10-Q


 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended September 30, 2015
 

VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)

Delaware
1-5759
65-0949535
(State or other jurisdiction of incorporation
Commission File Number
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 

4400 Biscayne Boulevard
Miami, Florida 33137
305-579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yes o No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
x Large accelerated filer
o  Accelerated filer
o  Non-accelerated filer
o  Smaller reporting company
 
 
(Do not check if a smaller reporting company)
 

Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.
o Yes x No

At November 9, 2015, Vector Group Ltd. had 122,592,329 shares of common stock outstanding.

 



VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


1
VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
September 30,
2015
 
December 31,
2014
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
246,347

 
$
326,365

Investment securities available for sale
288,376

 
346,043

Accounts receivable - trade, net
20,112

 
23,328

Inventories
90,695

 
90,323

Income taxes receivable, net
—

 
3,282

Restricted assets
2,834

 
2,595

Other current assets
37,824

 
36,718

Total current assets
686,188

 
828,654

Property, plant and equipment, net
76,367

 
84,112

Real estate held for sale, net
22,963

 
10,643

Long-term investments
53,648

 
40,292

Investments in real estate ventures
194,052

 
163,460

Restricted assets
18,647

 
12,013

Goodwill and other intangible assets, net
265,480

 
269,972

Prepaid pension costs
27,440

 
25,032

Other assets
54,016

 
58,893

Total assets
$
1,398,801

 
$
1,493,071

LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
7,957

 
$
52,640

   Current portion of fair value of derivatives embedded within convertible debt
—

 
884

 Current payments due under the Master Settlement Agreement
92,952

 
26,322

   Current portion of employee benefits
931

 
931

Income taxes payable, net
186

 
1,743

Litigation accruals
7,640

 
3,149

Deferred income taxes, net
7,321

 
28,479

Other current liabilities
111,803

 
126,755

Total current liabilities
228,790

 
240,903

Notes payable, long-term debt and other obligations, less current portion
879,690

 
860,711

Fair value of derivatives embedded within convertible debt
149,739

 
168,502

Non-current employee benefits
49,913

 
49,314

Deferred income taxes, net
96,497

 
94,510

Payments due under the Master Settlement Agreement
20,094

 
25,809

Litigation accruals
24,072

 
25,700

Other liabilities
6,833

 
5,570

Total liabilities
1,455,628

 
1,471,019

Commitments and contingencies (Note 7)

 

Stockholders' (deficiency) equity:
 
 
 
Preferred stock, par value $1.00 per share, 10,000,000 shares authorized
—

 
—

Common stock, par value $0.10 per share, 250,000,000 and 250,000,000 shares authorized, 122,592,329 and 118,646,261 shares issued and 122,592,329 and 114,501,014 shares outstanding
12,259

 
11,450

Additional paid-in capital
—

 
—

Accumulated deficit
(163,914
)
 
(90,160
)
Accumulated other comprehensive income
9,868

 
34,540

Treasury shares, at cost, 0 and 4,145,247
—

 
(12,857
)
Total Vector Group Ltd. stockholders' deficiency
(141,787
)
 
(57,027
)
Non-controlling interest
84,960

 
79,079

Total stockholders' (deficiency) equity
(56,827
)
 
22,052

Total liabilities and stockholders' (deficiency) equity
$
1,398,801

 
$
1,493,071


The accompanying notes are an integral part of the condensed consolidated financial statements.

2


VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
   Tobacco*
$
264,170

 
$
264,520

 
$
747,145

 
$
748,468

   Real estate
185,563

 
153,748

 
478,841

 
415,280

   E-Cigarettes
201

 
1,608

 
881

 
9,977

          Total revenues
449,934

 
419,876

 
1,226,867

 
1,173,725

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
   Cost of sales:
 
 
 
 
 
 
 
     Tobacco*
174,418

 
189,728

 
506,315

 
537,667

     Real estate
121,078

 
96,442

 
309,306

 
261,531

     E-Cigarettes
421

 
1,066

 
1,518

 
6,357

        Total cost of sales
295,917

 
287,236

 
817,139

 
805,555

 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
79,114

 
69,431

 
232,737

 
200,431

Litigation settlement and judgment expense
3,750

 
225

 
5,843

 
1,725

Restructuring expenses
1,548

 
—

 
1,548

 
—

Operating income
69,605

 
62,984

 
169,600

 
166,014

 
 
 
 
 
 
 
 
Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(32,898
)
 
(44,034
)
 
(96,405
)
 
(123,670
)
Change in fair value of derivatives embedded within convertible debt
7,044

 
7,127

 
18,760

 
7,447

Acceleration of interest expense related to debt conversion
—

 
(994
)
 
—

 
(5,112
)
Equity (loss) income from real estate ventures
(916
)
 
3,258

 
1,278

 
3,002

Equity (loss) income from investments
(579
)
 
829

 
(2,273
)
 
1,462

(Loss) gain on sale of investment securities available for sale
(821
)
 
33

 
12,018

 
(38
)
Impairment of investment securities available for sale
(12,211
)
 
—

 
(12,211
)
 
—

Other, net
133

 
2,466

 
3,554

 
8,167

Income before provision for income taxes
29,357

 
31,669

 
94,321

 
57,272

Income tax expense
13,508

 
11,964

 
37,551

 
21,007

 
 
 
 
 
 
 
 
Net income
15,849

 
19,705

 
56,770

 
36,265

 
 
 
 
 
 
 
 
Net income attributed to non-controlling interest
(3,644
)
 
(4,826
)
 
(5,741
)
 
(10,881
)
 
 
 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
$
12,205

 
$
14,879

 
$
51,029

 
$
25,384

 
 
 
 
 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.10

 
$
0.13

 
$
0.42

 
$
0.23

 
 
 
 
 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.10

 
$
0.13

 
$
0.42

 
$
0.23

 
 
 
 
 
 
 
 
Cash distributions and dividends declared per share
$
0.38

 
$
0.36

 
$
1.14

 
$
1.09

                                      

* Revenues and cost of sales include excise taxes of $112,773, $115,323, $319,044 and $327,434, respectively.


The accompanying notes are an integral part of the condensed consolidated financial statements.

3



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
Net income
$
15,849

 
$
19,705

 
$
56,770

 
$
36,265

 
 
 
 
 
 
 
 
Net unrealized (losses) gains on investment securities available for sale:
 
 
 
 
 
 
 
    Change in net unrealized (losses) gains
(50,067
)
 
19,184

 
(43,550
)
 
22,292

    Net unrealized losses (gains) reclassified into net income
9,091

 
(33
)
 
(3,748
)
 
38

Net unrealized (losses) gains on investment securities available for sale
(40,976
)
 
19,151

 
(47,298
)
 
22,330

 
 
 
 
 


 
 
Net unrealized (losses) gains on long-term investments accounted for under the equity method:
 
 
 
 
 
 
 
Change in net unrealized (losses) gains
—

 
(4,694
)
 
1,190

 
3,920

Net unrealized losses reclassified into net income
—

 
—

 
1,624

 
—

Net unrealized (losses) gains on long-term investments accounted for under the equity method
—

 
(4,694
)
 
2,814

 
3,920

 
 
 
 
 
 
 
 
Net change in forward contracts
15

 
16

 
47

 
48

 
 
 
 
 
 
 
 
Net change in pension-related amounts
 
 
 
 
 
 
 
Net loss arising during the year
—

 
—

 
1,607

 
—

Amortization of loss
229

 
147

 
750

 
442

Net change in pension-related amounts
229

 
147

 
2,357

 
442

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
(40,732
)
 
14,620

 
(42,080
)
 
26,740

 
 
 
 
 
 
 
 
Income tax effect on:
 
 
 
 
 
 
 
    Change in net unrealized (losses) gains on investment securities
20,702

 
(7,438
)
 
18,008

 
(9,218
)
    Net unrealized losses (gains) reclassified into net income on investment securities
(3,759
)
 
13

 
1,550

 
(16
)
Change in unrealized (losses) gains on long-term investments accounted for under the equity method
—

 
1,933

 
(484
)
 
(1,621
)
Net unrealized losses reclassified into net income on long-term investments accounted for under the equity method
—

 
—

 
(672
)
 
—

Forward contracts
(6
)
 
(8
)
 
(19
)
 
(20
)
Pension-related amounts
(95
)
 
(105
)
 
(975
)
 
(31
)
Income tax provision on other comprehensive (loss) income
16,842

 
(5,605
)
 
17,408

 
(10,906
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
(23,890
)
 
9,015

 
(24,672
)
 
15,834

 
 
 
 
 
 
 
 
Comprehensive (loss) income
(8,041
)
 
28,720

 
32,098

 
52,099

 
 
 
 
 
 
 
 
Comprehensive income attributed to non-controlling interest
(3,644
)
 
(4,826
)
 
(5,741
)
 
(10,881
)
Comprehensive (loss) income attributed to Vector Group Ltd.
$
(11,685
)
 
$
23,894

 
$
26,357

 
$
41,218


The accompanying notes are an integral part of the condensed consolidated financial statements.

4


VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIENCY) EQUITY
(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
Vector Group Ltd. Stockholders' (Deficiency) Equity
 
 
 
 
 
 
 
Additional
 
 
 
Accumulated
Other
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Treasury
 
Non-controlling
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Income
 
Stock
 
Interest
 
Total
Balance, January 1, 2015
114,501,014

 
$
11,450

 
$
—

 
$
(90,160
)
 
$
34,540

 
$
(12,857
)
 
$
79,079

 
$
22,052

Net income
—

 
—

 
—

 
51,029

 
—

 
—

 
5,741

 
56,770

Total other comprehensive loss
—

 
—

 
—

 
—

 
(24,672
)
 
—

 
—

 
(24,672
)
Total comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
—

 
32,098

Distributions and dividends on common stock
—

 
—

 
(16,082
)
 
(124,199
)
 
—

 
—

 
—

 
(140,281
)
Surrender of shares in connection with restricted stock vesting
(83,411
)
 
(8
)
 
(2,075
)
 
—

 
—

 
—

 
—

 
(2,083
)
Effect of stock dividend
5,837,144

 
584

 
—

 
(584
)
 
—

 
—

 
—

 
—

Note conversions, net of taxes $367
2,227,552

 
223

 
25,299

 
—

 
—

 
—

 
—

 
25,522

Cancellation of treasury shares
—

 
—

 
(12,857
)
 
—

 
—

 
12,857

 
—

 
—

Exercise of stock options
110,030

 
10

 
1,311

 
—

 
—

 
—

 
—

 
1,321

Tax benefit of options exercised
—

 
—

 
756

 
—

 
—

 
—

 
—

 
756

Stock-based compensation
—

 
—

 
3,648

 
—

 
—

 
—

 
—

 
3,648

Contributions made by non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
704

 
704

Distributions to non-controlling interest
—

 
—

 
—

 
—

 
—

 
—

 
(564
)
 
(564
)
Balance as of September 30, 2015
122,592,329

 
$
12,259

 
$
—

 
$
(163,914
)
 
$
9,868

 
$
—

 
$
84,960

 
$
(56,827
)


The accompanying notes are an integral part of the condensed consolidated financial statements.

5


VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
Nine Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
Net cash provided by operating activities
$
140,018

 
$
100,044

Cash flows from investing activities:
 
 
 
Sale of investment securities
161,029

 
173,046

Maturities of investment securities
2,653

 
517

Purchase of investment securities
(162,845
)
 
(312,919
)
Proceeds from sale or liquidation of long-term investments
182

 
549

Purchase of long-term investments
(10,000
)
 
(12,000
)
Investments in real estate ventures
(43,280
)
 
(29,378
)
Distributions from investments in real estate ventures
11,205

 
5,540

Increase in cash surrender value of life insurance policies
(1,225
)
 
(435
)
Increase in restricted assets
(6,872
)
 
(1,108
)
Issuance of notes receivable
(4,410
)
 
(250
)
Proceeds from sale of fixed assets
3

 
4

Capital expenditures
(7,859
)
 
(20,746
)
Repayments of notes receivable
5,106

 
933

Purchase of subsidiaries
—

 
(250
)
Pay downs of investment securities
5,743

 
690

Proceeds from sale of preferred securities
1,000

 
—

Investments in real estate held for sale
(12,512
)
 
—

Net cash used in investing activities
(62,082
)
 
(195,807
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
1,519

 
413,918

Deferred financing costs
(624
)
 
(12,360
)
Repayments of debt
(4,968
)
 
(10,305
)
Borrowings under revolver
130,691

 
645,894

Repayments on revolver
(146,655
)
 
(673,866
)
Dividends and distributions on common stock
(139,430
)
 
(122,051
)
Distributions to non-controlling interest
(564
)
 
(4,861
)
Proceeds from exercise of Vector options
1,321

 
4,407

Tax benefit of options exercised
756

 
937

Net cash (used in) provided by financing activities
(157,954
)
 
241,713

Net (decrease) increase in cash and cash equivalents
(80,018
)
 
145,950

Cash and cash equivalents, beginning of period
326,365

 
234,466

Cash and cash equivalents, end of period
$
246,347

 
$
380,416


The accompanying notes are an integral part of the condensed consolidated financial statements.

6
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
Basis of Presentation:

The condensed consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of VGR Holding LLC (“VGR Holding”), Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), Zoom E-Cigs LLC (“Zoom”), New Valley LLC (“New Valley”) and other less significant subsidiaries. New Valley includes the accounts of Douglas Elliman Realty, LLC (“Douglas Elliman”) and other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. Zoom is engaged in the sale of electronic cigarettes in the United States. New Valley is engaged in the real estate business.
The unaudited, interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and, in management's opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair statement of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission. The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.
Revisions to December 31, 2014 Consolidated Balance Sheet. The Company has revised its December 31, 2014 Consolidated Balance Sheet, which originally presented deferred income tax assets and liabilities (current and noncurrent) on a gross basis, rather than a net basis. The revisions conform to ASC 740-10-45-6 which states all current deferred tax liabilities and assets shall be offset and presented as a single amount and all noncurrent deferred tax liabilities and assets shall be offset and presented as a single amount. The Company assessed the materiality of this error on previously issued financial statements and concluded that the error was immaterial.

The revisions are presented in the table below:

 
 
December 31, 2014
 
 
As Previously Reported
 
Revision
 
As Revised
 
 
 
 
 
 
 
Deferred income taxes
 
$
29,192

 
$
(29,192
)
 
$
—

Total current assets
 
857,846

 
(29,192
)
 
828,654

 
 
 
 
 
 
 
Deferred income taxes
 
51,129

 
(51,129
)
 
—

Total assets
 
$
1,573,392

 
$
(80,321
)
 
$
1,493,071

 
 
 
 
 
 
 
Deferred income taxes, net
 
$
57,671

 
$
(29,192
)
 
$
28,479

Total current liabilities
 
270,095

 
(29,192
)
 
240,903

 
 
 
 
 
 
 
Deferred income taxes, net
 
145,639

 
(51,129
)
 
94,510

Total liabilities
 
1,551,340

 
(80,321
)
 
1,471,019

Total stockholders' equity
 
22,052

 
—

 
22,052

Total liabilities and stockholders' equity
 
$
1,573,392

 
$
(80,321
)
 
$
1,493,071

 
 
 
 
 
 
 


7
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(b)
Distributions and Dividends on Common Stock:

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders' deficiency to the extent of retained earnings and accumulated paid-in capital. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital. Any amounts then exceeding accumulated paid-in capital are recorded as an increase to accumulated deficit.

(c)
Revenue Recognition:

Tobacco and E-Cigarettes sales:  Revenues from sales are recognized upon the shipment of finished goods when title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, the sale price is fixed or determinable and collectibility is reasonably assured. The Company provides an allowance for expected sales returns, net of any related inventory cost recoveries. Certain sales incentives, including promotional price discounts, are classified as reductions of net sales. The Company includes federal excise taxes on tobacco sales in revenues and cost of goods sold. Since the Company’s primary line of business is tobacco, the Company’s financial position and its results of operations and cash flows have been and could continue to be materially adversely affected by significant unit sales volume declines at the Company and industry levels, regulation, litigation and defense costs, increased tobacco costs or reductions in the selling price of cigarettes in the near term.
Real estate sales: Revenue is recognized only when persuasive evidence of an arrangement exists, the price is fixed or determinable, the transaction has been completed and collectibility of the resulting receivable is reasonably assured. Real estate commissions earned by the Company’s real estate businesses are recorded as revenue on a gross basis upon the closing of a real estate transaction as evidenced when the escrow or similar account is closed, the transaction documents have been recorded and funds are distributed to all appropriate parties. Commissions expenses are recognized concurrently with related revenues. Property management fees earned are recorded as revenue when the related services are performed.

(d)
Earnings Per Share (“EPS”):

Information concerning the Company's common stock has been adjusted to give retroactive effect to the 5% stock dividend paid to Company stockholders on September 29, 2015. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividends.

Net income for purposes of determining basic and diluted EPS was as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income attributed to Vector Group Ltd.
$
12,205

 
$
14,879

 
$
51,029

 
$
25,384

Expense attributed to participating securities
(360
)
 
(423
)
 
(1,510
)
 
(739
)
Net income attributed to Vector Group Ltd. available to common stockholders
$
11,845

 
$
14,456

 
$
49,519

 
$
24,645


Basic and diluted EPS were calculated using the following shares:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Weighted-average shares for basic EPS
118,023,224

 
108,374,350

 
117,660,001

 
106,464,835

Plus incremental shares related to stock options and non-vested restricted stock
134,315

 
120,354

 
175,097

 
118,724

Weighted-average shares for diluted EPS
118,157,539

 
108,494,704

 
117,835,098

 
106,583,559



8
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The following were outstanding during the three and nine months ended September 30, 2015 and 2014, but were not included in the computation of diluted EPS because the effect was anti-dilutive.

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
  Weighted-average number of shares issuable upon
  conversion of debt
24,895,477

 
34,229,687

 
25,186,773

 
32,820,165

  Weighted-average conversion price
$
19.63

 
$
17.49

 
$
19.53

 
$
16.48



(e)
Fair Value of Derivatives Embedded within Convertible Debt:

The Company has estimated the fair market value of the embedded derivatives based principally on the results of a valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based principally on the present value of future dividend payments expected to be received by the convertible debt holders over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the yield of the Company's debt when compared to risk-free securities with the same duration. A readily determinable fair market value of the embedded derivatives is not available. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The valuation also considers other items, including current and future dividends and the volatility of the Company's stock price. At September 30, 2015, the range of estimated fair market values of the Company's embedded derivatives was between $148,769 and $150,125. The Company recorded the fair market value of its embedded derivatives at the approximate midpoint of the range at $149,739 as of September 30, 2015. At December 31, 2014, the range of estimated fair market values of the Company's embedded derivatives was between $167,593 and $171,215. The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $169,386 as of December 31, 2014. The estimated fair market value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note 6.)

(f)
Investment in Real Estate Ventures:

The Company's interest in Variable Interest Entities ("VIE") is primarily in the form of equity ownership. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE's executive committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of economic disproportionality between the Company and its other partner(s).

Accounting guidance requires the consolidation of VIEs in which the Company is the primary beneficiary. The guidance requires consolidation of VIEs that an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company's maximum exposure to loss in its investments in unconsolidated VIEs is limited to its investment in the unconsolidated VIEs which is the carrying value. The Company's maximum exposure to loss in its investment in its consolidated VIEs is limited to its investment which is the carrying value of the investment net of the non-controlling interest. Creditors of the consolidated VIEs have no recourse to the general credit of the primary beneficiary.

9
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(g)
Other Income, Net:

Other income, net consisted of:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
(Loss) gain on warrants
$
(1,282
)
 
$
991

 
$
(1,765
)
 
$
868

Interest and dividend income
1,578

 
1,476

 
5,185

 
3,665

Accretion of interest income from debt discount on notes receivable
5

 
11

 
79

 
87

Gain on long-term investment
137

 
—

 
361

 
—

Out-of-period adjustment
—

 
—

 
—

 
1,231

Acceleration of closing fee related to termination of Douglas Elliman joint venture
—

 
—

 
—

 
2,335

Provision for loss on real estate held for sale
(229
)
 
—

 
(229
)
 
—

Loss on sale of assets
(75
)
 
—

 
(75
)
 
—

Other expense
(1
)
 
(12
)
 
(2
)
 
(19
)
Other income, net
$
133

 
$
2,466

 
$
3,554

 
$
8,167


The out-of-period adjustment related to a non-accrual of a receivable from Douglas Elliman in the fourth quarter of 2013 and would have increased the Company's gain on acquisition of Douglas Elliman in 2013. The Company assessed the materiality of this error on all previously issued financial statements and concluded that the error was immaterial to all previously issued financial statements. The impact of correcting this error in 2014 was not material to the Company's 2014 consolidated financial statements.


(h)
Other Current Liabilities:
Other current liabilities consisted of:
 
September 30, 2015
 
December 31, 2014
Accounts payable
$
11,966

 
$
10,856

Accrued promotional expenses
20,053

 
20,191

Accrued excise and payroll taxes payable, net
5,034

 
23,172

Accrued interest
16,121

 
28,321

Commissions payable
14,942

 
9,523

Accrued salary and benefits
17,232

 
16,009

Other current liabilities
26,455

 
18,683

Total other current liabilities
$
111,803

 
$
126,755




10
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(i)
Goodwill and Other Intangible Assets:

The components of “Goodwill and other intangible assets, net” were as follows:
 
 
September 30,
2015
 
December 31,
2014
Goodwill
 
$
70,791

 
$
70,791

 
 
 
 
 
Indefinite life intangibles:
 
 
 
 
Intangible asset associated with benefit under the MSA
 
107,511

 
107,511

Trademark - Douglas Elliman
 
80,000

 
80,000

 
 
 
 
 
Intangibles with a finite life, net
 
7,178

 
11,670

 
 
 
 
 
  Total goodwill and other intangible assets, net
 
$
265,480

 
$
269,972


(j)
Treasury shares:

On September 4, 2015, the Company canceled all of its 4,145,247 treasury shares with a cost basis of $12,857. The Company reduced Additional paid-in-capital in the Condensed Statement of Stockholders' Deficiency by its cost basis in the Treasury Stock.

(k)
New Accounting Pronouncements:

In September 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement Period Adjustments (“ASU 2015-16”), which requires adjustments to provisional amounts initially recorded in a business combination that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-15 also requires the disclosure of the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance is effective for the Company beginning January 1, 2016. The Company will apply the guidance prospectively for all business combinations that occur subsequent to the adoption date.

