VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(
Dollars in Thousands, Except Per Share Amounts
)
Unaudited
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
ASSETS:
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
410,409
|
|
|
$
|
393,530
|
|
Investment securities available for sale
|
146,223
|
|
|
156,903
|
|
Accounts receivable - trade, net
|
25,479
|
|
|
18,801
|
|
Inventories
|
87,979
|
|
|
89,834
|
|
Income taxes receivable, net
|
8,178
|
|
|
16,110
|
|
Restricted assets
|
8,797
|
|
|
7,330
|
|
Other current assets
|
29,458
|
|
|
22,955
|
|
Total current assets
|
716,523
|
|
|
705,463
|
|
Property, plant and equipment, net
|
80,994
|
|
|
80,448
|
|
Investments in real estate, net
|
23,675
|
|
|
23,640
|
|
Long-term investments
|
75,171
|
|
|
53,197
|
|
Investments in real estate ventures
|
201,356
|
|
|
221,258
|
|
Restricted assets
|
3,754
|
|
|
3,986
|
|
Goodwill and other intangible assets, net
|
261,189
|
|
|
261,918
|
|
Prepaid pension costs
|
22,882
|
|
|
22,273
|
|
Other assets
|
34,742
|
|
|
31,852
|
|
Total assets
|
$
|
1,420,286
|
|
|
$
|
1,404,035
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of notes payable and long-term debt
|
$
|
20,941
|
|
|
$
|
39,508
|
|
Current payments due under the Master Settlement Agreement
|
68,039
|
|
|
16,192
|
|
Current portion of employee benefits
|
937
|
|
|
937
|
|
Litigation accruals
|
5,371
|
|
|
3,659
|
|
Other current liabilities
|
145,825
|
|
|
135,852
|
|
Total current liabilities
|
241,113
|
|
|
196,148
|
|
Notes payable, long-term debt and other obligations, less current portion
|
1,158,877
|
|
|
1,132,943
|
|
Fair value of derivatives embedded within convertible debt
|
95,627
|
|
|
112,332
|
|
Non-current employee benefits
|
59,384
|
|
|
58,958
|
|
Deferred income taxes, net
|
85,176
|
|
|
93,085
|
|
Payments due under the Master Settlement Agreement
|
23,642
|
|
|
22,257
|
|
Litigation accruals
|
23,574
|
|
|
27,513
|
|
Other liabilities
|
17,414
|
|
|
14,071
|
|
Total liabilities
|
1,704,807
|
|
|
1,657,307
|
|
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,128,934,081 and 127,739,481 shares issued and outstanding
|
12,893
|
|
|
12,774
|
|
Accumulated deficit
|
(368,140
|
)
|
|
(333,529
|
)
|
Accumulated other comprehensive loss
|
(12,606
|
)
|
|
(11,245
|
)
|
Total Vector Group Ltd. stockholders' deficiency
|
(367,853
|
)
|
|
(332,000
|
)
|
Non-controlling interest
|
83,332
|
|
|
78,728
|
|
Total stockholders' deficiency
|
(284,521
|
)
|
|
(253,272
|
)
|
Total liabilities and stockholders' deficiency
|
$
|
1,420,286
|
|
|
$
|
1,404,035
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(
Dollars in Thousands, Except Per Share Amounts
)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Revenues
|
|
|
|
|
|
|
|
Tobacco*
|
$
|
272,177
|
|
|
$
|
255,498
|
|
|
$
|
529,631
|
|
|
$
|
476,513
|
|
Real estate
|
199,812
|
|
|
182,765
|
|
|
357,566
|
|
|
342,512
|
|
E-cigarettes
|
—
|
|
|
10
|
|
|
—
|
|
|
48
|
|
Total Revenues
|
471,989
|
|
|
438,273
|
|
|
887,197
|
|
|
819,073
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
Tobacco*
|
186,907
|
|
|
168,607
|
|
|
362,661
|
|
|
305,345
|
|
Real estate
|
127,987
|
|
|
115,017
|
|
|
228,156
|
|
|
214,695
|
|
E-cigarettes
|
—
|
|
|
7
|
|
|
—
|
|
|
13
|
|
Total cost of sales
|
314,894
|
|
|
283,631
|
|
|
590,817
|
|
|
520,053
|
|
|
|
|
|
|
|
|
|
Operating, selling, administrative and general expenses
|
83,183
|
|
|
83,922
|
|
|
167,952
|
|
|
163,750
|
|
Litigation settlement and judgment expense
|
102
|
|
|
—
|
|
|
1,687
|
|
|
2,350
|
|
Restructuring charges
|
—
|
|
|
—
|
|
|
—
|
|
|
41
|
|
Operating income
|
73,810
|
|
|
70,720
|
|
|
126,741
|
|
|
132,879
|
|
|
|
|
|
|
|
|
|
Other income (expenses):
|
|
|
|
|
|
|
|
Interest expense
|
(46,691
|
)
|
|
(36,369
|
)
|
|
(92,912
|
)
|
|
(67,089
|
)
|
Loss on extinguishment of debt
|
—
|
|
|
—
|
|
|
(34,110
|
)
|
|
—
|
|
Change in fair value of derivatives embedded within convertible debt
|
8,134
|
|
|
7,416
|
|
|
16,705
|
|
|
17,110
|
|
Equity in earnings from real estate ventures
|
15,291
|
|
|
2,813
|
|
|
26,404
|
|
|
2,306
|
|
Equity in (losses) earnings from investments
|
(1,459
|
)
|
|
1,089
|
|
|
(2,520
|
)
|
|
(582
|
)
|
Gain on sale of investment securities available for sale
|
37
|
|
|
139
|
|
|
187
|
|
|
706
|
|
Impairment of investment securities available for sale
|
(87
|
)
|
|
(49
|
)
|
|
(126
|
)
|
|
(4,862
|
)
|
Other, net
|
1,338
|
|
|
581
|
|
|
2,997
|
|
|
1,628
|
|
Income before provision for income taxes
|
50,373
|
|
|
46,340
|
|
|
43,366
|
|
|
82,096
|
|
Income tax expense
|
18,827
|
|
|
19,003
|
|
|
16,045
|
|
|
33,366
|
|
|
|
|
|
|
|
|
|
Net income
|
31,546
|
|
|
27,337
|
|
|
27,321
|
|
|
48,730
|
|
|
|
|
|
|
|
|
|
Net income attributed to non-controlling interest
|
(4,735
|
)
|
|
(3,322
|
)
|
|
(4,737
|
)
|
|
(5,377
|
)
|
|
|
|
|
|
|
|
|
Net income attributed to Vector Group Ltd.
|
$
|
26,811
|
|
|
$
|
24,015
|
|
|
$
|
22,584
|
|
|
$
|
43,353
|
|
|
|
|
|
|
|
|
|
Per basic common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common share attributed to Vector Group Ltd.
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
Per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common share attributed to Vector Group Ltd.
|
$
|
0.20
|
|
|
$
|
0.19
|
|
|
$
|
0.16
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
0.40
|
|
|
$
|
0.38
|
|
|
$
|
0.80
|
|
|
$
|
0.76
|
|
*
Revenues and cost of sales include federal excise taxes of
$115,194
,
$106,861
,
$224,562
and
$197,707
, respectively.
The accompanying notes are an integral part of the condensed consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(
Dollars in Thousands
)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
|
Net income
|
$
|
31,546
|
|
|
$
|
27,337
|
|
|
$
|
27,321
|
|
|
$
|
48,730
|
|
|
|
|
|
|
|
|
|
Net unrealized losses on investment securities available for sale:
|
|
|
|
|
|
|
|
Change in net unrealized losses
|
(3,043
|
)
|
|
(820
|
)
|
|
(3,219
|
)
|
|
(5,454
|
)
|
Net unrealized losses (gains) reclassified into net income
|
50
|
|
|
(90
|
)
|
|
(61
|
)
|
|
4,156
|
|
Net unrealized losses on investment securities available for sale
|
(2,993
|
)
|
|
(910
|
)
|
|
(3,280
|
)
|
|
(1,298
|
)
|
|
|
|
|
|
|
|
|
|
Net change in forward contracts
|
1
|
|
|
9
|
|
|
2
|
|
|
18
|
|
|
|
|
|
|
|
|
|
Net change in pension-related amounts -
|
|
|
|
|
|
|
|
Amortization of loss
|
489
|
|
|
445
|
|
|
977
|
|
|
890
|
|
Net change in pension-related amounts
|
489
|
|
|
445
|
|
|
977
|
|
|
890
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
(2,503
|
)
|
|
(456
|
)
|
|
(2,301
|
)
|
|
(390
|
)
|
|
|
|
|
|
|
|
|
Income tax effect on:
|
|
|
|
|
|
|
|
Change in net unrealized losses on investment securities
|
1,235
|
|
|
337
|
|
|
1,311
|
|
|
2,245
|
|
Net unrealized losses (gains) reclassified into net income on investment securities
|
(20
|
)
|
|
37
|
|
|
25
|
|
|
(1,708
|
)
|
Forward contracts
|
1
|
|
|
(4
|
)
|
|
—
|
|
|
(7
|
)
|
Pension-related amounts
|
(198
|
)
|
|
(183
|
)
|
|
(396
|
)
|
|
(366
|
)
|
Income tax benefit on other comprehensive loss
|
1,018
|
|
|
187
|
|
|
940
|
|
|
164
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of tax
|
(1,485
|
)
|
|
(269
|
)
|
|
(1,361
|
)
|
|
(226
|
)
|
|
|
|
|
|
|
|
|
Comprehensive income
|
30,061
|
|
|
27,068
|
|
|
25,960
|
|
|
48,504
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributed to non-controlling interest
|
(4,735
|
)
|
|
(3,322
|
)
|
|
(4,737
|
)
|
|
(5,377
|
)
|
Comprehensive income attributed to Vector Group Ltd.
