Vector Group Ltd.
VECTOR GROUP LTD (Form: 10-Q, Received: 07/30/2014 17:21:09)


 

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 June 30, 2014
 

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 July 30, 2014 , Vector Group Ltd. had 100,437,406 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

 
June 30,
2014
 
December 31,
2013
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
506,423

 
$
234,466

Investment securities available for sale
237,767

 
172,534

Accounts receivable - trade, net
15,753

 
12,159

Inventories
108,257

 
93,496

Deferred income taxes
28,264

 
50,479

Income tax receivable, net
12,769

 

Restricted assets
2,555

 
1,785

Other current assets
28,532

 
23,392

Total current assets
940,320

 
588,311

Property, plant and equipment, net
80,332

 
79,258

Real estate held for sale, net
10,669

 
20,911

Long-term investments accounted for at cost
27,239

 
20,788

Long-term investments accounted for under the equity method
17,842

 
8,595

Investments in non-consolidated real estate businesses
133,629

 
128,202

Restricted assets
11,581

 
11,981

Deferred income taxes
64,712

 
51,474

Intangible assets, net
8,755

 
11,919

Goodwill
72,976

 
71,681

Trademarks
80,005

 
80,000

Intangible asset associated with benefit under the Master Settlement Agreement
107,511

 
107,511

Prepaid pension costs
27,663

 
26,080

Other assets
59,428

 
53,553

Total assets
$
1,642,662

 
$
1,260,264

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
141,808

 
$
151,577

   Current portion of fair value of derivatives embedded within convertible debt
7,768

 
19,128

 Current payments due under the Master Settlement Agreement
62,009

 
25,348

   Current portion of employee benefits
939

 
939

Accounts payable
10,180

 
10,260

Accrued promotional expenses
20,040

 
18,655

Income taxes payable, net
3,156

 
6,423

Accrued excise and payroll taxes payable, net
16,809

 
11,621

Litigation accruals
4,536

 
59,310

Deferred income taxes
51,433

 
45,734

Accrued interest
29,926

 
21,968

Other current liabilities
31,708

 
34,147

Total current liabilities
380,312

 
405,110

Notes payable, long-term debt and other obligations, less current portion
853,669

 
540,766

Fair value of derivatives embedded within convertible debt
183,786

 
92,934

Non-current employee benefits
48,564

 
47,917

Deferred income taxes
153,481

 
137,650

Payments due under the Master Settlement Agreement
25,809

 
27,571

Litigation accruals
24,376

 
27,058

Other liabilities
3,778

 
2,867

Total liabilities
1,673,775

 
1,281,873

Commitments and contingencies

 

Stockholders' deficiency:
 
 
 
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 150,000,000 shares authorized, 104,385,261 and 101,430,853 shares issued and 100,437,406 and 97,482,998 shares outstanding
10,043

 
9,748

Additional paid-in capital

 

Accumulated deficit
(134,385
)
 
(114,787
)
Accumulated other comprehensive income
29,679

 
22,860

Less: 3,947,855 and 3,947,855 shares of common stock in treasury, at cost
(12,857
)
 
(12,857
)
Total Vector Group Ltd. stockholders' deficiency
(107,520
)
 
(95,036
)
Non-controlling interest
76,407

 
73,427

Total stockholders' deficiency
(31,113
)
 
(21,609
)
Total liabilities and stockholders' deficiency
$
1,642,662

 
$
1,260,264


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
   Tobacco*
$
250,556

 
$
249,120

 
$
483,948

 
$
489,522

   Real estate
153,488

 
7,106

 
261,532

 
12,873

   E-Cigarettes
2,569

 

 
8,369

 

          Total revenues
406,613

 
256,226

 
753,849

 
502,395

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
   Cost of sales:
 
 
 
 
 
 
 
     Tobacco*
179,773

 
180,430

 
347,939

 
353,386

     Real estate
97,763

 
6,015

 
165,087

 
10,236

     E-Cigarettes
1,746

 

 
5,293

 

        Total cost of sales
279,282

 
186,445

 
518,319

 
363,622

 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
67,023

 
25,541

 
132,500

 
51,437

Operating income
60,308

 
44,240

 
103,030

 
87,336

 
 
 
 
 
 
 
 
Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(44,183
)
 
(32,086
)
 
(79,636
)
 
(65,462
)
Loss on extinguishment of debt

 

 

 
(21,458
)
Change in fair value of derivatives embedded within convertible debt
1,970

 
2,450

 
320

 
5,499

Acceleration of interest expense related to debt conversion
(439
)
 

 
(4,118
)
 

Equity (loss) income from non-consolidated real estate businesses
(1,808
)
 
6,804

 
(256
)
 
7,285

Equity (loss) income on long-term investments
(273
)
 
846

 
633

 
823

(Loss) gain on sale of investment securities available for sale
(18
)
 
