Vector Group Ltd (VGR) 2002 Q4 法說會逐字稿

Welcome to Vector Group's fourth quarter 2002 earnings conference call. Before the call begins, I would 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 filing.

Now I would like to turn the call over to the chairman and chief executive officer of Vector Group, Bennett LeBow. Sir, the floor is yours.

Thank you. Good afternoon and thank you all for joining us for Vector's fourth quarter 2002 earnings conference call. With me today is Ron Bernstein, the president and CEO of Liggett Vector brands and Liggett, and Howard Lorber, our chief operating officer.

On today's call, I will provide an overview of the launch of our Quest brand and then outline our financial performance. Ron will then give his perspective on our conventional cigarette tobacco business and then we will be available to answer your questions.

Let me first say it has been a challenging year for the cigarette industry in the United States. New taxes in various jurisdictions and higher price points are beginning to affect domestic sales. Industry wide, total domestic sales were down approximately 2.2% year-over-year and a significant shift was seen to third and fourth year brands, and to this end, when Liggett outperformed its peers and we are pleased with Liggett's growth during the year.

Unlike Philip Morris USA, RGR, Brown & Williamson, and Loralar (ph), Liggett was able to gain volume and market share for the year. Liggett buying increased to 9.82 billion units in 2002 from 8.89 billion units in 2001. Market share was up .2 to 2.4%.

Regarding Quest, as you know, we launched our Quest product in late January in seven states, which account for approximately 30% of the domestic market. While it is still too early to provide sales figures, we're encouraged with the initial performance of the brand. Before launch, we concluded the Quest one, two, three, approach was the most affective way to gain consumer acceptance on the new product and to provide the smoker with a potential road map to nicotine-free smoking. Thus we embarked on a comprehensive advertising and marketing campaign utilizing the "step your way to nicotine-free" tag line and theme.

Our campaign is multi-faceted and uses print advertising, public relations efforts, toll free call centers, an informational website, point of sale and direct marketing devices to get our message out.

Today, we believe we have great success raising awareness for Quest. We've gone halfway through our initial advertising campaign. Our ads are run in major metropolitan secondary market newspapers and prime positions of well-read publications such as "Time," "Newsweek," "New York Magazine," "Women's Day," "National Enquirer," "People," "TV Guide," "Parade" magazine and a host of other magazines.

To give you a sense of the scope and reach of the ad campaign, 90% of our target market in the seven states will see a Quest ad an average of 12 times during the six month campaign. And every ad includes our toll free number and our web address. In addition, the introduction of Quest has generated tremendous publicity in the national regional press. An independent media monitoring service estimates that 50 million people have been exposed to a television or radio mention of Quest.

This is unprecedented exposure for a new tobacco product and this 50 million number does not factor into the significant reach of all the print media that have also covered the Quest story. Since late January, our toll free call center has been handling roughly 400 to 500 calls a day on the product and our website is generating more than ten times as much traffic as that from unique -- as that from unique visitors daily.

Between the interested consumers that have contacted us and various other means, we have assembled a list of probably1 million adult smokers who are sending direct mail and promotional materials and this database is growing every day.

In terms of retail penetration, we now have verified distribution in more than 32,000 stores in the seven states, including many of the key chains in the convenience and supermarket terminals. To put that number in perspective, that is more stores that Liggett Select is in nationwide. Liggett Select is the fastest growing brand in the country.

Our sales force is getting us into new stores every day and now that we have created solid awareness in the marketplace, retailers are coming to us to ask to carry the product. Importantly, we are seeing a strong level of reorders. This is evident both at the retail level as well as from the wholesale, and both retail and wholesale sales have been steadily increasing since the January product launch.

I must caution, however, that although we always felt the trial of this product would be good and has been, it is still too early to determine the long-term consumer conversion levels of Quest. While all of this is very encouraging, we are most excited about the consumer reaction. Every day we receive multiple testimonials from consumers who absolutely love Quest and we believe this product and its focus on nicotine are proving as compelling in the marketplace as we saw in our development and research.

All marketing efforts aside, at the end of the day, Quest will succeed or fail on the strength and appeal of the product at the consumer level. So we're very heartened by the performance to date. As we said before, if the product continues to perform we expect to roll it out nationally sometime this year.