|
$
|
25,326
|
|
|
$
|
23,746
|
|
|
$
|
21,223
|
|
|
$
|
43,127
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
DEFICIENCY
(
Dollars in Thousands, Except Share Amounts
)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vector Group Ltd. Stockholders' Deficiency
|
|
|
|
|
|
|
Additional Paid-In
|
|
|
|
Accumulated
Other Comprehensive
|
|
Non-controlling
|
|
|
|
Common Stock
|
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Deficit
|
|
Loss
|
|
Interest
|
|
Total
|
Balance as of January 1, 2017
|
127,739,481
|
|
|
$
|
12,774
|
|
|
$
|
—
|
|
|
$
|
(333,529
|
)
|
|
$
|
(11,245
|
)
|
|
$
|
78,728
|
|
|
$
|
(253,272
|
)
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
22,584
|
|
|
—
|
|
|
4,737
|
|
|
27,321
|
|
Total other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,361
|
)
|
|
—
|
|
|
(1,361
|
)
|
Total comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,960
|
|
Distributions and dividends on common stock
|
—
|
|
|
—
|
|
|
(49,139
|
)
|
|
(57,195
|
)
|
|
—
|
|
|
—
|
|
|
(106,334
|
)
|
Issuance of common stock
|
2,000,000
|
|
|
200
|
|
|
43,030
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43,230
|
|
Cancellation of shares under share lending agreement
|
(805,400
|
)
|
|
(81
|
)
|
|
81
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
6,028
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,028
|
|
Distributions to non-controlling interest
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(133
|
)
|
|
(133
|
)
|
Balance as of June 30, 2017
|
128,934,081
|
|
|
$
|
12,893
|
|
|
$
|
—
|
|
|
$
|
(368,140
|
)
|
|
$
|
(12,606
|
)
|
|
$
|
83,332
|
|
|
$
|
(284,521
|
)
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(
Dollars in Thousands
)
Unaudited
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
June 30,
2017
|
|
June 30,
2016
|
Net cash provided by operating activities
|
$
|
117,611
|
|
|
$
|
78,825
|
|
Cash flows from investing activities:
|
|
|
|
Sale of investment securities
|
22,396
|
|
|
67,033
|
|
Maturities of investment securities
|
93,368
|
|
|
343
|
|
Purchase of investment securities
|
(109,891
|
)
|
|
(56,691
|
)
|
Proceeds from sale or liquidation of long-term investments
|
466
|
|
|
1,000
|
|
Purchase of long-term investments
|
(26,000
|
)
|
|
(50
|
)
|
Investments in real estate ventures
|
(8,454
|
)
|
|
(11,806
|
)
|
Distributions from investments in real estate ventures
|
23,338
|
|
|
17,983
|
|
Increase in cash surrender value of life insurance policies
|
(854
|
)
|
|
(393
|
)
|
(Increase) decrease in restricted assets
|
(1,235
|
)
|
|
2,674
|
|
Issuance of notes receivable
|
(1,500
|
)
|
|
—
|
|
Proceeds from sale of fixed assets
|
75
|
|
|
5
|
|
Capital expenditures
|
(8,346
|
)
|
|
(7,615
|
)
|
Pay downs of investment securities
|
1,620
|
|
|
4,926
|
|
Investments in real estate, net
|
(205
|
)
|
|
(81
|
)
|
Net cash (used in) provided by investing activities
|
(15,222
|
)
|
|
17,328
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds from issuance of debt
|
850,020
|
|
|
243,282
|
|
Deferred financing costs
|
(19,200
|
)
|
|
(6,600
|
)
|
Repayments of debt
|
(836,145
|
)
|
|
(2,917
|
)
|
Borrowings under revolver
|
110,979
|
|
|
89,695
|
|
Repayments on revolver
|
(129,479
|
)
|
|
(80,223
|
)
|
Dividends and distributions on common stock
|
(104,750
|
)
|
|
(97,846
|
)
|
Contributions from non-controlling interest
|
—
|
|
|
248
|
|
Distributions to non-controlling interest
|
(165
|
)
|
|
(7,422
|
)
|
Proceeds from issuance of Vector common stock
|
43,230
|
|
|
—
|
|
Net cash (used in) provided by financing activities
|
(85,510
|
)
|
|
138,217
|
|
Net increase in cash and cash equivalents
|
16,879
|
|
|
234,370
|
|
Cash and cash equivalents, beginning of period
|
393,530
|
|
|
240,368
|
|
Cash and cash equivalents, end of period
|
$
|
410,409
|
|
|
$
|
474,738
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
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 Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), Zoom E-Cigs LLC (“Zoom”), New Valley LLC (“New Valley”) and other less significant subsidiaries. New Valley includes the accounts of Douglas Elliman Realty, LLC (“Douglas Elliman”) and other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. Zoom is engaged in the sale of electronic cigarettes in the United States. New Valley is engaged in the real estate business.
The unaudited, interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) 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. GAAP 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, 2016
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.
|
|
(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. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital to the extent paid-in-capital is available and then to accumulated deficit. 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 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 and the earnings process is complete.
|
|
(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, 2016
. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividends.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Net income for purposes of determining basic and diluted EPS was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net income attributed to Vector Group Ltd.
|
$
|
26,811
|
|
|
$
|
24,015
|
|
|
$
|
22,584
|
|
|
$
|
43,353
|
|
Income attributed to participating securities
|
(1,501
|
)
|
|
(784
|
)
|
|
(2,984
|
)
|
|
(1,417
|
)
|
Net income available to common shares attributed to Vector Group Ltd.
|
$
|
25,310
|
|
|
$
|
23,231
|
|
|
$
|
19,600
|
|
|
$
|
41,936
|
|
Basic and diluted EPS were calculated using the following common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average shares for basic EPS
|
126,180,511
|
|
|
123,969,150
|
|
|
125,876,144
|
|
|
123,965,476
|
|
Plus incremental shares related to stock options and non-vested restricted stock
|
354,577
|
|
|
248,165
|
|
|
317,563
|
|
|
226,155
|
|
Weighted-average shares for diluted EPS
|
126,535,088
|
|
|
124,217,315
|
|
|
126,193,707
|
|
|
124,191,631
|
|
The following were outstanding during the three and
six months ended June 30, 2017
and
2016
, but were not included in the computation of diluted EPS because the effect was anti-dilutive.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Weighted-average number of shares issuable upon
conversion of debt
|
26,140,250
|
|
|
26,140,251
|
|
|
26,140,250
|
|
|
26,140,251
|
|
Weighted-average conversion price
|
$
|
18.70
|
|
|
$
|
18.70
|
|
|
$
|
18.70
|
|
|
$
|
18.70
|
|
|
|
(e)
|
Fair Value of Derivatives Embedded within Convertible Debt
:
|
The Company has estimated the fair value of the embedded derivatives based principally on the results of a valuation model. A readily determinable fair value of the embedded derivatives is not available. 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. 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 Vector's stock price. At
June 30, 2017
, the range of estimated fair values of the Company's embedded derivatives was between
$95,256
and
$96,300
. The Company recorded the fair value of its embedded derivatives at the approximate midpoint of the range at
$95,627
as of
June 30, 2017
. At
December 31, 2016
, the range of estimated fair values of the Company's embedded derivatives was between
$111,653
and
$113,090
. The Company recorded the fair value of its embedded derivatives at the midpoint of the range at
$112,332
as of
December 31, 2016
. The estimated fair value of the Company's embedded derivatives could change significantly based on future market conditions. (See Note
6
.)
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
(f)
|
Investments in Real Estate Ventures:
|
In accounting for its Investments in real estate ventures, the Company identified its participation in Variable Interest Entities (“VIE”), which are defined as entities in which the equity investors at risk have not provided enough equity at risk to finance its activities without additional subordinated support or the equity investors (1) cannot directly or indirectly make decisions about the entity’s activities through their voting rights or similar rights; (2) do not have the obligation to absorb the expected losses of the entity; (3) do not have the right to receive the expected residual returns of the entity; or (4) have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company's interest in VIEs is primarily in the form of equity ownership. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE's executive committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of economic disproportionality between the Company and its other partner(s).
Accounting guidance requires the consolidation of VIEs in which the Company is the primary beneficiary. The guidance requires consolidation of VIEs that an enterprise has a controlling 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 impact the VIE's economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from 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.
Other, net consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Interest and dividend income
|
$
|
1,625
|
|
|
$
|
1,452
|
|
|
$
|
3,370
|
|
|
$
|
2,776
|
|
Gain on long-term investment
|
197
|
|
|
—
|
|
|
162
|
|
|
—
|
|
Impairment of long-term investments
|
(525
|
)
|
|
(921
|
)
|
|
(525
|
)
|
|
(1,203
|
)
|
Other income (expense)
|
41
|
|
|
50
|
|
|
(10
|
)
|
|
55
|
|
Other, net
|
$
|
1,338
|
|
|
$
|
581
|
|
|
$
|
2,997
|
|
|
$
|
1,628
|
|
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:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Accounts payable
|
$
|
9,453
|
|
|
$
|
10,573
|
|
Accrued promotional expenses
|
19,857
|
|
|
23,763
|
|
Accrued excise and payroll taxes payable, net
|
22,809
|
|
|
10,044
|
|
Accrued interest
|
33,130
|
|
|
35,449
|
|
Commissions payable
|
14,269
|
|
|
6,164
|
|
Accrued salary and benefits
|
20,857
|
|
|
26,958
|
|
Other current liabilities
|
25,450
|
|
|
22,901
|
|
Total other current liabilities
|
$
|
145,825
|
|
|
$
|
135,852
|
|
|
|
(i)
|
Goodwill and Other Intangible Assets, Net
:
|
The components of “Goodwill and other intangible assets, net” were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Goodwill
|
|
$
|
70,815
|
|
|
$
|
70,815
|
|
|
|
|
|
|
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
|
|
2,863
|
|
|
3,592
|
|
|
|
|
|
|
Total goodwill and other intangible assets, net
|
|
$
|
261,189
|
|
|
$
|
261,918
|
|
On July 31, 2017, Douglas Elliman entered into a contract of sale to acquire Los Angeles-based Teles Properties, a California real estate brokerage firm.
|
|
(k)
|
New Accounting Pronouncements
:
|
Accounting Standards Updates (“ASU”) adopted in 2017
:
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 modified U.S. 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 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)
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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 was effective for the Company's fiscal year beginning January 1, 2017, including interim periods. The Company adopted ASU 2016-09 in the first quarter of 2017 and elected to apply this adoption prospectively. See Note
9
for information regarding the impact on the Company's condensed consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40)-Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). ASU 2014-15 provides guidance to U.S. GAAP about management’s responsibility to evaluate whether there is a substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. Specifically, ASU 2014-15 (1) defines the term substantial doubt, (2) requires an evaluation of every reporting period including interim periods, (3) provides principles for considering the mitigating effect of management’s plan, (4) requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) requires an express statement and other disclosures when substantial doubt is not alleviated, and (6) requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this update were effective for annual periods beginning after December 15, 2016 and interim periods within those reporting periods. The adoption of ASU 2014-15 did not change the Company’s conclusion of its ability to continue as a going concern.
ASUs to be adopted in future periods:
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). ASU 2017-07 provides guidance that require an employer to report the service cost component separate from the other components of net benefit pension costs. The employer is required to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside the subtotal of income from operations, if one is presented. If a separate line item is not used, the line item used in the income statement must be disclosed. The amendments of this ASU are effective for annual reporting periods beginning after December 15, 2017 and interim periods within those years. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Other than the revised statement of operations presentation, the adoption of ASU 2017-07 is not expected to have a material impact on the Company's condensed consolidated financial statements. The Company does not plan to early adopt ASU 2017-07.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) (“ASU 2016-18”). ASU 2016-18 provides guidance on the classification of restricted cash to be included with cash and cash equivalents when reconciling the beginning of period and end of period total amounts on the statement of cash flows. This pronouncement is effective for reporting periods beginning after December 15, 2017 using a retrospective adoption method and early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2016-18 will have on the Company’s condensed consolidated financial statements and does not plan to early adopt ASU 2016-18.
In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 is intended to reduce diversity in practice on how certain cash receipts and payments are presented and classified in the statement of cash flows. The standard provides guidance in a number of situations including, among others, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and distributions received from equity method investees. ASU 2016-15 also provides guidance for classifying cash receipts and payments that have aspects of more than one class of cash flows. ASU 2016-15 is effective for the Company's fiscal year beginning January 1, 2018. Early adoption is permitted. The standard requires application using a retrospective transition method. The Company is currently assessing the impact the adoption of ASU 2016-15 will have on the Company’s condensed consolidated financial statements and does not plan to early adopt ASU 2016-15.
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, Revenue from Contracts with Customers (Topic 606), (“ASU 2014-9”), 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. In May 2014, FASB issued ASU 2014-9 that outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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 periods beginning subsequent to December 15, 2016. The Company currently anticipates it will present the cumulative effect of initially applying the new standard at the date of initial application, however, this expectation may change following the completion of the Company's evaluation of the impact of this guidance on the Company's condensed consolidated financial statements and related disclosures.
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.
Inventories consist of:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Leaf tobacco
|
$
|
40,378
|
|
|
$
|
46,253
|
|
Other raw materials
|
3,438
|
|
|
3,733
|
|
Work-in-process
|
390
|
|
|
633
|
|
Finished goods
|
69,010
|
|
|
65,052
|
|
Inventories at current cost
|
113,216
|
|
|
115,671
|
|
LIFO adjustments
|
(25,237
|
)
|
|
(25,837
|
)
|
|
$
|
87,979
|
|
|
$
|
89,834
|
|
All of the Company's inventories at
June 30, 2017
and
December 31, 2016
are reported under the LIFO method. The
$25,237
LIFO adjustment as of
June 30, 2017
decreases the current cost of inventories by
$17,633
for Leaf tobacco,
$213
for Other raw materials,
$29
for Work-in-process and
$7,362
for Finished goods. The
$25,837
LIFO adjustment as of
December 31, 2016
decreased the current cost of inventories by
$17,632
for Leaf tobacco,
$214
for Other raw materials,
$29
for Work-in-process and
$7,962
for Finished goods.
