Vector Group Ltd.
VECTOR GROUP LTD (Form: 10-Q, Received: 04/29/2016 06:05:06)


 

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

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

For The Quarterly Period Ended March 31, 2016
 

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

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

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

 

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

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

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

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

At April 28, 2016 , Vector Group Ltd. had 123,792,329 shares of common stock outstanding.

 




VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

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


1

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

 
March 31,
2016
 
December 31,
2015
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
209,048

 
$
240,368

Investment securities available for sale
152,700

 
181,976

Accounts receivable - trade, net
20,449

 
23,889

Inventories
92,451

 
86,516

Income taxes receivable, net
4,621

 
2,841

Restricted assets
9,628

 
9,195

Other current assets
37,748

 
38,954

Total current assets
526,645

 
583,739

Property, plant and equipment, net
73,608

 
75,632

Real estate held for sale, net
23,366

 
23,318

Long-term investments
59,488

 
62,726

Investments in real estate ventures
225,033

 
217,168

Restricted assets
14,887

 
12,303

Goodwill and other intangible assets, net
263,413

 
263,959

Prepaid pension costs
20,976

 
20,650

Other assets
21,373

 
21,120

Total assets
$
1,228,789

 
$
1,280,615

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
25,927

 
$
8,919

 Current payments due under the Master Settlement Agreement
43,705

 
29,241

   Current portion of employee benefits
914

 
915

Income taxes payable, net

 
96

Litigation accruals
7,686

 
22,904

Other current liabilities
113,085

 
154,217

Total current liabilities
191,317

 
216,292

Notes payable, long-term debt and other obligations, less current portion
864,554

 
856,108

Fair value of derivatives embedded within convertible debt
134,348

 
144,042

Non-current employee benefits
55,171

 
55,055

Deferred income taxes, net
85,069

 
79,429

Payments due under the Master Settlement Agreement
20,094

 
20,094

Litigation accruals
22,034

 
24,718

Other liabilities
10,062

 
7,038

Total liabilities
1,382,649

 
1,402,776

Commitments and contingencies (Note 7)

 

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

 

Common stock, par value $0.10 per share, 250,000,000 shares authorized, 123,792,329 shares issued and outstanding
12,379

 
12,379

Accumulated deficit
(238,180
)
 
(210,113
)
Accumulated other comprehensive income
(8,270
)
 
(8,313
)
Total Vector Group Ltd. stockholders' deficiency
(234,071
)
 
(206,047
)
Non-controlling interest
80,211

 
83,886

Total stockholders' deficiency
(153,860
)
 
(122,161
)
Total liabilities and stockholders' deficiency
$
1,228,789

 
$
1,280,615


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

2



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

 
Three Months Ended
 
March 31,
 
2016
 
2015
Revenues:
 
 
 
   Tobacco*
$
221,015

 
$
228,085

   Real estate
159,747

 
132,256

   E-Cigarettes
38

 
419

          Total revenues
380,800

 
360,760

 
 
 
 
Expenses:
 
 
 
   Cost of sales:
 
 
 
     Tobacco*
136,738

 
157,030

     Real estate
99,678

 
84,358

     E-Cigarettes
6

 
630

        Total cost of sales
236,422

 
242,018

 
 
 
 
Operating, selling, administrative and general expenses
79,828

 
74,181

Litigation settlement and judgment expense
2,350

 
843

Restructuring charges
41

 

Operating income
62,159

 
43,718

 
 
 
 
Other income (expenses):
 
 
 
Interest expense
(30,720
)
 
(31,746
)
Change in fair value of derivatives embedded within convertible debt
9,694

 
6,460

Equity in (losses) earnings from real estate ventures
(507
)
 
338

Equity in (losses) earnings from investments
(1,671
)
 
612

Gain on sale of investment securities available for sale
567

 
13,029

Impairment of investment securities available for sale
(4,813
)
 

Other, net
1,047

 
1,937

Income before provision for income taxes
35,756

 
34,348

Income tax expense
14,363

 
12,867

 
 
 
 
Net income
21,393

 
21,481

 
 
 
 
Net income attributed to non-controlling interest
(2,055
)
 
(260
)
 
 
 
 
Net income attributed to Vector Group Ltd.
$
19,338

 
$
21,221

 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.16

 
$
0.18

 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.16

 
$
0.18

 
 
 
 
Dividends declared per share
$
0.40

 
$
0.38

                                      

* Revenues and cost of sales include excise taxes of $90,846 and $97,359 , respectively.


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

3




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

 
Three Months Ended
 
March 31,
 
2016
 
2015
 
 
Net income
$
21,393

 
$
21,481

 
 
 
 
Net unrealized losses on investment securities available for sale:
 
 
 
    Change in net unrealized (losses) gains
(4,634
)
 
20,910

    Net unrealized losses (gains) reclassified into net income
4,246

 
(13,029
)
Net unrealized (losses) gains on investment securities available for sale
(388
)
 
7,881

 


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

 
14

 
 
 
 
Net change in forward contracts
9

 
16

 
 
 
 
Net change in pension-related amounts
 
 
 
Amortization of loss
445

 
267

Net change in pension-related amounts
445

 
267

 
 
 
 
Other comprehensive income
66

 
8,178

 
 
 
 
Income tax effect on:
 
 
 
    Change in net unrealized (losses) gains on investment securities
1,908

 
(8,460
)
    Net unrealized losses (gains) reclassified into net income on investment securities
(1,745
)
 
5,387

Change in unrealized gains on long-term investments accounted for under the equity method

 
(6
)
Forward contracts
(3
)
 
(6
)
Pension-related amounts
(183
)
 
(111
)
Income tax provision on other comprehensive income
(23
)
 
(3,196
)
 
 
 
 
Other comprehensive income, net of tax
43

 
4,982

 
 
 
 
Comprehensive income
21,436

 
26,463

 
 
 
 
Comprehensive income attributed to non-controlling interest
(2,055
)
 
(260
)
Comprehensive income attributed to Vector Group Ltd.
$
19,381

 
$
26,203


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

4



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


 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
 
Additional
 
 
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Paid-In
 
Accumulated
 
Comprehensive
 
Non-controlling
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Income
 
Interest
 
Total
Balance, January 1, 2016
123,792,329

 
$
12,379

 
$

 
$
(210,113
)
 
$
(8,313
)
 
$
83,886

 
$
(122,161
)
Net income

 

 

 
19,338

 

 
2,055

 
21,393

Total other comprehensive income

 

 

 

 
43

 

 
43

Total comprehensive income

 

 

 

 

 

 
21,436

Distributions and dividends on common stock

 

 
(2,307
)
 
(47,405
)
 

 

 
(49,712
)
Stock-based compensation

 

 
2,307

 

 

 

 
2,307

Contributions from non-controlling interest

 

 

 

 

 
248

 
248

Distributions to non-controlling interest

 

 

 

 

 
(5,978
)
 
(5,978
)
Balance as of March 31, 2016
123,792,329

 
$
12,379

 
$

 
$
(238,180
)
 
$
(8,270
)
 
$
80,211

 
$
(153,860
)


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

5



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


 
Three Months Ended
 
Three Months Ended
 
March 31,
2016
 
March 31,
2015
Net cash (used in) provided by operating activities
$
(4,936
)
 
$
7,828

Cash flows from investing activities:
 
 
 
Sale of investment securities
51,218

 
74,591

Maturities of investment securities
343

 
947

Purchase of investment securities
(29,112
)
 
(67,628
)
Proceeds from sale or liquidation of long-term investments

 
1,216

Purchase of long-term investments

 
(5,000
)
Investments in real estate ventures
(5,795
)
 
(7,816
)
Distributions from investments in real estate ventures
12

 