Now I will quickly review the key financials for the quarter of December 31st, 2002, for Vector Group, our conventional cigarette business and our Vector tobacco potential or reduced risk cigarette subsidiary.

Our conventional cigarette business includes sales for both Liggett Group cigarettes and our USA brand cigarettes from the Medallion acquisition. In addition for comparative purposes we've excluded new value minority interests, discontinued operation of Latterberg Falman (ph), and extraordinary items.

The following financial results reflect a new revenue recognition requirements on our current and comparative basis. For the quarter ending December 31st, 2002, Vector Group revenues were 124.5 million compared to 136.9 million in the 2001 fourth quarter. The company reported operating income of 1.4 million compared to operating loss of four and-a-half in the 2001 period. Net loss was 8.4 million or 24 cents per diluted common share compared to a net loss of 1.5 million or 4 cents per diluted common share in the 2001 fourth quarter.

For the year-ended December 31st, 2002, Vector Group revenues were 503.4 million in 2002 compared to 447.4 million in 2001. The company recorded an operating loss of 12.9 million in 2002 compared to operating income of 37 million in 2001. Net loss was 31.8 million or 91 cents per diluted common share for 2002 compared to net income of 22.1 million or 57 cents per diluted common share in 2001.

Now for the performance of our conventional cigarette business -- for the three months ended December 31st, 2002, our conventional cigarettes had revenue of 122.3 million compared to 130 million for the three months ended December 31st, 2001. Operating income was 32.1 million for the fourth quarter of 2002 compared to 30.6 million for the three months ended December 31st, 2001.

Our conventional cigarettes continued our strong cash flow from operations. For the three months ended December 31st, 2002, conventional cigarettes EBITDA increased to 33.5 million from 31.8 million for the same period in 2001. Our Vector tobacco subsidiary on the other hand continues to have significant expenditures for items such as R&D and initial advertising and marketing for the Quest launch, resulting in an operating loss of approximately 23.3 million for the quarter.

For the year-ended December 31st, 2002, our conventional cigarettes had revenues of 495 million compared to 432.9 million for the year-ended December 31st of 2001.

Operating income was 102.7 million for the 12 months ended December 31st compared to 107.1 million for the year-ended December 31st, 2001. Our conventional cigarettes continue to have strong cash flow from operations. For the year-ended December 31st, 2002, conventional cigarette EBITDA decreased to 111.6 million from 121.7 million for the same period in 2001.

As previously mentioned, our Vector tobacco subsidiary continues to have significant expenditures for items such as R&D, advertising and marketing resulting in an operating loss of approximately 88.2 million for the year.

Now we'll turn the call over to Ron Bernstein, the president and CEO of Liggett Vector brands and Liggett to update you on the forms of Liggett Group and USA brand cigarettes - Ron?

Thanks, Ben. Good afternoon, everybody.

It has been indicated 2002 was indeed a challenging year for the tobacco industry and a challenging year for Liggett Vector brands as well.

I'm pleased that Liggett Vector could sustain overall volume growth during a difficult year and am particularly pleased that the growth rate of our core Liggett Select brand. While we generated significant operating income of approximately$103 million at our conventional tobacco business for the year, market conditions caused these results to be somewhat below our prior guidance of 110 to $115 million. Going forward it is important to note that our focus as a company has shifted during the past year in reaction to the changing dynamic of our industry.

As we enter 2002, there was a sense of relative stability in the marketplace. Liggett Vector was experiencing growth across its entire brand portfolio and prospects for continued growth appeared good. In April, Philip Morris announced a price increase of $1.20 per carton and it appeared that 2002 would look much like the previous several years. However, we are already starting to see troubling signs in the market place. Price competition was starting to emerge amongst the big four companies, including the brands Kool and Salem, both of which were undergoing packaging and (inaudible) changes.

Pressure was also starting to develop within the branded discount segment, with GPC and Basic starting to lose market share. Most notable was the continued proliferation of so-called fourth-tier brands. Initial industry estimates for MFA and other purposes dramatically underestimated 2001 volume of non-participating manufacturer's at less than 5 billion units.

