Vector Group Ltd.
VECTOR GROUP LTD (Form: 10-Q, Received: 08/03/2015 06:12:26)


 

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

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

For The Quarterly Period Ended June 30, 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 July 29, 2015 , Vector Group Ltd. had 116,830,619 shares of common stock outstanding.

 




VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

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


1

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

 
June 30,
2015
 
December 31,
2014
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
238,323

 
$
326,365

Investment securities available for sale
342,577

 
346,043

Accounts receivable - trade, net
18,022

 
23,328

Inventories
98,576

 
90,323

Income taxes receivable, net

 
3,282

Restricted assets
2,324

 
2,595

Other current assets
45,236

 
36,718

Total current assets
745,058

 
828,654

Property, plant and equipment, net
79,448

 
84,112

Real estate held for sale, net
23,043

 
10,643

Long-term investments
46,219

 
40,292

Investments in real estate ventures
199,026

 
163,460

Restricted assets
20,220

 
12,013

Goodwill and other intangible assets, net
267,000

 
269,972

Prepaid pension costs
26,635

 
25,032

Other assets
56,194

 
58,893

Total assets
$
1,462,843

 
$
1,493,071

LIABILITIES AND STOCKHOLDERS' (DEFICIENCY) EQUITY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
6,074

 
$
52,640

   Current portion of fair value of derivatives embedded within convertible debt

 
884

 Current payments due under the Master Settlement Agreement
62,626

 
26,322

   Current portion of employee benefits
931

 
931

Income taxes payable, net
3,723

 
1,743

Litigation accruals
3,477

 
3,149

Deferred income taxes, net
28,322

 
28,479

Other current liabilities
125,523

 
126,755

Total current liabilities
230,676

 
240,903

Notes payable, long-term debt and other obligations, less current portion
872,999

 
860,711

Fair value of derivatives embedded within convertible debt
156,783

 
168,502

Non-current employee benefits
49,705

 
49,314

Deferred income taxes, net
98,180

 
94,510

Payments due under the Master Settlement Agreement
25,809

 
25,809

Litigation accruals
23,444

 
25,700

Other liabilities
6,913

 
5,570

Total liabilities
1,464,509

 
1,471,019

Commitments and contingencies (Note 7)

 

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

 

Common stock, par value $0.10 per share, 250,000,000 and 250,000,000 shares authorized, 120,975,866 and 118,646,261 shares issued and 116,830,619 and 114,501,014 shares outstanding
11,683

 
11,450

Additional paid-in capital

 

Accumulated deficit
(115,570
)
 
(90,160
)
Accumulated other comprehensive income
33,758

 
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
(82,986
)
 
(57,027
)
Non-controlling interest
81,320

 
79,079

Total stockholders' (deficiency) equity
(1,666
)
 
22,052

Total liabilities and stockholders' (deficiency) equity
$
1,462,843

 
$
1,493,071


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

2



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
   Tobacco*
$
254,890

 
$
250,556

 
$
482,975

 
$
483,948

   Real estate
161,022

 
153,488

 
293,278

 
261,532

   E-Cigarettes
261

 
2,569

 
680

 
8,369

          Total revenues
416,173

 
406,613

 
776,933

 
753,849

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
   Cost of sales:
 
 
 
 
 
 
 
     Tobacco*
174,867

 
179,773

 
331,897

 
347,939

     Real estate
103,870

 
97,763

 
188,228

 
165,087

     E-Cigarettes
467

 
1,746

 
1,097

 
5,293

        Total cost of sales
279,204

 
279,282

 
521,222

 
518,319

 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
79,679

 
67,023

 
153,623

 
131,000

Litigation settlement and judgment expense
1,250

 

 
2,093

 
1,500

Operating income
56,040

 
60,308

 
99,995

 
103,030

 
 
 
 
 
 
 
 
Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(31,761
)
 
(44,183
)
 
(63,507
)
 
(79,636
)
Change in fair value of derivatives embedded within convertible debt
5,256

 
1,970

 
11,716

 
320

Acceleration of interest expense related to debt conversion

 
(439
)
 

