Vector Group Ltd.
VECTOR GROUP LTD (Form: 10-K, Received: 03/08/2016 16:33:57)
Table of Contents

 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________
Form 10-K
_____________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 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
incorporation or organization)
 
Commission File Number
 
(I.R.S. Employer Identification No.)
4400 Biscayne Boulevard, Miami, Florida
(Address of principal executive offices)
 
33137
(Zip Code)
(305) 579-8000
(Registrant’s telephone number, including area code)
_____________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $.10 per share
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   R  Yes      o  No
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.   o   Yes   þ  No
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.   R  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).   R  Yes      o  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   R
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  R
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
 
(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   þ  No
The aggregate market value of the common stock held by non-affiliates of Vector Group Ltd. as of June 30, 2015 was approximately $1.979 billion .
At March 8, 2016 , Vector Group Ltd. had 123,792,329  shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2016 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year covered by this report.
 




VECTOR GROUP LTD.
FORM 10-K
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 EX-12.1
 EX-10.44
 EX-21
 EX-23.1
 EX-23.2
 EX-23.3
 EX-23.4
 EX-23.5
 EX-23.6
 EX-23.7
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-99.1
 EX-99.2
 EX-99.3
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

2

Table of Contents

PART I

ITEM 1.
BUSINESS
Overview
Vector Group Ltd., a Delaware corporation, is a holding company and is principally engaged in:
the manufacture and sale of cigarettes in the United States through our Liggett Group LLC (“Liggett”) and Vector Tobacco Inc. (“Vector Tobacco”) subsidiaries, 
the sale of electronic cigarettes (“e-cigarettes”) in the United States through our Zoom E-Cigs LLC (“Zoom”) subsidiary, and
the real estate business through our New Valley LLC subsidiary, which is seeking to acquire or invest in additional real estate properties or projects. New Valley owns 70.59% of Douglas Elliman Realty, LLC (“Douglas Elliman Realty”), which operates the largest residential brokerage company in the New York metropolitan area.
Financial information relating to our business segments can be found in Note  19 to our consolidated financial statements. Our significant business segments for the year ended December 31, 2015 were Tobacco, E-Cigarettes, and Real Estate. The Tobacco segment consists of the manufacture and sale of cigarettes. The E-Cigarettes segment includes the operations of the Company's e-cigarette business. The Real Estate segment includes the Company’s investment in New Valley LLC, which includes Douglas Elliman, Escena, Sagaponack and investments in real estate ventures.
Strategy
Our strategy is to maximize stockholder value by increasing the profitability of our subsidiaries in the following ways:
Liggett and Vector Tobacco
Capitalize on our tobacco subsidiaries’ cost advantage in the U.S. cigarette market due to the favorable treatment that they receive under the Master Settlement Agreement (“MSA”);
Focus marketing and selling efforts on the discount segment, continue to build volume and margin in core discount brands (EAGLE 20’s, PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and utilize core brand equity to selectively build distribution;
Continue product development to provide the best quality products relative to other discount products in the marketplace;
Increase efficiency by developing and adopting an organizational structure to maximize profit potential;
Selectively expand the portfolio of private and control label partner brands utilizing a pricing strategy that offers long-term list price stability for customers;
Identify, develop and launch relevant new tobacco products to the market in the future; and
Pursue strategic acquisitions of smaller tobacco manufacturers.
New Valley
Continue to grow Douglas Elliman Realty’s operations by utilizing its strong brand name recognition and pursuing strategic and financial opportunities;
Continue to leverage our expertise as direct investors by actively pursuing real estate investments in the United States and abroad which we believe will generate above-market returns;
Acquire operating companies through mergers, asset purchases, stock acquisitions or other means; and
Invest our excess funds opportunistically in situations that we believe can maximize stockholder value.
Tobacco Operations
General.   Liggett is the operating successor to Liggett & Myers Tobacco Company, which was founded in 1873. Vector Tobacco is a discount cigarette manufacturer selling product in the deep discount category. In this report, certain references to “Liggett” refer to our tobacco operations, including the business of Liggett and Vector Tobacco, unless otherwise specified.
For the year ended December 31, 2015 , Liggett was the fourth -largest manufacturer of cigarettes in the United States in terms of unit sales. Liggett’s manufacturing facilities are located in Mebane, North Carolina where it manufactures most of Vector

3

Table of Contents

Tobacco’s cigarettes pursuant to a contract manufacturing agreement. At the present time, Liggett and Vector Tobacco have no foreign operations.
According to data from Management Science Associates, Inc., Liggett’s domestic shipments of approximately 8.7 billion cigarettes during 2015 accounted for 3.3% of the total cigarettes shipped in the United States during such year. Liggett’s market share decreased 0.1% in 2015 from 3.4% in 2014 . Market share in 2013 was 3.3% . Historically, Liggett produced premium cigarettes as well as discount cigarettes (which include among others, control label, private label, branded discount and generic cigarettes). Premium cigarettes are generally marketed under well-recognized brand names at higher retail prices to adult smokers with a strong preference for branded products, whereas discount cigarettes are marketed at lower retail prices to adult smokers who are more cost conscious. In recent years, the discounting of premium cigarettes has become far more significant in the marketplace. This has led to some brands that were traditionally considered premium brands becoming more appropriately categorized as branded discount, following list price reductions. Liggett’s EVE brand falls into that category. All of Liggett’s unit sales volume in 2015 , 2014 and 2013 was in the discount segment, which Liggett’s management believes has been the primary growth segment in the industry for more than a decade.
Liggett produces cigarettes in 117 combinations of length, style and packaging. Liggett’s current brand portfolio includes:
EAGLE 20’s — a brand positioned in the deep discount segment for long-term growth re-launched as a national brand in 2013,
PYRAMID — the industry’s first deep discount product with a brand identity relaunched in the second quarter of 2009,
GRAND PRIX — re-launched as a national brand in 2005,
LIGGETT SELECT — a discount category brand originally launched in 1999,
EVE —  a 120 millimeter cigarette in the branded discount category, and
USA and various Partner Brands and private label brands.
In April 2009, Liggett repositioned PYRAMID as a box-only brand with a low price to specifically compete with brands which are priced at the lowest level of the deep discount segment. PYRAMID is now the largest seller in Liggett’s family of brands with 54.4% of Liggett’s unit volume in 2015 , 61.1% in 2014 and 65.5% in 2013 . In January 2013, Liggett repackaged and relaunched EAGLE 20’s to distributors and retailers on a national basis. EAGLE 20’s is marketed to compete with brands positioned in the deep discount segment. EAGLE 20’s represented 23.4% in 2015 and 13.4% in 2014 of Liggett’s unit volume. According to Management Science Associates, Liggett held a share of approximately 11.8% of the overall discount market segment for 2015 and 2014 and 11.6% for 2013 .
Under the MSA reached in November 1998 with 46  states and various territories, the three largest cigarette manufacturers must make settlement payments to the states and territories based on how many cigarettes they sell annually. Liggett, however, is not required to make any payments unless its market share exceeds approximately 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco has no payment obligation unless its market share exceeds approximately 0.28% of the U.S. cigarette market. We believe our tobacco subsidiaries have a sustainable cost advantage over their competitors as a result of the settlement.
Liggett’s and Vector Tobacco’s payments under the MSA are based on each respective company’s incremental market share above the minimum threshold applicable to each respective company. Thus, if Liggett’s total market share is 3%, its MSA payment is based on 1.35%, which is the difference between Liggett’s total market share of 3% and its approximate applicable grandfathered share of 1.65% . We anticipate that both Liggett’s and Vector Tobacco’s payment exemptions will be fully utilized in the foreseeable future.
The source of industry data in this report is Management Science Associates, Inc., an independent third-party database management organization that collects wholesale and retail shipment data from various cigarette manufacturers and distributors and provides analysis of market share, unit sales volume and premium versus discount mix for individual companies and the industry as a whole. Management Science Associates’ information relating to unit sales volume and market share of certain of the smaller, primarily deep discount, cigarette manufacturers is based on estimates developed by Management Science Associates.
Business Strategy.   Liggett’s business strategy is to capitalize upon its cost advantage in the United States cigarette market resulting from the favorable treatment our tobacco subsidiaries receive under settlement agreements with the states and the MSA. Liggett’s long-term business strategy is to continue to focus its marketing and selling efforts on the discount segment of the market, to continue to build volume and margin in its core discount brands (EAGLE 20’s, PYRAMID, GRAND PRIX, LIGGETT SELECT and EVE) and to utilize its core brand equity to selectively build distribution. Liggett intends to continue its product development to provide the best quality products relative to other discount products in the market place. Liggett will continue to seek increases in efficiency by developing and adapting its organizational structure to maximize profit potential.
Sales, Marketing and Distribution.   Liggett’s products are distributed from a central distribution center in Mebane, North Carolina to 17 public warehouses located throughout the United States. These warehouses serve as local distribution centers for

4

Table of Contents

Liggett’s customers. Liggett’s products are transported from the central distribution center to the public warehouses by third-party trucking companies to meet pre-existing contractual obligations to its customers.
Liggett’s customers are primarily candy and tobacco distributors and large grocery, drug and convenience store chains. Two customers, accounted for 19% and 10% of Liggett's revenues in 2015 and 18% and 10% in 2013. One customer accounted for 19% of Liggett's revenues in 2014 . Concentrations of credit risk with respect to trade receivables are generally limited due to the large number of customers, located primarily throughout the United States, comprising Liggett’s customer base. Liggett’s two largest customers, represented approximately 4% and 1% , respectively, of net accounts receivable at December 31, 2015 and 5% and 1% , respectively, at December 31, 2013 . Liggett’s largest customer represented approximately 11% of net accounts receivable at December 31, 2014 . Ongoing credit evaluations of customers’ financial condition are performed and, generally, no security is required. Liggett maintains reserves for potential credit losses and such losses, in the aggregate, have not exceeded management’s expectations.
Trademarks.   All of the major trademarks used by Liggett are federally registered or are in the process of being registered in the United States and other markets. Trademark registrations typically have a duration of ten years and can be renewed at Liggett’s option prior to their expiration date.
In view of the significance of cigarette brand awareness among consumers, management believes that the protection afforded by these trademarks is material to the conduct of its business. These trademarks are pledged as collateral for certain of our senior secured debt.
Manufacturing.   Liggett purchases and maintains leaf tobacco inventory to support its cigarette manufacturing requirements. Liggett believes that there is a sufficient supply of tobacco within the worldwide tobacco market to satisfy its current production requirements. Liggett stores its leaf tobacco inventory in warehouses in North Carolina and Virginia. There are several different types of tobacco, including flue-cured leaf, burley leaf, Maryland leaf, oriental leaf, cut stems and reconstituted sheet. Leaf components of American-style cigarettes are generally the flue-cured and burley tobaccos. While premium and discount brands use many of the same tobacco products, input ratios of tobacco products may vary between premium and discount products. Liggett purchases its tobacco requirements from both domestic and foreign leaf tobacco dealers, much of it under long-term purchase commitments. As of December 31, 2015 , the majority of Liggett’s commitments were for the purchase of foreign tobacco.
Liggett’s cigarette manufacturing facility was designed for the execution of short production runs in a cost-effective manner, which enables Liggett to manufacture and market 117 different cigarette brand styles including private labels for other companies. Liggett’s facility produced approximately 8.4 billion cigarettes in 2015 , but maintains the capacity to produce approximately 16.4 billion cigarettes per year. Vector Tobacco has contracted with Liggett to produce most of its cigarettes at Liggett’s manufacturing facility in Mebane.
Competition.   Liggett’s competition is divided into two segments. The first segment consists of the three largest manufacturers of cigarettes in the United States: Philip Morris USA Inc., RJ Reynolds Tobacco Company (which is now part of Reynolds American) (“RJ Reynolds”) and ITG Brands LLC, which is owned by Imperial Brands Plc. These three manufacturers, while primarily premium cigarette-based companies, also produce and sell discount cigarettes. The second segment of competition is comprised of a group of smaller manufacturers and importers, most of which sell deep discount cigarettes.
The merger between RJ Reynolds and Lorillard in June 2015 consolidated more than 80% of the U.S. cigarette market within the control of two manufacturers, Philip Morris and RJ Reynolds. Consolidation in the industry could have a material adverse effect on our ability to compete in the U.S. cigarette market. 
Historically, there have been substantial barriers to entry into the cigarette business, including extensive distribution organizations, large capital outlays for sophisticated production equipment, substantial inventory investment, costly promotional spending, regulated advertising and, for premium brands, strong brand loyalty. However, after the MSA was signed, some smaller manufacturers and importers that are not parties to the MSA were able to overcome these competitive barriers due to their cost advantage resulting from the MSA. These smaller manufacturers and importers that are not parties to the MSA have been impacted in recent years by the state statutes enacted pursuant to the MSA and have seen a decline in volume after years of growth. However, these companies still have significant market share through competitive discounting in this segment.
In the cigarette business, Liggett competes on a dual front. The two major manufacturers compete among themselves for premium brand market share based on advertising and promotional activities and trade rebates and incentives and compete with Liggett and others for discount market share, on the basis of cost and brand loyalty. These two competitors have substantially greater financial resources than Liggett, and most of their brands have greater sales and consumer recognition than Liggett’s products. Liggett’s discount brands must also compete in the marketplace with the smaller manufacturers’ and importers’ deep discount brands.
According to Management Science Associates’ data, the unit sales of Philip Morris and RJ Reynolds accounted in the aggregate for approximately 78.5% of the domestic cigarette market in 2015 . Liggett’s domestic shipments of approximately 8.7

5

Table of Contents

billion cigarettes during 2015 accounted for 3.3% of the approximately 264 billion cigarettes shipped in the United States, compared to 8.9 billion cigarettes in 2014 ( 3.4% ) and 9.1 billion cigarettes in 2013 ( 3.3% ).
Industry-wide shipments of cigarettes in the United States have been declining for a number of years, with Management Science Associates’ data indicating that domestic industry-wide shipments declined by approximately 0.1% (approximately 0.3 billion units) and 3.0% (approximately 8.0 billion units) in 2015 and 2014 , respectively. Liggett’s management believes that industry-wide shipments of cigarettes in the United States will continue to decline as a result of numerous factors. These factors include health considerations, diminishing social acceptance of smoking, and a wide variety of federal, state and local laws limiting smoking in restaurants, bars and other public places, as well as increases in federal and state excise taxes and settlement-related expenses which have contributed to higher cigarette prices in recent years.
Historically, because of their dominant market share, Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, have been able to determine cigarette prices for the various pricing tiers within the industry. Market pressures have historically caused the other cigarette manufacturers to bring their prices in line with the levels established by these two major manufacturers. Off-list price discounting and similar promotional activity by manufacturers, however, has substantially affected the average price differential at retail, which can be significantly less than the manufacturers’ list price gap. Recent discounting by manufacturers has been far greater than historical levels, and the actual price gap between premium and deep-discount cigarettes has changed accordingly. This has led to shifts in price segment performance depending upon the actual price gaps of products at retail.
Philip Morris and RJ Reynolds dominate the domestic cigarette market with a combined market share of approximately 78.5% at December 31, 2015 . This concentration of United States market share makes it more difficult for Liggett to compete for shelf space in retail outlets and could impact price competition in the market, either of which could have a material adverse effect on its sales volume, operating income and cash flows.
E-Cigarettes
Our subsidiary, Zoom, entered the emerging United States e-cigarette market in limited retail distribution outlets in January 2014 with a cautious plan to minimize expense. In January of 2014, we announced the national rollout of our Zoom e-cigarette brand. Uncertainties regarding e-cigarettes are significantly greater today than they were a year ago and, at this point, the trend lines do not predict a bright future. In fact, we have seen significant changes in the e-cigarette market over the past year with disposable e-cigarettes in rapid decline, rechargeable e-cigarettes appearing to be in decline and open system vapor products, that feature refillable tanks and use low-cost flavored liquids, demonstrating mixed results with limited category volume growth but rapidly declining prices. Additionally, we believe uncertainties related to the regulation of e-cigarettes, including open system vapor products, exist. Given this backdrop, our primary focus on the e-cigarette product is to limit risk while staying prepared to pursue opportunities if they occur. Zoom incurred operating losses of $13.0 million and $13.1 million in 2015 and 2014 , respectively, and approximately $1.0 million in operating losses during 2013 relating to startup costs.

Legislation, Regulation and Litigation
In the United States, tobacco products are subject to substantial and increasing legislation, regulation and taxation, which have a negative effect on revenue and profitability. In June 2009, legislation was passed providing for regulation of the tobacco industry by the United States Food and Drug Administration. See Item 7. “Management Discussion and Analysis of Financial Condition and Results of Operations — Legislation and Regulation.”
The cigarette industry continues to be challenged on numerous fronts. The industry is facing increased pressure from anti-smoking groups and continued smoking and health litigation, the effects of which, at this time, we are unable to quantify. Product liability litigation, particularly in Florida in the Engle progeny cases, continues to adversely affect the cigarette industry. See Item 1A. “Risk Factors,” Item 3. “Legal Proceedings” and Note  15 to our consolidated financial statements, which contain a description of litigation.
It is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any tobacco-related litigation or as a result of additional federal or state regulation relating to the manufacture, sale, distribution, advertising or labeling of tobacco products.
Liggett’s management believes that it is in compliance in all material respects with the laws regulating cigarette manufacturers.
The MSA and Other State Settlement Agreements
In March 1996, March 1997, and March 1998, Liggett entered into settlements of tobacco-related litigation with 45  states and territories. The settlements released Liggett from all tobacco-related claims within those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.

6

Table of Contents

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 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 healthcare cost recovery and certain other claims of those Settling States. The MSA received final judicial approval in each Settling State.
In the Settling States, the MSA released Liggett and other participating tobacco product manufacturers 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 usage 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 $9.0 billion (subject to applicable adjustments, offsets and reductions). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligations 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 3.3% of the total cigarettes sold in the United States in 2015 . 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.
Liggett may have additional payment obligations under the MSA and its other settlement agreements with the states. See Item 1A. “Risk Factors” and Note  15 to our consolidated financial statements.