(197
)
 
(71
)
 
5,209

Other, net
3,575

 
1,471

 
5,701

 
2,280

Income before provision for income taxes
19,132

 
23,528

 
25,603

 
21,512

Income tax expense
6,101

 
10,017

 
9,043

 
9,682

 
 
 
 
 
 
 
 
Net income
13,031

 
13,511

 
16,560

 
11,830

 
 
 
 
 
 
 
 
Net income attributed to non-controlling interest
(5,106
)
 

 
(6,055
)
 

 
 
 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
$
7,925

 
$
13,511

 
$
10,505

 
$
11,830

 
 
 
 
 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.08

 
$
0.14

 
$
0.11

 
$
0.13

 
 
 
 
 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.08

 
$
0.14

 
$
0.11

 
$
0.13

 
 
 
 
 
 
 
 
Cash distributions and dividends declared per share
$
0.40

 
$
0.38

 
$
0.80

 
$
0.76

                                      

* Revenues and cost of sales include excise taxes of $109,695 , $112,596 , $212,108 and $221,507 , 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 INCOME
( Dollars in Thousands, Except Per Share Amounts )
Unaudited


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
Net income
$
13,031

 
$
13,511

 
$
16,560

 
$
11,830

 
 
 
 
 
 
 
 
Net unrealized (losses) gains on investment securities available for sale:
 
 
 
 
 
 
 
    Change in net unrealized (losses) gains
(2,886
)
 
2,866

 
3,108

 
16,904

    Net unrealized losses (gains) reclassified into net income
18

 
197

 
71

 
(5,209
)
Net unrealized (losses) gains on investment securities available for sale
(2,868
)
 
3,063

 
3,179

 
11,695

 
 
 
 
 


 
 
Net unrealized gains (losses) on long-term investments accounted for under the equity method:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
5,282

 
(1,542
)
 
8,614

 
(584
)
Net unrealized gains (losses) reclassified into net income

 

 

 

Net unrealized gains (losses) on long-term investments accounted for under the equity method
5,282

 
(1,542
)
 
8,614

 
(584
)
 
 
 
 
 
 
 
 
Net change in forward contracts
15

 
16

 
32

 
31

 
 
 
 
 
 
 
 
Net change in pension-related amounts
147

 
351

 
295

 
702

 
 
 
 
 
 
 
 
Other comprehensive income
2,576

 
1,888

 
12,120

 
11,844

 
 
 
 
 
 
 
 
Income tax effect on:
 
 
 
 
 
 
 
    Change in net unrealized (losses) gains on investment securities
1,193

 
(1,163
)
 
(1,780
)
 
(6,863
)
    Net unrealized losses (gains) reclassified into net income on investment securities
(7
)
 
(80
)
 
(29
)
 
2,115

Change in unrealized gains (losses) on long-term investments
(2,184
)
 
626

 
(3,554
)
 
237

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

 

 

 

Forward contracts
(6
)
 
(6
)
 
(12
)
 
(12
)
Pension-related amounts
(61
)
 
(143
)
 
74

 
(285
)
Income tax provision on other comprehensive income
(1,065
)
 
(766
)
 
(5,301
)
 
(4,808
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
1,511

 
1,122

 
6,819

 
7,036

 
 
 
 
 
 
 
 
Comprehensive income
14,542

 
14,633

 
23,379

 
18,866

 
 
 
 
 
 
 
 
Comprehensive income attributed to non-controlling interest
(5,106
)
 

 
(6,055
)
 

Comprehensive income attributed to Vector Group Ltd.
$
9,436

 
$
14,633

 
$
17,324

 
$
18,866


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
( Dollars in Thousands, Except Per Share Amounts )
Unaudited


 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
 
 
Additional
 
 
 
Accumulated
Other
 
 
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Treasury
 
Non-controlling
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Income
 
Stock
 
Interest
 
Total
Balance, January 1, 2014
97,482,998

 
$
9,748

 
$

 
$
(114,787
)
 
$
22,860

 
$
(12,857
)
 
$
73,427

 
$
(21,609
)
Net income

 

 

 
10,505

 

 

 
6,055

 
16,560

Change in net loss and prior service cost, net of income taxes

 

 

 

 
369

 

 

 
369

Forward contract adjustments, net of income taxes

 

 

 

 
20

 

 

 
20

Unrealized gain on long-term investment securities accounted for under the equity method, net of income taxes

 

 

 

 
5,060

 

 

 
5,060

Change in net unrealized gain on investment securities, net of income taxes

 

 

 

 
1,328

 

 

 
1,328

Net unrealized loss reclassified into net income, net of income taxes

 

 

 

 
42

 

 

 
42

Unrealized gain on investment securities, net of income taxes

 

 

 

 

 

 

 
1,370

Total other comprehensive income

 

 

 

 

 

 