Increase in cash surrender value of life insurance policies
(62
)
 
(606
)
Increase in restricted assets
(3,017
)
 
(6,933
)
Proceeds from sale of fixed assets

 
3

Capital expenditures
(3,915
)
 
(3,156
)
Pay downs of investment securities
2,174

 
1,594

Investments in real estate held for sale
(49
)
 

Net cash provided by (used in) investing activities
11,797

 
(12,788
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
57

 

Deferred financing costs

 
(585
)
Repayments of debt
(1,576
)
 
(1,857
)
Borrowings under revolver
59,426

 
107,668

Repayments on revolver
(41,482
)
 
(110,792
)
Dividends and distributions on common stock
(48,876
)
 
(46,350
)
Contributions from non-controlling interest
248

 

Distributions to non-controlling interest
(5,978
)
 

Proceeds from exercise of Vector options

 
809

Tax benefit of options exercised

 
274

Net cash used in financing activities
(38,181
)
 
(50,833
)
Net decrease in cash and cash equivalents
(31,320
)
 
(55,793
)
Cash and cash equivalents, beginning of period
240,368

 
326,365

Cash and cash equivalents, end of period
$
209,048

 
$
270,572


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

6

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


1 .
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
Basis of Presentation :

The condensed consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of VGR Holding LLC (“VGR Holding”), Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), Zoom E-Cigs LLC (“Zoom”), New Valley LLC (“New Valley”) and other less significant subsidiaries. New Valley includes the accounts of Douglas Elliman Realty, LLC (“Douglas Elliman”) and other less significant subsidiaries. All intercompany balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. Zoom is engaged in the sale of electronic cigarettes in the United States. New Valley is engaged in the real estate business.
The unaudited, interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and, in management's opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair statement of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission. The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.
Revisions to December 31, 2015 Consolidated Balance Sheet. In April 2015, the FASB issued ASU No. 2015-03, “Interest-Imputation of Interest” (“ASU 2015-03”), which requires debt issuance costs to be reported in the balance sheet as a direct deduction from the face amount of the note. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2015. This amendment must be applied retrospectively to all periods presented. The Company adopted the provisions of this ASU retrospectively in the first quarter of 2016, and adjusted all prior periods accordingly.  The adoption of this ASU will simplify the presentation of debt issuance costs and reduce complexity without decreasing the usefulness of information provided to users of financial statements. 


7

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The cumulative impacts of the application of the new ASU are presented in the table below:

 
 
December 31, 2015
 
 
As Previously Reported
 
ASU Adoption
 
As Revised
 
 
 
 
 
 
 
Other assets
 
$
51,261

 
$
(30,141
)
 
$
21,120

Total assets
 
$
1,310,756

 
$
(30,141
)
 
1,280,615

 
 
 
 
 
 
 
Notes payable, long-term debt and other obligations, less current portion
 
$
886,249

 
$
(30,141
)
 
$
856,108

Total liabilities
 
1,432,917

 
(30,141
)
 
1,402,776

Total stockholders' deficiency
 
(122,161
)
 

 
(122,161
)
Total liabilities and stockholders' deficiency
 
$
1,310,756

 
$
(30,141
)
 
$
1,280,615

 
 
 
 
 
 
 

Adoption of Equity Method. The Company adopted the equity method of accounting for its investments in Ladenburg Thalmann Financial Services Inc. (“LTS”) and Castle Brands Inc. (“Castle”) in 2015 because the Company determined that it had significant influence due to the evolution of the relationships with each company. In accordance with ASC 323-35-33, the Company has adjusted its condensed consolidated financial statements, retrospectively, on a step-by-step basis as if the equity method had been in effect since inception.
The cumulative impact of the retrospective application of the equity method of accounting for the two investments are presented in the table below:

8

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
Three months ended
 
March 31, 2015
 
As Previously Reported
 
Revision
 
As Revised
 
 
 
 
 
 
Operating, selling, administrative and general expenses
$
73,944

 
$
237

 
$
74,181

 
 
 
 
 
 
Operating income
43,955

 
(237
)
 
43,718

 
 
 
 
 
 
Equity in (losses) earnings from investments
(37
)
 
649

 
612

 
 
 
 
 
 
Other, net
1,896

 
41

 
1,937

 
 
 
 
 
 
Income before provision for income taxes
33,895

 
453

 
34,348

Income tax expense
12,679

 
188

 
12,867

Net income
21,216

 
265

 
21,481

 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
20,956

 
265

 
21,221

 
 
 
 
 
 
Other comprehensive income (loss), net of tax
1,999

 
2,983

 
4,982

 
 
 
 
 
 
Comprehensive income
23,215

 
3,248

 
26,463

 
 
 
 
 
 
Comprehensive income attributed to Vector Group Ltd.
$
22,955

 
$
3,248

 
$
26,203

 
 
 
 
 
 


(b)
Distributions and Dividends on Common Stock :

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders' deficiency to the extent of retained earnings and accumulated paid-in capital. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital to the extent paid-in-capital is available. The Company’s stock dividends are recorded as stock splits and given retroactive effect to earnings per share for all periods presented.

(c)
Revenue Recognition :

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

9

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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.

(d)
Earnings Per Share (“EPS”) :

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

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

 
Three Months Ended
 
March 31,
 
2016
 
2015
Net income attributed to Vector Group Ltd.
$
19,338

 
$
21,221

Income attributed to participating securities
(633
)
 
(630
)
Net income available to common shares attributed to Vector Group Ltd.
$
18,705

 
$
20,591



Basic and diluted EPS were calculated using the following common shares:

 
Three Months Ended
 
March 31,
 
2016
 
2015
Weighted-average shares for basic EPS
118,058,860

 
116,990,724

Plus incremental shares related to stock options and non-vested restricted stock
194,424

 
201,456

Weighted-average shares for diluted EPS
118,253,284

 
117,192,180


The following were outstanding during the three months ended March 31, 2016 and 2015 , but were not included in the computation of diluted EPS because the effect was anti-dilutive.

 
Three Months Ended
 
March 31,
 
2016
 
2015
  Weighted-average shares of non-vested restricted stock
1,200,000

 

  Weighted-average expense per share
$
22.75

 
$

  Weighted-average number of shares issuable upon
  conversion of debt
24,895,477

 
25,779,073

  Weighted-average conversion price
$
19.63

 
$
19.32




10

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

The Company has estimated the fair market value of the embedded derivatives based principally on the results of a valuation model. The estimated fair value of the derivatives embedded within the convertible debt is based principally on the present value of future dividend payments expected to be received by the convertible debt holders over the term of the debt. The discount rate applied to the future cash flows is estimated based on a spread in the yield of the Company's debt when compared to risk-free securities with the same duration. A readily determinable fair market value of the embedded derivatives is not available. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads for secured to unsecured debt, unsecured to subordinated debt and subordinated debt to preferred stock to determine the fair value of the derivatives embedded within the convertible debt. The valuation also considers other items, including current and future dividends and the volatility of the Company's stock price. At March 31, 2016 , the range of estimated fair market values of the Company's embedded derivatives was between $133,267 and  $135,403 . The Company recorded the fair market value of its embedded derivatives at the approximate midpoint of the range at $134,348 as of March 31, 2016 . At December 31, 2015 , the range of estimated fair market values of the Company's embedded derivatives was between $143,422 and  $144,660 . The Company recorded the fair market value of its embedded derivatives at the midpoint of the range at $144,042 as of December 31, 2015 . The estimated fair market value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note 6 .)

