VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Basic and diluted EPS were calculated using the following common shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average shares for basic EPS
|
132,668,397
|
|
|
132,489,537
|
|
|
132,662,072
|
|
|
132,169,951
|
|
Plus incremental shares related to stock options and non-vested restricted stock
|
319,835
|
|
|
372,306
|
|
|
320,273
|
|
|
333,441
|
|
Weighted-average shares for diluted EPS
|
132,988,232
|
|
|
132,861,843
|
|
|
132,982,345
|
|
|
132,503,392
|
|
The following were outstanding during the three and
six months ended June 30, 2018
and
2017
, 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,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Weighted-average number of shares issuable upon conversion of debt
|
27,447,263
|
|
|
27,447,263
|
|
|
27,447,263
|
|
|
27,447,263
|
|
Weighted-average conversion price
|
$
|
17.81
|
|
|
$
|
17.81
|
|
|
$
|
17.81
|
|
|
$
|
17.81
|
|
|
|
(d)
|
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, 2018
, the range of estimated fair values of the Company’s embedded derivatives was between
$54,897
and
$55,252
. The Company recorded the fair value of its embedded derivatives at the approximate midpoint of the range at
$55,129
as of
June 30, 2018
. At
December 31, 2017
, the range of estimated fair values of the Company’s embedded derivatives was between
$76,215
and
$76,874
. The Company recorded the fair value of its embedded derivatives at the midpoint of the range at
$76,413
as of
December 31, 2017
. The estimated fair value of the Company’s embedded derivatives could change significantly based on future market conditions. (See Note
7
.)
|
|
(e)
|
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
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Interest and dividend income
|
$
|
2,145
|
|
|
$
|
1,625
|
|
|
$
|
4,067
|
|
|
$
|
3,370
|
|
Gain on long-term investment
|
—
|
|
|
197
|
|
|
—
|
|
|
162
|
|
Net periodic benefit cost other than the service costs
|
(254
|
)
|
|
(490
|
)
|
|
(507
|
)
|
|
(980
|
)
|
Impairment of debt securities available for sale
|
(225
|
)
|
|
(87
|
)
|
|
(811
|
)
|
|
(126
|
)
|
Impairment of long-term investments
|
—
|
|
|
(525
|
)
|
|
—
|
|
|
(525
|
)
|
Other (expense) income
|
(4
|
)
|
|
78
|
|
|
(36
|
)
|
|
177
|
|
Other, net
|
$
|
1,662
|
|
|
$
|
798
|
|
|
$
|
2,713
|
|
|
$
|
2,078
|
|
|
|
(g)
|
Other Current Liabilities
:
|
Other current liabilities consisted of:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Accounts payable
|
$
|
9,088
|
|
|
$
|
18,552
|
|
Accrued promotional expenses
|
21,424
|
|
|
30,691
|
|
Accrued excise and payroll taxes payable, net
|
15,880
|
|
|
11,946
|
|
Accrued interest
|
33,139
|
|
|
33,138
|
|
Commissions payable
|
15,366
|
|
|
14,320
|
|
Accrued salary and benefits
|
19,866
|
|
|
29,639
|
|
Other current liabilities
|
32,768
|
|
|
18,837
|
|
Total other current liabilities
|
$
|
147,531
|
|
|
$
|
157,123
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
(h)
|
Goodwill and Other Intangible Assets, Net
:
|
The components of “Goodwill and other intangible assets, net” were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Goodwill
|
$
|
77,568
|
|
|
$
|
77,059
|
|
|
|
|
|
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
|
2,376
|
|
|
3,138
|
|
|
|
|
|
Total goodwill and other intangible assets, net
|
$
|
267,455
|
|
|
$
|
267,708
|
|
|
|
(i)
|
Reconciliation of Cash, Cash Equivalents and Restricted Cash
:
|
The components of “Cash, cash equivalents and restricted cash” in the Statement of Cash Flows were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Cash and cash equivalents
|
$
|
322,414
|
|
|
$
|
301,353
|
|
Restricted cash and cash equivalents included in current restricted assets
|
3,077
|
|
|
9,081
|
|
Restricted cash and cash equivalents included in non-current restricted assets
|
4,516
|
|
|
503
|
|
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows
|
$
|
330,007
|
|
|
$
|
310,937
|
|
Amounts included in current restricted assets and restricted assets represent cash and cash equivalents required to be deposited into escrow for bonds required to appeal adverse product liability judgments, amounts required for letters of credit related to office leases, and certain deposit requirements for banking arrangements. The restrictions related to the appellate bonds will remain in place until the appeal process has been completed. The restrictions related to the letters of credit will remain in place for the duration of the respective lease. The restrictions related to the banking arrangements will remain in place for the duration of the arrangement.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
(j)
New Accounting Pronouncements
:
Accounting Standards Updates (“ASU”) adopted in
2018
:
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740), Amendments Pursuant to SEC Staff Accounting Bulletin No. 118.” The ASU adds various Securities and Exchange Commission (“SEC”) paragraphs pursuant to the issuance of the December 2017 SEC Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”), which was effective immediately. The SEC issued SAB 118 to address concerns about reporting entities’ ability to timely comply with the accounting requirements to recognize all of the effects of the Tax Cuts and Jobs Act in the period of enactment. SAB 118 requires disclosure that timely determination of some or all of the income tax effects from the Tax Cuts and Jobs Act are incomplete at the time of filing the financial statements and disclosure upon completion of measurement of the effects. Additionally, the Company has accounted for the tax effects of the Tax Cuts and Jobs Act under the guidance of SAB 118 on a provisional basis as the Company has determined reasonable estimates for those effects and has recorded the provisional amounts in its condensed consolidated financial statements as of
June 30, 2018
and December 31, 2017
.
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 requires 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 Company adopted ASU 2017-07 during the first quarter of 2018 using a retrospective adoption method. Other than the revised statement of operations presentation, the adoption of ASU 2017-07 did not have a material impact on the Company’s condensed consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30, 2017
|
|
June 30, 2017
|
|
As Previously Reported
|
|
Adoption of ASU 2017-07
|
|
As Revised
|
|
As Previously Reported
|
|
Adoption of ASU 2017-07
|
|
As Revised
|
Operating, selling, administrative and general expenses
|
$
|
83,183
|
|
|
$
|
(490
|
)
|
|
$
|
82,693
|
|
|
$
|
167,952
|
|
|
$
|
(980
|
)
|
|
$
|
166,972
|
|
Operating income
|
73,810
|
|
|
490
|
|
|
74,300
|
|
|
126,741
|
|
|
980
|
|
|
127,721
|
|
Other, net
|
1,288
|
|
|
(490
|
)
|
|
798
|
|
|
3,058
|
|
|
(980
|
)
|
|
2,078
|
|
Loss before provision for income taxes
|
$
|
50,373
|
|
|
$
|
—
|
|
|
$
|
50,373
|
|
|
43,366
|
|
|
—
|
|
|
43,366
|
|
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. The Company adopted ASU 2016-18 during the first quarter of 2018 using a retrospective adoption method. Other than the changes in presentation within the statement of cash flows, the adoption of ASU 2016-18 did not have a material impact on the Company’s condensed consolidated financial statements. See Note 1. item (j) for a reconciliation of cash, cash equivalents, and restricted cash from the condensed consolidated balance sheet to the condensed consolidated statement of cash flows.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
June 30, 2017
|
|
As Previously Reported
|
|
Adoption of ASU 2016-18
|
|
As Revised
|
Decrease in restricted assets
|
$
|
(1,235
|
)
|
|
$
|
3,780
|
|
|
$
|
2,545
|
|
Net cash used in investing activities
|
(15,222
|
)
|
|
3,780
|
|
|
(11,442
|
)
|
Net increase in cash, cash equivalents and restricted cash
|
16,879
|
|
|
3,780
|
|
|
20,659
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
393,530
|
|
|
5,048
|
|
|
398,578
|
|
Cash, cash equivalents and restricted cash, end of period
|
410,409
|
|
|
8,828
|
|
|
419,237
|
|
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 was effective for the Company’s fiscal year beginning January 1, 2018. Other than the changes in presentation within the statement of cash flows, the adoption of ASU 2016-15 did not have a material impact on the Company’s condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). ASU 2016-08 does not change the core principle of the guidance stated in ASU 2014-09, 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 had the same effective date and transition requirements as the new revenue standard issued in ASU 2014-09. In May 2014, the FASB issued ASU 2014-09. The new revenue standard outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The new revenue standard contains principles to determine the measurement of revenue and timing of when it is recognized. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. 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.
The Company adopted the provisions of this guidance on January 1, 2018 using the modified retrospective approach with a cumulative-effect adjustment to beginning stockholders’ deficiency at January 1, 2018. The Comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented.
See Note
2
- Revenue Recognition, for additional accounting policy and transition disclosures.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): 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 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. In February 2018, the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments - Overall (Subtopic 825-10) (“ASU 2018-03”), which amends the guidance in ASU 2016-01 by replacing the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company adopted the new guidance during the first quarter of 2018 using a modified-retrospective method for equity securities measured at fair value and early adopted the amendments for equity securities without readily determinable fair values that do not qualify for the practical expedient. The adoption of the guidance resulted in a cumulative-effect adjustment that decreased beginning accumulated deficit by
$14,874
. The adjustment consisted of
$6,036
, net of tax related to the reclassification from accumulated other comprehensive income (“AOCI”) into accumulated deficit of the net unrealized
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
gains and related tax impact pertaining to investment securities that were previously classified as equity securities available for sale and fixed-income securities available for sale. The net impact of
$8,838
to stockholder’s deficiency related to the change in accounting treatment for equity securities previously classified as cost-method long-term investments. In March 2018, the FASB issued ASU 2018-04, Investments - Debt Securities (Topic 320) and Regulated Operations (Topic 980): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 117 and SEC Release No. 33-9273 (“ASU 2018-04”), which incorporate into the Accounting Standards Codification (“ASC”) recent SEC guidance which was issued in order to make the relevant interpretive guidance consistent with current authoritative accounting guidance, such as Topic 321, and SEC rules and regulations. The guidance also amends and supersedes various paragraphs that contain SEC guidance in ASC 320, Investments - Debt Securities and ASC 980, Regulated Operations. The Company indirectly adopted this guidance upon the adoption of ASU 2016-01 during the first quarter of 2018. There was no additional impact on the Company’s condensed consolidated financial statements other than those resulting from the adoption of ASU 2016-01.
ASUs to be adopted in future periods:
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (“ASU 2018-09”). This standard does not prescribe any new accounting guidance, but instead makes minor improvements and clarifications of several different FASB Accounting Standards Codification areas based on comments and suggestions made by various stakeholders. Certain updates are applicable immediately while others provide for a transition period to adopt as part of the next fiscal year beginning after December 15, 2018. The Company is currently assessing the impact the adoption of ASU 2018-09 will have on the Company’s condensed consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to nonemployees for goods and services. ASU 2018-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2018-07 will have on the Company’s condensed consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the Tax Act to be reclassified to retained earnings. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact the adoption of ASU 2018-02 will have on the Company’s condensed consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which provides guidance for accounting for leases. ASU 2016-02 requires lessees to classify leases as either finance or operating leases and to record a right-of-use asset and a lease liability for all leases with a term greater than 12 months regardless of the lease classification. The lease classification will determine whether the lease expense is recognized based on an effective interest rate method or on a straight line basis over the term of the lease. Accounting for lessors remains largely unchanged from current U.S. GAAP. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11 “Leases (Topic 842): Targeted Improvements” (ASU 2018-11). ASU 2018-10 clarifies certain areas within ASU 2016-02. Prior to ASU 2018-11, a modified retrospective transition was required for financing or operating leases existing at or entered into after the beginning of the earliest comparative period presented in the financial statements. ASU 2018-11 allows entities an additional transition method to the existing requirements whereby an entity could adopt the provisions of ASU 2016-02 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. ASU 2018-11 also allows a practical expedient that permits lessors to not separate non-lease components from the associated lease component if certain conditions are present. ASU 2016-02, ASU 2018-10 and ASU 2018-11 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 these ASUs will have on the Company’s condensed consolidated financial statements.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Revenue Recognition Accounting Pronouncement Adoption
On January 1, 2018, the Company adopted Topic 606 applying the modified retrospective method. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the FASB Accounting Standard Codification Topic 605 (“Topic 605”) in effect for the prior periods and are, therefore, not comparative.