Liggett enters into purchase commitments with third-party providers for leaf tobacco. The future quantities of leaf tobacco and prices are established at the date of the commitments. At
June 30, 2017
, Liggett had tobacco purchase commitments of approximately
$21,463
. Liggett has a single source supply agreement for reduced ignition propensity cigarette paper through 2019.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Each period, 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
$17,689
and
$17,364
at
June 30, 2017
and
December 31, 2016
, respectively. Federal excise tax in inventory was
$28,949
and
$25,888
at
June 30, 2017
and
December 31, 2016
.
|
|
3
.
|
INVESTMENT SECURITIES AVAILABLE FOR SALE
|
The components of investment securities available for sale at
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Marketable equity securities
|
$
|
35,425
|
|
|
$
|
12,427
|
|
|
$
|
(55
|
)
|
|
$
|
47,797
|
|
Mutual funds invested in fixed income securities
|
20,734
|
|
|
141
|
|
|
—
|
|
|
20,875
|
|
Marketable debt securities
|
77,201
|
|
|
350
|
|
|
—
|
|
|
77,551
|
|
Total investment securities available for sale
|
$
|
133,360
|
|
|
$
|
12,918
|
|
|
$
|
(55
|
)
|
|
$
|
146,223
|
|
The components of investment securities available for sale at
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Marketable equity securities
|
$
|
34,956
|
|
|
$
|
16,141
|
|
|
$
|
(254
|
)
|
|
$
|
50,843
|
|
Mutual funds invested in fixed income securities
|
20,507
|
|
|
81
|
|
|
(6
|
)
|
|
20,582
|
|
Marketable debt securities
|
85,297
|
|
|
181
|
|
|
—
|
|
|
85,478
|
|
Total investment securities available for sale
|
$
|
140,760
|
|
|
$
|
16,403
|
|
|
$
|
(260
|
)
|
|
$
|
156,903
|
|
The table below summarizes the maturity dates of marketable debt securities at
June 30, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Type:
|
Market Value
|
|
Under 1 Year
|
|
1 Year up to 5 Years
|
|
More than 5 Years
|
U.S. Government securities
|
$
|
28,527
|
|
|
$
|
—
|
|
|
$
|
28,527
|
|
|
$
|
—
|
|
Corporate securities
|
40,128
|
|
|
7,766
|
|
|
32,362
|
|
|
—
|
|
U.S. mortgage-backed securities
|
5,648
|
|
|
—
|
|
|
26
|
|
|
5,622
|
|
Commercial mortgage-backed securities
|
440
|
|
|
—
|
|
|
—
|
|
|
440
|
|
Index-linked U.S. bonds
|
2,307
|
|
|
—
|
|
|
2,307
|
|
|
—
|
|
Foreign fixed-income securities
|
501
|
|
|
—
|
|
|
501
|
|
|
—
|
|
Total marketable debt securities by maturity dates
|
$
|
77,551
|
|
|
$
|
7,766
|
|
|
$
|
63,723
|
|
|
$
|
6,062
|
|
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
|
June 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
$
|
5,945
|
|
|
$
|
(55
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,945
|
|
|
$
|
(55
|
)
|
|
$
|
5,945
|
|
|
$
|
(55
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,945
|
|
|
$
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
$
|
5,746
|
|
|
$
|
(254
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,746
|
|
|
$
|
(254
|
)
|
Mutual funds invested in fixed income securities
|
10,253
|
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
10,253
|
|
|
(6
|
)
|
|
$
|
15,999
|
|
|
$
|
(260
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,999
|
|
|
$
|
(260
|
)
|
Unrealized losses from mutual funds invested in fixed-income securities are primarily attributable to changes in interest rates. Unrealized losses from equity securities are due to market price movements. The Company believes the unrealized losses associated with the Company's mutual funds and 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
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Gross realized gains on sales
|
$
|
90
|
|
|
$
|
206
|
|
|
$
|
295
|
|
|
$
|
955
|
|
Gross realized losses on sales
|
(53
|
)
|
|
(67
|
)
|
|
(108
|
)
|
|
(249
|
)
|
Gains on sale of investment securities available for sale
|
$
|
37
|
|
|
$
|
139
|
|
|
$
|
187
|
|
|
$
|
706
|
|
|
|
|
|
|
|
|
|
Gross realized losses on other-than-temporary impairments
|
$
|
(87
|
)
|
|
$
|
(49
|
)
|
|
$
|
(126
|
)
|
|
$
|
(4,862
|
)
|
|
|
|
|
|
|
|
|
The Company recorded an “Other-than-temporary impairment” charge of
$87
and
$126
during the three and
six months ended June 30, 2017
, respectively. The Company recorded an “Other-than-temporary impairment” charge of
$49
and
$4,862
during the three and
six months ended June 30, 2016
, respectively. The largest component of the charge for the
six months ended June 30, 2016
was
$4,772
related to an investment in the common stock of Morgans Hotel Group Co. (“MHGC”), a company where Vector's President and Chief Executive Officer served as Chairman of the Board of Directors until December 1, 2016 when MHGC merged with another company. As a result, the common shares of MHGC ceased to be outstanding.
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.
Proceeds from investment securities sales totaled
$22,396
and
$67,033
and proceeds from early redemptions by issuers totaled
$94,988
and
$5,269
in the
six
months ended
June 30, 2017
and
2016
, respectively, mainly from the sales and redemptions of Corporate securities and U.S. Government securities.
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:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
Investments accounted at cost
|
$
|
60,450
|
|
|
$
|
35,476
|
|
Investments accounted for under the equity method
|
14,721
|
|
|
17,721
|
|
|
$
|
75,171
|
|
|
$
|
53,197
|
|
(a) Cost-Method Investments:
Long-term investments accounted at cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
Investment partnerships
|
$
|
60,450
|
|
|
$
|
68,857
|
|
|
$
|
34,975
|
|
|
$
|
40,569
|
|
Real estate partnership
|
—
|
|
|
—
|
|
|
501
|
|
|
494
|
|
|
$
|
60,450
|
|
|
$
|
68,857
|
|
|
$
|
35,476
|
|
|
$
|
41,063
|
|
The principal business of the investment partnerships is investing in investment securities. 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
$25,000
in
five
new investments and made an additional contribution of
$1,000
to
one
of its existing investments during the
six
months ended
June 30, 2017
. There were
no
cash contributions during the
six
months ended
June 30, 2016
. The Company received cash distributions of
$663
and
$1,000
from the Company's investments in long-term investments under the cost method for the
six
months ended
June 30, 2017
and
2016
, respectively.
The long-term investments are carried on the condensed consolidated balance sheet at cost. The fair value determination disclosed above would be classified as Level 3 under fair value hierarchy disclosed in Note
10
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 their investment portfolio.
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:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31, 2016
|
Indian Creek Investors LP ("Indian Creek")
|
$
|
3,209
|
|
|
$
|
5,248
|
|
Boyar Value Fund ("Boyar")
|
8,328
|
|
|
7,816
|
|
Ladenburg Thalmann Financial Services Inc. ("LTS")
|
3,184
|
|
|
4,657
|
|
Castle Brands, Inc. ("Castle")
|
—
|
|
|
—
|
|
|
$
|
14,721
|
|
|
$
|
17,721
|
|
At
June 30, 2017
, the Company's ownership percentages in Indian Creek, Boyar, LTS and Castle were
20.09%
,
32.18%
,
7.79%
and
7.96%
, respectively. The Company accounted for its 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 its 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 value of Boyar, based on the quoted market price as of
June 30, 2017
, was
$8,328
, equal to its carrying value. Ladenburg Thalmann Fund Management, LLC, an indirect subsidiary of LTS, is the manager of Boyar.
At
June 30, 2017
, the aggregate values of the LTS and Castle investments based on the quoted market price were
$37,067
and
$21,794
, 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
$480
and
$572
from the Company's investments in long-term investments under the equity method for the
six
months ended
June 30, 2017
and
2016
, respectively. The Company recognized equity in losses from investments under the equity method of
$1,459
for the three months ended
June 30, 2017
and equity in earnings from investments under the equity method of
$1,089
for the three months ended
June 30, 2016
. The Company recognized equity in losses from investments under the equity method of
$2,520
and
$582
for the
six
months ended
June 30, 2017
and
2016
, respectively. The Company has suspended its recognition of equity in losses from 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 condensed 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 long-term investments are carried on the condensed consolidated balance sheet at cost under the equity method of accounting. The fair value determination disclosed above would be classified as Level 3 under fair value hierarchy disclosed in Note
10
if such assets were recorded on the condensed consolidated balance sheet at fair value.
