Vector Group Ltd.
VECTOR GROUP LTD (Form: 10-Q, Received: 04/29/2015 17:12:16)


 

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 March 31, 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 April 29, 2015 , Vector Group Ltd. had 116,798,712 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

 
March 31,
2015
 
December 31,
2014
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
270,572

 
$
326,365

Investment securities available for sale
352,811

 
346,043

Accounts receivable - trade, net
18,092

 
23,328

Inventories
99,058

 
90,323

Deferred income taxes
28,057

 
29,192

Income taxes receivable, net
6,801

 
3,282

Restricted assets
2,221

 
2,595

Other current assets
43,389

 
36,718

Total current assets
821,001

 
857,846

Property, plant and equipment, net
82,293

 
84,112

Real estate held for sale, net
10,592

 
10,643

Long-term investments
45,159

 
40,292

Investments in real estate ventures
170,780

 
163,460

Restricted assets
19,320

 
12,013

Deferred income taxes
49,595

 
51,129

Goodwill and other intangible assets, net
268,521

 
269,972

Prepaid pension costs
25,833

 
25,032

Other assets
57,829

 
58,893

Total assets
$
1,550,923

 
$
1,573,392

LIABILITIES AND STOCKHOLDERS' EQUITY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
20,864

 
$
52,640

   Current portion of fair value of derivatives embedded within convertible debt

 
884

 Current payments due under the Master Settlement Agreement
51,527

 
26,322

   Current portion of employee benefits
931

 
931

Income taxes payable, net
1,753

 
1,743

Litigation accruals
3,363

 
3,149

Deferred income taxes
58,599

 
57,671

Other current liabilities
106,661

 
126,755

Total current liabilities
243,698

 
270,095

Notes payable, long-term debt and other obligations, less current portion
868,133

 
860,711

Fair value of derivatives embedded within convertible debt
162,039

 
168,502

Non-current employee benefits
49,504

 
49,314

Deferred income taxes
147,132

 
145,639

Payments due under the Master Settlement Agreement
25,809

 
25,809

Litigation accruals
22,838

 
25,700

Other liabilities
5,424

 
5,570

Total liabilities
1,524,577

 
1,551,340

Commitments and contingencies

 

Stockholders' 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, 120,943,959 and 118,646,261 shares issued and 116,798,712 and 114,501,014 shares outstanding
11,680

 
11,450

Additional paid-in capital

 

Accumulated deficit
(88,421
)
 
(90,160
)
Accumulated other comprehensive income
36,539

 
34,540

Less: 4,145,247 and 4,145,247 shares of common stock in treasury, at cost
(12,857
)
 
(12,857
)
Total Vector Group Ltd. stockholders' deficiency
(53,059
)
 
(57,027
)
Non-controlling interest
79,405

 
79,079

Total stockholders' equity
26,346

 
22,052

Total liabilities and stockholders' equity
$
1,550,923

 
$
1,573,392


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
 
March 31,
 
2015
 
2014
Revenues:
 
 
 
   Tobacco*
$
228,085

 
$
233,392

   Real estate
132,256

 
108,044

   E-Cigarettes
419

 
5,800

          Total revenues
360,760

 
347,236

 
 
 
 
Expenses:
 
 
 
   Cost of sales:
 
 
 
     Tobacco*
157,030

 
168,166

     Real estate
84,358

 
67,324

     E-Cigarettes
630

 
3,547

        Total cost of sales
242,018

 
239,037

 
 
 
 
Operating, selling, administrative and general expenses
73,944

 
63,977

Litigation settlement and judgment expense
843

 
1,500

Operating income
43,955

 
42,722

 
 
 
 
Other income (expenses):
 
 
 
Interest expense
(31,746
)
 
(35,453
)
Change in fair value of derivatives embedded within convertible debt
6,460

 
(1,650
)
Acceleration of interest expense related to debt conversion

 
(3,679
)
Equity income from real estate ventures
338

 
1,552

Equity (loss) income on long-term investments
(37
)
 
906

Gain (loss) on sale of investment securities available for sale
13,029

 
(53
)
Other, net
1,896

 
2,126

Income before provision for income taxes
33,895

 
6,471

Income tax expense
12,679

 
2,942

 
 