The following practical expedients and optional disclosure exemptions available under Topic 606 have been applied:
|
|
1.
|
The Company applied the practical expedient in paragraph 606-10-65-1(h) of Topic 606, and did not restate contracts that were completed as of the date of initial application i.e. January 1, 2018.
|
|
|
2.
|
The Company applied the practical expedient in paragraph 606-10-65-1(f)(4) of Topic 606, and did not separately evaluate the effects of contract modifications. Instead, the Company reflected the aggregate effect of all the modifications that occurred before the initial application date, i.e. January 1, 2018.
|
|
|
3.
|
The Company applied the optional exemption in paragraph 606-10-50-14 of Topic 606, and has not disclosed the amount of the transaction price allocated to the remaining performance obligations for the Real Estate property management business because the contracts to provide property management services are typically annual contracts and provide cancellation rights to customers.
|
|
|
4.
|
The Company applied the optional exemption in paragraph 606-10-50-14A of Topic 606, and has not disclosed the amount of the transaction price allocated to the remaining performance obligations for the Real Estate development marketing business because the transaction prices in these contracts are comprised entirely of variable consideration based on the ultimate selling price of each unit in the subject property. The total contract transaction price is allocated to each unit in the subject property and recognized when the performance obligation, i.e. the sale of each unit, is satisfied. Accordingly, the transaction price allocated to the remaining performance obligations for the development marketing business represents variable consideration allocated entirely to wholly unsatisfied performance obligations.
|
The details of the significant changes and quantitative impact of the changes resulting in the adoption of Topic 606 are set out below.
Tobacco:
The adoption of the new revenue standard had no impact on the timing of Tobacco revenue recognition. However, certain amounts previously classified as revenue, cost of sales and operating, selling, administrative and general expenses in the condensed consolidated statement of operations are classified differently beginning January 1, 2018. Certain amounts previously classified as other current liabilities on the condensed consolidated balance sheet as of January 1, 2018 and
June 30, 2018
were also reclassified.
Upon adoption of the new revenue standard, the Company elected to account for shipping and handling expenses that occur after the customer has obtained control of cigarettes as a fulfillment activity in cost of sales. Prior to the adoption of Topic 606, these costs were recorded as operating, selling, administrative and general expenses. In addition, the Company determined that payments to customers attributed to the sharing of sales data that were previously presented as operating, selling, administrative and general expenses do not constitute a distinct service under the new standard and are now presented as a reduction in Tobacco revenue.
Prior to the adoption of Topic 606, the Company’s allowance for expected sales returns, net of expected federal excise tax recoveries was presented in other current liabilities. Changes in the allowance for expected returns were reflected as a change in Tobacco revenue. Upon adoption of Topic 606, the Company records an allowance for goods estimated to be returned in other current liabilities and an associated receivable for anticipated federal excise tax refunds in other current assets on the condensed consolidated balance sheet. Changes in the liability for sales returns continue to be reflected in Tobacco revenue, while changes in the receivable associated with expected federal excise tax refunds on returns are reflected in Tobacco cost of sales.
Real Estate.
Certain services and advanced payments in the Company’s Real Estate development marketing business do not meet the requirements for revenue recognition as a separate performance obligation. Accordingly, these revenues, previously recognized, have been deferred under the new standard until the performance obligation is met. In addition, certain direct fulfillment costs in its Real Estate development marketing business that were previously expensed upon payment, have now been deferred under the new standard until the performance obligation is met. Certain expense reimbursements, previously recorded as a reduction of operating expense, are now presented as revenue under Topic 606 as the Company is the principal in the related transaction.
Some real estate brokerage commercial leasing contracts specify extended payment terms for commission payments. Under Topic 606, revenue is recognized at the time the performance obligation is satisfied, including any amounts of future payments
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
for extended payment terms. Accordingly, these future payments, previously recognized as revenue upon receipt, have been accrued under the new standard when the performance obligation is satisfied.
Impacts on Financial Statements on January 1, 2018
:
The Company recorded an adjustment of
$21,695
due to the cumulative impact of adopting Topic 606 which resulted in an increase to opening stockholders’ deficiency, allocated to increases in accumulated deficit and decreases in non-controlling interest as of January 1, 2018. The following tables summarize the impacts of Topic 606 adoption on the Company’s condensed consolidated balance sheet as of January 1, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously Reported
|
|
Adjustments
|
|
As Revised
|
|
|
December 31, 2017
|
|
Tobacco
|
|
Real Estate
|
|
January 1, 2018
|
ASSETS:
|
|
|
|
|
|
|
|
|
Accounts receivable - trade, net
|
|
$
|
29,481
|
|
|
$
|
—
|
|
|
$
|
4,514
|
|
(2)
|
$
|
33,995
|
|
Other current assets
|
|
21,121
|
|
|
2,525
|
|
(1)
|
623
|
|
(3)
|
24,269
|
|
Total current assets
|
|
613,709
|
|
|
2,525
|
|
|
5,137
|
|
|
621,371
|
|
Other assets
|
|
36,786
|
|
|
—
|
|
|
3,740
|
|
(3)
|
40,526
|
|
Total assets
|
|
$
|
1,328,278
|
|
|
$
|
2,525
|
|
|
$
|
8,877
|
|
|
$
|
1,339,680
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY:
|
|
|
|
|
|
|
|
|
Other current liabilities
|
|
$
|
157,123
|
|
|
$
|
2,525
|
|
(1)
|
$
|
7,806
|
|
(2)(4)
|
$
|
167,454
|
|
Total current liabilities
|
|
204,639
|
|
|
2,525
|
|
|
7,806
|
|
|
214,970
|
|
Deferred income taxes, net
|
|
58,801
|
|
|
—
|
|
|
(5,217
|
)
|
(5)
|
53,584
|
|
Other liabilities
|
|
22,380
|
|
|
—
|
|
|
27,983
|
|
(4)
|
50,363
|
|
Total liabilities
|
|
1,660,038
|
|
|
2,525
|
|
|
30,572
|
|
|
1,693,135
|
|
Accumulated deficit
|
|
(414,785
|
)
|
|
—
|
|
|
(13,780
|
)
|
|
(428,565
|
)
|
Total Vector Group Ltd. stockholders' deficiency
|
|
(413,919
|
)
|
|
—
|
|
|
(13,780
|
)
|
(6)
|
(427,699
|
)
|
Non-controlling interest
|
|
82,159
|
|
|
—
|
|
|
(7,915
|
)
|
(6)
|
74,244
|
|
Total stockholders' deficiency
|
|
(331,760
|
)
|
|
—
|
|
|
(21,695
|
)
|
|
(353,455
|
)
|
Total liabilities and stockholders' deficiency
|
|
$
|
1,328,278
|
|
|
$
|
2,525
|
|
|
$
|
8,877
|
|
|
$
|
1,339,680
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Adjustments to other current assets and other current liabilities for
$2,525
relates to the presentation as a receivable the component of the allowance for sales returns representing the federal excise tax refunds expected for future returned product as a receivable in other current assets, which was previously presented as a reduction to the allowance for sales returns liability in other current liabilities.
|
|
|
(2)
|
Adjustments of
$4,514
to accounts receivable and
$3,139
to other current liabilities relate to commission receivables and commissions payable from the Real Estate commercial leasing contracts for which the performance obligation has been satisfied, have extended payment terms and are expected to be received and paid in the next twelve-months.
|
|
|
(3)
|
Adjustments of
$623
to other current assets and
$3,740
to other assets represents the current and noncurrent portions, respectively, of deferred contract costs relating to direct fulfillment costs incurred in advance of the satisfaction of performance obligations for Development Marketing arrangements.
|
|
|
(4)
|
Adjustments of
$4,667
to other current liabilities and
$27,983
to other liabilities relate to the current and long term portions, respectively, of contract liabilities representing payments received from customers in advance of the performance obligations being satisfied under contracts for Real Estate development marketing.
|
|
|
(5)
|
Adjustment reflects the tax effect of the adoption of Topic 606 which was estimated to result in a decrease in net deferred income tax liability of
$5,217
based on a recalculation of the income tax provision using the Company’s deferred rate of approximately
27.46%
.
|
|
|
(6)
|
The allocation of the net impact of the adoption of Topic 606 between accumulated deficit and non-controlling interest is based on relative ownership interest of
70.59%
and
29.41%
, respectively.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Impacts on Financial Statements at June 30, 2018:
The following table compares the reported condensed consolidated balance sheet as of
June 30, 2018
, to the pro-forma amounts had the previous guidance been in effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Pro forma as if the previous accounting guidance were in effect
|
|
Increase/(Decrease)
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
Accounts receivable - trade, net
|
$
|
30,836
|
|
|
$
|
28,888
|
|
|
$
|
1,948
|
|
(1)
|
Income taxes receivable, net
|
9,126
|
|
|
11,526
|
|
|
(2,400
|
)
|
(6)
|
Other current assets
|
30,099
|
|
|
26,225
|
|
|
3,874
|
|
(2)(3)
|
Total current assets
|
629,012
|
|
|
625,590
|
|
|
3,422
|
|
|
Other assets
|
47,116
|
|
|
43,299
|
|
|
3,817
|
|
(3)
|
Total assets
|
$
|
1,333,911
|
|
|
$
|
1,326,672
|
|
|
$
|
7,239
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
|
|
|
|
|
|
|
Other current liabilities
|
$
|
147,531
|
|
|
$
|
135,699
|
|
|
$
|
11,832
|
|
(1)(2)(4)
|
Total current liabilities
|
464,107
|
|
|
452,275
|
|
|
11,832
|
|
|
Deferred income taxes, net
|
56,637
|
|
|
62,843
|
|
|
(6,206
|
)
|
(5)
|
Other liabilities
|
53,045
|
|
|
23,231
|
|
|
29,814
|
|
(4)
|
Total liabilities
|
1,762,630
|
|
|
1,727,190
|
|
|
35,440
|
|
|
Stockholders' deficiency:
|
|
|
|
|
—
|
|
|
Accumulated deficit
|
(495,637
|
)
|
|
(476,849
|
)
|
|
(18,788
|
)
|
(6)
|
Total Vector Group Ltd. stockholders' deficiency
|
(500,235
|
)
|
|
(481,447
|
)
|
|
(18,788
|
)
|
|
Non-controlling interest
|
71,516
|
|
|
80,929
|
|
|
(9,413
|
)
|
(6)
|
Total stockholders' deficiency
|
(428,719
|
)
|
|
(400,518
|
)
|
|
(28,201
|
)
|
|
Total liabilities and stockholders' deficiency
|
$
|
1,333,911
|
|
|
$
|
1,326,672
|
|
|
$
|
7,239
|
|
|
|
|
(1)
|
Adjustments of
$1,948
to accounts receivable and
$1,365
to other current liabilities relate to commission receivables and commissions payable from the Real Estate commercial leasing contracts for which the performance obligation has been satisfied, have extended payment terms and are expected to be received and paid in the next twelve-months.
|
|
|
(2)
|
Adjustments to other current assets and other current liabilities for
$2,189
relates to the presentation of the component of the allowance for sales returns representing the federal excise tax refunds expected for future returned product as a receivable in other current assets, which was previously presented as a reduction to the allowance for sales returns liability in other current liabilities.
|
|
|
(3)
|
Adjustments of
$1,685
to other current assets and
$3,817
to other assets represents the current and noncurrent portions, respectively, of deferred contract costs relating to direct fulfillment costs incurred in advance of the satisfaction of performance obligations for Development Marketing arrangements.
|
|
|
(4)
|
Adjustments of
$8,278
to other current liabilities and
$29,814
to other liabilities relate to the current and long term portions, respectively, of contract liabilities representing payments received from customers in advance of the performance obligations being satisfied under contracts for Real Estate development marketing.
|
|
|
(5)
|
Adjustments reflect the tax effect of the adoption of Topic 606 based on a recalculation of the income tax provision using the estimated annual effective tax rate of approximately
39.23%
and the Company’s deferred rate approximately
27.46%
.
|
|
|
(6)
|
The allocation of the net impact of the adoption of Topic 606 between accumulated deficit and non-controlling interest is based on relative ownership interest of
70.59%
and
29.41%
, respectively.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The following table compares the reported condensed consolidated statement of operations for the
three months ended June 30, 2018
, to the pro-forma amounts had the previous guidance been in effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Pro forma as if the previous accounting guidance were in effect
|
|
Increase/(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
Tobacco
|
$
|
274,833
|
|
|
$
|
275,144
|
|
|
$
|
(311
|
)
|
|
Real estate
|
206,655
|
|
|
212,528
|
|
|
(5,873
|
)
|
|
Total revenues
|
481,488
|
|
|
487,672
|
|
|
(6,184
|
)
|
(1)
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
Tobacco
|
192,761
|
|
|
191,242
|
|
|
1,519
|
|
|
Real estate
|
140,005
|
|
|
142,418
|
|
|
(2,413
|
)
|
|
Total cost of sales
|
332,766
|
|
|
333,660
|
|
|
(894
|
)
|
(2)
|
|
|
|
|
|
|
|
Operating, selling, administrative and general expenses
|
86,336
|
|
|
88,756
|
|
|
(2,420
|
)
|
(3)
|
Operating income
|
61,861
|
|
|
64,731
|
|
|
(2,870
|
)
|
|
Other income (expenses):
|
|
|
|
|
|
|
Income before provision for income taxes
|
31,756
|
|
|
34,626
|
|
|
(2,870
|
)
|
|
Income tax expense
|
12,760
|
|
|
13,573
|
|
|
(813
|
)
|
(4)
|
|
|
|
|
|
|
|
Net income
|
18,996
|
|
|
21,053
|
|
|
(2,057
|
)
|
|
|
|
|
|
|
|
|
Net income attributed to non-controlling interest
|
(1,178
|
)
|
|
(2,021
|
)
|
|
843
|
|
|
|
|
|
|
|
|
|
Net income attributed to Vector Group Ltd.
|
$
|
17,818
|
|
|
$
|
19,032
|
|
|
(1,214
|
)
|
|
|
|
|
|
|
|
|
Per basic common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common share attributed to Vector Group Ltd.
|
$
|
0.12
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common share attributed to Vector Group Ltd.