Investments in real estate ventures:
New Valley also holds equity investments in various real estate projects. The majority of New Valley's investment in real estate ventures were located in the New York City Standard Metropolitan Statistical Area ("SMSA"). New Valley aggregated the disclosure of its investments in real estate ventures by property type and operating characteristics.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The components of “Investments in real estate ventures” were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Range of Ownership
|
|
June 30, 2017
|
|
December 31, 2016
|
Condominium and Mixed Use Development:
|
|
|
|
|
|
New York City SMSA
|
3.1% - 49.5%
|
|
$
|
128,168
|
|
|
$
|
131,770
|
|
All other U.S. areas
|
3.0% - 48.5%
|
|
26,615
|
|
|
40,950
|
|
|
|
|
154,783
|
|
|
172,720
|
|
Apartment Buildings:
|
|
|
|
|
|
All other U.S. areas
|
7.6% - 16.3%
|
|
7,458
|
|
|
8,287
|
|
|
|
|
7,458
|
|
|
8,287
|
|
Hotels:
|
|
|
|
|
|
New York City SMSA
|
5.2%
|
|
22,226
|
|
|
21,895
|
|
International
|
49.0%
|
|
2,501
|
|
|
3,037
|
|
|
|
|
24,727
|
|
|
24,932
|
|
Commercial:
|
|
|
|
|
|
New York City SMSA
|
49.0%
|
|
2,820
|
|
|
3,290
|
|
All other U.S. areas
|
2.1%
|
|
9,844
|
|
|
10,000
|
|
|
|
|
12,664
|
|
|
13,290
|
|
|
|
|
|
|
|
Other
|
50.0%
|
|
1,724
|
|
|
2,029
|
|
Investments in real estate ventures
|
|
|
$
|
201,356
|
|
|
$
|
221,258
|
|
Contributions:
New Valley made contributions to its investments in real estate ventures as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Condominium and Mixed Use Development:
|
|
|
|
New York City SMSA
|
$
|
675
|
|
|
$
|
1,259
|
|
All other U.S. areas
|
6,242
|
|
|
7,542
|
|
|
6,917
|
|
|
8,801
|
|
Hotels:
|
|
|
|
New York City SMSA
|
1,537
|
|
|
2,515
|
|
International
|
—
|
|
|
490
|
|
|
1,537
|
|
|
3,005
|
|
|
|
|
|
Total contributions
|
$
|
8,454
|
|
|
$
|
11,806
|
|
New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners during the
six months ended
June 30, 2017
and
June 30, 2016
. New Valley did not elect to make certain capital contributions to Monad Terrace. This resulted in a change in ownership percentage from
24.3%
to
22.2%
. For other ventures where New Valley previously held an investment, New Valley contributed its proportionate share of additional capital along with contributions by the other investors. New Valley's direct investment percentage for these ventures did not change.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Distributions:
New Valley received distributions from its investments in real estate ventures as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Condominium and Mixed Use Development:
|
|
|
|
New York City SMSA
|
$
|
31,280
|
|
|
$
|
9,940
|
|
All other U.S. areas
|
17,949
|
|
|
10,045
|
|
|
49,229
|
|
|
19,985
|
|
Apartment Buildings:
|
|
|
|
All other U.S. areas
|
182
|
|
|
8,707
|
|
|
182
|
|
|
8,707
|
|
Hotels:
|
|
|
|
International
|
239
|
|
|
—
|
|
|
239
|
|
|
—
|
|
Commercial:
|
|
|
|
New York City SMSA
|
101
|
|
|
235
|
|
All other U.S. areas
|
92
|
|
|
—
|
|
|
193
|
|
|
235
|
|
|
|
|
|
Other
|
1,150
|
|
|
1,049
|
|
Total distributions
|
$
|
50,993
|
|
|
$
|
29,976
|
|
Of the distributions received by New Valley from its investment in real estate ventures,
$27,655
and
$11,993
were from distributions of earnings for the
six months ended
June 30, 2017
and
June 30, 2016
, respectively, and
$23,338
and
$17,983
were a return of capital for the
six months ended
June 30, 2017
and
June 30, 2016
, respectively. Distributions from earnings are included in cash from operations in the Condensed Consolidating Statements of Cash Flows, while distributions that are returns of capital are included in cash flows from investing activities in the Condensed Consolidating Statements of Cash Flows.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Equity in Earnings (Losses) from Real Estate Ventures:
New Valley recognized equity in earnings (losses) from real estate ventures as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Condominium and Mixed Use Development:
|
|
|
|
|
|
|
|
New York City SMSA
|
$
|
17,116
|
|
|
$
|
3,279
|
|
|
$
|
29,296
|
|
|
$
|
2,610
|
|
All other U.S. areas
|
(863
|
)
|
|
(317
|
)
|
|
(1,155
|
)
|
|
(831
|
)
|
|
16,253
|
|
|
2,962
|
|
|
28,141
|
|
|
1,779
|
|
Apartment Buildings:
|
|
|
|
|
|
|
|
All other U.S. areas
|
(724
|
)
|
|
1,630
|
|
|
(647
|
)
|
|
2,146
|
|
|
(724
|
)
|
|
1,630
|
|
|
(647
|
)
|
|
2,146
|
|
Hotels:
|
|
|
|
|
|
|
|
New York City SMSA
|
(519
|
)
|
|
(494
|
)
|
|
(1,206
|
)
|
|
(1,074
|
)
|
International
|
254
|
|
|
305
|
|
|
(296
|
)
|
|
230
|
|
|
(265
|
)
|
|
(189
|
)
|
|
(1,502
|
)
|
|
(844
|
)
|
Commercial:
|
|
|
|
|
|
|
|
New York City SMSA
|
(124
|
)
|
|
(1,744
|
)
|
|
(369
|
)
|
|
(1,532
|
)
|
All other U.S. areas
|
(64
|
)
|
|
—
|
|
|
(64
|
)
|
|
—
|
|
|
(188
|
)
|
|
(1,744
|
)
|
|
(433
|
)
|
|
(1,532
|
)
|
|
|
|
|
|
|
|
|
Other
|
215
|
|
|
154
|
|
|
845
|
|
|
757
|
|
Equity in earnings from real estate ventures
|
$
|
15,291
|
|
|
$
|
2,813
|
|
|
$
|
26,404
|
|
|
$
|
2,306
|
|
Investment in Real Estate Ventures Entered into during 2017:
In March 2017, New Valley invested
$1,170
for an approximate
3.0%
interest in Witkoff GP Partners LLC. The purpose of the joint venture is to use contributed capital to invest in other real estate ventures. New Valley has invested an additional
$4,286
as of
June 30, 2017
. The venture is a variable interest entity; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in Witkoff GP Partners LLC was
$5,463
at
June 30, 2017
. New Valley has committed to contribute up to an additional
$14,544
to the venture.
In April 2017, New Valley invested
$402
for an approximate
9.8%
interest in New Brookland East LLC. The joint venture plans to develop a condominium complex. The venture is a variable interest entity; however, New Valley is not the primary beneficiary. New Valley accounts for this investment under the equity method of accounting. New Valley's maximum exposure to loss as a result of its investment in New Brookland East LLC was
$410
at
June 30, 2017
.
VIE Consideration:
The Company has determined that New Valley is the primary beneficiary of
two
real state ventures because it controls the activities that most significantly impact economic performance of each of the
two
real estate ventures. Consequently, New Valley consolidates these variable interest entities ("VIEs").
The carrying amount of the consolidated assets of the VIEs was
$14,533
and
$14,385
as of
June 30, 2017
and
December 31, 2016
, respectively. Those assets are owned by the VIEs, not the Company. Neither of the
two
consolidated VIEs had recourse liabilities as of
June 30, 2017
and
December 31, 2016
. A VIE's assets can only be used to settle obligations of that VIE. The VIEs are not guarantors of the Company's senior notes and other debts payable.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
For the remaining investments in real estate ventures, New Valley determined that the entities were variable interest entities but New Valley was not the primary beneficiary. Therefore, New Valley's investment in such real estate ventures has been accounted for under the equity method of accounting.
Maximum Exposure to Loss:
New Valley's maximum exposure to loss was as follows:
|
|
|
|
|
|
June 30, 2017
|
Condominium and Mixed Use Development:
|
|
New York City SMSA
|
$
|
129,745
|
|
All other U.S. areas
|
32,377
|
|
|
162,122
|
|
Apartment Buildings:
|
|
All other U.S. areas
|
7,458
|
|
|
7,458
|
|
Hotels:
|
|
New York City SMSA
|
22,226
|
|
International
|
2,501
|
|
|
24,727
|
|
Commercial:
|
|
New York City SMSA
|
2,820
|
|
All other U.S. areas
|
9,844
|
|
|
12,664
|
|
Other
|
1,724
|
|
Total maximum exposure to loss
|
$
|
208,695
|
|
For the
six months ended
June 30, 2017
, New Valley recognized
$3,766
of interest expense that was previously capitalized into the carrying value of its ventures. For the
six months ended
June 30, 2016
, New Valley capitalized
$4,836
of interest expense into the carrying value of its ventures whose projects were currently under development.
Douglas Elliman has been engaged by the developers as the sole broker or the co-broker for several of the real estate ventures that New Valley owns an interest. Douglas Elliman earned gross commissions of approximately
$5,371
and
$8,079
from these projects for the
six
months ended
June 30, 2017
and
June 30, 2016
, respectively.
Combined Financial Statements for Unconsolidated Subsidiaries:
Pursuant to Rule 10-01(b), the following summarized financial data for unconsolidated subsidiaries includes information for the 10 Madison Square West Condominium and Mixed Use Development. New Valley has elected a one-month lag reporting period for 10 Madison Square West.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Condominium and Mixed Use Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income Statement
|
|
|
|
|
|
|
|
Revenue
|
$
|
102,039
|
|
|
$
|
196,658
|
|
|
$
|
162,364
|
|
|
$
|
258,584
|
|
Cost of sales
|
49,037
|
|
|
122,911
|
|
|
101,879
|
|
|
155,714
|
|
Other expenses
|
1,512
|
|
|
1,151
|
|
|
3,093
|
|
|
1,436
|
|
Income from continuing operations
|
$
|
51,490
|
|
|
$
|
72,596
|
|
|
$
|
57,392
|
|
|
$
|
101,434
|
|
Investments in Real Estate, net:
The components of “Investments in real estate, net” were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Escena, net
|
$
|
10,622
|
|
|
$
|
10,792
|
|
Sagaponack
|
13,053
|
|
|
12,848
|
|
Investments in real estate, net
|
$
|
23,675
|
|
|
$
|
23,640
|
|
Escena.
The assets of “Escena, net” were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Land and land improvements
|
$
|
8,907
|
|
|
$
|
8,907
|
|
Building and building improvements
|
1,879
|
|
|
1,878
|
|
Other
|
2,058
|
|
|
2,028
|
|
|
12,844
|
|
|
12,813
|
|
Less accumulated depreciation
|
(2,222
|
)
|
|
(2,021
|
)
|
|
$
|
10,622
|
|
|
$
|
10,792
|
|
New Valley recorded operating losses of
$345
and
$299
for the three months ended
June 30, 2017
and
2016
, respectively, from Escena. New Valley recorded operating income of
$207
and
$209
for the
six
months ended
June 30, 2017
and
2016
, respectively, from Escena.
Investment in Sagaponack.
In April 2015, New Valley invested
$12,502
in a residential real estate project located in Sagaponack, NY. The project is wholly owned and the balances of the project are included in the condensed consolidated financial statements of the Company. As of
June 30, 2017
, the assets of Sagaponack consisted of land and land improvements of
$13,053
.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
6
.
|
NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
|
Notes payable, long-term debt and other obligations consist of:
|
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
December 31,
2016
|
Vector:
|
|
|
|
7.75% Senior Secured Notes due 2021, including premium of $13,954
|
$
|
—
|
|
|
$
|
848,954
|
|
6.125% Senior Secured Notes due 2025
|
850,000
|
|
|
—
|
|
7.5% Variable Interest Senior Convertible Notes due 2019, net of unamortized discount of $91,396 and $108,480*
|
138,604
|
|
|
121,520
|
|
5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $62,852 and $71,247*
|
195,898
|
|
|
187,503
|
|
Liggett:
|
|
|
|
Revolving credit facility
|
18,810
|
|
|
37,163
|
|
Term loan under credit facility
|
2,852
|
|
|
2,999
|
|
Equipment loans
|
3,474
|
|
|
4,519
|
|
Other
|
512
|
|
|
591
|
|
Notes payable, long-term debt and other obligations
|
1,210,150
|
|
|
1,203,249
|
|
Less:
|
|
|
|
Debt issuance costs
|
(30,332
|
)
|
|
(30,798
|
)
|
Total notes payable, long-term debt and other obligations
|
1,179,818
|
|
|
1,172,451
|
|
Less:
|
|
|
|
Current maturities
|
(20,941
|
)
|
|
(39,508
|
)
|
Amount due after one year
|
$
|
1,158,877
|
|
|
$
|
1,132,943
|
|
______________________
*
The fair value of the derivatives embedded within the
7.5%
Variable Interest Senior Convertible Notes (
$42,489
at
June 30, 2017
and
$52,899
at
December 31, 2016
, respectively) and the
5.5%
Variable Interest Senior Convertible Debentures (
$53,138
at
June 30, 2017
and
$59,433
at
December 31, 2016
, respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.
Senior Secured Notes - Vector
:
7.75% Senior Secured Notes due 2021 - Vector
:
In February 2013, the Company issued
$450,000
of its
7.75%
Senior Secured Notes due 2021. The aggregate net proceeds from the issuance of the
7.75%
Senior Secured Notes were approximately
$438,250
after deducting offering expenses. On April 15, 2014, the Company completed the sale of an additional
$150,000
principal amount of its
7.75%
Senior Secured Notes due 2021 for a price of
106.75%
. The Company received net proceeds of approximately
$158,670
after deducting underwriting discounts, commissions, fees and offering expenses. On May 9, 2016, the Company completed the sale of an additional
$235,000
principal amount of its
7.75%
Senior Secured Notes due 2021 for a price of
103.5%
. The Company received net proceeds of approximately
$236,900
after deducting underwriting discounts, commissions, fees and offering expenses.
The
7.75%
Senior Secured Notes paid interest on a semi-annual basis at a rate of
7.75%
per year and had a maturity date of February 15, 2021. The
7.75%
Senior Secured Notes were guaranteed subject to certain customary automatic release provisions on a joint and several basis by all of the
100%
owned domestic subsidiaries of the Company that are engaged in the conduct of the Company’s cigarette businesses. In addition, some of the guarantees were collateralized by second priority or first priority security interests in certain collateral of some of the subsidiary guarantors, including their common stock, pursuant to security and pledge agreements.