 
 
Net income
21,216

 
3,529

 
 
 
 
Net income attributed to non-controlling interest
(260
)
 
(949
)
 
 
 
 
Net income attributed to Vector Group Ltd.
$
20,956

 
$
2,580

 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.18

 
$
0.03

 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.18

 
$
0.03

 
 
 
 
Cash distributions and dividends declared per share
$
0.40

 
$
0.38

                                      

* Revenues and cost of sales include excise taxes of $97,359 and $102,413 , 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
 
March 31,
 
2015
 
2014
 
 
Net income
$
21,216

 
$
3,529

 
 
 
 
Net unrealized gains on investment securities available for sale:
 
 
 
    Change in net unrealized (losses) gains
(9,918
)
 
5,994

    Net unrealized gains reclassified into net income
13,029

 
53

Net unrealized gains on investment securities available for sale
3,111

 
6,047

 


 
 
Net unrealized gains on long-term investments accounted for under the equity method:
 
 
 
Net unrealized gains on long-term investments accounted for under the equity method
14

 
3,332

 
 
 
 
Net change in forward contracts
16

 
17

 
 
 
 
Net change in pension-related amounts
 
 
 
Amortization of gain
267

 
148

Net change in pension-related amounts
267

 
148

 
 
 
 
Other comprehensive income
3,408

 
9,544

 
 
 
 
Income tax effect on:
 
 
 
    Change in net unrealized (losses) gains on investment securities
4,101

 
(2,973
)
    Net unrealized losses reclassified into net income on investment securities
(5,387
)
 
(22
)
Change in unrealized losses on long-term investments
(6
)
 
(1,370
)
Forward contracts
(6
)
 
(6
)
Pension-related amounts
(111
)
 
135

Income tax provision on other comprehensive income
(1,409
)
 
(4,236
)
 
 
 
 
Other comprehensive income, net of tax
1,999

 
5,308

 
 
 
 
Comprehensive income
23,215

 
8,837

 
 
 
 
Comprehensive income attributed to non-controlling interest
(260
)
 
(949
)
Comprehensive income attributed to Vector Group Ltd.
$
22,955

 
$
7,888


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

4



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


 
Vector Group Ltd. Stockholders' 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

 

 

 
20,956

 

 

 
260

 
21,216

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

 

 

 

 
156

 

 

 
156

Forward contract adjustments, net of income taxes

 

 

 

 
10

 

 

 
10

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

 

 

 

 
8

 

 

 
8

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

 

 

 

 
(5,817
)
 

 

 
(5,817
)
Net unrealized loss on investment securities available for sale reclassified into net income, net of income taxes

 

 

 

 
7,642

 

 

 
7,642

Unrealized gain on investment securities, net of income taxes

 

 

 

 

 

 

 
1,825

Total other comprehensive income

 

 

 

 

 

 

 
1,999

Total comprehensive income

 

 

 

 

 

 

 
23,215

Distributions and dividends on common stock

 

 
(27,539
)
 
(19,217
)
 

 

 

 
(46,756
)
Note conversions, net of taxes $367
2,227,552

 
223

 
25,299

 

 

 

 

 
25,522

Exercise of stock options
70,146

 
7

 
802

 

 

 

 

 
809

Tax benefit of options exercised

 

 
274

 

 

 

 

 
274

Stock-based compensation

 

 
1,164

 

 

 

 

 
1,164

Deemed dividend from subsidiary

 

 

 

 

 

 

 

Acquisition of Douglas Elliman Realty, LLC

 

 

 

 

 

 

 

Contributions made by non-controlling interest

 

 

 

 

 

 
66

 
66

Balance as of March 31, 2015
116,798,712

 
$
11,680

 
$

 
$
(88,421
)
 
$
36,539

 
$
(12,857
)
 
$
79,405

 
$
26,346



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


 
Three Months Ended
 
Three Months Ended
 
March 31,
2015
 
March 31,
2014
Net cash provided by (used in) operating activities
$
7,828

 
$
(39,084
)
Cash flows from investing activities:
 
 
 