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
|
|
|
|
(1)
|
The impact to revenue for the
three months ended June 30, 2018
was a decrease of
$6,184
primarily due to
$1,352
of commission revenue payments received in the current period for the Real Estate Commercial Leasing business relating to performance obligations satisfied and accrued for in prior periods under Topic 606, and
$6,370
in advance commission and services payments received in the current period for the Real Estate Development Marketing business that are deferred since they do not constitute satisfied performance obligations under Topic 606, offset by revenue recognized for performance obligations satisfied in the current period. Commission payments for these businesses would have been previously recognized as revenue upon receipt.
|
|
|
(2)
|
The impact to cost of sales was a decrease of
$894
primarily related to the decrease in Real Estate business of
$2,413
related primarily to commission expense payments made in the current period that relate to performance obligations satisfied and accrued for in prior periods or deferred until the performance obligation is satisfied, offset by the reclassification of
$1,318
of Tobacco shipping and handling costs from operating, selling, administrative and general expenses to costs of sales as a result of adopting Topic 606.
|
|
|
(3)
|
The impact to operating, selling, administrative and general expenses was a decrease of
$2,420
primarily due to:
|
|
|
•
|
The reclassification of
$1,318
Tobacco shipping and handling costs to cost of sales,
|
|
|
•
|
The reclassification of
$512
sales returns reserve provision to revenue for the Tobacco business,
|
|
|
•
|
The deferral of
$626
of direct costs in the Real Estate Development Marketing business related to performance obligations not satisfied as discussed above, offset by the amortization of previously deferred contract costs of
$325
.
|
|
|
(4)
|
The net impact of the adoption of Topic 606 was estimated to result in an increase in income taxes of
$813
based on a recalculation of the income tax provision using the estimated annual effective tax rate of approximately
39.23%
and the Company’s deferred rate approximately
27.46%
.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The following table compares the reported condensed consolidated statement of operations for the
six months ended June 30, 2018
, to the pro-forma amounts had the previous guidance been in effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As Reported
|
|
Pro forma as if the previous accounting guidance were in effect
|
|
Increase/(Decrease)
|
|
Revenues:
|
|
|
|
|
|
|
Tobacco
|
$
|
541,949
|
|
|
$
|
542,633
|
|
|
$
|
(684
|
)
|
|
Real estate
|
368,505
|
|
|
376,333
|
|
|
(7,828
|
)
|
|
Total revenues
|
910,454
|
|
|
918,966
|
|
|
(8,512
|
)
|
(1)
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
Tobacco
|
377,723
|
|
|
374,717
|
|
|
3,006
|
|
|
Real estate
|
249,318
|
|
|
251,092
|
|
|
(1,774
|
)
|
|
Total cost of sales
|
627,041
|
|
|
625,809
|
|
|
1,232
|
|
(2)
|
|
|
|
|
|
|
|
Operating, selling, administrative and general expenses
|
175,412
|
|
|
180,061
|
|
|
(4,649
|
)
|
(3)
|
Operating income
|
109,945
|
|
|
115,040
|
|
|
(5,095
|
)
|
|
Other income (expenses):
|
|
|
|
|
|
|
Income before provision for income taxes
|
37,368
|
|
|
42,463
|
|
|
(5,095
|
)
|
|
Income tax expense
|
14,708
|
|
|
16,119
|
|
|
(1,411
|
)
|
(4)
|
|
|
|
|
|
|
|
Net income
|
22,660
|
|
|
26,344
|
|
|
(3,684
|
)
|
|
|
|
|
|
|
|
|
Net loss attributed to non-controlling interest
|
2,369
|
|
|
871
|
|
|
1,498
|
|
|
|
|
|
|
|
|
|
Net income attributed to Vector Group Ltd.
|
$
|
25,029
|
|
|
$
|
27,215
|
|
|
$
|
(2,186
|
)
|
|
|
|
|
|
|
|
|
Per basic common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common share attributed to Vector Group Ltd.
|
$
|
0.16
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
Per diluted common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common share attributed to Vector Group Ltd.
|
$
|
0.16
|
|
|
$
|
0.18
|
|
|
|
|
|
|
(1)
|
The impact to revenue for the
six months ended June 30, 2018
was a decrease of
$8,512
primarily due to
$3,161
of commission revenue payments received in the current period for the Real Estate Commercial Leasing business relating to performance obligations satisfied and accrued for in prior periods under Topic 606, and
$10,277
in advance commission and services payments received in the current period for the Real Estate Development Marketing business that are deferred since they do not constitute satisfied performance obligations under Topic 606, offset by revenue recognized for performance obligations satisfied in the current period. Commission payments for these businesses would have been previously recognized as revenue upon receipt.
|
|
|
(2)
|
The impact to cost of sales was an increase of
$1,232
primarily related to the reclassification of
$2,670
of Tobacco shipping and handling costs from operating, selling, administrative and general expenses to costs of sales as a result of adopting Topic 606, offset by a
$1,774
decrease from the Real Estate business related primarily to commission expense payments made in the current period that relate to performance obligations satisfied and accrued for in prior periods or deferred until the performance obligation is satisfied.
|
|
|
(3)
|
The impact to operating, selling, administrative and general expenses was a decrease of
$4,649
primarily due to:
|
|
|
•
|
The reclassification of
$2,670
Tobacco shipping and handling costs to cost of sales,
|
|
|
•
|
The reclassification of
$1,020
sales returns reserve provision to revenue for the Tobacco business,
|
|
|
•
|
The deferral of
$1,731
of direct costs in the Real Estate Development Marketing business related to performance obligations not satisfied as discussed above, offset by the amortization of previously deferred contract costs of
$592
.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
(4)
|
The net impact of the adoption of Topic 606 was estimated to result in an increase in income taxes of
$1,411
based on a recalculation of the income tax provision using the estimated annual effective tax rate of approximately
39.23%
and the Company’s deferred rate approximately
27.46%
.
|
The adoption of the standard did not have a material impact to the Company’s condensed consolidated statement of cash flows for the
six months ended June 30, 2018
.
Revenue Recognition Policies
Revenue is measured based on a consideration specified in a contract with a customer and excludes any sales incentives. Revenue is recognized when (a) an enforceable contract with a customer exists, that has commercial substance, and collection of substantially all consideration for services is probable; and (b) the performance obligations to the customer are satisfied either over time or at a point in time.
Tobacco sales:
Prior to the adoption of Topic 606, revenues from cigarette sales, which included federal excise taxes billed to customers, were recognized upon the shipment of finished goods when title and risk of loss had passed to the customer, there was persuasive evidence of an arrangement, the sale price was fixed or determinable and collectability was reasonably assured. The Company provided an allowance for expected sales returns, net of any related cost recoveries (e.g. federal excise taxes). Certain sales incentives, including promotional price discounts, were presented as reductions of net sales. Shipping and handling fees related to sales transactions were recorded as operating, selling, administrative and general expenses.
After the adoption of Topic 606, revenue from cigarette sales, which include federal excise taxes billed to customers, are recognized upon shipment of cigarettes when control has passed to the customer. Average collection terms for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the customer. The Company records an allowance for goods estimated to be returned in other current liabilities and the associated receivable for anticipated federal excise tax refunds in other current assets on the condensed consolidated balance sheet. The allowance for returned goods is based principally on sales volumes and historical return rates. The estimated costs of sales incentives, including customer incentives and trade promotion activities, are based principally on historical experience and are accounted for as reductions in Tobacco revenue. Expected payments for sales incentives are included in other current liabilities on the Company’s condensed consolidated balance sheet. The Company accounts for shipping and handling costs as fulfillment costs as part of cost of sales.
Real estate sales:
Prior to the adoption of Topic 606, revenue was recognized only when persuasive evidence of an arrangement existed, the price was fixed or determinable, the transaction had been completed and collectability of the resulting receivable was reasonably assured. Real estate commissions earned by the Company’s real estate brokerage businesses were recorded as revenue upon the closing of a real estate sale or leasing transaction, as evidenced when the escrow or similar account was closed, the transaction documents have been recorded and funds were distributed to all appropriate parties. Agents’ commissions expense was recognized as cost of sales concurrently with related revenues. Property management fees were recorded as revenue when the related services were performed and the earnings process was complete. Title insurance commission fee revenue is earned when the sale of the title insurance policy is completed, which corresponds to the point in time when the underlying real estate sale transaction closes and the payment is received.
After the adoption of Topic 606, real estate commissions earned by the Company’s real estate brokerage businesses are recognized as revenue at the point in time that the real estate sale is completed or lease agreement is executed, which is the point in time that the performance obligation is satisfied. Any commission and other payments received in advance are deferred until the satisfaction of the performance obligation. Corresponding agent commission expenses, including any advance commission or other direct expense payments, are deferred and recognized as cost of sales concurrently with related revenues. The accounting for these commissions and other brokerage income under Topic 606 are largely consistent with the previous accounting for these transactions under Topic 605, except for customer arrangements in the development marketing business and extended payments terms that exist in some commercial leasing contracts.
The Company’s Real Estate revenue contracts with customers do not have multiple material performance obligations to customers under Topic 606, except for contracts in the Company’s development marketing business. Contracts in the development marketing business provide the Company with the exclusive right to sell units in a subject property for a commission fee per unit sold calculated as a percentage of the sales price of each unit. Accordingly, a performance obligation exists for each unit in the development marketing property under contract, and a portion of the total contract transaction price is allocated to and recognized at the time each unit is sold.
Under development marketing service arrangements, dedicated administrative staff are required for a subject property and these costs are typically reimbursed from the customer through advance payments that sometimes are recoupable from future commission earnings. Advance payments received and associated direct costs paid are deferred, allocated to each unit in the subject property, and recognized consistent with the pattern of value transferred to the customer, which is at the time of the completed sale of each unit. Under Topic 605 any advance payments received that were non-refundable were recognized as revenue when
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
received. Similarly, under Topic 605 any non-refundable advance payments made of commission expenses and other direct costs were expensed when paid.
Development marketing service arrangements also include direct fulfillment costs incurred in advance of the satisfaction of the performance obligation. The Company capitalizes costs incurred in fulfilling a contract with a customer if the fulfillment costs 1) relate directly to an existing contract or anticipated contract, 2) generate or enhance resources that will be used to satisfy performance obligations in the future, and 3) are expected to be recovered. These costs are amortized over the estimated customer relationship period which is the contract term. The Company uses an amortization method that is consistent with the pattern of transfer of goods or services to its customers by allocating these costs to each unit the subject property and expensing these costs as each unit is sold. Under Topic 605, these direct costs were expensed as incurred.
Revenue is recognized at the time the performance obligation is met for commercial leasing contracts, which is when the lease agreement is executed, as there are no further performance obligations, including any amounts of future payments under extended payment terms. Under Topic 605, these future payments were recognized as revenue upon receipt because collectibility might not have been reasonably assured at the time the performance obligation was met.
Property management revenue arrangements consist of providing operational and administrative services to manage a subject property. Fees for these services are typically billed and collected monthly. Property management service fees are recognized as revenue over time using the output method as the performance obligations under the customer arrangement are satisfied each month, which are largely consistent with the accounting practices under Topic 605.