In August 2015, FASB issued ASU 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measure of Debt Issuance Costs Associated with Line-of-Credit Arrangements (Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting), which codifies an Securities and Exchange Commission staff announcement that entities are permitted to defer and present debt issuance costs related to line-of-credit arrangement as assets. Given the absence of authoritative guidance within ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, ASU 2015-15 clarifies that the Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This guidance is effective immediately and will be applied prospectively to any line-of-credit arrangements entered into subsequent to the effective date.

In April 2015, FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. Upon adoption, the Company will apply the new guidance on a retrospective basis and adjust the balance sheet of each individual period presented to reflect the period-specific effects of applying the new guidance. This guidance

11
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


is effective for the Company beginning January 1, 2016. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.

In February 2015, FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis (“ASU 2015-02”). ASU 2015-02 amends the consolidation requirements and significantly changes the consolidation analysis required. ASU 2015-02 requires management to reevaluate all legal entities under a revised consolidation model specifically (1) modify the evaluation of whether limited partnership and similar legal entities are Variable Interest Entities (“VIEs”), (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Act of 1940 for registered money market funds. The guidance is effective for the Company beginning January 1, 2016. Early adoption is permitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.

In May 2014, FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-9”). ASU 2014-9 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. As amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date the new standard is effective for annual reporting periods beginning after December 15, 2018, with early adoption permitted for annual reporting periods beginning subsequent to December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and it has not determined the impact of the new standard on its consolidated financial statements.


2.
INVENTORIES

Inventories consist of:
 
September 30,
2015
 
December 31,
2014
Leaf tobacco
$
50,672

 
$
49,948

Other raw materials
4,184

 
3,532

Work-in-process
624

 
879

Finished goods
66,266

 
62,876

E-Cigarettes
106

 
3,079

Inventories at current cost
121,852

 
120,314

LIFO adjustments
(31,157
)
 
(29,991
)
 
$
90,695

 
$
90,323


All of the Company's inventories at September 30, 2015 and December 31, 2014 are reported under the LIFO method. The $31,157 LIFO adjustment as of September 30, 2015 decreases the current cost of inventories by $20,321 for Leaf tobacco, $900 for Other raw materials, $41 for Work-in-Process, $9,887 for Finished goods and $8 for E-Cigarettes. The $29,991 LIFO adjustment as of December 31, 2014 decreased the current cost of inventories by $19,941 for Leaf tobacco, $861 for Other raw materials, $39 for Work-in-Process, $9,054 for Finished goods and $96 for E-Cigarettes.

Liggett enters into purchase commitments for leaf tobacco that will be used entirely for future production. The future quantities of leaf tobacco and prices are established at the date of the commitments. At September 30, 2015, Liggett had tobacco purchase commitments of approximately $14,796. Liggett has a single source supply agreement for fire safe cigarette paper through 2019.


12
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The Company capitalizes the incremental prepaid cost of the MSA in ending inventory. Each year, the Company capitalizes in inventory that portion of its MSA liability that relates to cigarettes shipped to public warehouses but not sold. The amount of capitalized MSA cost in “Finished goods” inventory was $15,906 and $14,369 at September 30, 2015 and December 31, 2014, respectively.


3.
INVESTMENT SECURITIES AVAILABLE FOR SALE

The components of investment securities available for sale at September 30, 2015 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
63,524

 
$
44,623

 
$
(1,171
)
 
$
106,976

Mutual funds invested in fixed income securities
54,864

 
—

 
—

 
54,864

Marketable debt securities
126,080

 
456

 
—

 
126,536

Total investment securities available for sale
$
244,468

 
$
45,079

 
$
(1,171
)
 
$
288,376


The components of investment securities available for sale at December 31, 2014 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
63,041

 
$
92,255

 
$
(1,104
)
 
$
154,192

Mutual funds invested in fixed income securities
61,485

 
—

 
(1,659
)
 
59,826

Marketable debt securities
130,311

 
2,630

 
(916
)
 
132,025

Total investment securities available for sale
$
254,837

 
$
94,885

 
$
(3,679
)
 
$
346,043



The table below summarizes the maturity dates of marketable debt securities at September 30, 2015.

Investment Type:
Market Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
35,433

 
$
—

 
$
35,433

 
$
—

Corporate securities
54,741

 
6,917

 
47,565

 
259

U.S. mortgage-backed securities
6,351

 
1,061

 
5,132

 
158

Commercial mortgage-backed securities
14,537

 
6,632

 
1,793

 
6,112

U.S. asset-backed securities
13,360

 
2,342

 
10,343

 
675

Index-linked U.S. bonds
2,114

 
—

 
2,114

 
—

Total marketable debt securities by maturity dates
$
126,536

 
$
16,952

 
$
102,380

 
$
7,204


The available-for-sale investment securities with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair values were as follows:


13
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
In loss position for
 
 
 
 
 
Less than 12 months
 
12 months or more
 
 
 
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
$
9,159

 
$
(1,171
)
 
$
—

 
$
—

 
$
9,159

 
$
(1,171
)
 
$
9,159

 
$
(1,171
)
 
$
—

 
$
—

 
$
9,159

 
$
(1,171
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
$
6,599

 
$
(138
)
 
$
3,534

 
$
(966
)
 
$
10,133

 
$
(1,104
)
Mutual funds invested in fixed income securities
59,826

 
(1,659
)
 
—

 
—

 
59,826

 
(1,659
)
Marketable debt securities

 

 

 

 

 

   U.S. Government securities
22,375

 
(18
)
 
—

 
—

 
22,375

 
(18
)
   Corporate securities
30,896

 
(204
)
 
7,224

 
(131
)
 
38,120

 
(335
)
   U.S. mortgage-backed securities
3,370

 
(26
)
 
—

 
—

 
3,370

 
(26
)
   Commercial mortgage-backed securities
11,332

 
(46
)
 
5,176

 
(432
)
 
16,508

 
(478
)
   U.S. asset-backed securities
15,228

 
(29
)
 
—

 
—

 
15,228

 
(29
)
   Index-linked U.S. bonds
2,098

 
(30
)
 
—

 
—

 
2,098

 
(30
)
 
$
151,724

 
$
(2,150
)
 
$
15,934

 
$
(1,529
)
 
$
167,658

 
$
(3,679
)

Unrealized losses from fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses
from equity and debt securities are due to market price movements. The Company believes the unrealized losses associated with the Company's equity securities will be recovered in the future.

Gross realized gains and losses on available-for-sale investment securities were as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Gross realized gains on sales
$
129

 
$
100

 
$
13,601

 
$
151

Gross realized losses on sales
(950
)
 
(67
)
 
(1,583
)
 
(189
)
(Loss) gain on sale of investment securities available for sale

$
(821
)
 
$
33

 
$
12,018

 
$
(38
)
 
 
 
 
 
 
 
 
Gross realized losses on other-than-temporary impairments
$
(12,211
)
 
$
—

 
$
(12,211
)
 
$
—

 

 

 

 


The Company recorded an “Other-than-temporary-impairment” charge of $12,211 during the three and nine months ended September 30, 2015.  The largest component of this charge was $6,895 related to Morgans Hotel Group Co., a company where Vector's President and Chief Executive Officer also serves as Chairman of the Board of Directors.
Although management generally does not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing the Company's investment securities portfolio, management may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders.

14
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Proceeds from investment securities sales totaled $42,768 and $124,342 and proceeds from early redemptions by issuers totaled $3,130 and $615 in the three months ended September 30, 2015 and 2014, respectively, mainly from sales of Corporate securities and U.S. Government securities.
Proceeds from investment securities sales totaled $161,029 and $173,046 and proceeds from early redemptions by issuers totaled $8,397 and $1,207 in the nine months ended September 30, 2015 and 2014, respectively, mainly from sales of Corporate securities and U.S. Government securities.

4.
LONG-TERM INVESTMENTS

Long-term investments consisted of the following:
 
September 30, 2015
 
December 31, 2014
Investments accounted at cost
$
42,056

 
$
32,239

Investments accounted under the equity method
11,592

 
8,053

 
$
53,648

 
$
40,292


Long-term investments accounted for at cost are summarized as follows:
 
September 30, 2015
 
December 31, 2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Long-term investments
$
41,541

 
$
46,435

 
$
31,541

 
$
38,039

Real estate partnership
515

 
587

 
698

 
1,108

 
$
42,056

 
$
47,022

 
$
32,239

 
$
39,147


The Company accounts for investments which it has significant influence under the equity method. The Company recorded an equity loss of $579 and equity income of $829 for the three months ended September 30, 2015 and September 30, 2014, respectively. The Company recorded an equity loss of $2,273 and equity income of $1,462 for the nine months ended September 30, 2015 and September 30, 2014, respectively. The fair value of the investments in investment companies accounted for under the equity method was approximately $11,592 and $8,053 as of September 30, 2015 and December 31, 2014.

The Company's investments under the equity method contains an investment in the common stock of Boyar Value Fund ("Boyar"). As of September 30, 2015, the Company owned approximately 30% of the outstanding stock of Boyar. The carrying value of the investment based on the quoted market price as of September 30, 2015 was $6,984. Ladenburg Thalmann Fund Management, LLC, an indirect subsidiary of Ladenburg Thalmann Financial Services Inc. is the manager of Boyar.


5.
NEW VALLEY LLC
Residential Brokerage Business Acquisition. New Valley is engaged in the real estate business and is seeking to acquire additional real estate properties and operating companies. The Company owns a 70.59% interest in Douglas Elliman and the condensed consolidated financial statements of the Company include the account balances of Douglas Elliman.
Investments in real estate ventures.  New Valley also holds equity investments in various real estate projects domestically and internationally. The components of “Investments in real estate ventures” were as follows:

15
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
September 30,
2015
 
December 31,
2014
 
 
 
 
Milanosesto Holdings (Sesto Holdings)
$
5,037

 
$
5,037

Land Development
5,037

 
5,037

 
 
 
 
10 Madison Square Park West (1107 Broadway)
9,522

 
6,383

The Marquand
13,900

 
12,000

11 Beach Street
11,928

 
12,328

20 Times Square (701 Seventh Avenue)
13,095

 
12,481

111 Murray Street
16,114

 
27,319

357 West (160 Leroy Street)
1,950

 
1,467

PUBLIC Chrystie House (Chrystie Street)
5,297

 
3,300

The Dutch (25-19 43rd Avenue)
980

 
733

Queens Plaza (23-10 Queens Plaza South)
14,732

 
11,082

87 Park (8701 Collins Avenue)
5,654

 
6,144

125 Greenwich Street
11,193

 
9,308

West Hollywood Edition (9040 Sunset Boulevard)
5,604

 
5,604

76 Eleventh Avenue
17,000

 
—

Monad Terrace
6,438

 
—

Condominium and Mixed Use Development
133,407

 
108,149

 
 
 
 
Maryland Portfolio
1,377

 
3,234

ST Portfolio
16,881

 
15,283

Apartment Buildings
18,258

 
18,517

 
 
 
 
Park Lane Hotel
19,373

 
19,341

Hotel Taiwana
7,337

 
7,629

Coral Beach and Tennis Club
3,023

 
2,816

Hotels
29,733

 
29,786

 
 
 
 
The Plaza at Harmon Meadow
5,638

 
—

Commercial
5,638

 
—

 
 
 
 
Other
1,979

 
1,971

 
 
 
 
Investments in real estate ventures
$
194,052

 
$
163,460

 
Condominium and Mixed-Use Development:
Condominium and mixed-use development investments range in ownership percentage from 5% to 49.5%. New Valley recorded net equity income of $248 and $923 for the three and nine months ended September 30, 2015, respectively. The $923 equity income for the nine months ended September 30, 2015 was primarily related to New Valley's proportionate share of the Marquand’s equity earnings from the sale of five units offset by equity losses from the other condominiums and mixed-use development projects. New Valley recorded equity income of $5,090 and $7,389 for the three and nine months ended September 30, 2014, respectively. The Company recorded $5,000 of equity income related to its proportionate share of the Marquand’s equity earnings from the sale of approximately 40% of its units during the quarter and $2,254 of equity income primarily related to the

16
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


sale of a commercial unit at 10 Madison Square Park West for the nine months ended September 30, 2014.
During the nine months ended September 30, 2015, New Valley made capital contributions totaling $35,776 related to ventures where New Valley previously held an investment, primarily at 10 Madison Square Park West, Queens Plaza and 125 Greenwich Street, and the new ventures 76 Eleventh Avenue and Monad Terrace. For ventures where New Valley previously held an investment, New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's direct investment percentage did not change. During the nine months ended September 30, 2014, New Valley made capital contributions totaling $27,225 primarily related to 111 Murray Street, Queens Plaza and 125 Greenwich Street. New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's investment percentages did not change.
In May 2015, New Valley purchased a 5.1% interest in 76 Eleventh Avenue for $17,000. The joint venture related to 76 Eleventh Avenue is a variable interest entity, however, New Valley is not the primary beneficiary. New Valley accounts for its interest in the joint venture under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in 76 Eleventh Avenue as of September 30, 2015 is $17,000.
In May and June 2015, New Valley purchased a 31.3% interest in Monad Terrace for $6,200. The joint venture related to Monad Terrace is a variable interest entity, however, New Valley is not the primary beneficiary of the joint venture. New Valley accounts for its interest in the joint venture under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in Monad Terrace as of September 30, 2015 is $6,438.
During the nine months ended September 30, 2015, New Valley received distributions of $11,441 primarily related to a return of capital from 111 Murray Street. The return of capital primarily resulted from the admittance of a new limited partner in 111 Murray Street. The admittance of the new limited partner reduced New Valley's interest in the overall joint venture from 25% to 9.5%. New Valley recognized equity income of $344 as a result of the transaction, offsetting the equity loss of $344 recognized during the year. During the nine months ended September 30, 2014, New Valley received distributions of $4,547 primarily related to 10 Madison Square Park West, 125 Greenwich Street, 11 Beach Street and 20 Times Square.
New Valley's maximum exposure to loss, net of non-controlling interest, as a result of its investments in condominium and mixed-use developments was $130,027 at September 30, 2015.

Apartment Buildings:
Apartment building investments range in ownership percentage from 7.6% to 16.3%. New Valley recorded an equity loss of $72 for the three months ended September 30, 2015 and equity income of $1,730 for the nine months ended September 30, 2015, respectively, primarily related to the ST Portfolio apartment portfolio. In 2015, ST Portfolio sold one (Phoenix, Arizona) of its three remaining Class A multi-family buildings and the proceeds were used to retire debt. New Valley recorded equity losses of $87 and $251 for the three and nine months ended September 30, 2014, respectively, primarily related to equity losses of ST Portfolio. New Valley received distributions of $1,989 and $375 during the nine months ended September 30, 2015 and 2014, respectively, primarily related to NV Maryland. New Valley's maximum exposure to loss as a result of its investment in apartment buildings was $18,258 at September 30, 2015.

Hotels:
Hotel investments range in ownership percentage from 5% to 49%. New Valley recorded equity losses of $1,323 and $2,330 for the three and nine months ended September 30, 2015, respectively, related to hotel operations. New Valley recorded equity losses of $2,053 and $4,222 for the three and nine months ended September 30, 2014, respectively. New Valley made capital contributions totaling $2,277 for the nine months ended September 30, 2015, primarily related to Coral Beach and Tennis Club and Park Lane Hotel. New Valley made capital contributions totaling $1,973 for the nine months ended September 30, 2014, primarily related to Coral Beach. New Valley's maximum exposure to loss as a result of its investments in hotels was $29,733 at September 30, 2015.

17
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Commercial:
Commercial ventures include a contribution by New Valley of $5,931 for a 49% interest in a joint venture which purchased a shopping center, The Plaza at Harmon Meadow, in New Jersey at the end of March 2015. The joint venture is a variable interest entity, however, New Valley is not the primary beneficiary of the joint venture. New Valley will account for its interest in the joint venture under the equity method of accounting. New Valley recorded equity income of $20 and $47 for the three and nine months ended September 30, 2015 related to shopping center rental operations. New Valley received distributions totaling $340 for the nine months ended September 30, 2015, related to Harmon Meadow. New Valley's maximum exposure to loss as a result of its investments in commercial ventures was $5,638 at September 30, 2015.

Other:
Other investments in real estate ventures relate to an investment in a mortgage company and an insurance company partially owned by Douglas Elliman.

Real Estate Held for Sale:
The components of “Real estate held for sale, net” were as follows:
 
September 30,
2015
 
December 31,
2014
Escena, net
$
10,451

 
$
10,643

Sagaponack
12,512

 
—

            Real estate held for sale, net
$
22,963

 
$
10,643


Escena.  The assets of “Escena, net” are as follows:
 
September 30,
2015
 
December 31,
2014
Land and land improvements
$
8,902

 
$
8,953

Building and building improvements
1,873

 
1,865

Other
1,596

 
1,568

 
12,371

 
12,386

Less accumulated depreciation
(1,920
)
 
(1,743
)
 
$
10,451

 
$
10,643


New Valley recorded operating losses of $779 and $804 for the three months ended September 30, 2015 and 2014, respectively, from Escena. New Valley recorded operating losses of $227 and $571 for the nine months ended September 30, 2015 and 2014, respectively, from Escena.


18
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Investment in Indian Creek. In March 2013, New Valley invested $7,616 for an 80% interest in Timbo LLC (“Indian Creek”) which owns a residential real estate project located on Indian Creek, Florida. As a result of the 80% ownership interest, the consolidated financial statements of the Company included the balances of Indian Creek.
 
In May 2014, the Indian Creek property was sold for $14,400 and New Valley received a distribution of approximately $7,100. New Valley recognized income of approximately $2,400 from the sale for the nine months ended September 30, 2014.

Investment in Sagaponack. In April 2015, New Valley has invested $12,502 in a residential real estate project located in Sagaponack, NY. The project is wholly owned and the balances of the project are included in the consolidated financial statements of the Company. As of September 30, 2015, the assets of Sagaponack consist of land and land improvements of $12,512.

6.
NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS

Notes payable, long-term debt and other obligations consist of:

 
September 30,
2015
 
December 31,
2014
Vector:
 
 
 
7.75% Senior Secured Notes due 2021, including premium of $8,337 and $9,275
$
608,337

 
$
609,275

6.75% Variable Interest Senior Convertible Note due 2015
—

 
25,000

7.5% Variable Interest Senior Convertible Notes due 2019, net of unamortized discount of $136,365 and $146,634*
93,635

 
83,366

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $89,454 and $98,831*
169,296

 
159,919

Liggett:
 
 
 
Revolving credit facility
1,803

 
17,767

Term loan under credit facility
3,368

 
3,589

Equipment loans
10,919

 
13,966

Other
289

 
469

Total notes payable, long-term debt and other obligations
887,647

 
913,351

Less:
 
 
 
Current maturities
(7,957
)
 
(52,640
)
Amount due after one year
$
879,690

 
$
860,711

______________________
* The fair value of the derivatives embedded within the 6.75% Variable Interest Senior Convertible Note ($0 at September 30, 2015 and $884 at December 31, 2014, respectively), the 7.5% Variable Interest Senior Convertible Notes ($75,788 at September 30, 2015 and $87,638 at December 31, 2014, respectively) and the 5.5% Variable Interest Senior Convertible Debentures ($73,951 at September 30, 2015 and $80,864 at December 31, 2014, respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.

6.75% Variable Interest Senior Convertible Note due 2015 - Vector:
On February 3, 2015, the holder of the 6.75% Variable Interest Senior Convertible Note due 2015, converted the remaining $25,000 principal balance of the $50,000 Note into 2,338,930 of the Company's common shares. The debt conversion resulted in a reduction of debt and an increase to equity in the amount of $25,000.

Revolving Credit Facility and Term Loan Under Credit Facility - Liggett:

As of September 30, 2015, a total of $5,171 was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately $52,915 based on eligible collateral at September 30, 2015.


19
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Shares of Common Stock per $1,000 Principal Amount due on Convertible Notes:

The conversion rates for all convertible debt outstanding as of September 30, 2015 and December 31, 2014, are summarized below:
 
September 30, 2015
 
December 31, 2014
 
Conversion Price
 
Shares per $1,000
 
Conversion Price
 
Shares per $1,000
 
 
 
 
 
 
 
 
6.75% Variable Interest Senior Convertible Note due 2014
$
—

 
—

 
$
10.69

 
93.5572

7.5% Variable Interest Senior Convertible Notes due 2019
$
15.98

 
62.5743

 
$
15.98

 
62.5743

5.5% Variable Interest Senior Convertible Debentures due 2020
$
24.64

 
40.5891

 
$
24.64

 
40.5891


Non-Cash Interest Expense - Vector:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Amortization of debt discount, net
$
6,868

 
$
14,277

 
$
18,708

 
$
41,180

Amortization of deferred finance costs
1,085

 
1,147

 
3,073

 
2,910

Accelerated interest expense on 6.75% Variable Interest Senior Convertible Note converted
—

 
—

 
—

 
3,679

Accelerated interest expense on 6.75% Variable Interest Senior Convertible Exchange Notes converted
—

 
994

 
—

 
1,433


$
7,953

 
$
16,418

 
$
21,781

 
$
49,202


Fair Value of Notes Payable and Long-Term Debt:

 
September 30, 2015
 
December 31, 2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Notes payable and long-term debt
$
887,647

(1)
$
1,285,711

 
$
913,351

(1)
$
1,313,711

 
 
 
 
 
 
 
 
______________________
(1) The carrying value does not include the carrying value of the embedded derivative. See Note 11.

Notes payable and long-term debt are carried on the condensed consolidated balance sheet at amortized cost. The fair value determinations disclosed above are classified as Level 2 under the fair value hierarchy disclosed in Note 11 if such liabilities were recorded on the condensed consolidated balance sheet at fair value. The estimated fair value of the Company's notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies including the evaluation of the Company's credit risk as described in the Company's Form 10-K. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein is not necessarily indicative of the amount that could be realized in a current market exchange.