Sale of investment securities
75,538

 
35,009

Purchase of investment securities
(67,628
)
 
(36,763
)
Proceeds from sale or liquidation of long-term investments
110

 

Purchase of long-term investments
(5,000
)
 
(1,000
)
Investments in real estate ventures
(7,816
)
 
(4,068
)
Distributions from investments in real estate ventures

 
2,575

Increase in cash surrender value of life insurance policies
(606
)
 
(47
)
Increase in restricted assets
(6,933
)
 
(390
)
Proceeds from sale of fixed assets
3

 

Capital expenditures
(3,156
)
 
(6,424
)
Repayments of notes receivable
1,106

 
933

Pay downs of investment securities
1,594

 

Net cash used in investing activities
(12,788
)
 
(10,175
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt

 
260,508

Deferred financing costs
(585
)
 
(8,210
)
Repayments of debt
(1,857
)
 
(2,215
)
Borrowings under revolver
107,668

 
196,842

Repayments on revolver
(110,792
)
 
(211,520
)
Dividends and distributions on common stock
(46,350
)
 
(40,865
)
Proceeds from exercise of Vector options
809

 
1,385

Tax benefit of options exercised
274

 
344

Net cash (used in) provided by financing activities
(50,833
)
 
196,269

Net (decrease) increase in cash and cash equivalents
(55,793
)
 
147,010

Cash and cash equivalents, beginning of period
326,365

 
234,466

Cash and cash equivalents, end of period
$
270,572

 
$
381,476


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 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, 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.

As a result of the amount of operating losses of Zoom as of September 30, 2014 when compared to the remaining components of Corporate and Other segment, the Company has reevaluated its operating segments and has separated Zoom’s operations from the Corporate and Other segment for previously reported as of and for the three months ended March 31, 2014. Thus, prior period information has been recast to conform to the current presentation. This change did not have an impact to the Company's historical consolidated results.

(b)
Distributions and Dividends on Common Stock :

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders' equity 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 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 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 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

7

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 26, 2014 . 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
 
March 31,
 
2015
 
2014
Net income attributed to Vector Group Ltd.
$
20,956

 
$
2,580

Expense attributed to participating securities
(622
)
 
(77
)
Net income attributed to Vector Group Ltd. available to common stockholders
$
20,334

 
$
2,503


Basic and diluted EPS were calculated using the following shares:

 
Three Months Ended
 
March 31,
 
2015
 
2014
Weighted-average shares for basic EPS
111,419,737

 
99,329,965

Plus incremental shares related to stock options and non-vested restricted stock
191,863

 
129,495

Weighted-average shares for basic and fully diluted EPS
111,611,600

 
99,459,460


The following stock options, non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three months ended March 31, 2015 and 2014 but were not included in the computation of diluted EPS because the effect was anti-dilutive.

 
Three Months Ended
 
March 31,
 
2015
 
2014
  Number of stock options
N/A

 
N/A

  Weighted-average exercise price
N/A

 
N/A

  Weighted-average shares of non-vested restricted stock
N/A

 
N/A

  Weighted-average expense per share
N/A

 
N/A

  Weighted-average number of shares issuable upon
  conversion of debt
24,551,498

 
26,964,642

  Weighted-average conversion price
$
20.29

 
$
14.94



(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

8

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 March 31, 2015 , the range of estimated fair market values of the Company's embedded derivatives was between $160,400 and  $163,711 . The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $162,039 as of March 31, 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)
Other Income, Net :

Other income, net consists of:
 
Three Months Ended
 
March 31,
 
2015
 
2014
Loss on warrants
$
(114
)
 
$
(168
)
Interest and dividend income
1,749

 
1,000

Accretion of interest income from debt discount on notes receivable
64

 
66

Out-of-period adjustment

 
1,231

Gain on long-term investment
200

 

Other expense
(3
)
 
(3
)
Other income, net
$
1,896

 
$
2,126


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.


