Vector Group Ltd (VGR) 2001 Q4 法說會逐字稿

Welcome to the Vector Group's fourth quarter and full-year 2001 conference call.

Before the call begins, I'd like to read a Safe Harbor statement: The statements made during this conference call which are not historical facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth or implied by forward-looking statements. These risks are described in more detail in the company's Securities and Exchange Commission's filings.

At this time, all participants have been placed on a listen-only mode and the floor will open for questions and comments following the presentation.

Now I would like to turn the call over to the chairman and Chief Executive Office of Vector Group, Bennett LeBow. Sir, you may begin.

OK. Thank you. Good morning, everyone. Good morning and thank you all for joining us for Vector's fourth quarter and full-year 2001 conference call. With me today is Howard Lorber, President and Chief Operating Officer of Vector Group; Dick Lampen, Vector's Executive Vice President; Dr. Tony Albino, Vector's Vice President for Public Health; and Ron Bernstein, the President of our Liggett subsidiary and President and Chief Executive Officer of the newly formed Liggett Vector Brand.

Our topics here today will be first, to detail the financial performance of Vector Group and our subsidiary Liggett Group as well as provide some data on Vector Tobacco. Second, I will provide you with a brief overview of the year's operations and discuss the formation of our new Liggett Vector Brand subsidiary. Thirdly, Ron Bernstein will provide his perspective on the Liggett Group's tobacco business. And fourth, I will discuss our plans and timetable for our new Quest product. Then we will be available to answer your questions.

First, quickly, the financials. The key financial for the quarter and the full-year ended December 31st, 2001, for Vector Group, Liggett Group and Vector Tobacco. For purposes we've excluded from the 2000 results the operations and sale of Liggett-Ducat, our former Russian subsidiary and the New Valley minority interests.

For Vector Group: for the quarter ending December 31st, 2001, Vector Group revenues were 225.1 million compared to 145.2 million in the 2000 fourth quarter. Operating off of 4.5 million compared to operating income of 16.5 million in the 2000 period. Net loss was 1.5 million or 4 cents per diluted common share compared to net income of 6.9 million or 24 cents per diluted common share in the 2000 quarter.

For the full-year ended December 31st, 2001, Vector Group's revenues were 744.2 million compared to 542.3 million for the full-year of 2000. Operating income was 37 million compared to operating income of million in 2000. Net income before discontinued operation was 21.2 million or 72 cents per diluted common share compared to 16.8 million or 58 cents per diluted common share in the full-year of 2000.

I sure hope you noticed that during the fourth quarter New Valley completed the spinoff and correspondingly, 2001 and continuing operations no longer include the performance of that broker-dealer business. They are referred to in the financial statements as discontinued operations.

Going forward and in connection to the creation of the new Liggett Vector Brand, we expect to take a one-time, non-recurring charge of approximately 3.8 million in first quarter of 2002. Related primarily to elimination of redundant positions and calibration of sale and marketing operations and systems integration.

Now for Liggett's performance. For the three months and full-year ended December 31st, 2001, Liggett Group, the company's U.S. tobacco business, had revenues of 216.7 million and 728.2 million respectively compared to 144 million and 539 million for the three months and full-year ended December 31st, 2000. Liggett's operating income was 30 million for the fourth quarter of 2001 and 116.5 million for the full-year of 2001. Compared to 21.5 million and 73 million for the three months and full-year ended December 31, 2000 respectively. The fourth quarter and full-year number exclude charges related to factory location, non-cash compensation and settlement expenses.

Since we've owned the company, Liggett's cash flow for operations has never been stronger. For the three months ended December 31st, 2001, Liggett's EBITDA increased to 31.1 million from 22.8 million on the same period in 2000. For the 12 months ended December 31st, 2001, Liggett's EBITDA was 121.1 million compared to EBITDA of 77.5 million in the corresponding 2000 period.