Subsequently, these estimates, which (inaudible) revised, is the most recent estimates reflecting an excess of 18 billion cigarettes. Due to the nature of these MPM companies, nobody was accurately picking up their volume and estimates of overall industry volume were being significantly understated. During 2002, this became a far greater focus for the industry and current estimates for 2002 reflect an MPM volume increase to approximately 25 billion cigarettes or 6% share of market.

The primary reasons for the MPM growth are lack of affective MSA enforcement by state attorney's general, exploited loopholes within the MSA, increasing prices by the big four, and increased state excise taxes. Fortunately, most of these issues are currently being addressed. Individual states after years of pressure from us and others are finally starting to enact legislation that will make it more difficult for companies to do business outside of MSA requirements.

Additionally, proposals to close existing loopholes in the MSA with the full endorsement of the National Association of Attorney Generals are working their way through various state houses and many are likely to be enacted during this year.

Finally, we are seeing pricing actions such as increased discounting from the big four that may stabilize industry pricing during this year.

What does all this mean for Liggett Vector brands?

First and foremost, it means that Liggett Select should continue to be an attractive alternative brand in the marketplace. During 2002, Liggett Select grew by an impressive 48%, making it the fastest growing brand in the country. The reasons for this growth are reflective of the price competitive nature of the brand and its high level of quality. Liggett Select's taste in packaging compare favorably to most premium products and have dramatic advantages over the fourth-tier brands.

As we continue our primary focus on Liggett Select, and as state MSA enforcement initiatives increase we expect that Liggett Select will continue to grow at a substantial rate in 2003.

For Eve, the expectations are more modest. After suffering unit declines through the first half of 2002, we stabilized the brand during the second half of the year with slightly upward trends heading into 2003.

Overall, Eve volumes declined by 36% in 2002 reflective of the discontinuation of the100-millimeter brand style and early year declines in the core Eve 120-millimeter brand style. Currently, demand for Eve 120s remain stable, but price competition is greater in this category than ever before. However, we do expect limited growth for Eve in 2003.

Jade was Liggett Vector brand's most significant victim of the 2002 price wars. Jade was introduced to offer menthol smokers a high quality alternative to existing menthol brands. We plan to differentiate this brand with innovative packaging and a significant price advantage to premium menthol brands.

Historically, the menthol category has been the most stable in the industry. Prior to 2002, there had never been a significant price war in this category. That all changed in 2002 as the menthol category became the most hotly contested category in the premium price segment. As indicated before, both Kool and Salem changed their packaging and pursued new more contemporary images. Those brands along with Marlboro menthol and Newport began discounting at unprecedented levels, including buy one get one promotions. That made it impossible to differentiate Jade effectively in the marketplace.

However, as indicated in prior calls we have positioned Jade at a price point that we believe has long-term potential for the brand.

As been discussed, we have recently added Quest to our brand portfolio in the seven state launch region. It is certainly too early to make any judgments relative to Quest but initial indications from the market are very positive. The step to nicotine free concept is clearly understood by retailers and consumers and the product is receiving excellent initial reviews from smokers. Distribution is growing daily and reorders from existing stores have been strong to date. There is a genuine buzz in the marketplace about Quest and that is shared throughout our organization.

Going forward, Liggett Vector brands enjoy some significant advantages in the marketplace. One, the MSA cap benefits assures us an ongoing base level of profitability and allows Liggett Vector to remain price competitive in a difficult market. Two, increased state legislation and enforcement should diminish price advantages of the non-participating manufactures. Three, with the organizational restructuring accomplished last year, we have a sizeable and experienced sales force and marketing operation. Four, we have the highest quality products in our price segments and a long-standing history of quality products and innovation. Five, Liggett Select is the country's fastest growing brand and, six, with Quest, Liggett Vector has the only meaningfully differentiated premium brand in the marketplace, and that is to name just a few.

We're truly excited about our future prospects. I thank you for your attention and I hand it back to you, Ben.

Okay, thank you, Ron.

Before I finish the prepared remarks I just want to reaffirm that our current dividend policy remains the same.

Now, operator, would you open the call for questions?

Thank you. The floor is now open for questions. If you do have a question or comment, you may press one followed by four on your touch-tone phones. If you're on a speaker phone we ask you to please pick up your handset to minimize any background noise. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. Once again, ladies and gentlemen, if you do have a question or comment, please press one followed by four on your touch-tone phones. Please hold while we poll our audience for questions. Thank you.