Disaggregation of Revenue
In the following table, revenue is disaggregated by major product line for the Tobacco segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Tobacco Segment Revenues:
|
|
|
|
|
|
|
|
|
Core Discount Brands - Pyramid, Grand Prix, Liggett Select, Eve and EAGLE 20’s
|
|
$
|
248,370
|
|
|
$
|
244,941
|
|
|
$
|
489,901
|
|
|
$
|
472,513
|
|
Other Brands
|
|
26,463
|
|
|
27,236
|
|
|
52,048
|
|
|
57,118
|
|
Total tobacco revenues
|
|
$
|
274,833
|
|
|
$
|
272,177
|
|
|
$
|
541,949
|
|
|
$
|
529,631
|
|
In the following table, revenue is disaggregated by major services line and primary geographical market for the Real Estate segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Total
|
|
New York City
|
|
Northeast
|
|
Southeast
|
|
West
|
Real Estate Segment Revenues
:
|
|
|
|
|
|
|
|
|
|
Commission and other brokerage income
|
$
|
179,411
|
|
|
$
|
76,175
|
|
|
$
|
43,228
|
|
|
$
|
31,909
|
|
|
$
|
28,099
|
|
Development marketing
|
15,525
|
|
|
10,559
|
|
|
129
|
|
|
4,788
|
|
|
49
|
|
Property management income
|
8,741
|
|
|
8,560
|
|
|
181
|
|
|
—
|
|
|
—
|
|
Title fees
|
1,922
|
|
|
—
|
|
|
1,922
|
|
|
—
|
|
|
—
|
|
Total Douglas Elliman Realty revenue
|
205,599
|
|
|
95,294
|
|
|
45,460
|
|
|
36,697
|
|
|
28,148
|
|
Other real estate revenues
|
1,056
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,056
|
|
Total real estate revenues
|
$
|
206,655
|
|
|
$
|
95,294
|
|
|
$
|
45,460
|
|
|
$
|
36,697
|
|
|
$
|
29,204
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Total
|
|
New York City
|
|
Northeast
|
|
Southeast
|
|
West
|
Real Estate Segment Revenues
:
|
|
|
|
|
|
|
|
|
|
Commission and other brokerage income
|
$
|
175,769
|
|
|
$
|
92,213
|
|
|
$
|
55,211
|
|
|
$
|
20,897
|
|
|
$
|
7,448
|
|
Development marketing
|
12,705
|
|
|
8,203
|
|
|
17
|
|
|
3,066
|
|
|
1,419
|
|
Property management income
|
8,573
|
|
|
8,390
|
|
|
183
|
|
|
—
|
|
|
—
|
|
Title fees
|
1,661
|
|
|
—
|
|
|
1,661
|
|
|
—
|
|
|
—
|
|
Total Douglas Elliman Realty revenue
|
198,708
|
|
|
108,806
|
|
|
57,072
|
|
|
23,963
|
|
|
8,867
|
|
Other real estate revenues
|
1,102
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,102
|
|
Total real estate revenues
|
$
|
199,810
|
|
|
$
|
108,806
|
|
|
$
|
57,072
|
|
|
$
|
23,963
|
|
|
$
|
9,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Total
|
|
New York City
|
|
Northeast
|
|
Southeast
|
|
West
|
Real Estate Segment Revenues
:
|
|
|
|
|
|
|
|
|
|
Commission and other brokerage income
|
$
|
318,307
|
|
|
$
|
136,583
|
|
|
$
|
75,906
|
|
|
$
|
56,307
|
|
|
$
|
49,511
|
|
Development marketing
|
26,745
|
|
|
21,169
|
|
|
252
|
|
|
5,081
|
|
|
243
|
|
Property management income
|
17,079
|
|
|
16,698
|
|
|
381
|
|
|
—
|
|
|
—
|
|
Title fees
|
2,911
|
|
|
—
|
|
|
2,911
|
|
|
—
|
|
|
—
|
|
Total Douglas Elliman Realty revenue
|
365,042
|
|
|
174,450
|
|
|
79,450
|
|
|
61,388
|
|
|
49,754
|
|
Other real estate revenues
|
3,463
|
|
|
—
|
|
|
|
|
|
—
|
|
|
3,463
|
|
Total real estate revenues
|
$
|
368,505
|
|
|
$
|
174,450
|
|
|
$
|
79,450
|
|
|
$
|
61,388
|
|
|
$
|
53,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Total
|
|
New York City
|
|
Northeast
|
|
Southeast
|
|
West
|
Real Estate Segment Revenues
:
|
|
|
|
|
|
|
|
|
|
Commission and other brokerage income
|
$
|
310,273
|
|
|
$
|
173,032
|
|
|
$
|
78,841
|
|
|
$
|
43,825
|
|
|
$
|
14,575
|
|
Development marketing
|
25,094
|
|
|
17,217
|
|
|
96
|
|
|
6,161
|
|
|
1,620
|
|
Property management income
|
16,356
|
|
|
16,003
|
|
|
353
|
|
|
—
|
|
|
—
|
|
Title fees
|
2,522
|
|
|
—
|
|
|
2,522
|
|
|
—
|
|
|
—
|
|
Total Douglas Elliman Realty revenue
|
354,245
|
|
|
206,252
|
|
|
81,812
|
|
|
49,986
|
|
|
16,195
|
|
Other real estate revenues
|
3,319
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,319
|
|
Total real estate revenues
|
$
|
357,564
|
|
|
$
|
206,252
|
|
|
$
|
81,812
|
|
|
$
|
49,986
|
|
|
$
|
19,514
|
|
The majority of the Company’s consolidated revenues are recognized at point in time. A small portion of revenues from contracts with customers are earned by providing services, such as property management, and these performance obligations are satisfied over time.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Contract Balances
The following table provides information about receivables, contracts assets, and contract liabilities from contracts with customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
At Adoption
|
|
|
|
|
Receivables, which are included in accounts receivable, net
|
$
|
1,948
|
|
|
$
|
4,514
|
|
Contract costs, net, which are included in other current assets
|
1,685
|
|
|
623
|
|
Payables, which are included in other current liabilities
|
1,365
|
|
|
3,139
|
|
Contract liabilities, which are included in other current liabilities
|
8,278
|
|
|
4,667
|
|
Contract costs, net, which are included in other assets
|
3,817
|
|
|
3,740
|
|
Contract liabilities, which are included in other liabilities
|
29,814
|
|
|
27,983
|
|
|
|
|
|
|
|
Receivables and payables relate to commission receivables and commissions payable from the Real Estate commercial leasing contracts for which the performance obligation has been satisfied, have extended payment terms and are expected to be received and paid in the next
twelve
months. Receivables decreased
$2,566
for the
six
-month period ended
June 30, 2018
primarily due to cash collections of
$3,161
, offset by additional revenue accrued as performance obligations are satisfied. Correspondingly, payables decreased
$1,774
primarily due to cash payments of
$1,989
, offset by additional expense accruals as performance obligations are satisfied.
Contract costs relate to direct fulfillment costs incurred in advance of the satisfaction of the performance obligation for Development Marketing arrangements. The Company capitalizes costs incurred in fulfilling a contract with a customer if the fulfillment costs 1) relate directly to an existing contract or anticipated contract, 2) generate or enhance resources that will be used to satisfy performance obligations in the future, and 3) are expected to be recovered. These costs are amortized over the estimated customer relationship period consistent with the pattern of transfer of goods or services to its customers.
Contract liabilities relate to payments received in advance of the performance obligations being satisfied under the contract for the Real Estate development marketing and are recognized as revenue at the points in time when the Company performs under the contract. Performance obligations related to the Real Estate development marketing contracts are considered satisfied when each unit is closed. Development marketing projects tend to span
4
to
6
years from the time the Company enters into the contract with the developer to the time that all of the sales of the units in a subject property are closed. The timing for sales closings are dependent upon several external factors outside the Company’s control, including but not limited to, economic factors, seller and buyer actions, construction timing and other real estate market factors. Accordingly, all contract liabilities and contract costs associated with development marketing are considered long-term until closing dates for unit sales are scheduled. As of
June 30, 2018
, the Company estimates approximately
$8,278
of contract liabilities will be recognized as revenue within the next twelve months.
Contract liabilities increased by
$5,442
during the
six months ended June 30, 2018
due to
$10,277
of advance payments received from customer prior to the satisfaction of performance obligations for Real Estate development marketing contracts, offset by revenue recognized for units sold during the quarter. Revenue recognized during the current reporting period that was included in the contract liabilities balance at January 1, 2018 was
$4,149
.
Topic 606 requires an entity to disclose the revenue recognized in the reporting period from performance obligations satisfied (or partially satisfied) in previous periods (for example, due to changes in transaction price). For the three and
six months ended June 30, 2018
, there was
no
revenue recognized relating to performance obligations satisfied or partially satisfied in prior periods.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Inventories consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Leaf tobacco
|
$
|
38,049
|
|
|
$
|
45,801
|
|
Other raw materials
|
3,775
|
|
|
3,272
|
|
Work-in-process
|
283
|
|
|
358
|
|
Finished goods
|
66,373
|
|
|
63,363
|
|
Inventories at current cost
|
108,480
|
|
|
112,794
|
|
LIFO adjustments
|
(22,304
|
)
|
|
(23,004
|
)
|
|
$
|
86,176
|
|
|
$
|
89,790
|
|
All of the Company’s inventories at
June 30, 2018
and
December 31, 2017
are reported under the LIFO method. The
$22,304
LIFO adjustment as of
June 30, 2018
decreases the current cost of inventories by
$15,742
for Leaf tobacco,
$123
for Other raw materials,
$18
for Work-in-process and
$6,421
for Finished goods. The
$23,004
LIFO adjustment as of
December 31, 2017
decreased the current cost of inventories by
$16,442
for Leaf tobacco,
$123
for Other raw materials,
$18
for Work-in-process and
$6,421
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, 2018
, Liggett had tobacco purchase commitments of approximately
$36,360
. Liggett has a single source supply agreement for reduced ignition propensity cigarette paper through 2019.
Each period, the Company capitalizes in inventory the 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
$17,166
and
$17,440
at
June 30, 2018
and
December 31, 2017
, respectively. Federal excise tax in inventory was
$26,413
and
$25,151
at
June 30, 2018
and
December 31, 2017
, respectively.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
4
.
|
INVESTMENT SECURITIES AT FAIR VALUE
|
Investment securities at fair value consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Debt securities available for sale
|
$
|
81,880
|
|
|
$
|
84,814
|
|
Equity securities available for sale
|
—
|
|
|
65,675
|
|
Equity securities at fair value
|
63,346
|
|
|
—
|
|
Total investment securities at fair value
|
$
|
145,226
|
|
|
$
|
150,489
|
|
On January 1, 2018, the Company adopted the amendments in ASU 2016-01 which required all equity securities to be measured at fair value with changes in fair value recognized in net income. Therefore, all of the Company’s equity investments that were classified as equity securities available for sale at December 31, 2017 are now classified as equity securities at fair value. These equity securities include marketable equity securities and mutual funds invested in fixed-income securities that had fair values of
$44,634
and
$21,041
at December 31, 2017, respectively, as shown below.
Prior to the adoption of ASU 2016-01, equity securities were measured at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. At December 31, 2017,
$9,681
of net unrealized gains related to equity securities had been recognized in AOCI. After the adoption of ASU 2016-01, these unrealized gains and losses were reclassified out of AOCI and into opening stockholders’ deficiency with subsequent changes in fair value being recognized in net income.
Sales of investment securities totaled
$2,647
and
$22,396
and proceeds from early redemptions by issuers totaled
$11,526
and
$94,988
in the
six
months ended
June 30, 2018
and
2017
, respectively, mainly from the sales and redemptions of Corporate securities and U.S. Government securities.
(a) Debt and Equity Securities Available for Sale
The components of debt securities available for sale at
June 30, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Marketable debt securities
|
$
|
81,875
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
81,880
|
|
Total debt securities available for sale
|
$
|
81,875
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
81,880
|
|
The table below summarizes the maturity dates of debt securities available for sale at
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Type:
|
Fair Value
|
|
Under 1 Year
|
|
1 Year up to 5 Years
|
|
More than 5 Years
|
U.S. Government securities
|
$
|
28,324
|
|
|
$
|
9,190
|
|
|
$
|
19,134
|
|
|
$
|
—
|
|
Corporate securities
|
41,748
|
|
|
9,931
|
|
|
31,817
|
|
|
—
|
|
U.S. mortgage-backed securities
|
3,576
|
|
|
452
|
|
|
3,124
|
|
|
—
|
|
Commercial mortgage-backed securities
|
412
|
|
|
—
|
|
|
412
|
|
|
—
|
|
Commercial paper
|
3,985
|
|
|
3,985
|
|
|
—
|
|
|
—
|
|
Index-linked U.S. bonds
|
2,335
|
|
|
1,568
|
|
|
767
|
|
|
—
|
|
Foreign fixed-income securities
|
1,500
|
|
|
355
|
|
|
1,145
|
|
|
—
|
|
Total debt securities available for sale by maturity dates
|
$
|
81,880
|
|
|
$
|
25,481
|
|
|
$
|
56,399
|
|
|
$
|
—
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The components of debt and equity securities available for sale at
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair
Value
|
Marketable equity securities
|
$
|
35,020
|
|
|
$
|
10,994
|
|
|
$
|
(1,380
|
)
|
|
$
|
44,634
|
|
Mutual funds invested in fixed income securities
|
20,977
|
|
|
93
|
|
|
(29
|
)
|
|
21,041
|
|
Marketable debt securities
|
84,708
|
|
|
106
|
|
|
—
|
|
|
84,814
|
|
Total debt and equity securities available for sale
|
$
|
140,705
|
|
|
$
|
11,193
|
|
|
$
|
(1,409
|
)
|
|
$
|
150,489
|
|
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
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
$
|
9,523
|
|
|
$
|
(1,380
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,523
|
|
|
$
|
(1,380
|
)
|
Mutual funds invested in fixed-income securities
|
10,483
|
|
|
(29
|
)
|
|
—
|
|
|
—
|
|
|
10,483
|
|
|
(29
|
)
|
|
$
|
20,006
|
|
|
$
|
(1,409
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,006
|
|
|
$
|
(1,409
|
)
|
Unrealized losses from marketable equity securities were due to market price movements. Unrealized losses from mutual funds invested in fixed-income securities were primarily attributable to changes in interest rates.