7

Table of Contents

New Valley LLC
New Valley LLC, a Delaware limited liability company, is engaged in the real estate business and is seeking to acquire or invest in additional real estate properties and projects. New Valley owns a 70.59% interest in Douglas Elliman Realty which operates the largest residential brokerage company in the New York City metropolitan area, which is known as Douglas Elliman Real Estate or Douglas Elliman. New Valley also holds investment interests in various real estate projects domestically and internationally.
Business Strategy
New Valley's business strategy is to continue to operate its real estate business, to acquire additional real estate properties and to acquire operating companies through merger, purchase of assets, stock acquisition or other means, or to acquire control of operating companies through one of such means. New Valley may also seek from time to time to dispose of such businesses and properties when favorable market conditions exist. New Valley’s cash and investments are available for general corporate purposes, including for acquisition purposes.
Douglas Elliman Realty, LLC
In addition to owning the largest residential brokerage company in the New York City metropolitan area, Douglas Elliman Realty owns Residential Management Group LLC, which conducts business as Douglas Elliman Property Management and is the New York metropolitan area’s largest manager of rental, co-op and condominium housing and Title Services business.
Prior to December 2013, New Valley owned a 50% interest in Douglas Elliman and on December 13, 2013, an affiliate of New Valley LLC acquired an additional 20.59% interest in Douglas Elliman Realty from Prudential Real Estate Financial Services of America, Inc. for $60 million . The acquisition increased our ownership in Douglas Elliman Realty to 70.59% . Consequently, after December 13, 2013, we consolidate in our financial statements the operations and financial position of Douglas Elliman Realty. 
Prior to December 31, 2013, we accounted for our interest in Douglas Elliman Realty under the equity method. We recorded income of $23.0 million for the period from January 1, 2013 to December 13, 2013 associated with Douglas Elliman Realty.
Real Estate Brokerage Business.   Douglas Elliman Real Estate is engaged in the real estate brokerage business through its seven subsidiaries. The seven brokerage companies have 79 offices with approximately 5,900 real estate agents in the metropolitan New York area as well as South Florida, Beverly Hills, California, Connecticut and Aspen. The companies achieved combined sales of approximately $22.4 billion of real estate in 2015 , approximately $18.2 billion of real estate in 2014 and approximately $14.9 billion of real estate in 2013 . Douglas Elliman Real Estate was ranked as the fourth-largest residential brokerage company in the United States in 2014 based on closed sales volume by the Real Trends broker survey. Douglas Elliman had revenues of $637.0 in 2015 , $543.2 million in 2014 , and $435.6 million in 2013 .
The New York City brokerage operation was founded in 1911 and has grown to be one of Manhattan’s leading residential brokers by specializing in the highest end of the sales and rental marketplaces. It has 21 New York City offices, with approximately 2,719 real estate agents, 7,119 transactions, representing sales volume of approximately $12.7 billion of real estate in 2015 . This is compared to approximately 6,950 transactions, representing approximately $11.5 billion of real estate in 2014 , and approximately 7,102 transactions closed in 2013 , representing approximately $9.6 billion of real estate.
The Long Island brokerage operation is headquartered in Huntington, New York and is the largest residential brokerage company on Long Island with 37 offices and approximately 2,091 real estate agents. Douglas Elliman of LI serves approximately 250 communities in Long Island and Queens, New York. The Westchester brokerage operation operates in a suburban area north of New York City with six offices and approximately 179 real estate agents. The Connecticut brokerage operation operates in Greenwich, Connecticut with one office and approximately 53 real estate agents. During 2015 , the three brokerage operations closed approximately 9,764 transactions, representing sales volume of approximately $6.3 billion of real estate. This is compared to approximately 8,548 transactions, representing sales volume of approximately $5.4 billion of real estate in 2014 , and approximately 8,197 transactions closed in 2013 , representing approximately $4.6 billion of real estate.
In December 2013, Douglas Elliman Realty acquired from an affiliate of New Valley the membership interest in the Florida brokerage operation. Douglas Elliman Florida, LLC operates in South Florida with 14 offices located in downtown Miami, Miami Beach, Coconut Grove, North Miami, Ft. Lauderdale, Boca Raton and Palm Beach. The offices have approximately 751 real estate agents and closed approximately 2,088 transactions, representing sales volume of $2.4 billion of real estate in 2015 . This compared to approximately 1,136 transactions, representing sales volume of approximately $1.2 billion of real estate in 2014 , and approximately 1,624 transactions closed in 2013 , representing approximately $0.8 billion of real estate.
Douglas Elliman Real Estate operates as a broker in residential real estate transactions. In performing these services, the company has historically represented the seller, either as the listing broker, or as a co-broker in the sale. In acting as a broker for the seller, their services include assisting the seller in pricing the property and preparing it for sale, advertising the property,

8

Table of Contents

showing the property to prospective buyers, and assisting the seller in negotiating the terms of the sale and in closing the transaction. In exchange for these services, the seller pays to the company a commission, which is generally a fixed percentage of the sales price. In a co-brokered arrangement, the listing broker typically splits its commission with the other co-broker involved in the transaction. The company also offers buyer brokerage services. When acting as a broker for the buyer, its services include assisting the buyer in locating properties that meet the buyer’s personal and financial specifications, showing the buyer properties, and assisting the buyer in negotiating the terms of the purchase and closing the transaction. In exchange for these services, a commission is paid to the company which also is generally a fixed percentage of the purchase price and is usually, based upon a co-brokerage agreement with the listing broker, deducted from, and payable out of, the commission payable to the listing broker. With the consent of a buyer and seller, subject to certain conditions, the company may, in certain circumstances, act as a selling broker and as a buying broker in the same transaction. The company’s sales and marketing services are provided by licensed real estate sales persons or associate brokers who have entered into independent contractor agreements with the company. The company recognizes revenue and commission expenses upon the consummation of the real estate sale.
Douglas Elliman Real Estate also offers relocation services to employers, which provide a variety of specialized services primarily concerned with facilitating the resettlement of transferred employees. These services include sales and marketing of transferees’ existing homes for their corporate employer, assistance in finding new homes, moving services, educational and school placement counseling, customized videos, property marketing assistance, rental assistance, area tours, international relocation, group move services, marketing and management of foreclosed properties, career counseling, spouse/partner employment assistance, and financial services. Clients can select these programs and services on a fee basis according to their needs.
DE Title Services. DE Title Services provides full-service title and settlement (i.e., closing and escrow) services to real estate companies and financial institutions. DE Title Services acts in the capacity of a title agent and sells title insurance to property buyers and mortgage lenders. DE Title Services is licensed as a title agent in New York.
elliman.com and AskElliman.com. Douglas Elliman Real Estate’s website, elliman.com, serves as a destination where consumers can search properties throughout the entire New York and South Florida markets and access current market information as well as comprehensive building and neighborhood guides and other interactive content. We have also recently launched AskElliman.com, our new web site that facilitates communication with consumers, providing them with access to information from real estate to mortgage financing, to specific neighborhoods.
Marketing.   Douglas Elliman Real Estate offers real estate sales and marketing and relocation services, which are marketed by a multimedia program. This program includes direct mail, newspaper, internet, catalog, radio and television advertising and is conducted throughout Manhattan and Long Island. In addition, the integrated nature of the real estate brokerage companies services is designed to produce a flow of customers between their real estate sales and marketing business and their mortgage business.
Competition.   The real estate brokerage business is highly competitive. However, Douglas Elliman Real Estate believes that its ability to offer their customers a range of inter-related services and its level of residential real estate sales and marketing help position them to meet the competition and improve their market share.
In the brokerage company’s traditional business of residential real estate sales and marketing, it competes with multi-office independent real estate organizations and, to some extent, with franchise real estate organizations, such as Century-21, ERA, RE/MAX International, Sotheby’s International Realty, Better Homes and Gardens Real Estate, Berkshire Hathaway HomeServices, and Coldwell Banker. Douglas Elliman believes that its major competitors in 2016 will also increasingly include multi-office real estate organizations, such as GMAC Home Services, NRT LLC (whose affiliates include the New York City-based Corcoran Group) and other privately-owned companies. Residential brokerage firms compete for sales and marketing business primarily on the basis of services offered, reputation, personal contacts, and, recently to a greater degree, price.
Government Regulation.  Several facets of real estate brokerage businesses are subject to government regulation. For example, their real estate sales and marketing divisions are licensed as real estate brokers in the states in which they conduct their real estate brokerage businesses. In addition, their real estate sales associates must be licensed as real estate brokers or salespersons in the states in which they do business. Future expansion of the real estate brokerage operations of Douglas Elliman Real Estate into new geographic markets may subject it to similar licensing requirements in other states.
A number of states and localities have adopted laws and regulations imposing environmental controls, disclosure rules, zoning and other land use restrictions, which can materially impact the marketability of certain real estate. However, Douglas Elliman Real Estate does not believe that compliance with environmental, zoning and land use laws and regulations has had, or will have, a materially adverse effect on its financial condition or operations.
RESPA and state real estate brokerage laws restrict payments that real estate brokers, title agencies, mortgage bankers, mortgage brokers and other settlement service providers may receive or pay in connection with the sales of residences and referral of settlement services (e.g., mortgages, homeowners insurance and title insurance). Such laws may, to some extent, restrict preferred alliance and other arrangements involving our real estate franchise, real estate brokerage, settlement services and relocation

9

Table of Contents

businesses. In addition, our relocation and title and settlement services businesses, RESPA and similar state laws require timely disclosure of certain relationships or financial interests with providers of real estate settlement services.
On November 17, 2008, the United States Department of Housing and Urban Development (“HUD”) published a rule that seeks to simplify and improve disclosures regarding mortgage settlement services and encourage consumers to compare prices for such services by consumers. The material provisions of the rule include: new Good Faith Estimate (“GFE”) and HUD-1 forms, permissibility of average cost pricing by settlement service providers, implementation of tolerance limits on various fees from the issuance of the GFE and the HUD-1 provided at closing, and disclosure of the title agent and title underwriter premium splits. To date, there has not been any material impact (financial or otherwise) to us arising out of compliance with these new rules.
Pursuant to the Dodd-Frank Act, administration of RESPA has been moved from HUD to the new Consumer Financial Protection Bureau (“CFPB”) and it is possible that the practices of HUD, taking very expansive broad readings of RESPA, will continue or accelerate at the CFPB creating increased regulatory risk. RESPA also has been invoked by plaintiffs in private litigation for various purposes.
Title Services Regulation . Many states license and regulate title agencies/settlement service providers or certain employees and underwriters through their Departments of Insurance or other regulatory body. In many states, title insurance rates are either promulgated by the state or are required to be filed with each state by the agent or underwriter, and some states promulgate the split of title insurance premiums between the agent and underwriter. States sometimes unilaterally lower the insurance rates relative to loss experience and other relevant factors. States also require title agencies and title underwriters to meet certain minimum financial requirements for net worth and working capital.
Franchises and Trade Names.   The “Douglas Elliman” trade name is a registered trademark in the United States. The name has been synonymous with the most exacting standards of excellence in the real estate industry since Douglas Elliman’s formation in 1911. Other trademarks used extensively in Douglas Elliman’s business, which are owned by Douglas Elliman and registered in the United States, include “We are New York,” “Bringing People and Places Together,” “If You Clicked Here You’d Be Home Now” and “Picture Yourself in the Perfect Home.”
The taglines “From Manhattan to Montauk” and “askelliman.com” are used extensively in the Douglas Elliman’s brokerage operations. In addition, Douglas Elliman’s brokerage operation continues to use the trade names of certain companies that it has acquired.
Residential Property Management Business.   Douglas Elliman Realty is also engaged in the management of cooperatives, condominiums and apartments though its subsidiary, Residential Management Group, LLC, which conducts business as Douglas Elliman Property Management and is the leading New York City based manager of apartments, cooperatives and condominiums in the New York metropolitan area according to a survey in the September 2013 issue of The Real Deal . Residential Management Group provides full service third-party fee management for approximately 344 properties, representing approximately 41,800  units in New York City, Nassau County, Northern New Jersey and Westchester County. Among the notable properties currently managed are the Dakota, Museum Tower, Olympic Tower Condominium, Manhattan House, CitySpire Condominium and The Sovereign buildings in New York City. Residential Management Group employs approximately 270  people, of whom approximately 198 work at Residential Management Group’s headquarters and the remainder at remote offices in the New York metropolitan area.
Real Estate Investments
We own, and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our current real estate investments include the following projects:
Land Development
Escena. We are developing a 450-acre approved master planned community in Palm Springs, CA. The development consisted of 667 residential lots, which include both single and multi-family lots, an 18-hole golf course, clubhouse restaurant, golf shop and seven-acre site approved for a 450-room hotel. In October 2013, we sold 200 single family lots for $22.7 million.
Sagaponack. We are developing an oceanfront plot of land in Sagaponack, NY. We are the sole owner of the land. We plan on partially developing the land by obtaining the appropriate permits and architectural plans and then subsequently selling it. The property is currently listed for sale.
Condominium and Mixed-Use Development
10 Madison Square West. We own an approximate 5.0% interest in a joint venture that is developing 10 Madison Square West. The joint venture is converting a 260,000-square-foot office building into a luxury residential condominium in the Flatiron District / NoMad neighborhood of Manhattan and is expected to be completed by August 2016 .

10

Table of Contents

The Marquand (11 East 68th Street) . We own an approximate 18.0% interest in a joint venture that is converting a 12-story residential rental building into a luxury residential condominium. The building is located in Manhattan’s Upper East Side. Thirteen of the 29 units were sold as of December 31, 2015.
11 Beach Street. We own an approximate 49.5% interest in a joint venture that is converting a 10-story, 250,000-square-foot office building into a luxury residential condominium. The building is located in the TriBeCa neighborhood of Manhattan and construction began in May 2014 and is expected to be completed by December 2016 .
20 Times Square (701 7th Avenue) . We own an approximate 7.1% interest in a joint venture that is developing a 340,000-square-foot multi-use project located in Times Square in Manhattan. The development includes retail space, hotel space and signage. Construction has started and is expected to be completed by January 2018 .
111 Murray Street. We own a 9.5% interest (and a related note receivable) in a joint venture that is developing a mixed-use property that includes both commercial space and a 157-unit luxury residential condominium in the TriBeCa neighborhood of Manhattan. Development began in 2014 and is expected to be completed by September 2018 .
160 Leroy Street .  We own an approximate 3.1% interest in a development site in the West Greenwich Village neighborhood of Manhattan. The site is being developed as a high-rise condominium that will face the Hudson River. Development began in 2015 and is expected to be completed by March 2018 .
215 Chrystie Street. We own an approximate 18.4% interest in a joint venture that owns a land development site in the Lower East Side neighborhood of Manhattan. The joint venture plans to develop the property into a 29-story mixed - use property with PUBLIC, an Ian Schrager-branded boutique hotel, and luxury condominium residences. Development began in 2014 and is expected to be completed by March 2017 .
The Dutch LIC (25-19 43rd Avenue). We own a 9.9% interest in a nine story, 87,000 square foot, condominium development in Long Island City, New York. Construction of the 86-unit building commenced in September 2014 and is anticipated to be completed by January 2017 .
Queens Plaza (23-10 Queens Plaza South). We own an approximate 45.4% interest in a joint venture that has purchased a pre-war building and a neighboring building in Queens, New York. The joint venture plans to develop a new apartment tower with 287,000 square feet of residential space and 10,000 square feet of retail space. Development began in 2014 and is expected to be completed by September 2016 .
87 Park (8701 Collins Avenue).   We own a 15.0% interest in an oceanfront development site in Miami Beach, Florida, which will be developed into a residential condominium building. Development is will begin in 2016 and be completed by September 2018 .
125 Greenwich Street.   We own a 13.3% interest in a development site in Manhattan's Financial District which will be developed into a high-rise condominium site along with a retail base. Development began in 2015 and is expected to be completed by October 2018 .
West Hollywood (9040 Sunset Boulevard). We own a 48.5% interest in a property at 9040 Sunset Boulevard which will be developed into a high-rise hotel and condominium complex. Development began in 2015 and is expected to be completed by April 2018 .
76 Eleventh Avenue . We own a 5.1% in a joint venture that is developing a mixed-use property that may include hotel, retail, commercial space and a luxury residential condominium in the West Chelsea neighborhood of Manhattan. Development is expected to begin during September 2016 and to be completed by March 2019 .
Monad Terrace. We own an approximate 31.3% interest in a joint venture that is developing a 160,000 -square-foot luxury condominium building in Miami Beach, FL. Development began is expected to begin during May 2016 and to be completed by May 2018 .
Takanasee. We own an approximate 22.8% interest in a joint venture that plans to develop luxury oceanfront single and multi-family homes in Long Branch, NJ.
Apartment Buildings
Maryland Portfolio. We own an approximate 7.6% indirect interest in a joint venture that owns approximately 5,500 apartment units primarily located in Baltimore County, Maryland.
ST Portfolio.   We own a 16.3% interest in two Class A multi-family rental assets in partnership with Winthrop Realty Trust. The two buildings are located in Houston, Texas and Stamford, Connecticut. The buildings include 488 apartment units and 20,000 square feet of retail space. The Phoenix, Arizona and San Pedro, California buildings were sold in 2015 and 2014, respectively, and the proceeds were used to pay down debt.

11

Table of Contents

Hotels
Park Lane Hotel. We own an approximate 5.2% interest in a joint venture that has acquired the Park Lane Hotel, which is presently a 47-story, 605-room independent hotel. The joint venture is developing plans for a future use.
Hotel Taiwana. We own an approximate 17.0% interest in a joint venture that owns a luxury hotel located in St. Barthelemy, French West Indies that has been recently renovated.
Coral Beach.  We own a 49.0% interest in a joint venture that owns a 52-acre private club in Bermuda. The property consists of Horizons cottages, which includes 39 units, and Coral Beach and Tennis Club, which includes 62 hotel and cottage units. Renovation began on the Coral Beach and Tennis Club in 2014.
Commercial
The Plaza at Harmon Meadow. We own an approximate 49.0% interest in a joint venture that has acquired Harmon Meadow, a 217,613 square foot retail shopping center in Secaucus, NJ.
In our real estate investment business, we seek to acquire investment interests in domestic and international real estate projects through debt and equity investments. We focus on new condominium development in Douglas Elliman markets and investing in well-located real estate assets that generate, or have the potential to generate, long-term, predictable and sustainable cash flows with attractive growth and development potential. We believe our ownership of Douglas Elliman provides us with a strategic advantage through its relationships with developers in New York City as well as its knowledge of the New York City residential real estate market. We and our partners seek to enhance the cash flows and returns from our investments by using varying levels of leverage. In addition, we and our partners may earn incentives on certain investments if the investments achieve rates of return that exceed targeted thresholds. Our real estate investments are located in the United States, Bermuda and the French West Indies and we may pursue growth in other markets where we identify attractive opportunities to invest in or acquire assets and to achieve strong risk-adjusted returns. We strive to invest at attractive valuations, capitalize on distressed situations where possible, create opportunities for superior valuation gains and cash flow returns and monetize assets at appropriate times to realize value. Our portfolio as of December 31, 2015 included interests in the 23 properties discussed above. As of December 31, 2015 , our real estate investment business held interests in joint ventures recorded on our financial statements at approximately $217.2 million and approximately $23.3 million in consolidated real estate investments.
For additional information concerning these investments, see Note 7 to our consolidated financial statements.
Long-Term Investments
Ladenburg Thalmann. We own 14,191,205  common shares of Ladenburg Thalmann Financial Services Inc. (NYSE MKT: LTS), which represents beneficial ownership of approximately 7.84% of the LTS, a publicly-traded entity engaged in independent brokerage and advisory services, investment banking, equity research, institutional sales and trading, asset management services, life insurance brokerage and trust services through its subsidiaries. We also own 1,000,000 warrants to purchase LTS common shares for $1.68 per share, 240,000 shares of LTS’s 8% Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 Per Share) (“LTS Preferred”) and have provided a loan to LTS, which had a principal balance of $1.7 million at December 31, 2015 and bears interest at 11% per annum. Three of our directors, Howard M. Lorber, Henry C. Beinstein and Jeffrey S. Podell, also serve as directors of LTS. Mr. Lorber also serves as Vice Chairman of LTS. Richard J. Lampen, who along with Mr. Lorber is an executive officer of ours, also serves as a director of LTS and has served as the President and Chief Executive Officer of LTS since September 2006. See Note  17 to our consolidated financial statements.
Castle Brands.   We own 12,671,159 shares of Castle Brands Inc. (NYSE MKT: ROX), a publicly-traded developer and importer of premium branded spirits, which represents beneficial ownership of approximately 8% of the Castle shares. Mr. Lampen is serving as the President, Chief Executive Officer and a director of Castle. Mr. Beinstein, a director of Vector, is also a director of Castle. See Note 17 to our consolidated financial statements. In 2013, we purchased in a private placement $200,000 of Castle’s convertible debt, which bears interest at 5% per annum, is convertible into 222,222 shares of Castle common stock and is due on December 15, 2018.
As of December 31, 2015 , long-term investments consisted primarily of investments in investment partnerships of approximately $62.7 million . In the future, we may invest in other investments including limited partnerships, real estate investments, equity securities, debt securities and certificates of deposit depending on risk factors and potential rates of return.
Employees
At December 31, 2015 , we had 1,367  employees, of which approximately 874 were employed by Douglas Elliman primarily in the New York area, 250 were employed at Liggett’s Mebane facility and approximately 220 were employed in sales and administrative functions at Liggett Vector Brands LLC (“LVB”), which coordinates our tobacco and e-cigarettes subsidiaries’ sales and marketing efforts, along with certain support functions. Approximately 13% of our employees are hourly employees, who are

12

Table of Contents

represented by unions. We have not experienced any significant work stoppages since 1977, and we believe that relations with our employees and their unions are satisfactory.
Available Information
Our website address is www.vectorgroupltd.com. We make available free of charge on the Investor Relations section of our website (http://www.vectorgroupltd.com/investor-relations/) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. We also make available through our website other reports filed with the SEC under the Exchange Act, including our proxy statements and reports filed by officers and directors under Section 16(a) of that Act. Copies of our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Audit Committee charter, Compensation Committee charter and Corporate Governance and Nominating Committee charter have been posted on the Investor Relations section of our website and are also available in print to any stockholder who requests it. We do not intend for information contained in our website to be part of this Annual Report on Form 10-K.