On January 27, 2017, the Company completed the sale of
$850,000
of its
6.125%
Senior Secured Notes due 2025 in a private offering to qualified institutional investors in accordance with Rule 144A of the Securities Act of 1933. The Company used the net cash proceeds from the
6.125%
Senior Secured Notes offering, together with the proceeds of the concurrent sale of
2,000,000
of its common shares, to redeem all of the Company’s outstanding
7.75%
Senior Secured Notes due 2021 and to satisfy and discharge the indenture governing the existing
7.75%
Senior Secured Notes due 2021.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
On February 26, 2017, the Company retired the outstanding
$835,000
principal amount of its
7.75%
Senior Secured Notes at a premium of
103.875%
, plus accrued and unpaid interest. The Company accounted for the redemption of the
7.75%
senior secured notes as an extinguishment of the debt. The Company incurred a loss on the extinguishment of debt of
$34,110
for the
six
months ended
June 30, 2017
, which is comprised of
$32,356
of redemption premium and tender offer costs as well as net non-cash charges of
$1,754
.
6.125%
Senior Secured Notes due 2025 — Vector
:
The aggregate net proceeds from the sale of the
6.125%
Senior Secured Notes were approximately
$831,100
after deducting underwriting discounts, commissions, fees and offering expenses. The
6.125%
Senior Secured Notes pay interest on a semi-annual basis at a rate of
6.125%
per year and mature on February 1, 2025. Prior to February 1, 2020, the Company may redeem some or all of the
6.125%
Senior Secured Notes at any time at a make-whole redemption price and, thereafter, the Company may redeem some or all of the
6.125%
Senior Secured Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In the event of a change of control, as defined in the indenture governing the
6.125%
Senior Secured Notes, each holder of the
6.125%
Senior Secured Notes may require the Company to repurchase some or all of its
6.125%
Senior Secured Notes at a repurchase price equal to
101%
of their aggregate principal amount plus accrued and unpaid interest, if any, to the date of purchase. If the Company sells certain assets and does not apply the proceeds as required pursuant to the indenture, it must offer to repurchase the
6.125%
Senior Secured Notes at the prices listed in the indenture.
The
6.125%
Senior Secured Notes are guaranteed subject to certain customary automatic release provisions on a joint and several basis by all of the wholly-owned domestic subsidiaries of the Company that are engaged in the conduct of the Company’s cigarette businesses. (See Note
12
.) In addition, some of the guarantees are collateralized by first priority or second priority security interests in certain assets of some of the subsidiary guarantors, including their common stock, pursuant to security and pledge agreements.
The indenture contains covenants that restrict the payment of dividends by the Company if the Company's consolidated earnings before interest, taxes, depreciation and amortization, as defined in the indenture, for the most recently ended four full quarters is less than
$75,000
. The indenture also restricts the incurrence of debt if the Company's Leverage Ratio and its Secured Leverage Ratio, as defined in the indenture, exceed
3.0
and
1.5
, respectively. The Company's Leverage Ratio is defined in the indenture as the ratio of the Company's and the guaranteeing subsidiaries' total debt less the fair market value of the Company's cash, investments in marketable securities and long-term investments to Consolidated EBITDA, as defined in the indenture. The Company's Secured Leverage Ratio is defined in the indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. As of
June 30, 2017
, the Company was in compliance with all debt covenants.
Variable Interest Senior Convertible Debt — Vector
:
Share Lending Agreement
:
In connection with the offering of its 2019 Convertible Notes in November 2012, the Company lent Jefferies & Company (“Jefferies”), the underwriter for the offering, shares of the Company’s common stock under the Share Lending Agreement. As of
June 30, 2017
,
774,479
shares were outstanding on the Share Lending Agreement. The fair value of the outstanding shares was
$16,512
. During the
six months ended June 30, 2017
,
805,400
shares were returned but no cash was exchanged. The issuance costs associated with the Share Lending Agreement were presented on the balance sheet as a direct deduction from the face amount of the related debt. The unamortized amount of these issuance costs was
$1,803
and
$2,140
at
June 30, 2017
and
December 31, 2016
, respectively.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Shares of Common Stock per
$1,000
Principal Amount due on Convertible Notes
:
The conversion rates for all convertible debt outstanding as of
June 30, 2017
and
December 31, 2016
, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Conversion Price
|
|
Shares per $1,000
|
|
Conversion Price
|
|
Shares per $1,000
|
|
|
|
|
|
|
|
|
7.5% Variable Interest Senior Convertible Notes due 2019
|
$
|
15.22
|
|
|
65.7030
|
|
|
$
|
15.22
|
|
|
65.7030
|
|
5.5% Variable Interest Senior Convertible Debentures due 2020
|
$
|
23.46
|
|
|
42.6185
|
|
|
$
|
23.46
|
|
|
42.6185
|
|
Revolving Credit Facility and Term Loan Under Credit Facility - Liggett
:
As of
June 30, 2017
, a total of
$21,662
was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately
$28,700
based on eligible collateral at
June 30, 2017
.
Non-Cash Interest Expense and Loss on Extinguishment of Debt - Vector
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortization of debt discount, net
|
$
|
13,426
|
|
|
$
|
8,653
|
|
|
$
|
25,262
|
|
|
$
|
16,609
|
|
Amortization of debt issuance costs
|
2,233
|
|
|
1,401
|
|
|
4,233
|
|
|
2,569
|
|
Loss on extinguishment of 7.75% Senior Secured Notes
|
—
|
|
|
—
|
|
|
1,754
|
|
(1)
|
—
|
|
|
$
|
15,659
|
|
|
$
|
10,054
|
|
|
$
|
31,249
|
|
|
$
|
19,178
|
|
______________________
(1)
The non-cash loss on extinguishment of the
7.75%
Senior Secured Notes is a component of the
$34,110
loss on the extinguishment of debt.
Fair Value of Notes Payable and Long-Term Debt
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
Notes payable and long-term debt
|
$
|
1,210,150
|
|
(1)
|
$
|
1,543,292
|
|
|
$
|
1,203,249
|
|
(1)
|
$
|
1,570,732
|
|
|
|
|
|
|
|
|
|
______________________
(1)
The carrying value does not include the carrying value of the embedded derivative. See Note
10
.
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
10
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 a derived price based upon quoted market prices and trade activity as of
June 30, 2017
to determine the fair value of its publicly-traded notes and debentures. The carrying value of the revolving 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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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”). The future financial impact of the risks and expenses of litigation are not quantifiable. For the three months ended
June 30, 2017
and
2016
, Liggett incurred tobacco product liability legal expenses and costs totaling
$1,683
and
$1,707
, respectively. For the six months ended
June 30, 2017
and 2016, Liggett incurred tobacco product liability legal expenses and costs totaling
$4,820
and
$5,878
, 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. Legal defense costs are expensed as incurred.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. 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
Calloway
,
Boatright
and
Ward
cases Liggett, as of
June 30, 2017
, had secured
$4,241
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. The maximum amount of any such bond for an appeal in the Florida state courts will be no greater than
$5,000
. 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.
Cautionary Statement About Engle Progeny Cases
. Since 2009, judgments have been entered against Liggett and other industry defendants in approximately
130
Engle
progeny cases. A number of the judgments have been affirmed on appeal and satisfied by the defendants. Many have been overturned on appeal. As of
June 30, 2017
,
25
Engle
progeny cases where Liggett was a defendant at trial resulted in verdicts. There have been
16
verdicts 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
five
of the cases, punitive damages were awarded against Liggett (although in
Calloway
,
the intermediate appellate court reversed the punitive and compensatory damages awards and remanded the case to the trial court for a new trial).
Calloway
,
Irimi,
Cohen
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
and
Caprio
were subsequently resolved under the
Engle
Progeny Settlement II, discussed below. 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, under certain circumstances, Liggett may have to pay more than its proportionate share of any bonding or judgment related amounts. Except as discussed in this Note
7
regarding the cases where an adverse verdict against Liggett remains on appeal, management is unable to estimate the possible loss or range of loss from the remaining
Engle
progeny cases as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact
Engle
class members (non-class members’ claims are generally time-barred), the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify their demand for damages.
Although Liggett has generally been successful in managing litigation, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining
Engle
progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and
Engle
progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of the Company could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are and will continue to be vigorously defended. Liggett 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 with respect to the remaining
Engle
progeny cases. In October 2013, Liggett announced a settlement of the claims of more than
4,900
Engle
progeny plaintiffs (see
Engle
Progeny Settlement I below). In December 2016, Liggett entered into an agreement to settle
124
Engle
progeny cases for
$17,650
(see
Engle
Progeny Settlement II below). In June 2017, Liggett entered into an agreement to settle
nine
cases (eight
Engle
progeny cases and one Individual Action) for
$1,400
. Liggett recorded a
$1,400
charge in the first quarter of 2017 in connection with the settlement. As of
June 30, 2017
, Liggett (and in certain cases the Company) had, on an individual basis, settled
182
Engle
progeny cases for approximately
$6,300
in the aggregate,
three
of which occurred in the second quarter of 2017.
Individual Actions
As of
June 30, 2017
, there were
19
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
|
|
8
|
New York
|
|
5
|
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
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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.
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 damages issues. 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 I.
In October 2013, the Company and Liggett 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 more than
4,900
plaintiffs, including the claims of all plaintiffs with cases pending in federal court, 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 approximately
$25,000
is related to certain payments discounted to their present value using an
11%
annual discount rate. 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.
Engle
Progeny Settlement II
. In December 2016, the Company and Liggett entered into an agreement with
124
Engle
progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay
$17,650
,
$14,000
of which was paid on December 7, 2016 with the balance of
$3,650
to be paid in equal quarterly payments starting in January 2018, with
5%
interest. Due to the settlement, the Company recorded a charge of
$17,650
in the fourth quarter of 2016.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Notwithstanding the comprehensive nature of the
Engle
Progeny Settlements, approximately
105
plaintiffs’ claims remain pending in state court. 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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
As of
June 30, 2017
, 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
|
|
17
|
|
—
|
|
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. 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, which, among other things, reversed an approximately $3,000 compensatory award against Liggett. The case was remanded to the trial court for proceedings consistent with those portions of the district court's decision that were not reversed. On May 23, 2017, the court granted Defendant's Motion for Remittitur and reduced the non-economic damages to $225. Plaintiff rejected the remittitur and a new trial will be conducted on non-economic damages.
|
April 2011
|
|
Tullo v. R.J. Reynolds
|
|
Palm Beach
|
|
225
|
|
—
|
|
Liggett satisfied the judgment and the case is concluded.
|
January 2012
|
|
Ward v. R.J. Reynolds
|
|
Escambia
|
|
1
|
|
—
|
|
Liggett satisfied the merits judgment. Subsequently, the trial court entered a joint and several final judgment on attorneys' fees and costs for $981 and defendants appealed that judgment. A decision is pending.
|
May 2012
|
|
Calloway v. R.J. Reynolds
|
|
Broward
|
|
—
|
|
—
|
|
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 moved for rehearing and in September 2016, the Fourth District Court of Appeal reversed the judgment in its entirety and remanded the case for a new trial. As a result, the $1,530 compensatory award against Liggett was also reversed. The plaintiff filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. The court declined to accept jurisdiction. Plaintiff filed a petition for
writ of certiorari
to the United States Supreme Court. This case was settled in December 2016 as part of
Engle
Progeny Settlement II.
|
December 2012
|
|
Buchanan v. R.J. Reynolds
|
|
Leon
|
|
2,750
|
|
—
|
|
Liggett satisfied the judgment and the case is concluded.
|
May 2013
|
|
D. Cohen v. R.J. Reynolds
|
|
Palm Beach
|
|
—
|
|
—
|
|
This case was settled in December 2016 as part of
Engle
Progeny Settlement II.
|
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
|
|
—
|
|
—
|
|
This case was settled in December 2016 as part of
Engle
Progeny Settlement II.
|
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. A joint and several judgment was entered in the amount of $12,750 on the compensatory damages. Judgment was also entered against Liggett for $300 in punitive damages. Defendants appealed and plaintiff cross-appealed. The Second District Court of Appeal reversed the trial court's decision to reduce the judgment by plaintiff's assessed fault and affirmed as to all other issues on that appeal. In a separate appeal, the Second District Court of Appeal also reversed the trial court's ruling that plaintiff's proposals for settlement were invalid and remanded for determination of attorney's fees. Defendants filed notices to invoke the discretionary jurisdiction of the Florida Supreme Court on both appeals.
|
|
|
|
|
|
|
|
|
|
|
Any potential liability as a result of the pending appeals is included in the amount Liggett will pay under
Engle
Progeny Settlement II.
|
June 2015
|
|
Caprio v. R.J. Reynolds
|
|
Broward
|
|
—
|
|
—
|
|
This case was settled in December 2016 as part of
Engle
Progeny Settlement II.
|
March 2017
|
|
Santoro v. R.J. Reynolds
|
|
Broward
|
|
160
|
|
15
|
|
In April 2017, a joint and several judgment was entered against R.J. Reynolds, Philip Morris and Liggett for $1,027, for compensatory damages. Judgment was also entered against Liggett for $15 in punitive damages. Post trial motions are scheduled for hearing on August 2, 2017.
|
Total Damages Awarded:
|
24,505
|
|
10,815
|
|
|
Amounts accrued, paid or compromised:
|
(24,328)
|
|
(10,800)
|
|
|
Damages remaining on Appeal:
|
$177
|
|
$15
|
|
|
(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
June 30, 2017
, Liggett paid
$39,773
, including interest and attorneys' fees, to satisfy the judgments in the following
Engle
progeny cases:
Lukacs
,
Campbell
,
Douglas
,
Clay,
Tullo, Ward, Rizzuto, Lambert
and
Buchanan
.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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. As cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Appeals of Engle Progeny Judgments.