Gross realized gains and losses on debt and equity securities available for sale were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Gross realized gains on sales
|
$
|
2
|
|
|
$
|
90
|
|
|
$
|
2
|
|
|
$
|
295
|
|
Gross realized losses on sales
|
(7
|
)
|
|
(53
|
)
|
|
(15
|
)
|
|
(108
|
)
|
Net (losses) gains on sale of debt and equity securities available for sale
|
$
|
(5
|
)
|
|
$
|
37
|
|
|
$
|
(13
|
)
|
|
$
|
187
|
|
|
|
|
|
|
|
|
|
Gross realized losses on other-than-temporary impairments
|
$
|
(225
|
)
|
|
$
|
(87
|
)
|
|
$
|
(811
|
)
|
|
$
|
(126
|
)
|
|
|
|
|
|
|
|
|
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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
(b) Equity Securities at Fair Value
Equity securities at fair value consisted of the following:
|
|
|
|
|
|
June 30, 2018
|
Marketable equity securities
|
$
|
42,338
|
|
Mutual funds invested in fixed income securities
|
21,008
|
|
Total equity securities at fair value
|
$
|
63,346
|
|
The following is a summary of unrealized and realized net losses and gains recognized in net income on equity securities at fair value after the adoption of ASU 2016-01 during the three and
six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2018
|
Net gains recognized on equity securities
(1)
|
$
|
3,236
|
|
|
$
|
491
|
|
Less: Net gains recognized on equity securities sold
|
53
|
|
|
183
|
|
Net unrealized gains recognized on equity securities still held at the reporting date
|
$
|
3,183
|
|
|
$
|
308
|
|
|
|
|
|
|
|
(1)
|
Includes
$1,505
and
$3,236
of net gains recognized on equity securities at fair value that qualify for the net asset value (“NAV”) practical expedient during the three and
six months ended June 30, 2018
, respectively. These equity securities are included in the “Long-term investments” line item on the condensed consolidated balance sheet and are further discussed in Note
5
.
|
The Company’s marketable equity securities and mutual funds invested in fixed-income securities are classified as Level 1 under the fair value hierarchy disclosed in Note
11
. Their fair values are based on quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.
(c) Equity Securities Without Readily Determinable Fair Values That Do Not Qualify for the NAV Practical Expedient
Equity securities without readily determinable fair values that do not qualify for the NAV practical expedient consisted of investments in the common stock of a reinsurance company and a residential real estate company. At
December 31, 2017
, prior to the adoption of ASU 2016-01 and ASU 2018-03, these investments were classified as cost-method long-term investments and had a total carrying value of
$5,428
. On January 1, 2018, upon the adoption of the new guidance, the Company classified these investments as equity securities without readily determinable fair values that do not qualify for the NAV practical expedient and valued them at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment. At
June 30, 2018
, the total carrying value of these investments were
$5,428
, and it was included in “Other assets” on the condensed consolidated balance sheet.
No
impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified for the
six months ended June 30, 2018
.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
5
.
|
LONG-TERM INVESTMENTS
|
Long-term investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Equity securities at fair value that qualify for the NAV practical expedient
|
$
|
72,524
|
|
|
$
|
—
|
|
Investments accounted at cost
|
—
|
|
|
65,450
|
|
Equity-method investments
|
21,012
|
|
|
15,841
|
|
|
$
|
93,536
|
|
|
$
|
81,291
|
|
(a) Equity Securities at Fair Value That Qualify for the NAV Practical Expedient
The amendments of ASU 2016-01 adopted on January 1, 2018 triggered a change in the accounting classification and accounting treatment of the Company’s long-term investments accounted at cost at December 31, 2017. Under the new guidance, certain investments are now measured at fair value and are classified as equity securities at fair value that qualify for the NAV practical expedient. The Company, using the practical expedient, estimates the fair value of these equity securities within the scope of ASC 820-10-15-4 through 15-5 using the per share NAV, which represents the amount of net assets attributable to each share of capital stock outstanding at the close of the period. These investments qualify for the NAV practical expedient because they do not have readily determinable fair values and are investment companies within the scope of Topic 946. The adoption of the guidance as it relates to these investments resulted in a cumulative-effect adjustment that increased opening stockholders’ deficiency by
$8,838
.
The Company’s equity securities at fair value that qualify for the NAV practical expedient are classified as Level 2 under the fair value hierarchy disclosed in Note
11
because they are measured at NAV per share. The estimated fair value of these investments 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.
$5,000
of the 2017 long-term investment balance of
$65,450
is now classified as equity securities without readily determinable fair values that do not qualify for the NAV practical expedient. Refer to Note
4
for disclosures related to this investment.
(b) Cost-Method Investments:
Long-term investments accounted at cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Carrying
|
|
Fair
|
|
Value
|
|
Value
|
Investment partnerships
|
$
|
65,450
|
|
|
$
|
74,111
|
|
|
$
|
65,450
|
|
|
$
|
74,111
|
|
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.
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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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
. The Company received cash distributions of
$663
from the Company’s investments in long-term investments under the cost method for the
six
months ended
June 30, 2017
.
The long-term investments were carried on the condensed consolidated balance sheet at cost at
December 31, 2017
. The fair value determination disclosed above would be classified as Level 3 under fair value hierarchy disclosed in Note
11
if such assets were recorded on the condensed 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.
(c) Equity-Method Investments:
Equity-method investments consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31, 2017
|
Indian Creek Investors LP (“Indian Creek”)
|
$
|
10,090
|
|
|
$
|
4,498
|
|
Boyar Value Fund (“Boyar”)
|
8,975
|
|
|
9,026
|
|
Ladenburg Thalmann Financial Services Inc. (“LTS”)
|
1,947
|
|
|
2,317
|
|
Castle Brands, Inc. (“Castle”)
|
—
|
|
|
—
|
|
|
$
|
21,012
|
|
|
$
|
15,841
|
|
At
June 30, 2018
, the Company’s ownership percentages in Indian Creek, Boyar, LTS and Castle were
22.83%
,
33.47%
,
7.61%
and
7.78%
, respectively.
The value of Boyar, based on the quoted market price as of
June 30, 2018
, was
$8,975
, equal to its carrying value. At
June 30, 2018
, the aggregate fair values of the LTS and Castle investments, based on the quoted market price, were
$51,650
and
$15,345
, respectively.
The Company received cash distributions of
$779
and
$480
from the Company’s equity-method investments for the
six
months ended
June 30, 2018
and
2017
, respectively. The Company recognized equity in earnings from equity-method investments of
$4,813
for the three months ended
June 30, 2018
and equity in losses from equity-method investments of
$1,459
for the three months ended
June 30, 2017
. The Company recognized equity in earnings from equity-method investments of
$5,975
for the
six
months ended
June 30, 2018
and equity in losses from equity-method investments of
$2,520
for the
six
months ended
June 30, 2017
. 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 equity-method 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 equity-method investments are carried on the condensed consolidated balance sheet at cost under the equity method of accounting. The fair values disclosed above for Boyar, LTS and Castle would be classified as Level 1 under the fair value hierarchy disclosed in Note
11
if such assets were recorded on the condensed consolidated balance sheet at fair value. The fair values are based on quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.
The fair value determination disclosed above for Indian Creek would be classified as Level 2 under the fair value hierarchy disclosed in Note
11
if it were recorded on the condensed consolidated balance sheet at fair value. The estimated fair value of the Company’s investment represents the NAV per share and was provided by the partnership based on the indicated market value of
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
the underlying assets or investment portfolio. The investment is illiquid and its ultimate realization is subject to the performance of the underlying partnership and its management by the general partners.
Investments in real estate ventures:
New Valley holds equity investments in various real estate projects domestically and internationally. 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 aggregates the disclosure of its investments in real estate ventures by property type and operating characteristics.
The components of “Investments in real estate ventures” were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Range of Ownership
|
|
June 30, 2018
|
|
December 31, 2017
|
Condominium and Mixed Use Development:
|
|
|
|
|
|
New York City SMSA
|
3.1% - 49.5%
|
|
$
|
60,238
|
|
|
$
|
96,386
|
|
All other U.S. areas
|
15.0% - 48.5%
|
|
29,753
|
|
|
28,763
|
|
|
|
|
89,991
|
|
|
125,149
|
|
Apartment Buildings:
|
|
|
|
|
|
New York City SMSA
|
45.4%
|
|
7,627
|
|
|
10,910
|
|
All other U.S. areas
|
7.6% - 16.3%
|
|
42
|
|
|
257
|
|
|
|
|
7,669
|
|
|
11,167
|
|
Hotels:
|
|
|
|
|
|
New York City SMSA
|
5.2%
|
|
18,333
|
|
|
19,616
|
|
International
|
49.0%
|
|
2,232
|
|
|
2,800
|
|
|
|
|
20,565
|
|
|
22,416
|
|
Commercial:
|
|
|
|
|
|
New York City SMSA
|
49.0%
|
|
2,049
|
|
|
2,437
|
|
All other U.S. areas
|
1.9%
|
|
16,444
|
|
|
15,642
|
|
|
|
|
18,493
|
|
|
18,079
|
|
|
|
|
|
|
|
Other
|
15.0% - 50.0%
|
|
14,646
|
|
|
11,320
|
|
Investments in real estate ventures
|
|
|
$
|
151,364
|
|
|
$
|
188,131
|
|
Contributions:
The components of New Valley’s contributions to its investments in real estate ventures were as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Condominium and Mixed Use Development:
|
|
|
|
New York City SMSA
|
$
|
533
|
|
|
$
|
675
|
|
All other U.S. areas
|
—
|
|
|
6,242
|
|
|
533
|
|
|
6,917
|
|
Hotels:
|
|
|
|
New York City SMSA
|
167
|
|
|
1,537
|
|
|
167
|
|
|
1,537
|
|
|
|
|
|
Other
|
3,643
|
|
|
—
|
|
Total contributions
|
$
|
4,343
|
|
|
$
|
8,454
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners during the
six months ended
June 30, 2018
and
June 30, 2017
. New Valley’s direct investment percentage for these ventures did not significantly change.