 
(4,118
)
Equity income (loss) from real estate ventures
1,856

 
(1,808
)
 
2,194

 
(256
)
Equity (loss) income on long-term investments
(1,657
)
 
(273
)
 
(1,694
)
 
633

(Loss) gain on sale of investment securities available for sale
(190
)
 
(18
)
 
12,839

 
(71
)
Other, net
1,525

 
3,575

 
3,421

 
5,701

Income before provision for income taxes
31,069

 
19,132

 
64,964

 
25,603

Income tax expense
11,364

 
6,101

 
24,043

 
9,043

 
 
 
 
 
 
 
 
Net income
19,705

 
13,031

 
40,921

 
16,560

 
 
 
 
 
 
 
 
Net income attributed to non-controlling interest
(1,837
)
 
(5,106
)
 
(2,097
)
 
(6,055
)
 
 
 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
$
17,868

 
$
7,925

 
$
38,824

 
$
10,505

 
 
 
 
 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.15

 
$
0.08

 
$
0.34

 
$
0.10

 
 
 
 
 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.15

 
$
0.08

 
$
0.34

 
$
0.10

 
 
 
 
 
 
 
 
Cash distributions and dividends declared per share
$
0.40

 
$
0.38

 
$
0.80

 
$
0.76

                                      

* Revenues and cost of sales include excise taxes of $108,912 , $109,695 , $206,271 and $212,108 , respectively.


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

3




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


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
Net income
$
19,705

 
$
13,031

 
$
40,921

 
$
16,560

 
 
 
 
 
 
 
 
Net unrealized (losses) gains on investment securities available for sale:
 
 
 
 
 
 
 
    Change in net unrealized (losses) gains
(9,623
)
 
(2,886
)
 
6,517

 
3,108

    Net unrealized losses (gains) reclassified into net income
190

 
18

 
(12,839
)
 
71

Net unrealized (losses) gains on investment securities available for sale
(9,433
)
 
(2,868
)
 
(6,322
)
 
3,179

 
 
 
 
 


 
 
Net unrealized gains on long-term investments accounted for under the equity method:
 
 
 
 
 
 
 
Change in net unrealized gains
1,176

 
5,282

 
1,190

 
8,614

Net unrealized losses reclassified into net income
1,624

 

 
1,624

 

Net unrealized gains on long-term investments accounted for under the equity method
2,800

 
5,282

 
2,814

 
8,614

 
 
 
 
 
 
 
 
Net change in forward contracts
16

 
15

 
32

 
32

 
 
 
 
 
 
 
 
Net change in pension-related amounts
 
 
 
 
 
 
 
Net loss arising during the year
1,607

 

 
1,607

 

Amortization of loss
254

 
147

 
521

 
295

Net change in pension-related amounts
1,861

 
147

 
2,128

 
295

 
 
 
 
 
 
 
 
Other comprehensive (loss) income
(4,756
)
 
2,576

 
(1,348
)
 
12,120

 
 
 
 
 
 
 
 
Income tax effect on:
 
 
 
 
 
 
 
    Change in net unrealized (losses) gains on investment securities
3,979

 
1,193

 
(2,694
)
 
(1,780
)
    Net unrealized losses (gains) reclassified into net income on investment securities
(78
)
 
(7
)
 
5,309

 
(29
)
Change in unrealized gains on long-term investments accounted for under the equity method
(478
)
 
(2,184
)
 
(484
)
 
(3,554
)
Net unrealized losses reclassified into net income on long-term investments accounted for under the equity method
(672
)
 

 
(672
)
 

Forward contracts
(7
)
 
(6
)
 
(13
)
 
(12
)
Pension-related amounts
(769
)
 
(61
)
 
(880
)
 
74

Income tax provision on other comprehensive income
1,975

 
(1,065
)
 
566

 
(5,301
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
(2,781
)
 
1,511

 
(782
)
 
6,819

 
 
 
 
 
 
 
 
Comprehensive income
16,924

 
14,542

 
40,139

 
23,379

 
 
 
 
 
 
 
 
Comprehensive income attributed to non-controlling interest
(1,837
)
 
(5,106
)
 
(2,097
)
 