ITEM 1A.
RISK FACTORS
Our business faces many risks. We have described below the known material risks that we and our subsidiaries face. There may be additional risks that we do not yet know of or that we do not currently perceive to be significant that may also impact our business or the business of our subsidiaries. Each of the risks and uncertainties described below could lead to events or circumstances that have a material adverse effect on the business, results of operations, cash flows, financial condition or equity of us or one or more of our subsidiaries, which in turn could negatively affect the value of our common stock. You should carefully consider and evaluate all of the information included in this report and any subsequent reports that we may file with the Securities and Exchange Commission or make available to the public before investing in any securities issued by us.
We have significant liquidity commitments.
During 2016 , we have certain liquidity commitments that could require the use of our existing cash resources. As of December 31, 2015 , our corporate expenditures (exclusive of Liggett, Vector Tobacco and New Valley) and other potential liquidity requirements over the next 12 months include the following:
cash interest expense of approximately $96.6 million ,
dividends on our outstanding common shares of approximately $202.8 million , and
other corporate expenses and taxes.
In order to meet the above liquidity requirements as well as other liquidity needs in the normal course of business, we will be required to use cash flows from operations and existing cash and cash equivalents. Should these resources be insufficient to meet the upcoming liquidity needs, we may also be required to liquidate investment securities available for sale and other long-term investments, or, if available, draw on Liggett’s credit facility. While there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures will be successful.
We are a holding company and depend on cash payments from our subsidiaries, which are subject to contractual and other restrictions, in order to service our debt and to pay dividends on our common stock.
We are a holding company and have no operations of our own. We hold our interests in our various businesses through our wholly-owned subsidiaries, VGR Holding LLC and New Valley. In addition to our own cash resources, our ability to pay interest on our debt and to pay dividends on our common stock depends on the ability of VGR Holding and New Valley to make cash available to us. VGR Holding’s ability to pay dividends to us depends primarily on the ability of Liggett, its wholly-owned subsidiary, to generate cash and make it available to VGR Holding. Liggett’s revolving credit agreement with Wells Fargo Bank, N.A. contains a restricted payments test that limits the ability of Liggett to pay cash dividends to VGR Holding. The ability of Liggett to meet the restricted payments test may be affected by factors beyond its control, including Wells Fargo’s unilateral discretion, if acting in good faith, to modify elements of such test.
Our receipt of cash payments, as dividends or otherwise, from our subsidiaries is an important source of our liquidity and capital resources. If we do not have sufficient cash resources of our own and do not receive payments from our subsidiaries in an amount sufficient to repay our debts and to pay dividends on our common stock, we must obtain additional funds from other sources. There is a risk that we will not be able to obtain additional funds at all or on terms acceptable to us. Our inability to service these obligations and to continue to pay dividends on our common stock would significantly harm us and the value of our common stock.

13

Table of Contents

We and our subsidiaries have a substantial amount of indebtedness.
We and our subsidiaries have significant indebtedness and debt service obligations. As of December 31, 2015 , we and our subsidiaries had total outstanding indebtedness of $1.1 billion . In addition, subject to the terms of any future agreements, we and our subsidiaries will be able to incur additional indebtedness in the future. There is a risk that we will not be able to generate sufficient funds to repay our debt. If we cannot service our fixed charges, it would have a material adverse effect on our business and results of operations.
Our high level of debt may adversely affect our ability to satisfy our obligations.
There can be no assurance that we will be able to meet our debt service obligations. A default in our debt obligations, including a breach of any restrictive covenant imposed by the terms of our indebtedness, could result in the acceleration of the affected debt as well as other of our indebtedness. In such a situation, it is unlikely that we would be able to fulfill our obligations under the debt or such other indebtedness or that we would otherwise be able to repay the accelerated indebtedness or make other required payments. Even in the absence of an acceleration of our indebtedness, a default under the terms of our indebtedness could have an adverse impact on our ability to satisfy our debt service obligations and on the trading price of our debt and our common stock.
Our high level of indebtedness could have important consequences. For example, it could:
make it more difficult for us to satisfy our other obligations with respect to our debt, including repurchase obligations upon the occurrence of specified change of control events;
increase our vulnerability to general adverse economic and industry conditions;
limit our ability to obtain additional financing;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, reducing the amount of our cash flow available for dividends on our common stock and other general corporate purposes;
require us to sell other securities or to sell some or all of our assets, possibly on unfavorable terms, to meet payment obligations;
restrict us from making strategic acquisitions, investing in new capital assets or taking advantage of business opportunities;
limit our flexibility in planning for, or reacting to, changes in our business and industry; and
place us at a competitive disadvantage compared to competitors that have less debt.
Our 7.75% senior secured notes contain restrictive covenants that limit our operating flexibility.
The indenture governing our 7.75% senior secured notes due 2021 contains covenants that, among other things, restrict our ability to take specific actions, even if we believe them to be in our best interest, including restrictions on our ability to:
incur or guarantee additional indebtedness or issue preferred stock;
pay dividends or distributions on, or redeem or repurchase, capital stock;
create liens with respect to our assets;
make investments, loans or advances;
prepay subordinated indebtedness;
enter into transactions with affiliates; and
merge, consolidate, reorganize or sell our assets.
In addition, Liggett’s revolving credit agreement requires us to meet specified financial ratios. These covenants may restrict our ability to expand or fully pursue our business strategies. Our ability to comply with these and other provisions of the indenture governing the senior secured notes and the Liggett revolving credit agreement may be affected by changes in our operating and financial performance, changes in general business and economic conditions, adverse regulatory developments or other events beyond our control. The breach of any of these covenants, including those contained in the indenture governing the senior secured notes and Liggett’s credit agreement, could result in a default under our indebtedness, which could cause those and other obligations to become due and payable. If any of our indebtedness is accelerated, we may not be able to repay it.
The indenture governing the senior secured notes contain restrictive covenants, which, among other things, restrict our ability to pay certain dividends or make other restricted payments or enter into transactions with affiliates if our Consolidated EBITDA,

14

Table of Contents

as defined in the indenture, is less than $75 million for the four quarters prior to such transaction. Our Consolidated EBITDA for the four quarters ended December 31, 2015 exceeded $75 million.
Changes in respect of the debt ratings of our notes may materially and adversely affect the availability, the cost and the terms and conditions of our debt.
Both we and several issues of our notes have been publicly rated by Moody’s Investors Service, Inc., or Moody’s, and Standard & Poor’s Rating Services, or S&P, independent rating agencies. In addition, future debt instruments may be publicly rated. These debt ratings may affect our ability to raise debt. Any future downgrading of the notes or our other debt by Moody’s or S&P may affect the cost and terms and conditions of our financings and could adversely affect the value and trading of the notes.
Liggett faces intense competition in the domestic tobacco industry.

Liggett is considerably smaller and has fewer resources than its major competitors, and, as a result, has a more limited ability to respond to market developments. Management Science Associates’ data indicate that in 2015 Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, controlled approximately  78.5%  of the United States cigarette market. Philip Morris is the largest manufacturer in the market, and its profits are derived principally from its sale of premium cigarettes. Philip Morris had approximately  60.3%  of the premium segment and  47.6%  of the total domestic market during  2015 . During 2015 , all of Liggett’s sales were in the discount segment, and its share of the total domestic cigarette market was  3.3% . Philip Morris and RJ Reynolds, the two largest cigarette manufacturers, historically, because of their dominant market share, have been able to determine cigarette prices for the various pricing tiers within the industry.

Consolidation in the industry could adversely affect our ability to compete in the U.S. cigarette market. For example, RJ Reynolds’ merger with Lorillard Tobacco Company could make it more difficult for Liggett and Vector Tobacco to compete for shelf space in retail outlets and could impact price competition in the market, either of which could have a material adverse effect on our sales volume, operating income and cash flows. Further, as part of the merger, RJ Reynolds and Lorillard Tobacco Company divested four of their brands to ITG Brands LLC, owned by Imperial Brands Plc.
Liggett’s business is highly dependent on the discount cigarette segment.
Liggett depends more on sales in the discount cigarette segment of the market, relative to the full-price premium segment, than its major competitors. Since 2004, all of Liggett’s unit volume was generated in the discount segment. The discount segment is highly competitive, with consumers having less brand loyalty and placing greater emphasis on price. While Philip Morris, RJ Reynolds, and Imperial compete with Liggett in the discount segment of the market, the strongest competition for market share has come from a group of smaller manufacturers and importers, most of which sell low quality, deep discount cigarettes. While Liggett’s share of the discount market was  11.8% in both 2015 and  2014  and  11.6%  in  2013 , Management Science Associates’ data indicate that the discount market share of these other smaller manufacturers and importers was approximately 24.8%  in  2015 34.1%  in  2014 , and  33.7%  in  2013 . If pricing in the discount market continues to be impacted by these smaller manufacturers and importers, margins in Liggett’s only current market segment could be negatively affected, which in turn could negatively affect the value of our common stock.
Liggett’s market share is susceptible to decline.

Liggett’s market share decreased  in 2015 , 2013 and 2012, after having increased in 2014. Liggett's market share increased during each of the years between 2000 and 2011 (except for 2008, which was unchanged). Earlier market share erosion resulted in part from Liggett’s highly leveraged capital structure that existed until December 1998 and its limited ability to match other competitors’ wholesale and retail trade programs, obtain retail shelf space for its products and advertise its brands. These declines also resulted from adverse developments in the tobacco industry, intense competition and changes in consumer preferences that have continued up to the current time. According to Management Science Associates' data, Liggett's overall domestic market share during 2015 was 3.3% compared to 3.4% during 2014 , and 3.3% during 2013 . Liggett's share of the discount segment was 11.8% in 2015 , 11.8%  in  2014  and  11.6%  in  2013 . Liggett's overall market share decreased by 0.1% in 2015 after increasing by 0.1% in 2014 . If it were to decline substantially in the future, Liggett's sales volume, operating income and cash flows would be materially adversely affected, which in turn would negatively affect the value of our common stock.
The domestic cigarette industry has experienced declining unit sales in recent periods.

Industry-wide shipments of cigarettes in the United States have been declining for a number of years, with Management Science Associates’ data indicating that domestic industry-wide shipments decreased by approximately 0.1% in 2015 as compared to 2014 , and by approximately 3.0% in 2014 as compared to 2013 . We believe that industry-wide shipments of cigarettes in the

15

Table of Contents

United States will continue to decline as a result of numerous factors. These factors include health considerations, diminishing social acceptance of smoking, and a wide variety of federal, state and local laws limiting smoking in restaurants, bars and other public places, as well as increases in federal and state excise taxes and settlement-related expenses which have contributed to high cigarette price levels in recent years . If this decline in industry-wide shipments continues and Liggett is unable to capture market share from its competitors, or if the industry as a whole is unable to offset the decline in unit sales with price increases, Liggett’s sales volume, operating income and cash flows could be materially adversely affected, which in turn could negatively affect the value of our common stock.
Our tobacco operations are subject to substantial and increasing legislation, regulation and taxation, which has a negative effect on revenue and profitability.
Tobacco products are subject to substantial federal and state excise taxes in the United States. These taxes may continue to increase. On April 1, 2009, the federal excise tax increased from $0.39 to $1.01 per pack of cigarettes, and significant tax increases on other tobacco products, to fund expansion of the State Children’s Health Insurance Program, referred to as SCHIP. The increases in federal excise tax under SCHIP are substantial, and, as a result, Liggett’s sales volume and profitability has been and may continue to be adversely impacted. In addition, SCHIP created certain tax differentials between certain types of tobacco products. This has caused a dramatic increase in the sale of mis-labeled pipe tobacco as a substitute for roll-your-own, which has directly impacted sales of cigarettes.
In addition to federal and state excise taxes, certain city and county governments also impose substantial excise taxes on tobacco products. Increased excise taxes are likely to result in declines in overall sales volume and shifts by consumers to less expensive brands.
A wide variety of federal, state and local laws limiting the advertising, sale and use of cigarettes have proliferated in recent years. For example, many local laws prohibit smoking in restaurants and other public places. Private businesses also have adopted regulations that prohibit or restrict, or are intended to discourage, smoking. Such laws and regulations also are likely to result in a decline in the overall sales volume of cigarettes.
Over the years, various state and local governments have continued to increase regulation of tobacco products. These regulations include, among other things, disclosure of ingredient information, the imposition of significantly higher taxes, increases in the minimum age to purchase tobacco products, sampling and advertising bans or restrictions, ingredient and constituent disclosure requirements and significant tobacco control media campaigns. Additional state and local legislative and regulatory actions will likely be considered in the future, including, among other things, restrictions on the use of flavorings.
In addition to the foregoing, there have been a number of other restrictive regulatory actions from various federal administrative bodies, including the United States Environmental Protection Agency and the Food and Drug Administration (“FDA”). There have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. In 2009, legislation was passed by Congress providing for regulation of cigarettes by the FDA. These developments generally receive widespread media attention. Additionally, a majority of states have passed legislation providing for reduced ignition propensity standards for cigarettes. 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 similar litigation or legislation. We are not able to evaluate the effect of these developing matters on pending litigation or the possible commencement of additional litigation, but our consolidated financial position, results of operations or cash flows could be materially adversely affected.
Additional federal or state regulation relating to the manufacture, sale, distribution, advertising, labeling, or information disclosure of tobacco products could further reduce sales, increase costs and have a material adverse effect on our business.
The Family Smoking Prevention and Tobacco Control Act may adversely affect our sales and operating profit.
On June 22, 2009, the President signed into law the Family Smoking Prevention and Tobacco Control Act (the “Tobacco Control Act”). The law grants FDA broad authority over the manufacture, sale, marketing and packaging of tobacco products, although FDA is prohibited from banning all cigarettes or all smokeless tobacco products. Among other measures, the law (under various deadlines):
increases the number of health warnings required on cigarette and smokeless tobacco products, increases the size of warnings on packaging and in advertising, requires FDA to develop graphic warnings for cigarette packages, and grants FDA authority to require new warnings;
imposes new restrictions on the sale and distribution of tobacco products, including significant new restrictions on tobacco product advertising and promotion, as well as the use of brand and trade names;
bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products;

16

Table of Contents

bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol;
gives FDA the authority to impose tobacco product standards that are appropriate for the protection of the public health (by, for example, requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling);
requires manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products, which could ultimately result in the FDA prohibiting Liggett from selling certain of its products;
requires pre-market approval by FDA for tobacco products represented (through labels, labeling, advertising, or other means) as presenting a lower risk of harm or tobacco-related disease;
requires manufacturers to report ingredients and harmful constituents and requires FDA to disclose certain constituent information to the public;
mandates that manufacturers test and report on ingredients and constituents identified by FDA as requiring such testing to protect the public health, and allows FDA to require the disclosure of testing results to the public;
requires manufacturers to submit to FDA certain information regarding the health, toxicological, behavioral or physiological effects of tobacco products;
prohibits use of tobacco containing a pesticide chemical residue at a level greater than allowed under federal law;
requires FDA to establish “good manufacturing practices” to be followed at tobacco manufacturing facilities;
requires tobacco product manufacturers (and certain other entities) to register with FDA;
authorizes FDA to require the reduction of nicotine (although it may not require the reduction of nicotine yields of a tobacco product to zero) and the potential reduction or elimination of other constituents, including menthol;
imposes (and allows FDA to impose) various recordkeeping and reporting requirements on tobacco product manufacturers; and
grants FDA the regulatory authority to impose broad additional restrictions.
It is likely that the tobacco law could result in a decrease in cigarette sales in the United States, including sales of Liggett’s and Vector Tobacco’s brands. Compliance and related costs are not possible to predict and depend substantially on the future requirements imposed by FDA under the law. Costs, however, could be substantial and could have a material adverse affect on the companies’ financial condition, results of operations, and cash flows. In addition, FDA has a number of investigatory and enforcement tools available to it. Failure to comply with the law and with FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on the business, financial condition and results of operation of both Liggett and Vector Tobacco. At present, we are not able to predict whether the law will impact Liggett and Vector Tobacco to a greater degree than other companies in the industry, thus affecting our competitive position.
Litigation will continue to harm the tobacco industry.
Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse judgments could have a negative impact on our ability to operate due to their impact on cash flows. We and our Liggett subsidiary, as well as the entire cigarette industry, continue to be challenged on numerous fronts, particularly with respect to the Engle progeny cases in Florida (described below). New cases continue to be commenced against Liggett and other cigarette manufacturers. As of December 31, 2015 , in addition to the Engle progeny cases, there were 40 individual product liability lawsuits, three purported class actions and one health care cost recovery action pending in the United States in which Liggett and/or us were named defendants. It is likely that similar legal actions, proceedings and claims will continue to be filed against Liggett. Punitive damages, often in amounts ranging into the billions of dollars, are specifically pled in certain cases, in addition to compensatory and other damages. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.
Liggett Only Cases.   There are currently three cases pending where Liggett is the only remaining tobacco company defendant. Cases where Liggett is the only defendant could increase substantially as a result of the Engle progeny cases.
As new product liability cases are commenced against Liggett, the costs associated with defending these cases and the risks relating to the inherent unpredictability of litigation continue to increase.