 
6,819

Total comprehensive income

 

 

 

 

 

 

 
23,379

Distributions and dividends on common stock

 

 
(49,756
)
 
(30,103
)
 

 

 

 
(79,859
)
Note conversions, net of income taxes
2,682,466

 
268

 
30,928

 

 

 

 

 
31,196

Beneficial conversion feature of notes payable, net of income taxes of $10,327

 

 
14,648

 

 

 

 

 
14,648

Exercise of stock options
271,942

 
27

 
3,378

 

 

 

 

 
3,405

Tax benefit of options exercised

 

 
680

 

 

 

 

 
680

Stock-based compensation

 

 
987

 

 

 

 

 
987

Tax rate adjustment

 

 
(865
)
 

 

 

 

 
(865
)
Distributions to non-controlling interest

 

 

 

 

 

 
(3,075
)
 
(3,075
)
Balance as of June 30, 2014
100,437,406

 
$
10,043

 
$

 
$
(134,385
)
 
$
29,679

 
$
(12,857
)
 
$
76,407

 
$
(31,113
)


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


 
Six Months Ended
 
Six Months Ended
 
June 30,
2014
 
June 30,
2013
Net cash provided by operating activities
$
53,995

 
$
5,190

Cash flows from investing activities:
 
 
 
Sale of investment securities
49,296

 
43,115

Purchase of investment securities
(110,419
)
 
(90,368
)
Proceeds from sale or liquidation of long-term investments
549

 
75

Purchase of long-term investments
(7,000
)
 
(5,000
)
Investments in non-consolidated real estate businesses
(12,534
)
 
(19,048
)
Investments in consolidated real estate businesses

 
(7,657
)
Distributions from non-consolidated real estate businesses
3,539

 

Increase in cash surrender value of life insurance policies
(395
)
 
(303
)
Increase in restricted assets
(371
)
 
(1,268
)
Issuance of notes receivable
(250
)
 

Proceeds from sale of fixed assets
4

 
13

Capital expenditures
(10,144
)
 
(5,995
)
Repayments of notes receivable
933

 
8,433

Purchase of subsidiaries
(250
)
 

Net cash used in investing activities
(87,042
)
 
(78,003
)
Cash flows from financing activities:
 
 
 
Proceeds from debt issuance
413,916

 
453,080

Deferred financing costs
(12,360
)
 
(11,663
)
Repayments of debt
(8,051
)
 
(418,833
)
Borrowings under revolver
429,188

 
474,493

Repayments on revolver
(437,736
)
 
(476,888
)
Dividends and distributions on common stock
(80,963
)
 
(71,518
)
Distributions to non-controlling interest
(3,075
)
 

Proceeds from exercise of Vector options
3,405

 

Tax benefit of options exercised
680

 

Net cash provided by (used in) financing activities
305,004

 
(51,329
)
Net increase (decrease) in cash and cash equivalents
271,957

 
(124,142
)
Cash and cash equivalents, beginning of period
234,466

 
405,855

Cash and cash equivalents, end of period
$
506,423

 
$
281,713


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. New Valley is engaged in the real estate business.

The accompanying 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 and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 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.

Certain reclassifications have been made to the 2013 financial information to conform to the 2014 presentation.

In connection with the December 13, 2013 acquisition of Douglas Elliman, the Company was required to disclose Douglas Elliman’s revenues and costs separately on the face of its condensed consolidated statements of operation. Consequently, the Company also revised the prior period in order to correctly present the gross revenues and costs of the other consolidated real estate investments as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30, 2013
 
June 30, 2013
 
As Previously Reported
 
Revision
 
As Revised
 
As Previously Reported
 
Revision
 
As Revised
Revenues
$
249,120

 
$
(249,120
)
 
$

 
$
489,522

 
$
(489,522
)
 
$

Tobacco revenues

 
249,120

 
249,120

 

 
489,522

 
489,522

Real estate revenues

 
7,106

 
7,106

 

 
12,873

 
12,873

Total revenue
249,120

 
7,106

 
256,226

 
489,522

 
12,873

 
502,395

 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
180,430

 
(180,430
)
 

 
353,386

 
(353,386
)
 

Tobacco cost of sales

 
180,430

 
180,430

 

 
353,386

 
353,386

Real estate cost of sales

 
6,015

 
6,015

 

 
10,236

 
10,236

Total cost of sales
180,430

 
6,015

 
186,445

 
353,386

 
10,236

 
363,622

 
 
 
 
 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
$
24,450

 
$
1,091

 
$
25,541

 
$
48,800

 
$
2,637

 
$
51,437



In addition, the preliminary fair values of the assets acquired, liabilities assumed and the non-controlling interest recorded for Douglas Elliman as of December 13, 2013 were adjusted during the first quarter of 2014. Goodwill and current liabilities were

7

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


reduced by $454 and $105 , respectively, while intangible assets related to favorable lease agreements were increased by $559 . The amounts are preliminary as management is still evaluating the valuations of certain assets acquired in the acquisition. These adjustments have been reflected in the Company's condensed consolidated balance sheet as of December 31, 2013.