In December 2010, in the
Martin
case, a state court case against R.J. Reynolds, the First District Court of Appeal held that the trial court correctly construed the Florida Supreme Court’s 2006 decision in
Engle
in instructing the jury on the preclusive effect of the Phase I
Engle
findings. In July 2011, the Florida Supreme Court declined to review the First District Court of Appeal’s decision. In March 2012, the United States Supreme Court declined to review the
Martin
case, along with the
Campbell
case and
two
other
Engle
progeny cases. The
Martin
decision has led to additional adverse rulings by other state appellate courts.
In
Jimmie Lee Brown
, a state court case against R.J. Reynolds, the trial court tried the case in two phases. In the first phase, the jury determined that the smoker was addicted to cigarettes that contained nicotine and that his addiction was a legal cause of his death, thereby establishing he was an
Engle
class member. In the second phase, the jury determined whether the plaintiff established legal cause and damages with regard to each of the underlying claims. The jury found in favor of plaintiff in both phases. In September 2011, the Fourth District Court of Appeal affirmed the judgment entered in plaintiff’s favor and approved the trial court’s procedure of bifurcating the trial. The Fourth District Court of Appeal agreed with
Martin
that individual post-
Engle
plaintiffs need not prove conduct elements as part of their burden of proof, but disagreed with
Martin
to the extent that the First District Court of Appeal only required a finding that the smoker was a class member to establish legal causation as to addiction and the underlying claims. The Fourth District Court of Appeal held that in addition to establishing class membership,
Engle
progeny plaintiffs must also establish legal causation and damages as to each claim asserted. In so finding, the Fourth District Court of Appeal’s decision in
Jimmie Lee Brown
is in conflict with
Martin
.
In
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 April 2015, in
Hess
, a state court case, the Florida Supreme Court held that
Engle
defendants cannot raise a statute of repose defense to claims for concealment or conspiracy.
In April 2015, in
Graham
, a federal case,
a panel of 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 January 2016, the court granted plaintiff’s motion for rehearing
en banc.
In June 2017, the Eleventh Circuit, sitting
en banc,
ruled that giving full faith and credit to the
Engle
findings does not deprive defendants of property without due process. The court further concluded that federal law does not preempt the
Engle
Phase I negligence and strict liability findings.
In January 2016, in
Marotta
, the Fourth District Court of Appeal disagreed with the
Graham
panel's April 2015 decision.
In April 2017, the Florida Supreme Court held that federal law does not implicitly preempt state law tort claims of strict liability and negligence by
Engle
progeny plaintiffs.
In November 2015, in
Schoeff
, the Fourth District Court of Appeal affirmed the trial court’s decision to reduce plaintiff’s compensatory damages award by the jury’s assessment of the deceased smoker’s assigned comparative fault despite the jury’s finding in favor of plaintiff on her claims for intentional torts. The Florida Supreme Court accepted discretionary jurisdiction of the issue based on a direct conflict with other district courts of appeal which have held that reduction of a compensatory
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
damages award is inappropriate where a defendant is found liable for an intentional tort. Oral argument occurred on March 8, 2017. A decision is pending.
In March 2016, in
Soffer
, the Florida Supreme Court held that
Engle
progeny plaintiffs may seek punitive damages on their claims for non-intentional torts, rejecting the argument that plaintiffs are precluded from doing so because the
Engle
class did not pursue such damages on those claims.
Maryland Cases
Liggett was a defendant in
16
multi-defendant personal injury cases in Maryland that allege claims arising from asbestos and tobacco exposure. The tobacco defendants, including Liggett, moved 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. In
Stidham, et al. v. R. J. Reynolds Tobacco Company, et al.,
however, a Maryland intermediate appellate court ruled that dismissal of tobacco company defendants may not be appropriate where the asserted injury is based on both asbestos and tobacco exposure (“synergy cases”). In July 2016, the Court of Appeals (Maryland's highest court) ruled that joinder of tobacco and asbestos cases may be possible in certain circumstances, but plaintiffs must demonstrate at the trial court level how such cases may be joined while providing appropriate safeguards to prevent embarrassment, delay, expense or prejudice to defendants and “the extent to which, if at all, the special procedures applicable to asbestos cases should extend to tobacco companies.” The Court of Appeals remanded these issues to be determined at the trial court level. On June 2, 2017, the trial court issued an order dismissing all synergy cases against the tobacco defendants, including Liggett, without prejudice. Plaintiffs may seek appellate review or file new cases against just the tobacco companies.
Liggett Only Cases
There are currently
two
cases pending where Liggett is the only remaining defendant. Each of these cases is an Individual Action. In
Hausrath
, a New York case, Liggett filed a motion to compel depositions. No hearing date has been scheduled. There has been no recent activity in
Cowart
, a Florida case. It is possible that cases where Liggett is the only defendant could increase as a result of the remaining
Engle
progeny cases.
Class Actions
As of
June 30, 2017
,
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. The case has been stayed for a number of years, with the stay renewed every few years. The last stay was entered on March 16, 2016 and stays the case, including all discovery, pending the completion of the smoking cessation program ordered by the court in
Scott v. The American Tobacco Co
.
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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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. 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. On May 23, 2016
,
the trial court ruled that the case may proceed against Liggett. Liggett requested that the trial court certify the matter to the West Virginia Supreme Court of Appeals for review, but the trial court refused. A scheduling order was entered governing the Phase I common issues pre-trial proceedings and discovery is underway. It is estimated that Liggett could be a defendant in approximately
90
individual cases.
Health Care Cost Recovery Actions
As of
June 30, 2017
,
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 misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. Claims were asserted under RICO.
In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for the District of Columbia affirmed most of the district court’s decision. The United States Supreme Court denied review. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States’ public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights,” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “lights” cigarettes,
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure of defendants’ public document websites and the production of all documents produced to the government or produced in any future court or administrative action concerning smoking and health; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedules as defendants now follow in disclosing such data to the Federal Trade Commission for a period of
ten years
; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette business within the United States; and (ix) payment of the government’s costs in bringing the action. In June 2014, the court approved a consent agreement between the defendants and the Department of Justice regarding the “corrective statements” to be issued by the defendants. In May 2015, the court of appeals issued an opinion on the legality of the “corrective statements,” affirming them in part and reversing them in part. The implementation of the “corrective statements” is uncertain as proceedings are ongoing.
It is unclear what impact, if any, the Final Judgment will have on the cigarette industry as a whole. To the extent that the Final Judgment leads to a decline in industry-wide shipments of cigarettes in the United States or otherwise results in restrictions that adversely affect the industry, the Company's consolidated financial position, results of operations and cash flows could be adversely affected.
Upcoming Trials
As of
June 30, 2017
, there was
one
Engle
progeny case scheduled for trial through June 30, 2018, where Liggett (and/or the Company) is a named defendant. Trial dates are subject to change and additional cases could be scheduled for trial during this time frame.
MSA and Other State Settlement Agreements
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with
45
states and territories. The settlements released Liggett from all smoking-related claims made by those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, R.J. Reynolds and two other companies (the “Original Participating Manufacturers” or “OPMs”) and Liggett and Vector Tobacco (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are hereinafter referred to jointly as "PMs") entered into the Master Settlement Agreement (the “MSA”) with
46
states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett and Vector Tobacco from:
|
|
•
|
all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
|
|
|
•
|
all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
|
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of PMs. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each PM to
one
tobacco brand name sponsorship during any
12
-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits PMs from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits PMs from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.
The MSA also requires PMs to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of PMs. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Under the payment provisions of the MSA, PMs are required to make annual payments of $
9,000,000
(subject to applicable adjustments, offsets and reductions including a “Non-Participating Manufacturers Adjustment” or “NPM Adjustment”). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligation of each PM and are not the responsibility of any parent or affiliate of a PM.
Liggett has
no
payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately
1.65%
of total cigarettes sold in the United States. Vector Tobacco has
no
payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately
0.28%
of total cigarettes sold in the United States. Liggett and Vector Tobacco’s domestic shipments accounted for
3.3%
of the total cigarettes sold in the United States in 2016. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year.
On December 29, 2016, Liggett and Vector Tobacco pre-paid
$102,000
of their approximate
$118,600
2016 MSA obligation, the balance of which was paid in April 2017, subject to any applicable disputes or adjustments.
Certain MSA Disputes
NPM Adjustment.
Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment for each year from 2003 - 2016. The NPM Adjustment is a potential adjustment to annual MSA payments, available when PMs suffer a market share loss to NPMs for a particular year and an economic consulting firm selected pursuant to the MSA determines that the MSA was a “significant factor contributing to” that loss. A Settling State that has “diligently enforced” its qualifying escrow statute in the year in question may be able to avoid its allocable share of the NPM Adjustment. For 2003 - 2016, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco either paid subject to dispute, withheld payment or paid into a disputed payment account, the amounts associated with these NPM Adjustments.
The two requirements for application of the NPM Adjustment, a market share loss and a finding or agreement that the MSA was a significant factor in that loss, have been satisfied for the years 2003 - 2014, and PMs have engaged in disputes with certain of the Settling States over whether they diligently enforced their respective escrow statutes in each of the years from 2003 - 2016. After several years of litigation over whether the MSA’s arbitration clause required a multistate arbitration of the NPM Adjustment dispute,
48
of
49
state courts ultimately compelled the states to participate in a single, multistate arbitration of the 2003 NPM Adjustment. Notwithstanding, many states continued to refuse to arbitrate and agreed to do so only after PMs agreed to a
20%
reduction in their 2003 NPM Adjustment claims.
The arbitration for the 2003 NPM Adjustment began in June 2010. During the proceedings, PMs decided not to contest the diligent enforcement of
16
states, with a combined allocable share of approximately
14%
.
While the 2003 arbitration was underway, PMs entered into a term sheet with
22
states settling the NPM Adjustment for 2003 - 2012 and agreed to terms to address the NPM Adjustment with respect to those states for future years. The parties have been working towards converting the binding term sheet into a final settlement agreement. In 2014, Kentucky and Indiana joined the term sheet settlement. In April 2017, Rhode Island and Oregon joined the term sheet settlement.