(f)
Investment in Real Estate Ventures:

The Company's investment in real estate ventures are subject to evaluation under ASU No. 2015-02, "Consolidation" ("ASU 2015-02) which requires all legal entities to be evaluated as either a voting interest entity or a Variable Interest Entities ("VIE"). The guidance is effective for financial statements of public companies issued for fiscal years beginning after December 15, 2015. The Company has followed the decision tree set forth in ASC 810-10-05-6 in analyzing each of its investments in real estate ventures. The Company examines specific criteria and uses judgment when determining if the real estate venture is a VIE and then if the Company is the primary beneficiary of a VIE. Factors considered in the qualification of a VIE include sufficient equity investment at risk, disproportionate voting rights and substantially all of the activities are conducted on behalf of an investor with disproportionately few voting rights, and characteristics of a controlling financial interest.
Accounting guidance requires the Company to perform the VIE primary-beneficiary assessment for entities determined to be VIEs. The Company is required to consolidate all VIEs in which the Company is the primary beneficiary. The guidance requires consolidation of VIEs that a reporting entity has a controlling financial financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly affect the VIE's economic performance and (b) the obligation to absorb losses or the right to receive residual returns of the VIE that could potentially be significant to the VIE.
The Company's maximum exposure to loss in its investments in unconsolidated VIEs is limited to its investment in the unconsolidated VIEs which is the carrying value. The Company's maximum exposure to loss in its investment in its consolidated VIEs is limited to its investment which is the carrying value of the investment net of the non-controlling interest. Creditors of the consolidated VIEs have no recourse to the general credit of the primary beneficiary.

(g)
Other Income, Net :

Other income, net consisted of:
 
Three Months Ended
 
March 31,
 
2016
 
2015
Interest and dividend income
$
1,324

 
$
1,740

Gain on long-term investment

 
200

Impairment of long-term investments
(282
)
 

Other expense
5

 
(3
)
Other income, net
$
1,047

 
$
1,937



11

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(h)
Other Current Liabilities :
Other current liabilities consisted of:
 
March 31, 2016
 
December 31, 2015
Accounts payable
$
10,865

 
$
19,639

Accrued promotional expenses
20,733

 
24,816

Accrued excise and payroll taxes payable, net
18,690

 
26,556

Accrued interest
16,523

 
28,147

Commissions payable
8,770

 
11,008

Accrued salary and benefits
9,117

 
20,134

Other current liabilities
28,387

 
23,917

Total other current liabilities
$
113,085

 
$
154,217



(i)
Goodwill and Other Intangible Assets :

The components of “Goodwill and other intangible assets, net” were as follows:
 
 
March 31,
2016
 
December 31,
2015
Goodwill
 
$
70,791

 
$
70,791

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

 
107,511

Trademark - Douglas Elliman
 
80,000

 
80,000

 
 
 
 
 
Intangibles with a finite life, net
 
5,111

 
5,657

 
 
 
 
 
  Total goodwill and other intangible assets, net
 
$
263,413

 
$
263,959


(j)
Commitments :

Douglas Elliman Lease Extension. On March 31, 2016, Douglas Elliman extended the duration of an existing lease and entered into a sublease for additional space in New York. The agreement extended the lease term from 2018 to 2032. The new agreements could increase the Company’s lease commitments by $0  in 2016, $1,164  in 2017, $1,412 in 2018, $3,733 in 2019, $5,394 in 2020 and $69,460 thereafter.


(k)
New Accounting Pronouncements :

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 modifies U.S. Generally Accepted Accounting Principles ("GAAP") by requiring the following, among others: (1) all excess tax benefits and tax deficiencies are to be recognized as income tax expense or benefit on the income statement (excess tax benefits are recognized regardless of whether the benefit reduces taxes payable in the current period); (2) excess tax benefits are to be classified along with other income tax cash flows as an operating activity in the statement of cash flows; (3) in

12

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


the area of forfeitures, an entity can still follow the current U.S. GAAP practice of making an entity-wide accounting policy election to estimate the number of awards that are expected to vest or may instead account for forfeitures when they occur; and (4) classification as a financing activity in the statement of cash flows of cash paid by an employer to the taxing authorities when directly withholding shares for tax withholding purposes. ASU 2016-09 is effective for the Company's fiscal year beginning January 1, 2017, including interim periods. Early application is permitted. The Company is currently assessing the impact the adoption of ASU 2016-09 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, instead, the amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis. ASU 2016-08 will have the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09. The Company is currently evaluating the method and impact the adoption of this ASU and ASU 2014-09 will have on the Company's condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, Investments- Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. ASU 2016-07 will be effective for the Company’s fiscal year beginning January 1, 2017 and subsequent interim periods. The adoption of ASU 2016-07 is not expected to have a material effect on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments (a consensus of the Emerging Issues Task Force) ("ASU 2016-06"). ASU 2016-06 clarifies the requirement for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under ASU 2016-06 is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. Consequently, when a call (put) option is contingently exercisable, an entity does not have to assess whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risks. The amendments in ASU 2016-06 are effective for the Company's fiscal year beginning January 1, 2017, including interim periods. The Company is currently evaluating the method and impact the adoption of this ASU 2016-06 will have on the Company's condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current U.S. GAAP. ASU 2016-02 will be effective for the Company’s fiscal year beginning January 1, 2019 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on the Company's condensed consolidated financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). ASU 2016-01 modifies how entities measure equity investments and present changes in the fair value of financial liabilities. Under the new guidance, entities will have to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicality exception. A practicality exception will apply to those equity investments that do not have a readily determinable fair value and do not qualify for the practical expedient to estimate fair value under ASC 820, Fair Value Measurements, and as such these investments may be measured at cost. ASU 2016-01 will be effective for the Company’s fiscal year beginning January 1, 2018 and subsequent interim periods. The Company is currently evaluating the impact the adoption of ASU 2016-01 will have on the Company’s condensed consolidated financial statements.

In May 2014, FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-9”). ASU 2014-9 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. Under the new model, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. As amended by ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date the new standard is effective for annual reporting periods beginning after December 15, 2017, with early adoption permitted for annual reporting

13

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


periods beginning subsequent to December 15, 2016. The new standard is required to be applied retrospectively to each prior reporting period presented or with the cumulative effect of initially applying it recognized at the date of initial application. The Company has not yet selected a transition method and it has not determined the impact of the new standard on its condensed consolidated financial statements.

2 .
INVENTORIES

Inventories consist of:
 
March 31,
2016
 
December 31,
2015
Leaf tobacco
$
51,035

 
$
49,856

Other raw materials
3,423

 
3,578

Work-in-process
918

 
789

Finished goods
65,781

 
61,493

E-Cigarettes
74

 
80

Inventories at current cost
121,231

 
115,796

LIFO adjustments
(28,780
)
 
(29,280
)
 
$
92,451

 
$
86,516


All of the Company's inventories at March 31, 2016 and December 31, 2015 are reported under the LIFO method. The $28,780 LIFO adjustment as of March 31, 2016 decreases the current cost of inventories by $19,363 for Leaf tobacco, $643 for Other raw materials, $33 for Work-in-Process, $8,736 for Finished goods and $5 for E-Cigarettes. The $29,280 LIFO adjustment as of December 31, 2015 decreased the current cost of inventories by $19,863 for Leaf tobacco, $643 for Other raw materials, $33 for Work-in-Process, $8,736 for Finished goods and $5 for E-Cigarettes.

Liggett enters into purchase commitments for leaf tobacco that will be used entirely for future production. The future quantities of leaf tobacco and prices are established at the date of the commitments. At March 31, 2016 , Liggett had tobacco purchase commitments of approximately $24,397 . Liggett has a single source supply agreement for fire safe cigarette paper through 2019.