(g)
Other Current Liabilities :
Other current liabilities consists of:
 
March 31, 2015
 
December 31, 2014
Accrued promotional expenses
$
17,196

 
$
20,191

Accrued excise and payroll taxes payable, net
20,569

 
23,172

Accrued interest
16,121

 
28,321

Other current liabilities
52,775

 
55,071

Total other current liabilities
$
106,661

 
$
126,755




9

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(h)
Goodwill and Other Intangible Assets :

The components of “Goodwill and other intangible assets, net” were as follows:

 
 
March 31,
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
 
10,219

 
11,670

 
 
 
 
 
  Total goodwill and other intangible assets, net
 
$
268,521

 
$
269,972



(i)
New Accounting Pronouncements :

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“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 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, the 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 annual periods beginning after December 15, 2015 and interim periods within those reporting periods. Early adoption is permitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.




10

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


2 .
INVENTORIES

Inventories consist of:
 
March 31,
2015
 
December 31,
2014
Leaf tobacco
$
59,616

 
$
49,948

Other raw materials
3,634

 
3,532

Work-in-process
503

 
879

Finished goods
65,365

 
62,876

E-Cigarettes
1,555

 
3,079

Inventories at current cost
130,673

 
120,314

LIFO adjustments
(31,615
)
 
(29,991
)
 
$
99,058

 
$
90,323


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 March 31, 2015 , Liggett had tobacco purchase commitments of approximately $14,729 and E-Cigarettes purchase commitments of $300 . The Company has a single source supply agreement for fire safe cigarette paper through 2019.

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 the public warehouses but not sold. The amount of capitalized MSA cost in “Finished goods” inventory was $14,814 and $14,369 at March 31, 2015 and December 31, 2014 , respectively.

All of the Company's inventories at March 31, 2015 and December 31, 2014 have been reported under the LIFO method.



11

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


3 . INVESTMENT SECURITIES AVAILABLE FOR SALE

The components of investment securities available for sale at March 31, 2015 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
66,278

 
$
91,505

 
$
(1,242
)
 
$
156,541

Mutual funds invested in fixed income securities
61,893

 

 
(1,439
)
 
60,454

Marketable debt securities
130,323

 
5,788

 
(295
)
 
135,816

Total investment securities available for sale
$
258,494

 
$
97,293

 
$
(2,976
)
 
$
352,811


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

 
$
92,244

 
$
(1,093
)
 
$
154,192

Mutual funds invested in fixed income securities
61,485

 

 
(1,659
)
 
59,826

Marketable debt securities
130,311

 
2,557

 
(843
)
 
132,025

Total investment securities available for sale
$
254,837

 
$
94,801

 
$
(3,595
)
 
$
346,043



The table below summarizes the maturity dates of marketable debt securities at March 31, 2015 .

Investment Type:
Market Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
32,423

 
$

 
$
32,423

 
$

Corporate securities
61,670

 
7,497

 
43,181

 
10,992

U.S. mortgage-backed securities
6,807

 
963

 
5,665

 
179

Commercial mortgage-backed securities
16,763

 
3,895

 
6,785

 
6,083

U.S. asset-backed securities
16,038

 
3,521

 
10,684

 
1,833

Index-linked U.S. bonds
2,115

 

 
2,115

 

Total marketable debt securities by maturity dates
$
135,816

 
$
15,876

 
$
100,853

 
$
19,087





12

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


4 .
LONG-TERM INVESTMENTS

Long-term investments consist of the following:

 
March 31, 2015
 
December 31, 2014
Investment partnerships
$
36,540

 
$
31,541

Real estate partnership
588

 
698

  Long-term investments at cost
37,128

 
32,239

 
 
 
 
Investment partnership accounted for under the equity method
8,031

 
8,053

 
$
45,159

 
$
40,292


Long-term investments consist of the following investments accounted for at cost:
 
March 31, 2015
 
December 31, 2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Investment partnerships
$
36,540

 
$
45,679

 
$
31,541

 
$
38,039

Real estate partnership
588

 
831

 
698

 
1,108

 
$
37,128

 
$
46,510

 
$
32,239

 
$
39,147


Long-term investment partnership accounted for under the equity method:
 
March 31,
2015
 
December 31,
2014
Investment partnership
$
8,031

 
$
8,053


The Company recorded a loss of $37 for the three months ended March 31, 2015 and equity income of $906 for the three months ended March 31, 2014 related to the investment partnership.