20
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


7.
CONTINGENCIES

Tobacco-Related Litigation:

Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. The cases have generally fallen into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (“Individual Actions”); (ii) lawsuits by individuals requesting the benefit of the Engle ruling (“Engle progeny cases”); (iii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging that use of the terms “lights” and/or “ultra lights” constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); and (iv) health care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (“Health Care Cost Recovery Actions”). With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. The future financial impact of the risks and expenses of litigation are not quantifiable. For the three months ended September 30, 2015 and 2014, Liggett incurred tobacco product liability legal expenses and costs totaling $5,355 and $2,108. For the nine months ended September 30, 2015 and 2014, Liggett incurred tobacco product liability legal expenses and costs totaling $11,068 and $7,282. These costs are included in the operating, selling, administrative and general expenses and litigation settlement and judgment expense line items in the Condensed Consolidated Statements of Operations.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. Management reviews on a quarterly basis with counsel all pending litigation and evaluates whether an estimate can be made of the possible loss or range of loss that could result from an unfavorable outcome. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. Damages awarded in tobacco-related litigation can be significant.
Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. To obtain stays on judgments pending current appeals, Liggett has secured approximately $12,268 in bonds as of September 30, 2015.
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. In several cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts have upheld the constitutionality of the statute. It is possible that the Company’s consolidated financial position, results of operations, and cash flows could be materially adversely affected by an unfavorable outcome of such challenges.
Accounting Policy. The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in this Note 7: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Cautionary Statement About Engle Progeny Cases. Judgments have been entered against Liggett and other industry defendants in Engle progeny cases. A number of the judgments have been affirmed on appeal and satisfied by the defendants. As of September 30, 2015, 23 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts. Fifteen verdicts were returned in favor of the plaintiffs (although in two of these cases (Irimi and Cohen), the court granted defendants' motion for a new trial and another (Putney) was reversed on appeal) and eight in favor of Liggett. In certain cases, the judgments were entered jointly and severally with other defendants and Liggett may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Liggett under certain circumstances may have to pay more than their proportionate share of any bonding

21
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


or judgment related amounts. In four of the cases, punitive damages were awarded against Liggett. Several of the judgments remain on appeal. Except as discussed in this Note 7 regarding the cases where an adverse verdict was entered against Liggett and that remain on appeal, management is unable to estimate the possible loss or range of loss from the remaining Engle progeny cases as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact Engle class members (non-class members’ claims are generally time-barred), the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify their demand for damages.
Although Liggett has generally been successful in managing litigation, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining Engle progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of the Company could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. Liggett may, however, enter into settlement discussions in particular cases if it believes it is in its best interest to do so, including the remaining Engle progeny cases. As of September 30, 2015, Liggett (and in certain cases the Company) had, on an individual basis, settled 168 Engle progeny cases for approximately $3,546 in the aggregate. Five of those settlements occurred in the third quarter of 2015. In October 2013, Liggett announced a settlement of the claims of over 4,900 Engle progeny plaintiffs (see Engle Progeny Settlement below).
Individual Actions
As of September 30, 2015, there were 55 Individual Actions pending against Liggett and, in certain cases, the Company, where one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. These cases do not include approximately 285 Engle progeny cases or the approximately 100 individual cases pending in West Virginia state court as part of a consolidated action. The following table lists the number of Individual Actions by state:
State
 
Number
of Cases
Florida
 
29

Maryland
 
12

New York
 
8

Louisiana
 
2

West Virginia
 
2

Missouri
 
1

Ohio
 
1

The plaintiffs’ allegations of liability in cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, equitable defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.

22
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Engle Progeny Cases
Engle Case. In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants’ conduct “rose to a level that would permit a potential award or entitlement to punitive damages.” Phase II of the trial was a causation and damages trial for three of the class plaintiffs and a punitive damages trial on a class-wide basis before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of $12,704 to the three class plaintiffs, to be reduced in proportion to the respective plaintiff’s fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett.
In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831, was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs.
In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but determined that the following Phase I findings are entitled to res judicata effect in Engle progeny cases: (i) that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they filed their individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. In October 2007, the United States Supreme Court denied defendants’ petition for writ of certiorari.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle, which decertified the class on a prospective basis, and affirmed the appellate court’s reversal of the punitive damages award, former class members had until January 2008 in which to file individual lawsuits. As a result, Liggett and the Company, and other cigarette manufacturers, were sued in thousands of Engle progeny cases in both federal and state courts in Florida. Although the Company was not named as a defendant in the Engle case, it was named as a defendant in substantially all of the Engle progeny cases where Liggett was named as a defendant.
Engle Progeny Settlement. In October 2013, the Company entered into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay a total of approximately $110,000, with approximately $61,600 paid in a lump sum and the balance to be paid in installments over 14 years, starting in February 2015. In exchange, the claims of over 4,900 plaintiffs were dismissed with prejudice against the Company and Liggett. Due to the settlement, in 2013 the Company recorded a charge of $86,213, of which $25,213 is related to certain payments discounted to their present value using an 11% annual discount rate. The Company recorded an additional charge of $643 in the first quarter of 2015 for additional cases joining the settlement and the restructuring of certain payments related to several previously settled cases. The installment payments total approximately $48,000 on an undiscounted basis. The Company’s future payments will be approximately $3,400 per annum through 2028, with a cost of living increase beginning in 2021.
Notwithstanding the comprehensive nature of the Engle Progeny Settlement, approximately 285 plaintiffs’ claims remain outstanding. Therefore, the Company and Liggett may still be subject to periodic adverse judgments which could have a material adverse affect on the Company’s consolidated financial position, results of operations and cash flows.



23
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


As of September 30, 2015, the following Engle progeny cases have resulted in judgments against Liggett:
Date
 
Case Name
 
County
 
Liggett Compensatory
Damages (as adjusted) (1)
 
Liggett Punitive Damages
 
Status (2)
June 2002
 
Lukacs v. R.J. Reynolds
 
Miami-Dade
 
$12,418
 
$—
 
Liggett satisfied the judgment and the case is concluded.
August 2009
 
Campbell v. R.J. Reynolds
 
Escambia
 
156
 
—
 
Liggett satisfied the judgment and the case is concluded.
March 2010
 
Douglas v. R.J. Reynolds
 
Hillsborough
 
1,350
 
—
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Clay v. R.J. Reynolds
 
Escambia
 
349
 
1,000
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Putney v. R.J. Reynolds
 
Broward
 
3,008
 
—
 
On June 12, 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings regarding the amount of the award. Plaintiff filed a motion for rehearing which was denied. Both sides sought discretionary review from the Florida Supreme Court. On September 28, 2015, the Florida Supreme Court directed the parties to brief the existence of its jurisdiction in light of the outcome of the Hess appeal.
April 2011
 
Tullo v. R.J. Reynolds
 
Palm Beach
 
225
 
—
 
Liggett satisfied the judgment and other than an issue with respect to the calculation of interest on the judgment and the amount of costs owed by Liggett, the case is concluded.
January 2012
 
Ward v. R.J. Reynolds
 
Escambia
 
1
 
—
 
Liggett satisfied the judgment and other than an issue regarding attorneys' fees, the case is concluded.
May 2012
 
Calloway v. R.J. Reynolds
 
Broward
 
1,947
 
7,600
 
A joint and several judgment for $16,100 was entered against R.J. Reynolds, Philip Morris, Lorillard and Liggett. On appeal to the Fourth District Court of Appeal. Oral argument occurred on June 16, 2015.
December 2012
 
Buchanan v. R.J. Reynolds
 
Leon
 
2,750
 
—
 
A joint and several judgment for $5,500 was entered against Liggett and Philip Morris. The court refused to reduce the award by decedent's comparative fault. Judgment was affirmed by the First District Court of Appeal, but the court certified an issue of conflict with another case. The defendants sought discretionary review by the Florida Supreme Court. On September 28, 2015, the Florida Supreme Court directed the parties to brief the existence of its jurisdiction in light of the outcome of the Hess appeal.  
May 2013
 
Cohen v. R.J. Reynolds
 
Palm Beach
 
205
 
—
 
Defendants' motion seeking a new trial was granted by the trial court. Plaintiff appealed to the Fourth District Court of Appeal. Defendants cross-appealed.
August 2013
 
Rizzuto v. R.J. Reynolds
 
Hernando
 
3,479
 
—
 
Liggett settled its portion of the judgment for $1,500 and the case is concluded as to Liggett.
August 2014
 
Irimi v. R.J. Reynolds
 
Broward
 
31
 
—
 
In January 2015, the trial court granted defendants' motion for a new trial. Plaintiff appealed to the Fourth District Court of Appeal.
October 2014
 
Lambert v. R.J. Reynolds
 
Pinellas
 
3,600
 
9,500
 
A final judgment was entered against Liggett for $13,100. Liggett was the only defendant at trial. On appeal to the Second District Court of Appeal. The parties reached an agreement regarding the amount of plaintiff's trial level attorneys' fees and costs in the event plaintiff prevails on appeal.
November 2014
 
Boatright v. R.J. Reynolds
 
Polk
 
—
 
300
 
In November 2014, the jury awarded compensatory damages in the amount of $15,000 with 15% fault apportioned to plaintiff and 85% to Philip Morris.  The jury further assessed punitive damages against Philip Morris for $19,700 and Liggett for $300.  Post-trial motions were denied. A joint and several judgment was entered in the amount of $12,750 on the compensatory damages. Judgment was further entered against Liggett for $300 in punitive damages. On appeal to the Second District Court of Appeal.
June 2015
 
Caprio v. R.J. Reynolds
 
Broward
 
28
 
0
 
In February 2015, the jury answered certain questions on the verdict form, but were deadlocked as to others.  The court entered a partial judgment and ordered a new trial on the remaining issues, including comparative fault and punitive damages.  On appeal to the Fourth District Court of Appeal.
Total Damages Awarded:
29,547
 
18,400
 
 
Amounts paid or compromised:
(17,978)
 
(1,000)
 
 
Damages remaining on Appeal:
$11,569
 
$17,400
 
 
(1) Compensatory damages are adjusted to reflect the jury's allocation of comparative fault. The amounts listed above do not include attorneys' fees or statutory interest.
(2) See Exhibit 99.1 for a more complete description of the cases currently on appeal.

Through September 30, 2015, Liggett paid $20,312, including interest and legal fees, to satisfy the judgments in seven Engle progeny cases (Lukacs, Campbell, Douglas, Clay, Tullo, Ward and Rizzuto).

24
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The Company’s potential range of loss in the Putney, Calloway, Cohen, Irimi, Lambert, Boatright and Caprio cases is between $0 and $26,219 in the aggregate, plus interest and legal fees. In determining the range of loss, the Company considers potential settlements as well as future appellate relief. Except as disclosed elsewhere in this Note 7, the Company is unable to determine a range of loss related to the remaining Engle progeny cases. Other than $4,146 for Buchanan, accrued by Liggett in the third quarter 2015, no amounts have been expensed or accrued in the condensed consolidated financial statements for the cases described above. However, as cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Appeals of Engle Progeny Judgments. In December 2010, in the Martin case, a state court case against R.J. Reynolds, the First District Court of Appeal held that the trial court correctly construed the Florida Supreme Court’s 2006 decision in Engle in instructing the jury on the preclusive effect of the Phase I Engle findings. In July 2011, the Florida Supreme Court declined to review the First District Court of Appeal’s decision. In March 2012, the United States Supreme Court declined to review the Martin case, along with the Campbell case and two other Engle progeny cases. The Martin decision has led to additional adverse rulings by other state appellate courts.
In Jimmie Lee Brown, a state court case against R.J. Reynolds, the trial court tried the case in two phases. In the first phase, the jury determined that the smoker was addicted to cigarettes that contained nicotine and that his addiction was a legal cause of his death, thereby establishing he was an Engle class member. In the second phase, the jury determined whether the plaintiff established legal cause and damages with regard to each of the underlying claims. The jury found in favor of plaintiff in both phases. In September 2011, the Fourth District Court of Appeal affirmed the judgment entered in plaintiff’s favor and approved the trial court’s procedure of bifurcating the trial. The Fourth District Court of Appeal agreed with Martin that individual post-Engle plaintiffs need not prove conduct elements as part of their burden of proof, but disagreed with Martin to the extent that the First District Court of Appeal only required a finding that the smoker was a class member to establish legal causation as to addiction and the underlying claims. The Fourth District Court of Appeal held that in addition to establishing class membership, Engle progeny plaintiffs must also establish legal causation and damages as to each claim asserted.  In so finding, the Fourth District Court of Appeal’s decision in Jimmie Lee Brown is in conflict with Martin. 
In the Rey case, a state court case, the trial court entered final summary judgment on all claims in favor of the Company, Liggett and Lorillard based on what has been referred to in the Engle progeny litigation as the “Liggett Rule.” The Liggett Rule stands for the proposition that a manufacturer cannot have liability to a smoker under any asserted claim if the smoker did not use a product manufactured by that particular defendant. The Liggett Rule is based on the entry of final judgment in favor of Liggett/Brooke Group in Engle on all of the claims asserted against them by class representatives Mary Farnan and Angie Della Vecchia, even though the Florida Supreme Court upheld, as res judicata, the generic finding that Liggett/Brooke Group engaged in a conspiracy to commit fraud by concealment. In September 2011, the Third District Court of Appeal affirmed in part and reversed in part holding that the defendants were entitled to summary judgment on all claims asserted against them other than the claim for civil conspiracy. Defendants’ further appellate efforts were unsuccessful.
In March 2012, in Douglas, the Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings, but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the use of Engle jury findings and determined that there is no violation of the defendants’ due process rights. This was the first time the Florida Supreme Court addressed the merits of an Engle progeny case. In October 2013, the United States Supreme Court declined to review the decision and Liggett satisfied the judgment. To date, the United States Supreme Court has declined to review any Engle progeny decisions.

In Hess, a case pending in Broward County, the jury returned a verdict finding that decedent relied to his detriment on an omission by the defendant before May 5, 1982 (twelve years prior to the filing of the Engle Complaint). Defendant moved for judgment as a matter of law on plaintiff’s fraudulent concealment claim on the basis that the claim was barred by Florida’s statute of repose. The trial court denied the motion and was reversed by the Fourth District Court of Appeal, which held that any Engle progeny claim for a fraud committed before May 5, 1982 is barred. In April 2015, the Florida Supreme Court reversed the Fourth District Court of Appeal decision and reinstated the jury verdict. The Florida Supreme Court held that Engle defendants cannot raise a statute of repose defense to claims for concealment or conspiracy. Defendants' motion for rehearing was denied.

In April 2015, in Graham v. R.J. Reynolds Tobacco Co., the Eleventh Circuit held that federal law impliedly preempts use of the res judicata Engle findings to establish claims for strict liability or negligence. The plaintiff moved for rehearing.


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(Dollars in Thousands, Except Per Share Amounts)
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Maryland Cases
    
Liggett is currently a defendant in 12 multi-defendant personal injury cases in Maryland that allege claims arising from asbestos and tobacco exposure.  Liggett along with other tobacco defendants have moved (or are in the process of moving) to dismiss the cases.  In the past, motions to dismiss have generally been successful, typically resulting in the dismissal without prejudice of the tobacco company defendants, including Liggett.  Recently, however, a Maryland intermediate appellate court ruled, in Stidham, et al. v. R. J. Reynolds Tobacco Company, et al., that dismissal of tobacco company defendants may not be appropriate where injury is asserted based on both asbestos and tobacco usage. Although Stidham is subject to further appellate review, and the scope of its holding is not yet known, it is possible that Liggett and other tobacco company defendants will not be dismissed from pending synergy exposure cases, and may be named as a defendant in asbestos-related personal injury actions in Maryland going forward, including approximately 20 additional synergy exposure cases currently pending in Maryland state court.
 
Liggett Only Cases.  There are currently three cases pending where Liggett is the only remaining defendant. Each of these cases is an Individual Action. In one of the Individual Actions, Hausrath (NY state court), plaintiff moved to restore the case to the active docket calendar after it was removed by the court. The motion was granted, affirmed on appeal and remanded to the trial court for further proceedings. A status conference is scheduled for November 13, 2015. There has been no further activity in the other two Individual Actions. Cases where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases.

Class Actions

As of September 30, 2015, three actions were pending for which either a class had been certified or plaintiffs were seeking class certification where Liggett is a named defendant. Other cigarette manufacturers are also named in these actions.
Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption.
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were manufactured by the defendants, including Liggett, and suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. No class certification hearing has been held. In 2013, plaintiffs’ filed a motion to stay the case and that motion was granted.
In February 1998, in Parsons v. AC & S Inc., a purported class action was commenced on behalf of all West Virginia residents who allegedly have personal injury claims arising from exposure to cigarette smoke and asbestos fibers. The complaint seeks to recover $1,000 in compensatory and punitive damages individually and unspecified compensatory and punitive damages for the class. The case is stayed due to the December 2000 bankruptcy of three of the defendants.
In February 2000, in Smith v. Philip Morris, a case pending in Kansas, a class action was commenced against cigarette manufacturers alleging they conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs sought to recover an unspecified amount in actual and punitive damages. Class certification was granted in November 2001. In March 2012, the court granted the defendants' motions for summary judgment and dismissed plaintiffs’ claims with prejudice. In July 2014, the court of appeals affirmed the lower court’s decision. In August 2014, plaintiffs sought review by the Kansas Supreme Court, which the court denied in June 2015, thereby concluding this litigation.

Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases), a West Virginia state court consolidated approximately 750 individual smoker actions that were pending prior to 2001 for trial of certain "common" issues. Liggett was severed from trial of the consolidated action. After two mistrials, in May 2013, the jury rejected all but one of the plaintiffs' claims, finding in favor of plaintiffs on the claim that ventilated filter cigarettes between 1964 and July 1, 1969 should

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


have included instructions on how to use them. The issue of damages was reserved for further proceedings. The court entered judgment in October 2013, dismissing all claims except the ventilated filter claim. The judgment was affirmed on appeal and remanded to the trial court for further proceedings. In April 2015, the plaintiffs filed a petition for writ of certiorari to the United States Supreme Court which subsequently declined review. In July 2015, the trial court ruled on the scope of the ventilated filter claim and determined that only 30 plaintiffs have potentially viable claims against the non-Liggett defendants, which may be pursued in a second phase of the trial. The court intends to try the claims of these plaintiffs in six consolidated trials, each with five plaintiffs. The trial court set the first two dates for the consolidated trials for June 13, 2016 and December 4, 2016. With respect to Liggett, the trial court requested that Liggett and plaintiffs brief whether any claims against Liggett survive given the outcome of the first phase of the trial.  Briefing of that issue is underway. If the case proceeds against Liggett, it is estimated that Liggett could be a defendant in less than 25 of the remaining individual cases.
In addition to the cases described above, numerous class actions remain certified against other cigarette manufacturers including cases alleging, among other things, that use of the terms “lights” and “ultra lights” constitutes unfair and deceptive trade practices. Adverse decisions in these cases could have a material adverse affect on Liggett’s sales volume, operating income and cash flows.
Health Care Cost Recovery Actions
As of September 30, 2015, one Health Care Cost Recovery Action was pending against Liggett, Crow Creek Sioux Tribe v. American Tobacco Company, a South Dakota case filed in 1997, where the plaintiff seeks to recover damages based on various theories of recovery as a result of alleged sales of tobacco products to minors. The case is inactive. Other cigarette manufacturers are also named as defendants.
The claims asserted in health care cost recovery actions vary, but can include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach of special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit.
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. Claims were asserted under RICO.
In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for the District of Columbia affirmed most of the district court’s decision. The United States Supreme Court denied review. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States’ public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights,” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “lights” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure of defendants’ public document websites and the production of all documents produced to the government or produced in any future court or administrative action concerning smoking and health; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedules as defendants now follow in disclosing such data to the Federal Trade Commission for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette business within the United States; and (ix) payment of the government’s costs in bringing the action. In June 2014, the court approved a consent agreement between the defendants and the Department of Justice regarding the “corrective statements” to be issued by the defendants. The implementation of the “corrective statements” is uncertain as the defendants appealed the specific language of the statements.
It is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United States or otherwise results in restrictions that adversely affect the industry, Liggett’s sales volume, operating income and cash flows could be materially adversely affected.
Upcoming Trials
As of September 30, 2015, there were nine Engle progeny cases scheduled for trial through September 30, 2016, where Liggett (and/or the Company) is a named defendant. Trial dates are, however, subject to change. In Shulman, an Engle progeny case, trial commenced October 16, 2015.
MSA and Other State Settlement Agreements
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims made by those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, Brown & Williamson, R.J. Reynolds and Lorillard (the “Original Participating Manufacturers” or “OPMs”) and Liggett (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are hereinafter referred to jointly as the “Participating Manufacturers”) entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett from:
•
all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
•
all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of Participating Manufacturers. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each Participating Manufacturer to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits Participating Manufacturers from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits Participating Manufacturers from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.
The MSA also requires Participating Manufacturers to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of Participating

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Manufacturers. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, the Participating Manufacturers are required to make annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligation of each Participating Manufacturer and are not the responsibility of any parent or affiliate of a Participating Manufacturer.
Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector Tobacco’s domestic shipments accounted for 3.4% of the total cigarettes sold in the United States in 2014. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. On December 31, 2014, Liggett and Vector Tobacco pre-paid $100,000 of their approximate $117,800 2014 MSA obligation. Liggett and Vector Tobacco paid the remaining $17,800 on April 15, 2015.
Certain MSA Disputes
NPM Adjustment.  In March 2006, an economic consulting firm selected pursuant to the MSA determined that the MSA was a “significant factor contributing to” the Participating Manufacturers' loss of market share to non-participating manufacturers for 2003. Under the MSA, such a “significant factor” determination results in the calculation of a reduction in the payment obligations of the Participating Manufacturers, which is known as the “NPM Adjustment.” The economic consulting firm subsequently made the same determination with respect to 2004 and 2005. In March 2009, a different economic consulting firm made the same determination for 2006. As a result, the Participating Manufacturers are entitled to potential NPM Adjustments to each of their 2003 - 2006 MSA payments. The Participating Manufacturers are also entitled to potential NPM Adjustments to their 2007 - 2014 payments pursuant to agreements entered into between the OPMs and the Settling States under which the OPMs agreed to make certain payments for the benefit of the Settling States, in exchange for which the Settling States stipulated that the MSA was a “significant factor contributing to” the loss of market share of Participating Manufacturers for each of those years. A Settling State that has diligently enforced its qualifying escrow statute in the year in question may be able to avoid allocation of the NPM Adjustment to the payments made by the Participating Manufacturers for the benefit of that Settling State.
For 2003 - 2014, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco paid subject to dispute, withheld payment or paid into a disputed payment account, the amounts associated with these NPM Adjustments.
Notwithstanding provisions in the MSA requiring arbitration, litigation was filed in 49 Settling States involving the application of the NPM Adjustment for 2003 and whether it was to be determined through litigation or arbitration. Under the MSA, the independent auditor previously determined the NPM Adjustment for 2003 to be as much as $1,200,000 for all Participating Manufacturers. All but one of the 48 courts that decided the issue ruled that the 2003 NPM Adjustment dispute was arbitrable.
In response to a proposal from the OPMs and many of the SPMs, 45 of the Settling States, representing approximately 90% of the allocable shares of the Settling States, entered into an agreement providing for the nationwide arbitration of the dispute with respect to the NPM Adjustment for 2003, as ordered by the various state courts. In exchange, the Participating Manufacturers agreed to a 20% reduction in amounts recovered for the NPM Adjustment for 2003. In June 2010, the three person arbitration panel was selected. In November 2011, the Participating Manufacturers advised the arbitration panel that they were not contesting diligent enforcement of 16 Settling States for 2003. Substantive hearings commenced in April 2012 and were completed in June 2013.