Vector Tobacco. As you know, Vector Tobacco was in development mode in 2001 with expenses greatly outpacing revenues, as expected. Revenues derived from Vector Tobacco's first product, Omni, which we began selling November, 2001 were approximately 6.1 million. As you might expect, the major components of expenditures as Vector Tobacco include R&D expenses, expenses linked to the launch of an entirely new product line not only significant marketing and advertising expenditures. Vector Tobacco's significant startup expenses coupled with only minimal fourth quarter revenues report an operating loss of 48.6 million for the year.

Going forward in addition I want to mention there are some new rules in revenue recognition that we wanted to bring to your attention. Effective January 1st, 2002 we will adopt new required accounting standards mandating that certain sales incentives currently reported operating, selling, general administrative expenses be shown in reduction of operating revenues. The adoption of new accounting standards will have no impact whatsoever in our net earnings or diluted earnings per share. What, for example. If the new rule had been effect in 2001, Liggett's revenue for 2001 would have been reported at 424 million instead of 728 million. promotion and expenses.

Let me now give you a brief overview of our 2001 accomplishments and our plans for this year. As you know, we began 2001 with two goals in mind: number one, to adequately fund and support Vector Tobacco in its effort to bring to market two revolutionary new tobacco products. And two, to continue to improve sales and profitability of our Liggett Group tobacco business. We believe that we've been successful in achieving these objectives and that the efforts of this past year will pay dividends in the future.

Our expenditures at Vector Tobacco have enabled us to develop and launch nationally the only reduced carcinogen cigarettes. That has positioned us for a third quarter 2002 launch of our nicotine-free product line. And Liggett's performance has been keyed to improve, which Ron will very shortly discuss more about.

In addition, as you know, yesterday we announced completion of our acquisition of Medallion, which brings to Vector Group the opportunity to sell annually an additional 1.2 billion units or 60 million packs with no payment obligation under the . We believe that this can add next year approximately 25 million to our EBITDA. That said, you did recognize that launching two new types of cigarettes is a challenging task that requires the full resources of our tobacco operations in order to be successful.

While we're pleased with much our progress we've made with Omni, sales have been slower than expected. We've done research in the field to ascertain the reasons for this and to help us adjust these issues. By far the biggest challenge we face in Omni is in its distribution area. Although we had commitments from a large number of stores early in the process, we lacked the people and resources to actually ensure that the product got into the stores, and onto the shelves and was replenished when required.

During that time toward that end, rather, we recently announced that we've combined the sales and marketing functionings of our Liggett Group and Vector Tobacco subsidiaries into a new entity Liggett Vector Brands, Inc. We concluded that Vector Group could best maximize our resources by creating one sales and marketing log for the company's entire tobacco operations.

This move greatly expands the our sales coverage in each state we serve. Liggett Vector Brand will have immediately 350 salespeople, enhanced distribution and marketing capability over our entire product line. In addition, recognizing the importance of freedom on the street, so-to-speak, our goal is to expand our sales force to approximately 500 by the end of 2002. Hopefully, this new expanded sales force will also allow us to better support Omni with a proper in store service and of sale advertising.

In addition, another advantage in forming Liggett Vector Brands is that this now gives the sales force two main premium products in the Omni and Quest to sell along on Liggett's premium products . Hopefully, this will now enable us to gain better shelf space and distribution by salesmen having a portfolio of premium products along with our discount products to sell.

Another problem we're facing is the challenge of conveying a new cigarette concept to the public. With the recent rollout of our new advertising, however, we now feel that our message is starting to be heard. Undoubtedly, the concept of a new category of cigarettes, that is to say, a reduced carcinogen cigarette, is an idea which will take time to explain and convey to the consumer.

On the management front, Ron Bernstein's been named President, Chief Executive Officer of Liggett Vector Brands and will oversee this enhanced sales, marketing, and distribution efforts. Working closely with Ron at Liggett Vector Brands will be and , Senior Vice President of Sales and Marketing respectively.