Our first question is coming from Joel Lutton (ph) of APS Financial.

Good afternoon, Ben. Just a couple of questions. In terms of your inventory levels, I noticed they were up quite substantially at year-end over the previous year, is that primarily in anticipation of the ramp up of Quest?

Yeah, that is all Quest inventory. You know, the Quest lead time is a good year and-a-half type thing so you seeing all Quest inventory.

And how much cash and investments and securities do you all have on your balance sheet taking out New Valley?

(inaudible) help me on that, it's about 125 million, something like that?

115 million as of December 31st, Ben.

Okay, 115.

And does that include investments in securities?

Yes, marketable instruments.

Okay.

Joel, this is Ron Bernstein. I want to clarify a point on the first question you asked.

Hi, Ron.

We are also carrying increased inventories and finished goods because of the increased volumes that we're doing, because of increased unit sales, so that is continuing to grow so, therefore, our inventories are growing as well.

Also, another factor there, Joel, was about, you know, the MSA payments go up in 2003 so we stockpiled a little more last year.

Okay. I also noticed reading through the K that there was something about buying back the 10% notes potentially up to 12 million at par. What essentially does that involve?

This is Howard Lorber -- hi, Joel.

Hi, how are you?

We have some financial covenants and debt occurrence in those diventures and we had extra room which ran out and the reason is because we were late in getting Quest off and because basically the losses in Omni were bigger than projected and obviously, also, because we didn't meet our original goals for last year, our budget because of what happened in the marketplace. So instead of paying, you know, fees and other things, you know, to change the covenants and give us some room, we thought the best thing to do and, you know, the bond holders were, you know, accommodated us is that over the next three quarters in addition to -- to get the additional room that we need, we are going to buy back 4 million of those bonds each quarter.

If we want to.

Yeah, with our option. Only if we need it. If we need the room then we're going to do it.

Do you regret borrowing that money because it really -

You know, in retrospect you could argue it either way. I don't know. Regret it? It's hard to say. You regret it -- if you go back to your original --the original 50 million, you don't regret because at that time it was before we had sold some stocks to Icon (ph), it was before we did the convertible. Obviously, we had to do that 50 million piece.

One more and maybe this is directed toward Ron. It looks like you all may be doing a national roll-out on the Quest just reading, you know, your positive comments. When do you think you'll have a definitive answer in terms of whether to proceed forward with the national roll-out?

Joel, we have not set a firm date. What we're doing is we're evaluating the situation on a daily, weekly, monthly basis and we anticipate that sometime toward the latter part of the second quarter that we'll have a better handle on when to set a date.

Okay, thanks a lot.

Thank you.

Our next question is coming from Mitch Pendis (ph) of Oppenheimer.

Hi, guys.

Hi, Mitch.

Hi.

You mentioned earlier it was about a year and-a-half lead time on growing the Quest tobacco?

Yeah, we're planting tobacco today -- actually you can't plant it until the spring, until March or May and it takes you six months to grow it and then we really like to age it about six months.

Take it through a summer sweat.

Yeah, through our summer. It is a good -- from right now it would be a year and-a-half lead time.

Okay. So my question is, seeing the large amount of inventories you have on stock, do you have enough to take you through a national roll-out if you go that direction? If not, have you already begun growing just as a sort of as an encased type thing?

If we have an inventory problem it will be a very high class problem. We owe enough to our national roll-out, yes.

And we have - just as a reference point we have contingency plans to meet any additional brands that we have. So if the brand were to explode off the charts, we don't anticipate that we will -- we won't be able to meet those - that demand.

If you don't mind my asking, what kind of contingency plan can you have on a very specialized tobacco like this?

One thing is in the U.S. you can only plant in May and June. For example, we could go plant in Hawaii any time of the year and not pick up that wait time.

We have various growing scenarios that we can call upon if we need an amount. We don't anticipate we're going to need large amounts above what we have.

But if we do, we have the means to meet it.

I see. My other question relates really to sort of the general circumstances surrounding the stock price and it just seems that each time we come into these conference calls, the stock trades lower prior to the conference call and continues on lower after the conference call. It seems to me that perhaps the message that you're trying to get out there, you know, either isn't getting out or could be gotten out better than it is. So are you planning on any kind of a marketing strategy for the stock itself or do you have any other company that might be covering the stock? In other words, what are we going to do to support this stock and to support your vision of where this company is going?