(6,055
)
Comprehensive income attributed to Vector Group Ltd.
$
15,087

 
$
9,436

 
$
38,042

 
$
17,324



4



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

5



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


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

 
$
11,450

 
$

 
$
(90,160
)
 
$
34,540

 
$
(12,857
)
 
$
79,079

 
$
22,052

Net income

 

 

 
38,824

 

 

 
2,097

 
40,921

Total other comprehensive loss

 

 

 

 
(782
)
 

 

 
(782
)
Total comprehensive income

 

 

 

 

 

 

 
40,139

Distributions and dividends on common stock

 

 
(29,292
)
 
(64,234
)
 

 

 

 
(93,526
)
Note conversions, net of taxes $367
2,227,552

 
223

 
25,299

 

 

 

 

 
25,522

Exercise of stock options
102,053

 
10

 
1,209

 

 

 

 

 
1,219

Tax benefit of options exercised

 

 
384

 

 

 

 

 
384

Stock-based compensation

 

 
2,400

 

 

 

 

 
2,400

Contributions made by non-controlling interest

 

 

 

 

 

 
144

 
144

Balance as of June 30, 2015
116,830,619

 
$
11,683

 
$

 
$
(115,570
)
 
$
33,758

 
$
(12,857
)
 
$
81,320

 
$
(1,666
)


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

6



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


 
Six Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
Net cash provided by operating activities
$
83,885

 
$
53,995

Cash flows from investing activities:
 
 
 
Sale of investment securities
118,261

 
49,296

Maturities of investment securities
1,737

 

Purchase of investment securities
(113,595
)
 
(110,419
)
Proceeds from sale or liquidation of long-term investments
148

 
549

Purchase of long-term investments
(5,000
)
 
(7,000
)
Investments in real estate ventures
(34,857
)
 
(12,534
)
Distributions from investments in real estate ventures

 
3,539

Increase in cash surrender value of life insurance policies
(1,118
)
 
(395
)
Increase in restricted assets
(7,934
)
 
(371
)
Issuance of notes receivable
(4,410
)
 
(250
)
Proceeds from sale of fixed assets
3

 
4

Capital expenditures
(5,379
)
 
(10,144
)
Repayments of notes receivable
1,106

 
933

Purchase of subsidiaries

 
(250
)
Pay downs of investment securities
3,530

 

Proceeds from sale of preferred securities
1,000

 

Investments in real estate held for sale
(12,502
)
 

Net cash used in investing activities
(59,010
)
 
(87,042
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
22

 
413,916

Deferred financing costs
(625
)
 
(12,360
)
Repayments of debt
(3,374
)
 
(8,051
)
Borrowings under revolver
126,727

 
429,188

Repayments on revolver
(144,492
)
 
(437,736
)
Dividends and distributions on common stock
(92,778
)
 
(80,963
)
Distributions to non-controlling interest

 
(3,075
)
Proceeds from exercise of Vector options
1,219

 
3,405

Tax benefit of options exercised
384

 
680

Net cash (used in) provided by financing activities
(112,917
)
 
305,004

Net (decrease) increase in cash and cash equivalents
(88,042
)
 
271,957

Cash and cash equivalents, beginning of period
326,365

 
234,466

Cash and cash equivalents, end of period
$
238,323

 
$
506,423


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

7

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


1 .
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
Basis of Presentation :

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

The revisions are presented in the table below:

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

 
$
(29,192
)
 
$

Total current assets
 
857,846

 
(29,192
)
 
828,654

 
 
 
 
 
 
 
Deferred income taxes
 
51,129

 
(51,129
)
 

Total assets
 
$
1,573,392

 
$
(80,321
)
 
$
1,493,071

 
 
 
 
 
 
 
Deferred income taxes, net
 
$
57,671

 
$
(29,192
)
 
$
28,479

Total current liabilities
 
270,095

 
(29,192
)
 
240,903

 
 
 
 
 
 
 
Deferred income taxes, net
 
145,639

 
(51,129
)
 
94,510

Total liabilities
 
1,551,340

 
(80,321
)
 
1,471,019

Total stockholders' equity
 
22,052

 