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


In December 2012, the Participating Manufacturers entered into a term sheet with 20 Settling States setting out terms for settlement of the NPM Adjustment for 2003 - 2012 and addressing the NPM Adjustment with respect to those states for future years. Certain of the non-settling states objected to the settlement. In March 2013, the arbitration panel entered a Stipulated Partial Settlement and Award which, among other things, overruled the objections of the non-settling states and directed the independent auditor to implement certain terms of the term sheet effective with the MSA payments for 2012, due April 2013. In May 2013, two additional states joined the settlement and in June 2014, another two states joined the settlement. Several non-settling states filed motions in state courts attempting to vacate the settlement award. Although certain terms of the settlement were implemented by the independent auditor in April 2013, no assurance can be given as to the ultimate outcome of the non-settling states’ challenges. The parties have been working towards converting the term sheet into a final settlement agreement. As a result of the settlement, in the first nine months of 2013, Liggett reduced cost of sales by $6,947. Liggett received credits of $1,733 in April 2014 from these settling states related to the 2013 NPM Adjustment. Liggett received additional credits of $1,940 in April 2015 related to the 2014 NPM Adjustment.
In September 2013, the panel issued its decisions with respect to the 15 states that did not enter into the term sheet and as to which the Participating Manufacturers contested diligence. The panel found that six of these states did not diligently enforce their MSA escrow statutes in 2003. As a result of this ruling, Liggett reduced cost of sales by $5,987, in the third quarter of 2013. All six of the states that were found to be non-diligent filed motions in state court seeking to vacate or reduce the amount of the arbitration award. Before the MSA payments for 2013 were due, the Pennsylvania trial court rejected the state’s motion to vacate the award, but granted its motion to reduce the award. As a result, in April 2014, Liggett received a credit in the amount of $6,441 for the 2003 NPM Adjustment (as calculated by the independent auditor). Liggett subsequently reimbursed the six states 20% of that credit pursuant to the agreement discussed above, bringing its net recovery to $5,152, which is approximately $1,315 lower than the amount to which Liggett believes it is entitled. After the April 2014 MSA payment date, a state trial court in Missouri issued a ruling similar to the ruling in Pennsylvania. As such, Liggett’s 2003 NPM Adjustment credit could be reduced by an additional $521. After the April 2014 MSA payment date, a state trial court in Maryland reached a different result from the Pennsylvania and Missouri trial courts, denying the state’s motion to vacate the award and further denying its motion to reduce the amount of the award payable to Liggett. A New Mexico trial court has not yet ruled on New Mexico’s motion. In June 2014, Kentucky and Indiana agreed to settle the dispute and join the term sheet described above. As a result, Liggett reduced cost of sales by approximately $1,400 in the second quarter of 2014. The Participating Manufacturers, including Liggett, appealed the Pennsylvania and Missouri decisions, while Maryland appealed the Maryland decision. In April 2015, the Pennsylvania decision was affirmed by the appellate court. The Participating Manufacturers have asked the Pennsylvania Supreme Court to grant discretionary review of that decision. In September 2015, the portion of the Missouri opinion that reduced the arbitration award was reversed by the appellate court. It is likely that the State will ask the Missouri Supreme Court to grant a discretionary appeal of that decision. In October 2015, the portion of the Maryland trial court ruling that denied reduction of the arbitration award was reversed by the appellate court. It is likely that the Participating Manufacturers will ask the Maryland Court of Appeals (Maryland’s highest court) to grant a discretionary review of that decision. If Liggett is unsuccessful in its appeals or if other states are successful with respect to any such appeals or motions, the amount of the 2003 NPM Adjustment and any interest or earnings to which Liggett is entitled could be lower than the amounts described above and Liggett might be obligated to pay additional monies.
In October 2015, substantially all of the Participating Manufacturers settled the NPM Adjustment dispute with the state of New York for 2004 - 2014 and agreed to a mechanism for potential future credits against the Participating Manufacturers' MSA payments for 2015 forward. As a result of the settlement, Liggett reduced cost of sales by approximately $5,700 for the three and nine months ended September 30, 2015.
The remaining NPM Adjustment accrual of approximately $20,000 at September 30, 2015 relates to the disputed amounts Liggett withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett loses the disputes for those years. Following release of previously disputed amounts to the state of New York as part of the October 2015 settlement, it is anticipated there will be approximately $23,000 remaining in the disputed payments accounts relating to Liggett's 2011- 2014 NPM Adjustment disputes with the non-settling states.
    Disputes over the NPM Adjustments for 2004-2014 remain to be arbitrated with the states that have not joined the settlement. Liggett is currently involved in litigation in 20 states over the scope and form of the arbitration for 2004. Further adjustments could also be due to Liggett and Vector Tobacco under the settlement with 24 states for 2013 forward.

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(Dollars in Thousands, Except Per Share Amounts)
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“Gross” v. “Net” Calculations.  In October 2004, the independent auditor notified all Participating Manufacturers that their payment obligations under the MSA, dating from the agreement’s execution in late 1998, had been recalculated using “net” units, rather than “gross” units (which had been used since 1999). Liggett objected to this retroactive change and disputed the change in methodology.
In December 2012, the parties arbitrated the dispute. In February 2013, the arbitrators ruled that the independent auditor was precluded from recalculating Liggett’s grandfathered market share (“GFMS”) exemption. The arbitrators further ruled that, for purposes of calculating Liggett’s payment obligations, Liggett’s market share, calculated on a net basis, should be increased by a factor of 1.25%. Liggett filed a motion seeking correction of the part of the arbitrators’ decision that would require the 1.25% increase in Liggett’s market share. The states opposed Liggett’s motion.
In October 2014, the panel issued a Corrected Final Award that eliminated the 1.25% adjustment increase. The panel further determined that the independent auditor shall compute Liggett’s market share for all years after 2000 on a “net” basis, but adjust that computation to approximate “gross” market share by using actual returned product data for each year. In July 2015, the independent auditor issued calculations, purportedly based on the Corrected Final Award, which indicated that Liggett owes approximately $16,000 for years 2001 - 2013. Liggett contends that the independent auditor's calculations are not consistent with the Corrected Final Award and has disputed same. Liggett's accrual for this matter was $8,500 at September 30, 2015.
Other State Settlements.  The MSA replaced Liggett’s prior settlements with all states and territories except for Florida, Mississippi, Texas and Minnesota. Each of these four states, prior to the effective date of the MSA, negotiated and executed settlement agreements with each of the other major tobacco companies, separate from those settlements reached previously with Liggett. Except as described below, Liggett’s agreements with these states remain in full force and effect. These states’ settlement agreements with Liggett contained most favored nation provisions which could reduce Liggett’s payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on each of these four states’ settlements with United States Tobacco Company, Liggett’s payment obligations to those states were eliminated. With respect to all non-economic obligations under the previous settlements, Liggett believes it is entitled to the most favorable provisions as between the MSA and each state’s respective settlement with the other major tobacco companies. Therefore, Liggett’s non-economic obligations to all states and territories are now defined by the MSA.
In 2003, as a result of a dispute with Minnesota regarding its settlement agreement, Liggett agreed to pay $100 a year in any year cigarettes manufactured by Liggett are sold in that state. The Attorneys General for Florida, Mississippi and Texas previously advised Liggett that they believed that Liggett had failed to make payments under the respective settlement agreements with those states. In 2010, Liggett settled with Florida and agreed to pay $1,200 and to make further annual payments of $250 for a period of 21 years, starting in March 2011, with the payments from year 12 forward being subject to an inflation adjustment. These payments are in lieu of any other payments allegedly due to Florida. In 2012, Mississippi provided Liggett with a 60-day notice that the state intended to pursue its remedies if Liggett did not cure the alleged defaults. Liggett responded to Mississippi’s letter denying the existence of any defaults. There can be no assurance that Liggett will be able to resolve the matters with Texas and Mississippi or that Liggett will not be required to make additional payments which could adversely affect the Company’s consolidated financial position, results of operations and cash flows.
Cautionary Statement.  Management is not able to reasonably predict the outcome of the litigation pending or threatened against Liggett or the Company. Litigation is subject to many uncertainties. Liggett has been found liable in multiple Engle progeny cases and Individual Actions, several of which were affirmed on appeal and satisfied by Liggett. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes it is in its best interest to do so.
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. An unfavorable outcome of a pending smoking-related case could encourage the commencement of additional litigation. Except as discussed in this Note 7, management is unable to estimate the loss or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its consolidated financial statements for unfavorable outcomes.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional litigation or legislation.

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


It is possible that the Company’s consolidated financial position, results of operations and cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation.
The activity in the Company's accruals for the MSA and tobacco litigation for the nine months ended September 30, 2015 were as follows:
 
Current Liabilities
 
Non-Current Liabilities
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2015
$
26,322

 
$
3,149

 
$
29,471

 
$
25,809

 
$
25,700

 
$
51,509

Expenses
83,236

 
6,371

 
89,607

 
—

 
(195
)
 
(195
)
NPM Settlement adjustment
—

 
—

 
—

 
(5,715
)
 
—

 
(5,715
)
Change in MSA obligations capitalized as inventory
1,536

 
—

 
1,536

 
—

 
—

 
—

Payments
(18,142
)
 
(5,851
)
 
(23,993
)
 
—

 
—

 
—

Reclassification from non-current liabilities
—

 
3,305

 
3,305

 
—

 
(3,305
)
 
(3,305
)
Interest on withholding
—

 
666

 
666

 
—

 
1,872

 
1,872

Balance as of September 30, 2015
$
92,952

 
$
7,640

 
$
100,592

 
$
20,094

 
$
24,072

 
$
44,166



The activity in the Company's accruals for the MSA and tobacco litigation for the nine months ended September 30, 2014 were as follows:
 
Current Liabilities
 
Non-Current Liabilities
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
$
25,348

 
$
59,310

 
$
84,658

 
$
27,571

 
$
27,058

 
$
54,629

Expenses
83,159

 
2,041

 
85,200

 
—

 
—

 
—

NPM Settlement adjustment
—

 
—

 
—

 
(1,419
)
 
—

 
(1,419
)
Change in MSA obligations capitalized as inventory
(917
)
 
—

 
(917
)
 
—

 
—

 
—

Payments
(16,343
)
 
(61,822
)
 
(78,165
)
 
—

 
—

 
—

Reclassification from non-current liabilities
343

 
3,575

 
3,918

 
(343
)
 
(3,575
)
 
(3,918
)
Interest on withholding
—

 
203

 
203

 
—

 
1,546

 
1,546

Balance as of September 30, 2014
$
91,590

 
$
3,307

 
$
94,897

 
$
25,809

 
$
25,029

 
$
50,838






32
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Other Matters:

Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco.
Liggett Vector Brands entered into an agreement with a subsidiary of the American Wholesale Marketers Association to support a program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the distribution of cigarettes. The agreement expires in February 2016. Under the agreement, Liggett Vector Brands agreed to pay a portion of losses incurred by the surety under the bond program, with a maximum loss exposure of $500. To secure its potential obligations under the agreement, Liggett Vector Brands posted a $100 letter of credit and agreed to fund up to an additional $400. Liggett previously paid $83 for obligations under this program, and therefore, is only committed to fund an additional $317 over the letter of credit. The Company believes Liggett Vector Brands' obligation under the agreement was immaterial at September 30, 2015.
There are several other proceedings, lawsuits and claims pending against the Company or one or more of its consolidated subsidiaries unrelated to tobacco or tobacco product liability. For instance, Douglas Elliman is subject to various types of litigation in the ordinary course of its business. Management is of the opinion that the liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially affect the Company’s financial position, results of operations or cash flows.


8.
EMPLOYEE BENEFIT PLANS

The following table summarizes key information related to the Company's pension plans and other postretirement benefits:

 
Pension Benefits
 
Other Postretirement Benefits
 
Three Months Ended
 
Nine Months Ended
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost — benefits earned during the period
$
133

 
$
131

 
$
398

 
$
392

 
$
2

 
$
2

 
$
6

 
$
7

Interest cost on projected benefit obligation
1,205

 
1,549

 
3,803

 
4,647

 
93

 
108

 
278

 
323

Expected return on assets
(1,814
)
 
(2,130
)
 
(5,627
)
 
(6,389
)
 
—

 
—

 
—

 
—

Settlement loss
—

 
—

 
1,607

 
—

 
—

 
—

 
—

 
—

Amortization of net loss (gain)
254

 
269

 
823

 
806

 
(24
)
 
(15
)
 
(73
)
 
(45
)
Net (income) expense
$
(222
)
 
$
(181
)
 
$
1,004

 
$
(544
)
 
$
71

 
$
95

 
$
211

 
$
285



9.
RESTRUCTURING
In October 2015, the Company's tobacco segment commenced a restructuring by realigning its sales force and adjusting its business model to more efficiently serve its chain and independent accounts. In connection with the restructuring, the segment's workforce is expected to decline by approximately 95 employees (or approximately 17% of the tobacco segment's workforce).

33
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

The following table summarizes estimated restructuring charges and actual amounts expensed for the three and nine months ended September 30, 2015:
 
Total Estimated Costs
 
Amounts expensed
through September 30, 2015
Cash Charges
 
 
 
Employee severance and benefits
$
1,094

 
$
1,094

Lease termination costs
223

 
—

Other restructuring expenses
207

 
—

 
1,524

 
1,094

Non-Cash:
 
 
 
Employee pension benefits
4,000

 
—

Point of Sale inventory impairment
454

 
454

 
4,454

 
454

 
 
 
 
  Total restructuring expenses
$
5,978

 
$
1,548

 
 
 
 
All amounts expensed through September 30, 2015 are included as Restructuring expenses in the Company’s condensed statements of operations and are all attributable to the Company’s Tobacco segment. The Company anticipates that the remaining restructuring expense will be recognized in the fourth quarter of 2015.
Severance and benefits expensed for the three and nine months ended September 30, 2015 relate entirely to a reduction in sales and administrative positions. Non-cash employee pension benefits costs relate to a reduction in manufacturing positions at Liggett’s plant in Mebane, NC.
The Company’s estimates of the restructuring expense and the timing of various events are based on a number of assumptions and actual results may differ materially from these estimates.
The following table presents the changes in the employee severance and benefits liability under the Tobacco segment restructuring plan:
 
 
 
Severance liability at July 1, 2015
 
$
—

Severance expense
 
1,094

Severance payments
 
—

Severance liability at September 30, 2015
 
$
1,094

 
 
 



34
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


10.
INCOME TAXES

The Company's provision for income taxes in interim periods is based on an estimated annual effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary operations. The annual effective income tax rate is reviewed and, if necessary, adjusted on a quarterly basis.
The Company's income tax expense consisted of the following:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Income before provision for income taxes
$
29,357

 
$
31,669

 
$
94,321

 
$
57,272

Income tax expense using estimated annual effective income tax rate
11,557

 
9,932

 
37,238

 
17,962

Changes in effective tax rates
1,539

 
(374
)
 
—

 
—

Impact of discrete items, net
412

 
1,305

 
313

 
1,944

Inclusion of tax liabilities from unincorporated entities
—

 
1,101

 
—

 
1,101

Income tax expense
$
13,508

 
$
11,964

 
$
37,551

 
$
21,007


The discrete item for the nine months ended September 30, 2015 is primarily related to a change in the marginal state tax rate as a result of recent state legislations changes, the rate differential in other comprehensive income and the results of recent state income tax audits.
In the first quarter of 2014, the Company properly determined an adjustment for $1,944 related to its marginal tax rate was required as a result of its acquisition of 20.59% of Douglas Elliman Realty, LLC. This amount was originally recorded as additional income tax expense of $639, a reduction of Additional Paid-In Capital of $865 and a reduction of Other Comprehensive Income of $440. During the three months ended September 30, 2014, the Company reassessed the treatment of the previously recorded reductions to Additional Paid-In-Capital and Accumulated Other Comprehensive Income and reclassified such amounts as an increase to income tax expense. The Company assessed the materiality of the misclassifications on the financial statements in the prior quarters of 2014 and concluded that it was immaterial to all previously issued quarterly financial statements and the three and nine months ended September 30, 2014.



35
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


11.
INVESTMENTS AND FAIR VALUE MEASUREMENTS

The Company's recurring financial assets and liabilities subject to fair value measurements are as follows:

 
 
Fair Value Measurements as of September 30, 2015
Description
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 

Significant Other Observable Inputs
(Level 2)
 


Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
101,960

 
$
101,960

 
$
—

 
$
—

Certificates of deposit
 
3,465

 
—

 
3,465

 
—

Bonds
 
12,368

 
12,368

 
—

 
—

Investment securities available for sale
 

 
 
 
 
 

Equity securities
 
106,976

 
106,976

 
—

 
—

Mutual funds invested in fixed income securities
 
54,864

 
54,864

 
—

 
—

Fixed income securities
 
 
 
 
 
 
 
 
U.S. Government securities
 
35,433

 
—

 
35,433

 
—

Corporate securities
 
54,741

 
—

 
54,741

 
—

U.S. mortgage backed securities
 
6,351

 
—

 
6,351

 
—

Commercial mortgage-backed securities
 
14,537

 
—

 
14,537

 
—

U.S. asset backed securities
 
13,360

 
—

 
13,360

 
—

Index-linked U.S. bonds
 
2,114

 
—

 
2,114

 
—

Total fixed income securities
 
126,536

 
—

 
126,536

 
—

 
 
 
 
 
 
 
 
 
Warrants (1)
 
577

 
—

 
—

 
577

Total
 
$
406,746

 
$
276,168

 
$
130,001

 
$
577

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Fair value of derivatives embedded within convertible debt
 
$
149,739

 
$
—

 
$
—

 
$
149,739

 
 
 
 
 
 
 
 
 

(1)
Warrants are 1,000,000 warrants to purchase Ladenburg Thalmann Financial Services Inc. (“LTS”) common stock received on November 4, 2011 which were carried at $577 as of September 30, 2015 and are included in “Other assets.” The Company recognized a loss of $1,765 for the nine months ended September 30, 2015 related to the change in fair value of the Warrants.


36
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
 
Fair Value Measurements as of December 31, 2014
Description
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 

Significant Other Observable Inputs
(Level 2)
 


Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market funds
 
$
205,180

 
$
205,180

 
$
—

 
$
—

Certificates of deposit
 
3,462

 
—

 
3,462

 
—

Bonds
 
4,868

 
4,868

 
—

 
—

Investment securities available for sale
 
 
 
 
 
 
 

Equity securities
 
154,192

 
153,666

 
526

 
—

Mutual funds invested in fixed income securities
 
59,826

 
59,826

 
—

 
—

Fixed income securities
 
 
 
 
 
 
 

U.S. Government securities
 
35,446

 
—

 
35,446

 
—

Corporate securities
 
56,248

 
7,397

 
48,851

 
—

U.S. Government and federal agency
 
4,770

 
—

 
4,770

 
—

Commercial mortgage-backed securities
 
16,508

 
—

 
16,508

 
—

U.S. asset-backed securities
 
16,955

 
—

 
16,955

 
—

Index-linked U.S. bonds
 
2,098

 
—

 
2,098

 
—

Total fixed income securities
 
132,025

 
7,397

 
124,628

 
—

 
 
 
 
 
 
 
 
 
Warrants (1)
 
2,342

 
—

 
—

 
2,342

Total
 
$
561,895

 
$
430,937

 
$
128,616

 
$
2,342

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of derivatives embedded within convertible debt
 
$
169,386

 
$
—

 
$
—

 
$
169,386

 
 
 
 
 
 
 
 
 

(1)
Warrants include 1,000,000 of LTS Warrants received on November 4, 2011 which were carried at $2,342 as of December 31, 2014 and are included in “Other assets.” The Company recognized income of $584 for the year ended December 31, 2014 related to the change in fair value of the Warrants. The Company recognized income of $868 for the nine months ended September 30, 2014.

The fair value of the Level 2 certificates of deposit are based on prices posted by the financial institutions. The fair value of investment securities available for sale included in Level 1 are based on quoted market prices from various stock exchanges. The Level 2 investment securities available for sale are based on quoted market prices of securities that are thinly traded.
The fair value of derivatives embedded within convertible debt was derived using a valuation model. These derivatives have been classified as Level 3. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads based upon the implied debt rate of the 5.50% Convertible Notes due 2020 to determine the fair value of the derivatives embedded within the convertible debt. The changes in fair value of derivatives embedded within convertible debt are presented on the Condensed Consolidated Statements of Operations.
The value of the embedded derivatives is contingent on changes in implied interest rates of the convertible debt, the Company's stock price, stock volatility as well as projections of future cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined by calculating the implied rate on the Company's 2020 Convertible Notes when removing the embedded option value within the convertible security. This rate is based upon market observable inputs and influenced by the Company's stock price, convertible bond trading price, risk free interest rates and stock volatility. 