 

(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 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 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’s accounting policy is to include federal excise taxes in revenues and cost of goods sold. Since the Company’s significant 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 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 and mortgage commissions earned by the Company’s real estate and mortgage brokerage 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 and royalties expenses are recognized concurrently with related revenues. Property management fees earned are recorded as revenue when the related services are performed.
E-Cigarettes:   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 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.


(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 27, 2013 . 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income attributed to Vector Group Ltd.
$
7,925

 
$
13,511

 
$
10,505

 
$
11,830

Income attributed to participating securities
(231
)
 
(374
)
 
(309
)
 
(328
)
Net income attributed to Vector Group Ltd. available to common stockholders
$
7,694

 
$
13,137

 
$
10,196

 
$
11,502


8

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited




 

Basic and diluted EPS were calculated using the following shares:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Weighted-average shares for basic EPS
96,760,894

 
91,167,749

 
95,686,399

 
91,165,686

Plus incremental shares related to stock options and non-vested restricted stock
101,258

 
216,890

 
112,293

 
205,721

Weighted-average shares for basic and fully diluted EPS
96,862,152

 
91,384,639

 
95,798,692

 
91,371,407



The following stock options, non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three and six months ended June 30, 2014 and 2013 but were not included in the computation of diluted EPS because the effect was anti-dilutive.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
  Number of stock options

 
N/A

 

 
N/A

  Weighted-average exercise price
N/A

 
N/A

 
N/A

 
N/A

  Weighted-average shares of non-vested restricted stock

 
56,175

 

 
56,175

  Weighted-average expense per share
N/A

 
$
15.58

 
N/A

 
$
15.58

  Weighted-average number of shares issuable upon
  conversion of debt
32,493,002

 
28,310,522

 
29,105,625

 
28,310,522

  Weighted-average conversion price
$
19.02

 
$
15.22

 
$
17.56

 
$
15.22




9

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(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; thus, 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 June 30, 2014 , the range of estimated fair market values of the Company's embedded derivatives was between $189,358 and  $193,797 .  The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $191,554 as of June 30, 2014 . At December 31, 2013 , the range of estimated fair market values of the Company's embedded derivatives was between $110,758 and  $113,392 .  The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $112,062 as of December 31, 2013 .  The estimated fair market value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note 6 .)

(f)
Other Income, Net:

Other income, net consists of:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Gain (loss) on warrants
$
45

 
$
(28
)
 
$
(123
)
 
$
37

Interest income
1,189

 
826

 
2,189

 
1,476

Accretion of interest income from debt discount on notes receivable
10

 
588

 
76

 
623

Out-of-period adjustment

 

 
1,231

 

Acceleration of closing fee related to termination of Douglas Elliman joint venture
2,335

 

 
2,335

 

Gain on long-term investment

 
142

 

 
142

Other (expense) income
(4
)
 
(57
)
 
(7
)
 
2

Other income, net
$
3,575

 
$
1,471

 
$
5,701

 
$
2,280


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 the current year is not expected to be material to the Company’s 2014 consolidated financial statements.

10

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



(g)
Subsequent Events :

On July 23, 2014, the Company granted its President and Chief Executive Officer an award of 1,000,000 shares of its Common Stock subject to performance-based vesting. The Award shares will be issued pursuant to the terms of an agreement that provides that both a performance requirement and a continued employment requirement must be met over a seven -year performance period to earn vested rights with respect to the Award Shares. The maximum potential amount of the Award Shares reflects recognition of the CEO's contributions as CEO since January 1, 2006 and the value of his management and real estate expertise to the Company. The Company anticipates expensing the value of the grant of approximately $20,660 over the seven -year term of the grant.

(h)
New Accounting Pronouncements :
 
On April 10, 2014, the Financial Accounting Standards Board issued final guidance to change the criteria for reporting discontinued operations while enhancing disclosures in this area (Accounting Standards Update (“ASU”) No. 2014-08). Under the new guidance, only disposals representing a strategic shift, such as a major line of business, a major geographical area or a major equity investment, should be presented as discontinued operations. The guidance will be applied prospectively to new disposals and new classifications of disposal groups as held for sale after the effective date. The guidance is effective for annual financial statements with fiscal years beginning on or after December 15, 2014 with early adoption permitted for disposals or classifications as held for sale which have not been reported in financial statements previously issued or available for issuance. The Company will adopt the guidance effective January 1, 2015 and the guidance is not anticipated to have a material impact on the Company's consolidated financial statements and notes to the consolidated financial statements.