The carrying value of the investment was approximately $8,031 and $8,053 as of March 31, 2015 and December 31, 2014 , 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. The Company owns 70.59% interest in Douglas Elliman, the condensed consolidated financial statements of the Company include the account balances of Douglas Elliman.






13

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



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:

 
March 31,
2015
 
December 31,
2014
 
 
 
 
Milanosesto Holdings (f/k/a Sesto Holdings)
$
5,037

 
$
5,037

Land Development
5,037

 
5,037

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

 
6,384

The Marquand
12,300

 
12,000

11 Beach Street
12,328

 
12,328

20 Times Square (f/k/a 701 Seventh Avenue)
12,660

 
12,481

111 Murray Street
27,319

 
27,319

160 Leroy Street
1,599

 
1,467

PUBLIC Chrystie House (f/k/a Chrystie Street)
4,159

 
3,300

25-19 43rd Avenue
981

 
733

Queens Plaza (f/k/a 23-10 Queens Plaza South)
11,082

 
11,082

8701 Collins Avenue
6,144

 
6,144

125 Greenwich Street
9,308

 
9,308

9040 Sunset Boulevard
5,604

 
5,604

Condominium and Mixed Use Development
109,868

 
108,150

 
 
 
 
Maryland Portfolio
3,051

 
3,234

ST Portfolio
15,206

 
15,283

Apartment Buildings
18,257

 
18,517

 
 
 
 
Park Lane Hotel
18,633

 
19,341

Hotel Taiwana
8,122

 
7,629

Coral Beach and Tennis Club
2,817

 
2,816

Hotels
29,572

 
29,786

 
 
 
 
Plaza at Harmon Meadow
5,931

 

Commercial
5,931

 

 
 
 
 
Other
2,115

 
1,970

 
 
 
 
Investments in real estate ventures
$
170,780

 
$
163,460

 
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 $536 during the three months ended March 31, 2015 , of which $300 related to New Valley's proportionate share of the Marquand’s income from the sale of two units during the quarter and $236 from Chelsea Eleven for a distribution of excess amounts held back in 2012 for final expenses of the investment. New Valley recorded equity income of $2,292 for the three months ended March 31, 2014 primarily related to the sale of a commercial unit at 10 Madison Square Park West.

14

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


During the three months ended March 31, 2015 , New Valley made capital contributions totaling $1,352 primarily related to PUBLIC Chrystie House and 25-19 43rd Avenue. During the three months ended March 31, 2014 , New Valley made capital contributions totaling $4,008 related to 11 Beach Street, 111 Murray Street, PUBLIC Chrystie House and 20 Times Square. New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's investment percentage did not change.
During the three months ended March 31, 2015, New Valley received a distribution of $236 from its investment in Chelsea Eleven, which sold its last unit in 2012, for excess amounts held back in 2012 for final expenses of the investment. During the three months ended March 31, 2014 , New Valley received distributions of $4,142 primarily related to 10 Madison Square Park West 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 $109,069 at March 31, 2015 .

Apartment Buildings:
Apartment buildings investments range in ownership percentage from 7.5% to 16.4% . New Valley recorded an equity loss of $48 and equity of income $53 for three months ended March 31, 2015 and 2014 , respectively, primarily related to an apartment portfolio. New Valley received distributions of $212 and $125 during the three months ended March 31, 2015 and 2014 , respectively, related to an apartment portfolio. New Valley's maximum exposure to loss as a result of its investment in apartment buildings was $18,257 at March 31, 2015 .

Hotels:
Hotel investments range in ownership percentage from 5% to 49% . During the three months ended March 31, 2015 , New Valley recorded net equity losses of $747 and $1,314 for the three months ended March 31, 2015 and 2014 , respectively, related to hotel operations. New Valley made capital contributions totaling $533 for the three months ended March 31, 2015 , primarily related to Coral Beach and Tennis Club. New Valley's maximum exposure to loss as a result of its investments in hotels was $29,572 at March 31, 2015 .

Commercial:
Commercial ventures includes 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's maximum exposure to loss as a result of its investments in commercial ventures was $5,931 at March 31, 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.