Well, I think we can -- first of all, you're seeing today the impact of all the Philip Morris problems. I mean, we're getting -- when RGR trades at a 12% yield, you know, we had --and Philip Morris at 9%, we got to trade at a higher yield than that. But forgetting all that, once we have some real firm data on Quest, we'll sit down with various investors and start some sort of program, when we can talk really intelligently about it and that is -- I'm not saying -- that is not a year away. That is much shorter than that, a time period away.

You mentioned that you thought you probably have an indication as to whether the national roll-out would happen on Quest sometime around the end of the first quarter going into the second quarter if I remember -

Second quarter, by the end of the second quarter.

Pardon me?

This is the end of the first quarter right now. We're thinking in terms of like around June, July having a good feel for things.

I see. Okay. Thank you, guys.

Thank you.

Our next question is coming from Fred Burrow (ph) of Smith Barney.

Good afternoon, Ben, how are you?

Good afternoon.

On the Quest launch, what is the size of the advertising campaign you guys have allocated for the seven state rollout and how much additional money would be spent on the national campaign?

We were spending about -- we're advertising and marketing not just advertising about $15 million on the seven state rollout and that is about 30% of the U.S. market, so you can almost pro-rate that for a national roll out.

Okay. And do you -- is Quest being rolled out in boxes or in soft pack?

Boxes. At the present time, box only and also no menthol yet.

Okay. How about the - with the war going on, are you losing any of the advertising effectiveness with, you know, the competition for all the war reporting?

You know, it is -- you can never quantify that exactly, but I would say this, that we're positioned very well in magazines. We're in "Time" and we're in "Newsweek." Our position in those are good and noticeable, and it certainly doesn't appear from either anything that we're seeing or what we're seeing out in the marketplace in general that the consumer is shutting down during this war. So this is not like post-September 11th where everything shut down. People are going forward and they're kind of -- I think the attention to the war frankly is waning a little bit from what I understand, so I would say -- and the other magazines we're in, for instance, we're in the Oscars edition of "People" magazine, we're in the "Entertainment Weekly" for the Oscars edition. So I think we're well-positioned and well-placed and I think we're getting bang for that buck.

I see.

If there is no war maybe it would be a little better, maybe we would be selling a little bit more. It is going pretty well but you have to assume that affects you a little bit. You can just not quantify it.

Also, if you do roll it out nationwide, are you going to have to raise additional funds financing wise in order to accommodate that?

No, we're not planning that at all.

You're going to be raising that internally?

Well, we feel we can do that.

Okay. And the last two questions on New Valley -

When I say three times that, that number, that is not all spent in one day but over the course of a year.

Sure.

Six months to a year.

Okay.

Also, the last two questions are on New Valley Corporation. How much of the funds in New Valley are uninvested in your new operating businesses that you have recently bought?

Uninvested or invested?

Uninvested. What percentage of cash have you not invested in the new real estate broker term purchases and the buildings?

Well, in the - you know, BK (ph), you may be able to answer that. But I'll tell you why, two facts, on the latest - on the real estate brokerage end of it we invested about 9.5 million dollars recently to purchase Douglas Element (ph), and on the real estate that we bought the end of 2002, I think we spent about 15 million. BK, is that correct?

That is correct. Now, one point that I would add is at the end of 2002, New Valley had cash and cash -- and marketable securities of around 95 million and most of that was held in the holding company because the real estate brokerage business is not consolidated. It's treated on the equity method, which means that is shown as a separate line item on New Valley's balance sheet, so we do have minimal balances in managing the buildings but nothing material.

So out of that 95 million, how much is still in cash or cash equivalence approximately?

You mean cash equivalence of marketable securities?

Correct.

Probably after real estate about 80, $85 million, BK?

That is correct.

Okay. And what is your vision for the purchase of the real estate brokerage company? What sort of a -- you know, what sort of a return are you guys looking for out of that particular business?