 
22,052

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

 
$
(80,321
)
 
$
1,493,071

 
 
 
 
 
 
 


8

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(b)
Distributions and Dividends on Common Stock :

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

(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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Net income attributed to Vector Group Ltd.
$
17,868

 
$
7,925

 
$
38,824

 
$
10,505

Expense attributed to participating securities
(529
)
 
(231
)
 
(1,151
)
 
(309
)
Net income attributed to Vector Group Ltd. available to common stockholders
$
17,339

 
$
7,694

 
$
37,673

 
$
10,196


Basic and diluted EPS were calculated using the following shares:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Weighted-average shares for basic EPS
112,337,817

 
101,598,939

 
111,881,314

 
100,470,719

Plus incremental shares related to stock options and non-vested restricted stock
199,112

 
106,321

 
195,488

 
117,908

Weighted-average shares for diluted EPS
112,536,929

 
101,705,260

 
112,076,802

 
100,588,627


9

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
  Weighted-average number of shares issuable upon
  conversion of debt
23,709,978

 
34,117,652

 
24,128,414

 
30,560,906

  Weighted-average conversion price
$
20.61

 
$
18.11

 
$
20.45

 
$
16.72



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

The Company has estimated the fair market value of the embedded derivatives based principally on the results of a valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based principally on the present value of future dividend payments expected to be received by the convertible debt holders over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the yield of the Company's debt when compared to risk-free securities with the same duration. A readily determinable fair market value of the embedded derivatives is not available. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The valuation also considers other items, including current and future dividends and the volatility of the Company's stock price. At June 30, 2015 , the range of estimated fair market values of the Company's embedded derivatives was between $155,272 and  $158,324 . The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $156,783 as of June 30, 2015 . At December 31, 2014 , the range of estimated fair market values of the Company's embedded derivatives was between $167,593 and  $171,215 . The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $169,386 as of December 31, 2014 . The estimated fair market value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note 6 .)


10

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(f)
Other Income, Net :

Other income, net consisted of:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
(Loss) gain on warrants
$
(369
)
 
$
45

 
$
(483
)
 
$
(123
)
Interest and dividend income
1,858

 
1,189

 
3,607

 
2,189

Accretion of interest income from debt discount on notes receivable
10

 
10

 
74

 
76

Gain on long-term investment
24

 

 
224

 

Out-of-period adjustment

 

 

 
1,231

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

 
2,335

 

 
2,335

Other income (expense)
2

 
(4
)
 
(1
)
 
(7
)
Other income, net
$
1,525

 
$
3,575

 
$
3,421

 
$
5,701


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 consisted of:
 
June 30, 2015
 
December 31, 2014
Accrued promotional expenses
$
18,215

 
$
20,191

Accrued excise and payroll taxes payable, net
20,885

 
23,172

Accrued interest
27,746

 
28,321

Commissions payable
13,442

 
9,523

Accrued salary and benefits
12,110

 
16,009

Other current liabilities
33,125

 
29,539

Total other current liabilities
$
125,523

 
$
126,755




11

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:

 
 
June 30,
2015
 
December 31,
2014
Goodwill
 
$
70,791

 
$
70,791

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

 
107,511

Trademark - Douglas Elliman
 
80,000

 
80,000

 
 
 
 
 
Intangibles with a finite life, net
 
8,698

 
11,670

 
 
 
 
 
  Total goodwill and other intangible assets, net
 
$
267,000

 
$
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 the Company beginning January 1, 2016. Early adoption is permitted. The Company is evaluating the effect that this guidance will have on its consolidated financial statements.

In May 2014, the FASB issued Accounting Standards Update No. 2014-9, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-9”). ASU 2014-9 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. As currently issued, the new standard is effective beginning January 1, 2019; early adoption is prohibited. The new standard is required to be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method nor has it determined the impact of the new standard on its condensed consolidated financial statements.



