 aggregate principal amount of initial notes issued and
$200,000 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(12) Includes $650,000 aggregate principal amount of initial notes issued and
$162,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(13) Includes $2,375,000 aggregate principal amount of initial notes issued
and $593,750 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(14) Includes $250,000 aggregate principal amount of initial notes issued and
$62,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(15) Includes $250,000 aggregate principal amount of initial notes issued and
$62,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(16) Includes $1,102,000 aggregate principal amount of initial notes issued
and $275,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights. Hamilton Investment Management
GP, LLC is the general partner of the selling securityholder and
exercises voting control and dispositive power over these securities. The
members of the general partner are Michael Knox, James Wohlmacher, Sandra
Satz, Evan Zimmerman, Neil Kennedy, Geoff Cragin and James McNeil. Also
beneficially owned $4,502,000 principal amount of our 6.25% Convertible
Subordinated Notes due 2008, convertible into 182,562 shares of our
common stock.
(17) Includes $33,000,000 aggregate principal amount of initial notes issued
and $8,250,000 aggregate principal amount of additional notes issuable
upon exercise of additional investment rights. Each of Highbridge Capital
Management, LLC, Glenn Dubin and Henry Swieca disclaims beneficial
ownership of these securities. Highbridge Capital Management, LLC is the
trading manager of the selling securityholder and exercises voting
control and dispositive power over these securities. Glenn Dubin and
Henry Swieca control Highbridge Capital Management, LLC. The selling
securityholder has informed us that (i) it is an affiliate of Highbridge
Capital Corporation, a
57
registered broker-dealer, (ii) it purchased the securities in the
ordinary course of business, and (iii) at the time of purchase, the
selling securityholder had no agreements or understandings, directly or
indirectly, with any person to distribute the securities.
(18) Includes $175,000 aggregate principal amount of initial notes issued and
$43,750 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(19) Includes $8,000,000 aggregate principal amount of initial notes issued
and $2,000,000 aggregate principal amount of additional notes issuable
upon exercise of additional investment rights. The selling securityholder
is managed by Jefferies Asset Management, LLC, a wholly-owned subsidiary
of Jefferies Group, Inc. Michael Handler and Joseph Contorinis are the
portfolio managers at Jefferies Asset Management, LLC and exercise voting
control and dispositive power over these securities. Jefferies & Company,
Inc. ("Jefferies"), a registered broker-dealer and a separate
wholly-owned subsidiary of Jefferies Group, Inc., was the placement agent
for the offering of notes. Jefferies or its affiliates have from time to
time provided investment banking, general financing and banking services
to us and our affiliates, for which they have received customary
compensation. The selling securityholder has informed us that (i) it
purchased the securities as an investment and not as compensation for
investment banking services, and (ii) at the time of purchase, the
selling securityholder had no agreements or understandings, directly or
indirectly, with any person to distribute the securities.
(20) Includes $2,875,000 aggregate principal amount of initial notes issued
and $718,000 aggregate principal amount of additional notes issued upon
exercise of additional investment rights.
(21) Hunter Capital Management, L.P. ("Hunter Capital") acts as the investment
manager for the selling securityholder. EBF & Associates, L.P. ("EBF") is
the general partner of Hunter Capital, and Global Capital Management,
Inc. ("Global Capital") is the general partner of EBF. John D.
Brandenborg and Michael J. Frey are the sole shareholders of Global
Capital. As such, each of Hunter Capital, EBF, Global Capital, Mr.
Brandenborg and Mr. Frey has dispositive power and voting control over
these securities, but each disclaims beneficial ownership of these
securities.
(22) Includes $1,523,000 aggregate principal amount of initial notes issued
and $380,750 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
(23) Also beneficially owned $6,218,000 principal amount of our 6.25%
Convertible Subordinated Notes due 2008, convertible into 252,149 shares
of our common stock.
(24) Includes $1,375,000 aggregate principal amount of initial notes issued
and $343,000 aggregate principal amount of additional notes issued upon
exercise of additional investment rights. Global Capital is the general
partner of the selling securityholder. John D. Brandenborg and Michael J.
Frey are the sole shareholders of Global Capital. As such, each of Global
Capital, Mr. Brandenborg and Mr. Frey has dispositive power and voting
control over these securities, but each disclaims beneficial ownership of
these securities.
(25) Includes $625,000 aggregate principal amount of initial notes issued.
John Wagner acts as portfolio manager for the selling securityholder and
exercises voting control and dispositive power over these securities.
(26) Includes $50,000 aggregate principal amount of initial notes issued and
$12,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights.
58
(27) Includes $1,875,000 aggregate principal amount of initial notes issued
and $468,750 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights. John Wagner acts as portfolio
manager for the selling securityholder and exercises voting control and
dispositive power over these securities.
(28) Includes $1,375,000 aggregate principal amount of initial notes issued
and $343,000 aggregate principal amount of additional notes issued upon
exercise of additional investment rights.
(29) Includes $1,250,000 aggregate principal amount of initial notes issued
and $312,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights. John Wagner acts as portfolio
manager for the selling securityholder and exercises voting control and
dispositive power over these securities.
(30) Includes $1,250,000 aggregate principal amount of initial notes issued
and $312,500 aggregate principal amount of additional notes issuable upon
exercise of additional investment rights. John Wagner acts as portfolio
manager for the selling securityholder and exercises voting control and
dispositive power over these securities.
(31) Information about other selling securityholders will be set forth in
prospectus supplements, if required. Assumes that any other holders of
notes, or any future transferees, pledgees, donees or successors of or
from any such other holders of notes, do not beneficially own any common
stock other than the common stock issuable upon conversion of the notes
at the initial conversion rate.