On March 13, 2014, the Emerging Issues Task Force (the “Task Force”) reached a final consensus to amend the accounting guidance for stock compensation tied to performance targets (Issue No. 13-D). The objective of this guidance is to clarify the accounting treatment of certain types of performance conditions in stock-based compensation awards, more specifically, when performance targets can be achieved after the requisite service period. The Task Force concluded that performance criteria subsequent to a service period vesting requirement should be treated as vesting conditions, and as a result, this type of performance condition may delay expense recognition until achievement of the performance target is probable. Issue No. 13-D will be effective for all entities for reporting periods (including interim periods) beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard but does not anticipate it will have a material impact on the Company's consolidated financial statements or notes to the consolidated financial statements.

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which amends the existing accounting standards for revenue recognition. ASU 2014-09 is based on principles that govern the recognition of revenue at an amount an entity expects to be entitled when products are transferred to customers. ASU 2014-09 will be effective for the Company on January 1, 2017. Early adoption is not permitted. The new revenue standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is currently evaluating the impact of adopting the new revenue standard on its consolidated financial statements.



11

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


2 .
INVENTORIES

Inventories consist of:

 
June 30,
2014
 
December 31,
2013
Leaf tobacco
$
59,506

 
$
49,140

Other raw materials
3,196

 
3,161

Work-in-process
388

 
353

Finished goods
65,021

 
67,201

E-Cigarettes
9,705

 
839

Inventories at current cost
137,816

 
120,694

LIFO adjustments
(29,559
)
 
(27,198
)
 
$
108,257

 
$
93,496


The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated requirements and are at prices, including carrying costs, established at the commitment date. At June 30, 2014 , Liggett had tobacco purchase commitments of approximately $17,277 and E-Cigarettes purchase commitments of $538 . The Company has a single source supply agreement for fire safe cigarette paper through 2015.

All of the Company's inventories at June 30, 2014 and December 31, 2013 have been reported under the LIFO method.


3 . INVESTMENT SECURITIES AVAILABLE FOR SALE

The components of investment securities available for sale at June 30, 2014 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
55,602

 
$
68,738

 
$
(1,306
)
 
$
123,034

Mutual funds invested in fixed income securities
60,217

 
305

 

 
60,522

Marketable debt securities
52,883

 
1,744

 
(416
)
 
54,211

Total investment securities available for sale
$
168,702

 
$
70,787

 
$
(1,722
)
 
$
237,767



The components of investment securities available for sale at December 31, 2013 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
53,586

 
$
65,851

 
$
(963
)
 
$
118,474

Marketable debt securities
53,063

 
1,497

 
(500
)
 
54,060

Total investment securities available for sale
$
106,649

 
$
67,348

 
$
(1,463
)
 
$
172,534




12

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The table below summarizes the maturity dates of marketable debt securities at June 30, 2014 .

Investment Type:
Market Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
11,197

 
$
830

 
$
10,367

 
$

Corporate securities
30,648

 
2,906

 
20,206

 
7,536

U.S. mortgage backed securities
214

 

 
214

 

Commercial mortgage-backed securities
6,645

 
854

 
5,791

 

U.S. asset backed securities
5,061

 

 
5,061

 

Government agencies
192

 

 
192

 

Index-linked U.S. bonds
254

 

 
254

 

Total marketable debt securities by maturity dates
$
54,211

 
$
4,590

 
$
42,085

 
$
7,536




4 .
LONG-TERM INVESTMENTS

Long-term investments accounted for at cost:

 
June 30, 2014
 
December 31, 2013
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Investment partnerships
$
26,541

 
$
32,619

 
$
20,041

 
$
24,095

Real estate partnership
698

 
1,148

 
747

 
1,067

Investments accounted for at cost
$
27,239

 
$
33,767

 
$
20,788

 
$
25,162


The Company contributed an additional $7,000 to Investment Partnerships during the six months ended June 30, 2014 .

Long-term investment partnership accounted for under the equity method:
 
June 30,
2014
 
December 31,
2013
Investment partnership
$
17,842

 
$
8,595


The Company recorded equity losses of $273 and equity income of $846 for the three months ended June 30, 2014 and 2013 , respectively, related to the limited partnership. The Company recorded equity income of $633 and $823 for the six months ended June 30, 2014 and 2013 , respectively, related to the limited partnership.

The carrying value of the investment was approximately $17,842 and $8,595 as of June 30, 2014 and December 31, 2013 , respectively, which approximated the investment's fair value.


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. As of January 1, 2013, the Company owned a 50% interest in Douglas Elliman, and the Company accounted for its 50% using the equity method of accounting. On December 13, 2013, an affiliate of New Valley acquired an additional 20.59% interest in Douglas Elliman from Prudential Real Estate Financial Services of America, Inc. for a purchase price of $60,000 in cash. The acquisition increased the Company's ownership position in Douglas Elliman from 50% to 70.59% and resulted in the Company having control.