The Company capitalizes the incremental prepaid cost of the MSA in ending inventory. Each year, the Company capitalizes in inventory that portion of its MSA liability that relates to cigarettes shipped to public warehouses but not sold. The amount of capitalized MSA cost in “Finished goods” inventory was $15,390 and $15,796 at March 31, 2016 and December 31, 2015 , respectively. Federal excise tax in inventory was $25,159 and $23,455 at March 31, 2016 and December 31, 2015 ,



14

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


3 .
INVESTMENT SECURITIES AVAILABLE FOR SALE

The components of investment securities available for sale at March 31, 2016 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
37,947

 
$
18,822

 
$
(238
)
 
$
56,531

Mutual funds invested in fixed income securities
20,215

 
77

 

 
20,292

Marketable debt securities
75,120

 
757

 

 
75,877

Total investment securities available for sale
$
133,282

 
$
19,656

 
$
(238
)
 
$
152,700


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

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable equity securities
$
47,502

 
$
19,833

 
$
(62
)
 
$
67,273

Mutual funds invested in fixed income securities
20,126

 

 
(15
)
 
20,111

Marketable debt securities
94,540

 
52

 

 
94,592

Total investment securities available for sale
$
162,168

 
$
19,885

 
$
(77
)
 
$
181,976



The table below summarizes the maturity dates of marketable debt securities at March 31, 2016 .

Investment Type:
Market Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
22,730

 
$

 
$
22,730

 
$

Corporate securities
35,592

 
433

 
35,159

 

U.S. mortgage-backed securities
5,369

 
605

 
4,764

 

Commercial mortgage-backed securities
5,605

 
4,526

 
1,079

 

U.S. asset-backed securities
4,443

 
3,857

 
586

 

Index-linked U.S. bonds
2,138

 

 
2,138

 

Total marketable debt securities by maturity dates
$
75,877

 
$
9,421

 
$
66,456

 
$



15

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

 
In loss position for
 
 
 
 
 
Less than 12 months
 
12 months or more
 
 
 
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Total Fair Value
 
Total Unrealized Losses
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
$
5,762

 
$
(238
)
 
$

 
$

 
$
5,762

 
$
(238
)
 
$
5,762

 
$
(238
)
 
$

 
$

 
$
5,762

 
$
(238
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Marketable equity securities
$
5,938

 
$
(62
)
 
$

 
$

 
$
5,938

 
$
(62
)
Mutual funds invested in fixed income securities
10,053

 
(15
)
 

 

 
10,053

 
(15
)
 
$
15,991

 
$
(77
)
 
$

 
$

 
$
15,991

 
$
(77
)

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

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

 
Three Months Ended
 
March 31,
 
2016
 
2015
Gross realized gains on sales
$
759

 
$
13,564

Gross realized losses on sales
(192
)
 
(535
)
Gains on sale of investment securities available for sale

$
567

 
$
13,029

 
 
 
 
Gross realized losses on other-than-temporary impairments
$
(4,813
)
 
$

 

 


The Company recorded an “Other-than-temporary impairment” charge of $4,813 during the three months ended March 31, 2016 . The largest component of this charge was $4,772 related to Morgans Hotel Group Co., a company where Vector's President and Chief Executive Officer also serves as Chairman of the Board of Directors.
Although management generally does not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing the Company's investment securities portfolio, management may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements and the funding of claims and obligations to policyholders.
Proceeds from investment securities sales totaled $51,218 and $74,591 and proceeds from early redemptions by issuers totaled $2,517 and $2,541 in the three months ended March 31, 2016 and 2015 , respectively, mainly from sales of Corporate securities and U.S. Government securities.


16

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


4 .
LONG-TERM INVESTMENTS

Long-term investments consisted of the following:
 
March 31, 2016
 
December 31, 2015
Investments accounted at cost
$
39,949

 
$
41,231

Investments accounted for under the equity method
19,539

 
21,495

 
$
59,488

 
$
62,726


(a) Cost-Method Investments:

Long-term investments accounted for at cost consisted of the following:

 
March 31, 2016
 
December 31, 2015
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Investments partnerships
$
39,448

 
$
41,386

 
$
40,730

 
$
44,217

Real estate partnership
501

 
505

 
501

 
552

 
$
39,949

 
$
41,891

 
$
41,231

 
$
44,769



The principal business of the investment partnerships is investing in investment securities and real estate. The estimated fair value of the investment partnerships was provided by the partnerships based on the indicated market values of the underlying assets or investment portfolio. 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. In the future, the Company may invest in other investments, including limited partnerships, real estate investments, equity securities, debt securities, derivatives and certificates of deposit, depending on risk factors and potential rates of return.
If it is determined that an other-than-temporary decline in fair value exists in long-term investments, the Company records an impairment charge with respect to such investment in its consolidated statements of operations. The Company will continue to perform additional assessments to determine the impact, if any, on the Company’s condensed consolidated financial statements. Thus, future impairment charges may occur.
The Company has accounted for these investments using the cost method of accounting because the investments did not meet the requirements for equity method accounting.
The Company invested $5,000 in a reinsurance company during the the three months ended March 31, 2015.
The long-term investments are carried on the consolidated balance sheet at cost. The fair value determination disclosed above
would be classified as Level 3 under fair value hierarchy disclosed in Note 11 if such assets were recorded on the consolidated balance sheet at fair value. The fair value determinations disclosed above were based on company assumptions, and information obtained from the partnerships based on the indicated market values of the underlying assets of the investment portfolio.


17

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



(b) Equity-Method Investments:

Long-term investments accounted for under the equity method consisted of the following:
 
March 31,
2016
 
December 31, 2015
Indian Creek Investors LP
$
3,780

 
$
4,989

Boyar Value Fund
7,286

 
7,302

Ladenburg Thalmann Financial Services Inc.
8,473

 
9,204

Castle Brands, Inc.

 

 
$
19,539

 
$
21,495



The Company's investments accounted for under the equity method include the following: Indian Creek Investors LP (“Indian Creek”), Boyar Value Fund (“Boyar”), Ladenburg Thalmann Financial Services Inc. (“LTS”) and Castle Brands Inc. (“Castle”). At March 31, 2016 , the Company's ownership percentages in Indian Creek, Boyar, LTS and Castle were 20.17% , 30.36% , 7.76% and 7.92% , respectively. The Company accounted for Indian Creek and Boyar interests as equity-method investments because the Company's ownership percentage meets the threshold for equity-method accounting. The Company accounted for the LTS and Castle interests as equity-method investments because the Company has the ability to exercise significant influence over their operating and financial policies.
The Company's investments under the equity method include an investment in Boyar. The value of the investment based on the quoted market price as of March 31, 2016 was $7,286 , equal to its carrying value. Ladenburg Thalmann Fund Management, LLC, an indirect subsidiary of LTS, is the manager of Boyar.

At March 31, 2016 , the aggregate values of the LTS and Castle investments based on the quoted market price were $35,478 and $11,911 , respectively.
The principal business of Indian Creek is investing in investment securities. Fair value approximates carrying value. The estimated fair value of the investment partnership was provided by the partnership based on the indicated market values of the underlying assets or investment portfolio. The investment in the investment partnership is illiquid and the ultimate realization of the investment is subject to the performance of the underlying partnership and its management by the general partners.
The Company received cash distributions of $285 and $1,433 from the Company's investments in long-term investments under the equity method for the three months ended March 31, 2016 and 2015 , respectively. The Company recognized equity in losses from long-term investments under the equity method of $1,671 for the three months ended March 31, 2016 and equity in earnings from long-term investments under the equity method of $612 for the three months ended March 31, 2015 . The Company has suspended its recognition of equity losses in Castle to the extent such losses exceed its basis.
If it is determined that an other-than-temporary decline in fair value exists in long-term investments, the Company records an impairment charge with respect to such investment in its consolidated statements of operations. The Company will continue to perform additional assessments to determine the impact, if any, on the Company’s condensed consolidated financial statements. Thus, future impairment charges may occur.