15

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Real Estate Held for Sale:
The components of “Real estate held for sale, net” were as follows:
 
March 31,
2015
 
December 31,
2014
Escena, net
$
10,592

 
$
10,643

            Real estate held for sale, net
$
10,592

 
$
10,643


Escena.   The assets of “Escena, net” are as follows:
 
March 31,
2015
 
December 31,
2014
Land and land improvements
$
8,953

 
$
8,953

Building and building improvements
1,873

 
1,865

Other
1,569

 
1,568

 
12,395

 
12,386

Less accumulated depreciation
(1,803
)
 
(1,743
)
 
$
10,592

 
$
10,643


New Valley recorded an operating income of $725 and $520 for the three months ended March 31, 2015 and 2014 , respectively, from Escena.



16

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

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

 
March 31,
2015
 
December 31,
2014
Vector:
 
 
 
7.75% Senior Secured Notes due 2021, including premium of $8,968 and $9,275
$
608,968

 
$
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 $143,661 and $146,634*
86,339

 
83,366

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $95,870 and $98,831*
162,880

 
159,919

Liggett:
 
 
 
Revolving credit facility
14,642

 
17,767

Term loan under credit facility
3,515

 
3,589

Equipment loans
12,249

 
13,966

Other
404

 
469

Total notes payable, long-term debt and other obligations
888,997

 
913,351

Less:
 
 
 
Current maturities
(20,864
)
 
(52,640
)
Amount due after one year
$
868,133

 
$
860,711

______________________
* The fair value of the derivatives embedded within the 6.75% Variable Interest Senior Convertible Note ( $0 at March 31, 2015 and $884 at December 31, 2014 , respectively), the 7.5% Variable Interest Senior Convertible Notes ( $83,662 at March 31, 2015 and $87,638 at December 31, 2014 , respectively) and the 5.5% Variable Interest Senior Convertible Debentures ( $78,377 at March 31, 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 2,227,552 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 March 31, 2015 , a total of $18,157 was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately $41,843 based on eligible collateral at March 31, 2015 .

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

The conversion rates for all convertible debt outstanding as of March 31, 2015 are summarized below:
 
March 31, 2015
 
Conversion Price
 
Shares per $1,000
 
 
 
 
7.5% Variable Interest Senior Convertible Notes due 2019
$
16.78

 
59.5946

5.5% Variable Interest Senior Convertible Debentures due 2020
$
25.87

 
38.6563



17

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
 
March 31,
 
2015
 
2014
Amortization of debt discount, net
$
5,627

 
$
12,456

Amortization of deferred finance costs
966

 
708

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

 
3,679


$
6,593

 
$
16,843


Fair Value of Notes Payable and Long-Term Debt :

 
March 31, 2015
 
December 31, 2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Notes payable and long-term debt
$
888,997

 
$
1,272,253

 
$
913,351

 
$
1,313,711


Notes payable and long-term debt are carried on the condensed consolidated 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 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 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”). 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 March 31, 2015 and 2014 , Liggett incurred tobacco product liability legal expenses and other litigation costs totaling $2,555 and $3,357 , respectively.
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.

18

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 March 31, 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 March 31, 2015 , 21 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts. Fourteen verdicts were returned in favor of the plaintiffs and seven 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 $3,600 . In certain cases, the judgments entered have been joint and several with other defendants. In four 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 March 31, 2015 , Liggett (and in certain cases the Company) had, on an individual basis, settled 161 Engle progeny cases for approximately $2,205 in the aggregate. Six of those settlements occurred in the first 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).

19

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Individual Actions
As of March 31, 2015 , there were 48 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:
State
 
Number
of Cases
Florida
 
27

New York
 
8

Maryland
 
7

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.

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.

20

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 named defendants 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. The present value of the installment payments was computed 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 $3,426 per annum through 2028, with a cost of living increase beginning in 2021.
Notwithstanding the comprehensive nature of the Engle Progeny Settlement, approximately 310 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.