12

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


2 .
INVENTORIES

Inventories consist of:
 
June 30,
2015
 
December 31,
2014
Leaf tobacco
$
57,576

 
$
49,948

Other raw materials
4,041

 
3,532

Work-in-process
592

 
879

Finished goods
67,619

 
62,876

E-Cigarettes
243

 
3,079

Inventories at current cost
130,071

 
120,314

LIFO adjustments
(31,495
)
 
(29,991
)
 
$
98,576

 
$
90,323


All of the Company's inventories at June 30, 2015 and December 31, 2014 are reported under the LIFO method. The $31,495 LIFO adjustment as of June 30, 2015 decreases the current cost of inventories by $19,821 for Leaf tobacco, $900 for Other raw materials, $41 for Work-in-Process, $10,637 for Finished goods and $96 for E-Cigarettes. The $29,991 LIFO adjustment as of December 31, 2014 decreased the current cost of inventories by $19,941 for Leaf tobacco, $861 for Other raw materials, $39 for Work-in-Process, $9,054 for Finished goods and $96 for E-Cigarettes.

The Company has a leaf inventory management program whereby, among other things, it is committed to purchase certain quantities of leaf tobacco. The purchase commitments are for quantities not in excess of anticipated requirements and are at prices, including carrying costs, established at the commitment date. At June 30, 2015 , Liggett had tobacco purchase commitments of approximately $13,917 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 $15,381 and $14,369 at June 30, 2015 and December 31, 2014 , respectively.



13

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 June 30, 2015 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
71,275

 
$
88,746

 
$
(1,747
)
 
$
158,274

Mutual funds invested in fixed income securities
62,399

 

 
(1,958
)
 
60,441

Marketable debt securities
124,019

 
109

 
(266
)
 
123,862

Total investment securities available for sale
$
257,693

 
$
88,855

 
$
(3,971
)
 
$
342,577


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 June 30, 2015 .

Investment Type:
Market Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
33,886

 
$

 
$
33,886

 
$

Corporate securities
51,937

 
6,685

 
44,840

 
412

U.S. mortgage-backed securities
6,757

 
839

 
5,751

 
167

Commercial mortgage-backed securities
15,758

 
5,084

 
4,614

 
6,060

U.S. asset-backed securities
13,393

 
2,080

 
9,852

 
1,461

Index-linked U.S. bonds
2,131

 

 
2,131

 

Total marketable debt securities by maturity dates
$
123,862

 
$
14,688

 
$
101,074

 
$
8,100




4 .
LONG-TERM INVESTMENTS

Long-term investments consisted of the following:

 
June 30, 2015
 
December 31, 2014
Investment partnerships
$
36,540

 
$
31,541

Real estate partnership
551

 
698

  Long-term investments at cost
37,091

 
32,239

 
 
 
 
Investment partnership accounted for under the equity method
9,128

 
8,053

 
$
46,219

 
$
40,292


Long-term investments consisted of the following investments accounted for at cost:
 
June 30, 2015
 
December 31, 2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Investment partnerships
$
36,540

 
$
46,093

 
$
31,541

 
$
38,039

Real estate partnership
551

 
762

 
698

 
1,108

 
$
37,091

 
$
46,855

 
$
32,239

 
$
39,147


Long-term investment partnership accounted for under the equity method:
 
June 30,
2015
 
December 31,
2014
Investment partnership
$
9,128

 
$
8,053


The Company recorded equity losses of $1,657 and $273 for the three months ended June 30, 2015 and June 30, 2014 , respectively. The Company recorded an equity loss of $1,694 and equity income of $633 for the six months ended June 30, 2015 and June 30, 2014 , respectively. The carrying value of the investment partnership was approximately $9,128 and $8,053 as of June 30, 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 a 70.59% interest in Douglas Elliman and the condensed consolidated financial statements of the Company include the account balances of Douglas Elliman.