17

Table of Contents

Individual tobacco-related cases have increased as a result of the Florida Supreme Court’s ruling in Engle.
In May 2003, a Florida intermediate appellate court overturned a $790.0 million punitive damages award against Liggett and decertified the Engle v. R. J. Reynolds Tobacco Co . smoking and health class action. In July 2006, the Florida Supreme Court affirmed in part and reversed in part the May 2003 intermediate appellate court decision. Among other things, the Florida Supreme Court affirmed the decision decertifying the class on a prospective basis and the order vacating the punitive damages award, but preserved several of the trial court’s Phase I findings (including that: (i) smoking causes lung cancer, among other diseases; (ii) nicotine in cigarettes is addictive; (iii) defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) the defendants concealed material information; (v) all defendants sold or supplied cigarettes that were defective; and (vi) all defendants were negligent) and allowed plaintiffs to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they commence their individual lawsuits within one year of the date the court’s decision became final on January 11, 2007, the date of the court’s mandate. 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.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle , former class members had until January 2008 to file individual lawsuits. Cases were commenced on behalf of approximately 8,000 plaintiffs. Lawsuits by individuals requesting the benefit of the Engle ruling are referred to as the “ Engle progeny cases.” In October 2013, the Company announced a settlement of the claims of approximately 4,900 Engle progeny plaintiffs. Notwithstanding this comprehensive settlement, the claims of approximately 260 state court Engle progeny plaintiffs remain outstanding. As of December 31, 2015 , there were seven Engle progeny cases currently scheduled for trial in 2016 . Through December 31, 2015, 15 adverse verdicts had been entered against Liggett in Engle progeny cases. Several of these were affirmed on appeal and were satisfied by Liggett. The remaining verdicts are at various stages of appeal although appellate efforts, to date, have generally not been successful. Liggett faces outstanding judgments of $12.7 million , plus interest and attorney fees, for the cases currently on appeal.
We cannot predict the cash requirements related to any future settlements and judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met.
Excise tax increases adversely affect cigarette sales.
Cigarettes are subject to substantial and increasing federal, state and local excise taxes. In February 2009, Federal legislation to reauthorize SCHIP, which includes funding provisions that increase the federal cigarette excise tax from $0.39 to $1.01 per pack, was enacted, effective April 1, 2009. Additional increases in the federal cigarette excise tax have been proposed by Congress. Various states and other jurisdictions are considering, or have pending, legislation proposing further state excise tax increases. Management believes increases in excise and similar taxes have had, and will continue to have, an adverse effect on sales of cigarettes.
Liggett may have additional payment obligations under the MSA.
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 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 their 2003, 2004, 2005 and 2006 MSA payments. The Participating Manufacturers are also entitled to potential NPM Adjustments to their 2007, 2008 and 2009 payments pursuant to an agreement entered into in June 2009 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 in 2007, 2008 and 2009. A settling state that has diligently enforced its qualifying escrow statute in the year in question may be able to avoid application of the NPM Adjustment to the payments made by the manufacturers for the benefit of that state or territory.

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 April 15, 2013 MSA payments. In May 2013, two additional states joined the settlement. Several non-settling states are attempting to vacate the settlement award by filing state court actions.

18

Table of Contents

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, in April 2014, Liggett received a credit for the 2003 NPM Adjustment, in the amount of $6.4 million including interest. This amount was recognized 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 the arbitration award. Three of those states have subsequently settled the dispute. No assurance can be given as to the ultimate outcome of the remaining challenges.
For 2003 - 2014, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco paid subject to dispute, withheld payment or paid into a disputed payment account the amounts associated with these NPM Adjustments.
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 1.645% 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.
In October 2014, the panel issued a Corrected Final Award that eliminated the 1.25% adjustment increase. The panel further determined that the independent auditor shall compute Liggett’s market share for all years after 2000 on a “net” basis, but, adjust that computation to approximate “gross” market share by using actual returned product data for each year. In July 2015, the independent auditor issued calculations, purportedly based on the Corrected Final Award, which indicated that Liggett owed approximately $16,000 for years 2001 - 2013. The independent auditor subsequently issued revised draft calculations indicating that Liggett owes $6,200 for years 2001-2013. Based on these revised calculations, Liggett is fully accrued for this matter.
Liggett may have additional payment obligations under its individual state settlements.
In 2004, the Attorneys General of Mississippi and Texas advised Liggett that they believed that Liggett had failed to make all required payments under the respective settlement agreements with these states. Liggett believes these allegations are without merit, based, among other things, on the language of the most favored nation provisions of the settlement agreements. No amounts have been accrued in our consolidated financial statements for any additional amounts that may be payable by Liggett under the settlement agreements with Mississippi and Texas. In January 2016, Mississippi commenced an action against Liggett for alleged breach of contract. There can be no assurance that Liggett will prevail in these matters and that Liggett will not be required to make additional payments, which could materially adversely affect our consolidated financial position, results of operations or cash flows and the value of our common stock.
Zoom is subject to risks relating to the industry in which it operates

Zoom’s e-cigarette business is subject to substantial risks, uncertainties and contingencies which include, without limitation, the challenges inherent in new product development initiatives, the ability to raise capital and manage the growth of its business, potential disputes concerning Zoom’s intellectual property, potential extensive government regulation or prohibition, technology, obsolescence, and market acceptance of Zoom’s products. Zoom is considerably smaller and has fewer resources than its major competitors, and, as a result, has a more limited ability to respond to market developments. Over the past year we have seen significant changes in the e-cigarette market with apparent declines in the sales of disposable and rechargeable e-cigarettes while open system vapor products that feature refillable tanks and low-cost flavored liquids have demonstrated mixed results. Given this backdrop, our primary focus on e-cigarettes is to stay prepared to pursue opportunities if they occur.
New Valley is subject to risks relating to the industries in which it operates.
Risks relating to the real estate industry.   
The real estate industry is significantly affected by changes in economic and political conditions as well as real estate markets, which could adversely impact returns on our investments, trigger defaults in project financing, cause cancellations of property sales, reduce the value of our properties or investments and could affect our results of operations and liquidity. The real estate industry is cyclical and is significantly affected by changes in general and local economic conditions which are beyond our control.
These conditions include short-term and long-term interest rates, inflation, fluctuations in debt and equity capital markets, levels of unemployment, consumer confidence and the general economic condition of the United States and the global economy. The real estate market also depends upon the strength of financial institutions, which are sensitive to changes in the general

19

Table of Contents

macroeconomic environment. Lack of available credit or lack of confidence in the financial sector could impact the real estate market, which in turn could adversely affect our business, financial condition and results of operations.
Any of the following could be associated with cyclicality in the real estate market by halting or limiting a recovery in the residential real estate market, and have an adverse effect on our business by causing periods of lower growth or a decline in the number of home sales and/or property prices which, in turn, could adversely affect our revenue and profitability:

periods of economic slowdown or recession;
rising interest rates;
the general availability of mortgage financing;
a negative perception of the market for residential real estate;
commission pressure from brokers who discount their commissions;
an increase in the cost of homeowners’ insurance;
weak credit markets;
a low level of consumer confidence in the economy and/or the real estate market;
instability of financial institutions;
legislative, tax or regulatory changes that would adversely impact the real estate market, including but not limited to potential reform relating to Fannie Mae, Freddie Mac and other government sponsored entities that provide liquidity to the U.S. housing and mortgage markets, and potential limits on, or elimination of, the deductibility of certain mortgage interest expense and property taxes;
adverse changes in economic and general business conditions in the New York metropolitan area;
a decline in the affordability of homes;
declining demand for real estate;
decreasing home ownership rates, declining demand for real estate and changing social attitudes toward home ownership; and/or
acts of God, such as hurricanes, earthquakes and other natural disasters, or acts or threats of war or terrorism.
New Valley is heavily dependent on the performance of the real estate market in the New York metropolitan area. New Valley’s business primarily depends on the performance of the real estate market in the New York metropolitan area. Our real estate brokerage businesses and our investments in real estate developments are largely located in the New York metropolitan area and to a lesser extent in South Florida. Further, as of December 31, 2015 , we had investments in or were developing 14 projects in the New York metropolitan area. Douglas Elliman Real Estate’s residential brokerage business primarily depends on volumes of sales transactions and sales prices for residential property in the New York metropolitan area. If volumes of residential property sales transactions in the New York metropolitan area decrease, the aggregate sales commission earned by Douglas Elliman Real Estate on sales transactions is also likely to decrease. Our business is and may continue to be heavily dependent on the continued growth of the property market in the New York metropolitan area, and any adverse developments in the supply and demand or in property prices in these areas would have an adverse effect on our financial condition and results of operations.
We cannot assure you that property development and investment activities will continue at past levels or that we will be able to benefit from future growth in the property market in the New York metropolitan area, South Florida or the United States. Any adverse developments in national and local economic conditions as measured by such factors as GDP growth, employment levels, job growth, consumer confidence, interest rates and population growth in the New York metropolitan area and the United States, particularly in the regions where our investments and brokerages are located, may reduce demand and depress prices for our properties and services and would have an adverse effect on our business, financial condition and results of operations.
New Valley is dependent on the attractiveness of New York City as a place to live and invest in and its status as an international center for business and commerce. Through its investments in Douglas Elliman Real Estate and 14 developments in the New York metropolitan area, New Valley is dependent on the attractiveness of New York City as a place to live and invest in. If New York City’s economy stagnates or contracts or if there are significant concerns or uncertainty regarding the strength of New York City’s economy, due to domestic, international or global macroeconomic trends or other factors (including, in particular, any matters which adversely affect New York City’s status as an international center for business and commerce or the economic benefits of New York City’s financial services industry), the New York metropolitan area may become a less attractive place to live, work, study or to own residential property for investment purposes. The attractiveness of New York City may also be negatively affected

20

Table of Contents

by other factors, including high residential property sales prices or rents (or a risk or perceived risk of a fall in sales prices in the future), high costs of living, and negative perceptions surrounding quality of life, safety and security (including the risk or perceived risk of acts of terrorism or protests).
Any reduction in the attractiveness of New York City as a place to live or a place to invest in residential real estate and any matters which adversely affect New York City’s status as an international center for business and commerce could result in a reduction, by volume and/or by value, in our investment in real estate developments and/or residential property sales transactions in the New York metropolitan area, which would adversely affect our business, financial condition and results of operations.
Risks associated with our real estate development business
Real estate development is a competitive industry, and competitive conditions may adversely affect our results of operations. The real estate development industry is highly competitive. Real estate developers compete not only for buyers, but also for desirable properties, building materials, labor and capital. We compete with other local, regional, national and international real estate asset managers, investors and property developers, who have significant financial resources and experience. Competitive conditions in the real estate development industry could result in: difficulty in acquiring suitable investments in properties at acceptable prices; increased selling incentives; lower sales volumes and prices; lower profit margins; impairments in the value of our investments in real estate developments and other assets; and increased construction costs, delays in construction and increased carry costs. Development projects are subject to special risks including potential increase in costs, changes in market demand, inability to meet deadlines which may delay the timely completion of projects, reliance on contractors who may be unable to perform and the need to obtain various governmental and third party consents.
If the market value of our properties or investments decline, our results of operations could be adversely affected by impairments and write-downs. We acquire land and invest in real estate projects in the ordinary course of our business. There is an inherent risk that the value of our land and investments may decline after purchase, which also may affect the value of existing properties under construction. The valuation of property is inherently subjective and based on the individual characteristics of each property. The market value of our land and investments in real estate projects depends on general and local real estate market conditions. These conditions can change and thereby subject valuations to uncertainty. Moreover, all valuations are made on the basis of assumptions that may not prove to reflect economic or demographic reality. We may have acquired options on or bought and developed land at a cost we will not be able to recover fully or on which we cannot build and sell the property profitably. In addition, our deposits or investments in deposits for building lots controlled under option or similar contracts may be put at risk. If market conditions deteriorate, some of our assets may be subject to impairments and write-down charges which would adversely affect our operations and financial results.
If demand for residential or commercial real estate decreases below what was anticipated when we purchased interests in or developed such inventory, profitability may be adversely affected and we may not be able to recover the related costs when selling and building our properties and/or investments. We regularly review the value of our investments and will continue to do so on a periodic basis. Write-downs and impairments in the value of our properties and/or investments may be required, and we may in the future sell properties and/or investments at a loss, which could adversely affect our results of operations and financial condition.
We face risks associated with property acquisitions. We may be unable to finance acquisitions or investments on favorable terms or properties may fail to perform as expected. We may underestimate the costs necessary to bring an investment up to standards established for its intended market position. We may also acquire or invest in properties subject to liabilities and with recourse, with respect to unknown liabilities. The Company's acquisition of real estate investments are subject to several risks including: underestimated operating expenses for a property, possibly making it uneconomical or unprofitable; a property may fail to perform in accordance with expectations, in which case the Company may sustain lower-than-expected income or need to incur additional expenses for the property; and the Company may not be able to sell, dispose or refinance the property at a favorable price or terms, or at all, as the case may be; in addition to any potential loss on a sale, the Company may have no choice but to hold on to the property and continue to incur net operating losses if underperforming for an indefinite period of time, as well as incur continuing tax, environmental and other liabilities. Acquisition agreements will typically contain conditions to closing, including completion of due diligence to our satisfaction or other conditions that are not within our control, which may not be satisfied. Each of these factors could have an adverse effect on our results of operations and financial condition.
Our success depends on the availability of suitable real estate investments at acceptable prices and having sufficient liquidity to acquire such investments. Our success in investing in real estate depends in part upon the continued availability of suitable real estate assets at acceptable prices. The availability of properties for investment at favorable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding on real estate assets. Should suitable opportunities become less available, the number of properties we develop and invest in would be reduced, which would reduce revenue and

21

Table of Contents

profits. In addition, our ability to make investments will depend upon whether we have sufficient liquidity to fund such purchases and investments.
If we, or the entities we invest in, are not able to develop and market our real estate developments successfully or within expected timeframes or at projected pricing, our business and results of operations will be adversely affected. Before a property development generates any revenues, material expenditures are incurred to acquire land, obtain development approvals and construct significant portions of project infrastructure, amenities, model offices, showrooms, apartments or homes and sales facilities. It generally takes several years for a real estate development to achieve cumulative positive cash flow. If we, or the entities we invest in, are unable to develop and market our real estate developments successfully or to generate positive cash flows from these operations within expected timeframes, it could have a material adverse effect on our business and results of operations.
Because certain of our assets are illiquid, we may not be able to sell these assets when appropriate or when desired. Large real estate development like the ones that we retain investments in can be hard to sell, especially if local market conditions are poor. Such illiquidity could limit our ability to diversify our assets promptly in response to changing economic or investment conditions. Additionally, financial difficulties of other property owners resulting in distressed sales could depress real estate values in the markets in which we operate in times of illiquidity. These restrictions reduce our ability to respond to changes in the performance of our assets and could adversely affect our financial condition and results of operations.
Guaranty risks; risks of joint ventures.   New Valley has a number of real estate-related investments in which other partners hold significant interests. New Valley must seek approval from these other parties for important actions regarding these joint ventures. Since the other parties’ interests may differ from those of New Valley, a deadlock could arise that might impair the ability of the ventures to function. Such a deadlock could significantly harm the ventures. If our partners face adverse financial conditions, it may impair their ability to fund capital calls or satisfy their share of any guarantees on project financing. In addition, we are typically obligated to execute guarantees or indemnify our partners for guarantees they may execute in connection with the acquisition or construction financing for our projects. The guarantees that we might be obligated to sign include guarantees for environmental liability at a project, "bad boy" acts committed by New Valley, as well as a "carry" guarantee and completion guarantee for a project. In the event of a default, if a lender were to exercise its rights under these guarantees, it could have a material adverse effect on our business and results of operations.
Our real estate investments and the real estate market in general could be adversely impacted by changes in the law . Many different laws govern the development of real estate. Changes to laws such as affordable housing, zoning, air rights and others, could adversely impact our real estate projects. The Financial Crimes Enforcement Network of the Treasury Department has recently issued Geographic Targeting Orders that will temporarily require certain United States title insurance companies to identify the natural persons who directly or indirectly beneficially own companies that pay all cash for high-end residential real estate in the Borough of Manhattan in New York City and in Miami-Dade County in Florida. No assurances can be given as to the impact such requirements may have on the continued purchasing of high-end residential properties in Manhattan and Miami-Dade County by such individuals for so long as such requirements are in effect, and no assurances can be given as to the impact such requirements may have in the event they are extended to other markets throughout the country in which New Valley is engaged in high-end residential properties.
The real estate developments we invest in may be subject to losses as a result of construction defects. Real estate developers, are subject to construction defect and warranty claims arising in the ordinary course of their business. These claims are common in the real estate development industry and can be costly.
Claims may be asserted against the real estate developments we invest in for construction defects, personal injury or property damage caused by the developer, general contractor or subcontractors, and if successful these claims may give rise to liability. Subcontractors are independent of the homebuilders that contract with them under normal management practices and the terms of trade contracts and subcontracts within the industry; however, if U.S. or other regulatory agencies or courts reclassify the employees of sub-contractors as employees of real estate developers, real estate developers using subcontractors could be responsible for wage, hour and other employment-related liabilities of their subcontractors.
In addition, where the real estate developments in which we invest hire general contractors, unforeseen events such as the bankruptcy of, or an uninsured or under-insured loss claimed against, the general contractor, may sometimes result in the real estate developer becoming responsible for the losses or other obligations of the general contractor. The costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies may be limited. There can be no assurance that this coverage will not be further restricted and become more costly. If the real estate developments in our real estate portfolio are not able to obtain adequate insurance against these claims in the future, our business and results of operations may be adversely affected.
Increasingly in recent years, individual and class action lawsuits have been filed against real estate developers asserting claims of personal injury and property damage caused by a variety of issues, including faulty materials and the presence of mold in residential dwellings. Furthermore, decreases in home values as a result of general economic conditions may result in an increase

22

Table of Contents

in both non-meritorious and meritorious construction defect claims, as well as claims based on marketing and sales practices. Insurance may not cover all of the claims arising from such issues, or such coverage may become prohibitively expensive. If real estate developments in our real estate portfolio are not able to obtain adequate insurance against these claims, they may experience litigation costs and losses that could reduce our revenues from these investments. Even if they are successful in defending such claims, we may incur significant losses.
Our real estate investments may face substantial damages as a result of existing or future litigation, arbitration or other claims. The real estate developments we invest in are exposed to potentially significant litigation, arbitration proceedings and other claims, including breach of contract, contractual disputes and disputes relating to defective title, property misdescription or construction defects. Class action lawsuits can be costly to defend, and if our assets were to lose any certified class action suit, it could result in substantial liability. With respect to certain general liability exposures, including construction defect and product liability claims, interpretation of underlying current and future trends, assessment of claims and the related liability and reserve estimation process requires us to exercise significant judgment due to the complex nature of these exposures, with each exposure exhibiting unique circumstances. Furthermore, once claims are asserted for construction defects, it is difficult to determine the extent to which the assertion of these claims will expand geographically. As a result, we may suffer losses on our investments which could adversely affect our business, financial condition and results of operations.
Our investments in real estate are susceptible to adverse weather conditions and natural and man-made disasters. Adverse weather conditions and natural and man-made disasters such as hurricanes, tornadoes, storms, earthquakes, floods, droughts, fires, snow, blizzards, as well as terrorist attacks, riots and electrical outages, can have a significant effect on the assets in our real estate portfolio. These adverse conditions can cause physical damage to work in progress and new developments, delays and increased costs in the construction of new developments and disruptions and suspensions of operations, whether caused directly or by disrupting or suspending operations of those upon whom our real estate developments rely in their operations. Such adverse conditions can mutually cause or aggravate each other, and their incidence and severity are unpredictable. If insurance is unavailable to the real estate developments we invest in or is unavailable on acceptable terms, or if insurance is not adequate to cover business interruptions or losses resulting from adverse weather or natural or man-made disasters, the real estate developments we invest in and our results of operations will be adversely affected. In addition, damage to properties in our real estate portfolio caused by adverse weather or a natural or man-made disaster may cause insurance costs for these properties to increase.
A major health and safety incident relating to our real estate investments could be costly in terms of potential liabilities and reputational damage. Building sites are inherently dangerous, and operating in the real estate development industry poses certain inherent health and safety risks. Due to regulatory requirements, health and safety performance is critical to the success of the real estate investments we invest in. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on the reputation and relationships of the developer with relevant regulatory agencies or governmental authorities, which in turn could have an adverse effect on our investment and operating results.
Insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates, which could adversely affect our financial condition and results of operations. Real estate properties in our real estate portfolio maintain insurance on their properties in amounts and with deductibles that we believe are comparable with what owners of similar properties carry; however, such insurance may not cover some potential losses or may not be obtainable at commercially reasonable rates in the future. There also are certain types of risks (such as war, environmental contamination such as toxic mold, and lease and other contract claims) which are either uninsurable or not economically insurable. Should any uninsured or underinsured loss occur, we could lose our investment in, and anticipated profits and cash flows from, one or more properties.
The volatility in the capital and credit markets has increased in recent years.   Because the volatility in capital and credit markets may create additional risks in the upcoming months and possibly years, we will continue to perform additional assessments to determine the impact, if any, on our consolidated financial statements. Thus, future impairment charges may occur.
  