21

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


As of March 31, 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. Plaintiff filed a motion for rehearing which was denied. Both sides sought discretionary review from the Florida Supreme Court. The appeal is stayed pending the outcome of Hess.
April 2011
 
Tullo v. R.J. Reynolds
 
Palm Beach
 
225
 
 
Affirmed by the Fourth District Court of Appeal. Discretionary review from the Florida Supreme Court was denied. Liggett satisfied the judgment and the case is concluded, other than an issue with respect to the calculation of interest on the judgment and the amount of costs owed by Liggett.
January 2012
 
Ward v. R.J. Reynolds
 
Escambia
 
1
 
 
Liggett satisfied the merits 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 is set for July 16, 2015.
December 2012
 
Buchanan v. R.J. Reynolds
 
Leon
 
2,035
 
 
A joint and several judgment for $5,500 was entered against Liggett and Philip Morris. 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. The appeal is stayed pending the outcome of Hess.
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.
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
 
 
 
Judgment was entered against Liggett for $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.
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. An additional $300 in punitive damages was awarded against Liggett. On appeal to the Second District Court of Appeal.
Total Damages Awarded:
28,773
 
18,400
 
 
Amounts paid or compromised:
(17,978)
 
(1,000)
 
 
Damages remaining on Appeal:
$10,795
 
$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.


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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Through March 31, 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 ).
The Company’s potential range of loss in the Putney , Calloway , Buchanan, Cohen, Lambert and Boatright cases is between $0 and $28,195 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. No amounts have been expensed or accrued in the accompanying 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 intend to move for rehearing.


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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


On April 8, 2015, in Graham v. R.J. Reynolds Tobacco Co. , the Eleventh Circuit found meritorious a defense that, in Engle progeny cases, federal law impliedly preempts use of the preserved Engle findings to establish claims for strict liability or negligence.
Liggett Only Cases.   There are currently four cases pending where Liggett is the only remaining defendant. These cases consist of three Individual Actions and one Engle progeny case. The Engle progeny case is not currently set for trial. 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. There has been no recent 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 March 31, 2015 , there were four actions pending for which either a class had been certified or plaintiffs were seeking class certification where Liggett is a named defendant, including one alleged price fixing case. 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. The defendants did not oppose and the stay was entered by the court.
In February 1998, in Parsons v. AC & S Inc. , a class 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 was commenced against cigarette manufacturers alleging they conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs seek to recover an unspecified amount in actual and punitive damages. Class certification was granted in November 2001. In January 2012, the trial court heard oral argument on defendants’ motions for summary judgment and in March 2012, the court granted the motions and dismissed plaintiffs’ claims with prejudice. In July 2014, the court of appeals affirmed the lower court’s decision. On August 18, 2014, plaintiffs filed a petition for review with the Kansas Supreme Court.
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. In January 2002, the court severed Liggett from the trial of the consolidated action. After two mistrials, on May 15, 2013, the jury rejected all but one of the plaintiffs’ claims, finding for the plaintiffs on the claim that ventilated filter cigarettes sold between 1964 and 1969 should have included instructions on how to use them. The issue of damages was reserved for further proceedings that have not yet been scheduled. 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. A hearing is scheduled for June 8, 2015 to address the remaining disputed issues. If the case were to proceed against Liggett as is, it is estimated that Liggett could be a defendant in less than 25 of the remaining individual cases. In April 2015, the plaintiffs filed a petition for writ of certiorari to the United States Supreme Court.

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Class action suits have been filed in a number of states against cigarette manufacturers, alleging, among other things, that use of the terms “lights” and “ultra lights” constitutes unfair and deceptive trade practices. In December 2008, the United States Supreme Court, in Altria Group v. Good , ruled that the Federal Cigarette Labeling and Advertising Act did not preempt the state law claims asserted by the plaintiffs and that they could proceed with their claims under the Maine Unfair Trade Practices Act. The Good decision resulted in the filing of additional “lights” class action cases in other states against other cigarette manufacturers. Although Liggett was not a defendant in the Good case, and is not currently a defendant in any other “lights” class actions, an adverse ruling or commencement of additional “lights” related class actions could have a material adverse effect on the Company.
In addition to the cases described above, numerous class actions remain certified against other cigarette manufacturers. 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 March 31, 2015 , there was one remaining Health Care Cost Recovery Action 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 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