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

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

 
$
5,037

Land Development
5,037

 
5,037

 
 
 
 
10 Madison Square Park West (1107 Broadway)
7,407

 
6,383

The Marquand
13,500

 
12,000

11 Beach Street
12,004

 
12,328

20 Times Square (701 Seventh Avenue)
12,737

 
12,481

111 Murray Street
27,203

 
27,319

357 West (160 Leroy Street)
1,753

 
1,467

PUBLIC Chrystie House (Chrystie Street)
5,297

 
3,300

The Dutch (25-19 43rd Avenue)
980

 
733

Queens Plaza (23-10 Queens Plaza South)
11,146

 
11,082

87 Park (8701 Collins Avenue)
5,736

 
6,144

125 Greenwich Street
9,110

 
9,308

West Hollywood Edition (9040 Sunset Boulevard)
5,604

 
5,604

76 Eleventh Avenue
17,000

 

Monad Terrace
6,200

 

Condominium and Mixed Use Development
135,677

 
108,149

 
 
 
 
Maryland Portfolio
2,916

 
3,234

ST Portfolio
16,910

 
15,283

Apartment Buildings
19,826

 
18,517

 
 
 
 
Park Lane Hotel
19,529

 
19,341

Hotel Taiwana
8,206

 
7,629

Coral Beach and Tennis Club
3,025

 
2,816

Hotels
30,760

 
29,786

 
 
 
 
The Plaza at Harmon Meadow
5,958

 

Commercial
5,958

 

 
 
 
 
Other
1,768

 
1,971

 
 
 
 
Investments in real estate ventures
$
199,026

 
$
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 net equity income of $138 and $675 for the three and six months ended June 30, 2015 , respectively. The $675 equity

14

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


income for the six months ended June 30, 2015 was primarily related to New Valley's proportionate share of three units at the Marquand offset by equity losses from the other condominiums and mixed use development projects. New Valley recorded equity income of $7 and $2,299 for the three and six months ended June 30, 2014 , respectively. The $2,299 equity income for the six months ended June 30, 2014 was primarily related to the sale of a commercial unit at 10 Madison Square Park West.
During the six months ended June 30, 2015 , New Valley made capital contributions totaling $27,091 primarily related to 76 Eleventh Avenue and Monad Terrace. During the six months ended June 30, 2014 , New Valley made capital contributions totaling $10,737 related to 11 Beach Street, 111 Murray Street, PUBLIC Chrystie House, Queens Plaza 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 percentages did not change.
During the six months ended June 30, 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 six months ended June 30, 2014 , New Valley received distributions of $5,189 primarily related to 10 Madison Square Park West, 11 Beach Street and 20 Times Square.
New Valley's maximum exposure to loss, net of non-controlling interest, as a result of its investments in condominium and mixed use developments was $132,842 at June 30, 2015 .

Apartment Buildings:
Apartment buildings investments range in ownership percentage from 7.6% to 16.3% . New Valley recorded equity income of $1,848 and $1,801 for the three and six months ended June 30, 2015 , respectively, primarily related to the ST Portfolio apartment portfolio. In 2015, ST Portfolio sold one (Phoenix, Arizona) of its three remaining Class A multi-family buildings and the proceeds were used to pay down debt. New Valley recorded net equity losses of $217 and $164 for the three and six months ended June 30, 2014 , respectively, primarily related to equity losses of ST Portfolio. New Valley received distributions of $493 and $250 during the six months ended June 30, 2015 and 2014 , respectively, primarily related to NV Maryland. New Valley's maximum exposure to loss as a result of its investment in apartment buildings was $19,826 at June 30, 2015 .

Hotels:
Hotel investments range in ownership percentage from 5% to 49% . New Valley recorded net equity losses of $261 and $1,006 for the three and six months ended June 30, 2015 , respectively, related to hotel operations. New Valley recorded net equity losses of $857 and $2,171 for the three and six months ended June 30, 2014 , respectively. New Valley made capital contributions totaling $1,980 for the six months ended June 30, 2015 , primarily related to Coral Beach and Tennis Club and Park Lane. New Valley made capital contributions totaling $589 for the six months ended June 30, 2014 , primarily related to Coral Beach. New Valley's maximum exposure to loss as a result of its investments in hotels was $30,760 at June 30, 2015 .

Commercial:
Commercial ventures include a contribution by New Valley of $5,931 for a 49% interest in a joint venture which purchased a shopping center, The Plaza at Harmon Meadow, in New Jersey at the end of March 2015. The joint venture is a variable interest entity, however, New Valley is not the primary beneficiary of the joint venture. New Valley will account for its interest in the joint venture under the equity method of accounting. New Valley recorded equity income of $27 for the three and six months ended June 30, 2015 related to shopping center rental operations. New Valley's maximum exposure to loss as a result of its investments in commercial ventures was $5,958 at June 30, 2015 .