Risks associated with Douglas Elliman Realty
Douglas Elliman Real Estate depends on a strong brand, and any failure to maintain, protect and enhance the Douglas Elliman brand would have an adverse effect on its ability to grow its real estate brokerage business. Douglas Elliman Real Estate has developed a strong brand that we believe has contributed significantly to the success of its business. Maintaining, protecting and enhancing Douglas Elliman Real Estate as a premium real estate brokerage brand is critical to growing its business. If Douglas Elliman Real Estate does not successfully build and maintain a strong brand, its real estate brokerage business could be negatively impacted. Maintaining and enhancing the quality of the Douglas Elliman Real Estate brand may require us to make substantial investments in areas such as marketing, community relations, outreach and employee training. Douglas Elliman Real Estate actively engages in print and online advertisements, targeted promotional mailings and email communications, and engages on a regular basis in public relations and sponsorship activities. There is no assurance that those activities will enhance the brand awareness.

23

Table of Contents

Brand value can be severely damaged even by isolated incidents, particularly if the incidents receive considerable negative publicity or result in litigation. Some of these incidents may relate to the way Douglas Elliman Real Estate manages its relationship with its agents, our growth strategies or the ordinary course of its business or its brokerage business. Other incidents may arise from events that are or may be beyond its ability to control and may damage its brand, such as actions taken (or not taken) by one or more agents relating to health, safety, welfare or other matters; litigation and claims; failure to maintain high ethical and social standards for all of its operations and activities; failure to comply with local laws and regulations; and illegal activity targeted at Douglas Elliman Real Estate or others. Douglas Elliman Real Estate’s brand value could diminish significantly if any such incidents or other matters erode consumer confidence in it, which may result in a decrease in its total agent count and, ultimately could adversely affect its business and operating results.
The real estate brokerage business in the New York metropolitan area, South Florida, Aspen, Colorado and Beverly Hills, California is extremely competitive. Douglas Elliman Real Estate competes with other multi-office independent real estate organizations and with franchise real estate organizations competing in local areas. Competition is particularly intense in the densely populated metropolitan areas of New York and South Florida in which it operates. In addition, in the real estate brokerage industry, new participants face minimal barriers to entry into the market. Douglas Elliman Real Estate also competes for the services of qualified licensed agents. The ability of its brokerage offices to retain agents is generally subject to numerous factors, including the sales commissions they receive, advertising support and its perception of brand value.
The financial results of Douglas Elliman Real Estate s real estate brokerage business is affected directly by the success of its agents. Douglas Elliman Real Estate’s real estate brokerage offices generate revenue in the form of commissions and service fees. Accordingly, its financial results depend upon the operational and financial success of its brokerage offices and its agents.
Infringement, misappropriation or dilution of Douglas Elliman Real Estate's intellectual property could harm its business. We regard the Douglas Elliman Real Estate trademark portfolio as having significant value and as being an important factor in the marketing of its brand. Douglas Elliman Real Estate believes that this and other intellectual property are valuable assets that are critical to its success. Douglas Elliman Real Estate relies on a combination of protections provided by contracts, as well as copyright, trademark, and other laws, to protect our intellectual property from infringement, misappropriation or dilution. It has registered certain trademarks and service marks and has other trademark and service mark registration applications pending in the U.S. and foreign jurisdictions. Although Douglas Elliman Real Estate monitors its trademark portfolio both internally and through external search agents and imposes an obligation on agents to notify it upon learning of potential infringement, there can be no assurance that it will be able to adequately maintain, enforce and protect its trademarks or other intellectual property rights.
Douglas Elliman Real Estate is not aware of any challenges to its right to use any of its brand names or trademarks. It is commonly involved in numerous proceedings, generally on a small scale, to enforce its intellectual property and protect its brand. Unauthorized uses or other infringement of its trademarks or service marks, including ones that are currently unknown to us, could diminish the value of its brand and may adversely affect its business. Failure to adequately protect its intellectual property rights could damage its brand and impair its ability to compete effectively. Even where it has effectively secured statutory protection for its trademarks and other intellectual property, its competitors may misappropriate its intellectual property. Defending or enforcing our trademark rights, branding practices and other intellectual property, and seeking an injunction and/or compensation for misappropriation of confidential information, could result in the expenditure of significant resources and divert the attention of management, which in turn may adversely affect our business and operating results.
Moreover, unauthorized third parties may use Douglas Elliman Real Estate’s intellectual property to trade on the goodwill of its brand, resulting in consumer confusion or dilution. Any reduction of its brand’s goodwill, consumer confusion, or dilution is likely to impact sales, and could adversely affect its business and operating results.
Douglas Elliman Real Estate relies on traffic to its websites, including its flagship website, elliman.com, directed from search engines. If these websites fail to rank prominently in unpaid search results, traffic to these websites could decline and its business would be adversely affected. Douglas Elliman Real Estate’s success depends in part on its ability to attract users through unpaid Internet search results on search engines. The number of users it attract to its websites, including its flagship website elliman.com, from search engines is due in large part to how and where its websites rank in unpaid search results. These rankings can be affected by a number of factors, many of which are not under our direct control, and they may change frequently. For example, a search engine may change its ranking algorithms, methodologies or design layouts. As a result, links to Douglas Elliman Real Estate’s websites may not be prominent enough to drive traffic to its websites, and we may not know how or otherwise be in a position to influence the results. In some instances, search engine companies may change these rankings in order to promote their own competing services or the services of one or more of its competitors. It websites have experienced fluctuations in search result rankings in the past, and it anticipates fluctuations in the future. Any reduction in the number of users directed to its websites could adversely affect its real estate brokerage business and results of operations. Further, a failure of Douglas Elliman Real Estate’s websites or website-based technology, which are subject to factors beyond our control, could significantly disrupt its business and lead to reduced revenue and reputational damage as Douglas Elliman Real Estate may not be able to effectively scale and adapt its existing technology and network infrastructure to ensure its platforms is accessible.

24

Table of Contents

Potential new investments we may make are unidentified and may not succeed.
We currently hold a significant amount of marketable securities and cash not committed to any specific investments. This subjects a security holder to increased risk and uncertainty because a security holder will not be able to evaluate how this cash will be invested and the economic merits of particular investments. There may be substantial delay in locating suitable investment opportunities. In addition, we may lack relevant management experience in the areas in which we may invest. There is a risk that we will fail in targeting, consummating or effectively integrating or managing any of these investments.
Cybersecurity incidents could disrupt business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results of operations.

Global cybersecurity threats and incidents can range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats, directed at the Company. In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and intellectual property, and that of our clients and personally identifiable information of our customers. Additionally, we increasingly rely on third-party data storage providers, including cloud storage solution providers. The secure processing, maintenance and transmission of this information are critical to our operations and with respect to information collected and stored by our third-party service providers, we are reliant upon their security procedures. While we and our third-party service providers have experienced, and expect to continue to experience, these types of threats and incidents, none of them to date have been material to the Company. Cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including personally identifiable information) and the disruption of business operations. Our business interruption insurance may be insufficient to compensate us for losses that may occur. The potential consequences of a material cybersecurity incident include reputational damage, litigation with third parties, diminution in the value of the services we provide to our customers, and increased cybersecurity protection and remediation costs, which in turn could adversely affect our competitiveness and results of operations.
We depend on our key personnel.
We depend on the efforts of our executive officers and other key personnel. While we believe that we could find replacements for these key personnel, the loss of their services could have a significant adverse effect on our operations.
We have concluded that there are material weaknesses in our internal control over financial reporting, which have not been fully remediated as of the filing date of this Form 10-K and we cannot assure you that other material weaknesses will not be identified in the future. If we fail to maintain an effective system of internal controls, the accuracy and timing of our financial reporting may be adversely affected.
As reported in “Item 9A: Controls and Procedures” of this Form 10-K, we have concluded that there are material weaknesses in our internal control over financial accounting and we did not maintain effective monitoring controls in certain areas relating to year-end financial reporting process at Douglas Elliman Realty, LLC for the years ended December 31, 2015 and 2014, respectively, and these material weaknesses have not been fully remediated as of the filing date of this Form 10-K. Nonetheless, since the identification of the material weaknesses, management has begun the evaluation process associated with the remediation of these weaknesses and will continue to take measures, including engaging service providers that may be necessary and advisable to address these weaknesses. We could incur significant expense and devote management resources in remediating these material weaknesses in 2016.
It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures so that we can provide timely and reliable financial and other information. A failure to maintain adequate internal controls may adversely affect our ability to provide financial statements that accurately reflect our financial condition and timely report information. This could cause investors to lose confidence in our reported financial and other information, cause our securities to trade at a decreased price and cause an adverse effect on our business and results of operations. A failure to correct material weaknesses in our internal controls could result in restatements of financial statements and correction of other information filed with the SEC.
The price of our common stock may fluctuate significantly.
The trading price of our common stock has ranged between $19.64 and $25.60 per share over the past 52 weeks. We expect that the market price of our common stock will continue to fluctuate.
The market price of our common stock may fluctuate in response to numerous factors, many of which are beyond our control. These factors include the following:
actual or anticipated fluctuations in our operating results;

25

Table of Contents

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;
the operating and stock performance of our competitors;
announcements by us or our competitors of new products or services or significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
the initiation or outcome of litigation;
the failure or significant disruption of our operations from various causes related to our critical information technologies and systems including cybersecurity threats to our data and customer data as well as reputational or financial risks associated with a loss of any such data;
changes in interest rates;
general economic, market and political conditions;
additions or departures of key personnel; and
future sales of our equity or convertible securities.
We cannot predict the extent, if any, to which future sales of shares of common stock or the availability of shares of common stock for future sale, may depress the trading price of our common stock.
In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of our common stock, regardless of our operating performance. Furthermore, stockholders may initiate securities class action lawsuits if the market price of our stock drops significantly, which may cause us to incur substantial costs and could divert the time and attention of our management. These factors, among others, could significantly depress the price of our common stock.
We have many potentially dilutive securities outstanding.
As of December 31, 2015 , we had outstanding options granted to employees, including restricted shares, to purchase approximately 5,940,244  shares of our common stock, with a weighted-average exercise price of $8.71 per share, of which options 2,035,345  shares were exercisable as of December 31, 2015 . We also have outstanding convertible notes and debentures maturing in January 2019 and April 2020, which are currently convertible into 24,894,522  shares of our common stock. The issuance of these shares will cause dilution which may adversely affect the market price of our common stock. The availability for sale of significant quantities of our common stock could adversely affect the prevailing market price of the stock.

ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.

ITEM 2.
PROPERTIES
Our principal executive offices are located in Miami, Florida. We lease 12,390 square feet of office space in an office building in Miami, which we share with various of our subsidiaries. The lease is with an affiliate of the Company and expires in March 2018, subject to two five-year renewal options.
We lease approximately 9,000 square feet of office space in New York, New York under a lease that expires in 2020. New Valley’s operating properties are discussed above under the description of New Valley’s business and in Note 7 to our consolidated financial statements.








26

Table of Contents

Douglas Elliman leases 86 offices throughout New York, Connecticut, Florida, California and Colorado. Leases expire at various times between 2015 and 2031. As of December 31, 2015 , the properties leased by Douglas Elliman are as follows:
Type
 
Number of Offices
 
Location
 
Owned or Leased
 
Approximate Total
Square Footage
 
 
 
 
 
 
 
 
 
Offices
 
21

 
New York City, NY
 
Leased
 
149,000

Offices
 
37

 
Long Island, NY
 
Leased
 
133,000

Offices
 
14

 
South Florida
 
Leased
 
20,000

Offices
 
6

 
Westchester County, NY
 
Leased
 
12,000

Offices
 
2

 
California
 
Leased
 
11,000

Offices
 
6

 
Other
 
Leased
 
9,000


Liggett’s tobacco manufacturing facilities, and several of the distribution and storage facilities, are currently located in or near Mebane, North Carolina. Various of such facilities are owned and others are leased. As of December 31, 2015 , the principal properties owned or leased by Liggett are as follows:
  
Type
 
Location
 
Owned or Leased
 
Approximate Total
Square Footage
 
 
 
 
 
 
 
Storage Facilities
 
Danville, VA
 
Owned
 
578,000

Office and Manufacturing Complex
 
Mebane, NC
 
Owned
 
240,000

Warehouse
 
Mebane, NC
 
Owned
 
60,000

Warehouse
 
Mebane, NC
 
Leased
 
125,000

Warehouse
 
Mebane, NC
 
Leased
 
22,000


LVB leases approximately 22,000 square feet of office space in Morrisville, North Carolina. The lease expires in January 2019.
Liggett’s management believes that its property, plant and equipment are well maintained and in good condition and that its existing facilities are sufficient to accommodate a substantial increase in production.

ITEM 3.
LEGAL PROCEEDINGS
Liggett and other United States cigarette manufacturers have been named as defendants in various types of cases predicated on the theory, among other things, that they should be liable for damages from adverse health effects alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes.
Reference is made to Note  15 to our consolidated financial statements, which contains a description of certain legal proceedings to which the Company, Liggett or their subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1, Material Legal Proceedings, incorporated herein, for additional information regarding the pending tobacco-related legal proceedings to which we or Liggett are parties. A copy of Exhibit 99.1 will be furnished without charge upon written request to us at our principal executive offices, 4400 Biscayne Boulevard, Miami, Florida 33137, Attn: Investor Relations.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

27

Table of Contents

PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is listed and traded on the New York Stock Exchange under the symbol “VGR.” The following table sets forth, for the periods indicated, high and low sale prices for a share of our common stock on the NYSE, as reported by the NYSE, and quarterly cash dividends declared on shares of common stock:
  
Year
 
High
 
Low
 
Cash Dividends
2015:
 
 

 
 

 
 
Fourth Quarter
 
$
25.60

 
$
22.13

 
$
0.40

Third Quarter
 
24.64

 
21.14

 
0.38

Second Quarter
 
22.54

 
20.58

 
0.38

First Quarter
 
22.19

 
19.64

 
0.38

2014:
 
 

 
 

 
 

Fourth Quarter
 
$
21.53

 
$
18.78

 
$
0.38

Third Quarter
 
21.77

 
18.15

 
0.36

Second Quarter
 
19.82

 
17.58

 
0.36

First Quarter
 
19.73

 
14.63

 
0.36


At February 19, 2016 , there were approximately 1,639 holders of record of our common stock.
The declaration of future cash dividends is within the discretion of our Board of Directors and is subject to a variety of contingencies such as market conditions, earnings and our financial condition as well as the availability of cash.
Liggett’s revolving credit agreement currently permits Liggett to pay dividends to VGR Holding only if Liggett’s borrowing availability exceeds $5 million for the 30 days prior to payment of the dividend and after giving effect to the dividend, and so long as no event of default has occurred under the agreement, as defined under the Credit Facility, including Liggett’s compliance with the covenants in the credit facility, including maintaining minimum levels of EBITDA (as defined) if its borrowing availability is less than $20 million and not exceeding maximum levels of capital expenditures (as defined).
Our 7.75% Senior Secured Notes due 2021 prohibit our payment of cash dividends or distributions on our common stock if, at the time of such payment, our Consolidated EBITDA (as defined) for the most recently completed four full fiscal quarters is less than $75 million. Our Consolidated EBITDA for the four quarters ended December 31, 2015 exceeded $75 million.
We paid 5% stock dividends on September 29, 2015 , September 26, 2014, and September 27, 2013 to the holders of our common stock. All information presented in this report is adjusted for the stock dividends.

28

Table of Contents

Performance Graph
The following graph compares the total annual return of our Common Stock, the S&P 500 Index, the S&P MidCap 400 Index and the NYSE Arca Tobacco Index, formerly known as the AMEX Tobacco Index, for the five years ended December 31, 2015 . The graph assumes that $100 was invested on December 31, 2010 in the Common Stock and each of the indices, and that all cash dividends and distributions were reinvested.
 
12/10
12/11
12/12
12/13
12/14
12/15
Vector Group Ltd. 
100

118

114

145

213

266

S&P 500
100

102

118

157

178

181

S&P MidCap
100

98

116

155

170

166

NYSE Arca Tobacco
100

118

140

154

153

185


Unregistered Sales of Equity Securities and Use of Proceeds

No securities of ours which were not registered under the Securities Act of 1933 were issued or sold by us during the three months ended December 31, 2015 .
Issuer Purchases of Equity Securities
There were no purchases of our common stock during the three months ended December 31, 2015 .
 

   


29

Table of Contents

EXECUTIVE OFFICERS OF THE REGISTRANT
The table below, together with the accompanying text, presents certain information regarding all our current executive officers as of March 8, 2016 . Each of the executive officers serves until the election and qualification of such individual’s successor or until such individual’s death, resignation or removal by the Board of Directors.