I'm going to now turn the call over to Ron Bernstein, the President of Liggett, who will update you on the great progress we've made at Liggett. Ron.

Thanks, Ben.

2001 was indeed a year of strong and significant growth at Liggett. I'm going to discuss some of the details of our significant progress and add some perspectives on the business going forward.

During our previous conference call I discussed the priorities that Liggett had established for 2001 and I'd like to update you on these now. The first priority for Liggett in 2001 was to ensure that we maximized our position under the settlement agreement by increasing our sales beyond our exclusion, which is approximately seven billion cigarettes. I'm pleased to report that we did in fact accomplish that goal and then some.

In the prior year, 2000, Liggett sold approximately 6.2 billion cigarettes. In 2001, Liggett significantly increased its sales to almost 8.9 billion cigarettes. An increase of 44 percent. The primary driver of this growth was our Liggett select brand which grew from 673 million cigarettes in 2000 to almost 2.8 billion in 2001. An increase of 316 percent.

The second priority for Liggett was to adjust our product mix with an emphasize on higher- margin premium unit sales to enhance profitability as we exceeded our 7 billion unit exclusion. Again, I'm please to report that we were successful in meeting this objective. In 2001, we increase our premium unit sales by 43 percent to 768 million cigarettes. When you check back over the past 25 years and 2001 represents the first year in at least that time that Liggett has increased its overall premium sales.

The bulk of that growth came from our menthol cigarette, , which sold 136 million cigarettes following its September launch. In addition, I'm pleased to note that the Eve brand family, recognized year-over-year growth for the first time in over 10 years with significant growth of 18 percent. Our premium unit growth allowed Liggett to maintain premium unit sales at nine percent of total sales, the same rate as 2000, despite our extraordinary Liggett Select growth in 2001. The positive trends continued during the fourth quarter, and actually exceeded our full-year figures. For the fourth quarter, premium sales were by 79 percent over the prior year period, and overall unit sales were up by 58 percent.

Looking forward to 2002, let me first say how excited I am about the formation of the Liggett-Vector brands. As we analyzed the opportunity of bringing these two operations together, it became immediately clear that the strengths of each company were highly complementary to one another. And that both Liggett and Vector Tobacco would benefit from a joining of forces.

One of the critical points that I emphasized on our last conference call was the importance of Liggett increasing its sales force in 2002 to support greater distribution. Liggett brands tend to sell at four times our national marketshare level in stores that carry our products, giving us great incentive to increased our coverage. While we will not complete the full operational integration of the Liggett and Vector sales and marketing operations until September 30th, our sales force will begin operating as Liggett Vector Brands effective April 1st. This will immediately increase Liggett's sales force by 100 people, and Vector Tobacco's sales force by 250 people, for a total of 350 salespeople.

As Ben noted, our plans call for us to increase this level to 500 by year-end. This immediate expansion will enable us to broaden distribution, and increase the effectiveness of each sales call, as each person now represents a broader product range. Product mix is one of the important complements of the two organizations. Vector's Omni product is in a unique category that in no way conflicts with Liggett's premium brands. And the same is true for Quest when it launches. The Liggett and Vector brands will strengthen Liggett Vector's position with distributors and retailers, as we now can offer integrated programs that will enhance profitability for the trade.

The joining of these organizations also significantly strengthens or senior management team. , senior vice president of sales, brings 22 years of industry experience with a major emphasis on menthol products, which will certainly be a big plus for the further development of . , senior vice president of marketing, as the former category manager for the market's leading brand, whose name eludes me at the moment, will add a proven track record of building and supporting brand equity and awareness to our overall brand portfolio. The net effect of this combination will be to accelerate the opportunities for growth and profitability at both Liggett and Vector Tobacco.

In addition, Ben mentioned that we closed on the acquisition of Medallion yesterday, and that this should further enhance Liggett Vector's prospects going forward. Importantly, the Medallion acquisition increases our overall exclusion under the MSA to approximately 8.2 billion cigarettes annually. In addition to increased profitability of our discount sales, we can use the leverage of discount sales to support the continued growth of our premium products.