37
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



The fair value of the warrants was derived using the Black-Scholes model and has been classified as Level 3. The assumptions used under the Black-Scholes model in computing the fair value of the warrants are based on contractual term of the warrants, volatility of the underlying stock based on the historical quoted prices of the underlying stock, assumed future dividend payments and a risk-free rate of return.
The unobservable inputs related to the valuations of the Level 3 assets and liabilities are as follows at September 30, 2015:

 
 
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
 
 
September 30,
2015
 
Valuation Technique
 
Unobservable Input
 
Range (Actual)
 
 
 
 
 
 
 
 
 
Warrant
 
$
577

 
Option model
 
Stock price
 
$
2.11

 
 
 
 
 
 
Exercise price
 
$
1.68

 
 
 
 
 
 
Term (in years)
 
1.1

 
 
 
 
 
 
Volatility
 
39.23
%
 
 
 
 
 
 
Dividend rate
 
—

 
 
 
 
 
 
Risk-free return
 
0.70
%
 
 
 
 
 
 
 
 
 
Fair value of derivatives embedded within convertible debt
 
$
149,739

 
Discounted cash flow
 
Assumed annual stock dividend
 
5
%
 
 
 
 
 
 
Assumed annual cash dividend
 
$
1.60

 
 
 
 
 
 
Stock price
 
$
22.61

 
 
 
 
 
 
Convertible trading price (as a percentage of par value)
 
111.63
%
 
 
 
 
 
 
Volatility
 
18.72
%
 
 
 
 
 
 
Risk-free rate
 
Term structure of US Treasury Securities
 
 
 
 
 
 
Implied credit spread
 
6.0% - 6.5% (6.14%)



38
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The unobservable inputs related to the valuations of the Level 3 assets and liabilities are as follows at December 31, 2014:

 
 
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
 
 
December 31,
2014
 
Valuation Technique
 
Unobservable Input
 
Range (Actual)
 
 
 
 
 
 
 
 
 
Warrants
 
$
2,342

 
Option model
 
Stock price
 
$
3.95

 
 
 
 
 
 
Exercise price
 
$
1.68

 
 
 
 
 
 
Term (in years)
 
1.8

 
 
 
 
 
 
Volatility
 
44.42
%
 
 
 
 
 
 
Dividend rate
 
—

 
 
 
 
 
 
Risk-free return
 
0.70
%
 
 
 
 
 
 
 
 
 
Fair value of derivatives embedded within convertible debt
 
$
169,386

 
Discounted cash flow
 
Assumed annual stock dividend
 
5
%
 
 
 
 
 
 
Assumed annual cash dividend
 
$
1.60

 
 
 
 
 
 
Stock price
 
$
21.31

 
 
 
 
 
 
Convertible trading price
 
106.8
%
 
 
 
 
 
 
Volatility
 
16.00
%
 
 
 
 
 
 
Implied credit spread
 
6.25% - 7.25% (6.75%)


In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company had no nonrecurring nonfinancial assets subject to fair value measurements as of September 30, 2015 and December 31, 2014.

12.
SEGMENT INFORMATION

The Company's significant business segments for the three and nine months ended September 30, 2015 and 2014 were Tobacco, E-Cigarettes and Real Estate. The Tobacco segment consists of the manufacture and sale of conventional cigarettes. The E-Cigarettes segment includes the operations of the Company's e-cigarette business. The Real Estate segment includes the Company’s investment in New Valley LLC, which includes Douglas Elliman, Escena, Indian Creek, Sagaponack and investments in real estate ventures. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
  

39
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Financial information for the Company's operations before taxes for the three and nine months ended September 30, 2015 and 2014 follows:

 
 
 
 
 
Real
 
Corporate
 
 
 
Tobacco
 
E-Cigarettes
 
Estate
 
and Other
 
Total
Three months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenues
$
264,170

 
$
201

 
$
185,563

 
$
—

 
$
449,934

Operating income (loss)
63,630

(1)
(2,146
)
 
12,227

 
(4,106
)
 
69,605

Equity loss from real estate ventures
—

 
—

 
(916
)
 
—

 
(916
)
Depreciation and amortization
2,850

 
—

 
3,388

 
435

 
6,673

 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenues
$
264,520

 
$
1,608

 
$
153,748

 
$
—

 
$
419,876

Operating income (loss)
52,993

(2)
(2,910
)
 
16,222

 
(3,321
)
 
62,984

Equity income from real estate ventures
—

 
—

 
3,258

 
—

 
3,258

Depreciation and amortization
2,853

 
—

 
2,740

 
452

 
6,045

 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenues
$
747,145

 
$
881

 
$
478,841

 
$
—

 
$
1,226,867

Operating income (loss)
169,515

(3)
(7,710
)
 
21,270

 
(13,475
)
 
169,600

Equity income from real estate ventures
—

 
—

 
1,278

 
—

 
1,278

Depreciation and amortization
8,717

 
—

 
9,372

 
1,307

 
19,396

Capital expenditures
3,305

 
—

 
4,554

 
—

 
7,859

 


 
 
 
 
 
 
 
 
Nine months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenues
$
748,468

 
$
9,977

 
$
415,280

 
$
—

 
$
1,173,725

Operating income (loss)
147,395

(4)
(7,100
)
 
36,867

 
(11,148
)
 
166,014

Equity income from real estate ventures
—

 
—

 
3,002

 
—

 
3,002

Depreciation and amortization
7,934

 
—

 
9,709

 
956

 
18,599

Capital expenditures
7,911

 
—

 
5,614

 
7,221

 
20,746

 
 
 
 
 
 
 
 
 
 

(1) Operating income includes $5,715 of income from MSA Settlement, $3,750 of litigation judgment expense and $1,548 of restructuring expense.
(2) Operating income includes $225 of litigation judgment expense.
(3) Operating income includes $5,715 of income from MSA Settlement, $5,843 of litigation judgment expense, $1,548 of restructuring expense, and $1,607 of pension settlement expense.
(4) 
Operating income includes $1,419 of income from MSA Settlement and $1,725 of litigation judgment expense.





40
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The accompanying condensed consolidating financial information has been prepared and presented pursuant to Securities and Exchange Commission Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Each of the subsidiary guarantors are 100% owned, directly or indirectly, by the Company, and all guarantees are joint and several and subject to certain automatic release provisions. Relief from the financial statement requirements under Rule 3-10 is being provided because the Company's guarantee release provisions are considered customary. Such release provisions are as follows:
•
the sale or other disposition of all or substantially all of the assets or all of the capital stock of any subsidiary guarantor; and
•
the satisfaction of the requirements for legal defeasance or the satisfaction and discharge of the indenture.
The Company's investments in its consolidated subsidiaries are presented under the equity method of accounting.
The indenture of the 7.75% Senior Secured Notes contains covenants that restrict the payment of dividends by the Company if the Company's consolidated earnings before interest, taxes, depreciation and amortization, as defined in the indenture, for the most recently ended four full quarters is less than $75,000 and the indenture also restricts the incurrence of debt if the Company's Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively.
At September 30, 2015, management believed that the Company was in compliance with all covenants under the indentures of the 7.75% Senior Secured Notes.





41
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING BALANCE SHEETS
 
 
 
September 30, 2015
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
Parent/
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.
ASSETS:
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
94,546

 
$
26,842

 
$
124,959

 
$
—

 
$
246,347

Investment securities available for sale
242,529

 
45,847

 
—

 
—

 
288,376

Accounts receivable - trade, net
—

 
12,099

 
8,013

 
—

 
20,112

Intercompany receivables
1,083

 
—

 
—

 
(1,083
)
 
—

Inventories
—

 
90,695

 
—

 
—

 
90,695

Deferred income taxes
—

 
1,939

 
—

 
(1,939
)
 
—

Income taxes receivable, net
11,822

 
—

 
—

 
(11,822
)
 
—

Restricted assets
—

 
1,420

 
1,414

 
—

 
2,834

Other current assets
912

 
5,103

 
31,809

 
—

 
37,824

Total current assets
350,892

 
183,945

 
166,195

 
(14,844
)
 
686,188

Property, plant and equipment, net
1,944

 
55,133

 
19,290

 
—

 
76,367

Real estate held for sale, net
—

 
—

 
22,963

 
—

 
22,963

Long-term investments
53,132

 
—

 
516

 
—

 
53,648

Investments in real estate ventures
—

 
—

 
194,052

 
—

 
194,052

Investments in consolidated subsidiaries
525,652

 
—

 
—

 
(525,652
)
 
—

Restricted assets
1,709

 
16,938

 
—

 
—

 
18,647

Goodwill and other intangible assets, net
—

 
107,511

 
157,969

 
—

 
265,480

Prepaid pension costs
—

 
27,440

 
—

 
—

 
27,440

Other assets
40,528

 
11,790

 
1,698

 
—

 
54,016

Total assets
$
973,857

 
$
402,757

 
$
562,683

 
$
(540,496
)
 
$
1,398,801

LIABILITIES AND STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of notes payable and long-term debt
$
—

 
$
7,731

 
$
226

 
$
—

 
$
7,957

Current portion of employee benefits
—

 
931

 
—

 
—

 
931

Intercompany payables
—

 
—

 
1,083

 
(1,083
)
 
—

Income taxes payable, net
—

 
12,005

 
3

 
(11,822
)
 
186

Litigation accruals and current payments due under the Master Settlement Agreement
—

 
100,592

 
—

 
—

 
100,592

Deferred income taxes, net
9,260

 
—

 
—

 
(1,939
)
 
7,321

Other current liabilities
24,329

 
41,751

 
45,723

 
—

 
111,803

Total current liabilities
33,589

 
163,010

 
47,035

 
(14,844
)
 
228,790

Notes payable, long-term debt and other obligations, less current portion
871,268

 
8,407

 
15

 
—

 
879,690

Fair value of derivatives embedded within convertible debt
149,739

 
—

 
—

 
—

 
149,739

Non-current employee benefits
33,651

 
16,262

 
—

 
—

 
49,913

Deferred income taxes, net
24,862

 
35,905

 
35,730

 
—

 
96,497

Other liabilities, primarily litigation accruals and payments due under the Master Settlement Agreement
2,535

 
44,356

 
4,108

 
—

 
50,999

Total liabilities
1,115,644

 
267,940

 
86,888

 
(14,844
)
 
1,455,628

Commitments and contingencies


 


 


 


 


Stockholders' (deficiency) equity attributed to Vector Group Ltd.
(141,787
)
 
134,817

 
390,835

 
(525,652
)
 
(141,787
)
Non-controlling interest
—

 
—

 
84,960

 
—

 
84,960

Total stockholders' (deficiency) equity
(141,787
)
 
134,817

 
475,795

 
(525,652
)
 
(56,827
)
Total liabilities and stockholders' (deficiency) equity
$
973,857

 
$
402,757

 
$
562,683

 
$
(540,496
)
 
$
1,398,801




42
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING BALANCE SHEETS
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
Parent/
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.
ASSETS:
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
211,751

 
$
9,724

 
$
104,890

 
$
—

 
$
326,365

Investment securities available for sale
278,010

 
68,033

 
—

 
—

 
346,043

Accounts receivable - trade, net
—

 
18,024

 
5,304

 
—

 
23,328

Intercompany receivables
795

 
267

 
—

 
(1,062
)
 
—

Inventories
—

 
90,323

 
—

 
—

 
90,323

Income taxes receivable, net
1,055

 
463

 
21

 
1,743

 
3,282

Restricted assets
—

 
1,181

 
1,414

 
—

 
2,595

Other current assets
899

 
9,133

 
26,686

 
—

 
36,718

Total current assets
492,510

 
197,148

 
138,315

 
681

 
828,654

Property, plant and equipment, net
2,648

 
61,149

 
20,315

 
—

 
84,112

Real estate held for sale, net
—

 
—

 
10,643

 
—

 
10,643

Long-term investments
39,594

 
—

 
698

 
—

 
40,292

Investments in real estate ventures
—

 
—

 
163,460

 
—

 
163,460

Investments in consolidated subsidiaries
518,963

 
—

 
—

 
(518,963
)
 
—

Restricted assets
1,707

 
10,306

 
—

 
—

 
12,013

Goodwill and other intangible assets, net
—

 
107,511

 
162,461

 
—

 
269,972

Prepaid pension costs
—

 
25,032

 
—

 
—

 
25,032

Other assets
45,904

 
10,743

 
2,246

 
—

 
58,893

Total assets
$
1,101,326

 
$
411,889

 
$
498,138

 
$
(518,282
)
 
$
1,493,071

LIABILITIES AND STOCKHOLDERS' EQUITY:
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of notes payable and long-term debt
$
25,000

 
$
27,248

 
$
392

 
$
—

 
$
52,640

Current portion of fair value of derivatives embedded within convertible debt
884

 
—

 
—

 
—

 
884

Current portion of employee benefits
—

 
931

 
—

 
—

 
931

Intercompany payables
—

 
—

 
1,062

 
(1,062
)
 
—

Income taxes payable, net
—

 
—

 
—

 
1,743

 
1,743

Litigation accruals and current payments due under the Master Settlement Agreement
—

 
29,471

 
—

 
—

 
29,471

Deferred income taxes, net
17,452

 
11,027

 
—

 
—

 
28,479

Other current liabilities
36,653

 
58,677

 
31,425

 
—

 
126,755

Total current liabilities
79,989

 
127,354

 
32,879

 
681

 
240,903

Notes payable, long-term debt and other obligations, less current portion
852,560

 
8,120

 
31

 
—

 
860,711

Fair value of derivatives embedded within convertible debt
168,502

 
—

 
—

 
—

 
168,502

Non-current employee benefits
32,842

 
16,472

 
—

 
—

 
49,314

Deferred income taxes, net
23,539

 
32,301

 
38,670

 
—

 
94,510

Other liabilities, primarily litigation accruals and payments due under the Master Settlement Agreement
921

 
51,775

 
4,383

 
—

 
57,079

Total liabilities
1,158,353

 
236,022

 
75,963

 
681

 
1,471,019

Commitments and contingencies


 


 


 


 


Stockholders' (deficiency) equity attributed to Vector Group Ltd.
(57,027
)
 
175,867

 
343,096

 
(518,963
)
 
(57,027
)
Non-controlling interest
—

 
—

 
79,079

 
—

 
79,079

Total stockholders' (deficiency) equity
(57,027
)
 
175,867

 
422,175

 
(518,963
)
 
22,052

Total liabilities and stockholders' (deficiency) equity
$
1,101,326

 
$
411,889

 
$
498,138

 
$
(518,282
)
 
$
1,493,071




43
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$
—

 
$
264,480

 
$
185,563

 
$
(109
)
 
$
449,934

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
174,839

 
121,078

 
—

 
295,917

Operating, selling, administrative and general expenses
6,372

 
20,712

 
52,139

 
(109
)
 
79,114

Litigation settlement and judgment expense
—

 
3,750

 
—

 
—

 
3,750

Management fee expense
—

 
2,562

 
—

 
(2,562
)
 
—

Restructuring expenses
—

 
1,548

 
—

 
—

 
1,548

Operating (loss) income
(6,372
)
 
61,069

 
12,346

 
2,562

 
69,605

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(31,609
)
 
(1,288
)
 
(1
)
 
—

 
(32,898
)
Change in fair value of derivatives embedded within convertible debt
7,044

 
—

 
—

 
—

 
7,044

Equity loss from real estate ventures
—

 
—

 
(916
)
 
—

 
(916
)
Equity loss from investments
(579
)
 
—

 
—

 
—

 
(579
)
Loss on sale of investment securities available for sale
(821
)
 
—

 
—

 
—

 
(821
)
Impairment of investment securities available for sale
(4,224
)
 
(7,987
)
 
—

 
—

 
(12,211
)
Equity income in consolidated subsidiaries
32,335

 
—

 
—

 
(32,335
)
 
—

Management fee income
2,562

 
—

 
—

 
(2,562
)
 
—

Other, net
(61
)
 
(111
)
 
305

 
—

 
133

(Loss) income before provision for income taxes
(1,725
)
 
51,683

 
11,734

 
(32,335
)
 
29,357

Income tax benefit (expense)
13,930

 
(24,043
)
 
(3,395
)
 
—

 
(13,508
)
Net income
12,205

 
27,640

 
8,339

 
(32,335
)
 
15,849

Net income attributed to non-controlling interest
—

 
—

 
(3,644
)
 
—

 
(3,644
)
Net income attributed to Vector Group Ltd.
12,205

 
27,640

 
4,695

 
(32,335
)
 
12,205

Comprehensive income attributed to non-controlling interest
—

 
—

 
(3,644
)
 
—

 
(3,644
)
Comprehensive (loss) income attributed to Vector Group Ltd.
$
(11,685
)
 
$
18,484

 
$
4,695

 
$
(23,179
)
 
$
(11,685
)


44
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 
 
 
Three Months Ended September 30, 2014
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$
—

 
$
266,328

 
$
153,748

 
$
(200
)
 
$
419,876

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
190,794

 
96,442

 
—

 
287,236

Operating, selling, administrative and general expenses
6,099

 
22,395

 
41,137

 
(200
)
 
69,431

Litigation settlement and judgment expense
—

 
225

 
—

 
—

 
225

Management fee expense
—

 
2,467

 
—

 
(2,467
)
 
—

Operating (loss) income
(6,099
)
 
50,447

 
16,169

 
2,467

 
62,984

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(43,005
)
 
(1,026
)
 
(3
)
 
—

 
(44,034
)
Change in fair value of derivatives embedded within convertible debt
7,127

 
—

 
—

 
—

 
7,127

Acceleration of interest expense related to debt conversion
(994
)
 
—

 
—

 
—

 
(994
)
Equity income from real estate ventures
—

 
—

 
3,258

 
—

 
3,258

Equity income from investments
829

 
—

 
—

 
—

 
829

Gain on sale of investment securities available for sale
33

 
—

 
—

 
—

 
33

Equity income in consolidated subsidiaries
36,428

 
—

 
—

 
(36,428
)
 
—

Management fee income
2,467

 
—

 
—

 
(2,467
)
 
—

Other, net
1,936

 
296

 
234

 
—

 
2,466

(Loss) income before provision for income taxes
(1,278
)
 
49,717

 
19,658

 
(36,428
)
 
31,669

Income tax benefit (expense)
16,157

 
(21,491
)
 
(6,630
)
 
—

 
(11,964
)
Net income
14,879

 
28,226

 
13,028

 
(36,428
)
 
19,705

Net income attributed to non-controlling interest
—

 
—

 
(4,826
)
 
—

 
(4,826
)
Net income attributed to Vector Group Ltd.
14,879

 
28,226

 
8,202

 
(36,428
)
 
14,879

Comprehensive income attributed to non-controlling interest
—

 
—

 
(4,826
)
 
—

 
(4,826
)
Comprehensive income attributed to Vector Group Ltd.
$
23,894

 
$
28,367

 
$
8,202

 
$
(36,569
)
 
$
23,894




45
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$
—

 
$
748,394

 
$
478,841

 
$
(368
)
 
$
1,226,867

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
507,833

 
309,306

 
—

 
817,139

Operating, selling, administrative and general expenses
20,266

 
64,604

 
148,235

 
(368
)
 
232,737

Litigation settlement and judgment expense
—

 
5,843

 
—

 
—

 
5,843

Management fee expense
—

 
7,687

 
—

 
(7,687
)
 
—

Restructuring expenses
—

 
1,548

 
—

 
—

 
1,548

Operating (loss) income
(20,266
)
 
160,879

 
21,300

 
7,687

 
169,600

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(93,243
)
 
(3,158
)
 
(4
)
 
—

 
(96,405
)
Change in fair value of derivatives embedded within convertible debt
18,760

 
—

 
—

 
—

 
18,760

Equity income from real estate ventures
—

 
—

 
1,278

 
—

 
1,278

Equity loss from investments
(2,273
)
 
—

 
—

 
—

 
(2,273
)
(Loss) gain on sale of investment securities available for sale
(1,157
)
 
13,175

 
—

 
—

 
12,018

Impairment of investment securities available for sale
(4,224
)
 
(7,987
)
 
—

 
—

 
(12,211
)
Gain on liquidation of long-term investment
—

 
—

 
—

 
—

 
—

Equity income in consolidated subsidiaries
104,083

 
—

 
—

 
(104,083
)
 
—

Management fee income
7,687

 
—

 
—

 
(7,687
)
 
—

Other, net
1,859

 
409

 
1,286

 
—

 
3,554

Income before provision for income taxes
11,226

 
163,318

 
23,860

 
(104,083
)
 
94,321

Income tax benefit (expense)
39,803

 
(69,450
)
 
(7,904
)
 
—

 
(37,551
)
Net income
51,029

 
93,868

 
15,956

 
(104,083
)
 
56,770

Net income attributed to non-controlling interest
—

 
—

 
(5,741
)
 
—

 
(5,741
)
Net income attributed to Vector Group Ltd.
51,029

 
93,868

 
10,215

 
(104,083
)
 
51,029

Comprehensive income attributed to non-controlling interest
—

 
—

 
(5,741
)
 
—

 
(5,741
)
Comprehensive income attributed to Vector Group Ltd.
$
26,357

 
$
84,073

 
$
10,215

 
$
(94,288
)
 
$
26,357



















46
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


 
 
 
Nine Months Ended September 30, 2014
 
 
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$
—

 
$
758,645

 
$
415,280

 
$
(200
)
 
$
1,173,725

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales
—

 
544,024

 
261,531

 
—

 
805,555

Operating, selling, administrative and general expenses
17,315

 
66,270

 
117,046

 
(200
)
 
200,431

Litigation settlement and judgment expense
—

 
1,725

 
—

 
—

 
1,725

Management fee expense
—

 
7,402

 
—

 
(7,402
)
 
—

Operating (loss) income
(17,315
)
 
139,224

 
36,703

 
7,402

 
166,014

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(120,977
)
 
(3,265
)
 
(40
)
 
612

 
(123,670
)
Change in fair value of derivatives embedded within convertible debt
7,447

 
—

 
—

 
—

 
7,447

Acceleration of interest expense related to debt conversion
(5,112
)
 
—

 
—

 
—

 
(5,112
)
Equity income from real estate ventures
—

 
—

 
3,002

 
—

 
3,002

Loss on sale of investment securities available for sale
(38
)
 
—

 
—

 
—

 
(38
)
Equity income from investments
1,462

 
—

 
—

 
—

 
1,462

Equity income in consolidated subsidiaries
96,554

 
—

 
—

 
(96,554
)
 
—

Management fee income
7,402

 
—

 
—

 
(7,402
)
 
—

Other, net
3,702

 
780

 
4,297

 
(612
)
 
8,167

(Loss) income before provision for income taxes
(26,875
)
 
136,739

 
43,962

 
(96,554
)
 
57,272

Income tax benefit (expense)
52,259

 
(57,846
)
 
(15,420
)
 
—

 
(21,007
)
Net income
25,384

 
78,893

 
28,542

 
(96,554
)
 
36,265

Net income attributed to non-controlling interest
—

 
—

 
(10,881
)
 
—

 
(10,881
)
Net income attributed to Vector Group Ltd.
25,384

 
78,893

 
17,661

 
(96,554
)
 
25,384

Comprehensive income attributed to non-controlling interest
—

 
—

 
(10,881
)
 
—

 
(10,881
)
Comprehensive income attributed to Vector Group Ltd.
$
41,218

 
$
79,026

 
$
17,661

 
$
(96,687
)
 