Name
 
Age
 
Position
 
Year Individual
Became an
Executive Officer
Howard M. Lorber
 
67

 
President and Chief Executive Officer
 
2001
Richard J. Lampen
 
62

 
Executive Vice President
 
1996
J. Bryant Kirkland III
 
50

 
Vice President, Chief Financial Officer and Treasurer
 
2006
Marc N. Bell
 
55

 
Vice President, General Counsel and Secretary
 
1998
Ronald J. Bernstein
 
62

 
President and Chief Executive Officer of Liggett
 
2000

Howard M. Lorber has been our President and Chief Executive Officer since January 2006. He served as our President and Chief Operating Officer from January 2001 to December 2005 and has served as a director of ours since January 2001. From November 1994 to December 2005, Mr. Lorber served as President and Chief Operating Officer of New Valley, where he also served as a director. Mr. Lorber was Chairman of the Board of Hallman & Lorber Assoc., Inc., consultants and actuaries of qualified pension and profit sharing plans, and various of its affiliates from 1975 to December 2004 and has been a consultant to these entities since January 2005; Chairman of the Board of Directors since 1987 and Chief Executive Officer from November 1993 to December 2006 of Nathan’s Famous, Inc., a chain of fast food restaurants; Chairman of the Board of Ladenburg Thalmann Financial Services from May 2001 to July 2006 and Vice Chairman since July 2006; member of the Board of Directors since March 2015 and Chairman since May 2015 of Morgans Hotel Group Co. Mr. Lorber was a Director of Borders Group Inc. from May 2010 until January 2012 and was a director from 1991 to 2011 of United Capital Corp., a real estate investment and diversified manufacturing company, which ceased to be a public reporting company in 2011. He is also a trustee of Long Island University.
Richard J. Lampen has served as our Executive Vice President since July 1996. From October 1995 to December 2005, Mr. Lampen served as the Executive Vice President and General Counsel of New Valley, where he also served as a director. Since September 2006, he has served as President and Chief Executive Officer of Ladenburg Thalmann Financial Services. From November 1998 to November 2011, he served as President and Chief Executive Officer of CDSI Holdings Inc., an affiliate of New Valley, which is now known as SG Blocks Inc. Since October 2008, Mr. Lampen has served as President and Chief Executive Officer of Castle Brands Inc. Mr. Lampen is a director of Castle and Ladenburg Thalmann Financial Services and served as a director of SG Blocks Inc. until January 2014.
J. Bryant Kirkland III has been our Vice President, Chief Financial Officer and Treasurer since April 2006. Mr. Kirkland has served as a Vice President of ours since January 2001 and served as New Valley’s Vice President and Chief Financial Officer from January 1998 to December 2005. He has served since July 1992 in various financial capacities with us, Liggett and New Valley. Mr. Kirkland served as Vice President, Treasurer and Chief Financial Officer of CDSI Holdings Inc. (now known as SG Blocks Inc.) from January 1998 to November 2011 and as a director of SG Blocks Inc. (formerly known as CDSI Holdings Inc.) from November 1998 to September 2015. Mr. Kirkland has served as Chairman of the Board of Directors, President and Chief Executive Officer of Multi Soft II, Inc. and Multi Solutions II, Inc. since July 2012.
Marc N. Bell has been our General Counsel and Secretary since May 1994 and our Vice President since January 1998 and the Senior Vice President and General Counsel of Vector Tobacco since April 2002. From November 1994 to December 2005, Mr. Bell served as Associate General Counsel and Secretary of New Valley and from February 1998 to December 2005, as a Vice President of New Valley. Mr. Bell previously served as Liggett’s General Counsel and currently serves as an officer, director or manager for many of Vector’s or New Valley’s subsidiaries. Mr. Bell served as a member of the Board of Directors of SG Blocks Inc. from March 2014 to September 2015.
Ronald J. Bernstein has served as President and Chief Executive Officer of Liggett since September 1, 2000 and of Liggett Vector Brands since March 2002 and has been a director of ours since March 2004. From July 1996 to December 1999, Mr. Bernstein served as General Director and, from December 1999 to September 2000, as Chairman of Liggett-Ducat, our former Russian tobacco business sold in 2000. Prior to that time, Mr. Bernstein served in various positions with Liggett commencing in 1991, including Executive Vice President and Chief Financial Officer.


30

Table of Contents

ITEM 6.
SELECTED FINANCIAL DATA

 
Year Ended December 31,
 
2015
 
2014
 
2013
 
2012
 
2011
 
(dollars in thousands, except per share amounts)
Statement of Operations Data:
 

 
 

 
 

 
 

 
 

Revenues (1)
$
1,657,197

 
$
1,591,315

 
$
1,079,921

 
$
1,084,546

 
$
1,133,380

Operating income
$
199,920

(3)
$
212,438

(3)
$
111,186

(3)
$
154,083

 
$
142,621

Net income attributed to Vector Group Ltd.
$
59,198

 
$
36,856

 
$
37,300

(4)
$
30,675

 
$
74,478

Per basic common share (2) :
 

 
 

 
 

 
 

 
 

Net income applicable to common shares attributed to Vector Group Ltd.
$
0.49

 
$
0.33

 
$
0.36

 
$
0.31

 
$
0.72

Per diluted common share (2) :
 

 
 

 
 

 
 

 
 

Net income applicable to common shares attributed to Vector Group Ltd.
$
0.49

 
$
0.33

 
$
0.36

 
$
0.31

 
$
0.72

Cash distributions declared per common share (2)
$
1.54

 
$
1.47

 
$
1.40

 
$
1.33

 
$
1.27

Balance Sheet Data:
 

 
 

 
 

 
 

 
 

Current assets
$
583,739

 
$
751,397

 
$
484,388

 
$
579,336

 
$
426,996

Total assets
$
1,310,756

 
$
1,423,254

 
$
1,115,793

 
$
986,928

 
$
824,979

Current liabilities
$
216,292

 
$
212,424

 
$
359,376

 
$
167,860

 
$
279,313

Notes payable, embedded derivatives, long-term debt and other obligations, less current portion
$
1,030,291

 
$
1,029,213

 
$
633,700

 
$
759,074

 
$
542,371

Non-current employee benefits, deferred income taxes and other long-term liabilities
$
186,334

 
$
202,297

 
$
173,322

 
$
149,064

 
$
113,303

Stockholders’ deficiency
$
(122,161
)
 
$
(20,680
)
 
$
(50,605
)
 
$
(89,070
)
 
$
(110,008
)
_____________________________

(1)
Revenues include federal excise taxes of $439,647 , $446,086 , $456,703 , $508,027 and $552,965, respectively.
(2)
Per share computations include the impact of 5% stock dividends on September 29, 2015 , September 26, 2014 , September 27, 2013 , September 28, 2012 , and September 29, 2011 .
(3)
Operating income includes $4,364 , $1,419 and $11,823 of income from MSA Settlements, $0 , $0 and $86,213 of Engle progeny settlement charge, and $20,072 , $2,475 and $1,893 of litigation judgment and settlement expense for the years ended December 31, 2015 , 2014 and 2013 , $7,257 of restructuring expense for the year ended December 31, 2015 , and $1,607 of pension settlement expense ended December 31, 2015 , respectively.
(4)
Net income includes a gain of $36,140, net of taxes, to account for the difference between the carrying value and the fair value of the previously held 50% interest in Douglas Elliman.

31

Table of Contents

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
( Dollars in Thousands, Except Per Share Amounts )
Overview
We are a holding company and are engaged principally in:
the manufacture and sale of cigarettes in the United States through our Liggett Group LLC and Vector Tobacco Inc. subsidiaries,
the sale of electronic cigarettes in the United States through our Zoom E-Cigs LLC subsidiary, and
the real estate business through our New Valley LLC subsidiary, which is seeking to acquire or invest in additional real estate properties or projects. New Valley owns 70.59% of Douglas Elliman, which operates the largest residential brokerage company in the New York metropolitan area.
All of our tobacco operations’ unit sales volume in 2015 , 2014 and 2013 was in the discount segment, which management believes has been the primary growth segment in the industry for over a decade. The significant discounting of premium cigarettes in recent years has led to brands, such as EVE, that were traditionally considered premium brands to become more appropriately categorized as discount, following list price reductions.
Our tobacco subsidiaries’ cigarettes are produced in 117 combinations of length, style and packaging. Liggett’s current brand portfolio includes:
EAGLE 20’s — a brand positioned in the deep discount segment for long-term growth re-launched as a national brand in 2013,
PYRAMID — the industry’s first deep discount product with a brand identity re-launched in the second quarter of 2009, 
GRAND PRIX — re-launched as a national brand in 2005,
LIGGETT SELECT — a discount category brand originally launched in 1999,
EVE — a 120 millimeter cigarette in the branded discount category, and
USA and various Partner Brands and private label brands.
In April 2009, Liggett repositioned PYRAMID as a box-only brand with a new low price to specifically compete with brands which are priced at the lowest level of the deep discount segment. PYRAMID is now the largest seller in Liggett’s family of brands with 54.4% of Liggett’s unit volume in 2015 , 61.1% in 2014 and 65.5% in 2013 . In January 2013, Liggett repackaged and relaunched EAGLE 20’s to distributors and retailers on a national basis. EAGLE 20’s is marketed to compete with brands positioned in the deep discount segment. EAGLE 20’s represented 23.4% in 2015 , 13.4% in 2014 and 6.6% in 2013 of Liggett’s unit volume. According to Management Science Associates, Liggett held a share of approximately 11.8% of the overall discount market segment for each of 2015 and 2014 compared to 11.6% for 2013 .
Under the Master Settlement Agreement (“MSA”) reached in November 1998 with 46  states and various territories, the three largest cigarette manufacturers must make settlement payments to the states and territories based on how many cigarettes they sell annually. Liggett, however, is not required to make any payments unless its market share exceeds 1.65% of the U.S. cigarette market. Additionally, Vector Tobacco has no payment obligation unless its market share exceeds approximately 0.28% of the U.S. market. Liggett’s and Vector Tobacco’s payments under the MSA are based on each company’s incremental market share above the minimum threshold applicable to such company. We believe that our tobacco subsidiaries have gained a sustainable cost advantage over their competitors as a result of the settlement.
The discount segment is a challenging marketplace, with consumers having less brand loyalty and placing greater emphasis on price. Liggett’s competition is now divided into two segments. The first segment consists of the three largest manufacturers of cigarettes in the United States: Philip Morris USA Inc., RJ Reynolds Tobacco Company (which is now part of Reynolds American) (“RJ Reynolds”) and ITG Brands LLC, which is owned by Imperial Brands Plc. These three manufacturers, while primarily premium cigarette-based companies, also produce and sell discount cigarettes.
Zoom entered the United States e-cigarette market in limited retail distribution outlets in 2013. Zoom’s operations are included in our “E-Cigarettes” reporting segment. We have seen significant changes in the e-cigarette market over the past year with apparent declines in the sales of disposable and rechargeable e-cigarettes while open-system vapor products that feature refillable tanks and use low-cost flavored liquids have demonstrated mixed results. Additionally, we believe uncertainties exist related to the regulation of e-cigarettes, including open-system vapor products. Given this backdrop, our primary focus on e-cigarettes is to stay prepared to pursue opportunities if they occur.

32

Table of Contents


Recent Developments
Liggett Restructuring. On October 5, 2015, our Tobacco segment commenced a restructuring of its operations by realigning its sales force and adjusting its business model to more efficiently serve its chain and independent accounts. In connection with the restructuring, the segment's workforce declined by 95 full-time employees (or 17% of the Tobacco segment's workforce).
The total costs of the restructuring were $7,257 for the year ended December 31, 2015. The restructuring costs are included as “Restructuring charges” in our consolidated statements of operations and are attributable to our Tobacco segment.
The restructuring plan is expected to yield approximately $10,000 of annual cost savings consisting of approximately $8,000 in reduced sales, general and administrative expenses and approximately $2,000 in reduced manufacturing expenses, beginning in the fourth quarter of 2015. We plan to reinvest the entire amount of cost savings into the Tobacco segment’s promotional and marketing programs.
Restructuring and impairment expense recognized for the year ended December 31, 2015 consisted of $5,438 related to employee pension benefits, $1,094 related to the elimination of sales and administrative positions, $454 related to a reserve for excess marketing point-of-sale material inventories and $271 of other charges .
As part of the restructuring plan, we offered voluntary termination and early retirement benefits to manufacturing employees meeting certain age and service requirements. The package consisted of enhanced pension benefits or severance based on past service and, for some employees, ongoing company contributions to insurance coverage until age 65. We expensed $5,438 in 2015 related to these benefits. All pension benefits were paid from existing pension plan assets.
We also recorded $203 for contract termination expenses related to cars leased on behalf of the terminated sales employees and an additional $68 for other related restructuring expenses.
Approximately $700 of non-pension related severance and benefits were paid in 2015. Payment of the remaining $400 of severance and benefits costs is expected in 2016. All non-pension-related restructuring payments are expected to be funded by ongoing operations and cash reserves.
Our estimates of the savings from the restructuring are based on a number of assumptions and actual results may differ from these estimates.
Liggett NPM. In October 2015, substantially all of the Participating Manufacturers settled the NPM Adjustment dispute with the State of New York for 2004 - 2014 and agreed to a mechanism for potential future credits against the Participating Manufacturers' MSA payments for 2015 forward. As a result of the settlement, Liggett reduced cost of sales by approximately $5,700 for the year ended December 31, 2015.
Liggett Retirement Window. Liggett recorded a charge of $1,607 for the year ended December 31, 2015 in connection with a window offered to terminated participants in two Defined Benefit Plans in 2015.
Liggett Credit Facility. On January 14, 2015, our subsidiaries, Liggett Group LLC (“Liggett”) and 100 Maple LLC (“Maple”), entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”), dated as of January 14, 2015, with Wells Fargo Bank, National Association (“Wells Fargo”), as agent and lender. The Credit Agreement governs a $60,000 credit facility (the “Credit Facility”) that consists of a revolving credit facility of up to $60,000 borrowing capacity (the “Revolver”) and a $3,600 term loan (the “Term Loan”) that is within the $60,000 commitment under the Credit Facility and reduces the amount available under the Revolver. All borrowings under the Credit Facility (other than the Term Loan) are limited to a borrowing base equal to roughly (1) the lesser of (a) 85% of the net amount of eligible accounts receivable and (b) $10,000 plus (2) the lesser of (a) the sum of (I) 80% of the value of eligible inventory consisting of packaged cigarettes plus (II) the lesser of (x) 60% multiplied by Liggett’s eligible cost of eligible inventory consisting of leaf tobacco and (y) 85% of the net orderly liquidation value of eligible inventory consisting of leaf tobacco and (b) $60,000, less (3) certain reserves against accounts receivable, inventory, bank products or other items which Wells Fargo, as agent, may establish from time to time in its permitted discretion. The obligations under the Credit Facility are secured on a first priority basis by all inventories, receivables and certain other personal property of Liggett and Maple, a mortgage on Liggett’s manufacturing facility and certain real property of Maple, subject to certain permitted liens. The Credit Facility amended and restated Liggett’s existing $50,000 credit facility with Wells Fargo and Maple’s existing $3,600 term loan with Wells Fargo. The term of the Credit Facility expires on March 31, 2020. Prime rate loans under the Credit Facility bear interest at a rate equal to the greatest of (i) the Federal Funds rate plus 0.50%, (ii) LIBOR plus 1.0% and (ii) the prime rate of Wells Fargo. LIBOR rate loans under the Credit Facility bear interest at a rate equal to LIBOR plus 2.25%. Monthly principal payments of $25 are due under the Term Loan on the first day of each month with the unpaid principal balance due at maturity on March 31, 2020. The Credit Facility contains customary affirmative and negative covenants, including covenants that limit Liggett’s, Maple’s and their subsidiaries’ ability to incur, create or assume certain indebtedness, to incur or assume certain liens, to purchase, hold or acquire certain investments, to declare or make certain dividends and distributions and to engage in certain mergers, consolidations and asset sales. The Credit Facility also requires us to comply with specified financial covenants, including

33

Table of Contents

that Liggett's earnings before interest, taxes, depreciation and amortization, as defined under the Credit Facility, on a trailing twelve month basis, shall not be less than $100,000 if Liggett's excess availability, as defined under the Credit Facility, is less than $20,000. The covenants also require that annual capital expenditures, as defined under the Credit Facility (before a maximum carryover amount of $10,000), shall not exceed $20,000 during any fiscal year. The Credit Facility also contains customary events of default.
Vector 6.75% Variable Interest Senior Convertible Note due 2014. On March 14, 2014, the holder of the 6.75% Variable Interest Senior Convertible Note due 2014 converted $25,000 principal balance of the $50,000 Note into 2,338,930 of our common shares. On November 14, 2014, the terms of the Note were amended to extend the maturity date to February 15, 2015. No other terms were modified. In February 2015, the holder of the 6.75% Variable Interest Senior Convertible Note due 2014 converted the remaining $25,000 principal balance of the $50,000 Note into 2,338,930 of our common shares.
Investments in Ladenburg Thalmann Financial Services (“LTS”) and Castle Brands Inc. (”Castle”). The Company adopted the equity method of accounting for its investments in LTS and Castle in 2015 because the Company determined that it had significant influence due to the evolution of the relationships with each company.  The Company has adjusted its consolidated financial statements, retroactively, as if the equity method had been in effect since inception.

New Valley Real Estate Ventures:
Takanasee . In December 2015, New Valley invested $4,428 for an approximate 22.8% interest in Takanasee Developers LLC. The joint venture plans to develop a luxury oceanfront community composed of single and multi family homes in Long Branch, NJ. The investment is a variable interest entity; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley’s maximum exposure to loss as a result of its investment in Takanasee was $4,428 at December 31, 2015 .
76 Eleventh Avenue . In May 2015, New Valley invested $17,000 for an approximate 5.1% interest in HFZ 76 Eleventh Holdco LLC. The joint venture plans to develop luxury residential condominium building in the Chelsea neighborhood of Manhattan, NY. The investment is a variable interest entity; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley’s maximum exposure to loss as a result of its investment in 76 Eleventh Avenue was $17,000 as of December 31, 2015 .
Monad Terrace . In May 2015, New Valley invested $6,438 for an approximate 31.3% interest in Monad Terrace LLC. The joint venture plans to develop luxury residential condominium building in Miami Beach, FL. The investment is a variable interest entity; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley recorded equity loss of $196 for the year ended December 31, 2015 . New Valley’s maximum exposure to loss as a result of its investment in Monad Terrace was $6,242 at December 31, 2015 .
Harmon Meadow. In March 2015, New Valley invested $5,931 to acquire a 49.0% in CSV-NV Harmon Meadow GP LLC. The purpose of the joint venture is to own and operate the Harmon Meadow retail shopping center in Secaucus, NJ. The investment is a variable interest entity; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. During 2015, New Valley received distributions of $480 and recorded equity loss of $2 . New Valley’s investment percentage did not change. New Valley’s maximum exposure to loss as a result of its investment in Harmon Meadow was $5,449 as of December 31, 2015 .
Stock Compensation . On November 10, 2015, we granted our President and Chief Executive Officer an award of 1,200,000 shares of our Common Stock subject to service and performance-based vesting. The Award Shares were issued pursuant to the terms of an agreement that provides that both a performance requirement and a continued employment requirement must be met over a seven -year performance period to earn vested rights with respect to the Award Shares. The maximum potential amount of the Award Shares reflects recognition of the CEO’s contributions as CEO since January 1, 2006 and the value of his management and real estate expertise to us. We will expense the value of the grant of approximately $28,400 over an estimated seven -year period.