We are very excited about Liggett's prospects in 2002 and beyond, and expect to see continued growth of both units and profitability. Giving consideration only to Liggett's operations, and giving effect for the April acquisition of Medallion, we anticipate operating income to grow to approximately 140 to $145 million in 2002.

Thank you for your attention, and back to you, Ben.

OK, thank you, Ron.

Let me say a few more words, everybody, about Omni. We're excited and proud of this important product, and while we cannot make any health claims, we hope it will help to decrease the incidence of lung cancer in smokers, and those exposed to secondhand smoke. Our goal over the next few years is to gain market acceptance of this product. Our research indicates that Omni's a highly differentiated product, which we believe can ultimately secure a significant market position. We also continually work to improve the benefits of Omni and finds ways to significantly reduce other harmful substances in cigarettes.

Now, we'll briefly discuss our second new product. For those of you who may not have heard, last month we announced that our new nicotine-free cigarette will be called Quest. In 2001, we grew the crop in over 200 acres in Pennsylvania, Illinois, Mississippi, and Louisiana. We're in the process of finalizing farmers for the 2002 growing season. We believe this product is different than anything the market has ever seen.

Unlike other new technology cigarette products such as Next, Accord, or Eclipse, our product will taste, smoke, and burn like a premium cigarette, just without the nicotine. I believe we've shown that we can get the taste right with our Omni product. In focus group testing and preliminary taste testing, we found that consumers liked the idea of a nicotine-free cigarette, and genuinely liked the taste of Quest, even though it lacked the nicotine kick.

We're currently finalizing our taste testing, and expect to begin production at our new Timberlake, North Carolina facility shortly. Additionally, because Quest cigarettes are nicotine-free, they also contain a greatly reduced level of the most potent tobacco-specific , known as NNK, which comes from nicotine, which is believed to be one of the leading contributors of lung cancer. We're planning a launch in the U.S. in the third quarter of 2002.

Quest cigarettes will be sold in lites and menthol-lites variance in both box and soft packs. And we'll be spending approximately $40 million to advertise this product. Quest will be positioned, advertised, and priced as a premium cigarette that provides smokers with a new choice. We also intend to work closely with the FDA to get approval to market our Quest technology as a smoking sensation device, which could take a couple of years.

In closing, I'm enthusiastic about 2002. We have a strong performing base tobacco business in Liggett, two revolutionary new products at Vector Tobacco, and the necessary resources to maximize their potential and continue our R&D efforts.

Now, Operator, would you please open the line for questions.

Thank you. The floor is now open for questions. If you have a question or a comment, you may press one followed by four on your touch-tone at this time. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they are received, and we do ask that while you pose your question, to please pick up your handset to provide optimum sound quality. Once again, that is one followed by four on your touch-tone phone at this time. One moment. please, while we poll for questions.

Thank you. Our first question is coming from of Jefferies, Inc. Please state your question or comment.

Good morning. On your last conference call, Ben, you indicated I believe -- you gave a number, I think it was 25,000 doors were going to be carrying, at that time, Omni. Could you update us as to how many doors distribution currently encompasses, and how do you see that ramping up going forward? Thank you.

We found we finally got our MSA data, which is the data from Management Science Associates, you know the real data that's collected. For the end of January, we found even though we had orders -- you know, contracts and orders from maybe 20, 25,000 stores at that time, that we were only in about 10,000 at the end of January.

Actually in less than 10,000 -- I think the number's 10, 11,000. I would say right now we have orders from 30,000, 35,000. The actual number of stores you really can go in and find an Omni is maybe in the 20, 25,000 range. We don't know for sure. Again, you know, we get this monthly, but the data we get -- the actual date we get -- was like six weeks old. But we found at the end of January we were under 10,000 stores. So I would guess end of February, maybe 18,000, 20,000. End of March maybe a little more.