13

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The transaction was accounted for as an acquisition of a business in the fourth quarter of 2013. The preliminary fair values of the assets acquired, liabilities assumed and the non-controlling interest recorded for Douglas Elliman as of December 13, 2013 were adjusted during the first quarter of 2014. Goodwill and current liabilities were reduced by $454 and $105 , respectively, while intangible assets related to favorable lease agreements were increased by $559 . The amounts are preliminary as management is still evaluating the valuations of certain assets acquired in the acquisition. These adjustments have been reflected in the Company's condensed consolidated balance sheet as of December 31, 2013 and March 31, 2014.
Equity Method of Accounting. Prior to December 13, 2013, New Valley accounted for its 50% interest in Douglas Elliman under the equity method of accounting. New Valley recorded income associated with Douglas Elliman of $6,815 and $7,438 for the three and six months ended June 30, 2013 , respectively, which included management fees earned by New Valley from Douglas Elliman.
Summarized income statement information for Douglas Elliman for the three and six months ended June 30, 2013 , is presented below.
 
 
Three Months Ended
 
Six Months Ended
 
 
 
June 30,
2013
 
June 30,
2013
 
Revenues
 
$
113,647

 
$
188,184

 
Costs and expenses
 
100,093

 
173,707

 
Depreciation expense
 
985

 
1,958

 
Amortization expense
 
55

 
111

 
Other income
 
261

 
403

 
Interest income, net
 
8

 
8

 
Income tax expense
 
301

 
242

 
Net income
 
$
12,482

 
$
12,577

 

New Valley received cash distributions from Douglas Elliman of $2,636 for the six months ended June 30, 2013 .

14

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Investments in non-consolidated real estate businesses.   New Valley also holds equity investments in various real estate projects domestically and internationally. The components of “Investments in non-consolidated real estate businesses” were as follows:

 
June 30,
2014
 
December 31,
2013
 
 
 
 
Sesto Holdings
$
5,037

 
$
5,037

Land Development
5,037

 
5,037

 
 
 
 
10 Madison Square Park West (f/k/a 1107 Broadway)
6,384

 
6,579

The Whitman
526

 
1,165

The Marquand
7,000

 
7,000

11 Beach Street
12,328

 
11,160

701 Seventh Avenue
11,324

 
11,148

101 Murray Street
23,006

 
19,256

Leroy Street
652

 
1,150

PUBLIC Chrystie House (f/k/a Chrystie Street)
3,081

 
2,048

25-19 43rd Avenue
733

 

23-10 Queens Plaza South
9,528

 
8,058

8701 Collins Avenue
4,000

 
3,794

Condominium and Mixed Use Development
78,562

 
71,358

 
 
 
 
Maryland Portfolio
3,518

 
3,498

ST Portfolio
15,550

 
15,984

Apartment Buildings
19,068

 
19,482

 
 
 
 
Park Lane Hotel
17,447

 
19,514

Hotel Taiwana
7,467

 
7,428

Coral Beach
3,410

 
2,964

Hotels
28,324

 
29,906

 
 
 
 
Other
2,638

 
2,419

 
 
 
 
Investments in non-consolidated real estate businesses
$
133,629

 
$
128,202

 
Condominium and Mixed Use Development:
Condominium and mixed use developments investments range in ownership percentage from 5% to 49.5% . New Valley recorded equity income of $7 and $2,299 during the three and six months ended June 30, 2014 , respectively. The $2,299 equity income was primarily related to the sale of a commercial unit at 10 Madison Square Park West (f/k/a 1107 Broadway). New Valley recorded equity income of $130 and $130 for the three and six months ended June 30, 2013 . During the six months ended June 30, 2014 , New Valley made capital contributions totaling $10,696 and received distributions of $5,791 . During the six months ended June 30, 2013 , New Valley made capital contributions totaling $15,392 and received distributions of $130 . New Valley's maximum exposure to loss as a result of its investments in condominium and mixed use developments was $78,562 at June 30, 2014 .

15

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Apartment Buildings:
Apartment buildings investments range in ownership percentage from 7.5% to 16.4% . New Valley recorded equity net equity losses of $217 and $142 for the three months ended June 30, 2014 and 2013, respectively, related to the apartment portfolios. New Valley recorded equity losses of $164 and $283 for six months ended June 30, 2014 and 2013, respectively, primarily related to an apartment portfolio. New Valley received distributions of $250 and $125 during the six months ended June 30, 2014 and 2013 , respectively, related to an apartment portfolio. New Valley's maximum exposure to loss as a result of its investment in apartment buildings was $19,068 at June 30, 2014 .