$
41,218

    

47
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer   
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.
Net cash provided by operating activities
$
84,832

 
$
168,095

 
$
31,660

 
$
(144,569
)
 
$
140,018

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Sale of investment securities
146,614

 
14,415

 
—

 
—

 
161,029

Maturities of investment securities
2,653

 
—

 
—

 
—

 
2,653

Purchase of investment securities
(156,521
)
 
(6,324
)
 
—

 
—

 
(162,845
)
Proceeds from sale or liquidation of long-term investments
—

 
—

 
182

 
—

 
182

Purchase of long-term investments
(10,000
)
 
—

 
—

 
—

 
(10,000
)
Investments in real estate ventures
—

 
—

 
(43,280
)
 
—

 
(43,280
)
Distributions from investments in real estate ventures
—

 
—

 
11,205

 
—

 
11,205

Increase in cash surrender value of life insurance policies
(766
)
 
(459
)
 
—

 
—

 
(1,225
)
Increase in restricted assets
(2
)
 
(6,870
)
 
—

 
—

 
(6,872
)
Issuance of notes receivable
—

 
—

 
(4,410
)
 
—

 
(4,410
)
Investments in subsidiaries
(53,511
)
 
—

 
—

 
53,511

 
—

Proceeds from sale of fixed assets
—

 
3

 
—

 
—

 
3

Capital expenditures
—

 
(3,305
)
 
(4,554
)
 
—

 
(7,859
)
Repayments of notes receivable
1,106

 
—

 
4,000

 
—

 
5,106

Pay downs of investment securities
5,743

 
—

 
—

 
—

 
5,743

Proceeds from sale of preferred securities
—

 
—

 
1,000

 
—

 
1,000

Investments in real estate held for sale
—

 
—

 
(12,512
)
 
—

 
(12,512
)
Net cash used in investing activities
(64,684
)
 
(2,540
)
 
(48,369
)
 
53,511

 
(62,082
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of debt
—

 
1,519

 
—

 
—

 
1,519

Deferred financing costs
—

 
(624
)
 
—

 
—

 
(624
)
Repayments of debt
—

 
(4,786
)
 
(182
)
 
—

 
(4,968
)
Borrowings under revolver
—

 
130,691

 
—

 
—

 
130,691

Repayments on revolver
—

 
(146,655
)
 
—

 
—

 
(146,655
)
Capital contributions received
—

 
5,633

 
47,878

 
(53,511
)
 
—

Intercompany dividends paid
—

 
(134,215
)
 
(10,354
)
 
144,569

 
—

Dividends and distributions on common stock
(139,430
)
 
—

 
—

 
—

 
(139,430
)
Distributions to non-controlling interest
—

 
—

 
(564
)
 
—

 
(564
)
Proceeds from exercise of Vector options
1,321

 
—

 
—

 
—

 
1,321

Tax benefit of options exercised
756

 
—

 
—

 
—

 
756

Net cash (used in) provided by financing activities
(137,353
)
 
(148,437
)
 
36,778

 
91,058

 
(157,954
)
Net (decrease) increase in cash and cash equivalents
(117,205
)
 
17,118

 
20,069

 
—

 
(80,018
)
Cash and cash equivalents, beginning of period
211,751

 
9,724

 
104,890

 
—

 
326,365

Cash and cash equivalents, end of period
$
94,546

 
$
26,842

 
$
124,959

 
$
—

 
$
246,347



48
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 
 
 
Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer   
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.        
Net cash provided by operating activities
$
23,189

 
$
98,319

 
$
53,475

 
$
(74,939
)
 
$
100,044

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Sale of investment securities
173,046

 
—

 
—

 
—

 
173,046

Maturities of investment securities
517

 
—

 
—

 
—

 
517

Purchase of investment securities
(310,934
)
 
(1,985
)
 
—

 
—

 
(312,919
)
Proceeds from sale or liquidation of long-term investments
500

 
—

 
49

 
—

 
549

Purchase of long-term investments
(12,000
)
 
—

 
—

 
—

 
(12,000
)
Investments in real estate ventures
—

 
—

 
(29,378
)
 
—

 
(29,378
)
Purchase of subsidiaries
—

 
—

 
(250
)
 
—

 
(250
)
Distributions from investments in real estate ventures
—

 
—

 
5,540

 
—

 
5,540

Increase in cash surrender value of life insurance policies
—

 
(435
)
 
—

 
—

 
(435
)
Decrease (increase) in restricted assets
188

 
(607
)
 
(689
)
 
—

 
(1,108
)
Issuance of notes receivable
(35,000
)
 
—

 
(250
)
 
35,000

 
(250
)
Repayments of notes receivable
35,933

 
—

 
—

 
(35,000
)
 
933

Pay downs of investment securities
690

 
—

 
—

 
—

 
690

Proceeds from sale of fixed assets
—

 
4

 
—

 
—

 
4

Investments in subsidiaries
(49,834
)
 
—

 
—

 
49,834

 
—

Capital expenditures
(11
)
 
(15,121
)
 
(5,614
)
 
—

 
(20,746
)
Net cash used in investing activities
(196,905
)
 
(18,144
)
 
(30,592
)
 
49,834

 
(195,807
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of debt
408,750

 
40,168

 
—

 
(35,000
)
 
413,918

Deferred financing costs
(12,360
)
 
—

 
—

 
—

 
(12,360
)
Repayments of debt
—

 
(41,485
)
 
(3,820
)
 
35,000

 
(10,305
)
Borrowings under revolver
—

 
645,894

 
—

 
—

 
645,894

Repayments on revolver
—

 
(673,866
)
 
—

 
—

 
(673,866
)
Capital contributions received
—

 
10,800

 
39,034

 
(49,834
)
 
—

Intercompany dividends paid
—

 
(54,000
)
 
(20,939
)
 
74,939

 
—

Dividends and distributions on common stock
(122,051
)
 
—

 
—

 
—

 
(122,051
)
Distributions to non-controlling interest
—

 
—

 
(4,861
)
 
—

 
(4,861
)
Proceeds from exercise of Vector options
4,407

 
—

 
—

 
—

 
4,407

Tax benefit of options exercised
937

 
—

 
—

 
—

 
937

Net cash provided by (used in) financing activities
279,683

 
(72,489
)
 
9,414

 
25,105

 
241,713

Net increase in cash and cash equivalents
105,967

 
7,686

 
32,297

 
—

 
145,950

Cash and cash equivalents, beginning of period
151,342

 
11,812

 
71,312

 
—

 
234,466

Cash and cash equivalents, end of period
$
257,309

 
$
19,498

 
$
103,609

 
$
—

 
$
380,416



49


ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION    AND RESULTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Amounts)


Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of Vector Group Ltd.’s financial statements with a narrative from our management's perspective. Our MD&A is divided into the following sections:
•Overview and Recent Developments
•Results of Operations
•Summary of Real Estate Investments
•Liquidity and Capital Resources

Please read this discussion along with our MD&A and audited financial statements as of and for the year ended December 31, 2014 and Notes thereto, included in our 2014 Annual Report on Form 10-K, and our Consolidated Condensed Financial Statements and related Notes as of and for the quarterly period ended September 30, 2015.

Overview
We are a holding company and are engaged principally in:
•
the manufacture and sale of cigarettes in the United States through our Liggett Group LLC (“Liggett”) and Vector Tobacco Inc. (“Vector Tobacco”) subsidiaries, 
•
the sale of electronic cigarettes (“e-cigarettes”) in the United States through our Zoom E-Cigs LLC (“Zoom”) subsidiary, and
•
the real estate business through our New Valley LLC (“New Valley”) subsidiary, which is seeking to acquire additional operating companies and real estate properties. New Valley owns 70.59% of Douglas Elliman Realty, LLC (“Douglas Elliman Realty”), which operates the largest residential brokerage company in the New York metropolitan area.
Zoom entered the United States e-cigarette market in limited retail distribution outlets in 2013. Zoom’s operations are included in our “E-Cigarettes” reporting segment. Our exposure to Zoom, as of September 30, 2015, was approximately $1,965, which was primarily comprised of Zoom's inventory and point-of-sale marketing material. We have seen significant changes in the e-cigarette market over the past year with apparent declines in the sales of disposable and rechargeable e-cigarettes while open-system vapor products that feature refillable tanks and use low-cost flavored liquids have demonstrated mixed results. Additionally, we believe uncertainties exist related to the regulation of e-cigarettes, including open-system vapor products. Given this backdrop, our primary focus on e-cigarettes is to stay prepared to pursue opportunities if they occur.



Recent Developments
Liggett Restructuring. On October 5, 2015, our tobacco segment commenced a restructuring of its operations by realigning its sales force and adjusting its business model to more efficiently serve its chain and independent accounts. In connection with the restructuring, the segment's workforce is expected to decline by approximately 95 full-time employees (or 17% of the tobacco segment's workforce).
The total costs of the restructuring are expected to be approximately $6,000 with approximately $1,500 expensed in the third quarter of 2015 and the remainder during the fourth quarter. The restructuring costs are included as “Restructuring expenses” in our condensed consolidated statements of operations and are attributable to our Tobacco segment.
The restructuring plan is expected to yield approximately $10,000 of annual cost savings consisting of approximately $8,000 in reduced sales, general and administrative expenses and approximately $2,000 in reduced manufacturing expenses, beginning in the fourth quarter of 2015. We plan to reinvest the entire amount of cost savings into the tobacco segment’s promotional and marketing programs.

50


Restructuring and impairment expense recognized for the three and nine months ended September 30, 2015 consisted of $1,094 related to the elimination of sales and administrative positions and $454 related to a reserve for excess marketing point-of-sale material inventories.
As part of the restructuring plan, we offered voluntary termination and early retirement benefits to manufacturing employees meeting certain age and service requirements. The package consists of enhanced pension benefits or severance based on past service and, for some employees, ongoing company contributions to insurance coverage until age 65. We believe that approximately $4,000 will be expensed in the fourth quarter of 2015 related to these benefits. All pension benefits are expected to be paid from existing pension plan assets.
We also anticipate a fourth-quarter expense of approximately $220 for contract terminations related to cars leased on behalf of the terminated sales employees and an additional $200 for other related restructuring expenses.
We expect approximately $1,100 of non-pension related severance and benefits will be paid in the fourth quarter of 2015. Payment of the remaining $400 of severance and benefits costs is expected in 2016. All non-pension-related restructuring payments are expected to be funded by ongoing operations and cash reserves.
Our estimates of the costs and savings of the restructuring and the timing of various events are based on a number of assumptions and actual results may differ materially from these estimates.
Liggett NPM. In October 2015, substantially all of the Participating Manufacturers settled the NPM Adjustment dispute with the state of New York for 2004 - 2014 and agreed to a mechanism for potential future credits against the Participating Manufacturers' MSA payments for 2015 forward. As a result of the settlement, Liggett reduced cost of sales by approximately $5,700 for the three and nine months ended September 30, 2015.
Liggett Credit Facility. On January 14, 2015, our subsidiaries, Liggett and 100 Maple LLC (“Maple”), entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”), dated as of January 14, 2015, with Wells Fargo Bank, National Association (“Wells Fargo”), as agent and lender. The Credit Agreement governs a $60,000 credit facility (the “Credit Facility”) that consists of a revolving credit facility of up to $60,000 borrowing capacity (the “Revolver”) and a $3,600 term loan (the “Term Loan”) that is within the $60,000 commitment under the Credit Facility and reduces the amount available under the Revolver. All borrowings under the Credit Facility (other than the Term Loan) are limited to a borrowing base equal to roughly (1) the lesser of (a) 85% of the net amount of eligible accounts receivable and (b) $10,000 plus (2) the lesser of (a) the sum of (I) 80% of the value of eligible inventory consisting of packaged cigarettes plus (II) the lesser of (x) 60% multiplied by Liggett’s eligible cost of eligible inventory consisting of leaf tobacco and (y) 85% of the net orderly liquidation value of eligible inventory consisting of leaf tobacco and (b) $60,000, less (3) certain reserves against accounts receivable, inventory, bank products or other items which Wells Fargo, as agent, may establish from time to time in its permitted discretion. The obligations under the Credit Facility are collateralized on a first priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject to certain permitted liens. The Credit Facility amended and restated Liggett’s existing $50,000 credit facility with Wells Fargo and Maple’s existing $3,600 term loan with Wells Fargo. The term of the Credit Facility expires on March 31, 2020. Prime rate loans under the Credit Facility bear interest at a rate equal to the greatest of (i) the Federal Funds rate plus 0.50%, (ii) LIBOR plus 1.0% and (ii) the prime rate of Wells Fargo. LIBOR rate loans under the Credit Facility bear interest at a rate equal to LIBOR plus 2.25%. Monthly principal payments of $25 are due under the Term Loan on the first day of each month with the unpaid principal balance due at maturity on March 31, 2020. The Credit Facility contains customary affirmative and negative covenants, including covenants that limit Liggett’s, Maple’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Facility also requires us to comply with specified financial covenants, including that Liggett's earnings before interest, taxes, depreciation and amortization, as defined under the Credit Facility, on a trailing twelve month basis, shall not be less than $100,000 if Liggett's excess availability, as defined under the Credit Facility, is less than $20,000. The covenants also require that annual capital expenditures, as defined under the Credit Facility (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any fiscal year. The Credit Facility also contains customary events of default.
Vector 6.75% Variable Interest Senior Convertible Note due 2015. In February 2015, the holder of the 6.75% Variable Interest Senior Convertible Note due 2015, converted the remaining $25,000 principal balance of the Note into 2,338,930 of our common shares.
Liggett Retirement Window. Liggett recorded a charge of $0 and $1,607 for the three and nine months ended September 30, 2015 in connection with a window offered to terminated participants in two Defined Benefit Plans in 2015.


51


Recent Developments in Smoking-Related Litigation

There are no material changes from the Recent Developments in Smoking-Related Litigation set forth in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K, for the year ended December 31, 2014. Please refer to that section and the information below for disclosures regarding the critical accounting policies related to our business.


Critical Accounting Policies

There are no material changes from the critical accounting policies set forth in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K, for the year ended December 31, 2014. Please refer to that section and the information below for disclosures regarding the critical accounting policies related to our business.



Results of Operations

The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report. The condensed consolidated financial statements include the accounts of VGR Holding, Liggett, Vector Tobacco, Liggett Vector Brands, New Valley and other less significant subsidiaries.

For purposes of this discussion and other consolidated financial reporting, our significant business segments for the three and nine months ended September 30, 2015 and 2014 were Tobacco, E-Cigarettes and Real Estate. The Tobacco segment consists of the manufacture and sale of cigarettes. The E-Cigarettes segment includes the operations of Zoom. The Real Estate segment includes our investment in New Valley LLC, which includes Douglas Elliman, Escena, Indian Creek, Sagaponack and investments in real estate ventures.

 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
Revenues:
 
 
 
 
 
 
 
 
Tobacco
$
264,170

 
$
264,520

 
$
747,145

 
$
748,468

 
E-Cigarettes
201

 
1,608

 
881

 
9,977

 
Real Estate
185,563

 
153,748

 
478,841

 
415,280

 
  Total revenues
$
449,934

 
$
419,876

 
$
1,226,867

 
$
1,173,725

 
Operating income (loss):
 
 
 
 
 
 
 
 
Tobacco
$
63,630

(1) 
$
52,993

(2) 
$
169,515

(3) 
$
147,395

(4) 
E-Cigarettes
(2,146
)
 
(2,910
)
 
(7,710
)
 
(7,100
)
 
Real Estate
12,227

 
16,222

 
21,270

 
36,867

 
Corporate and Other
(4,106
)
 
(3,321
)
 
(13,475
)
 
(11,148
)
 
Total operating income
$
69,605

 
$
62,984

 
$
169,600

 
$
166,014

 
____________________
(1)  
Operating income includes includes $5,715 of income from MSA Settlement, $3,750 of litigation judgment expense and $1,548 of restructuring expense.
(2)  
Operating income includes $225 of litigation judgment expense.
(3)  
Operating income includes $5,715 of income from MSA Settlement, $5,843 of litigation judgment expense, $1,548 of restructuring expense, and $1,607 of pension settlement expense.
(4) 
Operating income includes $1,419 of income from MSA Settlement and $1,725 of litigation judgment expense.



52


Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Revenues. Total revenues were $449,934 for the three months ended September 30, 2015 compared to $419,876 for the three months ended September 30, 2014. Total revenues increased by $30,058 (7.2%) due to an increase in Real Estate revenues of $31,815 which was primarily related to Douglas Elliman's brokerage revenues. This was offset by a decline in Zoom e-cigarette revenues of $1,407 and a decline in Tobacco revenues of $350.
Cost of Sales. Total cost of sales were $295,917 for the three months ended September 30, 2015 compared to $287,236 for the three months ended September 30, 2014. The $8,681 (3.0%) increase in cost of sales was due to an increase in Real Estate cost of sales of $24,636 related to an increase of real estate commission expense at Douglas Elliman. This was offset by a decline in Tobacco cost of sales of $15,310 related to a lower net MSA expense due to MSA settlements in 2015, the elimination of the tobacco quota buyout program in 2015 and decreased sales volume as well as a decline in Zoom e-cigarette brand cost of sales of $645.
Expenses. Operating, selling, general and administrative expenses were $79,114 for the three months ended September 30, 2015 compared to $69,431 for the same period last year. This was an increase of $9,683 (13.9%) of which $11,174 was due to an increase in Real Estate operating, selling and administrative expenses primarily related to Douglas Elliman's brokerage business and an increase in Corporate and Other expense of $787. This was offset by a decline in Zoom operating, selling, general and administrative expenses of $1,526 and a decline in Tobacco operating, selling, general and administrative expenses of $752.
Operating income (loss). Operating income was $69,605 for the three months ended September 30, 2015 compared to $62,984 for the same period last year, an increase of $6,621 (10.5%). The increase was primarily related to an increase in Tobacco operating income of $10,637 and a decline in operating losses related to Zoom of $764. This was offset by a decline in Real Estate operating income of $3,995 and an increase in Corporate and Other of $785.
Other income (expenses). Other expenses were $40,248 and $31,315 for the three months ended September 30, 2015 and 2014, respectively. For the three months ended September 30, 2015, other expenses primarily consisted of interest expense of $32,898, impairment of investment securities available for sale of $12,211, loss on sale of investment securities available for sale of $821, equity loss on long-term investments of $579 and equity loss from real estate ventures of $916. This was offset by income of $7,044 from changes in fair value of derivatives embedded within convertible debt and other income of $133. For the three months ended September 30, 2014, other expenses primarily consisted of interest expense of $44,034 and acceleration of interest expense related to the debt conversion of the 6.75% Variable Interest Senior Convertible Exchange Notes of $994. The higher interest expense in 2014 was primarily attributable to higher average debt balances and higher non-cash interest expense in 2014. This was offset by income of $7,127 from changes in fair value of derivatives embedded within convertible debt, equity income from real estate ventures of $3,258, other income of $2,466, equity income on long-term investments of $829 and gain on sale of investment securities available for sale of $33.
Income before provision for income taxes. Income before income taxes for the three months ended September 30, 2015 was $29,357 compared to $31,669 for the three months ended September 30, 2014.
Income tax expense. Income tax expense was $13,508 for the three months ended September 30, 2015 compared to $11,964 for the three months ended September 30, 2014. Our provision for income taxes in interim periods is based on an estimated annual effective income tax rate derived, in part, from estimated annual income before provision for income taxes in accordance with guidance on accounting for income taxes on interim periods. For the three months ended September 30, 2015, our income tax expense increased by $1,539 due to changes in the anticipated effective income tax rate for 2015 and $412 due primarily to a change in the marginal state tax rate as a result of recent state legislations changes and the results of a recent state income tax audits.
Tobacco.
Tobacco Revenues. Liggett increased the list price of PYRAMID, LIGGETT SELECT, EVE and GRAND PRIX by $0.70 per carton in May 2015 and $0.70 per carton in November 2014.
All of our Tobacco sales were in the discount category in 2015 and 2014. For the three months ended September 30, 2015, tobacco revenues were $264,170 compared to $264,520 for the three months ended September 30, 2014. Revenues declined by $350 (0.1%) due to a favorable price variance of $9,031 offset by a 2.2% decline in sales volume of $9,381 (approximately 50.6 million units).
Tobacco Cost of Sales. Our Tobacco cost of sales declined from $189,728 for the three months ended September 30, 2014 to $174,418 for the three months ended September 30, 2015. The major components of our Tobacco cost of sales are as follows:

53



 
 
 
 
Three Months Ended
 
 
 
 
September 30,
 
 
 
 
2015
 
2014
 
 
 
 
 
Manufacturing overhead, raw materials and labor
 
$
33,143

 
$
33,315

Federal Excise Taxes, net
 
 
112,773

 
115,326

Tobacco quota buyout expense (1)
 
 
—

 
6,425

FDA expense
 
 
4,416

 
4,012

MSA expense, net of market share exemption (2)
 
 
24,086

 
30,650

 
Total cost of sales
 
 
$
174,418

 
$
189,728

 
 
 
 
 
 
 
(1) The quarterly assessments due under the Fair and Equitable Tobacco Reform Act (shown as “Tobacco quota buyout expense” above) expired at the end of 2014.
(2) Includes $5,715 of income from MSA Settlement for the three months ended September 30, 2015.

Tobacco gross profit was $89,752 for the three months ended September 30, 2015 compared to $74,792 for the three months ended September 30, 2014. The $14,960 (20.0%) increase was due to higher margins associated with price increases primarily on the PYRAMID brand, the absence of the tobacco quota buyout expense and a decrease in net MSA expenses due to lower volume. This increase was partially offset by increased FDA expense, which increased in 2015 on a per-unit basis. As a percentage of revenues (excluding Federal Excise Taxes), Tobacco gross profit was 59.3% in the 2015 period compared to 50.1% in the comparable 2014 period.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses were $20,822 and $21,574 for the three months ended September 30, 2015 and 2014, respectively. The decline of $752 primarily related to a decrease in professional fees.
Total tobacco product liability legal expenses, including settlements and judgments, were $5,355 and $2,108 for the three months ended September 30, 2015 and 2014, respectively.
Tobacco operating income. Tobacco operating income was $63,630 for the three months ended September 30, 2015 compared to $52,993 for the same period last year. The Tobacco operating income increase of $10,637 (20.1%) was primarily due to higher margins associated with price increases primarily on the PYRAMID brand, $5,715 of income from MSA settlement and the absence of the tobacco quota buyout expense. This was partially offset by increased product liability legal expense and restructuring and impairment charges.