OK. And then, giving effect to the consolidation of the two sales forces, do you anticipate that the ramp-up of distribution will be more rapid with respect to Quest when that is launched in the third quarter?

Let Ron -- Ron, why don't you answer that.

The answer is definitively yes. I mean, when Omni was introduced, there was a very, very small sales force. It's been building up to the level of 100 sales people that its at right now. When we introduce Quest, we'll put the full weight of the 350, which by the time we get to the third quarter will likely be in excess of 400, out on the street, right away.

So we'll get the full benefit of that right away. And believe that we'll get much greater impact by being able to touch the product in the stores. While a lot of product is out of Omni in the stores, they're not necessarily where they're supposed to be in every store. And that's what the sales force will be able to do for us, is to get that product on the right shelves, as well as just being in the store.

Right, that's the point I want to make also, , it's one thing to get the order. It's another thing to maintain the order. To have someone go in there and make sure it's on the right shelf, it's constantly being restocked. Finding a lot of people going back to the store, it's not there. It's just not being reordered properly. And that's a problem of not having a major sales force.

With respect to the advertising effort that is accompanying Omni, have you learned anything that would suggest that maybe you should give consideration to altering the media that you're spending your money on? Or, are you happy with the media that your currently using?

Media -- the advertising people and our experts tell us you have to get the awareness out there first. You have to have people aware of the name and aware of the product. And you know, yes, we really want to start spending a lot more money on direct mail, and so forth. We think that's one of the most effective mechanisms, and we've done a couple of mailings, and we're starting to look at the results of that. But you have to get the awareness out there first.

Thank you very much.

Thank you. Our next question is coming from of APS Financial. Please state your question or comment.

Good morning, Ben. I was just wondering if you happened to see the basketball game last night, and there was an anti-tobacco ad on, that was run about it seemed to be kind of directly targeted at you all, in terms of low carcinogenic cigarettes. And I was wondering if you have any comments on kind of what take the anti-tobacco forces are taking towards you all, and the Omni and the Quest cigarettes? And you know, how you plan to address their concerns?

Right. First of all, I didn't see the ad, I heard about it. Everyone told me about. I didn't see any of the ads. I know it was raining all yesterday, it was April Fools Day. I want to let Tony answer that question, about what he calls the -- well, let him answer the question.

Well, first, the Institute of Medicine, which is a derivative of the FDA and the National Academy of Sciences, thinks the strategy of reducing carcinogens, if it translates into reduced risk for smokers, is a sensible route that ought to be followed and tested. So our indication is that we should do this. And we really feel that once it comes in, that there is reduced risk, that the public health people will adopt a new attitude towards these types of reduced carcinogen cigarettes.

Yes, as of right now, as you all know, the public health people only have one goal in mind, and that's complete -- you know, everyone should stop smoking immediately. And 50 million people in the United States are not going to stop smoking immediately. So yes, we have conflicts with that. And of course, we feel that, just like you tell people don't go out in the sun, you know, you can't keep people from stopping -- from going out in the sun, but you give them sun block. So the same concept should hold here. And it is possible -- we really believe it is possible to make a reduced-risk cigarette. And I think you're starting to see the rest of the industry is coming around to this.

I mean you've see, though, I'm sure -- you know, is working on their advanced cigarettes. And recently last week you saw that, you know, the top guy in Philip Morris U.S.A. has been kicked upstairs to work on Philip Morris' reduced-risk cigarettes. So Philip Morris is coming out with something most likely sometime in the next six months to a year, and is working on it. And, of course, we're leading the charge in that area.

So there's definitely, you know, a need and a desire. The public people just have not embraced this yet, admittedly. They want everyone to stop smoking period, end of subject. And that's going to be a conflict with us.

OK, thank you.

Thank you.

Our next question or comment is comment from of Credit Suisse First Boston.

Good morning.

Hi Bonnie.