PMs continued to contest the diligence of
15
states relating to the 2003 NPM Adjustment. In September 2013, the panel found that
six
of those states did not diligently enforce their MSA escrow statutes in 2003.
Two
of the states found non-diligent, Kentucky and Indiana, agreed to settle the dispute and enter into the term sheet described above. The remaining
four
non-diligent states pursued motions in their respective state courts seeking to vacate or reduce the amount of the arbitration award. The Pennsylvania, Maryland and Missouri courts refused to vacate the award but reduced the recovery by approximately
50%
. In October 2016, the United States Supreme Court denied PMs' petitions for certiorari from the Pennsylvania and Maryland decisions and, in February 2017, the Missouri Supreme Court affirmed the trial court’s order reducing the award. In September 2016, the New Mexico trial court refused to vacate the award and reduced Liggett's recovery by approximately
$150
. PMs appealed that decision to the New Mexico Court of Appeals. Briefing is underway.
In October 2015, substantially all PMs settled the NPM Adjustment dispute with the state of New York for 2004 - 2014 and agreed to a mechanism for potential future credits against PMs' MSA payments for 2015 forward.
As a result of the settlements and arbitration award described above, Liggett and Vector Tobacco reduced cost of sales in the aggregate by
$21,739
for years 2013 - 2016 and by an additional
$896
for the six months ended June 30, 2017. Liggett and Vector Tobacco may be entitled to further adjustments for 2015 forward. The remaining NPM Adjustment accrual of
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
approximately
$19,000
at
June 30, 2017
relates to the disputed amounts Liggett withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett loses the disputes for those years. As of
June 30, 2017
, there remains approximately
$32,700
in the disputed payments account relating to Liggett's 2011 - 2016 NPM Adjustment disputes with the non-settling states.
Disputes over the NPM Adjustments for 2004 - 2016 remain to be arbitrated with the
19
states that have not settled. The disputes over the NPM Adjustments for 2015 and 2016 remain to be arbitrated with all states except Oregon, which settled the dispute for 2015.
The arbitration for the 2004 NPM Adjustment dispute has commenced. Courts in
three
states, Pennsylvania, Maryland, and Missouri rejected arguments that those states’ claims of diligent enforcement should be addressed by a separate state-specific panel and they are participating in the multistate arbitration. New Mexico's trial court recently granted a motion to compel it to participate as well. New Mexico appealed that order, but PMs have moved to compel New Mexico to participate in the arbitration pending the appeal. A hearing on the motion occurred on July 13, 2017 and a decision is pending. Discovery has been completed in the 2004 NPM Adjustment proceeding. A common hearing applicable to all states began on June 20, 2017 and evidentiary hearings will commence in November 2017.
“
Gross
”
v.
“
Net
”
Calculations.
In October 2004, the independent auditor notified all PMs that their payment obligations under the MSA, dating from the agreement’s execution in late 1998, had been recalculated using “net” units, rather than “gross” units (which had been used since 1999). Liggett objected to this retroactive change and disputed the change in methodology.
In December 2012, the parties arbitrated the dispute. In February 2013, the arbitrators ruled that the independent auditor was precluded from recalculating Liggett’s grandfathered market share exemption. The panel further determined, in a subsequent order, that the independent auditor shall compute Liggett’s market share for all years after 2000 on a “net” basis, but adjust that computation to approximate “gross” market share by using actual returned product data for each year. In July 2015, the independent auditor issued calculations, purportedly based on the arbitrators' award, which indicated that Liggett owed approximately
$16,000
for years 2001 - 2013. Liggett disputed those calculations. In June 2016, the independent auditor issued revised calculations indicating that Liggett owed approximately
$8,100
for years 2001 - 2013. In September 2016, Liggett paid the
$8,100
and reduced cost of sales by
$370
.
Other State Settlements.
The MSA replaced Liggett’s prior settlements with all states and territories except for Florida, Mississippi, Texas and Minnesota. Each of these
four
states, prior to the effective date of the MSA, negotiated and executed settlement agreements with each of the other major tobacco companies, separate from those settlements reached previously with Liggett. Except as described below, Liggett’s agreements with these states remain in full force and effect. These states’ settlement agreements with Liggett contained most favored nation provisions which could reduce Liggett’s payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on settlements or resolutions with United States Tobacco Company, Liggett’s payment obligations to those
four
states were eliminated. With respect to all non-economic obligations under the previous settlements, Liggett believes it is entitled to the most favorable provisions as between the MSA and each state’s respective settlement with the other major tobacco companies. Therefore, Liggett’s non-economic obligations to all states and territories are now defined by the MSA.
In 2003, as a result of a dispute with Minnesota regarding its settlement agreement, Liggett agreed to pay
$100
a year in any year cigarettes manufactured by Liggett are sold in that state. Further, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed Liggett had failed to make payments under the respective settlement agreements with those states. In 2010, Liggett settled with Florida and agreed to pay
$1,200
and to make further annual payments of
$250
for a period of
21
years, starting in March 2011, with the payments from year
12
forward being subject to an inflation adjustment.
In January 2016, the Attorney General for Mississippi filed a motion in state court in Jackson County, Mississippi (Chancery Division) to enforce the March 1996 settlement agreement alleging that Liggett owes Mississippi at least
$27,000
in damages (including interest), and
$20,000
in punitive damages and attorneys' fees. On April 21, 2017, the court ruled that the settlement agreement should be enforced and referred the matter to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded. In May, 2017, Liggett filed both a Motion to Stay proceedings before the Special Master and a Petition for Interlocutory Appeal to the Mississippi Supreme Court. In July 2017, the trial court granted the Motion to Stay. A decision is pending on the Petition for Interlocutory Appeal.
Liggett may be required to make additional payments to Texas and Mississippi which could adversely affect the Company’s condensed consolidated financial position, results of operations and cash flows.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Cautionary Statement
Management is not able to reasonably predict the outcome of the litigation pending or threatened against Liggett or the Company. Litigation is subject to many uncertainties. Liggett has been found liable in multiple
Engle
progeny cases and Individual Actions, several of which were affirmed on appeal and satisfied by Liggett. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes it is in its best interest to do so.
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. An unfavorable outcome of a pending smoking-related case could encourage the commencement of additional litigation. Except as discussed in this Note
7
, management is unable to estimate the loss or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its consolidated financial statements for unfavorable outcomes.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional litigation or legislation.
It is possible that the Company’s consolidated financial position, results of operations and cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation.
The activity in the Company’s accruals for the MSA and tobacco litigation for the six months ended
June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
Non-Current Liabilities
|
|
Payments due under Master Settlement Agreement
|
|
Litigation Accruals
|
|
Total
|
|
Payments due under Master Settlement Agreement
|
|
Litigation Accruals
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2017
|
$
|
16,192
|
|
|
$
|
3,659
|
|
|
$
|
19,851
|
|
|
$
|
22,257
|
|
|
$
|
27,513
|
|
|
$
|
49,770
|
|
Expenses
|
68,099
|
|
|
1,712
|
|
|
69,811
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NPM Settlement adjustment
|
33
|
|
|
—
|
|
|
33
|
|
|
(928
|
)
|
|
—
|
|
|
(928
|
)
|
Change in MSA obligations capitalized as inventory
|
324
|
|
|
—
|
|
|
324
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments
|
(14,296
|
)
|
|
(5,368
|
)
|
|
(19,664
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification to/(from) non-current liabilities
|
(2,313
|
)
|
|
5,217
|
|
|
2,904
|
|
|
2,313
|
|
|
(5,217
|
)
|
|
(2,904
|
)
|
Interest on withholding
|
—
|
|
|
151
|
|
|
151
|
|
|
—
|
|
|
1,278
|
|
|
1,278
|
|
Balance as of June 30, 2017
|
$
|
68,039
|
|
|
$
|
5,371
|
|
|
$
|
73,410
|
|
|
$
|
23,642
|
|
|
$
|
23,574
|
|
|
$
|
47,216
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The activity in the Company's accruals for the MSA and tobacco litigation for the
six
months ended
June 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
Non-Current Liabilities
|
|
Payments due under Master Settlement Agreement
|
|
Litigation Accruals
|
|
Total
|
|
Payments due under Master Settlement Agreement
|
|
Litigation Accruals
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2016
|
$
|
29,241
|
|
|
$
|
22,904
|
|
|
$
|
52,145
|
|
|
$
|
20,094
|
|
|
$
|
24,718
|
|
|
$
|
44,812
|
|
Expenses
|
42,637
|
|
|
2,583
|
|
|
45,220
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Change in MSA obligations capitalized as inventory
|
69
|
|
|
—
|
|
|
69
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments
|
(12,847
|
)
|
|
(25,545
|
)
|
|
(38,392
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification to/(from) non-current liabilities
|
(2,163
|
)
|
|
3,252
|
|
|
1,089
|
|
|
2,163
|
|
|
(3,252
|
)
|
|
(1,089
|
)
|
Interest on withholding
|
35
|
|
|
320
|
|
|
355
|
|
|
—
|
|
|
1,153
|
|
|
1,153
|
|
Balance as of June 30, 2016
|
$
|
56,972
|
|
|
$
|
3,514
|
|
|
$
|
60,486
|
|
|
$
|
22,257
|
|
|
$
|
22,619
|
|
|
$
|
44,876
|
|
Other Matters
:
Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material affect on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco.
Liggett Vector Brands entered into an agreement with a subsidiary of the Convenience Distribution Association to support a program to permit certain tobacco distributors to secure, on reasonable terms, tax stamp bonds required by state and local governments for the distribution of cigarettes. Under the agreement, Liggett Vector Brands has agreed to pay a portion of losses incurred by the surety under the bond program, with a maximum loss exposure of
$500
. The Company believes the fair value of Liggett Vector Brands’ obligation under the agreement was immaterial at
June 30, 2017
.
In addition to the foregoing, Douglas Elliman Realty, LLC and its subsidiaries are subject to numerous proceedings, lawsuits and claims in connection with their ordinary business activities. Many of these matters are covered by insurance or, in some cases, the company is indemnified by third parties.
Management is of the opinion that the liabilities, if any, resulting from these other matters pending against the Company and/or its consolidated subsidiaries, should not have a material adverse affect on the Company’s consolidated financial position, results of operations or cash flows.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
8
.
|
EMPLOYEE BENEFIT PLANS
|
The following table summarizes key information related to the Company's pension plans and other postretirement benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Other Postretirement Benefits
|
|
Three Months Ended
|
|
Six Months Ended
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service cost — benefits earned during the period
|
$
|
141
|
|
|
$
|
137
|
|
|
$
|
282
|
|
|
$
|
274
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
2
|
|
Interest cost on projected benefit obligation
|
1,266
|
|
|
1,355
|
|
|
2,530
|
|
|
2,710
|
|
|
92
|
|
|
97
|
|
|
184
|
|
|
194
|
|
Expected return on assets
|
(1,356
|
)
|
|
(1,519
|
)
|
|
(2,712
|
)
|
|
(3,038
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net loss (gain)
|
502
|
|
|
464
|
|
|
1,004
|
|
|
928
|
|
|
(13
|
)
|
|
(19
|
)
|
|
(27
|
)
|
|
(38
|
)
|
Net expense
|
$
|
553
|
|
|
$
|
437
|
|
|
$
|
1,104
|
|
|
$
|
874
|
|
|
$
|
80
|
|
|
$
|
79
|
|
|
$
|
160
|
|
|
$
|
158
|
|
The Company's
income tax expense
in interim periods is based on an estimated annual effective income tax rate derived, in part, from estimated annual pre-tax results from ordinary operations. The annual effective income tax rate is reviewed and, if necessary, adjusted on a quarterly basis. As a result of adopting ASU 2016-09, all excess tax benefits and deficiencies in the current and future periods will be recognized as income tax expense in the Company’s Condensed Consolidated Statement of Operations in the reporting period in which they occur. This may result in increased volatility in the Company’s effective tax rate.