E-Cigarettes.
E-Cigarettes revenues were $201 for the three months ended September 30, 2015 compared to $1,608 for three months ended September 30, 2014. Revenues declined because of lower sales volume and increased product returns and sales reserves.
Our E-Cigarettes cost of sales were $421 for the three months ended September 30, 2015 compared to $1,066 for the three months ended September 30, 2014. Cost of sales declined due to lower sales volume.
E-Cigarettes operating, selling, general and administrative expenses were $1,928 and $3,454 for the three months ended September 30, 2015 and 2014, respectively. The decline was due to lower advertising and marketing expenses. E-Cigarettes operating losses were $2,146 and $2,910 for the three months ended September 30, 2015 and 2014, respectively.

Real Estate.
Real Estate Revenues. Real Estate revenues were $185,563 and $153,748 for the three months ended ended September 30, 2015 and 2014, respectively. Real Estate revenues increased by $31,815, which is primarily related to Douglas Elliman's Commission and other brokerage income.

54


Real Estate revenues and cost of sales for the three months ended September 30, 2015 and 2014 were as follows:

 
Three Months Ended
 
September 30,
 
2015
 
2014
Real Estate Revenues:
 
 
 
Commission and other brokerage income
$
176,742

 
$
145,407

Property management income
6,906

 
6,998

Title fees
1,352

 
800

Sales on facilities primarily from Escena
481

 
543

Other
82

 
—

  Total real estate revenues
$
185,563

 
$
153,748

 
 
 
 
Real Estate Cost of Sales:
 
 
 
Commission and other brokerage income
$
120,021

 
$
95,434

Cost of sales on facilities primarily from Escena
840

 
905

Title fees
217

 
103

Other
—

 
—

Total real estate cost of sales
$
121,078

 
$
96,442

___________________________________ 

Brokerage Cost of sales. Douglas Elliman commission cost of sales increased by $24,587 due to increased sales volume.
Real Estate expenses. Real Estate operating, selling, general and administrative expenses were $52,258 and $41,084 for the three months ended September 30, 2015 and 2014, respectively. Real Estate operating, selling, general and administrative expenses increased by $11,174 primarily related to an increase of expenses at Douglas Elliman related to its strategic investments fueled by its expansion into new markets, its development marketing division and increased advertising and marketing expenses to strengthen the long-term value of the Douglas Elliman brand name.
Real Estate operating income. The Real Estate segment had operating income of $12,227 and $16,222 for the three months ended September 30, 2015 and 2014, respectively. The decline of $3,995 was primarily related to an increase in Douglas Elliman operating, selling, general and administrative expenses.

Corporate and Other.
Corporate and Other operating loss. Corporate and Other operating loss was $4,106 for the three months ended September 30, 2015 compared to $3,321 for 2014. Corporate and Other operating losses increased by $785 primarily as a result of increased professional fees and increased non-cash compensation expense for the three months ended September 30, 2015.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Revenues. Total revenues were $1,226,867 for the nine months ended September 30, 2015 compared to $1,173,725 for the nine months ended September 30, 2014. The $53,142 (4.5%) increase in revenues was due to an increase in Real Estate revenues of $63,561 primarily related to Douglas Elliman's brokerage revenues, offset by a $9,096 decline in E-Cigarettes revenues and a $1,323 decline in Tobacco revenues.

55


Cost of Sales. Total cost of sales were $817,139 for the nine months ended September 30, 2015 compared to $805,555 for the nine months ended September 30, 2014. The $11,584 (1.4%) increase in cost of sales was due to an increase in Real Estate cost of sales of $47,775 related to an increase of real estate commission expense at Douglas Elliman. This was offset by a $31,352 decline in Tobacco cost of sales primarily related to a lower net MSA expense due to MSA settlements in 2015, the elimination of the tobacco quota buyout program in 2015 and decreased sales volume as well as a $4,839 decline in Zoom e-cigarette cost of sales.
Expenses. Operating, selling, general and administrative expenses were $232,737 for the nine months ended September 30, 2015 compared to $200,431 for the same period last year. This was an increase of $32,306 (16.1%) of which $31,383 was related to the operating, selling and administrative expenses of Real Estate, $2,242 to Tobacco operating, selling and administrative expenses and an increase in Corporate and Other expenses of $2,327. This was offset by a decline in operating, selling, general and administrative expenses in the E-Cigarettes segment of $3,646.
Operating income. Operating income was $169,600 for the nine months ended September 30, 2015 compared to $166,014 for the same period last year, an increase of $3,586 (2.2%). Tobacco operating income increased by $22,120. This was offset by a $15,597 decline in Real Estate operating income, a $610 increase in operating losses related to E-Cigarettes and a $2,327 increase in Corporate and Other expenses.
Other income (expenses). Other expenses were $75,279 and $108,742 for the nine months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015, other expenses primarily consisted of interest expense of $96,405, impairment of investment securities available for sale of $12,211 and equity loss on long-term investments of $2,273. This was offset by income of $18,760 from changes in fair value of derivatives embedded within convertible debt, gain on sale of investment securities available for sale of $12,018, other income of $3,554 and equity income on real estate ventures of $1,278. For the nine months ended September 30, 2014, other expenses primarily consisted of interest expense of $123,670, acceleration of interest expense related to the debt conversion of the 6.75% Variable Interest Senior Convertible Exchange Notes of $5,112, and loss on sale of investment securities available for sale of $38. The higher interest expense in 2014 was primarily attributable to higher average debt balances. This was offset by interest and other income of $8,167, income of $7,447 from changes in fair value of derivatives embedded within convertible debt, equity income on real estate ventures of $3,002 and equity income on long-term investments of $1,462.
Income before provision for income taxes. Income before income taxes was $94,321 and $57,272 for the nine months ended September 30, 2015 and 2014, respectively.
Income tax expense. Income tax expense was $37,551 and $21,007 for the nine months ended September 30, 2015 and 2014, respectively. Our provision for income taxes in interim periods is based on an estimated annual effective income tax rate derived, in part, from estimated annual income before provision for income taxes in accordance with guidance on accounting for income taxes on interim periods. For the nine months ended September 30, 2015, our income tax expense was increased by $313 due primarily to a change in the marginal state tax rate as a result of recent state legislations changes, the rate differential in other comprehensive income and the results of a recent state income tax audits.
Tobacco.
Tobacco Revenues. Liggett increased the list price of PYRAMID, LIGGETT SELECT, EVE and GRAND PRIX by $0.70 per carton in May 2015, $0.60 per carton in May 2014 and $0.70 per carton in November 2014.
All of our Tobacco sales were in the discount category in 2015 and 2014. For the nine months ended September 30, 2015, Tobacco revenues were $747,145 compared to $748,468 for the nine months ended September 30, 2014. Revenues declined by $1,323 (0.2%) due to a 2.6% decline in sales volume of $28,841 (approximately 166.5 million units), offset by a favorable price variance of $27,518.
Tobacco Cost of Sales. Our Tobacco cost of sales declined from $537,667 for the nine months ended September 30, 2014 to $506,315 for the nine months ended September 30, 2015. The major components of our Tobacco cost of sales are as follows:

56


 
 
 
 
Nine Months Ended
 
 
 
 
September 30,
 
 
 
 
2015
 
2014
 
 
 
 
 
Manufacturing overhead, raw materials and labor
 
$
95,106

 
$
94,779

Federal Excise Taxes, net
 
 
319,044

 
327,434

Tobacco quota buyout expense (1)
 
 
664

 
20,697

FDA expense
 
 
13,980

 
13,017

MSA expense, net of market share exemption (2)
 
 
77,521

 
81,740

 
Total cost of sales
 
 
$
506,315

 
$
537,667

 
 
 
 
 
 
 
(1) The quarterly assessments due under the Fair and Equitable Tobacco Reform Act (shown as “Tobacco quota buyout expense” above) expired at the end of 2014. The $664 for the nine months ended September 30, 2015 represents a final assessment for Q4 2014, which was received in Q2 2015.
(2) Includes $5,715 and $1,419 of income from MSA Settlement for the nine months ended September 30, 2015 and 2014, respectively.
    
Tobacco gross profit was $240,830 for the nine months ended September 30, 2015 compared to $209,382 for the nine months ended September 30, 2014. The $31,448 (15.0%) increase was due to higher margins associated with the absence of the tobacco quota buyout expense, price increases and decreased MSA expense. As a percentage of revenues (excluding Federal Excise Taxes), Tobacco gross profit was 56.3% in the 2015 period and 50.1% in the 2014 period.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses were $63,923 for the nine months ended September 30, 2015 compared to $61,681 for the nine months ended September 30, 2014. The $2,242 increase in expenses primarily relates to a pension settlement charge of $1,607.
Tobacco product liability legal expenses, including settlements and judgments, were $11,068 and $7,282 for the nine months ended September 30, 2015 and 2014, respectively.
Tobacco operating income. Tobacco operating income was $169,515 for the nine months ended September 30, 2015 compared to $147,395 for the same period last year. The Tobacco operating income increase of $22,120 (15.0%) was due to higher margins associated with price increases, the absence of the tobacco quota buyout expense and a net change of $4,296 of income from MSA settlement. This was partially offset by increased manufacturing expense, increased FDA expense which increased in 2015 on a per-unit basis and increased operating, selling, general and administrative expenses.
E-Cigarettes.
E-Cigarettes revenues were $881 for the nine months ended September 30, 2015 compared to $9,977 for nine months ended September 30, 2014. Revenues declined because of lower sales volume and increased per unit promotional spending.
Our E-Cigarettes cost of sales were $1,518 for the nine months ended September 30, 2015 compared to $6,357 for the nine months ended September 30, 2014. Cost of sales decreased by $4,839 due to lower sales volumes.
E-Cigarettes operating, selling, general and administrative expenses were $7,074 and $10,720 for the nine months ended September 30, 2015 and 2014, respectively. The decline was due to lower advertising and marketing expenses. Operating losses from E-Cigarettes were $7,710 and $7,100 for the nine months ended September 30, 2015 and 2014, respectively.

Real Estate.
Real Estate Revenues. Real Estate revenues were $478,841 and $415,280 for the nine months ended ended September 30, 2015 and 2014, respectively. Real Estate revenues increased by $63,561 (15.3%), primarily related to an increase of $76,730 in Douglas Elliman's Commission and other brokerage income and offset by the absence of the $14,400 revenue from the sale of Indian Creek in 2014.
.

57


Real Estate revenues and cost of sales for the nine months ended ended September 30, 2015 were as follows:
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Real Estate Revenues:
 
 
 
Commission and other brokerage income
$
449,468

 
$
372,738

Property management income
21,592

 
22,111

Title fees
3,303

 
2,134

Indian Creek
—

 
14,400

Sales on facilities primarily from Escena
4,005

 
3,897

Other
473

 
—

  Total real estate revenues
$
478,841

 
$
415,280

 
 
 
 
Real Estate Cost of Sales:
 
 
 
Commission and other brokerage income
$
305,885

 
$
248,213

Indian Creek cost of sales
—

 
9,987

Cost of sales on facilities primarily from Escena
2,895

 
3,052

Title fees
526

 
279

Total real estate cost of sales
$
309,306

 
$
261,531

Brokerage Cost of sales. Douglas Elliman commission cost of sales increased by $57,672 due to increased sales volume.
Real Estate expenses. Real Estate operating, selling, general and administrative expenses were $148,265 and $116,882 for the nine months ended September 30, 2015 and 2014, respectively. The increase of $31,383 was primarily due to an increase of expenses at Douglas Elliman related to its strategic investments fueled by its expansion into new markets, its development marketing division and increased advertising and marketing expenses to strengthen the long-term value of the Douglas Elliman brand name.
Real Estate operating income. The Real Estate segment had operating income of $21,270 and $36,867 for the nine months ended September 30, 2015 and 2014, respectively. The decrease in operating income of $15,597 was primarily related to an increase in in Douglas Elliman operating, selling, general and administrative expenses, offset by higher profits and the absence of the operating income related to the 2014 sale of Indian Creek.
Corporate and other.
Corporate and other loss. The operating loss at the corporate segment was $13,475 for the nine months ended September 30, 2015 compared to $11,148 for the same period in 2014. The increase was primarily due to increased non-cash compensation expense and increased professional fees for the nine months ended September 30, 2015.


58


Summary of Real Estate Investments
We own, and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our current real estate investments primarily include the following projects as of September 30, 2015:
 
(Dollars in Thousands. Area and Unit Information in Ones)
 
Location
Date of Initial Investment
Percentage Owned
Net Cash Invested
Cumulative Earnings (Losses)
Carrying Value as of September 30, 2015
Future Capital Commit-
ments from New Valley (1)
Projected Residential and/or Hotel Area
Projected Commercial Space
Projected Number of Residential Lots, Units and/or Hotel Rooms
Projected Construction Start Date
Projected Construction End Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sagaponack
Sagaponack, NY
April 2015
100
%
$
12,512

$
—

$
12,512

$
—

TBD

 
N/A

 
TBD

 
N/A
N/A
Escena, net
Master planned community, golf course, restaurant and shop in Palm Springs, CA
March 2008
100
%
1,975

8,476

10,451

—

450

Acres
 
 
667
450

R Lots
H
N/A
N/A
Real estate held for sale, net
 
 
 
$
14,487

$
8,476

$
22,963

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 Madison Square Park West (1107 Broadway)
Flatiron District/NoMad neighborhood, Manhattan, NY
October 2011
5.0
%
$
7,345

$
2,177

$
9,522

—

260,000

SF
20,000

SF
124

R
August 2012
May 2016
The Marquand
Upper East Side, Manhattan, NY
December 2011
18.0
%
7,000

6,900

13,900

—

90,000

SF
—

 
29

R
June 2012
August 2015
11 Beach Street
TriBeCa, Manhattan, NY
June 2012
49.5
%
12,328

(400
)
11,928

—

97,000

SF
—

 
27

R
May 2014
December 2016
20 Times Square (701 Seventh Avenue) (2)
Times Square, Manhattan, NY
August 2012
7.1
%
13,095

—

13,095

—

280,000

SF
80,000

SF
452

H
September 2013
January 2018
111 Murray Street
TriBeCa, Manhattan, NY
May 2013
9.5
%
16,114

—

16,114

—

330,000

SF
TBD

 
157

R
September 2014
September 2018
357 West (160 Leroy Street) (2), (3)
West Greenwich Village, Manhattan, NY
March 2013
3.1
%
1,950

—

1,950

—

130,000

SF
—

 
50

R
Fall 2015
March 2018
PUBLIC Chrystie House (Chrystie Street)
Lower East Side, Manhattan, NY
December 2012
18.4
%
5,297

—

5,297

—

217,000

SF
43,000

SF
11
367

R
H
June 2014
March 2017
The Dutch (25-19 43rd Avenue)
Long Island City, NY
May 2014
9.9
%
980

—

980

 
63,000

SF
—

 
86

R
September 2014
January 2017
Queens Plaza (23-10 Queens Plaza South)
Long Island City, NY
December 2012
45.4
%
14,711

21

14,732

—

260,000

SF
25,000

 
391

R
March 2014
April 2016
87 Park (8701 Collins Avenue)
Miami Beach, FL
December 2013
15.0
%
6,000

(346
)
5,654

—

160,000

SF
TBD

 
70

R
October 2015
August 2017
125 Greenwich Street (3)
Financial District, Manhattan, NY
August 2014
13.3
%
11,458

(265
)
11,193

—

306,000

SF
16,000

 
275

R
March 2015
March 2018
West Hollywood Edition (9040 Sunset Boulevard)
West Hollywood, CA
October 2014
48.5
%
5,604

—

5,604

—

295,000

SF
TBD

 
20
190

R
H
May 2015
April 2018
76 Eleventh Avenue
West Chelsea, Manhattan, NY
May 2015
5.1
%
17,000

—

17,000

—

620,000

SF
48,000

SF
250

H
September 2016
March 2019
Monad Terrace
Miami Beach, FL
May 2015
31.3
%
6,438

—

6,438

—

160,000

SF
—


TBD

R
May 2016
May 2018
Condominium and Mixed Use Development
 
 
 
$
125,320

$
8,087

$
133,407

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maryland Portfolio
Primarily Baltimore County, MD
July 2012
7.6
%
$
1,837

$
(460
)
$
1,377

—

N/A

 
N/A

 
5,517

R
N/A
N/A
Mosaic II (ST Portfolio)
Houston, TX and Stamford, CT
November 2013
16.3
%
15,543

1,338

16,881

—

1,018,404

SF
24,987

SF
761

R
N/A
N/A
Apartment Buildings
 
 
 
$
17,380

$
878

$
18,258

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Park Lane Hotel
Central Park South, Manhattan, NY
November 2013
5.2
%
23,104

(3,731
)
19,373

—

445,600

SF
—

 
628

H
N/A
N/A
Hotel Taiwana
St. Barthelemy, French West Indies
October 2011
17.0
%
7,942

(605
)
7,337

—

61,300

SF
4,300

SF
22

H
N/A
N/A
Coral Beach and Tennis Club
Coral Beach, Bermuda
December 2013
49.0
%
5,155

(2,132
)
3,023

—

52

Acres
—

 
87

H
N/A
N/A
Hotels
 
 
 
$
36,201

$
(6,468
)
$
29,733

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Plaza at Harmon Meadow
Secaucus, NJ
March 2015
49.0
%
$
5,591

$
47

$
5,638

—

—

—
217,613

SF
—

—
N/A
N /A
      Commercial
 
 
 
$
5,591

$
47

$
5,638

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Milanosesto Holdings (Sesto Holdings)
Milan, Italy
October 2010
7.2
%
$
5,037

$
—

$
5,037

—

322

Acres
TBD

 
TBD

 
2014
2024
Land Development
 
 
 
$
5,037

$
—

$
5,037

$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) This column only represents capital commitments required under the various joint venture agreements. However, many of the operating agreements provide for the operating partner to call capital. If a joint venture partner, such as New Valley, declines to fund the capital call, then the partner’s ownership percentage could either be diluted or, in some situations, the character of a funding member’s contribution would be converted from a capital contribution to a member loan. 
(2) Percentage owned as of September 30, 2015 has been corrected from the Company's Report on Form 10-Q for the quarterly period ended June 30, 2015.
(3) Carrying value as of September 30, 2015, includes non-controlling interest of $975 and $2,405, respectively.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
N/A - Not applicable
SF - Square feet
H - Hotel rooms
 
 
 
 
 
 
 
 
 
 
 
TBD -To be determined
R - Residential Units
R Lots - Residential lots
 
 
 
 
 
 
 
 
 
 
 
Other investments in real estate ventures relate to an investment in a mortgage company and an insurance company by Douglas Elliman with a carrying value of $1,979 as of September 30, 2015.

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Liquidity and Capital Resources

Cash and cash equivalents decreased by $80,018 for the nine months ended September 30, 2015 and increased by $145,950 for the nine months ended September 30, 2014.
Cash provided from operations was $140,018 and $100,044 for the nine months ended September 30, 2015 and 2014, respectively. The increase in cash provided from operations for the nine month ended September 30, 2015 was primarily due to the absence of a one-time payment in 2014 related to the the Engle progeny settlement. In October 2013, we entered into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Liggett agreed to pay a total of approximately $110,000 under this settlement, which consisted of a $61,600 lump sum payment in 2014 and agreed to pay the balance in installments over 14 years, beginning in February 2015. The increase in cash provided from operations for the nine months ended September 30, 2015 was offset by higher income tax payments in 2015.
Cash used in investing activities was $62,082 and $195,807 for the nine months ended September 30, 2015 and 2014, respectively. In the first nine months of 2015, cash used in investing activities was for the purchase of investment securities of $162,845, investment in real estate ventures of $43,280, investment in real estate held for sale of $12,512, purchase of long-term investments of $10,000, capital expenditures of $7,859, an increase in restricted assets of $6,872, issuance of notes receivable of $4,410 and an increase in cash surrender value of corporate-owned life insurance policies of $1,225. This was offset by the sale of investment securities of $161,029, distributions from investments in real estate ventures of $11,205, collections of notes receivable of $5,106, pay-downs of investment securities of $5,743, the maturity of investment securities of $2,653, proceeds from sale of preferred securities of $1,000, proceeds from the sale or liquidation of long-term investments of $182 and proceeds from the sale of fixed assets of $3. In the first nine months of 2014, cash used in investing activities was for the purchase of investment securities of $312,919, investment in real estate ventures of $29,378, capital expenditures of $20,746, purchase of long-term investments of $12,000, an increase in restricted assets of $1,108, an increase in cash surrender value of corporate-owned life insurance policies of $435, an issuance of notes receivable of $250 and purchase of subsidiaries of $250. This was offset by the sale of investment securities of $174,253, distributions from investments in real estate ventures of $5,540, proceeds from the sale or liquidation of long-term investments of $549, collections of notes receivable of $933 and proceeds from the sale of fixed assets of $4.
Our investment philosophy is to maximize return on investments using a reasonable expectation for return. For example, we expect our investment returns to exceed the comparable return on cash or short-term U.S. Treasury Bills when investing in equity and debt securities and more than our weighted average cost of capital when investing in non-consolidated real estate businesses and capital expenditures. In accordance with this philosophy, our investing activities increased in 2014 and we will continue to monitor our investment philosophy in the future.
Cash used in financing activities was $157,954 for the nine months ended September 30, 2015 compared to cash provided by financing activities of $241,713 for the nine months ended September 30, 2014. In the first nine months of 2015, cash was used for the dividends and distributions on common stock of $139,430, net repayments of debt under the revolver of $15,964, repayments of debt of $4,968, payment of deferred financing costs of $624 and distributions to non-controlling interest of $564. This was offset by proceeds from issuance of debt of $1,519, proceeds from the exercise of Vector options of $1,321 and the tax benefit of options exercised of $756. In the first nine months of 2014, cash was provided by the proceeds from issuance of debt of $413,918, proceeds from the exercise of Vector options of $4,407 and tax benefit of options exercised of $937. This was offset by cash used for the dividends and distributions on common stock of $122,051, payment of deferred financing costs of $12,360, repayment of debt of $10,305, net repayments of debt under the revolver of $27,972 and distributions to non-controlling interest of $4,861.
In recent years, we have taken advantage of historically low interest rates and lowered our weighted average cost of capital by issuing debt at lower interest rates than our historical borrowing levels. We will continue to evaluate current market conditions related to our capital structure. For example, based on quoted market prices, our 7.75% Senior Secured Notes were yielding approximately 5.9% on a “yield to worst” basis, or approximately 4.5% more than the comparable U.S. Treasury Bond at September 30, 2015. The Company is able to redeem such bonds at price of 105.813% beginning on February 15, 2016. The redemption price declines to 103.875% on February 15, 2017, 101.938% on February 15, 2018 and 100% on February 15, 2019. We have no current intentions or plans to undertake any capital markets activities, and there can be no assurance that we would be able to issue debt at a lower interest rate than our historical borrowing levels in the future. In the event we pursue any capital markets activities, our ability to complete any offering would be subject to market conditions.
Liggett Credit Facility and Liggett Term Loan Under Credit Facility. As discussed in Recent Developments, Liggett and Maple entered into an amended and restated Credit Agreement on January 14, 2015, with Wells Fargo. The credit facility increased from $50,000 to $60,000 and expires on March 31, 2020. As of September 30, 2015, $5,171 was outstanding under the revolving and term loan portions of the credit facility. Availability as determined under the Credit Facility was approximately $52,915 based on eligible collateral at September 30, 2015. At September 30, 2015, management believed that Liggett was in compliance with

60


all covenants under the credit facility; Liggett's EBITDA, as defined, were approximately $215,195 for the last twelve months ended September 30, 2015.
Vector. On February 3, 2015, the holder of the 6.75% Variable Interest Senior Convertible Note due 2015, converted the remaining $25,000 principal balance of the $50,000 Note into 2,338,930 of our common shares. The debt conversion resulted in a reduction of debt and an increase to equity in the amount of $25,000.
The indenture of our 7.75% senior secured notes due 2021 contains covenants that restrict the payment of dividends if our consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”), as defined in the indenture, for the most recently ended four full quarters is less than $75,000. The indenture also restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, as defined in the indenture, exceed 3.0 and 1.5, respectively. Our Leverage Ratio is defined in the indenture as the ratio of our guaranteeing subsidiaries’ total debt less the fair market value of our cash, investments in marketable securities and long-term investments to Consolidated EBITDA, as defined in the indenture. Our Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. The following table summarizes the requirements of financial covenants and the results of the calculation, as defined by the indenture.