Well, original investment in Prudential Long Island realty, which was I think about a million, a million and a half dollars -- the latest valuation we had on it, our share was worth probably I think 15 to $20 million. You know, we have now purchased (inaudible) settlement and our vision there is sort of a real estate company from (inaudible) and some of the upsides there are not so much just in the residential brokerage end of it but in the ancillary things. Like in Long Island we have a mortgage company; Douglas, Elmon (ph) and Manhattan didn't have a mortgage company. So we think there is a lot to pick up on the mortgage side of it. Title insurance company, insurance, other types of insurance. So we think there is a lot of other, you know, pieces to pick up there.

And does that last purchase satisfy the requirements to not put the company in a position to be an investment company?

That's correct. We have an opinion from our law firm that we're not a 40 ad (ph) company.

So without buying any additional operating business you guys should be fine on that score?

That's correct right now.

Thank you very much.

Next question is coming from Don Schot (ph) of Jeffries and Company.

Good afternoon, gentlemen.

Good afternoon.

I was wondering in connection with the recent adverse ruling against Morris in connection with their contention that certain cigarettes were light cigarettes and the past confusion on the part of consumers between what is a light cigarette and what is a reduced carcinogen cigarette, does this perhaps pave the way for you guys to be able to re-launch Omni and make claims where your message gets across better differentiating your cigarettes, Merits, versus the claims that had in the past been made for light cigarettes?

No, Don, I don't think it has any effect whatsoever.

We have made a decision on Omni not to re-launch Omni until we have absolute proof, you know, that it really does stop these diseases. As you know, we developed a proof in animals, now we want the proof in humans. And as we said before, that what is we're working on and that is one to two years away minimum and when we have our proof we'll be re-launching Omni.

Another important point -- by the way, we're not in any of the lawsuits, any of the light lawsuits going on, number one. Number two, the issue on the lights is compensation. The public health community made a big deal over the air holes you can just cover up and get more nicotine and more tar in your system than is advertised. The important point is that in Omni and in Quest, especially in Quest, there are no air holes. So there is no compensation problem as there is in the light cigarettes for those cigarettes.

And just another question for Ron. In terms of the growth that has been occurring in Liggett's volume, Liggett Select, to what degree is that a function of added doors as opposed to increased sales per outlet?

Don, the -- we are seeing growth -- we're seeing clear additional doors and the price wars, the renegade activity have made same-store sales a challenging area; however, we're moving aggressively and we're showing slightly upward trends in same-store sales as well as new growth of new stores.

Right. The new year in here, do you see the same phenomenon? In other words, the continuing increase in a meaningful manner and the number of doors offering the product?

Yes, we do.

Okay, thank you very much.

Thank you.

Our next question is coming from Bill Moore (ph) of Hamilton.

Hi. Of the cash not in New Valley I think you said was 115, are you guys able to break that out by division at all?

There is only one division, it's just a parent, you know.

It's all with the parent?

Yes.

Okay, that answers it. That answers my question.

Huh?

That answers the question then. The only other question I had -- reading the 10-K I was a little confused about your ability to upflow cash from VGR holdings, whether at this point you were able to do that or whether you at this point were restricted from doing that?

Sorry, I didn't hear the question.

No problem. It appears reading the 10-K I'm a little confused as to whether you can or cannot upflow cash from VGR holdings.

Yes, we can.

You can.

Subject to covenants under the notes.

Right. Right now we're in compliance with the covenants.

So as of 12/31 you were not in compliance?

Yes.

A little confusing in the K. Thank you very much.

Any other questions?

I would like to remind our audience if there is any further comments or questions please press one followed by four on your touch-tone phones at this time. Thank you.

Our next question is coming from Mark McMahon (ph) of Tetesche.(ph) and McMahon.

Good afternoon, guys.

Hi, Mark.

Just a couple of questions, on the Liggett side, can you give a little more color on the breakdown between your sales at Medallion versus Liggett proper and your expectations on Medallion and how they bear fruit throughout the year?

The Medallion operation was completely assimilated within the conventional tobacco business and represents a fairly small component of the business.

Okay.

At the time that we acquired Medallion, the primary brand was USA, which we are continuing. I think as I have said before, it is not a focus necessarily of growth beyond its existing core client base.