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

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:
 
June 30,
2015
 
December 31,
2014
Escena, net
$
10,541

 
$
10,643

Sagaponack
12,502

 

            Real estate held for sale, net
$
23,043

 
$
10,643


Escena.   The assets of “Escena, net” are as follows:
 
June 30,
2015
 
December 31,
2014
Land and land improvements
$
8,953

 
$
8,953

Building and building improvements
1,873

 
1,865

Other
1,575

 
1,568

 
12,401

 
12,386

Less accumulated depreciation
(1,860
)
 
(1,743
)
 
$
10,541

 
$
10,643


New Valley recorded operating losses of $173 and $287 for the three months ended June 30, 2015 and 2014 , respectively, from Escena. New Valley recorded operating income of $552 and $233 for the six months ended June 30, 2015 and 2014 , respectively, from Escena.

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

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



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:

 
June 30,
2015
 
December 31,
2014
Vector:
 
 
 
7.75% Senior Secured Notes due 2021, including premium of $8,656 and $9,275
$
608,656

 
$
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 $140,259 and $146,634*
89,741

 
83,366

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $92,747 and $98,831*
166,003

 
159,919

Liggett:
 
 
 
Revolving credit facility

 
17,767

Term loan under credit facility
3,442

 
3,589

Equipment loans
10,873

 
13,966

Other
358

 
469

Total notes payable, long-term debt and other obligations
879,073

 
913,351

Less:
 
 
 
Current maturities
(6,074
)
 
(52,640
)
Amount due after one year
$
872,999

 
$
860,711

______________________
* The fair value of the derivatives embedded within the 6.75% Variable Interest Senior Convertible Note ( $0 at June 30, 2015 and $884 at December 31, 2014 , respectively), the 7.5% Variable Interest Senior Convertible Notes ( $80,283 at June 30, 2015 and $87,638 at December 31, 2014 , respectively) and the 5.5% Variable Interest Senior Convertible Debentures ( $76,500 at June 30, 2015 and $80,864 at December 31, 2014 , respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.

6.75% Variable Interest Senior Convertible Note due 2015 - Vector :
On February 3, 2015, the holder of the 6.75% Variable Interest Senior Convertible Note due 2015, converted the remaining $25,000 principal balance of the $50,000 Note into 2,227,552 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 June 30, 2015 , a total of $3,442 was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately $56,558 based on eligible collateral at June 30, 2015 .

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

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

 

 
$
11.22

 
89.1021

7.5% Variable Interest Senior Convertible Notes due 2019
$
16.78

 
59.5946

 
$
16.78

 
59.5946

5.5% Variable Interest Senior Convertible Debentures due 2020
$
25.87

 
38.6563

 
$
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Amortization of debt discount, net
$
6,213

 
$
7,563

 
$
11,840

 
$
20,019

Amortization of deferred finance costs
1,022

 
1,055

 
1,988

 
1,763

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

 

 

 
3,679

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

 
439

 

 
439


$
7,235

 
$
9,057

 
$
13,828

 
$
25,900


Fair Value of Notes Payable and Long-Term Debt :

 
June 30, 2015
 
December 31, 2014
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Notes payable and long-term debt
$
879,073

(1)
$
1,282,056

 
$
913,351

(1)
$
1,313,711

 
 
 
 
 
 
 
 
______________________
(1) The carrying value does not include the carrying value of the embedded derivative. See Note 9 .

Notes payable and long-term debt are carried on the condensed consolidated balance sheet at amortized cost. The fair value determination disclosed above are 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 is not necessarily indicative of the amount that could be realized in a current market exchange.