34

Table of Contents

Recent Developments in Smoking-Related Litigation
The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse litigation outcomes could have a negative impact on our ability to operate due to their impact on cash flows. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.
Notwithstanding the comprehensive nature of the Engle Progeny Settlement, approximately 260 plaintiffs did not participate in the settlement and, therefore, we and Liggett may still be subject to periodic adverse judgments which could have a material adverse affect on the our consolidated financial position, results of operations and cash flows.
In February 2016, two adverse verdicts in Engle progeny cases, Buchanan and Lambert , were affirmed on appeal. Liggett has accrued for these cases as of December 31, 2015.

Critical Accounting Policies
General.   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Significant estimates subject to material changes in the near term include impairment charges, inventory valuation, deferred tax assets, allowance for doubtful accounts, promotional accruals, sales returns and allowances, actuarial assumptions of pension plans, the estimated fair value of embedded derivative liabilities, settlement accruals, long-term investments and impairments, accounting for investments in equity securities, and litigation and defense costs. Actual results could differ from those estimates.
Revenue Recognition.   Revenues from sales of cigarettes and e-cigarettes 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. We provide an allowance for expected sales returns, net of any related inventory cost recoveries. In accordance with authoritative guidance on how taxes collected from customers and remitted to governmental authorities should be presented in the income statement (that is, gross versus net presentation), we include federal excise taxes on cigarettes in revenues and cost of goods sold. Such revenues and cost of sales totaled $439,647 , $446,086 , and $456,703 for the years ended December 31, 2015 , 2014 and 2013 , respectively. Since our primary line of business is tobacco, our financial position and our results of operations and cash flows have been and could continue to be materially adversely affected by significant unit sales volume declines, regulation, litigation and defense costs, increased tobacco costs or reductions in the selling price of cigarettes in the near term.
Revenue is recognized only when persuasive evidence of an arrangement exists, the price is fixed or determinable, the transaction has been completed and collectibility of the resulting receivable is reasonably assured. Real estate commissions earned by the Company’s real estate 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 expenses are recognized concurrently with related revenues. Property management fees and rental commissions earned are recorded as revenue when the related services are performed.
Contingencies.   We record Liggett’s product liability legal expenses and other litigation costs as operating, selling, administrative and general expenses as those costs are incurred. As discussed in Note 15 to our consolidated financial statements, legal proceedings regarding Liggett’s tobacco products are pending or threatened in various jurisdictions against Liggett and us.
We record provisions in our consolidated financial statements for pending litigation when we 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 Note  15 to our consolidated financial statements and discussed below related to the 15 cases where an adverse verdict was entered against Liggett: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Although Liggett has generally been successful in managing litigation in the past, litigation is subject to uncertainty and significant challenges remain, particularly with respect to the Engle progeny cases.
Adverse verdicts have been entered against Liggett in 15 state court Engle progeny cases (see Note 15 to our consolidated financial statements), and several of these verdicts have been affirmed on appeal and satisfied by Liggett.

35

Table of Contents

Except as discussed in Note 15 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.
There is other tobacco-related litigation pending against Liggett, which is discussed in Note 15 to our consolidated financial statements. This litigation is also evaluated on a quarterly basis. Management is not able to predict the outcome of any of the other tobacco-related litigation pending or threatened against Liggett.
A reader should not infer from the absence of any reserve in our consolidated financial statements that we will not be subject to significant tobacco-related liabilities in the future. Litigation is subject to many uncertainties, and it is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.
There may be several other proceedings, lawsuits and claims pending against us and certain of our consolidated subsidiaries unrelated to tobacco or tobacco product liability. We are of the opinion that the liabilities, if any, ultimately resulting from such other proceedings, lawsuits and claims should not materially affect our financial position, results of operations or cash flows.
Settlement Agreements.   As discussed in Note  15 to our consolidated financial statements, Liggett and Vector Tobacco are participants in the MSA. Liggett and Vector Tobacco have no payment obligations under the MSA except to the extent their market shares exceed approximately 1.65% and 0.28% , respectively, of total cigarettes sold in the United States. Their obligations, and the related expense charges under the MSA, are subject to adjustments based upon, among other things, the volume of cigarettes sold by Liggett and Vector Tobacco, their relative market shares and inflation. Since relative market shares are based on cigarette shipments, the best estimate of the allocation of charges under the MSA is recorded in cost of goods sold as the products are shipped. Settlement expenses under the MSA recorded in the accompanying consolidated statements of operations were $113,919 for 2015 , $116,650 for 2014 and $103,530 for 2013 . Adjustments to these estimates are recorded in the period that the change becomes probable and the amount can be reasonably estimated.
Embedded Derivatives and Beneficial Conversion Feature.   We measure all derivatives, including certain derivatives embedded in other contracts, at fair value and recognize them in the consolidated balance sheet as an asset or a liability, depending on our rights and obligations under the applicable derivative contract. We have issued variable interest senior convertible debt in a series of private placements where a portion of the total interest payable on the debt is computed by reference to the cash dividends paid on our common stock. This portion of the interest payment is considered an embedded derivative within the convertible debt, which we are required to separately value. As a result, we have bifurcated this embedded derivative and estimated the fair value of the embedded derivative liability. The resulting discount created by allocating a portion of the issuance proceeds to the embedded derivative is then amortized to interest expense over the term of the debt using the effective interest method.
As of December 31, 2015 and 2014 , the fair value of derivative liabilities was estimated at $144,042 and $169,386 , respectively. The decrease is due to the gains on the changes in fair value of convertible debt and the conversion of the Vector 6.75% Variable Interest Senior Convertible Note due 2015 (as amended).
Changes to the fair value of these embedded derivatives are reflected on our consolidated statements of operations as “Changes in fair value of derivatives embedded within convertible debt.” The value of the embedded derivative is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt as well as projections of future cash and stock dividends over the term of the debt. We recognized gains of $24,455 , $19,409 and $18,935 in 2015 , 2014 and 2013 , respectively, due to changes in the fair value of the embedded derivatives.
After giving effect to the recording of embedded derivative liabilities as a discount to the convertible debt, our common stock had a fair value at the issuance date of the notes in excess of the conversion price, resulting in a beneficial conversion feature. The intrinsic value of the beneficial conversion feature was recorded as additional paid-in capital and as a further discount on the debt. The discount is then amortized to interest expense over the term of the debt using the effective interest rate method.
We recognized non-cash interest expense of $18,529 , $32,071 and $21,482 in 2015 , 2014 and 2013 , respectively, due to the amortization of the debt discount attributable to the embedded derivatives and $8,681 , $19,401 and $14,896 in 2015 , 2014 and 2013 , respectively, due to the amortization of the debt discount attributable to the beneficial conversion feature.
Stock-Based Compensation.   Our stock-based compensation uses a fair-value-based method to recognize non-cash compensation expense for share-based transactions. Under the fair value recognition provisions, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest on a straight-line basis over the requisite service period of the award. We recognized stock-based compensation expense of $1,675 , $1,573 and $2,212 in 2015 , 2014 and 2013 , respectively, related to the amortization of stock option awards and $3,945 , $1,678 and $307 , respectively, related to the amortization of restricted stock grants. As of December 31, 2015 and 2014 , there was $3,775

36

Table of Contents

and $2,829 , respectively, of total unrecognized cost related to employee stock options and $44,632 and $20,181 , respectively, of total unrecognized cost related to restricted stock grants. See Note  14 to our consolidated financial statements.
Employee Benefit Plans.   The determination of our net pension and other postretirement benefit income or expense is dependent on our selection of certain assumptions used by actuaries in calculating such amounts. Those assumptions include, among others, the discount rate, expected long-term rate of return on plan assets and rates of increase in compensation and healthcare costs. We determine discount rates by using a quantitative analysis that considers the prevailing prices of investment grade bonds and the anticipated cash flow from our two qualified defined benefit plans and our postretirement medical and life insurance plans. These analyses construct a hypothetical bond portfolio whose cash flow from coupons and maturities match the annual projected cash flows from our pension and retiree health plans. As of December 31, 2015 , our benefit obligations were computed assuming a discount rate between 3.75% - 4.50% . As of December 31, 2015 , our service cost was computed assuming a discount rate of 2.75% - 4.25% . In determining our expected rate of return on plan assets, we consider input from our external advisors and historical returns based on the expected long-term rate of return which is the weighted average of the target asset allocation of each individual asset class. Our actual 10-year annual rate of return on our pension plan assets was 6.0% , 6.6% and 7.2% for the years ended December 31, 2015 , 2014 and 2013 , respectively, and our actual five-year annual rate of return on our pension plan assets was 6.3% , 9.8% and 13.6% for the years ended December 31, 2015 , 2014 and 2013 , respectively. In computing expense for the year ended December 31, 2016 , we will use an assumption of a 6.0% annual rate of return on our pension plan assets. In accordance with accounting principles generally accepted in the United States of America, actual results that differ from our assumptions are accumulated and amortized over future periods and therefore, generally affect our recognized income or expense in such future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our future net pension and other postretirement benefit income or expense.
Net pension expense for defined benefit pension plans and other postretirement expense was $6,556 and $1,304 for 2015 and 2013 , respectively, while net pension benefit for defined benefit pension plans and other postretirement expense was $345 a for 2014 and we currently anticipate benefit expense will be approximately $3,101 for 2016 . In contrast, our funding obligations under the pension plans are governed by the Employee Retirement Income Security Act (“ERISA”). To comply with ERISA’ s minimum funding requirements, we do not currently anticipate that we will be required to make any funding to the tax qualified pension plans for the pension plan year beginning on January 1, 2016 and ending on December 31, 2016 .
Long-Term Investments and Impairments.   At December 31, 2015 , we had long-term investments of $62,726 , which consisted primarily of investment partnerships investing in investment securities and real estate. The investments in these investment partnerships are illiquid and the ultimate realization of these investments is subject to the performance of the underlying partnership and its management by the general partners. The estimated fair value of the investment partnerships is provided by the partnerships based on the indicated market values of the underlying assets or investment portfolio. Gains are recognized when realized in our consolidated statement of operations. Losses are recognized as realized or upon the determination of the occurrence of an other-than-temporary decline in fair value. On a quarterly basis, we evaluate our investments to determine whether an impairment has occurred. If so, we also make a determination of whether such impairment is considered temporary or other than temporary. We believe that the assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven. However, among the matters that are considered in making such a determination are the period of time the investment has remained below its cost or carrying value, the severity of the decline, the likelihood of recovery given the reason for the decrease in market value and our original expected holding period of the investment.
Goodwill and Indefinite Life Assets. Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment on an annual basis, or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable.
The Company’s goodwill and trademarks are related to Douglas Elliman. The Company's intangible asset associated with the benefit under MSA is related to Vector Tobacco.
The Company follows ASC 350, Intangibles -- Goodwill and Other, included in ASU 2011-08, Testing Goodwill for Impairment. The amendments permit entities to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Based on the results of the qualitative assessment, if the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, it would then perform the first step of the goodwill impairment test; otherwise, no further impairment test would be required. The Company performed the first step of the two step method for the year ended December 31, 2015 and determined that performing the second step of the two-step impairment test was unnecessary.
The fair value of the intangible asset associated with the Douglas Elliman trademark is calculated using a “relief from royalty payments” method. This approach involves two steps: (i) estimating reasonable royalty rates for its trademark associated with the Douglas Elliman trademark and (ii) applying these royalty rates to a net sales stream and discounting the resulting cash flows to determine fair value. This fair value is then compared with the carrying value of the trademark. The Company performed its impairment test for the year ended December 31, 2015 and no impairment was noted.

37

Table of Contents

The fair value of the intangible asset associated with the benefit under the MSA is calculated using discounted cash flows. This approach involves two steps: (i) estimating future cash savings due to the payment exemption under the MSA and (ii) discounting the resulting cash flow savings to determine fair value. This fair value is then compared with the carrying value of the intangible asset associated with the benefit under the MSA. To the extent that the carrying amount exceeds the implied fair value of the intangible asset, an impairment loss is recognized. The Company performed its impairment test as of December 31, 2015 and no impairment was noted.
Income Taxes.   The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations change over time and, as a result, changes in our subjective assumptions and judgments may materially affect amounts recognized in our consolidated financial statements. See Note  13 to our consolidated financial statements for additional information regarding our accounting for income taxes and uncertain tax positions.

Results of Operations
The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The consolidated financial statements include the accounts of VGR Holding, Liggett, Vector Tobacco, Liggett Vector Brands, New Valley and other less significant subsidiaries.
Our significant business segments were Tobacco, E-Cigarettes and Real Estate for the three years ended December 31, 2015 , 2014 and 2013 . The Tobacco segment consists of the manufacture and sale of cigarettes. The E-Cigarettes segment includes the operations of Zoom. The Real Estate segment includes our investment in New Valley LLC, which includes Douglas Elliman, Escena, our previous investment in Indian Creek, Sagaponack and investments in real estate ventures.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies and can be found in Note  1 to our consolidated financial statements.

 
Year Ended December 31,
 
 
2015
 
 
2014
 
 
2013
 
 
(Dollars in thousands)
 
Revenues:
 

 
 
 

 
 
 

 
Tobacco
$
1,017,761

 
 
$
1,021,259

 
 
$
1,014,341

 
E-Cigarettes
(1,970
)
 
 
8,589

 
 

 
Real Estate
641,406

 
 
561,467

 
 
65,580

 
  Total revenues
$
1,657,197

 
 
$
1,591,315

 
 
$
1,079,921

 
 
 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 

 
Tobacco
$
209,393

(1)  
 
$
199,119

(2)  
 
$
113,039

(3)  
E-Cigarettes
(13,037
)
 
 
(13,124
)
 
 
(1,018
)
 
Real Estate
24,087

 
 
42,354

 
 
15,805

 
Corporate and Other
(20,523
)
 
 
(15,911
)
 
 
(16,640
)
 
Total operating income
$
199,920

 
 
$
212,438

 
 
$
111,186

 
_________________________ ____
(1)  
Operating income includes $4,364 of income from MSA Settlement, $20,072 of litigation judgment expense, $7,257 of restructuring expense, and $1,607 of pension settlement expense.
(2)
Operating income includes $1,419 of income from NPM Settlement and $2,475 of litigation settlement charges and judgment expense.
(3)  
Operating income includes $11,823 of income from MSA Settlements, $86,213 of Engle progeny settlement charge, and $1,893 of litigation judgment expense for the year ended and December 31, 2013 .
2015 Compared to 2014

Revenues . Total revenues were $1,657,197 for the year ended December 31, 2015 compared to $1,591,315 for the year ended December 31, 2014 . The $65,882 ( 4.1% ) increase in revenues was due to an increase in Real Estate revenues of $79,939 , primarily

38


related to increases in Douglas Elliman's commissions, offset by a decline of $10,559 in E-Cigarettes revenues and a decline of $3,498 in Tobacco revenues.
Cost of sales . Total cost of sales were $1,109,727 for the year ended December 31, 2015 compared to $1,097,060 for the year ended December 31, 2014 . The $12,667 ( 1.2% ) increase in cost of sales was due to an increase in Real Estate cost of sales of $56,259 , primarily related to an increase in Douglas Elliman's commissions expense, offset by a decline of $37,825 in Tobacco cost of sales due to lower sales volume and the elimination of the Tobacco Quota Buyout and a decline of $5,767 in E-Cigarettes cost of sales due to lower sales volume.
Expenses . Operating, selling, general and administrative expenses were $320,221 for the year ended December 31, 2015 compared to $279,342 for the year ended December 31, 2014 . This was an increase of $40,879 ( 14.6% ) of which $41,947 was related to the operating, selling and administrative expenses of Real Estate primarily related to the Douglas Elliman brokerage expenses and $4,612 of Corporate and Other expenses. This was offset by a decline of $4,880 in E-Cigarettes expenses and $800 in Tobacco expenses.
Operating income . Operating income was $199,920 for the year ended December 31, 2015 compared to $212,438 for the same period last year, a decline of $12,518 ( 5.9% ). Real Estate operating income declined by $18,267 and Corporate and Other expenses increased by $4,612 . This was offset by an increase in Tobacco operating income of $10,274 and a decline in operating losses related to E-Cigarettes of $87 .
Other expenses . Other expenses were $92,215 and $130,159 for the years ended December 31, 2015 and 2014 , respectively. For the year ended December 31, 2015 , other expenses primarily consisted of equity in losses from long-term investments of $2,681 , impairment of investment securities available for sale of 12,846 and interest expense of $120,691 . The decline in interest expense in 2015 was primarily attributable to lower average debt balances and the capitalization of interest expense allocated to our equity method investments in entities developing real estate projects. This was offset by income of $24,455 , from changes in fair value of derivatives embedded within convertible debt, gain on sale of investment securities available for sale of $11,138 , equity in earnings from real estate ventures of $2,001 and interest and other income of $6,409 . For the year ended December 31, 2014 , other expenses consisted primarily of interest expense of $160,991, accelerated interest expense of $5,205 related to the debt conversions of the 6.75% Variable Interest Senior Convertible Note and loss on sale of investment securities available for sale of $11. The increase in interest expense in 2014 was primarily attributable to higher average debt balances. This was offset by a benefit of $19,409 from changes in fair value of derivatives embedded within convertible debt, equity earnings in income from real estate ventures of $4,103, equity income on long-term investments of $3,140 and interest and other income of $9,396.
The value of the embedded derivatives is contingent on changes in implied interest rates of the convertible debt, our stock price, stock volatility as well as projections of future cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined by calculating the implied rate on our 2020 Convertible Notes when removing the embedded option value within the convertible security. This rate is based upon market observable inputs and influenced by our stock price, convertible bond trading price, risk free interest rates and stock volatility. We recognized benefits from reductions in the value of embedded derivatives of $24,455 and $19,409 for the years ended December 31, 2015 and 2014 , respectively.
Income before provision for income taxes . Income before income taxes was $107,705 and $82,279 for the years ended December 31, 2015 , and 2014 , respectively. The increase is attributable to the items discussed above.
Income tax expense . Income tax expense was $41,233 for the year ended December 31, 2015 , compared to $33,165 for the year ended December 31, 2014 . Our income tax rates for the years ended December 31, 2015 and 2014 do not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes and interest and penalties accrued on unrecognized tax benefits offset by the impact of the domestic production activities deduction.
Tobacco.
Tobacco revenues . Liggett increased the list price of PYRAMID, LIGGETT SELECT, EVE and GRAND PRIX by $0.70 per carton in November 2015, May 2015 and November 2014 and $0.60 per carton in May 2014. Liggett increased the list price of EAGLE 20's by $1.00 per carton in December 2015.
All of our Tobacco sales were in the discount category in 2015 and 2014 . For the year ended December 31, 2015 , Tobacco revenues were $1,017,761 compared to $1,021,259 for the year ended December 31, 2014 . Revenues for 2015 declined by 0.3% ( $3,498 ) due to a decline in sales volume of $36,981 (approximately 172.3 million units) offset by a favorable price variance of $33,483 related to the prices increases in 2015.
Tobacco cost of sales . Our Tobacco cost of sales declined from $735,725 for the year ended December 31, 2014 to $697,900 for the year ended December 31, 2015 . The major components of our Tobacco cost of sales are as follows:

39


 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
 
 
 
2015
 
2014
 
 
 
 
 
Manufacturing overhead, raw materials and labor
 
$
124,814

 
$
128,157

Federal Excise Taxes
 
 
439,647

 
446,086

Tobacco quota buyout expense (1)
 
 
664

 
27,122

FDA expense
 
 
18,856

 
17,710

MSA expense, net of market share exemption (2)
 
 
113,919

 
116,650

 
Total cost of sales
 
 
$
697,900

 
$
735,725

 
 
 
 
 
 
 
(1) The quarterly assessments due under the Fair and Equitable Tobacco Reform Act (shown as “Tobacco quota buyout expense” above) expired at the end of 2014. The $664 for the twelve months ended December 31, 2015 represents a final assessment for the fourth quarter of 2014 that was received in the second quarter of 2015.
(2) Includes $4,364 and $1,419 of income from MSA Settlement for the twelve months ended December 31, 2015 and 2014, respectively.