I just wanted to go back to the combined sales force. Ben, did you mention that that's effective immediately, the 350 are currently -- are they all selling the Omni cigarette?

Yeah -- Ron, why don't you answer that real quick?

OK.

, what we've done is, is the full operational transition is going to take us about five or six months to complete. But effective today, all of our sales people are in the process of being able to cover both company's products and will be carrying their products and able to sell them . Now it will take us probably most of this month to go through the training process with a full sales force, but we anticipate by the end of this month that the entire sales force will be covering all products.

And I just -- you know, just a few more questions about this. I'm just trying to understand from, you know, the Liggett sales person's perspective, you know, now selling this new product. Are they open to it? You know, when they're used to selling their core brands at Liggett, you know, are there any incentives for them to sell the new -- or Omni and then the new Quest?

Well I think that there's a tremendous amount of enthusiasm within the sales force from the sales rep on up to sales management. Because what it does is it gives them more weapons, if you will, in their arsenal. The -- as I mentioned in my remarks, these products are complementary, not competitive to one another.

So what they have is they're broadening the base that they can cover of stores, where there are stores that these folks have in their territories now that may not be targets necessarily for Jade of for Eve, which are differentiated products. The Omni market is a much broader one, and the same is true for Quest. So the bottom line is that they will be incentivized against the full range of sales, so they're not going to be more highly incentivized to one or the other brands. But rather, for the overall targets that are being set for the brands.

OK, and then going back to the point about the Omni volume and sales just being a little bit weaker. And I think Ben mentioned, a lot of that has to do with the lack of distribution. Just trying to understand a little bit more in terms of the -- I think you had maybe 15 salespeople on Omni, trying to get that into the stores. You know, what was the biggest issue? I mean, is it where stores just saying no, we're not interested, or hey, would love to have your product, but we just simply don't have the shelf space? Or was it maybe we'll stock it for a little bit, but then, like Ben said, you didn't have the manpower to go back and keep reordering things like that?

For the most part, , the initial acceptance of Omni was very, very good. The issue was two things. Many of the initial sales were sold through chain accounts, which then controlled the distribution throughout the chains themselves. How quickly they accomplished that differs by chains. The other thing is, once the products got to the stores, then we didn't have the real point that we had to work against was being able to actually go into those stores and to make sure the product was positioned the way that it was meant to be positioned. So I don't think that we're dissatisfied at all with the amount of stores.

I think what we're more focused on right now is making sure that we continue to grow those stores, and to develop in the independent accounts, as well as the chain accounts. And at the same time, make sure that our product is positioned the right way with the right point of sale-types of advertising, which is critical to this product. I mean, we talk about the advertising and information, nothing in my opinion is more important that what people see when they walk into the store.

Right.

, one other point. You know, we found that also the 100 Vector salesmen were pretty much were chain salesmen. They're coming from the major tobacco companies, as they all came from. They had excellent contacts in all the major chains, and we got into all the major chains very quickly. And did an excellent job in that area. The Liggett salespeople were primarily selling discount cigarettes mostly, were primarily contacts in the independent area, and the distributor area. And the merger of the two is a one-plus-one equal three situation, because of picking up that expertise.

In addition, the Vector salespeople, as you know, have a lot of -- like Ron mentioned before -- have a lot of experience in the menthol market. Which you know, the Liggett people can use in the Jade endeavor.

Right, that makes sense. One final question regarding I guess the overall deep discount category. You guys have seen great growth with Liggett Select. D you expect that growth to continue for that brand in '02? Are you starting to see any signs where the deep discount category overall is starting to slow? Or do you expect that maybe even next with some of the things that are happening.

We are continuing to see growth on Liggett Select, certainly on a year-over-year basis. I would not expect to see the same percentage of growth, obviously, in 2002 that we saw in 2001. But we do expect the growth trend to continue, and we expect some significant increases in Liggett Select, going forward.

, inasmuch as we're over the cap now, there's not much margin going over the cap.