Hotels:
Hotel investments range in ownership percentage from 5% to 49% . During the three and six months ended June 30, 2014 , New Valley recorded net equity losses of $857 and $2,171 . New Valley made capital contributions totaling $589 for the six months ended June 30, 2014, related to Coral Beach. New Valley made capital contributions totaling $3,655 for the six months ended June 30, 2013, primarily related to Hotel Taiwana. New Valley's maximum exposure to loss as a result of its investments in hotels was $28,324 at June 30, 2014 .

Other:
Other non-consolidated real estate business 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:
 
June 30,
2014
 
December 31,
2013
Escena, net
$
10,669

 
$
10,625

Indian Creek

 
10,286

            Real estate held for sale, net
$
10,669

 
$
20,911


Escena.   In October 2013, the Company sold 200 of the 867 residential lots. The remaining project consists of 667 residential lots, consisting of both single family and multi-family lots, an 18 -hole golf course, clubhouse restaurant and golf shop, and a seven -acre site approved for a 450 -room hotel.
The assets of "Escena, net" are as follows:

 
June 30,
2014
 
December 31,
2013
Land and land improvements
$
8,930

 
$
8,930

Building and building improvements
1,830

 
1,530

Other
1,526

 
1,577

 
12,286

 
12,037

Less accumulated depreciation
(1,617
)
 
(1,412
)
 
$
10,669

 
$
10,625



16

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The Company recorded an operating loss of $287 and $307 for the three months ended June 30, 2014 and 2013 , respectively, from Escena. The Company recorded operating income of $233 and $76 for the six months ended June 30, 2014 and 2013 , respectively, from Escena.

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 three and six months ended June 30, 2014.

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

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

 
June 30,
2014
 
December 31,
2013
Vector:
 
 
 
7.75% Senior Secured Notes due 2021, including premium of $9,879 and $0
$
609,879

 
$
450,000

6.75% Variable Interest Senior Convertible Note due 2014, net of unamortized discount of $4,895 and $19,311*
20,105

 
30,689

6.75% Variable Interest Senior Convertible Exchange Notes due 2014, net of unamortized discount of $11,569 and $25,944*
88,461

 
81,586

7.5% Variable Interest Senior Convertible Notes due 2019, net of unamortized discount of $151,675 and $155,817*
78,325

 
74,183

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $104,496 and $0*
154,254

 

Liggett:
 
 
 
Revolving credit facility
21,876

 
30,424

Term loan under credit facility
3,737

 
3,884

Equipment loans
18,237

 
17,252

Other
603

 
4,325

Total notes payable, long-term debt and other obligations
995,477

 
692,343

Less:
 
 
 
Current maturities
(141,808
)
 
(151,577
)
Amount due after one year
$
853,669

 
$
540,766

______________________
* The fair value of the derivatives embedded within the 6.75% Variable Interest Senior Convertible Note ( $1,716 at June 30, 2014 and $6,607 at December 31, 2013 , respectively), the 6.75% Variable Interest Senior Convertible Exchange Notes ( $6,052 at June 30, 2014 and $12,521 at December 31, 2013 , respectively), the 5.50% Variable Interest Senior Convertible Debentures ( $87,217 at June 30, 2014 and $0 at December 31, 2013 , respectively), and the 7.50% Variable Interest Senior Convertible Debentures ( $96,569 at June 30, 2014 and $92,934 at December 31, 2013 , respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.

7.75% Senior Secured Notes due 2021 - Vector:

On April 15, 2014, the Company completed the sale of $150,000 principal amount of its 7.75% Senior Secured Notes due 2021 for a price of 106.750% in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. The Company received net proceeds of approximately $158,700 after deducting underwriting discounts, commissions, fees and offering expenses. The net proceeds will be used for general corporate purposes, including additional investments in real estate and in its tobacco business. The Company will amortize the deferred costs and debt premium related to the additional Senior Secured Notes over the estimated life of the debt.

17

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


In connection with the issuance of the 7.75% Senior Secured Notes, the Company entered into a Registration Rights Agreement. The Company consummated a registered exchange offer for the 7.75% Senior Secured Notes on July 9, 2014. The new 7.75% Senior Secured Notes issued in the exchange offer have substantially the same terms as the original notes, except that the new 7.75% Senior Secured Notes have been registered under the Securities Act.

6.75% Variable Interest Senior Convertible Note due 2014 - Vector:
On March 14, 2014, the holder of the 6.75% Variable Interest Senior Convertible Note due 2014 converted $25,000 principal balance of the $50,000 Note into 2,121,479 of the Company's common shares. The Company recorded non-cash accelerated interest expense related to the converted debt of $3,679 for the six months ended June 30, 2014 . The debt conversion resulted in a reduction of debt and an increase to equity in the amount of $25,000 .
6.75% Variable Interest Senior Convertible Exchange Notes due 2014 - Vector:
On May 20, 2014, a holder of the 6.75% Variable Interest Senior Convertible Exchange Notes due 2014 converted $7,500 principal balance of the $107,530 Notes into 560,987 of the Company's common shares. The Company recorded non-cash accelerated interest expense related to the converted debt of $439 for the three and six months ended June 30, 2014 . The debt conversion resulted in a reduction of debt and an increase to equity in the amount of $7,500 .