18

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



7 . CONTINGENCIES

Tobacco-Related Litigation :

Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. The cases have generally fallen into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (“Individual Actions”); (ii) lawsuits by individuals requesting the benefit of the Engle ruling (“ Engle progeny cases”); (iii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging that use of the terms “lights” and/or “ultra lights” constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); and (iv) health care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (“Health Care Cost Recovery Actions”). With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. The future financial impact of the risks and expenses of litigation are not quantifiable. For the three months ended June 30, 2015 and 2014 , respectively, Liggett incurred tobacco product liability legal expenses and other litigation costs totaling $3,158 and $1,817 . For the six months ended June 30, 2015 and 2014 , Liggett incurred tobacco product liability legal expenses and other litigation costs totaling $5,713 and $5,174 . These are included in the operating, selling, administrative and general expenses in the Condensed Statement of Operations.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. Management reviews on a quarterly basis with counsel all pending litigation and evaluates whether an estimate can be made of the possible loss or range of loss that could result from an unfavorable outcome. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. Damages awarded in some tobacco-related litigation can be significant.
Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. To obtain stays on judgments pending current appeals, Liggett has secured approximately $12,268 and $4,768 in bonds as of June 30, 2015 and December 31, 2014 , respectively.
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 June 30, 2015 , 21 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts. Fourteen verdicts were returned in favor of the plaintiffs (although in two of these cases ( Irimi and Cohen ), the court granted defendants' motion for a new trial and another ( Putney ) was reversed on appeal) and seven in favor of Liggett. 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

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multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact Engle class members (non-class members’ claims are generally time-barred), the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify their demand for damages.
Although Liggett has generally been successful in managing litigation, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining Engle progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of the Company could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. Liggett may, however, enter into settlement discussions in particular cases if it believes it is in its best interest to do so, including the remaining Engle progeny cases. As of June 30, 2015 , Liggett (and in certain cases the Company) had, on an individual basis, settled 163 Engle progeny cases for approximately $3,456 in the aggregate. Two of those settlements occurred in the second quarter of 2015. In October 2013, Liggett announced a settlement of the claims of over 4,900 Engle progeny plaintiffs (see Engle Progeny Settlement below).
Individual Actions
As of June 30, 2015 , there were 52 Individual Actions pending against Liggett and, in certain cases, the Company, where one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. These cases do not include approximately 300 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
 
28

Maryland
 
10

New York
 
8

Louisiana
 
2

West Virginia
 
2

Missouri
 
1

Ohio
 
1

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


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Engle Progeny Cases
Engle Case. In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants’ conduct “rose to a level that would permit a potential award or entitlement to punitive damages.” Phase II of the trial was a causation and damages trial for three of the class plaintiffs and a punitive damages trial on a class-wide basis before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of $ 12,704 to the three class plaintiffs, to be reduced in proportion to the respective plaintiff’s fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett.
In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831 , was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs.
In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but determined that the following Phase I findings are entitled to res judicata effect in Engle progeny cases: (i) that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they filed their individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. In October 2007, the United States Supreme Court denied defendants’ petition for writ of certiorari.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle , which decertified the class on a prospective basis, and affirmed the appellate court’s reversal of the punitive damages award, former class members had until January 2008 in which to file individual lawsuits. As a result, Liggett and the Company, and other cigarette manufacturers, were 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 $3,400 per annum through 2028, with a cost of living increase beginning in 2021.
Notwithstanding the comprehensive nature of the Engle Progeny Settlement, approximately 300 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.

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As of June 30, 2015 , the following Engle progeny cases have resulted in judgments against Liggett:
Date
 
Case Name
 
County
 
Liggett Compensatory
Damages (as adjusted)
 (1)
 
Liggett Punitive Damages
 
Status (2)
June 2002
 
Lukacs v. R.J. Reynolds
 
Miami-Dade
 
$12,418
 
$—
 
Liggett satisfied the judgment and the case is concluded.
August 2009
 
Campbell v. R.J. Reynolds
 
Escambia
 
156
 
 
Liggett satisfied the judgment and the case is concluded.
March 2010
 
Douglas v. R.J. Reynolds
 
Hillsborough
 
1,350
 
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Clay v. R.J. Reynolds
 
Escambia
 
349
 
1,000
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Putney v. R.J. Reynolds
 
Broward
 
3,008
 
 
On June 12, 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings. 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.