 
 
Indenture
 
September 30,
2015
 
December 31,
2014
Covenant
 
Requirement
 
 
Consolidated EBITDA, as defined
 
$75,000
 
$270,033
 
$244,100
Leverage ratio, as defined
 
<3.0 to 1
 
1.56 to 1
 
1.23 to 1
Secured leverage ratio, as defined
 
<1.5 to 1
 
0.6 to 1
 
0.1 to 1

We and our subsidiaries have significant indebtedness and debt service obligations. At September 30, 2015, we and our subsidiaries had total outstanding indebtedness of $1,105,129. Approximately $230,000 of our 7.5% convertible notes mature in 2019, $258,750 of our 5.5% variable interest senior convertible notes mature in 2020, and $600,000 of our 7.75% senior secured notes mature in 2021. 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 believe that our cigarette and real estate operations are positive cash-flow-generating units and will continue to be able to sustain their operations without any significant liquidity concerns.
In order to meet the above liquidity requirements as well as other anticipated liquidity needs in the normal course of business, we had cash and cash equivalents of approximately $246,300, investment securities available for sale of approximately $288,400, long-term investments with an estimated value of approximately $58,600 and availability under Liggett's credit facility of approximately $52,900 at September 30, 2015. Management currently anticipates that these amounts, as well as expected cash flows from our operations, management fees and other payments from subsidiaries should be sufficient to meet our liquidity needs over the next 12 months. We may acquire or seek to acquire additional operating businesses through merger, purchase of assets, stock acquisition or other means, or to make other investments, which may limit our liquidity otherwise available.
On a quarterly basis, we evaluate our investments to determine whether an impairment has occurred. If so, we also make a determination if such impairment is considered temporary or other-than-temporary. We believe that the assessment of temporary or other-than-temporary impairment is facts and circumstances driven. However, among the matters that are considered in making such a determination are the period of time the investment has remained below its cost or carrying value, the likelihood of recovery given the reason for the decrease in market value and our original expected holding period of the investment.

Market Risk

We are exposed to market risks principally from fluctuations in interest rates, foreign currency exchange rates and equity prices. We seek to minimize these risks through our regular operating and financing activities and our long-term investment strategy. Our market risk management procedures cover all market risk sensitive financial instruments.
As of September 30, 2015, approximately $5,200 of our outstanding debt at face value had variable interest rates determined by various interest rate indices, which increases the risk of fluctuating interest rates. Our exposure to market risk includes interest rate fluctuations in connection with our variable rate borrowings, which could adversely affect our cash flows. As of September 30, 2015, we had no interest rate caps or swaps. Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual interest expense could increase or decrease by approximately $52.

61


In addition, as of September 30, 2015, $262,931 ($488,750 principal amount) of outstanding debt had a variable interest rate determined by the amount of the dividends on our common stock. The difference between the stated value of the debt and carrying value is due principally to certain embedded derivatives, which were separately valued and recorded upon issuance. Changes to the estimated fair value of these embedded derivatives are reflected within our statements of operations as “Changes in fair value of derivatives embedded within convertible debt.” The value of the embedded derivative is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt as well as projections of future cash and stock dividends over the term of the debt and changes in the closing stock price at the end of each quarterly period. Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual “Changes in fair value of derivatives embedded within convertible debt” could increase or decrease by approximately $2,692 with approximately $1,157 resulting from the embedded derivative associated with the 7.5% variable interest senior convertible notes, and the remaining $1,535 resulting from the embedded derivative associated with our 5.5% variable interest senior convertible debentures due 2020. An increase in our quarterly dividend rate by $0.10 per share would increase interest expense by approximately $9,900 per year.
We have estimated the fair market value of the embedded derivatives based principally on the results of a valuation model. The value of the embedded derivatives is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt, our stock price as well as projections of future cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined by calculating the implied rate on our 7.5% Convertible Notes when removing the embedded option value within the convertible security. This rate is based upon market observable inputs and influenced by our stock price, convertible bond trading price, risk-free interest rates and stock volatility. The range of estimated fair market values of our embedded derivatives was between $150,125 and $148,769. We recorded the fair market value of our embedded derivatives at the approximate midpoint of the range at $149,739 as of September 30, 2015. The estimated fair market value of our embedded derivatives could change significantly based on future market conditions.

We and New Valley also hold long-term investments in various investment partnerships. These investments are illiquid, and their ultimate realization is subject to the performance of the underlying entities.

New Accounting Pronouncements

Refer to Note 1, Summary of Significant Accounting Policies, to our financial statements for further information on New Accounting Pronouncements.

Legislation and Regulation

There are no material changes from the Legislation and Regulation section set forth in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K, for the year ended December 31, 2014. Please refer to that section and the information below for disclosures regarding the critical accounting policies related to our business.


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report 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,
•
legislation and regulations,
•
cash flows,
•
operating performance,
•
litigation,
•
impairment charges and cost saving associated with restructurings of our tobacco operations, and
•
related industry developments (including trends affecting our business, financial condition and results of operations).

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We identify forward-looking statements in this report 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:
•
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 business combinations, including acquisitions and divestitures, both internally for us and externally in the tobacco industry,
•
impact of legislation on our competitors’ payment obligations, results of operations and product costs, i.e. the impact of federal legislation eliminating the federal tobacco quota system and providing for regulation of tobacco products by the FDA,
•
impact of substantial increases in federal, state and local excise taxes,
•
uncertainty related to product liability litigation including the Engle progeny cases pending in Florida; and,
•
potential additional payment obligations for us under the MSA and other settlement agreements with the states.
Further information on the risks and uncertainties to our business include the risk factors discussed above in “Management's Discussion and Analysis of Financial Condition and Results of Operations” and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014 filed with the Securities and Exchange Commission.
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.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption “Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk” is incorporated herein by reference.

ITEM 4.    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

In connection with the preparation of this Quarterly Report on Form 10-Q, the Company carried out an evaluation under the supervision of and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as of September 30, 2015, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2015, the Company’s disclosure controls and procedures were not effective because of the material weaknesses in internal control over financial reporting described in Part II, Item 9A of the 2014 Form 10-K. Management has concluded that the material weaknesses that were present at December 31, 2014 continued to exist as of September 30, 2015, as discussed below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.


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In 2014, management was required to include in its assessment of internal control over financial reporting the controls of Douglas Elliman Realty, LLC (“Douglas Elliman”), which became a consolidated subsidiary of the Company on December 13, 2013. In connection with management’s assessment of the Company’s internal control over financial reporting as of December 31, 2014, management identified control deficiencies that constituted material weaknesses in internal control over financial reporting at the Company's Douglas Elliman subsidiary as follows: 

 
 
i.
The Company did not maintain effective monitoring of controls in certain areas relating to the period-end financial reporting process at Douglas Elliman. This material weakness contributed to additional material weaknesses related to the analysis and review of significant account reconciliations and the interim and annual financial statements, segregation of duties of finance and accounting personnel, processing and recording of recurring and non-recurring journal entries and supervision of access of rights and privileges of users of Douglas Elliman’s information technology system for finance and accounting as described below.

 
 
ii.
The Company did not maintain effective controls over Douglas Elliman’s period-end financial reporting processes, including controls over the preparation, analysis and review of certain significant account reconciliations required to assess the appropriateness of account balances at period-end, as well as controls over the preparation and review of the interim and annual financial statements. This lack of controls over the preparation and review of interim and annual financial statements impacted the Company’s ability to identify and accumulate all information required to determine the completeness and accuracy of the financial statements and disclosures.

 
 
iii.
The Company did not maintain effective controls over the segregation of duties of finance and accounting personnel at Douglas Elliman. Specifically, finance and accounting personnel at Douglas Elliman were authorized to perform interrelated functions that could have resulted in either erroneous or inappropriate actions that could have affected the Company’s financial statements.

 
 
iv.
The Company did not maintain effective controls over the processing and recording of recurring and non-recurring journal entries at Douglas Elliman. Specifically, effective controls did not exist to ensure that journal entries were either prepared with sufficient documentation or were reviewed and approved to verify the accuracy and completeness of the journal entries.

 
 
v.
The Company did not maintain effective controls over access to Douglas Elliman’s information technology system for finance and accounting (“IT System”). Specifically, access review controls to Douglas Elliman’s IT System were not effectively designed to restrict access to certain financial applications and data. This impacted controls over financial reporting at Douglas Elliman that depended on the effective operation of restricted access.

These material weaknesses did not result in any material misstatements to the financial statements in any accounting periods ending prior to January 1, 2015 or for the three and nine months ended September 30, 2015. However, these material

64


weaknesses could result in misstatement of the aforementioned account balances or disclosures that would result in material misstatements to the annual or interim consolidated financial statements that would not be prevented or detected.

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the Company’s consolidated interim unaudited financial statements were prepared in accordance with U.S. GAAP. Based on the performance of additional procedures by management designed to ensure the reliability of the Company’s financial reporting, the Company’s management believes that the consolidated interim unaudited financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented and that this Quarterly Report on Form 10-Q does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this report.

Remediation Plan

The Company’s management has engaged in and is continuing to engage in efforts to remediate the underlying causes of the material weaknesses described above. Specifically, the following steps have been taken by management of the Douglas Elliman subsidiary:

i.
Hiring additional personnel, including a new Chief Financial Officer, in Douglas Elliman’s finance department and restructuring titles and duties in Douglas Elliman’ finance department.

ii.
Adding or strengthening new controls to ameliorate the processing and review of transactions and segregation of duties. The new controls are being tested and testing will continue in the fourth quarter of 2015.

The Company’s management and the Board of Directors believe that these remediation efforts represent significant improvements in the Company’s control environment and in its controls over the financial reporting of Douglas Elliman. Additional controls may also be required over time. The identified material weaknesses in internal control will not be considered fully addressed until the internal controls over these areas have been in operation for a sufficient period of time for management to conclude that the material weaknesses have been fully remediated. Management continues to work on implementing and testing the new controls in order to make this final determination.

Changes in Internal Control Over Financial Reporting

As discussed above, during the quarter ended September 30, 2015, management continued to implement certain remediation measures to improve the Company’s internal controls over financial reporting and to remediate previously identified material weaknesses. However, there were no changes that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Furthermore, neither the design nor the operating effectiveness of additional changes in internal control over financial reporting has been evaluated in the Company’s remediation process.

PART II

OTHER INFORMATION

Item 1.     Legal Proceedings

Reference is made to Note 7, incorporated herein by reference, to our condensed consolidated financial statements included elsewhere in this report which contains a general description of certain legal proceedings to which our company, or its subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1 for additional information regarding the pending smoking-related legal proceedings to which Liggett or us is a party. A copy of Exhibit 99.1 will be furnished without charge upon written request to us at our principal executive offices, 4400 Biscayne Boulevard, 10th Floor, Miami, Florida 33137, Attn. Investor Relations.

Item 1A. Risk Factors

Except as set forth below, there are no material changes from the risk factors set forth in Item 1A, “Risk Factors,” of our Annual Report on 10-K for the year ended December 31, 2014.

Liggett faces intense competition in the domestic tobacco industry.

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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 in 2014 Philip Morris, RJ Reynolds and Lorillard Tobacco Company, then the three largest cigarette manufacturers, controlled approximately 84.9% of the United States cigarette market. Philip Morris is the largest manufacturer in the market, and its profits are derived principally from its sale of premium cigarettes. Philip Morris had approximately 60.8% of the premium segment and 47.3% of the total domestic market during 2014. During 2014, all of Liggett’s sales were in the discount segment, and its share of the total domestic cigarette market was 3.4%. Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, historically, because of their dominant market share, have been able to determine cigarette prices for the various pricing tiers within the industry.

Consolidation in the industry could adversely affect our ability to compete in the U.S. cigarette market. For example, RJ Reynolds’ merger with Lorillard Tobacco Company, which consolidates more than 80% of the United States cigarette market within the control of two cigarette manufacturers, 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 effect on our sales volume, operating income and cash flows. Further, as part of the merger, RJ Reynolds and Lorillard Tobacco Company divested four of their brands to Imperial Tobacco PLC, our largest competitor for the sale of deep discount cigarettes.

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. Since 2004, all of Liggett’s unit volume was generated in the discount segment. The discount segment is highly competitive, with consumers having less brand loyalty and placing greater emphasis on price. While Philip Morris ,RJ Reynolds, and Imperial compete with Liggett in the discount segment of the market, the strongest competition for market share has come from a group of smaller manufacturers and importers, most of which sell low quality, deep discount cigarettes. While Liggett’s share of the discount market was 11.8% in 2014,11.6% in 2013 and 12.1% in 2012, Management Science Associates’ data indicate that the discount market share of these other smaller manufacturers and importers was approximately 24.6% in 2014, 24.2% in 2013, and 22.2% in 2012. 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 our common stock.

Liggett’s market share is susceptible to decline.

For a number of years prior to 2000, Liggett suffered a substantial decline in market share. Liggett’s market share increased in 2014, after having declined in 2013 and 2012. Liggett's market share increased during each of the years between 2000 and 2011 (except for 2008, which was unchanged). 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. These declines also resulted from adverse developments in the tobacco industry, intense competition and changes in consumer preferences which have continued up to the current time. According to Management Science Associates' data, Liggett's overall domestic market share during 2014 was 3.4% compared to 3.3% during 2013, and 3.5% during 2012. Liggett's share of the discount segment was 11.8% during 2014, 11.6% during 2013 and 12.1% during 2012. Liggett's overall market share increased by 0.1% in 2014 after declining by 0.2% in 2013. If it were to decline substantially in the future, Liggett's sales volume, operating income and cash flows would be materially adversely affected, which in turn would negatively affect the value of 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 declining for a number of years, with Management Science Associates’ data indicating that domestic industry-wide shipments decreased by approximately 3.0% in 2014 as compared to 2013, and by approximately 4.7% in 2013 as compared to 2012. We believe that industry-wide shipments of cigarettes in the United States will 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 increases in federal and state excise taxes 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 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 our common stock.

66


The Family Smoking Prevention and Tobacco Control Act may adversely affect our sales and operating profit.
On June 22, 2009, the President signed into law the Family Smoking Prevention and Tobacco Control Act (the “Tobacco Control Act”). The law grants FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although FDA is prohibited from banning all cigarettes or all smokeless tobacco products. Among other measures, the law (under various deadlines):
•
increases the number of health warnings required on cigarette and smokeless tobacco products, increases the size of warnings on packaging and in advertising, requires FDA to develop graphic warnings for cigarette packages, and grants FDA authority to require new warnings;
•
imposes new restrictions on the sale and distribution of tobacco products, including significant new restrictions on tobacco product advertising and promotion, as well as the use of brand and trade names;
•
bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;
•
bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol;
•
gives FDA the authority to impose tobacco product standards that are appropriate for the protection of the public health (by, for example, requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling);
•
requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products;
•
requires pre-market approval by FDA for tobacco products represented (through labels, labeling, advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;
•
requires manufacturers to report ingredients and harmful constituents and requires FDA to disclose certain constituent information to the public;
•
mandates that manufacturers test and report on ingredients and constituents identified by FDA as requiring such testing to protect the public health, and allows FDA to require the disclosure of testing results to the public;
•
requires manufacturers to submit to FDA certain information regarding the health, toxicological, behavioral or physiological effects of tobacco products;
•
prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal law;
•
requires FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing facilities;
•
requires tobacco product manufacturers (and certain other entities) to register with FDA;
•
authorizes FDA to require the reduction of nicotine (although it may not require the reduction of nicotine yields of a tobacco product to zero) and the potential reduction or elimination of other constituents, including menthol;
•
imposes (and allows FDA to impose) various recordkeeping and reporting requirements on tobacco product manufacturers; and
•
grants FDA the regulatory authority to impose broad additional restrictions.


The Tobacco Control Act requires premarket review of “new tobacco products.” A “new tobacco product” is one that was not commercially marketed in the U.S. as of February 15, 2007 or that was modified after that date. In general, before a company may commercially market a “new tobacco product,” it must either (a) submit an application and obtain an order from FDA permitting the product to be marketed; or (b) submit a report and receive an FDA order finding the product to be “substantially equivalent” to a “predicate” tobacco product that was commercially marketed in the U.S. prior to February 15, 2007. A “substantially equivalent” tobacco product is one that has the “same characteristics” as the predicate or one that has “different characteristics” but does not raise “different questions of public health.”
Manufacturers of products first introduced after February 15, 2007 and before March 22, 2011 who submitted a substantial equivalence report to FDA prior to March 23, 2011 may continue to market the tobacco product unless FDA issues an order that the product is not substantially equivalent. Failure to timely submit the report, or FDA’s conclusion that such a “new tobacco product” is not substantially equivalent, will cause the product to be deemed misbranded and/or adulterated. After March 22, 2011, a “new tobacco product” may not be marketed without an FDA substantial equivalence determination. Prior to the deadline, Liggett and Vector Tobacco submitted substantial equivalence reports to FDA for numerous products. It is possible that FDA could

67


determine some, or all, of these products are not “substantially equivalent” to a preexisting tobacco product. Such a determination could prevent us from marketing these products in the United States and could have a material adverse effect on us.
Liggett and Vector Tobacco have begun to receive feedback from FDA regarding certain of their substantial equivalence reports, including “Preliminary Finding” letters and other FDA correspondence requesting additional information that would support FDA’s determinations of substantial equivalence. Liggett and Vector Tobacco have timely responded to FDA’s requests. Liggett and Vector Tobacco cannot predict whether FDA will deem these responses sufficient to support determinations of substantial equivalence for the products covered by these substantial equivalence reports.
It is likely that the new tobacco law could result in a decrease in cigarette sales in the United States, including sales of Liggett’s and Vector Tobacco’s brands. Total compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by FDA under the new tobacco law. Costs, however, could be substantial and could have a material adverse affect on the companies’ financial condition, results of operations, and cash flows. In addition, FDA has a number of investigatory and enforcement tools available to it. Failure to comply with the new tobacco law and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on the business, financial condition and results of operation of both Liggett and Vector Tobacco. At present, we are not able to predict whether the new tobacco law will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry, thus affecting our competitive position.

Zoom is subject to risks relating to the industry in which it operates

Zoom’s e-cigarette business is subject to substantial risks, uncertainties and contingencies which include, without limitation, the challenges inherent in new product development initiatives, the ability to raise capital and manage the growth of its business, potential disputes concerning Zoom’s intellectual property, potential extensive government regulation or prohibition, technology, obsolescence, and market acceptance of Zoom’s products. Zoom 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. Over the past year we have seen significant changes in the e-cigarette market with apparent declines in the sales of disposable and rechargeable e-cigarettes while open system vapor products that feature refillable tanks and low-cost flavored liquids have demonstrated mixed results. Given this backdrop, our primary focus on e-cigarettes is to stay prepared to pursue opportunities if they occur. Our exposure to Zoom, as of September 30, 2015, was approximately $2.0 million.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

No securities of ours which were not registered under a private offering of the Securities Act of 1933 have been issued or sold by us during the three months ended September 30, 2015 except for approximately 5,837,759 shares of our common stock issued as a stock dividend on September 29, 2015.

Issuer Purchases of Equity Securities

Our purchases of our common stock during the three months ended September 30, 2015 were as follows:

Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
 
 
 
 
 
—

 
—

July 1 to July 31, 2015
—

 
—

 
—

 
—

August 1 to August 31, 2015
83,411

(1)
24.98

(1)
—

 
—

September 1 to September 30, 2015
—

 
—

 
—

 
—

  Total
83,411

 
$
24.98

 
—

 
—

____________________________

(1) 
Delivery of shares to us in payment of tax wtihholding in connection with an employee's vesting in restricted stock. The shares were immediately canceled. The number of shares and average price paid per share have not been adjusted for the impact of our 5% stock dividend, payable on September 29, 2015.


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Item 6.    Exhibits


 
 
 
 
12.1
Computation of Ratio of Earnings to Fixed Charges for each of the five years within the period ended December 31, 2014 and for each of the nine months within the periods ended September 30, 2015 and 2014.
 
 
31.1
Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2
Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
99.1
Material Legal Proceedings
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
 

69


SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
VECTOR GROUP LTD.
 
 
(Registrant)
 
 
 
 
 
By: /s/ J. Bryant Kirkland III
 
 
J. Bryant Kirkland III
 
 
Vice President, Treasurer and
 
 
Chief Financial Officer
Date:
November 9, 2015
 

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