5 .
NEW VALLEY LLC
Residential Brokerage Business. New Valley is engaged in the real estate business and is seeking to acquire additional real estate properties and operating companies. The Company owns a 70.59% interest in Douglas Elliman and the condensed consolidated financial statements of the Company include the account balances of Douglas Elliman.

18

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Investments in real estate ventures.   New Valley also holds equity investments in various real estate projects domestically and internationally. The components of “Investments in real estate ventures” were as follows:
 
March 31,
2016
 
December 31,
2015
10 Madison Square Park (1107 Broadway)
$
12,123

 
$
11,391

The Marquand (11 East 68th Street)
13,054

 
13,900

11 Beach Street
13,527

 
13,209

20 Times Square (701 Seventh Avenue)
16,024

 
14,985

111 Murray Street
25,387

 
25,567

160 Leroy Street
4,530

 
3,952

215 Chrystie Street
5,666

 
5,592

The Dutch (25-19 43rd Avenue)
1,107

 
1,077

Queens Plaza (23-10 Queens Plaza South)
16,553

 
16,177

87 Park (8701 Collins Avenue)
8,770

 
8,658

125 Greenwich Street
9,870

 
9,750

West Hollywood Edition (9040 Sunset Boulevard)
14,416

 
10,510

76 Eleventh Avenue
18,487

 
17,967

Monad Terrace
6,849

 
6,608

Takanasee
4,816

 
4,680

Condominium and Mixed Use Development
171,179

 
164,023

 
 
 
 
Maryland Portfolio

 

ST Portfolio
16,270

 
15,754

Apartment Buildings
16,270

 
15,754

 
 
 
 
Park Lane Hotel
19,835

 
19,697

Hotel Taiwana
7,451

 
7,069

Coral Beach and Tennis Club
2,702

 
3,159

Hotels
29,988

 
29,925

 
 
 
 
The Plaza at Harmon Meadow
5,526

 
5,449

Commercial
5,526

 
5,449

 
 
 
 
Other
2,070

 
2,017

 
 
 
 
Investments in real estate ventures
$
225,033

 
$
217,168


19

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
Condominium and Mixed-Use Development:
Condominium and mixed-use development investments range in ownership percentage from 3.1% to 49.5% . New Valley recorded net equity in losses of $1,183 for the three months ended March 31, 2016 from its condominium and mixed-used developments. New Valley recorded equity income of $536 for the three months ended March 31, 2015 . The Company recorded $300 of equity income related to its proportionate share of the Marquand’s equity earnings from the sale of two of its units during the quarter and $236 from Chelsea Eleven for a distribution of excess amounts held back in 2012 for final expenses of the investment for the three months ended March 31, 2015 .
During the three months ended March 31, 2016 , New Valley made capital contributions totaling $5,077 related to ventures where New Valley previously held an investment, primarily at 20 Times Square, 160 Leroy Street, West Hollywood Edition, and Monad Terrace. For ventures where New Valley previously held an investment, New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's direct investment percentage did not change. During the three months ended March 31, 2015 , New Valley made capital contributions totaling $1,352 primarily related to 215 Chrystie Street and the Dutch. New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners. New Valley's investment percentages did not change.
During the three months ended March 31, 2016 , New Valley received distributions of $258 primarily related to income from marketing fees paid by 125 Greenwich Street. During the three months ended March 31, 2015 , New Valley received distributions of $236 from its investment in Chelsea Eleven, which sold its last unit in 2012, for excess amounts held back in 2012 for final expenses of the investment.
New Valley's maximum exposure to loss, net of non-controlling interest, as a result of its investments in condominium and mixed-use developments was $153,669 at March 31, 2016 .

New Valley capitalized  $3,520  of interest expense into the carrying value of its ventures whose projects were currently under development during the three months ended March 31, 2016 .

Douglas Elliman has been engaged by the developers as the sole broker or the co-broker for several of the real estate development projects that New Valley owns an interest in through its joint venture investments. Douglas Elliman had gross commissions of approximately  $2,405  for the three months ended   March 31, 2016  from these projects.

Apartment Buildings:
Apartment building investments range in ownership percentage from 7.6% to 16.3% . New Valley recorded equity income of $516 for the three months ended March 31, 2016 , related to the ST Portfolio apartment portfolio. New Valley recorded equity losses of $48 for the three months ended March 31, 2015 , primarily related to equity losses of the Maryland Portfolio. New Valley received distributions of $212 during the three months ended March 31, 2015 , primarily related to the Maryland Portfolio. New Valley has suspended its recognition of equity losses in Maryland Portfolio to the extent such losses exceed its basis. New Valley's maximum exposure to loss as a result of its investment in apartment buildings was $16,270 at March 31, 2016 .

Hotels:
Hotel investments range in ownership percentage from 5.2% to 49.0% . New Valley recorded equity losses of $655 for the three months ended March 31, 2016 , related to hotel operations. New Valley recorded equity losses of $747 for the three months ended March 31, 2015 . New Valley made capital contributions totaling $718 for the three months ended March 31, 2016 , related to the Park Lane Hotel. New Valley made capital contributions totaling $533 for the three months ended March 31, 2015 , primarily related to Coral Beach and Tennis Club. New Valley's maximum exposure to loss as a result of its investments in hotels was $29,988 at March 31, 2016 .

20

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Commercial:
Commercial ventures include a contribution by New Valley of $5,931 for a 49% interest in a joint venture which purchased a shopping center, The Plaza at Harmon Meadow, in New Jersey at the end of March 2015. New Valley recorded equity income of $212 for the three months ended March 31, 2016 related to shopping center rental operations. New Valley received distributions totaling $135 for the three months ended March 31, 2016 , related to Harmon Meadow. New Valley's maximum exposure to loss as a result of its investments in commercial ventures was $5,526 at March 31, 2016 .

Other:
Other investments in real estate ventures relate to a 50% investment in an insurance consulting company owned by Douglas Elliman.

Real Estate Held for Sale:
The components of “Real estate held for sale, net” were as follows:
 
March 31,
2016
 
December 31,
2015
Escena, net
$
10,714

 
$
10,716

Sagaponack
12,652

 
12,602

            Real estate held for sale, net
$
23,366

 
$
23,318


Escena.   The assets of “Escena, net” were as follows:
 
March 31,
2016
 
December 31,
2015
Land and land improvements
$
8,907

 
$
8,907

Building and building improvements
1,874

 
1,875

Other
2,004

 
1,923

 
12,785

 
12,705

Less accumulated depreciation
(2,071
)
 
(1,989
)
 
$
10,714

 
$
10,716


New Valley recorded operating income of $508 and $725 for the three months ended March 31, 2016 and 2015 , respectively, from Escena.

Investment in Sagaponack. In April 2015, New Valley has invested $12,502 in a residential real estate project located in Sagaponack, NY. The project is wholly owned and the balances of the project are included in the condensed consolidated financial statements of the Company. As of March 31, 2016 , the assets of Sagaponack consist of land and land improvements of $12,652 .