59
PLAN OF DISTRIBUTION
We will not receive any of the proceeds of the sale of the notes or the
underlying common stock offered by this prospectus. The notes and the underlying
common stock may be sold from time to time to purchasers:
- directly by the selling securityholders; or
- through underwriters, broker-dealers or agents that may receive
compensation in the form of discounts, concessions or commissions
from the selling securityholders or the purchasers of the notes
and the underlying common stock.
The selling securityholders and any such broker-dealers or agents that
participate in the distribution of the notes and the underlying common stock may
be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. As a result, any profits on the sale of the notes
and underlying common stock by selling securityholders and any discounts,
commissions or concessions received by any such broker-dealers or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
If the selling securityholders were to be deemed underwriters, the selling
securityholders may be subject to certain statutory liabilities, including, but
not limited to, those set forth in Sections 11, 12 and 17 of the Securities Act
and Rule 10b-5 under the Exchange Act.
If the notes and underlying common stock are sold through underwriters
or broker-dealers, the selling securityholders will be responsible for
underwriting discounts or commissions or agent's commissions.
The notes and underlying common stock may be sold in one or more
transactions at:
- fixed prices,
- prevailing market prices at the time of sale,
- varying prices determined at the time of sale, or
- negotiated prices.
These sales may be effected in transactions:
- on any national securities exchange or quotation service on which
the notes and underlying common stock may be listed or quoted at
the time of the sale, including the New York Stock Exchange in the
case of the common stock,
- in the over-the-counter market,
- in transactions otherwise than on such exchanges or services or in
the over-the-counter market,
- through the writing of options, whether the options are listed on
an option exchange or otherwise,
- through the settlement of short sales, or
- through other types of transactions.
60
These transactions may include block transactions or crosses. Crosses
are transactions in which the same broker acts as an agent on both sides of the
trade.
In connection with sales of the notes and underlying common stock or
otherwise, the selling securityholders may enter into hedging transactions with
broker-dealers or other financial institutions. These broker-dealers or
financial institutions may in turn engage in short sales of the notes and
underlying common stock in the course of hedging their positions. The selling
securityholders may also sell the notes and underlying common stock short and
deliver notes and underlying common stock to close out short positions, or loan
or pledge notes and underlying common stock to broker-dealers that in turn may
sell the notes and underlying common stock.
The selling securityholders may pledge or grant a security interest in
some or all of the convertible notes or shares of common stock owned by them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time pursuant to this prospectus or any amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act,
amending, if necessary, the list of selling securityholders to include the
pledgee, transferee or other successors in interest as selling securityholders
under this prospectus. The selling securityholders also may transfer and donate
the shares of common stock in other circumstances in which case the transferees,
donees, pledgees or other successors in interest will be the selling beneficial
owners for purposes of this prospectus.
To our knowledge, there are currently no plans, arrangements or
understandings between any selling securityholders and any underwriter,
broker-dealer or agent regarding the sale of the notes and the underlying common
stock by the selling securityholders. Selling securityholders may decide not to
sell any of the notes and the underlying common stock offered by them pursuant
to this prospectus. In addition, there may be circumstances where a selling
securityholder may transfer, devise or gift the notes and the underlying common
stock by other means not described in this prospectus.
Our common stock trades on the New York Stock Exchange under the symbol
"VGR". We cannot assure you as to the development of liquidity or any trading
market for the notes. See "Risk Factors - No public trading market for the notes
exists".
With respect to a particular offering of notes or common stock, to the
extent required, an accompanying prospectus supplement or, if appropriate, a
post-effective amendment to the registration statement of which this prospectus
is a part will be prepared and will set forth the following information:
- the specific notes or common stock to be offered or sold,
- the names of the selling securityholders,
- the respective purchase prices and public offering prices and
other material terms of the offering,
- the names of any participating agents, broker-dealers or
underwriters, and
- any applicable commissions, discounts, concessions and other
items constituting compensation from the selling
securityholders.
There can be no assurance that any selling securityholder will sell any
or all of the notes or underlying common stock pursuant to this prospectus. In
addition, any notes or underlying common stock covered by this prospectus that
qualify for sale pursuant to Rule 144 or Rule 144A of the Securities
61
Act may be sold under Rule 144 or Rule 144A, as the case may be, rather than
pursuant to this prospectus.
The securityholders and any other person participating in such
distribution will be subject to the Exchange Act. The Exchange Act rules
include, without limitation, Regulation M, which may limit the timing of
purchases and sales of any of the notes and the underlying common stock by the
selling securityholders and any other such person. In addition, Regulation M of
the Exchange Act may restrict the ability of any person engaged in the
distribution of the notes and the underlying common stock to engage in
market-making activities with respect to the particular notes and the underlying
common stock being distributed for a period of up to five business days prior to
the commencement of such distribution. This may affect the marketability of the
notes and the underlying common stock and the ability of any person or entity to
engage in market-making activities with respect to the notes and the underlying
common stock.
Pursuant to the registration rights agreement filed as an exhibit to
this registration statement, we have agreed to indemnify the selling
securityholders and the selling securityholders have agreed to indemnify us
against certain liabilities, including certain liabilities under the Securities
Act, or we will be entitled to contribution in connection with these
liabilities.
We have agreed to pay substantially all of the expenses incidental to
the registration, offering and sale of the notes and underlying common stock to
the public other than commissions, fees and discounts of underwriters, brokers,
dealers and agents.
LEGAL MATTERS
The validity of the issuance of the notes and the shares of common
stock issuable upon conversion of the notes has been passed upon by McDermott
Will & Emery LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements and financial statement schedule
incorporated in this prospectus by reference to the Annual Report on Form 10-K
for the year ended December 31, 2003, have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, an independent registered certified
public accounting firm, given on the authority of said firm as experts in
auditing and accounting.
62