25

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 are appealing 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 March 31, 2015 , there were 12 Engle progeny cases scheduled for trial through March 31, 2016, where Liggett (and/or the Company) is a named defendant. Trial dates are, however, subject to change.
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 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

26

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 loss of market share of Participating Manufacturers, to non-participating manufacturers, for 2003. This is known as the “NPM Adjustment.” The economic consulting firm subsequently rendered the same decision with respect to 2004 and 2005. In March 2009, a different economic consulting firm made the same determination for 2006. As a result, the 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 - 2013 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 manufacturers for the benefit of that Settling State.
For 2003 - 2013, 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. These actions related to the potential NPM Adjustment for 2003, which the independent auditor under the MSA previously determined 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 share of the Settling States, entered into an agreement providing for a nationwide arbitration of the dispute with respect to the NPM Adjustment for 2003. In exchange, the OPMs and SPMs 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.
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 2013 MSA payments. In May 2013, two additional states joined the settlement and in June 2014, another two states joined the settlement. Several non-settling states are attempting to vacate the settlement award by filing state court actions. In Idaho, a trial court denied that state’s motion to vacate, and the state appealed that denial. In Colorado, a trial court also denied that state’s motion to vacate; Colorado did not appeal. Although certain terms of the settlement were implemented by the independent auditor on April 15, 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


As a result of the settlement, in the first nine months of 2013, Liggett recognized income of $6,947 . Liggett received credits of $1,733 in April 2014 from these settling states related to the 2013 NPM Adjustment. The remaining NPM Adjustment accrual of $25,809 at March 31, 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. Approximately $30,100 currently remains in the disputed payments accounts relating to the 2011, 2012, 2013 and 2014 NPM Adjustment dispute with the non-settling states.
In September 2013, the panel issued its decisions with respect to the 15 states that did not enter into the Stipulated Partial Settlement and Award, finding that six states did not diligently enforce their MSA escrow statutes in 2003. As a result of this ruling Liggett recognized income of $5,987 including interest, 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. In Pennsylvania, the 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. Subsequent to the April 15, 2014 MSA payment date, a state 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 . In June 2014, Kentucky and Indiana agreed to settle the dispute. As a result, Liggett recognized income of approximately $1,400 in the second quarter of 2014. The Participating Manufacturers, including Liggett, appealed the Pennsylvania and Missouri decisions. In April 2015, the Pennsylvania decision was affirmed by the appellate court. The Participating Manufacturers are reviewing their options for further appeal. If Liggett is unsuccessful in its appeals or if other states are successful with respect to any such 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 would be obligated to pay the difference.

Disputes over the NPM Adjustments for 2004-2014 remain to be arbitrated with the states that have not joined the settlement.
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 re-calculated 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 objected to 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. Liggett contends that the independent auditor's calculations regarding the implementation of the Corrected Final Award, including amounts purportedly owed by Liggett for years 2001 - 2013 are not consistent with the Corrected Final Award and Liggett has disputed them. Liggett accrued $8,500 for this matter included in non-current litigation accruals as of March 31, 2015 and December 31, 2014.
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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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 in 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.
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 three months ended March 31, 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
24,760

 
1,115

 
25,875

 

 
(195
)
 
(195
)
NPM Settlement adjustment

 

 

 

 

 

Change in MSA obligations capitalized as inventory
445

 

 
445

 

 

 

Payments

 
(4,295
)
 
(4,295
)
 

 

 

Reclassification from non-current liabilities

 
3,305

 
3,305

 

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

 
89

 
89

 

 
638

 
638

Balance as of March 31, 2015
$
51,527

 
$
3,363

 
$
54,890

 
$
25,809

 
$
22,838

 
$
48,647


29

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited




The activity in the Company's accruals for the MSA and tobacco litigation for the three months ended March 31, 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
24,542

 
1,688

 
26,230

 

 

 

NPM Settlement adjustment

 

 

 

 

 

Change in MSA obligations capitalized as inventory
29

 

 
29

 

 

 

Payments

 
(59,782
)
 
(59,782
)