21

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


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

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

 
March 31,
2016
 
December 31,
2015
Vector:
 
 
 
7.75% Senior Secured Notes due 2021, including premium of $7,685 and $8,014
$
607,685

 
$
608,014

7.5% Variable Interest Senior Convertible Notes due 2019, net of unamortized discount of $127,301 and $132,119*
102,699

 
97,881

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $82,668 and $86,136*
176,082

 
172,614

Liggett:
 
 
 
Revolving credit facility
21,157

 
3,213

Term loan under credit facility
3,220

 
3,269

Equipment loans
8,227

 
9,716

Other
384

 
461

Notes payable, long-term debt and other obligations
919,454

 
895,168

Less:
 
 
 
Debt issuance costs
(28,973
)
 
(30,141
)
Total notes payable, long-term debt and other obligations
890,481

 
865,027

Less:
 
 
 
Current maturities
(25,927
)
 
(8,919
)
Amount due after one year
$
864,554

 
$
856,108

______________________
* The fair value of the derivatives embedded within the 7.5% Variable Interest Senior Convertible Notes ( $66,558 at March 31, 2016 and $72,083 at December 31, 2015 , respectively) and the 5.5% Variable Interest Senior Convertible Debentures ( $67,790 at March 31, 2016 and $71,959 at December 31, 2015 , respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.

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

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

As of March 31, 2016 , a total of $24,377 was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately $35,600 based on eligible collateral at March 31, 2016 .

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

The conversion rates for all convertible debt outstanding as of March 31, 2016 and December 31, 2015 , are summarized below:
 
March 31, 2016
 
December 31, 2015
 
Conversion Price
 
Shares per $1,000
 
Conversion Price
 
Shares per $1,000
 
 
 
 
 
 
 
 
7.5% Variable Interest Senior Convertible Notes due 2019
$
15.98

 
62.5743

 
$
15.98

 
62.5743

5.5% Variable Interest Senior Convertible Debentures due 2020
$
24.64

 
40.5891

 
$
24.64

 
40.5891



22

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Non-Cash Interest Expense - Vector :

 
Three Months Ended
 
March 31,
 
2016
 
2015
Amortization of debt discount, net
$
7,956

 
$
5,627

Amortization of debt issuance costs
1,168

 
966


$
9,124

 
$
6,593


Fair Value of Notes Payable and Long-Term Debt :

 
March 31, 2016
 
December 31, 2015
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Notes payable and long-term debt
$
919,454

(1)
$
1,292,584

 
$
895,168

(1)
$
1,297,875

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

Notes payable and long-term debt are carried on the condensed consolidated balance sheet at amortized cost. The fair value determinations disclosed above are classified as Level 2 under the fair value hierarchy disclosed in Note 11 if such liabilities were recorded on the condensed consolidated balance sheet at fair value. The estimated fair value of the Company's notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies including the evaluation of the Company's credit risk as described in the Company's Form 10-K. The Company used the quoted market prices as of March 31, 2016 to determine the fair value of its publicly traded notes and debentures. The carrying value of the credit facility and term loan is equal to the fair value. The fair value of the equipment loans and other obligations was determined by calculating the present value of the required future cash flows. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein is not necessarily indicative of the amount that could be realized in a current market exchange.


7 .
CONTINGENCIES

Tobacco-Related Litigation :

Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. The cases have generally fallen into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (“Individual Actions”); (ii) lawsuits by individuals requesting the benefit of the Engle ruling (“ Engle progeny cases”); (iii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging that use of the terms “lights” and/or “ultra lights” constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); and (iv) health care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (“Health Care Cost Recovery Actions”). With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. The future financial impact of the risks and expenses of litigation are not quantifiable. For the three months ended March 31, 2016 and 2015 , Liggett incurred tobacco product liability legal expenses and costs totaling $4,171 and $2,555 , respectively. The tobacco product liability legal expenses and costs are included in the operating, selling, administrative and general expenses and litigation settlement and judgment expense line items in the Condensed Consolidated Statements of Operations.

23

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. Management reviews on a quarterly basis with counsel all pending litigation and evaluates the probability of a loss being incurred and whether an estimate can be made of the possible loss or range of loss that could result from an unfavorable outcome. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. Damages awarded in tobacco-related litigation can be significant.
Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. To obtain stays on judgments pending current appeals of the Putney , Calloway , Buchanan , Lambert , Boatright and Ward cases Liggett, as of March 31, 2016 , has secured approximately $15,767 in bonds.
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. In several cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts have upheld the constitutionality of the statute. It is possible that the Company’s consolidated financial position, results of operations, and cash flows could be materially adversely affected by an unfavorable outcome of such challenges.
Accounting Policy . The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as disclosed in this Note 7 : (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.
Cautionary Statement About Engle Progeny Cases . Judgments have been entered against Liggett and other industry defendants in Engle progeny cases. A number of the judgments have been affirmed on appeal and satisfied by the defendants. As of March 31, 2016 , 24 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts. Fifteen verdicts were returned in favor of the plaintiffs (although in two of these cases ( Irimi and Cohen ) the court granted defendants' motion for a new trial) and nine in favor of Liggett. In four of the cases, punitive damages were awarded against Liggett (although in Calloway , the punitive damages award was reversed and remanded to the trial court). In certain cases, the judgments were entered jointly and severally with other defendants and Liggett may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, Liggett under certain circumstances may have to pay more than its proportionate share of any bonding or judgment related amounts. Several of the judgments remain on appeal. Except as discussed in this Note 7 regarding the cases where an adverse verdict was entered against Liggett and that remain on appeal, management is unable to estimate the possible loss or range of loss from the remaining Engle progeny cases as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact Engle class members (non-class members’ claims are generally time-barred), the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify their demand for damages.
Although Liggett has generally been successful in managing litigation, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining Engle progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of the Company could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended, however, Liggett has entered into settlement discussions in individual cases or groups of cases, where Liggett has determined it was in its best interest to do so, and it may continue to do so in the future, including the remaining Engle progeny cases. In October 2013, Liggett announced a settlement of the claims of over 4,900 Engle progeny plaintiffs (see Engle Progeny Settlement below). As of March 31, 2016 , Liggett (and in certain cases the Company) had, on an individual basis, settled 174 Engle progeny cases for approximately $5,982 in the aggregate. Three of those settlements occurred in the first quarter of 2016 .

24

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Individual Actions
As of March 31, 2016 , there were 37 Individual Actions pending against Liggett and, in certain cases, the Company, where one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. These cases do not include the remaining Engle progeny cases or the individual cases pending in West Virginia state court as part of a consolidated action. The following table lists the number of Individual Actions by state:
State
 
Number
of Cases
Florida
 
12

Maryland
 
12

New York
 
7

Louisiana
 
2

West Virginia
 
2

Missouri
 
1

Ohio
 
1

The plaintiffs’ allegations of liability in cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, equitable defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.
Engle Progeny Cases
Engle Case. In May 1994, Engle was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants’ conduct “rose to a level that would permit a potential award or entitlement to punitive damages.” Phase II of the trial was a causation and damages trial for three of the class plaintiffs and a punitive damages trial on a class-wide basis before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of $ 12,704 to the three class plaintiffs, to be reduced in proportion to the respective plaintiff’s fault. In July 2000, the jury awarded approximately $145,000,000 in punitive damages, including $790,000 against Liggett.
In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of one of the three class plaintiffs, in the amount of $5,831 , was overturned as time barred and the court found that Liggett was not liable to the other two class plaintiffs.