Distributions:
The components of distributions received by New Valley from its investments in real estate ventures were as follows:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Condominium and Mixed Use Development:
|
|
|
|
New York City SMSA
|
$
|
34,490
|
|
|
$
|
31,280
|
|
All other U.S. areas
|
—
|
|
|
17,949
|
|
|
34,490
|
|
|
49,229
|
|
Apartment Buildings:
|
|
|
|
All other U.S. areas
|
201
|
|
|
182
|
|
|
201
|
|
|
182
|
|
Hotels:
|
|
|
|
International
|
—
|
|
|
239
|
|
|
—
|
|
|
239
|
|
Commercial:
|
|
|
|
New York City SMSA
|
—
|
|
|
101
|
|
All other U.S. areas
|
341
|
|
|
92
|
|
|
341
|
|
|
193
|
|
|
|
|
|
Other
|
644
|
|
|
1,150
|
|
Total distributions
|
$
|
35,676
|
|
|
$
|
50,993
|
|
Of the distributions received by New Valley from its investment in real estate ventures,
$8,542
and
$27,655
were from distributions of earnings for the
six months ended
June 30, 2018
and
June 30, 2017
, respectively, and
$27,134
and
$23,338
were a return of capital for the
six months ended
June 30, 2018
and
June 30, 2017
, 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,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Condominium and Mixed Use Development:
|
|
|
|
|
|
|
|
New York City SMSA
|
$
|
(152
|
)
|
|
$
|
17,116
|
|
|
$
|
(3,613
|
)
|
|
$
|
29,296
|
|
All other U.S. areas
|
(321
|
)
|
|
(863
|
)
|
|
(826
|
)
|
|
(1,155
|
)
|
|
(473
|
)
|
|
16,253
|
|
|
(4,439
|
)
|
|
28,141
|
|
Apartment Buildings:
|
|
|
|
|
|
|
|
All other U.S. areas
|
(1,717
|
)
|
|
(724
|
)
|
|
(3,297
|
)
|
|
(647
|
)
|
|
(1,717
|
)
|
|
(724
|
)
|
|
(3,297
|
)
|
|
(647
|
)
|
Hotels:
|
|
|
|
|
|
|
|
New York City SMSA
|
(636
|
)
|
|
(519
|
)
|
|
(1,450
|
)
|
|
(1,206
|
)
|
International
|
(143
|
)
|
|
254
|
|
|
(568
|
)
|
|
(296
|
)
|
|
(779
|
)
|
|
(265
|
)
|
|
(2,018
|
)
|
|
(1,502
|
)
|
Commercial:
|
|
|
|
|
|
|
|
New York City SMSA
|
(121
|
)
|
|
(124
|
)
|
|
(388
|
)
|
|
(369
|
)
|
All other U.S. areas
|
913
|
|
|
(64
|
)
|
|
1,143
|
|
|
(64
|
)
|
|
792
|
|
|
(188
|
)
|
|
755
|
|
|
(433
|
)
|
|
|
|
|
|
|
|
|
Other
|
65
|
|
|
215
|
|
|
327
|
|
|
845
|
|
Equity in (losses) earnings from real estate ventures
|
$
|
(2,112
|
)
|
|
$
|
15,291
|
|
|
$
|
(8,672
|
)
|
|
$
|
26,404
|
|
As part of the Company’s ongoing assessment of the carrying values of its investments in real estate ventures, the Company determined that the fair value of a New York City SMSA
C
ondominium and Mixed Use Development venture was less than its carrying value as of
June 30, 2018
. The Company determined that the impairment was other than temporary. The Company recorded an impairment charge as a component of equity in losses from real estate ventures of
$2,700
and
$10,174
of which
$2,113
and
$8,467
, respectively, were attributed to the Company for the three and six months ended
June 30, 2018
.
VIE Consideration:
The Company has determined that New Valley is the primary beneficiary of
two
real estate 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
$4,264
and
$14,548
as of
June 30, 2018
and
December 31, 2017
, respectively. Those assets are owned by the VIEs, not the Company. Neither of the
two
consolidated VIEs had recourse liabilities as of
June 30, 2018
and
December 31, 2017
. 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.
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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Maximum Exposure to Loss:
New Valley’s maximum exposure to loss from its investments in real estate ventures consisted of the net carrying value of the venture adjusted for any future capital commitments and/or guarantee arrangements. The maximum exposure to loss was as follows:
|
|
|
|
|
|
June 30, 2018
|
Condominium and Mixed Use Development:
|
|
New York City SMSA
|
$
|
63,598
|
|
All other U.S. areas
|
42,253
|
|
|
105,851
|
|
Apartment Buildings:
|
|
All other U.S. areas
|
7,669
|
|
|
7,669
|
|
Hotels:
|
|
New York City SMSA
|
18,333
|
|
International
|
2,232
|
|
|
20,565
|
|
Commercial:
|
|
New York City SMSA
|
2,049
|
|
All other U.S. areas
|
16,444
|
|
|
18,493
|
|
Other
|
19,446
|
|
Total maximum exposure to loss
|
$
|
172,024
|
|
New Valley capitalized
$4,303
of interest expense into the carrying value of its ventures whose projects were currently under development for the
six months ended June 30, 2018
. New Valley recognized
$3,766
of interest expense into the carrying value of its ventures whose projects were currently under development for the
six months ended June 30, 2017
.
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
$8,145
and
$5,371
from these projects for the
six
months ended
June 30, 2018
and
June 30, 2017
, respectively.
Combined Financial Statements for Unconsolidated Subsidiaries:
The following summarized financial data for certain unconsolidated subsidiaries that meet certain thresholds pursuant to SEC Regulation S-X Rule 210.10-01(b) includes information for the 10 Madison Square West and 125 Greenwich Street investments. New Valley has elected a one-month lag reporting period for both investments.
Condominium and Mixed Use Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Income Statement
|
|
|
|
|
|
|
|
Revenue
|
$
|
61
|
|
|
$
|
102,049
|
|
|
$
|
28,045
|
|
|
$
|
162,384
|
|
Cost of sales
|
(9,351
|
)
|
|
49,037
|
|
|
16,671
|
|
|
101,879
|
|
Other expenses
|
1,497
|
|
|
1,974
|
|
|
147,379
|
|
|
4,682
|
|
Income from continuing operations
|
$
|
7,915
|
|
|
$
|
51,038
|
|
|
$
|
(136,005
|
)
|
|
$
|
55,823
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Investments in Real Estate, net:
The components of “Investments in real estate, net” were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Escena, net
|
$
|
10,305
|
|
|
$
|
10,485
|
|
Sagaponack
|
14,476
|
|
|
13,467
|
|
Investments in real estate, net
|
$
|
24,781
|
|
|
$
|
23,952
|
|
Escena.
The assets of “Escena, net” were as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Land and land improvements
|
$
|
8,911
|
|
|
$
|
8,907
|
|
Building and building improvements
|
1,891
|
|
|
1,891
|
|
Other
|
2,133
|
|
|
2,111
|
|
|
12,935
|
|
|
12,909
|
|
Less accumulated depreciation
|
(2,630
|
)
|
|
(2,424
|
)
|
|
$
|
10,305
|
|
|
$
|
10,485
|
|
New Valley recorded operating losses of
$290
and
$345
for the
three months ended June 30, 2018
and
2017
, respectively, from Escena. New Valley recorded operating income of
$510
and
$207
for the
six
months ended
June 30, 2018
and
2017
, 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, 2018
, the assets of Sagaponack consisted of land and land improvements of
$14,476
.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
7
.
|
NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS
|
Notes payable, long-term debt and other obligations consisted of:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
Vector:
|
|
|
|
6.125% Senior Secured Notes due 2025
|
$
|
850,000
|
|
|
$
|
850,000
|
|
7.5% Variable Interest Senior Convertible Notes due 2019, net of unamortized discount of $40,618 and $69,253*
|
189,382
|
|
|
160,747
|
|
5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $43,743 and $53,687*
|
215,007
|
|
|
205,063
|
|
Liggett:
|
|
|
|
Revolving credit facility
|
28,194
|
|
|
31,614
|
|
Term loan under credit facility
|
2,557
|
|
|
2,704
|
|
Equipment loans
|
1,831
|
|
|
2,662
|
|
Other
|
606
|
|
|
752
|
|
Notes payable, long-term debt and other obligations
|
1,287,577
|
|
|
1,253,542
|
|
Less:
|
|
|
|
Debt issuance costs
|
(19,913
|
)
|
|
(25,478
|
)
|
Total notes payable, long-term debt and other obligations
|
1,267,664
|
|
|
1,228,064
|
|
Less:
|
|
|
|
Current maturities
|
(214,641
|
)
|
|
(33,820
|
)
|
Amount due after one year
|
$
|
1,053,023
|
|
|
$
|
1,194,244
|
|
______________________
*
The fair value of the derivatives embedded within the
7.5%
Variable Interest Senior Convertible Notes (
$18,930
at
June 30, 2018
and
$31,164
at
December 31, 2017
, respectively) and the
5.5%
Variable Interest Senior Convertible Debentures (
$36,199
at
June 30, 2018
and
$45,249
at
December 31, 2017
, respectively), is separately classified as a derivative liability in the condensed consolidated balance sheets.
6.125%
Senior Secured Notes due 2025 — Vector
:
As of
June 30, 2018
, the Company was in compliance with all debt covenants related to its
6.125%
Senior Secured Notes due 2025.
Revolving Credit Facility and Term Loan Under Credit Facility - Liggett
:
As of
June 30, 2018
, a total of
$30,751
was outstanding under the revolving and term loan portions of the credit facility. Availability, as determined under the facility, was approximately
$18,900
based on eligible collateral at
June 30, 2018
.
Non-Cash Interest Expense and Loss on Extinguishment of Debt - Vector
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Amortization of debt discount, net
|
$
|
20,386
|
|
|
$
|
13,426
|
|
|
$
|
38,579
|
|
|
$
|
25,262
|
|
|
Amortization of debt issuance costs
|
2,914
|
|
|
2,233
|
|
|
5,625
|
|
|
4,233
|
|
|
Loss on extinguishment of 7.75% Senior Secured Notes
|
—
|
|
|
—
|
|
|
—
|
|
|
1,754
|
|
(1)
|
|
$
|
23,300
|
|
|
$
|
15,659
|
|
|
$
|
44,204
|
|
|
$
|
31,249
|
|
|
______________________
(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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Fair Value of Notes Payable and Long-Term Debt
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
Value
|
|
Value
|
|
Value
|
|
Value
|
Notes payable and long-term debt
|
$
|
1,287,577
|
|
(1)
|
$
|
1,461,578
|
|
|
$
|
1,253,542
|
|
(1)
|
$
|
1,579,616
|
|
|
|
|
|
|
|
|
|
______________________
(1)
The carrying value does not include the carrying value of the embedded derivative. See Note
11
.
Notes payable and long-term debt are carried on the condensed consolidated balance sheet at amortized cost. The fair value determinations disclosed above are classified as Level 2 under the fair value hierarchy disclosed in Note
11
if such liabilities were recorded on the condensed consolidated balance sheet at fair value. The estimated fair value of the Company’s notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies including the evaluation of the Company’s credit risk as described in the Company’s Form 10-K. The Company used a derived price based upon quoted market prices and trade activity as of
June 30, 2018
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.
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
six
months ended
June 30, 2018
and
2017
, Liggett incurred tobacco product liability legal expenses and costs totaling
$3,584
and
$4,820
, 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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Bonds.
Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. As of
June 30, 2018
, to obtain a stay of the judgment pending the appeal of the
Santoro
case, Liggett had secured
$535
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 discussed in this Note
8
: (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.
Except as discussed in this Note
8
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, 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 the amount of their demand for damages. 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.
Cautionary Statement About Engle Progeny Cases
. Since 2009, judgments have been entered against Liggett and other cigarette manufacturers in
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, 2018
,
25
Engle
progeny cases where Liggett was a defendant 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 and, in
Santoro
, the trial court set aside the punitive award).
Calloway
,
Irimi,
Cohen
and
Caprio
were subsequently resolved under the
Engle
Progeny Settlement II, discussed below. In certain cases, 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.
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. 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 (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
and, in September 2017, Liggett entered into an agreement to settle
20
Engle
progeny cases for
$4,100
. As of
June 30, 2018
, Liggett (and in certain cases the Company) had, on an individual basis, settled
183
Engle
progeny cases for approximately
$7,100
in the aggregate.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Individual Actions
As of
June 30, 2018
, there were
29
Individual Actions pending against Liggett 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
|
|
19
|
New York
|
|
3
|
Illinois
|
|
2
|
Louisiana
|
|
2
|
West Virginia
|
|
2
|
Ohio
|
|
1
|
The plaintiffs’ allegations of liability in cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, equitable defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.
Engle Progeny Cases
Engle Case.
In May 1994,
Engle
was filed against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” In July 1999, after the conclusion of Phase I of the trial, the jury returned a verdict against Liggett and other cigarette manufacturers on certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. The jury made several findings adverse to the defendants including that defendants’ conduct “rose to a level that would permit a potential award or entitlement to punitive damages.” Phase II of the trial was a causation and damages trial for
three
of the class plaintiffs and a punitive damages trial on a class-wide basis before the same jury that returned the verdict in Phase I. In April 2000, the jury awarded compensatory damages of
$12,704
to the
three
class plaintiffs, to be reduced in proportion to the respective plaintiff’s fault. In July 2000, the jury awarded approximately
$145,000,000
in punitive damages, including
$790,000
against Liggett.
In May 2003, Florida’s Third District Court of Appeal reversed the trial court and remanded the case with instructions to decertify the class. The judgment in favor of
one
of the
three
class plaintiffs, in the amount of
$5,831
, was overturned as time barred and the court found that Liggett was not liable to the other
two
class plaintiffs.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
In July 2006, the Florida Supreme Court affirmed the decision vacating the punitive damages award and held that the class should be decertified prospectively, but determined that the following Phase I findings are entitled to res judicata effect in
Engle
progeny cases: (i) that smoking causes lung cancer, among other diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants placed cigarettes on the market that were defective and unreasonably dangerous; (iv) that defendants concealed material information knowing that the information was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vi) that defendants sold or supplied cigarettes that were defective; and (vii) that defendants were negligent. The Florida Supreme Court decision also allowed former class members to proceed to trial on individual liability issues (using the above findings) and compensatory and punitive 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 (“
Engle
Progeny Settlement I”). 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. In December 2017, Liggett pre-paid the 2018 and 2019 installment payments.