Right.

So we're not going to push it tremendously further, because the margins are too slim. The emphasis now is on premium cigarettes, not on the discount cigarettes.

I would just add to that, Ben, though as the discount products are doing two things for us. First of all, above the cap it is providing us with small profitability. But on top of that is that it does increase our ability to leverage the relationship with the retailers and distributors. And we'll intend to continue to do that.

OK, thanks, you guys.

You're welcome.

Thank you. Our next question is coming from of CIBC Oppenheimer. Please state your question or comment.

, do you have a question or a comment today?

Guess not.

Thank you. Our next question is coming from of .

Hi, thank you. Could I just -- I want to be sure. What was the operating income from operations in 2001?

For what, for the whole company?

For the whole -- well, you spoke about 140 to 145 million this coming year. What's the comparable number in 2001 for that division?

116.

116, OK. Does that represent any sort of decrease, versus what your prior guidance had been?

Say that again?

Does that represent any change as to what -- versus what your prior guidance had been.

This is the first time we've given out guidance.

OK.

The first year we've giving on guidance on Liggett, and the numbers Ron mentioned is 140 to 145 for this year.

What do you believe the overall company will do?

Well, again, now you're asking us to predict Vector Tobacco, and we just can't predict that right now. So we're not giving any guidance on the overall basis.

Will you manage it to meet -- to limit the losses, as you build the brand? Or ...?

Oh, yes, you always do that. I mean, that's a given. But we are going to be having losses there, to increasing -- trying to get Vector Tobacco off the ground, and Quest off the ground, and Omni off the ground. So you have to anticipate some losses in the Vector Tobacco area. How much we don't' know yet, it's a whole function of how well things sell.

OK, and speaking to one of the earlier questions as it relates to sales incentives for the salesmen to be able to cross-sell the products a little better, or sell it into their current distribution channels. Is there a difference in the compensation scheme as it relates to selling the traditional cigarette brands, versus the newer ones?

No, there's not. And what we've made sure is that we equalize to the higher denominator, if you will, for the two companies. And the overall incentives that the sales folks have is based upon the overall profitability that's targeted on the brand profitabilities.

OK. I mean, to me that sounds intuitively correct, but wouldn't it be likely, or at least as you're launching the brand, wouldn't it be more likely -- wouldn't it be more beneficial to you to be able to give then a higher -- sort of a higher or a higher commission to be able to sell the newer brand, to try to get it ...?

Our folks are very well incentivized. And the whole essence of what we're doing is really managing the priorities on a market by market basis. So that what you have is there may be certain markets that are optimum Jade markets or Eve markets of Omni markets. And the sales folks, in terms of their plans for the year, and for each month, are predicated on that evaluation of priorities.

OK. And I haven't seen it yet, but I'm assuming you filed now a 10-K?

Yes, yes, sir.

Oh, OK, I didn't see it. So benefit, I haven't printed it out yet, but I didn't see a balance sheet along with this. What was your cash and debt balance as of the end of the quarter and year?

I don't have it in front of me. It's in the 10-K. I don't have the ....

OK, I'll take a look at that. And last question, can you speak to the dividend as it relates to this year or next year, what your growth targets are? As you grow the operating income of the company and launch the brand, what your philosophy is as it relates to the dividend, versus the earnings and income growth?

Right now, our dividend is staying constant. We don't have any formula that we automatically increase the dividend if earnings go up. That's something the board looks at quarterly -- by quarter. But as of right now, the policy is to keep it where it is.

Thank you very much.

Thank you. Our next question is coming from .

Hi, Ben.

Hi.

I guess, looking at the -- these numbers might be wrong, but it looks to me like you had a $48 million loss in Vector for the year. You had a $100 million increase in SG&A, so 50 million's associated with Vector. The other 50 million I guess is associated with the rest of the business. Can you sort of break that down as to where did that come from? The increase?

The SG&A?