As sort of a segue from the USA brand at Medallion, I notice that you guys have recently signed up for Quest I guess the largest convenience store chain in this area, and I'm in southeastern Pennsylvania, New Jersey area by Wawa, who also happens to be a big distributor of the USA brands and has quite a bit of display and signage for it. Do you guys anticipate being able to get any display and signage in the Wawa stores for Quest?

We are working with them and think we will have signage in the Wawa outlets.

How are you dealing with the fact that the 30-day trial I suppose is over from January 27th in the initial outlets and a lot of the displays have come down. Is there anything precluding you guys from signing deals with some convenience stores to get signs back up or is the market leaders program shutting you out of a lot of market opportunity?

No. We're working very consistently to keep the product visible within the store and to get ourselves the type of shelving space that will make sure that people are aware that it is there and to keep point of sale type materials up. So, you know, the -- obviously you have a number of outlets that don't have those kind of restrictions and there are other places where we have longer term type of agreements.

Okay. In terms of -- Ben, you just mentioned the lawsuit that Philip Morris, you know, is under such pressure and RGR and Loralord (ph) and that as well -- you're not named but this is a duplicatable (ph) case basically for any state in the country. Do you guys have any anticipation of following under this category even though you sold your larger brands to Philip Morris years ago, but maybe just on Eve as a holdover or because of your past association?

First of all, we're not in any cases and anybody can file a case anywhere at any time. But one -- a couple of big differences here, I think. First of all, on the Philip Morris, they found documents, you know, stating that, you know, that they knew the light -- somehow they knew the light was not as safe as the regular cigarettes which we don't agree with but they had some very damaging Philip Morris documents which they don't have on us.

In addition, I think all the research we're doing -- that we're doing for the Omni, I think in time we're going to maybe show that that is not really true, that lights and regular cigarettes are definitely different. If there ever comes a trial for us we'll have plenty of defenses. As I said, in the next few years, there is no lawsuit out there with us being named in it, no class action.

All right. As a follow up to question that an earlier person, Mitch, had asked regarding the supply, the inventory you have on hand. There was speculation that you guys might actually sign up some additional acreage out in Lancaster Country with the Amish. Did you guys decide to revisit your earlier decision?

We're obviously waiting until the last minute to do that. We want to wait and see how Quest does. I think we have until May some time before we have to make a decision. We have enough inventory to meet our needs going forward for the next couple of years. The question is, it is kind of hard to predict what is going to happen the third year. We're waiting until the last possible moment to make a decision, depending how it goes in these seven states.

The last question is and I guess either I misheard or I didn't quite get it fully answered. On the Medallion acquisition, was the run rate on their sales, was there any stagnation once it was assimilated into Liggett or did it maintain market share? Looking at your fourth quarter numbers I'm looking for sort of where the bump in the road was in terms of Liggett? Was it just primarily attributed to Jade and the premiums or did Medallion -

The -- first of all, the Medallion, the USA brand or any of the Medallion brands would not reflect a year on year decline because we did not have it the prior year.

Uh-huh.

The bump in the road, as you put it, relates more to the premium end of the business with the pressures that came on relative to the market pricing situation.

Okay. So it was just primarily you would say Jade and Eve to a somewhat smaller extent?

Yes.

Thank you very much.

The comparison to the fourth quarter in 2001 is you had a rollout of Jade so obviously a lot goes out when you're rolling out a new product so it would be hard to keep that up in the fourth quarter of 2002.

Yes. And I was also figuring you guys launched Omni in the year before so not just Liggett conventional but in general I thought you guys did somewhere around 4 or 5 million.

Right, right.

I'm sorry?

Yes, there was some - (inaudible) of Omni half the time.

None of the Quest numbers are included in the fourth quarter even though you shipped in December; is that correct?

Very small amount.

Very small, okay.

We shipped some late December.

Thank you very much.

You're welcome.

Thank you.

I would like to turn the floor back over to Mr. LeBow for any closing remarks.

I want to thank everybody for joining us and as I said during the prepared speech, we're very hopeful on Quest. It's going very well but it is too early to really tell. The big issue here is the trial has been great. The question is going to be the repeat business, how that goes and we will shed more answers for that in a few months. Thank you all for joining us.

Thank you ladies and gentlemen for your participation. This does conclude today's conference. You may disconnect your lines at this time and have a wonderful day.