Engle
Progeny Settlement II
. In December 2016, the Company and Liggett entered into an agreement with
124
Engle
progeny plaintiffs and their counsel (“
Engle
Progeny Settlement II”). 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. As a result of the settlement, the Company recorded a charge of
$17,650
in the fourth quarter of 2016. In December 2017, Liggett prepaid all remaining
Engle
Progeny Settlement II payments.
Notwithstanding the comprehensive nature of the
Engle
Progeny Settlements, approximately
75
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.
As of
June 30, 2018
, 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.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Case Name
|
|
County
|
|
Liggett Compensatory
Damages (as adjusted)
(1)
|
|
Liggett Punitive Damages
|
|
Status
(2)
|
April 2010
|
|
Putney v. R.J. Reynolds
|
|
Broward
|
|
17
|
|
—
|
|
In June 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. In May 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 was scheduled on non-economic damages. In connection with court ordered mediation, Liggett settled this matter in July 2018 and this case is now concluded.
|
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 judgment and the case is concluded.
|
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. In September 2016, the Fourth District Court of Appeal reversed the judgment in its entirety and remanded the case for a new trial. This case was settled in December 2016 as part of
Engle
Progeny Settlement II and the case is concluded as to Liggett.
|
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 and the case is concluded as to Liggett.
|
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 and the case is concluded as to Liggett.
|
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. 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 in that appeal. Defendants filed a notice to invoke the discretionary jurisdiction of the Florida Supreme Court. In June 2018, the court declined to exercise jurisdiction.
|
|
|
|
|
|
|
|
|
|
|
Any potential liability as a result of the pending appeal is included in the amount Liggett paid 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 and the case is concluded as to Liggett.
|
March 2017
|
|
Santoro v. R.J. Reynolds
|
|
Broward
|
|
160
|
|
—
|
|
In April 2017, the trial court entered a joint and several judgment 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. A hearing on post trial motions occurred in October 2017. In December 2017, the court granted the motion to set aside the verdict as to all claims other than conspiracy. Defendants moved for rehearing with respect to that claim and plaintiff moved for entry of an amended final judgment to increase plaintiff’s recovery by the percentage of decedent’s fault in light of the
Schoeff
decision. The court denied defendants' remaining post trial motions and the motion for rehearing and granted, in part, plaintiff’s motion to amend the final judgment. The parties agreed that plaintiff is not entitled to punitive damages since the trial court vacated that portion of the verdict in which punitive damages were awarded. A joint and several amended final judgment in the amount of $1,605,000 was entered by the court in May 2018. Defendants appealed.
|
Total Damages Awarded:
|
24,505
|
|
10,800
|
|
|
Amounts accrued, paid or compromised:
|
(24,345)
|
|
(10,800)
|
|
|
Damages remaining on Appeal:
|
$160
|
|
$0
|
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Case Name
|
|
County
|
|
Liggett Compensatory
Damages (as adjusted)
(1)
|
|
Liggett Punitive Damages
|
|
Status
(2)
|
(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.
|
Judgments Paid
. As of
June 30, 2018
, Liggett has paid in the aggregate
$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
. As of June 30, 2018, Liggett was fully accrued for the settlement of the
Putney
matter.
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.
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 Court of Appeals 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 September 2017, R.J. Reynolds filed a petition for writ of certiorari to the United States Supreme Court, which declined review in January 2018.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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. In December 2017, the Florida Supreme Court ruled that compensatory damages in
Engle
progeny cases should not be reduced by the smoker’s comparative fault if a jury finds for the plaintiff on intentional tort claims.
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 alleging claims arising from 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. In June 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 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, mediation is set for September 7, 2018 and trial is set for March 28, 2019. Discovery is ongoing. 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 and newly filed Individual Cases.
Class Actions
As of
June 30, 2018
,
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 stay order entered on March 16, 2016 stays the case pending 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.
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.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Liggett was severed from trial of the consolidated action. 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 court entered judgment in October 2013, dismissing all claims against the non-Liggett defendants except the ventilated filter claim on behalf of
30
plaintiffs. In May 2016
,
the trial court ruled that the case could proceed against Liggett, notwithstanding the outcome of the first phase of the trial against the non-Liggett defendants. In October 2017, the trial court vacated the case management orders for the second phase based on notice from the non-Liggett parties of a settlement with the remaining
30
plaintiffs. In December 2017, the court ordered plaintiffs’ counsel to confirm all remaining plaintiffs with claims against Liggett. The court further agreed that it would entertain a renewed motion by Liggett regarding the impact of the final judgment in favor of co-defendants on the claims against Liggett and whether those claims are barred by the doctrine of collateral estoppel. In March and April 2017, Liggett moved to dismiss a number of plaintiffs’ claims on various grounds. The court granted the motions as to approximately
25
plaintiffs and reserved ruling as to other claims until additional information is provided by plaintiffs. The parties have been ordered to mediate, but a date has not been selected. It is currently estimated that Liggett could be a defendant in approximately
60
individual cases.
Health Care Cost Recovery Actions
As of
June 30, 2018
,
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 from Liggett and other cigarette manufacturers based on various theories of recovery as a result of alleged sales of tobacco products to minors. The case is dormant.
The claims asserted in health care cost recovery actions vary, but can include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach of special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover an unspecified amount of health care costs paid and to be paid by the federal government for lung cancer, heart disease, emphysema and other smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants, to restrain defendants and co-conspirators from engaging in alleged fraud and other allegedly unlawful conduct in the future, and to compel defendants to disgorge the proceeds of their unlawful conduct. Claims were asserted under RICO.
In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. In May 2009, the United States Court of Appeals for the District of Columbia affirmed most of the district court’s decision. The United States Supreme Court denied review. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States’ public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights,” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “lights” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure of defendants’ public document websites and the production of all documents
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
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 parties regarding the “corrective statements” to be issued by the defendants. In April 2018, the parties reached agreement on the implementation details of the “corrective statements” to be posted on the defendants’ websites and cigarette pack onserts. Liggett is not required to comply with the foregoing.
Upcoming Trials
As of
June 30, 2018
, there was
one
Engle
progeny trial scheduled (March 11, 2019) through June 30, 2019, where Liggett (and/or the Company) is a named defendant. Trial dates are subject to change and cases could be set for trial during this time.
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.
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
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
United States. Liggett and Vector Tobacco’s domestic shipments accounted for
3.7%
of the total cigarettes sold in the United States in 2017. 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 28, 2017, Liggett and Vector Tobacco pre-paid
$137,000
of their approximate
$148,000
2017 MSA obligation, the balance of which was paid in April 2018.
Certain MSA Disputes
NPM Adjustment.
Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment for each year from 2003 - 2017. 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 (or the parties agree) 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 - 2017, 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.
In June 2010, after the PMs prevailed in
48
of
49
motions to compel arbitration, the parties commenced the arbitration for the 2003 NPM Adjustment. That arbitration concluded in September 2013. It was followed by various challenges filed in state courts by states that did not prevail in the arbitration. Those challenges resulted in reductions, but not elimination of, the amounts awarded. The arbitration for the 2004 NPM Adjustment started in 2016, and hearings in that arbitration are underway. Separate proceedings in state courts are also underway for one state that is not required to arbitrate the NPM Adjustment (Montana) and for another that is appealing an order compelling arbitration (New Mexico).
The PMs have now settled most of the disputed NPM Adjustment years with
37
states representing approximately
75%
of the MSA share. The 2004 arbitration and separate court proceedings continue for states with which the PMs have not settled.
As a result of the settlements and arbitration award described above, Liggett and Vector Tobacco reduced cost of sales in the aggregate by
$24,460
for years 2013 - 2017 and by an additional
$7,323
for the six months ended
June 30, 2018
. Liggett and Vector Tobacco may be entitled to further adjustments. As of June 30, 2018, Liggett and Vector Tobacco had accrued approximately
$13,500
related to the disputed amounts withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett and Vector Tobacco lose the disputes for those years. As of
June 30, 2018
, there remains approximately
$33,300
in the disputed payments account relating to Liggett and Vector Tobacco’s 2011 - 2017 NPM Adjustment disputes with the non-settling states.
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 Chancery Court in Jackson County, Mississippi 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. In April 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 a Petition for Interlocutory Appeal to the Mississippi Supreme Court, which was denied.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Liggett filed a demand for arbitration with AAA regarding certain of the issues that remain in dispute and
moved in Chancery Court to compel arbitration and stay the proceedings pending before the Special Master. In June 2018, the Chancery Court granted Liggett’s motion to compel arbitration and stayed the proceedings before the Special Master pending completion of the arbitration. The proceedings before AAA have commenced.
Liggett may be required to make additional payments to Texas and Mississippi which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Cautionary Statement
Management is not able to reasonably predict the outcome of the litigation pending or threatened against Liggett or the Company. Litigation is subject to many uncertainties. Liggett has been found liable in multiple
Engle
progeny cases and 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
8
, 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, 2018
was 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, 2018
|
$
|
12,385
|
|
|
$
|
260
|
|
|
$
|
12,645
|
|
|
$
|
21,479
|
|
|
$
|
19,840
|
|
|
$
|
41,319
|
|
Expenses
|
79,739
|
|
|
525
|
|
|
80,264
|
|
|
—
|
|
|
—
|
|
|
—
|
|
NPM Settlement adjustment
|
(595
|
)
|
|
—
|
|
|
(595
|
)
|
|
(5,703
|
)
|
|
—
|
|
|
(5,703
|
)
|
Change in MSA obligations capitalized as inventory
|
(275
|
)
|
|
—
|
|
|
(275
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Payments
|
(9,463
|
)
|
|
(250
|
)
|
|
(9,713
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification to/(from) non-current liabilities
|
(647
|
)
|
|
218
|
|
|
(429
|
)
|
|
647
|
|
|
(218
|
)
|
|
429
|
|
Interest on withholding
|
—
|
|
|
19
|
|
|
19
|
|
|
—
|
|
|
1,048
|
|
|
1,048
|
|
Balance as of June 30, 2018
|
$
|
81,144
|
|
|
$
|
772
|
|
|
$
|
81,916
|
|
|
$
|
16,423
|
|
|
$
|
20,670
|
|
|
$
|
37,093
|
|
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, 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
|
|
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.
In December 2017, Liggett and the Company received a demand for indemnification from Altria Group Inc. in connection with Eve Holdings’ 1998 sale of certain cigarette brands to Philip Morris. The indemnification demand relates to a lawsuit regarding a smoker’s use of L&M cigarettes.
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, 2018
.
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 other proceedings, lawsuits and claims pending against the Company and its consolidated subsidiaries, unrelated to tobacco product liability, should not materially affect 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
|
|
9
.
|
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,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Service cost — benefits earned during the period
|
$
|
147
|
|
|
$
|
141
|
|
|
$
|
294
|
|
|
$
|
282
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
3
|
|
Interest cost on projected benefit obligation
|
1,124
|
|
|
1,265
|
|
|
2,246
|
|
|
2,531
|
|
|
82
|
|
|
92
|
|
|
164
|
|
|
184
|
|
Expected return on assets
|
(1,393
|
)
|
|
(1,356
|
)
|
|
(2,786
|
)
|
|
(2,712
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net loss (gain)
|
451
|
|
|
502
|
|
|
903
|
|
|
1,003
|
|
|
(10
|
)
|
|
(13
|
)
|
|
(20
|
)
|
|
(26
|
)
|
Net expense
|
$
|
329
|
|
|
$
|
552
|
|
|
$
|
657
|
|
|
$
|
1,104
|
|
|
$
|
72
|
|
|
$
|
80
|
|
|
$
|
145
|
|
|
$
|
161
|
|
In accordance with the adoption of ASU 2017-07, the components of net periodic benefit cost other than the service cost component are included in Other, net in the Condensed Consolidated Statement of Operations.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The Company’s effective income tax rate is based on expected income, statutory rates, valuation allowances against deferred tax assets, and any tax planning opportunities available to the Company. For interim financial reporting, the Company estimates the annual effective income tax rate based on full year projections and applies the annual effective income tax rate against year-to-date pretax income (loss) to record
income tax expense
, adjusted for discrete items, if any. The Company refines annual estimates as new information becomes available. The Company’s tax rate does not bear a relationship to statutory tax rates due to a valuation allowance being established for expenses that are not deductible under the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). Specifically, the Tax Act establishes criteria that limit the amount of deductible annual interest expense but allows for an interest expense carry forward for any interest expense limitation applied to taxable income. The Company expects a portion of its interest expense in 2018 to be disallowed as a tax deduction and the Company does not expect any of this disallowed interest expense to be tax deductible in the future. Consequently, as part of its annual effective tax rate, the Company has established an interest expense carryforward deferred tax asset and corresponding valuation allowance for any disallowed interest expense in 2018. Further, based on available guidance for the Tax Act, the Company expects to receive an income tax deduction for any stock-based compensation granted as part of a binding agreement in effect prior to November 2, 2017 as well as any performance-based incentive plans that existed as part of a binding agreement in effect prior to November 2, 2017 but does not expect to receive an income tax deduction for any stock-based compensation granted in 2018. Upon the issuance of additional guidance related to the Tax Act, the Company’s expectations may change which could result in additional changes to the Company’s annual effective tax rate.