25

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but determined that the following Phase I findings are entitled to res judicata effect in Engle progeny cases: (i) that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive damage issues, provided they filed their individual lawsuits by January 2008. In December 2006, the Florida Supreme Court added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations made by defendants. In October 2007, the United States Supreme Court denied defendants’ petition for writ of certiorari.
Pursuant to the Florida Supreme Court’s July 2006 ruling in Engle , which decertified the class on a prospective basis, and affirmed the appellate court’s reversal of the punitive damages award, former class members had until January 2008 in which to file individual lawsuits. As a result, Liggett and the Company, and other cigarette manufacturers, were sued in thousands of Engle progeny cases in both federal and state courts in Florida. Although the Company was not named as a defendant in the Engle case, it was named as a defendant in substantially all of the Engle progeny cases where Liggett was named as a defendant.
Engle Progeny Settlement. In October 2013, the Company entered into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay a total of approximately $110,000 , with approximately $61,600 paid in a lump sum and the balance to be paid in installments over 14 years , starting in February 2015. In exchange, the claims of over 4,900 plaintiffs were dismissed with prejudice against the Company and Liggett. Due to the settlement, in 2013 the Company recorded a charge of $86,213 , of which $25,213 is related to certain payments discounted to their present value using an 11% annual discount rate. The Company recorded a charge of $643 in the first quarter of 2015 for additional cases joining the settlement and the restructuring of certain payments related to several previously settled cases. The installment payments total approximately $48,000 on an undiscounted basis. The Company’s future payments will be approximately $3,400 per annum through 2028, with a cost of living increase beginning in 2021.
Notwithstanding the comprehensive nature of the Engle Progeny Settlement, approximately 255 plaintiffs’ claims remain outstanding. Therefore, the Company and Liggett may still be subject to periodic adverse judgments which could have a material adverse affect on the Company’s consolidated financial position, results of operations and cash flows.
As of March 31, 2016 , the following Engle progeny cases have resulted in judgments against Liggett:
Date
 
Case Name
 
County
 
Liggett Compensatory
Damages (as adjusted)
 (1)
 
Liggett Punitive Damages
 
Status (2)
June 2002
 
Lukacs v. R.J. Reynolds
 
Miami-Dade
 
$12,418
 
$—
 
Liggett satisfied the judgment and the case is concluded.
August 2009
 
Campbell v. R.J. Reynolds
 
Escambia
 
156
 
 
Liggett satisfied the judgment and the case is concluded.
March 2010
 
Douglas v. R.J. Reynolds
 
Hillsborough
 
1,350
 
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Clay v. R.J. Reynolds
 
Escambia
 
349
 
1,000
 
Liggett satisfied the judgment and the case is concluded.
April 2010
 
Putney v. R.J. Reynolds
 
Broward
 
3,008
 
 
On June 12, 2013, the Fourth District Court of Appeal reversed and remanded the case for further proceedings regarding the amount of the award. Both sides sought discretionary review from the Florida Supreme Court. In February 2016, the Florida Supreme Court reinstated the jury's verdict. The defendants moved for clarification of that order, which was granted in March 2016. The court clarified that it reversed the district court's decision regarding the statute of repose only, leaving the remaining portions of the decision intact. The case will be remanded to the trial court for proceedings consistent with those portions of the district court's decision that were not reversed.
April 2011
 
Tullo v. R.J. Reynolds
 
Palm Beach
 
225
 
 
Liggett satisfied the judgment and other than an issue with respect to the calculation of interest on the judgment and the amount of costs owed by Liggett, the case is concluded.

26

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


January 2012
 
Ward v. R.J. Reynolds
 
Escambia
 
1
 
 
Liggett satisfied the merits judgment. Subsequently, the trial court entered a final judgment on attorneys' fees and costs for $981 and defendants appealed that judgment.
May 2012
 
Calloway v. R.J. Reynolds
 
Broward
 
1,530
 
 
A joint and several judgment for $16,100 was entered against R.J. Reynolds, Philip Morris, Lorillard and Liggett. On January 6, 2016, the Fourth District Court of Appeal reversed in part, including the $7,600 punitive damages award against Liggett, and remanded the case to the trial court for a new trial on certain issues. Both sides have moved for rehearing.
December 2012
 
Buchanan v. R.J. Reynolds
 
Leon
 
2,750
 
 
A joint and several judgment for $5,500 was entered against Liggett and Philip Morris. The court refused to reduce the award by decedent's comparative fault. Judgment was affirmed by the First District Court of Appeal, but the court certified an issue of conflict with another case. The defendants sought discretionary review by the Florida Supreme Court, which was declined in February 2016. The defendants are considering their appellate options.
May 2013
 
Cohen v. R.J. Reynolds
 
Palm Beach
 
 
 
In May 2013, the jury awarded compensatory damages in the amount of $2,055 and apportioned 10% of the fault to Liggett ($205). Defendants' motion seeking a new trial was granted by the trial court. Plaintiff appealed and defendants cross-appealed. Oral argument is scheduled for June 7, 2016.
August 2013
 
Rizzuto v. R.J. Reynolds
 
Hernando
 
3,479
 
 
Liggett settled its portion of the judgment for $1,500 and the case is concluded as to Liggett.
August 2014
 
Irimi v. R.J. Reynolds
 
Broward
 
 
 
In August 2014, the jury awarded compensatory damages in the amount of $3,123 and apportioned 1% of the fault to Liggett ($31). In January 2015, the trial court granted defendants' motion for a new trial. Plaintiff appealed.
October 2014
 
Lambert v. R.J. Reynolds
 
Pinellas
 
3,600
 
9,500
 
Liggett satisfied the judgment and the case is concluded.
November 2014
 
Boatright v. R.J. Reynolds
 
Polk
 
 
300
 
In November 2014, the jury awarded compensatory damages in the amount of $15,000 with 15% fault apportioned to plaintiff and 85% to Philip Morris.  The jury further assessed punitive damages against Philip Morris for $19,700 and Liggett for $300. Post trial motions were denied.  A joint and several judgment was entered in the amount of $12,750 on the compensatory damages. Judgment was further entered against Liggett for $300 in punitive damages. Defendants appealed and plaintiff cross-appealed.
June 2015
 
Caprio v. R.J. Reynolds
 
Broward
 
 
 
In February 2015, the jury answered certain questions on the verdict form, but were deadlocked as to others.  The jury returned a verdict of $559 in economic damages. The court entered a partial judgment and ordered a new trial on the remaining issues, including comparative fault and punitive damages.  Defendants appealed.
Total Damages Awarded:
28,866
 
10,800
 
 
Amounts accrued, paid or compromised:
(24,328)
 
(10,500)
 
 
Damages remaining on Appeal:
$4,538
 
$300
 
 
(1) Compensatory damages are adjusted to reflect the jury's allocation of comparative fault and only include Liggett's jury allocated share, regardless of whether a judgment was joint and several. The amounts listed above do not include attorneys' fees or statutory interest.
(2) See Exhibit 99.1 for a more complete description of the cases currently on appeal.

Through March 31, 2016 , Liggett paid $ 35,416 , including interest and attorneys' fees, to satisfy the judgments in the following Engle progeny cases: Lukacs , Campbell , Douglas , Clay, Tullo, Ward, Rizzuto and Lambert .
The Company’s current potential range of loss in the remaining cases on appeal is between $0 and $4,838 in the aggregate, plus interest and attorneys' fees, however, this is only an estimate and final damages in any case might increase as a result of pending appeals. In determining the range of loss, the Company considers potential settlements as well as future appellate relief. Except as disclosed elsewhere in this Note 7 , the Company is unable to determine a range of loss related to the remaining Engle progeny cases. The Company's balance sheet as of March 31, 2016 contains an accrual of $4,323 for the Buchanan Engle progeny case . As cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Appeals of Engle Progeny Judgments. In December 2010, in the Martin case, a state court case against R.J. Reynolds, the First District Court of Appeal held that the trial court correctly construed the Florida Supreme Court’s 2006 decision in Engle in instructing the jury on the preclusive effect of the Phase I Engle findings. In July 2011, the Florida Supreme Court declined to review the First District Court of Appeal’s decision. In March 2012, the United States Supreme Court declined to review the Martin case, along with the Campbell case and two other Engle progeny cases. The Martin decision has led to additional adverse rulings by other state appellate courts.