Tobacco gross profit was $319,861 for the year ended December 31, 2015 compared to $285,534 for the year ended December 31, 2014 . The $34,327 ( 12.0% ) increase was due to higher margins that were generated from the absence of the tobacco quota buyout in 2015, price increases in 2015, primarily on the PYRAMID brand, and lower MSA expense due to increased income in 2015 from the MSA Settlement. This was offset by increased FDA expenses of $1,146. As a percentage of revenues (excluding Federal Excise Taxes), Tobacco gross profit was 55.3% in the 2015 period and 49.6% in the 2014 period.
Tobacco expenses . Tobacco operating, selling, general and administrative expenses were $83,140 for the year ended December 31, 2015 compared to $83,940 for the year ended December 31, 2014 . The $800 decline in expenses primarily related to reduced legal expenses and savings related to the October 2015 restructuring. In addition, tobacco operating, selling, general and administrative expenses increased during 2015 due to litigation, settlement and judgments expense of $20,072 and $7,257 for restructuring expenses.
Tobacco operating income . Tobacco operating income was $209,393 for the year ended December 31, 2015 compared to $199,119 for the year ended December 31, 2014 . The Tobacco operating income increase of $10,274 was primarily due to the higher gross profit margins of $34,327 discussed above. This was partially offset by an increase in litigation, settlement and judgments of $17,597 and $7,257 of restructuring expenses for the year ended December 31, 2015 .
E-Cigarettes.
E-Cigarettes revenues. E-Cigarettes revenues were negative $1,970 for the year ended December 31, 2015 compared to revenues of $8,589 for the year ended December 31, 2014 . Revenues declined because of lower sales volume and an increase in the estimate for the customer returns allowance of $2,849.
E-Cigarettes cost of sales. C ost of sales associated with our E-Cigarettes segment were $1,540 for the year ended December 31, 2015 compared to $7,307 for the year ended December 31, 2014 . Cost of sales decreased by $5,767 due to lower sales volumes.
E-Cigarettes expenses . E-Cigarettes operating, selling, general and administrative expenses were $9,526 and $14,406 for the years ended December 31, 2015 and 2014 , respectively. The decline was due to lower advertising and marketing expenses. Operating losses from E-Cigarettes were $13,037 and $13,124 for the years ended December 31, 2015 and 2014 , respectively.
Real Estate.
Real Estate revenues . Real Estate revenues were $641,406 and $561,467 for the years ended December 31, 2015 and 2014 , respectively. Real Estate revenues increased by $79,939 ( 14.2% ), primarily related to an increase of $92,601 in Douglas Elliman's Commission and other brokerage income, offset primarily by the absence of the $13,234 revenue from the sale of Indian Creek in 2014.

40


Real Estate revenues and cost of sales were as follows:
 
 
 
Year Ended December 31,
 
2015
 
2014
Real Estate Revenues :
 
 
 
Commission and other brokerage income
$
601,937

 
$
509,336

Property management income
28,522

 
28,974

Title fees
4,616

 
3,152

Real estate held for sale
1,166

 
14,400

Sales on facilities primarily from Escena
5,165

 
5,166

Other

 
439

  Total Real Estate revenues
$
641,406

 
$
561,467

 
 
 
 
Real Estate Cost of Sales:
 
 
 
Commission and other brokerage expense
$
405,678

 
$
339,543

Real estate held for sale

 
9,987

Cost of sales on facilities primarily from Escena
3,865

 
4,050

Title fees
743

 
448

Total Real Estate cost of sales
$
410,286

 
$
354,028

Real estate held for sale revenues and cost of sales for the year ended December 31, 2015 related to the sale of our residential real estate project located on Indian Creek, Florida. Real estate held for sale revenues and cost of sales for the year ended December 31, 2014 related to the sale of our residential real estate project located on Indian Creek, Florida.
Real Estate expenses . Real Estate operating, selling, general and administrative expenses were $207,032 and $165,085 for the years ended December 31, 2015 and 2014 , respectively. The increase of $41,947 was primarily due to an increase of expenses at Douglas Elliman related to its strategic investments fueled by its expansion into new markets, its development marketing division and increased advertising and marketing expenses to strengthen the long-term value of the Douglas Elliman brand name.
Real Estate operating income . The Real Estate segment had operating income of $24,087 and $42,354 for the years ended December 31, 2015 and 2014 , respectively. The decrease in operating income of $18,267 was primarily related to an increase in in Douglas Elliman operating, selling, general and administrative expenses, offset by higher profits and the absence of the operating income related to the 2014 sale of Indian Creek.
Corporate and other.
Corporate and other loss . The operating loss at the corporate segment was $20,523 for the year ended December 31, 2015 compared to $15,911 for the same period in 2014 . The increase was primarily due to increased non-cash compensation expense and increased professional fees for the year ended December 31, 2015 .
2014 Compared to 2013
Revenues . Total revenues were $1,591,315 for the year ended December 31, 2014 compared to $1,079,921 for the year ended December 31, 2013 . The $511,394 ( 47.4% ) increase in revenues was due to an increase in Real Estate revenues of $495,887 primarily related to the addition of Douglas Elliman revenues for the entire year in 2014 (we began to consolidate the operations of Douglas Elliman on December 13, 2013), an increase of $8,589 in E-Cigarettes revenues associated with the Zoom e-cigarette brand and an increase of $6,918 in Tobacco revenues.
Cost of sales . Total cost of sales was $1,097,060 for the year ended December 31, 2014 compared to $767,031 for the year ended December 31, 2013 . The $330,029 ( 43.0% ) increase in cost of sales was due to an increase in Real Estate cost of sales of $316,390 primarily related to the addition of Douglas Elliman's real estate commissions expense for the entire year in 2014, $7,307 of E-Cigarettes cost of sales associated with the Zoom e-cigarette brand and a $6,332 increase in Tobacco cost of sales.

41


Expenses . Operating, selling, general and administrative expenses were $279,342 for the year ended December 31, 2014 compared to $113,598 for the same period last year. This was an increase of $165,744 ( 145.9% ) of which $152,949 was related to the operating, selling and administrative expenses of Real Estate, $13,388 related to E-Cigarettes and $136 to Tobacco. This was offset by a decline of Corporate and Other expenses of $729 .
Operating income . Operating income was $212,438 for the year ended December 31, 2014 compared to $111,186 for the same period last year, an increase of $101,252 ( 91.1% ). Tobacco operating income increased by $86,080 and Real Estate operating income increased by $26,549 and Corporate and Other expenses declined by $729 . This was offset by an increase in operating losses related to E-Cigarettes of $12,106 .
Other expenses . Other expenses were $130,159 and $50,466 for the years ended December 31, 2014 and 2013 , respectively. For the year ended December 31, 2014 , other expenses primarily consisted of interest expense of $160,991 and accelerated interest expense of $5,205 related to the debt conversions of the 6.75% Variable Interest Senior Convertible Note and loss on sale of investment securities available for sale of $11. The increase in interest expense in 2014 was primarily attributable to higher average debt balances. This was offset by income of $19,409 from changes in fair value of derivatives embedded within convertible debt, equity earnings in income from real estate ventures of $4,103, equity income on long-term investments of $3,140 and interest and other income of $9,396. For the year ended December 31, 2013, other expenses primarily consisted of interest expense of $132,147, loss on extinguishment of the 11% Senior Secured Notes of $21,458 and accelerated interest expense of $12,414 related to the conversion of the 3.875% Variable Interest Senior Convertible Debentures. This was offset by the gain on the Douglas Elliman acquisition of $60,842, equity in earnings from real estate ventures of $22,925, income of $18,935 from changes in fair value of derivatives embedded within convertible debt, gain on sale of investment securities available for sale of $5,152, equity income on long-term investments of $3,126 and interest and other income of $4,573.
The value of the embedded derivatives is contingent on changes in interest rates of debt instruments maturing over the duration of the convertible debt, our stock price as well as projections of future cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. We recognized benefits from reductions in the value of embedded derivatives of $19,409 and $18,935 for the years ended December 31, 2014 and 2013 , respectively.
Income before income taxes . Income before income taxes was $82,279 and $60,720 for the years ended December 31, 2014 and 2013 , respectively. The increase is attributable to the items discussed above.
Income tax expense . The income tax expense was $33,165 for the year ended December 31, 2014 , compared to $23,672 for the year ended December 31, 2013 . Our income tax rates for the years ended December 31, 2014 and 2013 do not bear a customary relationship to statutory income tax rates as a result of the impact of nondeductible expenses, state income taxes and interest and penalties accrued on unrecognized tax benefits offset by the impact of the domestic production activities deduction.
Tobacco.
Tobacco revenues . Liggett increased the list price of PYRAMID, LIGGETT SELECT, EVE and GRAND PRIX by $0.60 per carton in June 2013 and May 2014 and $0.70 per carton in December 2013 and November 2014.
All of our Tobacco sales were in the discount category in 2014 and 2013 . For the year ended December 31, 2014 , Tobacco revenues were $1,021,259 compared to $1,014,341 for the year ended December 31, 2013 . Revenues for 2014 increased by 0.7% ( $6,918 ) due to a favorable price variance of $38,677 offset by a decline in sales volume of $31,759 (approximately 211.1 million units).
Tobacco cost of sales . Our Tobacco cost of sales increased from $729,393 for the year ended December 31, 2013 to $735,725 for the year ended December 31, 2014 . The major components of our Tobacco cost of sales are as follows:

42


 
 
 
 
 
 
 
 
 
Year Ended December 31,
 
 
 
 
2014
 
2013
 
 
 
 
 
Manufacturing overhead, raw materials and labor
 
$
128,157

 
$
123,258

Federal Excise Taxes, net
 
 
446,086

 
456,703

Tobacco quota buyout expense
 
 
27,122

 
28,691

FDA expense
 
 
17,710

 
17,211

MSA expense, net of market share exemption
 
 
116,650

 
103,530

 
Total cost of sales
 
 
$
735,725

 
$
729,393

 
 
 
 
 
 
 
Adjusting for the MSA settlements, Tobacco gross profit was $284,115 for the year ended December 31, 2014 compared to $273,125 for the year ended December 31, 2013 . The $10,990 ( 4.0% ) increase was due to higher margins associated with price increases primarily on the PYRAMID brand. As a percentage of revenues (excluding Federal Excise Taxes and adjusting for the MSA settlements), Tobacco gross profit was 49.4% in the 2014 period and 49.0% in the 2013 period.
Tobacco expenses . Tobacco operating, selling, general and administrative expenses excluding litigation settlement judgment expenses were $83,940 for the year ended December 31, 2014 compared to $83,804 for the year ended December 31, 2013 .
Tobacco operating income . Tobacco operating income was $199,119 for the year ended December 31, 2014 compared to $113,039 for the same period in 2013 . The Tobacco operating income increase of $86,080 was primarily associated with the absence of the $86,213 Engle progeny settlement charge offset by a decline in benefit from the MSA settlements of $10,404 in 2013 .
E-Cigarettes.
Zoom entered the emerging United States e-cigarette market in limited retail distribution outlets in 2013 and expanded distribution in 2014. E-Cigarettes revenues were $8,589 and E-Cigarettes cost of sales were $7,307 for the year ended December 31, 2014 . E-Cigarettes operating, selling, general and administrative expenses were $14,406 and $1,018 for the years ended December 31, 2014 and 2013 , respectively. The increase was due to additional selling and administrative costs in 2014 associated with marketing and promotions activity. E-Cigarettes operating losses were $13,124 and $1,018 for the years ended December 31, 2014 and 2013 , respectively.

Real Estate.
Real Estate revenues . Real Estate revenues were $561,467 and $65,580 for the years ended ended December 31, 2014 and 2013 , respectively. Real Estate revenues increased by $495,887 primarily related to the Douglas Elliman operations. Douglas Elliman became a consolidated subsidiary of ours in December 2013.

43


Real Estate revenues and cost of sales were as follows:
 
 
 
Year Ended December 31,
 
2014
 
2013
Real Estate Revenues :
 
 
 
Commission and other brokerage income
$
509,336

 
$
36,238

Property management income
28,974

 
1,134

Title fees
3,152

 
155

Real estate held for sale
14,400

 
22,734

Sales on facilities primarily from Escena
5,166

 
5,104

Other
439

 
215

  Total Real Estate revenues
$
561,467

 
$
65,580

 
 
 
 
Real Estate Cost of Sales:
 
 
 
Commission and other brokerage expense
$
339,543

 
$
30,787

Real estate held for sale
9,987

 
2,548

Cost of sales on facilities primarily from Escena
4,050

 
4,263

Title fees
448

 
40

Total Real Estate cost of sales
$
354,028

 
$
37,638

Real estate held for sale revenues and cost of sales for the year ended December 31, 2014 related to the sale of our residential real estate project located on Indian Creek, Florida. Real estate held for sale revenues and cost of sales for the year ended December 31, 2013 related to the sale of 200 of the 867 residential lots of our residential real estate project, Escena, located in Palm Springs, California. Other revenues are New Valley marketing revenues.
Real Estate expenses . Real Estate operating, selling, general and administrative expenses were $165,085 and $12,136 for the years ended December 31, 2014 and 2013 , respectively. Real Estate operating, selling, general and administrative expenses increased by $152,949 primarily related to the Douglas Elliman operations.
Real Estate operating income (loss) . The Real Estate segment had operating income of $42,354 for the year ended December 31, 2014 compared to operating income of $15,805 for the year ended December 31, 2013 . The increase in operating income of $26,549 was primarily related to a full year of the Douglas Elliman operations in 2014.
Corporate and other.
Corporate and other loss . The operating loss at the corporate segment was $15,911 for the year ended December 31, 2014 compared to $16,640 for the same period in 2013 .




44


Summary of Real Estate Investments
We own, and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our current real estate investments primarily include the following projects as of December 31, 2015 :
 
(Dollars in Thousands. Area and Unit Information in Ones)
 
Location
Date of Initial Investment
Percentage Owned
Net Cash Invested
Cumulative Earnings (Losses) (3)
Carrying Value as of December 31, 2015
Future Capital Commit-
ments from New Valley (1)
Projected Residential and/or Hotel Area
Projected Commercial Space
Projected Number of Residential Lots, Units and/or Hotel Rooms
Projected Construction Start Date
Projected Construction End Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sagaponack
Sagaponack, NY
April 2015
100
%
$
12,602

$

$
12,602

$

TBD

 
N/A

 
TBD

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

$
8,741

$
10,716

$

450

Acres
 
 
667
450

R Lots
H
N/A
N/A
Real estate held for sale, net
 
 
 
14,577

8,741

23,318


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 Madison Square West (1107 Broadway)
Flatiron District/NoMad neighborhood, Manhattan, NY
October 2011
5.0
%
$
7,346

$
4,045

$
11,391


260,000

SF
20,000

SF
124

R
August 2012
August 2016
The Marquand (11 East 68th Street)
Upper East Side, Manhattan, NY
December 2011
18.0
%
7,000

6,900

13,900


90,000

SF

 
29

R
June 2012
June 2016
11 Beach Street
TriBeCa, Manhattan, NY
June 2012
49.5
%
12,327

882

13,209


97,000

SF

 
27

R
May 2014
December 2016
20 Times Square (701 Seventh Avenue)
Times Square, Manhattan, NY
August 2012
7.1
%
13,516

1,469

14,985


252,000

SF
80,000

SF
452

H
September 2013
January 2018
111 Murray Street
TriBeCa, Manhattan, NY
May 2013
9.5
%
25,732

(165
)
25,567


330,000

SF
1,700

SF
157

R
September 2014
September 2018
160 Leroy Street (2)
West Greenwich Village, Manhattan, NY
March 2013
3.1
%
2,169

1,783

3,952


130,000

SF

 
57

R
Fall 2015
March 2018
215 Chrystie Street
Lower East Side, Manhattan, NY
December 2012
18.4
%
5,297

295

5,592


246,000

SF


11
367

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

97

1,077

 
65,000

SF

 
86

R
September 2014
January 2017
Queens Plaza (23-10 Queens Plaza South)
Long Island City, NY
December 2012
45.4
%
14,712

1,465

16,177


260,000

SF
25,000

SF
391

R
March 2014
September 2016
87 Park (8701 Collins Avenue)
Miami Beach, FL
December 2013
15.0
%
8,275

383

8,658


160,000

SF
TBD

 
70

R
October 2015
September 2018
125 Greenwich Street (2)
Financial District, Manhattan, NY
August 2014
13.3
%
8,319

1,431

9,750


306,000

SF
16,000

SF
275

R
March 2015
October 2018
West Hollywood Edition (9040 Sunset Boulevard)
West Hollywood, CA
October 2014
48.5
%
9,727

783

10,510


210,000

SF

 
20
190

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

967

17,967


620,000

SF
48,000

SF
250

H
September 2016
March 2019
Monad Terrace
Miami Beach, FL
May 2015
31.3
%
6,437

171

6,608


160,000

SF

 
TBD

R
May 2016
May 2018
Takanasee
Long Branch, NJ
December 2015
22.8
%
$
4,428

$
252

$
4,680

$

TBD

 
N/A

 
TBD

R
TBD
TBD
Condominium and Mixed Use Development
 
 
 
$
143,265

$
20,758

$
164,023

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maryland Portfolio
Primarily Baltimore County, MD
July 2012
7.6
%
$
1,637

$
(1,637
)
$


N/A

 
N/A

 
5,517

R
N/A
N/A
ST Portfolio
Houston, TX and Stamford, CT
November 2013
16.3
%
14,442

1,312

15,754


640,576

SF
20,065

SF
488

R
N/A
N/A
Apartment Buildings
 
 
 
$
16,079

$
(325
)
$
15,754

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Park Lane Hotel
Central Park South, Manhattan, NY
November 2013
5.2
%
$
23,695

$
(3,998
)
$
19,697


445,600

SF

 
628

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

(873
)
7,069


61,300

SF
4,300

SF
22

H
N/A
N/A
Coral Beach and Tennis Club
Coral Beach, Bermuda
December 2013
49.0
%
5,558

(2,399
)
3,159


52

Acres

 
101

H
N/A
N/A
Hotels
 
 
 
$
37,195

$
(7,270
)