The Company’s
income tax expense
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Income before provision for income taxes
|
$
|
31,756
|
|
|
$
|
50,373
|
|
|
$
|
37,368
|
|
|
$
|
43,366
|
|
Income tax expense using estimated annual effective income tax rate
|
14,209
|
|
|
19,152
|
|
|
16,720
|
|
|
16,457
|
|
Changes in effective tax rates
|
455
|
|
|
(56
|
)
|
|
—
|
|
|
—
|
|
Change in estimate for the impact of Tax Cuts and Jobs Act of 2017
|
(1,809
|
)
|
|
—
|
|
|
(1,809
|
)
|
|
—
|
|
Impact of discrete items, net
|
(95
|
)
|
|
(269
|
)
|
|
(203
|
)
|
|
(412
|
)
|
Income tax expense
|
$
|
12,760
|
|
|
$
|
18,827
|
|
|
$
|
14,708
|
|
|
$
|
16,045
|
|
The Company’s change in estimate for the impact of the Tax Cuts and Jobs Act of 2017 relates to increased deductions taken on the Company’s 2017 federal income tax return in conjunction with the Tax Act’s income tax rate reduction from 2017 to 2018. The discrete item for the
six
months ended
June 30, 2018
are primarily related to an income tax deduction for stock-based compensation as well as a change in estimate for the impact of the Tax Act. The discrete item for the
six months ended June 30, 2017
are primarily related to an income tax deduction as a result of adopting ASU 2016-09 and the results of an income tax audit completed during the
six months ended June 30, 2017
. In accordance with Topic 606, the Company plans to file an automatic method change related to revenue recognition and estimates a
$5,217
current tax benefit related to the accounting method change. As a result of the accounting method change and limits imposed on the deductibility of interest expense by the Tax Act, the Company adjusted its estimated current year interest expense carry forward valuation allowance by
$1,565
, of which
$734
was recognized for the three and
six months ended June 30, 2018
.
On
December 22, 2017
, the Tax Act was enacted and made significant changes to the Internal Revenue Code. Changes effective for tax years beginning after
December 31, 2017
include, but are not limited to, a corporate tax rate decrease from
35%
to
21%
and a limit on interest expense deductions to
30%
of taxable income before interest, depreciation and amortization from
2018
to
2021
and then taxable income before interest thereafter. The Tax Act permits disallowed interest expense to be carried forward indefinitely. The Company has calculated its best estimate of the impact of the Tax Act in its
2017
year-end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of this filing. The Company’s estimate of the provisional amount related to the remeasurement of certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future was a benefit of
$28,845
at
December 31, 2017
. The provisional estimates are
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
based on the Company’s initial analysis of the Tax Act. Given the significant complexity of the Tax Act, anticipated guidance from the U.S. Treasury about implementing the Tax Act, and the potential for additional guidance from the Securities and Exchange Commission or the Financial Accounting Standards Board related to the Tax Act, these estimates may be adjusted during
2018
.
On
December 22, 2017
, SAB 118 was issued to address the application of US GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. Upon refinement of certain estimates from those computed as of
December 31, 2017
, the Company has recorded an additional income tax benefit of
$1,809
during the three and
six months ended June 30, 2018
. As the Company continues to analyze the Tax Act additional adjustments may be necessary.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
|
|
11
.
|
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, 2018
|
|
|
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)
|
|
$
|
188,852
|
|
|
$
|
188,852
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
(1)
|
|
47,326
|
|
|
—
|
|
|
47,326
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
(2)
|
|
2,235
|
|
|
—
|
|
|
2,235
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds securing legal bonds
(2)
|
|
535
|
|
|
535
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities at fair value
|
|
|
|
|
|
|
|
|
|
|
Equity securities at fair value
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
|
42,338
|
|
|
42,338
|
|
|
—
|
|
|
—
|
|
|
|
Mutual funds invested in fixed-income securities
|
|
21,008
|
|
|
21,008
|
|
|
—
|
|
|
—
|
|
|
|
Total equity securities at fair value
|
|
63,346
|
|
|
63,346
|
|
|
—
|
|
|
—
|
|
|
|
Debt securities available for sale
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
28,324
|
|
|
—
|
|
|
28,324
|
|
|
—
|
|
|
|
Corporate securities
|
|
41,748
|
|
|
—
|
|
|
41,748
|
|
|
—
|
|
|
|
U.S. government and federal agency
|
|
3,576
|
|
|
—
|
|
|
3,576
|
|
|
—
|
|
|
|
Commercial mortgage-backed securities
|
|
412
|
|
|
—
|
|
|
412
|
|
|
—
|
|
|
|
Commercial paper
|
|
3,985
|
|
|
—
|
|
|
3,985
|
|
|
—
|
|
|
|
Index-linked U.S. bonds
|
|
2,335
|
|
|
—
|
|
|
2,335
|
|
|
—
|
|
|
|
Foreign fixed-income securities
|
|
1,500
|
|
|
—
|
|
|
1,500
|
|
|
—
|
|
|
|
Total debt securities available for sale
|
|
81,880
|
|
|
—
|
|
|
81,880
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities at fair value
|
|
145,226
|
|
|
63,346
|
|
|
81,880
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term investments
|
|
|
|
|
|
|
|
|
|
|
Equity securities at fair value that qualify for the NAV practical expedient
|
|
72,524
|
|
|
—
|
|
|
72,524
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
456,698
|
|
|
$
|
252,733
|
|
|
$
|
203,965
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
55,129
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
55,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amounts included in cash and cash equivalents on the condensed consolidated balance sheet, except for
$2,570
that is included in current restricted assets and
$3,980
that is included in restricted assets.
|
|
|
(2)
|
Amounts included in current restricted assets and restricted assets on the condensed consolidated balance sheet.
|
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, 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)
|
|
$
|
166,915
|
|
|
$
|
166,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
(1)
|
|
43,781
|
|
|
—
|
|
|
43,781
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
(2)
|
|
2,497
|
|
|
—
|
|
|
2,497
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds securing legal bonds
(2)
|
|
2,990
|
|
|
2,990
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities at fair value
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
44,634
|
|
|
44,634
|
|
|
—
|
|
|
—
|
|
|
|
Mutual funds invested in fixed-income securities
|
|
21,041
|
|
|
21,041
|
|
|
—
|
|
|
—
|
|
|
|
Fixed-income securities
|
|
|
|
|
|
|
|
|
|
|
U.S. government securities
|
|
28,502
|
|
|
—
|
|
|
28,502
|
|
|
—
|
|
|
|
Corporate securities
|
|
41,329
|
|
|
—
|
|
|
41,329
|
|
|
—
|
|
|
|
U.S. government and federal agency
|
|
4,564
|
|
|
—
|
|
|
4,564
|
|
|
—
|
|
|
|
Commercial mortgage-backed securities
|
|
426
|
|
|
—
|
|
|
426
|
|
|
—
|
|
|
|
Commercial paper
|
|
7,027
|
|
|
—
|
|
|
7,027
|
|
|
—
|
|
|
|
Index-linked U.S. bonds
|
|
2,316
|
|
|
—
|
|
|
2,316
|
|
|
—
|
|
|
|
Foreign fixed income securities
|
|
650
|
|
|
—
|
|
|
650
|
|
|
—
|
|
|
|
Total fixed-income securities
|
|
84,814
|
|
|
—
|
|
|
84,814
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment securities at fair value
|
|
150,489
|
|
|
65,675
|
|
|
84,814
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
366,672
|
|
|
$
|
235,580
|
|
|
$
|
131,092
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
76,413
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
76,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
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 at fair value included in Level 1 is based on quoted market prices from various stock exchanges. The Level 2 investment securities at fair value are based on 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 Level 2 long-term investments are based on NAV per share provided by the partnerships based on the indicated market value of the underlying assets or investment portfolio.
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 condensed 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, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Actual)
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
55,129
|
|
|
Discounted cash flow
|
|
Assumed annual stock dividend
|
|
5
|
%
|
|
|
|
|
|
|
Assumed annual cash dividend
|
|
$
|
1.60
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
19.08
|
|
|
|
|
|
|
|
Convertible trading price (as a percentage of par value)
|
|
105.24
|
%
|
|
|
|
|
|
|
Volatility
|
|
17.84
|
%
|
|
|
|
|
|
|
Risk-free rate
|
|
Term structure of US Treasury Securities
|
|
|
|
|
|
|
Implied credit spread
|
|
5.5% - 6.5% (6.0%)
|
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
|
Fair Value at
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Actual)
|
|
|
|
|
|
|
|
|
|
Fair value of derivatives embedded within convertible debt
|
|
$
|
76,413
|
|
|
Discounted cash flow
|
|
Assumed annual stock dividend
|
|
5
|
%
|
|
|
|
|
|
|
Assumed annual cash dividend
|
|
$
|
1.60
|
|
|
|
|
|
|
|
Stock price
|
|
$
|
22.38
|
|
|
|
|
|
|
|
Convertible trading price (as a percentage of par value)
|
|
115.19
|
%
|
|
|
|
|
|
|
Volatility
|
|
17.98
|
%
|
|
|
|
|
|
|
Risk-free rate
|
|
Term structure of US Treasury Securities
|
|
|
|
|
|
|
Implied credit spread
|
|
3.0% - 4.0% (3.5%)
|
|
The Company’s business segments for the
three and six months ended June 30, 2018 and 2017
were Tobacco and Real Estate. The Tobacco segment consisted of the manufacture and sale of conventional cigarettes. The Real Estate segment included 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. As a result of the reduction in e-cigarette activities, results from the Company’s E-cigarette operations are now included in the Corporate and Other Segment and 2017 information has been recast to conform to the 2018 presentation. This change did not have an impact to the Company’s historical consolidated results.
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited
Financial information for the Company’s operations before taxes and non-controlling interests for the
three and six months ended June 30, 2018 and 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
|
|
Corporate
|
|
|
|
Tobacco
|
|
Estate
|
|
and Other
|
|
Total
|
Three months ended June 30, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
274,833
|
|
|
$
|
206,655
|
|
|
$
|
—
|
|
|
$
|
481,488
|
|
Operating income (loss)
|
62,515
|
|
(1)
|
5,867
|
|
|
(6,521
|
)
|
|
61,861
|
|
Equity in losses from real estate ventures
|
—
|
|
|
(2,112
|
)
|
|
—
|
|
|
(2,112
|
)
|
Depreciation and amortization
|
2,075
|
|
|
2,418
|
|
|
256
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
272,177
|
|
|
$
|
199,812
|
|
|
$
|
—
|
|
|
$
|
471,989
|
|
Operating income (loss)
|
64,281
|
|
(2)
|
16,586
|
|
|
(6,567
|
)
|
|
74,300
|
|
Equity in earnings from real estate ventures
|
—
|
|
|
15,291
|
|
|
—
|
|
|
15,291
|
|
Depreciation and amortization
|
2,333
|
|
|
1,913
|
|
|
367
|
|
|
4,613
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
541,949
|
|
|
$
|
368,505
|
|
|
$
|
—
|
|
|
$
|
910,454
|
|
Operating income (loss)
|
125,926
|
|
(3)
|
(2,893
|
)
|
(4)
|
(13,088
|
)
|
|
109,945
|
|
Equity in losses from real estate ventures
|
—
|
|
|
(8,672
|
)
|
|
—
|
|
|
(8,672
|
)
|
Depreciation and amortization
|
4,112
|
|
|
4,707
|
|
|
517
|
|
|
9,336
|
|
Capital expenditures
|
2,072
|
|
|
6,529
|
|
|
15
|
|
|
8,616
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
529,631
|
|
|
$
|
357,566
|
|
|
$
|
—
|
|
|
$
|
887,197
|
|
Operating income (loss)
|
123,925
|
|
(5)
|
17,206
|
|
|
(13,410
|
)
|
|
127,721
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Operating income includes
$2,808
of income from MSA Settlements, and
$525
of litigation judgment expense.
|
|
|
(2)
|
Operating income includes
$102
of litigation judgment expense.
|
|
|
(3)
|
Operating income includes
$6,298
of income from MSA Settlements, and
$525
of litigation judgment expense.
|
|
|
(4)
|
Operating income includes
$2,469
of litigation judgment income.
|
|
|
(5)
|
Operating income includes
$895
of income from MSA Settlement, and
$1,687
of litigation judgment expense.
|
VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Dollars in Thousands, Except Per Share Amounts)
Unaudited