Oh, you got to be careful in the tobacco business. At least, there's a reason for this accounting change I mentioned, is that a lot of the SG&A could be -- I mean, I could go through it in detail -- but a lot of is promotional increase. In other words, a lot of the tobacco companies, you see these price increases, and they increase prices by so much per pack, but then they give it back in discounts and promotions. And that's in the SG&A number. So a lot of it is just that. And they control with the discounts and giving one away, and this type of thing. And that's the reason, by the way, for the accounting changes.

You won't see that next year. You'll be able to really look at SG&A properly as pure SG&A. And that's a lot of it. Obviously, the Vector Tobacco SG&A has increased, and is running towards the level that Liggett was. And it will be, with the R&D and everything else in that. So you absolutely will see an increase in SG&A, primarily in the Vector Tobacco area.

OK. Will the non-Vector SG&A, adjusted for the new accounting rules, be up or down in 2002?

You'll probably see it up, because you know, we're now promoting very heavily going to start promoting Eve and Jade, our premium products. So we will be spending more money on promotions and advertising in that area, and also as Ron mentioned, and as I mentioned, we're increasing our sales force from 350 people to 500. So those type of increases you will see this year. Along with hopefully increased profits, too.

OK, so that results in the operating income going from 116 to 140. You bought this latest acquisition at 25 million, so basically the business is -- the earnings of the business are flat to ...

No, that's not true, because the 116 we'll be getting out of the 25 million for next year, about 14 or 15 million of that is in the 116. OK, because these acquisitions -- we only have nine months of the Medallion acquisition this year. We have nine months of it. And also next year, what happens is there's an automatic price increase built into the MSA. So let's say 70 percent, or 60, 70 percent of the Medallion acquisition is in the 116 number. It's not just the full 25. And so ...

Did you pay cash for Medallion?

We paid 50 million in cash, and 60 million in notes.

And 60 in notes, OK. Thanks.

Thank you, the floor is still open for questions. If you have a question or a comment, you may press one followed by four, on your touch-tone phone.

Our next question is coming from .

Hi, it's . How many cigarettes are you actually producing in Roxboro on a monthly basis, in terms of Quest and Omni?

Well, again, these are numbers we're not giving out right now. I mean, we're capable of producing whatever we need.

And Quest is not being produced yet.

Quest is not being produced yet.

And you're not giving out the numbers on Omni, on how many cigarettes you're producing? Or are you producing in Roxboro yet?

Yes. By the way, it's Timberlake, it's not Roxboro. There's a bigger town -- Roxboro -- it's actually the legal location is Timberlake, North Carolina.

Thank you.

Thank you. We're showing time for one final question. Our last question is coming from with Jefferies, Inc.

Ben, couple things here. First of all, the first quarter has now been concluded. We're going on the assumption that in the fourth quarter Vector Tobacco lost over 50 cents a share. Is there any reason to believe that you don't again have a big loss in the first quarter attributable to Vector Tobacco? And therefore, a fairly significant loss for the company in general? That's the first question.

Give me one second. Yes, obviously in the first quarter Vector Tobacco is going to lose money. The sales are still ramping up. So there's no question about that. And there will be -- it may not be as big as the last quarter, but it will be significant.

All right, OK. So the company in total should probably have a fairly meaningful loss in the first quarter. And then, I was wondering are there any plans -- this is a question for Ron -- are there any plans later this year or perhaps in 2003 to launch additional premium brands?

There may be, , and as I think I mentioned in the last conference call we had, is that's something that was on the agenda for Liggett. Right now, we are looking to maintain our focus on the brands that we have, and with the addition of Quest coming by the third quarter, we feel we're going to have a pretty good complement of products to work with. However, I would not preclude the possibility that we might bring out another product.

Thank you.

Thank you. Gentlemen, do you have any additional or closing comments?

I just want to thank everybody for joining us today on our conference call. And if you have any direct questions, please feel free to call either myself of Howard Lorber, and we'll try and answer them for you.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.