27

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


In Jimmie Lee Brown , a state court case against R.J. Reynolds, the trial court tried the case in two phases. In the first phase, the jury determined that the smoker was addicted to cigarettes that contained nicotine and that his addiction was a legal cause of his death, thereby establishing he was an Engle class member. In the second phase, the jury determined whether the plaintiff established legal cause and damages with regard to each of the underlying claims. The jury found in favor of plaintiff in both phases. In September 2011, the Fourth District Court of Appeal affirmed the judgment entered in plaintiff’s favor and approved the trial court’s procedure of bifurcating the trial. The Fourth District Court of Appeal agreed with Martin that individual post- Engle plaintiffs need not prove conduct elements as part of their burden of proof, but disagreed with Martin to the extent that the First District Court of Appeal only required a finding that the smoker was a class member to establish legal causation as to addiction and the underlying claims. The Fourth District Court of Appeal held that in addition to establishing class membership, Engle progeny plaintiffs must also establish legal causation and damages as to each claim asserted.  In so finding, the Fourth District Court of Appeal’s decision in Jimmie Lee Brown is in conflict with Martin
In Rey, a state court case, the trial court entered final summary judgment on all claims in favor of the Company, Liggett and Lorillard based on what has been referred to in the Engle progeny litigation as the “Liggett Rule.” The Liggett Rule stands for the proposition that a manufacturer cannot have liability to a smoker under any asserted claim if the smoker did not use a product manufactured by that particular defendant. The Liggett Rule is based on the entry of final judgment in favor of Liggett/Brooke Group in Engle on all of the claims asserted against them by class representatives Mary Farnan and Angie Della Vecchia, even though the Florida Supreme Court upheld, as res judicata, the generic finding that Liggett/Brooke Group engaged in a conspiracy to commit fraud by concealment. In September 2011, the Third District Court of Appeal affirmed in part and reversed in part holding that the defendants were entitled to summary judgment on all claims asserted against them other than the claim for civil conspiracy. Defendants’ further appellate efforts were unsuccessful.
In Douglas , a state court case, the Second District Court of Appeal issued a decision affirming the judgment of the trial court in favor of the plaintiff and upholding the use of the Engle jury findings, but certified to the Florida Supreme Court the question of whether granting res judicata effect to the Engle jury findings violates defendants’ federal due process rights. In March 2013, the Florida Supreme Court affirmed the use of Engle jury findings and determined that there is no violation of the defendants’ due process rights. This was the first time the Florida Supreme Court addressed the merits of an Engle progeny case. In October 2013, the United States Supreme Court declined to review the decision and Liggett satisfied the judgment. To date, the United States Supreme Court has declined to review any Engle progeny decisions.
In Hess , a state court case, in April 2015, the Florida Supreme Court held that Engle defendants cannot raise a statute of repose defense to claims for concealment or conspiracy. Defendants' motion for rehearing was denied.
In April 2015, in Graham , a federal case, the Eleventh Circuit held that federal law impliedly preempts use of the res judicata Engle findings to establish claims for strict liability or negligence. In February 2016, the Eleventh Circuit Court of Appeals vacated the panel’s opinion and granted Plaintiff’s motion for rehearing en banc .  Defendant's filed a motion requesting that the court enter a briefing order directing the parties to address both implied preemption and whether the application of the Engle findings violates federal due process.  That motion was granted and briefing is underway.

Maryland Cases
    
Liggett is currently a defendant in 12 multi-defendant personal injury cases in Maryland that allege claims arising from asbestos and tobacco exposure.  Liggett along with other tobacco defendants have moved (or are in the process of moving) to dismiss the cases.  In the past, motions to dismiss have generally been successful, typically resulting in the dismissal without prejudice of the tobacco company defendants, including Liggett.  Recently, however, a Maryland intermediate appellate court ruled, in Stidham, et al. v. R. J. Reynolds Tobacco Company, et al., that dismissal of tobacco company defendants may not be appropriate where injury is asserted based on both asbestos and tobacco usage. Although Stidham is subject to further appellate review, and the scope of its holding is not yet known, it is possible that Liggett and other tobacco company defendants will not be dismissed from pending synergy exposure cases, and may be named as a defendant in asbestos-related personal injury actions in Maryland going forward, including approximately 20 additional synergy exposure cases currently pending in Maryland state court.
 
Liggett Only Cases   

There are currently three cases pending where Liggett is the only remaining defendant. Each of these cases is an Individual Action. In November 2015, in Hausrath (NY state court), one of the Individual Actions, the court entered a case management

28

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


order providing discovery deadlines. There has been no further activity in the other two Individual Actions. Cases where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases.

Class Actions

As of March 31, 2016 , three actions were pending for which either a class had been certified or plaintiffs were seeking class certification where Liggett is a named defendant. Other cigarette manufacturers are also named in these actions.
Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption.
In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were manufactured by the defendants, including Liggett, and suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. No class certification hearing has been held. In 2013, plaintiffs’ filed a motion to stay the case and that motion was granted.
In February 1998, in Parsons v. AC & S Inc. , a purported class action was commenced on behalf of all West Virginia residents who allegedly have personal injury claims arising from exposure to cigarette smoke and asbestos fibers. The complaint seeks to recover $1,000 in compensatory and punitive damages individually and unspecified compensatory and punitive damages for the class. The case is stayed due to the December 2000 bankruptcy of three of the defendants.
Although not technically a class action, in In Re: Tobacco Litigation (Personal Injury Cases) , a West Virginia state court consolidated approximately 750 individual smoker actions that were pending prior to 2001 for trial of certain "common" issues. Liggett was severed from trial of the consolidated action. After two mistrials, in May 2013, the jury rejected all but one of the plaintiffs' claims, finding in favor of plaintiffs on the claim that ventilated filter cigarettes between 1964 and July 1, 1969 should have included instructions on how to use them. The issue of damages was reserved for further proceedings. The court entered judgment in October 2013, dismissing all claims except the ventilated filter claim. The judgment was affirmed on appeal and remanded to the trial court for further proceedings. In April 2015, the plaintiffs filed a petition for writ of certiorari to the United States Supreme Court which subsequently declined review. In July 2015, the trial court ruled on the scope of the ventilated filter claim and determined that only 30 plaintiffs have potentially viable claims against the non-Liggett defendants, which may be pursued in a second phase of the trial. The court intends to try the claims of these plaintiffs in six consolidated trials, each with five plaintiffs. The trial court set the first date for the consolidated trials for January 9, 2017. With respect to Liggett, the trial court requested that Liggett and plaintiffs brief whether any claims against Liggett survive given the outcome of the first phase of the trial. A hearing is scheduled for May 23, 2016.  If the case proceeds against Liggett, it is estimated that Liggett could be a defendant in less than 25 of the remaining individual cases.
In addition to the cases described above, numerous class actions remain certified against other cigarette manufacturers including cases alleging, among other things, that use of the terms “lights” and “ultra lights” constitutes unfair and deceptive trade practices. Adverse decisions in these cases could have a material adverse affect on Liggett’s sales volume, operating income and cash flows.
Health Care Cost Recovery Actions
As of March 31, 2016 , one Health Care Cost Recovery Action was pending against Liggett, Crow Creek Sioux Tribe v. American Tobacco Company , a South Dakota case filed in 1997, where the plaintiff seeks to recover damages based on various theories of recovery as a result of alleged sales of tobacco products to minors. The case is inactive. Other cigarette manufacturers are also named as defendants.
The claims asserted in health care cost recovery actions vary, but can include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach of special duty, fraud, negligent

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited


misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to