5.5% Variable Interest Senior Convertible Notes due 2020 - Vector:
On March 24, 2014, the Company completed the sale of $258,750 of its Variable Interest Convertible Senior Notes due 2020 (the "2020 Convertible Notes"). The 2020 Convertible Notes are the Company's senior unsecured obligations and are effectively subordinated to any of its secured indebtedness to the extent of the assets securing such indebtedness. The 2020 Convertible Notes are also structurally subordinated to all liabilities and commitments of the Company's subsidiaries.
The aggregate net proceeds from the sale of the 2020 Convertible Notes were approximately $250,300 after deducting underwriting discounts, commissions, fees and offering expenses. The net proceeds will be used for general corporate purposes, including for additional investments in real estate and in the Company's tobacco business. The Company may also consider using a portion of the net proceeds from the sale of the notes to address upcoming debt maturities.
The 2020 Convertible Notes pay interest (“Total Interest”) on a quarterly basis beginning April 15, 2014 at a rate of 1.75% per annum plus additional interest, which is based on the amount of cash dividends paid during the prior three-month period ending on the record date for such interest payment multiplied by the total number of shares of its common stock into which the debt will be convertible on such record date. Notwithstanding the foregoing, however, the interest payable on each interest payment date after April 15, 2014 shall be the higher of (i) the Total Interest and (ii) 5.5% per annum with the interest payment on April 15, 2014 being based on 5.5% per annum. The notes are convertible into the Company’s common stock at the holder’s option. The conversion price at June 30, 2014 was $27.16 per share (approximately 36.8155  shares of common stock per $1,000 principal amount of the note), and is subject to adjustment for various events, including the issuance of stock dividends. The notes will mature on April 15, 2020. If a fundamental change (as defined in the indenture) occurs, the Company will be required to offer to repurchase the notes at 100% of their principal amount, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date.


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

As of June 30, 2014 , a total of $25,613 was outstanding under the revolving and term loan portions of the credit facility. Availability as determined under the facility was approximately $24,387 based on eligible collateral at June 30, 2014 .



18

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Non-Cash Interest Expense - Vector :

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Amortization of debt discount
$
7,563

 
$
8,464

 
$
20,019

 
$
15,812

Amortization of deferred finance costs
1,055

 
447

 
1,763

 
1,044

Loss on extinguishment of 11% Senior Secured Notes

 

 

 
3,638

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
439

 

 
439

 


$
9,057

 
$
8,911

 
$
25,900

 
$
20,494



Fair Value of Notes Payable and Long-Term Debt:

 
June 30, 2014
 
December 31, 2013
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Notes payable and long-term debt
$
995,477

 
$
1,473,738

 
$
692,343

 
$
1,006,562


Notes payable and long-term debt are carried on the condensed balance sheet at amortized cost. The fair value determination disclosed above would be classified as Level 2 under the fair value hierarchy disclosed in Note 9 if such liabilities were recorded on the condensed 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 are not necessarily indicative of the amount that could be realized in a current market exchange.



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”). As new cases are commenced, the costs associated with defending these cases and the risks relating to the inherent unpredictability of litigation increase. The future financial impact of the risks and expenses of litigation are not quantifiable. For the six months ended June 30, 2014 and 2013 , Liggett incurred tobacco product liability legal expenses and other litigation costs totaling $5,174 and $3,562 , respectively.

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 some 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 $5,093 in bonds as of June 30, 2014 .
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 have challenged the constitutionality of the bond cap statute, but to date the courts that have addressed the issue 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 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 June 30, 2014 , 16 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts. Eleven verdicts were returned in favor of the plaintiffs and five in favor of Liggett. Excluding the Lukacs case, which was tried in 2002, seven years before the trials of Engle progeny cases commenced, the compensatory verdicts against Liggett have ranged from $1 to $3,479 . In certain cases, the judgments entered have been joint and several with other defendants. In two of the cases, punitive damages were awarded against Liggett. 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 June 30, 2014 , Liggett (and in certain cases the Company) had, on an individual basis, settled 144 Engle progeny cases for approximately $1,170 in the aggregate. Seven of those cases were settled in the second quarter of 2014. In addition, in October 2013, Liggett announced a settlement of the claims of over 4,900 Engle progeny plaintiffs (see Engle Progeny Settlement below).

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Individual Actions
As of June 30, 2014 , there were 49 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 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, that are pending against Liggett or the Company as of June 30, 2014 :
State
 
Number
of Cases
Florida
 
30

New York
 
9

Maryland
 
4

Louisiana
 
2

West Virginia
 
2

Missouri
 
1