The Company's
income tax expense
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Income before provision for income taxes
|
$
|
50,373
|
|
|
$
|
46,340
|
|
|
$
|
43,366
|
|
|
$
|
82,096
|
|
Income tax expense using estimated annual effective income tax rate
|
19,152
|
|
|
18,793
|
|
|
16,457
|
|
|
33,317
|
|
Changes in effective tax rates
|
(56
|
)
|
|
210
|
|
|
—
|
|
|
—
|
|
Impact of discrete items, net
|
(269
|
)
|
|
—
|
|
|
(412
|
)
|
|
49
|
|
Income tax expense
|
$
|
18,827
|
|
|
$
|
19,003
|
|
|
$
|
16,045
|
|
|
$
|
33,366
|
|
The discrete items for the
six
months ended
June 30, 2017
are primarily related to an income tax deduction resulting from the adoption of ASU 2016-09 and the results of a recent state income tax audit. The discrete item for the
six months ended June 30, 2016
is primarily related to the results of a recent state income tax audit.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
10
.
|
INVESTMENTS AND FAIR VALUE MEASUREMENTS
|
The Company's recurring financial assets and liabilities subject to fair value measurements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of June 30, 2017
|
|
|
Description
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total Gains (Losses)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
247,739
|
|
|
$
|
247,739
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
(1)
|
|
50,470
|
|
|
—
|
|
|
50,470
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
(2)
|
|
2,749
|
|
|
—
|
|
|
2,749
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
(2)
|
|
4,240
|
|
|
4,240
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
47,797
|
|
|
47,797
|
|
|
—
|
|
|
—
|
|
|
|
Mutual funds invested in fixed income securities
|
|
20,875
|
|
|
20,875
|
|
|
—
|
|
|
—
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
28,527
|
|
|
—
|
|
|
28,527
|
|
|
—
|
|
|
|
Corporate securities
|
|
40,128
|
|
|
—
|
|
|
40,128
|
|
|
—
|
|
|
|
U.S. government and federal agency
|
|
5,648
|
|
|
—
|
|
|
5,648
|
|
|
—
|
|
|
|
Commercial mortgage-backed securities
|
|
440
|
|
|
—
|
|
|
440
|
|
|
—
|
|
|
|
Index-linked U.S. bonds
|
|
2,307
|
|
|
—
|
|
|
2,307
|
|
|
—
|
|
|
|
Foreign fixed-income securities
|
|
501
|
|
|
—
|
|
|
501
|
|
|
—
|
|
|
|
Total fixed income securities
|
|
77,551
|
|
|
—
|
|
|
77,551
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
146,223
|
|
|
68,672
|
|
|
77,551
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
451,421
|
|
|
$
|
320,651
|
|
|
$
|
130,770
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
95,627
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
(3)
|
|
$
|
4,475
|
|
|
|
|
|
|
$
|
4,475
|
|
|
$
|
(525
|
)
|
|
|
$
|
4,475
|
|
|
|
|
|
|
$
|
4,475
|
|
|
$
|
(525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts included in cash and cash equivalents on the condensed consolidated balance sheet.
|
|
|
(2)
|
Amounts included in current restricted assets and restricted assets on the condensed consolidated balance sheet.
|
|
|
(3)
|
Long-term investments with a carrying amount of
$5,000
were written down to their fair value of
$4,475
, resulting in an impairment charge of
$525
, which was included in earnings.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of December 31, 2016
|
|
|
Description
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Total Gains (Losses)
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
Money market funds
(1)
|
|
$
|
248,552
|
|
|
$
|
248,552
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
(1)
|
|
41,247
|
|
|
—
|
|
|
41,247
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
(2)
|
|
2,982
|
|
|
—
|
|
|
2,982
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds
(2)
|
|
4,240
|
|
|
4,240
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities available for sale
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
50,843
|
|
|
50,843
|
|
|
—
|
|
|
—
|
|
|
|
Mutual funds invested in fixed income securities
|
|
20,582
|
|
|
20,582
|
|
|
—
|
|
|
—
|
|
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
30,642
|
|
|
—
|
|
|
30,642
|
|
|
—
|
|
|
|
Corporate securities
|
|
36,687
|
|
|
—
|
|
|
36,687
|
|
|
—
|
|
|
|
U.S. government and federal agency
|
|
6,500
|
|
|
—
|
|
|
6,500
|
|
|
—
|
|
|
|
Commercial mortgage-backed securities
|
|
1,398
|
|
|
—
|
|
|
1,398
|
|
|
—
|
|
|
|
Commercial paper
|
|
8,980
|
|
|
—
|
|
|
8,980
|
|
|
—
|
|
|
|
Index-linked U.S. bonds
|
|
770
|
|
|
—
|
|
|
770
|
|
|
—
|
|
|
|
Foreign fixed income securities
|
|
501
|
|
|
—
|
|
|
501
|
|
|
—
|
|
|
|
Total fixed income securities
|
|
85,478
|
|
|
—
|
|
|
85,478
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities available for sale
|
|
156,903
|
|
|
71,425
|
|
|
85,478
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
453,924
|
|
|
$
|
324,217
|
|
|
$
|
129,707
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
112,332
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
112,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonrecurring fair value measurements
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
(3)
|
|
$
|
6,396
|
|
|
|
|
|
|
$
|
6,396
|
|
|
$
|
(1,203
|
)
|
|
|
$
|
6,396
|
|
|
|
|
|
|
$
|
6,396
|
|
|
$
|
(1,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts included in cash and cash equivalents on the condensed consolidated balance sheet
|
|
|
(2)
|
Amounts included in current restricted assets and restricted assets on the condensed consolidated balance sheet.
|
|
|
(3)
|
Long-term investments with a carrying amount of
$7,599
were written down to their fair value of
$6,396
, resulting in an impairment charge of
$1,203
, which was included in earnings.
|
The fair value of the Level 2 certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is the rate offered by the financial institution. The fair value of investment securities available for sale included in Level 1 are based on quoted market prices from various stock exchanges. The Level 2 investment securities available for sale are based on
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
quoted market prices of securities that are thinly traded, quoted prices for identical or similar assets in markets that are not active or inputs other than quoted prices such as interest rates and yield curves.
The fair value of derivatives embedded within convertible debt was derived using a valuation model. These derivatives have been classified as Level 3. The valuation model assumes future dividend payments by the Company and utilizes interest rates and credit spreads based upon the implied credit spread of the
5.5%
Convertible Notes due 2020 to determine the fair value of the derivatives embedded within the convertible debt. The changes in fair value of derivatives embedded within convertible debt are presented on the consolidated statements of operations.
The value of the embedded derivatives is contingent on changes in implied interest rates of the convertible debt, the Company's stock price, stock volatility as well as projections of future cash and stock dividends over the term of the debt. The interest rate component of the value of the embedded derivative is computed by calculating an equivalent non-convertible, unsecured and subordinated borrowing cost. This rate is determined by calculating the implied rate on the Company's 2020 Convertible Notes when removing the embedded option value within the convertible security. This rate is based upon market observable inputs and influenced by the Company's stock price, convertible bond trading price, risk-free interest rates and stock volatility.
The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
June 30,
2017
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Actual)
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
95,627
|
|
|
Discounted cash flow
|
|
Assumed annual stock dividend
|
|
5
|
%
|
|
|
|
|
|
|
Assumed annual cash dividend
|
|
$
|
1.60
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
21.32
|
|
|
|
|
|
|
|
Convertible trading price (as a percentage of par value)
|
|
115.25
|
%
|
|
|
|
|
|
|
Volatility
|
|
18.72
|
%
|
|
|
|
|
|
|
Risk-free rate
|
|
Term structure of US Treasury Securities
|
|
|
|
|
|
|
Implied credit spread
|
|
3.0% - 4.0% (3.5%)
|
|
The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Actual)
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
112,332
|
|
|
Discounted cash flow
|
|
Assumed annual stock dividend
|
|
5
|
%
|
|
|
|
|
|
|
Assumed annual cash dividend
|
|
$
|
1.60
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
22.74
|
|
|
|
|
|
|
|
Convertible trading price (as a percentage of par value)
|
|
114.69
|
%
|
|
|
|
|
|
|
Volatility
|
|
19.47
|
%
|
|
|
|
|
|
|
Risk-free rate
|
|
Term structure of US Treasury Securities
|
|
|
|
|
|
|
Implied credit spread
|
|
4.5% - 5.5% (5.0%)
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The Company's business segments for the three and
six months ended June 30, 2017
and
2016
were Tobacco, E-Cigarettes and Real Estate. The Tobacco segment consists of the manufacture and sale of conventional cigarettes. The E-Cigarettes segment includes the operations of the Company's e-cigarette business. The Real Estate segment includes the Company’s investment in New Valley LLC, which includes Douglas Elliman, Escena, Sagaponack and investments in real estate ventures. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
Financial information for the Company’s operations before taxes and non-controlling interests for the three and
six months ended June 30, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
Corporate
|
|
|
|
Tobacco
|
|
E-Cigarettes
|
|
Estate
|
|
and Other
|
|
Total
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
272,177
|
|
|
$
|
—
|
|
|
$
|
199,812
|
|
|
$
|
—
|
|
|
$
|
471,989
|
|
Operating income (loss)
|
64,407
|
|
(1)
|
(1
|
)
|
|
16,586
|
|
|
(7,182
|
)
|
|
73,810
|
|
Equity in earnings from real estate ventures
|
—
|
|
|
—
|
|
|
15,291
|
|
|
—
|
|
|
15,291
|
|
Depreciation and amortization
|
2,333
|
|
|
—
|
|
|
1,913
|
|
|
367
|
|
|
4,613
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
255,498
|
|
|
$
|
10
|
|
|
$
|
182,765
|
|
|
$
|
—
|
|
|
$
|
438,273
|
|
Operating income (loss)
|
66,016
|
|
|
(91
|
)
|
|
11,706
|
|
|
(6,911
|
)
|
|
70,720
|
|
Equity in earnings from real estate ventures
|
—
|
|
|
—
|
|
|
2,813
|
|
|
—
|
|
|
2,813
|
|
Depreciation and amortization
|
2,499
|
|
|
—
|
|
|
2,943
|
|
|
428
|
|
|
5,870
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
529,631
|
|
|
$
|
—
|
|
|
$
|
357,566
|
|
|
$
|
—
|
|
|
$
|
887,197
|
|
Operating income (loss)
|
124,177
|
|
(2)
|
(78
|
)
|
|
17,206
|
|
|
(14,564
|
)
|
|
126,741
|
|
Equity in earnings from real estate ventures
|
—
|
|
|
—
|
|
|
26,404
|
|
|
—
|
|
|
26,404
|
|
Depreciation and amortization
|
4,753
|
|
|
—
|
|
|
4,135
|
|
|
754
|
|
|
9,642
|
|
Capital expenditures
|
2,049
|
|
|
—
|
|
|
6,291
|
|
|
6
|
|
|
8,346
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
476,513
|
|
|
$
|
48
|
|
|
$
|
342,512
|
|
|
$
|
—
|
|
|
$
|
819,073
|
|
Operating income (loss)
|
127,499
|
|
(3)
|
(284
|
)
|
|
19,380
|
|
|
(13,716
|
)
|
|
132,879
|
|
Equity in earnings from real estate ventures
|
—
|
|
|
—
|
|
|
2,306
|
|
|
—
|
|
|
2,306
|
|
Depreciation and amortization
|
4,939
|
|
|
—
|
|
|
5,225
|
|
|
870
|
|
|
11,034
|
|
Capital expenditures
|
3,716
|
|
|
—
|
|
|
3,873
|
|
|
26
|
|
|
7,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Operating income includes
$102
of litigation judgment expense.
|
|
|
(2)
|
Operating income includes
$895
of income from MSA Settlement, and
$1,687
of litigation judgment expense.
|
|
|
(3)
|
Operating income includes
$2,350
of litigation judgment expense and
$41
of restructuring expense.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited